Baytex Energy (TSX:BTE) and Crescent Point Energy (TSX:CPG) are benefitting from the post-pandemic rally in the energy sector. Investors who missed the rally off the lows of the market crash are wondering if one of these stocks is still undervalued and good to buy today.
Baytex Energy
Baytex Energy got itself into big trouble at the height of the last oil boom in 2014 when it spent $2.8 billion to buy Aurora Oil and Gas: a producer in the Eagle Ford play in Texas. The deal closed just before the price of oil went into a steep decline. Baytex stock fell from $48 per share that summer to below $4 by the end of 2015. The $2.88-per-share annualized dividend disappeared, as the company struggled with huge debt and dwindling cash flow for years.
The stock took another beating during the pandemic, eventually falling as low as $0.30 per share at the bottom of the 2020 crash. Investors who had the guts to buy at that point have enjoyed stellar returns. At the time of writing, Baytex trades near $5 per share, and that’s down from the 12-month high around $9.
The recently announced US$2.5 billion acquisition of another Eagle Ford producer, Ranger Oil, has investors wondering if Baytex will get it right this time or if it is repeating its mistake of making a major acquisition near the top of the oil cycle. After working hard to reduce debt to get the balance sheet back in order, Baytex is taking on new debt to fund the deal at a time when borrowing costs are expensive and oil prices are volatile. The deal is expected to close by the end of June 2023.
Oil bulls predict that West Texas Intermediate oil will return to US$100 per barrel in the coming months and potentially stay there for years. If that turns out to be the case, Baytex’s new big bet could prove to be a winner.
Crescent Point Energy
Crescent Point is another energy player that used to be a popular pick among dividend investors. The company was among the oil patch’s most aggressive buyers for years with a strategy that used a high dividend payout to attract buyers of ongoing rounds of new stock issues to fund growth. Crescent Point also carried a lot of debt on the balance sheet.
All this worked fine, as long as the price of oil remained high enough to generate the needed cash flow to support the bulk of the distributions and cover debt costs. However, once the bottom fell out of the oil market, and the stock price tanked, the party ended.
Crescent Point tumbled from $47 per share in June 2014 to about $16 by the end of 2015. The slide continued until CPG stock hit $1.00 in March 2020.
As with Baytex, investors who bought the bottom have watched their investments increase substantially. Crescent Point currently trades near $10 per share and was as high as $13 last year.
The management team did a good job of finding buyers for non-core assets before the 2020 plunge and now that the balance sheet is in better shape, Crescent Point is making acquisitions again to drive production and revenue growth. Investors have also started to see a return to dividend growth after the former payout was nearly eliminated.
At the time of writing, CPG stock provides a 5% yield.
Is one a better bet?
Baytex and Crescent Point remain volatile stocks, and any negative move in the oil market could send the share prices sharply lower in a short period of time, so investors need to have a strong stomach for turbulence and should be oil bulls to pull the trigger on these stocks today.
If you are in that camp, Crescent Point at least pays you a decent yield to ride out the bumps and should move higher with the broader energy sector as oil prices increase. I would probably make CPG the first pick.
Baytex potentially offers better upside torque on a surge in the price of oil, but the big bet on Ranger Oil has increased the risk for investors.
