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

man touches brain to show a good idea
Energy Stocks

1 No-Brainer Energy Stock to Buy With $500 Right Now

Should you buy a cyclical energy stock at its decade-high? Probably not. But read this before you make a decision.

Read more »

A solar cell panel generates power in a country mountain landscape.
Energy Stocks

Top Canadian Renewable Energy Stocks to Buy Now

Here are two top renewable energy stocks long-term investors can put in their portfolios and forget about for a decade…

Read more »

oil and gas pipeline
Energy Stocks

Where Will Enbridge Stock Be in 3 Years?

After 29 straight years of increasing its dividend and a current yield of 6%, here's why Enbridge is one of…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

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

Enbridge stock just hit a multi-year high.

Read more »

oil pump jack under night sky
Energy Stocks

Where Will CNQ Stock Be in 3 Years?

Here’s why CNQ stock could continue to outperform the broader market by a huge margin over the next three years.

Read more »

engineer at wind farm
Energy Stocks

Invest $20,000 in This Dividend Stock for $100 in Monthly Passive Income

This dividend stock has it all – a strong outlook, monthly income, and even more to consider buying today.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

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

Valued at a market cap of $55 billion, Imperial Oil pays shareholders a growing dividend yield of 2.4%. Is the…

Read more »

Pumpjack in Alberta Canada
Energy Stocks

Where Will Imperial Oil Stock Be in 1 Year?

Imperial Oil is a TSX energy stock that has delivered market-thumping returns to shareholders over the last two decades.

Read more »