Shares of Baytex Energy have been crushed over the past year, down more than 75%.
That said, shares have come up considerably off their bottom, and are up more than 30% since the start of the year. Some investors might see this as the beginning stages of a recovery and be tempted to double down. That, however, is the worst mistake investors could make right now, because this driller is far from being out of the woods just yet. Instead, the company is facing two big problems: Weak credit and even weaker oil and gas prices.
Credit is on thin ice
Baytex Energy's credit is quite worrisome at the moment. The company currently has $1.2 billion in debt, which is a heavy weight to bear. It has become such a concern that one of the company's credit rating agencies just downgraded its credit rating from Caa1 to Caa2. That not only pushed the company's credit even further below investment grade, but it signaled a very elevated credit risk. That's because while a Caa1 rating suggests a company has substantial risk, a Caa2 implies that its credit is extremely speculative. Furthermore, it puts it just one notch away from a Caa3 rating, which warns that a default is imminent. In other words, the company is currently very financially vulnerable and needs more favorable conditions to be able to meet its financial commitments.
Contrast that with Encana , which recently had its own credit rating downgraded, though from Baa2 to Ba2. While that pushed Encana's credit rating below investment grade, its credit still suggests that it is less vulnerable than lower-rated companies like Baytex Energy at being unable to meet its current financial obligations.
Because of these challenged economics, Baytex Energy has deferred investment in both plays this year, canceling plans to drill 12 Peace River and 24 Lloydminster wells. As a result of that and the aforementioned production shut-ins, the company's 2016 production is expected to decline by slightly more than 10% year over year.
Needless to say, the company needs a much higher oil price in order to not only be able to restart some of its legacy wells, but to start drilling economic wells in all of its key plays to both maintain and grow production. There's no guarantee that oil will improve to the more sustainable level that Baytex Energy needs to start creating value for investors again.
With its credit still very tight, and a huge chunk of its wells and drilling locations currently below break-even, now is not the time to double down on Baytex Energy's stock. The company still faces a very real risk that it might not make it out of the downturn if oil prices take another dive down and stay there for a while. Instead, investors are better off putting their investment dollars elsewhere, at least until there's a bit more clarity on both oil prices and credit.
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The article The Worst Mistake Baytex Energy Corp. Investors Can Make Right Now originally appeared on Fool.com.
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