TSX energy stocks have lost around 30% in the last six months as oil and gas prices fell rapidly. However, if oil prices move higher, we will likely see energy names racing toward their previous highs. Higher demand from China post-reopening and slowing supplies could be a big growth driver for energy commodities. Plus, considering discounted valuation, earnings strength, and buybacks, TSX energy stocks will likely outperform.
Here are three energy names to consider.
Baytex Energy
Canadian mid-cap energy stock Baytex Energy (TSX:BTE) has dropped 50% since its 52-week highs since mid-last year. However, Baytex is a fundamentally strong name with a diversified asset base and sound balance sheet.
Baytex Energy reported free cash flows of $650 million last year from $397 million in 2021. Such stellar growth was a result of higher production in a strong price environment. This excess cash was used to repay debt, which remarkably improved its balance sheet. To be precise, its net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio has come down to 0.7x in Q4 2022 from 4.5x in 2020.
Its recently announced Ranger Oil acquisition is expected to boost production and earnings in the next few quarters. The combination will increase Baytex’s light oil production significantly and will likely help improve margins.
Decent earnings growth prospects and a sound balance sheet make it a fundamentally strong name. Moreover, its discounted valuation is another plus, mainly after the recent correction. BTE stock is trading three times its earnings and two times its cash flows. This indicates a discounted valuation compared to peers and highlights appealing growth prospects.
Vermilion Energy
Vermilion Energy (TSX:VET) stock is one of the laggards and has lost 50% since August 2022. However, along with the correction, it has also become one of the undervalued names among peers. It is trading at a free cash flow yield of 26%, way higher than the industry average.
Its international operations will likely speak for itself once oil and gas prices recover. Although windfall taxes could weigh on its financial growth, management has given handsome guidance through 2024. So, its current levels might act as a floor, and investors can consider it an appealing bet to recover in the second half of 2023.
Tourmaline Oil
Canada’s natural gas giant Tourmaline Oil (TSX:TOU) has dropped 33% since October, mimicking its peers. The drop was quite evident, given the substantial price fall in natural gas prices. However, some of the Canadian energy bigwigs like Tourmaline look well placed, particularly after the correction.
Along with natural gas, Tourmaline Oil also produces condensate, which compensates it in low-price environments to some extent. Moreover, it sells natural gas in export markets which obtains much higher prices than Canadian peers. Its low-cost assets and scale play well and help its bottom line even when gas prices are low.
Tourmaline Oil has been an immense value creator in the last few years. It’s been firing on all cylinders and has returned 550% since the pandemic. Its balance sheet has notably improved in the same period with rapid free cash flow growth and deleveraging. If gas prices recover later in the year, Tourmaline stock will likely be some of the biggest beneficiaries among TSX energy stocks.
