Many investors attempting to bet on an oil rebound and hopefully strike it rich have focused energy on picking some of the most beaten up oil companies, choosing to find the best bargains at the bottom of the dumpster, so to speak.
As it turns out, the past two years have not been very kind to oil & gas concerns, with many companies feeling the sting of years of high debt accumulation and capital expenditure now overshadowing operations, eating into whatever profit margin remains after accounting for the massive drop in the commodity price of oil.
One company that would fit in this category, in my opinion, is Baytex Energy Corp. (TSX:BTE). Baytex is a company with an extremely high debt load, and has been generating reduced cash flows for some time now, resulting in a situation where the company has seen its share price decrease from around $50 per share in 2014 to the $3.50 level today.
The compounding effect of a reduction in free cash flow over time is one in which the company is forced to take on debt, reduce capital expenditures and growth projects internally, and will eventually see the equity of the company diminish over time until significant positive free cash flow returns.
While many great deals may exist in the Canadian oil & gas industry, at this point in time, I believe better opportunities exist in this space and argue Baytex simply represents too much risk for a prudent investor right now.
