The rebound in the TSX energy sector off the 2020 market crash has investors wondering if more gains are on the way. Suncor (TSX: SU) and Baytex Energy (TSX: BTE) are former favourites that have fallen out of favour but could be interesting contrarian picks.
Suncor
Suncor just released first-quarter (Q1) 2023 results that show the impact of the decline in the price of oil over the past year. Adjusted operating earnings came in at $1.81 billion compared to $2.76 billion in the same period in 2022. Lower oil prices accounted for the bulk of the difference, although production also slipped from 766,100 barrels of oil equivalent per day (boe/d) in Q1 2022 to 742,100 boe/d in the first three months of 2023.
In addition to oil production, Suncor has refineries along with roughly 1,500 Petro-Canada retail locations. Total refinery utilization was 79% in Q1 2023 compared to 94% in Q1 2022. Downtime at the Commerce City site caused the drop in throughput.
At the time of writing, Suncor stock trades near $39.50 per share. That’s down from $53 last June and pretty much right where it was just before the start of the pandemic.
Suncor has underperformed its oil sands peers who have enjoyed stock gains as high as 100% above their pre-pandemic levels. This could make Suncor a good contrarian opportunity right now while the shares remain out of favour.
Suncor made good progress in the past couple of years in its effort to shore up the balance sheet and reverse the dividend cut that occurred in the spring of 2020. Management is using excess cash to buy back stock and the dividend is now at a record high. Non-core asset sales have helped streamline the operations and the new chief executive officer is expected to push hard to drive more efficiency across the business lines.
Investors who buy SU stock at the current level can get a 5.25% dividend yield.
Baytex
Baytex (TSX: BTE) used to be a dividend darling in the Canadian oil patch. At one point in 2014, the stock traded for about $48 and paid an annualized dividend of $2.88 per share. Unfortunately, Baytex made an expensive acquisition in the Eagle Ford play in Texas right before the oil market crashed in 2014 and 2015. The heavy debt load combined with a plunge in revenue sent BTE stock into a downward spiral that continued until the share price bottomed out around $0.30 in 2020.
Investors who had the courage to buy at that point are sitting on decent gains, but long-term owners of the stock are still in bad shape. At the time of writing, Baytex trades for close to $4.50 per share.
Management took advantage of the rebound in oil prices to finally pay down debt in 2021 and 2022. However, the company recently announced another big acquisition in the Eagle Ford area. Baytex is buying Ranger Oil for US$2.5 billion based on valuations at the time the deal was announced at the end of February. The stock and cash deal will require Baytex to take on new debt to close the acquisition.
Oil bulls expect West Texas Intermediate oil to rise from its current price near US$73 per barrel to US$100 in the next 12-18 months. If they are correct, Baytex could see big rewards from the Ranger Oil deal.
Is one a better pick today?
Investors should expect ongoing volatility in the energy sector, so you need to be an oil bull to make any long-term bets right now. Baytex likely has more upside torque in the scenario where oil prices rally. However, I would probably make Suncor the first choice. The dividend should be safe, so you get paid well to wait for the rebound. In addition, the refining and retail operations normally provide a decent revenue hedge when oil prices drop.
