2 oil and gas stocks to buy; 1 to hold

A recent MoneyLetter review of analyst reports from the energy sector found two oil and gas stocks to buy. But a third stock could only muster a ‘neutral’ rating.

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A recent MoneyLetter oil patch survey found two stocks analysts favor to buy; but one that could only muster a ‘neutral’ reaction.

Baytex Energy Corp. (TSX—BTE)

Early results in the Clearwater and Duvernay wells continue to be positive, while the energy company commits to drilling four additional Clearwater wells, says ATB Capital Markets analyst Patrick O’Rourke. Mr. O’Rourke says this has the potential to be a further positive catalyst for the Baytex story.

Baytex is updating its five-year plan to formally include capital allocated to the Clearwater asset. Third-quarter production in Clearwater averaged 1,500 barrels of oil per day. The company currently has five producing wells in play, with current Clearwater production of roughly 1,900 barrels of oil per day. Three eight-leg wells continue to outperform internal type curves, and two of the wells rank among the top initial production-rate wells in Clearwater. In third-quarter 2021, Baytex drilled two Pembina Duvernay wells, with the 7-8 well currently producing 1,010 barrels of oil equivalent per day and the 6-8 well producing 1,500 barrels of oil equivalent per day. Mr. O’Rourke views the company’s third-quarter 2021 financial results as “positive”. Third-quarter production of 79,900 barrels of oil equivalent per day was in line with the analyst’s estimate of 78,600 barrels of oil equivalent per day.

The company’s third-quarter liquids cut of 81 per cent was also directly in line with consensus estimates. Third-quarter cash flow of $198.4 million beat both Mr. O’Rourke’s $163.5 million forecast and the consensus estimate of $182.4 million. Lastly, Baytex generated $101 million of free cash flow in the quarter. Baytex is rated a Buy.

Paramount Resources Ltd. (TSX—POU)

Paramount’s dividend implementation of $0.24 annually (yielding 1.74 per cent) arrived a bit earlier than CIBC World Markets analysts Jamie Kubik and Camille Gordon anticipated. Furthermore, this oil and gas stock’s buybacks are also back in play. They say the moves are aligned with management’s recent messaging of rewarding investors. They also reflect the broader improvement in financial flexibility underway within the company.

“We see this update as an indicator of continued positive momentum underway for the business, and also being favorable for the shares, but maintain our ‘neutral’ rating on the shares at this juncture,” say Mr. Kubik and Ms. Gordon.

They add that the stock remains expensive near term, but 2022 metrics look solid. They comment further on its Montney operations: “Karr clearly remains the free cash flow engine for the business, and with Karr approaching plateau mode by the end of 2021, it will fund development at Wapiti over 2022 and 2023. While we still expect to see some growth for Paramount in the coming years, we expect the focus on debt reduction and shareholder returns is here to stay, which we anticipate will be supportive for the share price.”

Paramount Resources is focused on building its condensate volumes through development of its marquee assets in the Montney formation. These assets are located in the Peace River Arch area of Alberta.

Parkland Corporation (TSX—PKI)

Parkland has offered $600 million worth of senior unsecured notes. The notes were priced at an “attractive” 3.875 per cent and are due June 2026, ATB Capital Markets analysts Nate Heywood and Ryan Bannerman report.

Following the first quarter of 2021, this oil and gas stock reported liquidity of about $1.3 billion. The analysts estimate that recent balance sheet initiatives have increased liquidity available to the company to over $2 billion. In addition to debt financing, the company previously established an “at-the-market” equity program.

The analysts label PKI, “A well-financed machine. Overall, we view the note offering and resulting financial position as positive given the attractive interest rate, improved financial flexibility and limited near-term debt obligations.

“We continue to view the current balance sheet as healthy, following the note offering (given the $600-million 2026 note offering will now be the nearest term bullet maturity for PKI). We see the company as being well positioned for the ongoing economic recovery. . . . In 2021, management has guided towards adjusted EBITDA of $1.2 billion.” The analysts reiterate an Outperform rating.

This is an edited version of an article that was originally published for subscribers in the December 2021, First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.

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