What to Make of Baytex Stock Following Earnings

Is now the time for investors to continue to buy Baytex (TSX:BTE)(NYSE:BTE), or is this rally in oil overdone right now?

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Baytex Energy (TSX:BTE)(NYSE:BTE) is a Calgary-based gas and oil corporation that engages in the production, development, and acquisition of natural gas and crude oil in the Eagle Ford and the Western Canadian Sedimentary Basin. Roughly 82% of this company’s production is weighted toward natural gas liquids and crude oil.

In recent years, Baytex has been beaten down by the overall market. This stock fell to deep-value levels amid price plunges in energy with the onset of the pandemic.

Boy, how times have changed.

Let’s dive into the company’s recent Q4 earnings, and see if the picture has changed dramatically enough to entice investors.

Impressive Q4 earnings boost Baytex stock

This past quarter, Baytex was certainly not left out from the stream of impressive earnings in the Canadian oil patch. In fact, this company reported $563 million in earnings, or $1 per share. This is up from $0.06 per share in Q3 and $0.39 in the same quarter the year prior.

Those are some impressive growth rates.

Of course, rising oil and gas prices are responsible for this increase. The company’s highly leveraged balance sheet provides for such impressive earnings. In times like these, Baytex is a stock many seek out as a way to play rising oil prices.

However, Baytex’s value, which is derived from its leveraged balance sheet, works both ways. Continued investment is made difficult by these higher levels of leverage. Accordingly, the company announced that it’s cutting its net debt to $1.1 billion. That’s impressive and should boost annual free cash flows.

Baytax has stated it wants to return 25% of its free cash flow directly to shareholders. This has meant a share-buyback program that’s expected to start in Q2.

Overall, these solid numbers, along with rising production, position Baytex well for continued forward momentum from here.

Bottom line

The oil and gas sector is one that’s been very hard to invest in for decades. Indeed, the rise of renewable energy and a shift to electrification has hurt the thesis for this sector. Over the very long term, I expect this will be the case.

However, this ongoing Russia-Ukraine crisis has changed the math for this sector. Investors and governments are more concerned about energy security than ever before. For producers like Baytex, this is an advantageous position, to be sure.

Baytex’s improving fundamentals and strong earnings growth are likely to produce strong near-term tailwinds. Of course, the degree to which these are already priced in is up for the individual investor to assess. However, my view is that this company may see impressive strength for a considerable amount of time.

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. The Motley Fool has no position in any of the stocks mentioned.

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