Baytex Energy (TSX:BTE) Could Rebound Sharply as Oil Prices Surge

Baytex Energy (TSX:BTE) stock could rebound, even if oil prices stay stable.

| More on:
oil and natural gas

Image source: Getty Images

Oil prices at the end of 2022 were lower than expected. A confluence of factors pushed the price of crude down to US$70 a barrel. Unsurprisingly, oil and gas stocks followed along. Small-cap energy producers like Baytex Energy (TSX:BTE) lost about 37% of its value between June and December 2022. 

Now, the stock looks undervalued, even if oil prices stay stable. Here’s a closer look. 

What’s driving oil lower?

Two key factors pushed oil prices higher last year: Russia’s invasion of Ukraine and a persistent undersupply of crude. 

After a decade of underinvestment, energy producers didn’t have the spare capacity needed to meet growing demand from a reopening economy. Meanwhile, Russia’s invasion attracted sanctions and changed the global supply chain of crude. Experts believed that these factors could push a barrel of crude oil over US$200 by winter 2022. That didn’t happen. 

Instead, Europe cut back on energy consumption and imported more gas from other sources. The continent is also using coal to replace some crude oil consumption. Winter 2022 has so far been unexpectedly mild, which means there wasn’t much need for heating in homes. 

All these factors allowed crude oil to sink to pre-invasion levels by late 2022. Consequently, Baytex stock dropped from $9 a share in June to just $5.5 in December. 

Could oil rebound?

West Texas Intermediate (WTI) crude has been range-bound for several months. The global shortage of energy supply has placed a floor on energy prices. China’s retreat from the “Zero Covid” policy has also acted as a tailwind. 

However, the global economy is on the verge of a recession. A sudden pullback in economic activity could reduce the need for oil and gas in 2023. The U.S. Energy Information Administration expects the average price of a barrel of Brent crude to be $83 in 2023 — 18% lower than last year. 

WTI, meanwhile, is expected to remain stable or lower for the rest of the year too. However, energy stocks like Baytex are undervalued, even if oil prices don’t rebound.

Baytex valuation

Baytex stock currently trades at just three times trailing earnings per share. The company also generated 15% free cash flow yield in 2022. Management expects to deliver $3 billion free cash flow through 2026. Meanwhile, analysts have an average price target of $8.6 per share — 53% higher than current levels. 

Put simply, Baytex is undervalued even if oil prices remain stable or drift mildly lower. Investors can expect a steady stream of cash flows for the next few years. A sudden supply shock, geopolitical tensions or a severe winter in 2023 could push the stock much higher. 

Bottom line

Oil stocks have been consistently undervalued during this cycle. The recent pullback in energy stocks could have created a rare opportunity for long-term investors. Keep an eye on this trend. 

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 Vishesh Raisinghani has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Investing

Target. Stand out from the crowd
Stocks for Beginners

2 No-Brainer Stocks to Buy With $7,000

Got some cash to fill up your TFSA? Here are two stocks that look like good buys on the recent…

Read more »

Path to retirement

RRSP Must-Haves: 2 Canadian Stocks to Secure Your Retirement

Future retirees can use the RRSP to save for retirement and be financially secure with the help of a Dividend…

Read more »

Digital background depicting innovative technologies in (AI) artificial systems, neural interfaces and internet machine learning technologies

2 Utility Stocks That Could Help Energize the AI Boom

Canadian Utilities (TSX:CU) and another great utility stock could indirectly benefit from the rise of AI.

Read more »

top TSX stocks to buy
Stocks for Beginners

3 Stocks That Can Help You to Get Richer in 2024

These three stocks have already proven their worth this year, but are set to continue climbing in 2024 and even…

Read more »

Woman has an idea
Dividend Stocks

3 No-Brainer Best Dividend Stocks in Canada to Buy With $500 Right Now

Are you craving more cash flow? $500 in one of these best dividend stocks in Canada might deliver a slice…

Read more »

Canadian energy stocks are rising with oil prices
Dividend Stocks

5 Stocks Whose Dividends Just Keep Growing

Stocks like Enbridge and Fortis are growing their dividends for decades, and returning higher cash to their shareholders.

Read more »

Man considering whether to sell or buy
Tech Stocks

BlackBerry Stock Is Down 20%: Buy the Dip or Call It a Pass?

BlackBerry stock has seen a series of 20% monthly dips since December 2023. Should you buy the dip or call…

Read more »

Happy family father of mother and child daughter launch a kite on nature at sunset

3 High-Flying TSX Stocks That Could Keep On Climbing

These high-flying TSX growth stocks certainly have the potential for more upside over the long term, if secular growth trends…

Read more »