Best Stock to Buy Right Now: Baytex vs. Suncor?

One energy stock could provide higher returns but also comes with greater risk. The other offers better safety but lower returns potential. How will you choose?

Kay Ng

Kay began investing in dividend stocks around 2008 via the concept of value investing. Since then, she has expanded into growth investing, including in small caps. Her passion for investing has only grown over the years! After graduating from UBC with a BSc in Computer Science, she took university courses in financial markets, finance, and financial accounting. She has contributed her works to Motley Fool, Sure Dividend, and Seeking Alpha.

Published October 3, 2024 10:30 am EDT

Energy stocks can be a roller-coaster ride due to their sensitivity to commodity price fluctuations. This volatility significantly impacts oil and gas producers like Baytex Energy (TSX: BTE), while integrated energy giants like Suncor Energy (TSX: SU) are more mitigated from that risk. As investors seek opportunities in the current market, we’ll dive deep into both companies to determine which stock is a better buy right now.

Baytex Energy: A strong comeback story

Baytex Energy, headquartered in Calgary, Alberta, focuses on crude oil and natural gas production, primarily in the Western Canadian Sedimentary Basin and the Eagle Ford formation in the United States. Its liquids production mix in the first half of the year is as follows: approximately 52% in light oil and condensate, nearly 33% in heavy oil, and about 15% in natural gas liquids.

The second-quarter (Q2) results released on July 25 showcased a remarkable rebound from last year’s struggles. In the first half of the year, Baytex’s production surged approximately 73%, averaging 152,407 barrels of oil equivalent per day (boe/d). This impressive performance translated into an 87% increase in adjusted funds flow, reaching $956.7 million, with a per-share rise of nearly 29% to $1.16. Operating cash flow more than doubled to $889.4 million, equating to a 64% per-share increase to $1.08.

Consequently, Baytex also reported a 91% increase in free cash flow, totalling $180.6 million, with a per-share rise of 29% to $0.22. The company rewards its shareholders with a quarterly dividend, offering an annualized payout of $0.09 per share and a yield of about 2.1%.

Looking ahead, chief executive officer (CEO) Eric T. Greager expressed optimism for the second half of the year, highlighting the success of a new oil-weighted pad in the Eagle Ford. As they gear up for 2024, Baytex anticipates strengthening free cash flow, leading to increased shareholder returns and debt reduction.

Analysts currently rate the stock as undervalued, estimating a potential upside of about 47% from its current price of $4.24 per share, although it carries a junk S&P credit rating of B+.

Suncor Energy: Stable and diversified

In contrast, Suncor Energy operates as an integrated oil and gas company, benefiting from a diversified revenue stream that includes oil sands, offshore production, petroleum refining, and a network of Petro-Canada gas stations. This diversification provides a cushion against the volatility often experienced by pure-play producers.

On August 6, Suncor reported its second-quarter (Q2) results. For the first half of the year, net earnings dipped 19% to $3.2 billion, but adjusted operating earnings rose 12% to $3.4 billion, with adjusted funds from operations up 16% to $6.6 billion. Free funds flow increased by over 8% to $3.2 billion, demonstrating solid operational resilience.

The company experienced growth in production volumes, with oil sands production up 11%, upstream production rising 8%, and refinery utilization climbing to 95% compared to 82% a year ago. Suncor’s President and CEO, Rich Kruger, stated that with most of the planned maintenance for 2024 completed, the company is well-positioned for a robust second half.

Currently trading at $52.18 per share, the energy stock is estimated to have a 12-month upside potential of around 15%, and it enjoys an investment-grade S&P credit rating of BBB. With a dividend yield close to 4.2%, it appeals to income-focused investors.

The Foolish investor takeaway

When weighing Baytex against Suncor, it’s clear that Suncor is a more stable investment. Its diversified operations across both upstream and downstream offer greater resilience against market fluctuations. Additionally, Suncor’s stronger financial position and investment-grade credit rating further enhance its appeal to risk-averse investors.

While Baytex may offer the allure of higher capital-appreciation potential, it comes with increased risks associated with its more volatile operational nature. Investors should carefully consider their risk tolerance and overall investment strategy before making decisions in this dynamic energy sector. Ultimately, Suncor stands out as the better buy for those seeking a blend of stability and growth in their portfolio.