Valued at a market cap of $3.36 billion, Baytex Energy (TSX:BTE) is a Canada-based oil and gas company that has significantly underperformed the broader markets. In the last decade, the TSX stock is down 86% burning massive investor wealth in the process. Let’s see if the energy stock can recover and generate inflation-beating returns for future investors.
Baytex Energy is part of a cyclical sector
Baytex Energy acquires, develops, and produces oil and natural gas in the Western Canadian Sedimentary Basin and in the state of Texas, south of the border. The company pays shareholders an annual dividend of $0.09 per share, translating to a yield of 2.1%. However, investors should note that over the years, Baytex has lowered and even suspended its dividend due to a challenging macro environment and lower commodity prices.
For instance, just before the Great Recession of 2008, it had an annual dividend payout of $3 per share, which fell to $1.44 in early 2009. Its yearly dividend payout then fell from $2.88 per share in December 2014 to $1.2 in September 2015. Between August 2015 and July 2023, the company entirely suspended these payouts, driving its stock price lower.
It shows us that the cyclical nature of the energy sector makes Baytex Energy a high-risk investment.
A strong performance in Q3 of 2024
Despite volatile commodity prices, Baytex Energy reported a free cash flow of $220 million in the third quarter (Q3) of 2024. It returned shareholders $101 million via dividends and buybacks and reduced its net debt by 5%.
In the last five quarters, it has returned almost $500 million to shareholders. Baytex has repurchased 75 million shares for $387 million, representing 9% of its total outstanding shares. In this period, its cumulative dividend payout has totaled $92 million.
With a dividend payout ratio of less than 10% in Q3, Baytex has enough flexibility to lower balance sheet debt. In the last 12 months, its net debt has decreased by 12%. Baytex Energy aims to allocate 50% of its free cash flow towards enhancing shareholder wealth and the rest to de-lever its balance sheet.
It ended Q3 with a total debt of $2.3 billion and maintained a total debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) multiple of one time.
Baytex has allocated $1.25 billion to an exploration and development program which should drive future cash flows and dividends higher.
What’s next for Baytex Energy stock?
According to the company’s investor presentation, Baytex Energy expects to
- Increase production by 35% through 2028;
- Almost double free cash flow per share from $0.57 in 2024 to $1.11 in 2028; and
- End 2028 with a total debt-to-EBITDA ratio of 0.5 times.
Right now, Baytex Energy stock is priced at 7.5 times forward free cash flow. If the TSX stock can consistently meet its production projections, it should trade at a higher multiple in the future. If BTE stock is priced at 10 times forward free cash flow, the stock will be priced at $11.1 per share in November 2028, indicating an upside potential of almost 160% from current levels.
Analysts remain bullish on the TSX energy stock and expect it to surge 40% in the next 12 months.
