Better Buy: Crescent Point Energy or Baytex Energy Stock?

Baytex Energy stock has returned 900% since the pandemic, while peer Crescent Point Energy has returned 430%.

| More on:
thinking

Image source: Getty Images

TSX energy stocks continue to trade in the value zone with depressed valuations but handsome growth prospects. However, recession fears will likely continue to weigh on them for some more time.

A few midcaps look far more interesting after the recent sell-off. Baytex Energy (TSX:BTE) is one of them, returning 900% since the pandemic. Peer Crescent Point Energy (TSX:CPG) stock has returned 430% in the same period.

With substantial balance sheet improvement, both have taken an inorganic route towards expansion recently. How shareholders will benefit in the long term remains to be seen.

Baytex Energy: Expansion in the US Eagle Ford will be a key growth driver

Baytex Energy has a diversified asset base mainly in the Vikings, Canada and US Eagle Ford. It aims to expand its footprint in the Eagle Ford Basin by acquiring Ranger Oil Corporation. The acquisition is expected to lower Baytex’s overall break-even price as well as give it important access to the US Gulf Coast.

Even though the transaction will increase Baytex Energy’s debt, the management is focused on deleveraging. Post-closing, the company will likely have a leverage ratio of around 1x. The acquisition will likely increase its free cash flow growth by 20%. Once the debt target is achieved, BTE aims to allocate 50% of its free cash flows to share repurchases.

BTE stock is currently trading at a price-to-free cash flow of 3 times and is one of the most undervalued names. In comparison, TSX energy stocks are trading 7 times their free cash flows.

Crescent Point Energy: Capital returns will drive shareholder value

Crescent Point Energy recently completed its strategic acquisition of liquids-rich Montney assets. The transaction is expected to boost its cash flows by 20%, a potentially higher allocation for higher shareholder returns.

Crescent Point has preferred both dividends as well as buybacks to return cash to shareholders. In Q1 2023, it returned $103 million to shareholders and intends to return 50% of free cash flows. According to the company guidance, it is forecast to generate $1.1 billion in free cash flows this year. CPG currently yields a decent 4.3%.

On a valuation front, CPG stock is trading 4.4x its free cash flows and looks richly valued compared to BTE. However, it is still undervalued compared to its peers. CPG’s superior drilling results in Montney and balance sheet improvements could create considerable shareholder value.

Conclusion

If I have to pick between Baytex and Crescent Point, I think BTE has an edge over CPG. That’s because the stock has suffered disproportionately as its depressed valuation suggests. Its balance sheet strength and superior growth prospects, mainly after completing the expansion in the US, deserve a higher valuation multiple.

Energy names have fallen off a cliff and have lost 25% since mid-2022. Baytex Energy is no different a story. It has in fact halved in the last 12 months, underperforming its peers. The only thing that will bring respite for TSX energy stocks and investors is crude oil. If higher demand from China or lower supply from Russia hit the market, oil will likely see a significant rally.

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.

More on Energy Stocks

value for money
Energy Stocks

1 Growth Stock Down 17.1% to Buy Right Now

An underperforming growth stock is a buy right now following its latest business wins and new growth catalysts.

Read more »

Coworkers standing near a wall
Energy Stocks

Why Shares of Parkland Are Rising This Week

Parkland stock is rallying higher as investors expect shareholder calls to take action will create shareholder value.

Read more »

energy industry
Energy Stocks

2 Energy Stocks to Buy With Oil Nearing $90/Barrel

Income-seeking investors can consider adding dividend-paying energy stocks such as Chevron to their portfolios right now.

Read more »

edit Sale sign, value, discount
Energy Stocks

Bargain Hunters: TRP Stock is the Best Dividend Deal Around!

TRP stock (TSX:TRP) offers a high dividend, but is still trading lower than 52-week highs. Now is the best time…

Read more »

Solar panels and windmills
Energy Stocks

So You Own Algonquin Stock: Is It Still a Good Investment?

Algonquin stock (TSX:AQN) was once a top investment for Canadians seeking a high dividend. But after a cut last year,…

Read more »

oil and natural gas
Energy Stocks

Enbridge Stock: Is the Energy Infrastructure Giant Undervalued?

With Enbridge trading nearly 15% off its 52-week high, is the energy infrastructure stock worth buying today?

Read more »

oil tank at night
Energy Stocks

Is Suncor a Buy, Sell, or Hold?

Suncor Energy stock is off to a strong start in 2024. Is the TSX energy stock a good buy right…

Read more »

Burning gas and electric cooker rings
Energy Stocks

2 Energy Stocks to Buy Hand Over Fist in April

These two top energy stocks are some of the best to buy due to their reliability, reasonable growth potential, and…

Read more »