Positioning for Oil Price Strength: Baytex Energy Corp. or Crescent Point Energy Corp.?

Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) struggles with its balance sheet, while Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) pays a 4% dividend.

| More on:

At the time of writing, crude oil is trading at just under US$50 after the commodity broke the all-important $50 mark earlier last week, as reduced supply due to production cuts and increased demand expectations are taking hold.

So, for investors wanting to position their portfolios accordingly, let’s look at two of the big names in the oil and gas space and compare them.

Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) is actually achieving operational momentum with production of 72,811 barrels of equivalent oil per day (boe/d) in the second quarter of 2017 — a 5% increase from the first quarter.

Oil at $50 per barrel means Baytex is free cash flow neutral; oil at $55 per barrel means incremental free cash flow of $75 million; and oil at $65 per barrel means incremental free cash flow of $175 million. So, the economics look very attractive with rising oil prices.

The problem with Baytex, and the reason the shares represent an elevated level of risk, is the fact that the company continues to carry an excessive level of debt, with a debt-to-capital ratio of 48% and $25 million in interest expenses every quarter.

Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) is also achieving operational momentum, reporting better-than-expected production of 175,615 boe/d for a 1.3% increase from the first quarter. That’s not great, but it is trending above the company’s average production target for 2017.

But Crescent Point is much more attractive from a balance sheet perspective with a debt-to-capital ratio of 30%, and the ability to sustain a dividend yield of 3.99%. Because of this, investors have more time to just sit and wait for the commodity price to strengthen. Because, as we know, we cannot always predict these things accurately.

I mean, who predicted that oil would surpass $140 per barrel a few years ago, and then who predicted how hard and how fast it would fall shortly thereafter? And even if some of us were predicting those things, who accurately predicted the timing of it all?

All this reminds us that these predictions are challenging to make with a good degree of accuracy. So, the second-best thing, in my view, is to decide on the direction you think the oil price will go, and if you believe it will go up, then position yourself in stock of a company that is set up to benefit, but that is strong enough to withstand the wait.

Better yet, investing in a basket of stocks can give you exposure to the oil and gas sector, while giving you a degree of diversification of risk. So, maybe three or four energy stocks would be a good basket, depending on your risk tolerance.

I would include an oil-service name in there as well, such as Mullen Group Ltd. (TSX:MTL), with its excellent management team and diversified strategy that should ensure limited downside with good upside.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas owns shares of Mullen Group.

More on Dividend Stocks

analyze data
Dividend Stocks

Here’s Why the Average TFSA for Canadians Aged 41 Isn’t Enough

The average TFSA simply isn't enough for most Canadians in their early 40s. Here's how to catch up.

Read more »

cloud computing
Dividend Stocks

Insurance Showdown: Better Buy, Great-West Life or Manulife Stock?

GWO stock and MFC stock are two of the top names in insurance, but which holds the better outlook?

Read more »

concept of real estate evaluation
Dividend Stocks

How to Earn a TFSA Paycheque Every Month and Pay No Taxes on It

Canadian REITs can turn your TFSA into a monthly paycheque machine for life. Here's how Morguard North American Residential REIT…

Read more »

A plant grows from coins.
Dividend Stocks

The Smartest Dividend-Growth Stocks to Buy With $1,000 Right Now

New dividend-growth investors should consider CN Rail (TSX:CNR) stock and another top play if they're looking to build wealth over…

Read more »

Dividend Stocks

The 3 Top Canadian Stocks to Buy With $1,000 Right Now

If you want consistent income, look to consistent dividend payers. These three stocks are some of the best in the…

Read more »

A worker gives a business presentation.
Dividend Stocks

Want a 6% Average Yield? 3 TSX Stocks to Buy Today

These stocks pay good dividends that should continue to grow.

Read more »

chart reflected in eyeglass lenses
Dividend Stocks

Is Alimentation Couche-Tard Stock a Buy for its 0.9% Dividend Yield?

Couche-Tard stock's small yield is not enticing, but its growth potential could be a wealth creator.

Read more »

Hourglass and stock price chart
Dividend Stocks

5.2% Dividend Yield! I’m Buying This TSX Stock and Holding for Decades!

With its 5.2% dividend yield, Toronto-Dominion Bank (TSX:TD) is a stock I'm eagerly buying.

Read more »