The cost of oil right now is right at 27% higher than it was a year ago. And, we just had another spike as Saudi Arabia and Russia announced in early September, they would be extending production cuts of 1 million barrels per day through the end of the year. 

Their unwillingness to pump additional supply is a boon to oil and gas developers like Baytex Energy (BTE - Get Rating), which develops oil and gas properties in the U.S. and Canada. Baytex operates in the Western Canadian Sedimentary Basin and in the Eagle Ford in the U.S.

You would think with the price of oil up so much, the number of drilling rigs in the U.S. would be increasing at a pretty good clip. But the reality is the number of oil rigs operating in the U.S. and Canada has decreased by over 17% this past year, according to rig count numbers from Baker Hughes released last week. 

Oil and gas prices are not coming down anytime soon, and this should greatly benefit small production companies like Baytex which stand to pull in huge profits while flying under most investors’ radar. BTE has committed to a goal of returning 50% of those profits to investors, via stock buybacks and dividends, and using the other 50% of free cash flow to shore up its balance sheet.

Baytex completed a large acquisition earlier this year of Ranger Oil Corporation, adding drilling capacity in the Eagle Ford, when oil was much cheaper. This extra capacity should flow directly to the bottom line in the next few quarters as higher oil prices increase earnings. 

The company currently trades at only 2.6x earnings and a lowly 3.5x projected earnings. BTE has operating margins of just over 40%, and an overall B rating in our POWR Ratings. Quality and Value are the standout components for BTE.

I think we all have to face it; higher oil prices are here to stay for the foreseeable future. Companies like Baytex should be able to reap profits from the geopolitical forces that are coming to bear on the market, and that show no sign of relenting.   

What To Do Next?

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BTE shares rose $0.06 (+1.39%) in after-hours trading Thursday. Year-to-date, BTE has declined -4.06%, versus a 13.30% rise in the benchmark S&P 500 index during the same period.

About the Author: Jay Soloff

Jay is a former professional market maker who cut his teeth trading on the floor of the CBOE. With more than 20 years of experience trading and investing, his focus is on making professional strategies accessible to everyone, which is exactly what does in his highly profitable POWR Income and POWR Stocks Under $10 investment advisory services. More...

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