Why Baytex Energy (TSX:BTE) Stock Tumbled 17% in September

Should you buy BTE stock?

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A massive weakness in the energy sector that started in June continued in September. Oil and gas stocks tumbled more than 15% last month, mimicking energy commodity prices. Since June, crude oil has dropped 30%, while natural gas has fallen 25%. Baytex Energy (TSX:BTE), one of the top gainers in the small- and mid-cap TSX energy space, tumbled 17% in September. Notably, despite the recent correction, BTE stock is still sitting on massive gains of 75% for the year.

Why did Baytex stock fall in September?

Energy commodity prices have been weak for months now, driven mainly due to rising interest rates and ensuing recession fears. At the same time, the war in Europe and supply woes from the middle east could boost energy prices. Moreover, an expected oil demand surge from China could all the more skew the demand-supply imbalance, fueling another massive rally in crude oil.

However, Baytex, along with its peers, kept digging deeper in the last few months. But considering its appealing valuation, production growth, and huge cash flow growth prospects, Baytex looks like an attractive investment for the long term.

Why Baytex Energy?

Baytex is a $3.8 billion energy producer with high-quality assets in the U.S. Eagle Ford, Clearwater, and Peace River basins. It is an 83% liquids-weighed energy producer and intends to produce 87,000 barrels of oil equivalent per day (boepd) in Q4 s2022. It aims to produce 10,000 boepd from Clearwater, one of the most economical oil plays in North America.

So far in 2022, it saw free cash flows of $307 million, more than double that in 2021. Higher production from more lucrative assets in a high-price environment will likely drive earnings growth and margin expansion for Baytex. As a result, free cash flow growth, as it saw in the first quarter of 2022, will likely continue in the second half as well.

Interestingly, free cash flows were effectively used for deleveraging and increasing shareholder returns. During the first half of 2022, Baytex repaid $300 million of debt, taking its net debt to $1.1 billion. Note that Baytex had net debt of $1.8 billion in late last year. As debt reduces, the company’s interest expenses also go down, ultimately increasing its profitability.

Moreover, aside from repaying debt, Baytex has also been aggressively repurchasing its shares since May. Till September 2022, it bought back 21.6 million shares of the total float. Share repurchases reduce the total number of outstanding shares, increasing the company’s per-share earnings and reducing the total outflow for future dividends.

BTE stock: Valuation

BTE is trading four times its 2023 earnings and 1.4 times its 2023 cash flows. Considering the industry average and Baytex’s handsome earnings potential, BTE stock looks undervalued at these levels. The stock should trade at higher multiples in the next few quarters.

After a weak September, crude oil and TSX energy stocks started trading strong in October. The momentum could continue, given the newly added supply woes. Undoubtedly, Baytex will be worth watching.

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.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

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