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Contrarian Investors: Is Baytex Energy Corp. (TSX:BTE) or AltaGas Ltd. (TSX:ALA) Attractive Today?

Andrew Walker

Contrarian investors are always searching for unloved stocks that might be on the verge of a significant rebound.

Let’s take a look at Baytex Energy Corp. (TSX:BTE)(NYSE:BTE) and AltaGas Ltd. (TSX:ALA) to see if one should be on your buy list today.

Baytex

Baytex was a $48 stock and paid out a huge dividend in the summer of 2014, when West Texas Intermediate (WTI) oil traded at US$100 per barrel. Today, the distribution is history, and investors can buy Baytex for $5.22 per share. At one point in early 2016, the stock traded for close to $2 per share.

Investors who had the courage to step in at the low are happy campers right now, but long-term holders of the stock are wondering if the good old days will ever return.

Management did a good job of keeping the company alive through the downturn by cutting the dividend early and renegotiating terms with lenders when there was still an appetite for deals. In addition, the company raised capital in 2015 when oil experienced a brief recovery.

What’s the issue now?

Baytex made a major acquisition right near the top of the market — a deal that’s been a double-edged sword. It gave the company attractive assets in the Eagle Ford shale play, but also saddled the balance sheet with a large debt load. Higher oil prices are allowing Baytex to live within its cash flow, but the debt is restricting management’s ability to significantly boost the capital plan and production.

Fans of the stock look at the quality of the assets and see huge upside opportunity. Baytex itself has even estimated its net asset value to be above $9 per share at oil prices that are lower than current levels.

AltaGas

AltaGas owns gas, utility, and power businesses in Canada and the United States. The company has grown over the years through a combination of organic developments and strategic acquisitions, and that trend continues.

AltaGas wrapped up its Townsend 2A and North Pine projects in British Columbia late last year, and is making good progress on its Ridley Island propane export terminal in the province. In addition, AltaGas is working through its $8.4 billion acquisition of Washington D.C.- based WGL Holdings.

The deal is scheduled to close in 2018, and management is confident that the company will see strong cash flow growth through 2021, supported by $4.5 billion in secured capital projects and an additional $1.5 billion in development opportunities. As a result, dividend increases should continue.

The market is concerned that AltaGas is biting off more than it can chew with the WGL purchase, which is why the stock is down from $30 per share a year ago to the current price of $25.

The company raised the monthly dividend payout by 4% last fall to $0.1825 per share. At the time of writing, that’s good for a yield of 8.75%.

Is one a better bet?

Both companies carry risk, but also offer attractive upside potential.

If you think oil is headed back to US$100 per barrel in the near term, Baytex might be worth considering. Otherwise, AltaGas provides an attractive payout that should be sustainable, and the stock could take a run back to the $30 level on a successful completion of the WGL purchase.

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Fool contributor Andrew Walker owns shares of AltaGas. AltaGas is a recommendation of Stock Advisor Canada.