The Motley Fool

1 High-Leverage Energy Play With Tonnes of Upside Today

Image source: Getty Images.

Right now, energy stocks are hot. Indeed, a bull market in commodities has taken energy prices on a nice ride. For long-term investors who bought the dip in the energy sector last year, congratulations.

For the rest of us who didn’t, there’s still opportunity in this sector today. Cash flows of many companies are soaring. And those with the most unfavourable balance sheets are getting re-rated higher.

One such company I think could have potential near- to medium-term upside is Baytex Energy (TSX:BTE)(NYSE:BTE). Here’s why.

Analysts increasingly getting bullish on Baytex

Analysts have historically not shown favourable ratings to Baytex in the past. The reasons are obvious. Indeed, the company’s limited production and relatively high levels of debt have burdened investors during downturns in the energy market. Accordingly, last year was not a good year for Baytex shareholders.

However, the company has made some significant improvements of late. These moves warrant another look by investors who may have taken this stock off their watch list.

This company has de-risked its balance sheet significantly of late. The company is focused on profitable investment opportunities such as its clearwater play. Additionally, Baytex has focused on continued debt repayment over time. If the company can get its books in order, more fundamentals-oriented investors may be enticed by this play.

As a higher-cost producer, Baytex also benefits greatly from the current oil price environment. With oil trading around US$70 WTI, Baytex has the potential for a triple-digit NAV increase this year. Analysts believe such a move could result in a re-rating for this stock higher. That is, if everything continues along perfectly, as it has, of late.

Should you invest in Suncor right now?

Click here to learn more!

Consolidation bullish?

The idea of debt-laden companies making acquisitions isn’t something I’m generally fond of. But for those who believe the energy sector has tonnes of room to run, perhaps the timing of deals right now makes sense.

Baytex recently acquired Raging River Exploration at a price of US$1.4 billion. This combination should provide roughly three times the cash flow Baytex is used to. This deal will also provide even more leverage to oil prices than what the company already provides.

Accordingly, Baytex’s ROI calculation is an intriguing one. For oil bulls, this is a no-brainer at this level. For more conservative investors unsure of where commodity prices are headed, it’s less so.

Bottom line

Conservative investors have rightly steered away from Baytex in recent years. Indeed, the company’s balance sheet still needs a lot of work.

However, deep-value investors have sought out Baytex stock as a unique buying opportunity in this environment. I think both viewpoints are valid. For investors intrigued with Baytex, whether to buy depends greatly one where one sees the price of oil in one, two, or five years from now.

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

Should you invest $1,000 in Suncor Energy right now?

Before you consider Suncor Energy, you may want to hear this.

Motley Fool Canadian Chief Investment Advisor, Iain Butler, and his Stock Advisor Canada team just revealed what they believe are the 10 best stocks for investors to buy right now... and Suncor Energy wasn't one of them.

The online investing service they've run since 2013, Motley Fool Stock Advisor Canada, has beaten the stock market by over 3X. And right now, they think there are 10 stocks that are better buys.

Learn More Today!

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 stocks mentioned in this article.

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.