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Bullish on Oil Stocks? Consider This High-Leverage Play Today

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Oil prices plunged to historic lows due to the pandemic. In fact, investors may remember that oil prices briefly went negative last year on a technical move.

However, commodities have made a strong recovery as of late. Hence, for investors who remain optimistic regarding oil prices, now is the right time to consider high-leverage energy plays. In that respect, investors should buy shares of Baytex Energy (TSX:BTE)(NYSE:BTE). Here’s why.

Analysts remain optimistic

As per Baytex’s latest quarterly earnings report for the period ended March 31, 2021, Baytex produced 78,780 boe/d. This exceeded analyst estimates of 77,300 boe/d. Additionally, these numbers represent an increase of nearly 12% when compared to the company’s Q4 numbers. Furthermore, the company’s cash flow jumped 90.5% on a quarter-over-quarter basis to $0.28, exceeding analyst projections by $0.23.

With the crucial operating metrics of Baytex surpassing consensus estimates for Q1 2021, the company has increased its capital program budget for this year. Its spending will now range from $285 million to $315 million, a significant increase when compared to prior estimates of $225-$275 million. Furthermore, this company has upgraded its production guidance for 2021 in addition to putting forward an impressive five-year plan, generating estimated free cash flow of $1 billion.

Patrick O’Rourke, an analyst at ATB Capital Markets, has raised his target from $1.60 to $1.75. Moreover, National Bank’s Dan Payne has increased his target price to $2 from $1.75.

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A speculative high-risk, high-reward play

As noted previously, oil prices were beaten to a pulp due to the pandemic-induced crisis. However, commodities have been soaring of late, with oil currently trading around the US$65 level. Without a doubt, this clearly has a positive impact on Baytex Energy given the company’s high exposure to oil prices.

This stock has been soaring this year; since January 1, 2021, its shares have skyrocketed over 135%. At the time of writing, it trades around the $1.65 mark. Yes, Baytex ended 2020 with long-term debt worth $1.8 billion, which is quite high for a company with a market capitalization rate of under $1 billion. However, it has been taking measures to reduce its debt balance.

These measures have clearly begun to pay off.

Bottom line

As far as high-leverage oil plays go, Baytex remains one of the best options for investors today.

This is a company with a higher risk profile due to its debt burden which remains elevated. However, for those who believe oil prices will continue to climb higher, this is a stock that could produce outsized returns.

Like this top energy pick? Here's another one to consider right now:

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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 Chris MacDonald has no position in any of the stocks mentioned.

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