Could Baytex Energy (TSX:BTE) Stock Hit $5 in 2021?

Baytex stock had a huge rally off the 2020 lows, and investors wonder if more big gains are on the way.

| More on:
Oil pumps against sunset

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Baytex Energy (TSX:BTE)(NYSE:BTE) soared from $0.30 per share at the 2020 low to as high as $1.50 last month. A pullback over the past few weeks has investors wondering if Baytex stock is undervalued and a good buy.

Tough times

Investors who bought Baytex stock near the 2020 low are sitting on some nice gains, and more upside could certainly be on the way. Long-term holders of the stock might not be overly impressed with the bounce.

A decade ago, Baytex traded for more than $50 per share and used to be a go-to stock for dividend investors in the energy sector who wanted reliable high-yield payouts.

The good times lasted until the summer of 2014. Unfortunately, Baytex closed its $2.8 billion purchase of Aurora Oil and Gas Limited in June of that year, right at the peak of the oil market. Management hoped the strategic Eagle Ford assets would drive strong revenue growth and profits. The board even raised the dividend at the time by 9% to an annualized $2.88 per share.

Fewer than six months later, the stock was down to $15 per share, and Baytex slashed the distribution to preserve cash as oil prices tanked. Aside from a brief bounce in 2015 when oil temporarily rebounded and the shares moved back above $23, the situation has steadily deteriorated, hitting the bottom during the pandemic rout last year. Baytex lost its listing on the NYSE last December.

Today, the company pays no dividend at all and still trades at a fraction of its previous value.

Upside

Baytex has managed to avoid dumping its best assets at fire-sale prices, giving the company a chance to develop the properties or monetize them at high values as the oil market recovers.

Production is targeted at 73,000-77,000 barrels of oil equivalent per day (boe/d) for 2021. Capital expenditures are expected to be $225-275 million. The company hedged 48% of 2021 production at WTI of US$45-US$52 per barrel. So far, the hedge leaves about 20% of potential profits on the table, but the unhedged production benefits from oil’s move above US$60.

Assuming WTI averages US$58 per barrel in 2021, Baytex expects to generate more than $250 million in free cash flow and increase liquidity to more than $550 million. This gives it some flexibility in the event oil prices tank again later in the year on in early 2022.

The company finished 2020 with $1.8 billion in long-term debt. That’s still pretty high for a company with a market capitalization of roughly $700 million, but a sustained surge in oil prices could allow Baytex to increase its capital plan and boost production to drive even higher revenue and greater free cash flow.

Baytex would then have room to knock the debt down to a more comfortable level. This would make the stock more attractive to investors and potentially drive the share price much higher.

The stock already appears cheap based on Baytex’s own net asset value calculation. The company figured it was worth about $2.78 per share at the end of last year, and that includes a 10% discount.

Risks

Oil prices are higher than the market expected coming into 2021. Volatility could still be on the way if OPEC+ decides to increase supply more than expected and demand recovery takes a hit due to new COVID-19 waves in large markets such as India and Europe.

If oil prices plunge again, investors could dump the stock on renewed debt fears.

The bottom line on Baytex stock

I wouldn’t back up the truck in the hopes that the stock will rally to $5 by the end of the year. However, oil bulls who are of the opinion that oil will continue to trend higher in the back half of 2021 and into next year might want to start nibbling at the current share price.

Baytex carries risk, but the stock has big upside potential if oil price surge.

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 Andrew Walker has no position in any stock mentioned.

More on Energy Stocks

Super sized rock trucks take a load of platinum rich rock into the crusher.
Energy Stocks

3 Top Commodity Stocks for Passive Dividend Income

Commodity stocks like Cameco Corp (TSX:CCO)(NYSE:CCJ) offer dividend income.

Read more »

Group of industrial workers in a refinery - oil processing equipment and machinery
Energy Stocks

2 Oil Stocks Under $11 With 90-110% Gains So Far This Year

Two small-cap oil stocks with enormous gains year to date are likely to deliver far superior returns in 2022 versus…

Read more »

Group of industrial workers in a refinery - oil processing equipment and machinery
Energy Stocks

Suncor Energy (TSX:SU) Could Power Your Portfolio to New Highs

Suncor Energy (TSX:SU)(NYSE:SU) is a cheap stock that could unlock value for its longer-term shareholders.

Read more »

TSX Today
Energy Stocks

TSX Today: What to Watch for in Stocks on Thursday, August 11

Rising commodity prices could take energy and mining shares on the TSX higher at the open today.

Read more »

Oil pumps against sunset
Energy Stocks

2 Top Canadian Energy Stocks to Buy Offering Dividend Yields Above 6%

These two top Canadian energy stocks are excellent long-term investments and offer unbelievable dividend yields if you buy them today.

Read more »

energy industry
Energy Stocks

Oil Price: Should You Buy Suncor (TSX:SU) or Canadian Natural Resources (TSX:CNQ) Stock?

Energy stocks are down from the 2022 highs. Investors can now get high dividend yields for Suncor and Canadian Natural…

Read more »

Illustration of bull and bear
Energy Stocks

What’s Next for TSX Energy Stocks as Bears Dominate?

Since June, TSX energy stocks have lost 25% on average, notably underperforming broad market indices.

Read more »

Oil pumps against sunset
Energy Stocks

For the 7th Time in Under 2 Years, Freehold Royalties Stock Increases its Dividend

After another record quarter generating funds from operations, Freehold Royalties stock just increased its dividend again!

Read more »