If small-cap Canadian energy stocks have not been on your watchlist, it’s time to put them right on top. A $3 billion Baytex Energy (TSX:BTE)(NYSE:BTE) stock has been up almost 280% since last year, and its recently released quarterly earnings could send it even higher.
Energy stocks are witnessing an epic rally this year not seen in the last decade. Since the pandemic lows, Baytex stock has zoomed more than 1,500%, standing tall among peers.
Baytex Energy doubles Q4 profits
Baytex Energy’s net income more than doubled in Q4 2021 to $563 million. Rallying oil and gas prices and higher production improved financial performance for the company.
Baytex derives more than 70% of its revenues from oil, while the rest comes from natural gas and liquids. Baytex Energy projects to produce 80,000 to 83,000 barrels of oil per day in 2022 — marginally higher than 2021.
Apart from the financial growth, Baytex’s upbeat long-term financial guidance could fuel its next leg of the stock rally. It expects to achieve $2.8 billion in free cash flows by 2025, assuming oil at US$75 a barrel. The bullish guidance seems achievable given the margin of safety due to the current higher oil prices.
The company has been repaying its debt and deleveraging its balance sheet for the last few quarters. As a result, its net debt-to-EBITDA ratio was around 4.5 in 2020, which reduced below one as of December 2021.
Interestingly, the company remains focused on maintaining its balance sheet strength. It intends to keep leverage at one, even if oil falls to US$55 a barrel.
More delight for shareholders
Note that current crude oil prices could notably boost its free cash flows. So, even after repaying debts, there will likely be enough excess cash to distribute among shareholders.
On these lines, Baytex announced a share-buyback program starting in Q2 2022 with the allocation of 25% of its free cash flows.
And it’s not just Baytex; this has been the theme for the sector since last year. Many small-cap energy companies are seeing record free cash flow growth this year.
As a result, their stocks have already gone through the roof. Shares of Obsidian Energy and NuVista Energy are up almost 503% and 390% since last year.
What’s next for BTE stock?
Strong financial growth, improving balance sheet strength, and a highly supportive macro environment place Baytex on a strong footing. It indicates management’s confidence in its future earnings growth.
Furthermore, improving balance sheet strength makes it stronger to play in low-price environments and also allows access to future funds at much more attractive rates.
Looking at its current valuation, BTE stock is trading close to three times its earnings. It highlights a significantly discounted valuation against the sector average and implies a huge future growth runway.
Though the small-cap energy sector seems well placed amid rallying oil prices, they could also witness relatively higher volatility. So, if oil prices take a U-turn from here, they could see an outsized impact.
