Baytex Energy Corp (BTE.TO)

This company transformed itself over the last couple of years. Unfortunately, it did it at a time when commodity prices were collapsing. 3 years ago, they bought Aurora and got into the Eagleford, one of the best development plays in the best area. Paid a pretty high price which hurt the balance sheet quite a bit. In the meantime, their Canadian heavy oil program was going on, the area that really got hurt when commodity prices collapsed, and ended up with a debt heavy balance sheet. They’ve done a lot to clean that up, and have just recently begun on the growth path by making an acquisition in Western Canada. There is a lot of “show me” that now needs to happen. It has become a play on commodity. There are better opportunities elsewhere.

He is still very positive on this. There were studies that were showing that when they bring forward their reserve numbers, the increases are going to be fantastic. This isn’t just a Canadian company. They have significant holdings in the shales in the US, where most of their capital expenditures are. They are going to do very well.

At this time, he would consider this to be just a Hold. There are some stocks in the sector that are more compelling from a price point of view, but with the improvements we are seeing within the sector, this one could do fairly well going forward.

(A Top Pick Feb 23/16. Up 96.6%.) There are times to own and there are times to not own. The time to own is not now. There is no differentiation largely in the marketplace between the “haves” and “have-nots”. This one is clearly a “have not” based on their balance sheet. He wants companies that have excess free cash flow, that they can use to drill, grow production faster and compress their multiples much faster.

For many years this had a very conservative balance sheet, primarily in Western Canada. A few years ago they made an acquisition in Texas. His issue is that their debt levels are very high at 5X debt to cash flow. The dividend payout is at about 112%. He prefers names that have a better, stronger balance sheet.

She is more constructive on crude oil than she was last year, but at $51-$52 it is probably range bound. She hadn’t increased her exposure in the energy sector last year, but is starting to add a bit more now. This particular company is not on her list.

Sort of a dual company ever since they bought Aurora a couple of years ago, so it has heavy oil assets in Western Canada, and really, really high quality Permian Basin assets in West Texas. It’s older legacy assets are higher cost and the Permian Basin are low cost. They went into this down cycle with too much debt, and got slammed. This is interesting here, because he is constructive on oil prices, and that oil will make its way higher up to the $60 range later this year. Even though that is only a 15%-20% move in oil, it has a much bigger impact on companies like this. He likes this here.

*Long* A pairs trade with CNQ-T. Over the next 6 months you could see oil prices drift up. Their balance sheet is possibly underestimated because their debt is all termed out. They are 80% down from their all time high. (Analysts’ Target: $7.97).

Historically, this has been a heavy oil producer. It has bought more heavy oil assets recently. Heavy oil trades at a discount to regular crude oil, because of processing. This is a call on if you think the price of oil is going higher. They still have some debt that they have to pay down. If oil goes to $70-$80, this company will do very well. In the $55-$60 range, there is not a lot of upside.

This was not considered to be one of the best, but does appear to be straightening out its finances. It is improving a little in the slightly better complexion of the oil/gas sector. He prefers others, such as Seven Generations (VII-T).

This week will really help us to figure oil out. Look at stop losses. Make sure you have it in place. He suggests $6.70. The down trend is over, however. ‘VSTOP’ is a calculated stop loss point that incorporates the volatility in the stock.

Oil prices have had quite a bit of drama over the last 24 months, and lately OPEC has pulled a surprise to the good, which has propped the price up. He thinks OPEC can largely stick to the deal and have the support of Russia. However, there is a cap to the upside on oil getting too high. At over a $60-$65 level, the US drillers will rush back in. This company was doing “just okay” in the $55 range. They are a big player in the US. If you believe oil prices will be in the mid-$50, this one will do just fine.

He has a very small position. Views this as torque to higher oil prices. He is comfortable with the credit profile, which has been an issue in the past. They ended up securitizing their credit facility against the assets, and pushing down the subordinate note holders. Doesn’t think the company has an issue with debt, but it has struggled in an environment of lower oil prices. Once we get to $55 oil, it becomes profitable again. Once it gets to $60 and beyond, this company looks a lot better than it does now.

Generally, energy looks like it is going to do better. We are probably at the bottom in energy. If they are okay on the balance sheet side, you are probably okay.

He has always liked it when he was looking for long oil exposure, but he is not looking for that right now. If you were bullish on oil, a $10 move will get you an outsized return.