Baytex Energy Corp (TSX:BTE) Shareholders: Buy Advantage Oil & Gas Ltd. (TSX:AAV) Instead

Baytex Energy Corp (TSX:BTE)(NYSE:BTE) isn’t the stock you think it is. Advantage Oil & Gas Ltd. (TSX:AAV)(NYSE:AAV) looks like a much better bet on the beaten-down energy sector.

| More on:

Last week, I explored whether Baytex Energy (TSX:BTE)(NYSE:BTE) stock could go to $0 in 2019. I asked a simple question: “With mounting debt levels and depressed selling prices, is 2019 finally the year Baytex goes under?”

I suggest you read my original article for the details, but my conclusion was that while the company may survive this year, it will likely come at a significant cost to current shareholders. Not only might the company be paying junk bond interest rates on its debt, but shareholders are likely to be extremely diluted via stock sales at market lows.

If you own Baytex stock, it’s time to reconsider your investment. If you want to maintain exposure to beaten-down energy names, Advantage Oil & Gas (TSX:AAV)(NYSE:AAV) looks like a much better choice.

It’s hard to win with Baytex

If oil prices rise, energy stocks should benefit, right? This is not so with Baytex.

Over the next three years, Baytex needs to pay down or refinance $1.6 billion in debt. Its current market capitalization is just $1.3 billion. Even if oil prices rise, shareholders could still lose due to this massive debt maturity cliff.

Baytex only has a few options to survive.

First, it could refinance its debt, pushing maturities out by another few years. This is a short-term fix that would likely come at expensive interest rates. At a time when the company is starved for cash, it may need to pay double or triple the interest per quarter, if debt markets even comply with its wishes for more funding.

Second, the company could sell assets. But with energy assets now fetching bottom-of-the-cycle prices, that would be a difficult route. Even if assets were sold, the value wouldn’t be able to cover the impending debt maturities.

Lastly, Baytex could massively dilute shareholders by selling hundreds of millions of dollars’ worth of stock near all-time lows. Out of all the options, this is the most likely, although this strategy will likely be complemented by some asset sales and pricey refinancing.

Advantage Oil & Gas looks much better

If Baytex stock could struggle even if industry conditions improve, which company should you bet on? Advantage Oil & Gas looks like a great pick.

With a market capitalization of $430 million, Advantage’s $300 million debt load isn’t anything to sneeze at, but it’s much more reasonable than Baytex’s daunting maturity cliff.

Most impressively, Advantage is positioned well for another market downturn.

Notably, if market conditions turn sour, up to $100 million in capital expenditures this year can be delayed to 2020 with minimal impact on long-term production. That’s a lifeline that Baytex simply doesn’t have.

Additionally, the company’s new projects break even at prices below $1.00 per mcf. With current prices around $2.00 per mcf, Advantage has a huge margin of safety.

Choose this stock

In total, the future of both companies will be dictated by the long-term prices of oil and gas. Advantage, however, has a much better chance of surviving to see that potential future.

If you own Baytex stock or are looking to capitalize on the energy bear market, Advantage Oil & Gas is a great place to start.

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 Ryan Vanzo has no position in any stocks mentioned.

More on Energy Stocks

sources of renewable energy
Energy Stocks

Canadian Renewable Energy Stocks to Buy Now

Renewable companies in Canada are currently struggling through a challenging phase, but quite a few of them are still worth…

Read more »

oil pump jack under night sky
Energy Stocks

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

CNQ stock is down in recent months. Is a rebound on the way next year?

Read more »

a person looks out a window into a cityscape
Energy Stocks

2 No-Brainer Energy Stocks to Buy With $500 Right Now

Two low-priced energy stocks can reward investors who have limited capital with far superior returns than expensive peers.

Read more »

canadian energy oil
Energy Stocks

Where Will Suncor Stock Be in 1 Year?

Suncor Energy Inc (TSX:SU) stock is doing well this year. Will it still be doing well next year?

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Best Stock to Buy Right Now: Cenovus vs Baytex?

It may not seem like a good time to buy most energy stocks, but there are always exceptions.

Read more »

A bull and bear face off.
Energy Stocks

Dividend Investors: Top Canadian Energy Stocks for November

These three dividend-payers are on a bullish uptrend.

Read more »

analyze data
Energy Stocks

Buy 8,850 Shares of This Top Dividend Stock for $2,000/Month in Passive Income

Let's do the math on what it would take to generate $2,000 a month in passive income from Enbridge (TSX:ENB)…

Read more »

oil and gas pipeline
Energy Stocks

Is TC Energy Stock a Good Buy?

TC Energy stock has a lot going for it, but there are also a few red flags to consider before…

Read more »