As Oil Prices Get Hit, Should We Buy the Dip or Head for the Hills?

Trading at levels below 2 years ago, despite the price of oil being up 60%, Baytex Energy Corp. (TSX:BTE) (NYSE:BTE) is presenting as a big opportunity.

| More on:
oil, petroleum, refinery

Crude oil prices are being hit hard today, declining more than 2.5% and fast approaching $60 again.

With last week’s reported rise in inventories and a general unease in the marketplace, what should investors do with their energy holdings?

Let’s start with the inventory number. Inventories rose by 6.7 million barrels, and while this was widely expected and it is less than the five-year average withdrawal, this may indeed have spooked investors.

But when we look at inventories, we also need to look at global inventories. With global inventories falling and demand in developing nations rising, the oil market will probably see some upward pressure on prices going forward.

Further, with continued geopolitical tensions, there is still the real possibility of supply disruptions coming from several sources.

Crude prices are 60% higher than they were in early 2016, so things are looking good for energy companies.

Companies like Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) will report their fourth quarter earnings on March 6.

The stock is trading below 2016 levels despite the 60% run up in the price of oil.

This signals a big opportunity because the market is not believing oil prices. However, if they at least hold above $55 or $60, which they have for some time now, energy companies will be beating market expectations, which will send their stocks climbing higher.

Baytex Energy, as we know, has been hit by the fact that the company was and is still carrying too much debt. But, while at sub $30 oil, this poses a huge problem. Baytex has big leverage to the oil price; accordingly, the stock has a big upside.

It has been slowly reducing its debt, and has taken it down from $2.1 billion to the current $1.7 billion.

The company’s asset disposition plan, which is expected to bring in much-needed proceeds from the sale of non-core assets, will go a long way toward deleveraging the balance sheet and reducing the risk of investing in these shares.

And the company has been performing better operationally, with management producing in the upper end of its guidance and reducing its 2017 operating cost guidance by 10%.

As a reminder, at $50 per barrel, Baytex is free cash flow neutral; at $55 per barrel, Baytex generates incremental free cash flow of $75 million. Oil at $65 per barrel means incremental free cash flow of $175 million.

Another option would be to invest in energy services companies like Precision Drilling Corp. (TSX:PD)(NYSE:PDS), which is seeing rising activity levels, soaring revenue, and a recovery in earnings.

As of the latest quarter, the company was still reporting net losses and the improvement — to the tune of 44% — was significant. More important, cash flow from operations was $37 million.

Precision had more than double the amount of rigs working than it had last year, and pricing remained firm as the sector continued to ramp up.

In summary, with oil holding above $60, and supply/demand environment having improved dramatically over the last while, energy stocks are still a good bet.

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 PRECISION DRILLING CORPORATION.

More on Energy Stocks

construction workers talk on the job site
Energy Stocks

Best Stock to Buy Right Now: Baytex vs Suncor?

Suncor and Baytex stocks both look like solid companies offering growth and dividends. But which is the better buy?

Read more »

bulb idea thinking
Energy Stocks

3 Incredibly Cheap Energy Stocks to Buy Now

Energy stocks are trending upwards on the back of several key factors. And these three continue to be top cheap…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Should You Buy Freehold Royalties Stock for its 8% Yield?

Freehold Royalties is a TSX dividend stock that offers shareholders a forward yield of 8%. But is the energy stock…

Read more »

Muscles Drawn On Black board
Energy Stocks

Is Suncor Energy Stock a Good Buy?

Suncor is on a roll in 2024. Are more gains on the way?

Read more »

profit rises over time
Top TSX Stocks

3 Reasons to Buy Enbridge Like There’s No Tomorrow

Have you considered buying Enbridge (TSX:ENB)? Here are 3 reasons to buy Enbridge today for lasting growth and income.

Read more »

oil pump jack under night sky
Energy Stocks

Is CNQ Stock a Buy for its 4.5% Dividend Yield?

CNQ stock is one of the best options out there for dividend growth. But what about value? Let's take a…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Is Imperial Oil Stock a Buy, Sell, or Hold for 2025?

Imperial Oil stock is in a precarious position, so what should investors consider as we head nearer to 2025?

Read more »

construction workers talk on the job site
Energy Stocks

Is Suncor Stock a Buy, Sell, or Hold for 2025?

Suncor Energy stock is trading at its decade-high on uncertainty in the oil market. Should you buy, sell, or hold…

Read more »