Baytex Energy (TSX:BTE), valued at $3.1 billion by market cap, is an energy company that acquires, develops, and produces oil and natural gas in the Western Canadian Sedimentary Basin and the U.S. It offers light oil and condensate, natural gas liquids, and natural gas.
The TSX stock has grossly underperformed the broader markets in the past decade and trades close to 90% below its all-time highs. While its past performance has disappointed shareholders, let’s see if Baytex Energy stock is a good buy right now.
Can Baytex Energy stock recover and deliver solid returns?
Baytex Energy has a track record of new discoveries and a diversified oil portfolio with more than 10 years of drilling inventory. The company expects to deliver annual organic growth in single digits with a reinvestment rate of between 55% and 60%. It has allocated 50% of its free cash flow towards dividends and buybacks and the rest to lower balance sheet debt.
Baytex Energy pays shareholders an annual dividend of $0.09 per share, translating to a forward yield of 2.2%. The company restarted its dividend payments in July 2023 after entirely suspending its dividend program in 2015. Before the financial crash in 2008, Baytex Energy paid investors an annual dividend of $3 per share. Notably, the stock trades at just over $4 per share at the time of writing.
In the first six months of 2024, Baytex Energy generated free cash flow of $181 million. Given its outstanding share count, its dividend expense would total around $36 million, indicating a payout ratio of just 20%. In addition to its quarterly dividend, Baytex returned over $60 million via share buybacks in the last two quarters.
Baytex Energy’s long-term debt rose from $1.8 billion in 2019 to $2.4 billion at the end of Q2 2024. Over time, it aims to lower its total debt to $1.5 billion.
Between Q4 2020 and Q2 2024, Baytex Energy increased production capacity by 50%. During this period, its total debt to EBITDA (earnings before interest, tax, depreciation, and amortization) improved from 4 times to 1.1 times.
Is Baytex Energy stock undervalued?
In 2024, Baytex Energy aims to generate free cash flow of $700 million, which is enough to meet its base dividend payout of $75 million. It also allows Baytex to reduce the debt balance by $350 million this year.
In the last 12 months, Baytex’s share count has reduced by 7.3% and is forecast to end 2024 with adjusted earnings per share of $0.39. Analysts expect earnings to expand to $0.47 per share in 2025. So, priced at 8.6 times forward earnings, Baytex Energy stock trades at a reasonable valuation.
Baytex expects to spend $1.3 billion in annual capital expenditures through 2028. These growth investments should help it expand free cash flow from $0.57 per share in 2024 to $1.11 per share.
If the TSX energy stock trades at 10 times forward free cash flow, it should be priced at $11 per share, indicating an upside potential of over 150%. Given consensus price target estimates, Baytex Energy stock trades at a 50% discount in October 2024.
The Foolish takeaway
Baytex Energy is cheap and might finally deliver outsized gains to investors if it successfully meets cash flow and production targets. Alternatively, the cyclical nature of the energy sector, a sluggish macro economy, and geopolitical headwinds might impact its performance in the next 12 months.
