The Motley Fool

Which Energy Stock Is the Better Buy: Baytex Energy Corp. (TSX:BTE) or Freehold Royalties Ltd. (TSX:FRU)?

Financial technology concept.
Image source: Getty Images

Are analysts warming up to Canadian oil and gas stocks?

Do you want to be there when these stocks rally from current undervalued levels?

With West Texas Intermediate (WTI) oil currently trading at $62.50, we have reason to be optimistic again. At these prices, many energy companies are racking in the profits and leaving the doldrums behind.

As far as Canadian oil prices go, the story is just as bullish. With the Western Canadian Select (WCS) oil price trading at $54.33 at writing, we have seen a reversal of the heavy discounts of 2018.

Now let’s look at two energy stocks with the goal of figuring out which one is the better buy at this time.

Baytex Energy Corp. (TSX:BTE)(NYSE:BTE)

Baytex stock has been a disaster in the last few years and is trading at a mere fraction of its stock price of over $40 just four years ago, as the company has struggled with high debt levels, rising costs, and declining production.

But the tide is turning, and Baytex is emerging as an attractive stock to play a strengthening energy sector. Its stock price discount is no longer warranted, and we can expect this to be rectified as cash flows come in and debt is reduced.

Because Baytex has finally positioned itself as a viable option to gain exposure to the energy sector, albeit still a higher risk one.

Increasingly diversified, quality assets

Baytex’s acquisition of Raging River has diversified the company’s production base, giving it quality light oil assets and land in the prolific Duvernay area in Alberta.

Add this to Baytex’s existing legacy Eagle Ford and Canadian heavy oil properties, and we can see the diversification that has lowered the risk profile of the company and the stock.

Improving balance sheet

The Raging River acquisition has already strengthened Baytex’s balance sheet, bringing its debt to capital ratio to 42%, down from 47% last year.

Future cash flows will further reduce the leverage, driving Baytex stock higher.

2019 free cash flow is expected to come in at between $100 million and $200 million, which is a big accomplishment after years of negative free cash flows draining the company’s balance sheet.

Freehold Royalties Ltd. (TSX:FRU)

Energy stock Freehold Royalties gives shareholders both a high dividend yield as well as the potential for big capital gains.

It is the less risky option relative to Baytex.

Freehold’s dividend yield currently stands at 7.31%. It’s a dividend that is easily covered by cash flows, with a 65% payout ratio at current prices.

These dividend payments also have high visibility, as the company’s low-risk business model, its attractive payout ratio, and its healthy balance sheet can attest to.

Although we continue to see consistently strong results out of Freehold, its stock remains depressed, providing investors with a solid opportunity.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.