The current year hasn’t been great for energy stocks. The index slipped in the first month, then went through a powerful bullish phase, and has been going down (very slowly) since April. The slump is not consistent, and there is a lot of fluctuation, but the overall downward momentum continues. It may not seem like a good time to buy most energy stocks, but there are always exceptions.
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The case for a mid-cap energy stock
Baytex Energy (TSX: BTE) has a market capitalization of about $3.4 billion and it experienced some wild swings in the last five years. Its performance has been towards the extremes even if we look farther back. The stock experienced powerful growth in the first decade of the century but, after 2014, lost over 94% of its value in less than two years.
The post-pandemic bullish momentum caused the stock to rise 2,800% in fewer than three years, but then it hit again by a correction phase and is trading at a 50% discount from its five-year peak.
The company has assets in both Canada and the U.S., and it’s “heavy” on light oils. Its light oil production from U.S. assets makes up about half of the total free cash flow. The finances are not drastically unhealthy, but the total debt is significant compared to its market capitalization, and the cash and investments are tiny.
Baytex seems like an outstanding stock to buy when the sector is clearly bullish, as it may offer magnified gains. But it might not be as appealing in the current bearish phase.
The case for a large-cap energy stock
Cenovus Energy (TSX: CVE) is a giant in comparison. It’s a large-cap stock with a market value of about $41.2 billion. It’s an integrated energy giant that covers everything from production to distribution. It has multiple fossil fuel products in its portfolio.
Oil sands make up the bulk of its production, and it’s among the largest producers and refiners of oil, natural gas, and a few other products (including bitumen) in Canada.
As an integrated company, Cenovus is more exposed to weak oil demands and other headwinds in the energy sector. However, it also has more control over the entire supply chain. This adds to the company’s stability, and it shows in its performance.
The company also lost over 70% of its value after 2014, but the slump was gradual. Its rise was massive in the post-pandemic market (over 1,100%). The stock is also in the correction phase and trading at a 24% discount from its yearly peak. It’s also offering a decent value, with a price-to-earnings ratio of 11. The yield is at 3.1% compared to Baytex’s 2%.
Foolish takeaway
There are a lot of differentiators between the stocks, but if we look at them from the current market context, we see that Cenovus has a slight edge. The yield is higher, and its slump is likely to be slower. It also has a longer, albeit inconsistent, dividend history, but it has been raising its payout at a compelling pace. Another hike in them may make its edge stronger.
