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2 Oil Stocks Leveraged to an Oil Rebound

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There are a couple of concerns the market probably has about Baytex. The first involves the amount of debt that the company now has after acquiring Aurora Resources for its Eagle Ford assets in late 2015. The second is that half of Baytex's production is heavy oil, which sells at a discounted price to lighter blends. Baytex has had to shut 7,500 barrels of that heavy oil production in because it bleeds cash at current oil prices.

Source: Baytex investor presentation.

Just to break even on drilling heavy oil wells at Lloydminster and Peace River Baytex needs $44 to $47 per barrel.

There's no beating around the bush here: If you think oil prices aren't going to recover to $60 or $70 per barrel, you shouldn't be owning Baytex. However, if you do think oil prices are going to recover, I think there's a lot of upside in Baytex's share price.

More importantly, this company can last a long time with low oil prices so that the turn higher in oil doesn't have to happen immediately. Baytex has a lot of term built into its debt structure, meaning it has no near-term debt maturities. None. There is nothing coming due until 2021.

Source: Baytex investor presentation.

Baytex also has plenty of liquidity, which means it has lots of money available to keep paying its bills and make interest payments.

Source: Baytex investor presentation.

Baytex has $850 million of room on its $1.05 billion bank facility and in 2016 expects to more or less live within cash flow. Baytex could have its bank line cut in half and still be in relatively decent shape.

Baytex shares suggest the company has been pushed to the precipice, and that is not the case at all. This company has the ability to wait for oil prices to recover.

Whiting Petroleum -- nice assets, bad timing, Part 2

Late in 2014, Whiting Petroleum (NYSE: WLL) closed on its acquisition of rival Bakken producer Kodiak Oil and Gas. Let's be honest -- the timing of the transaction couldn't have been worse, given that it added $2.2 billion of debt to Whiting's balance sheet just as the oil price collapsed.

In 2015, Whiting took measures to try to shore up its balance sheet by issuing 35 million shares at $30 each for just over a $1 billion of cash. At the time, Whiting shareholders who were used to a much higher share price probably cringed at the dilution. With the share price now at $9 and change, it looks like a pretty savvy move.

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Despite raising all of that cash, Whiting is still faced with a very leveraged balance sheet. But like Baytex it also has lots of liquidity and no debt maturing anytime soon. Whiting's first debt maturity of significant size doesn't happen until 2019.

Source: Whiting investor presentation.

The current stated amount of Whiting's liquidity is $2.7 billion. Whiting CEO Jim Volker said recently at an energy conference that he could see the company's credit line reduced by up to $1 billion in the coming months. That would still leave Whiting with $1.5 billion of liquidity, which is more than enough for a company planning to live within cash flows.

For oil bulls only

For investors who believe that we're going to see oil above $70 again within the next couple of years, I think the term structure and liquidity that these two companies possess on their balance sheets make them good choices.

To be clear, though, if oil prices stay at current prices for four or five years, you aren't going to be wanting to own these companies because of the very high level of interest payments they are on the hook for relative to the cash flow that their operations generate. These stock prices are beaten down for a reason and it is because the debt levels here are high.

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The article 2 Oil Stocks Leveraged to an Oil Rebound originally appeared on Fool.com.

TMFWolfpack has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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