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A sustained bull market looms on the horizon as inflation drifts toward central bank targets and interest rate cuts begin. The energy sector underperformed last year, although a resurgence is highly possible.
Oil sentiment is still a bit low, so 2024 is a stockpicker’s market according to Eric Nutall, senior portfolio manager at Nine Point Partners. However, picking prospects in the energy sector is a challenge. You have 106 stocks and 4 industries to choose from. But if you have $200 to invest, set your sights on the oil and gas exploration and production (E&P) industry.
Athabasca Oil (TSX:ATH) and Baytex Energy (TSX:BTE) are no-brainer buys. Both mid-cap stocks trade below $5 per share, are TSX30 winners, and have delivered far superior returns than their larger peers in the last three years. More importantly, their profits and free cash flow (FCF) have grown significantly post-pandemic.
High growth stock
Athabasca is a non-dividend payer but the windfall from price appreciation is enormous. At $4.36 per share, the overall return in three years is 914%. Had you invested $500 ($0.43 per share) in February 2021, your money would be $5,069 today.
TSX30 is the flagship program for Canada’s top growth stocks. Athabasca ranked 19th in 2022 and beat the broader market in 2023, gaining 73% versus 8.12%, respectively. In Q3 2023, revenue declined 4.5% to $379.2 million versus Q3 2022, while the net loss reached $79.2 million compared to $155 million in net income a year ago. However, FCF jumped 2,027.3% year over year to a record $107.8 million.
Athabasca enhances shareholder value through multi-year cash flow per share growth. Its asset base drives profitable liquids-weighted growth and ensures financial resiliency. The recent creation of Duvernay Energy with Cenovus Energy is the latest growth catalyst.
According to management, the 70% ownership stake in Duvernay Energy provides a clear path for self-funded production and cash flow growth in the Kaybob Duvernay resource play.
Soon-to-be top-tier oil producer
Baytex Energy offers a compelling value proposition. The energy stock ranked 26th and 12th in the TSX30 List in 2022 and 2023, respectively. At $4.32 per share, the total return in three years is 340.4%. Furthermore, you can earn two ways: this $3.7 billion oil & E&P company also pays a 2.08% dividend.
In Q3 2023, revenue increased 94.2% to $1.2 billion, while net income fell 40.3% to $127.4 million. Notably, FCF rose 64.5% year over year to $158.4 million. Its President and CEO, Eric T. Greager, said the quarterly results reflect the first full quarter of combined operations of the recently acquired Ranger Oil. It also showed the strength of Baytex’s diversified oil-weighted portfolio.
Baytex operates in the Western Canadian Sedimentary Basin and Ranger Oil is an operator at Eagle Ford in the US. Management can achieve its goal of becoming a top-tier North American oil producer because of the prolific oil resource plays and high-return projects.
Energy boom
Athabasca Oil and Baytex Energy continue to display strong fundamentals amid massive headwinds. Should an energy boom materialize in 2024, it will begin in the oil & gas E&P industry.
