Crescent Point- Too Cheap to Pass Up
Crescent Point (CPG on the TSX, NYSE) is a light oil and natural gas company with solid underlying assets in Saskatchewan, Alberta, and Utah. The company, being in Canada, is exposed to large differentials to WTI. However that exposure is limited by the majority of pricing being light oil, including LSB and MSW which are priced “only” at around a $20/barrel differential. This is compared to the over $40/barrel WCS differential. Even their worst pricing on medium oil is still priced above WCS, meaning the company is less exposed than peers to canadian differentials.
Even with this horrible pricing sentiment, it has more than reflected it in the price. Crescent Point is trading at the mid $4 range- a shell of its $40 share prices back in just 2014, when it was the market darling. Some of their demise and depression of share price can be seen as a result of the following:
- diluting shareholders
- over emphasis on the dividend rather than the debt load,
- huge capex spending as price tumbled.
CPG has made some key changes. Their management has been replaced with a new board and management team in place.
Although mismanagement was some of the demise, the rest was the price of oil nosediving, with investors avoiding the sector like the plague. This is why we think it’s time to start chipping away at a few names like CPG, as it seems investors believe oil will cease to exist in the coming years. That’s nowhere close to true.
Diamond in the Rough
Crescent Point is trading at less than 3x EV/Ebitda, with a roughly 8% dividend, that based off of FFO is secure. Although they are at a rather high 2x Debt/Cash Flow, it is more than manageable. Management is looking towards monetization of assets in the midstream and more controlled Capex to bring that down to a reasonable 1.3x Debt/Cash Flow. We think this is a solid plan to reign in spending a bit to de-risk the balance sheet, helping to improve their other windfall with investors, which is their debt level. The company as well has slashed operating expenses including executive compensation. These are smart moves to help the company increase efficiency and mobility, especially with the depressed oil prices in Canada.
Although a fairly rigorous budget is needed to continue production amounts, the company has strong opportunities to grow production over the longer term. Areas like the Alberta Duvernay and the Basin offer the company low cost production potential for the future.
Sector Wide Discount
Although Crescent Point looks insanely cheap, it’s not just them, it’s the whole sector. Crescent Point, at less than 3x EV/Cash Flow, with a fairly safe yield (barring even more of a WTI and differential collapse), potential for production growth, and the realization of efficiencies and lower debt is insanely appealing. At these levels, the risk is getting lower the cheaper these names get, and the upside continues to grow. Over the very longterm, the differentials should even out to a more manageable level, and production by then will be even higher than now. While you wait, you’re receiving a dividend yield which is greater than the overall TSX return over the last decade.
If and when oil turns around, you’re also getting fairly a decent torque to a rise in prices. With a balance sheet that, as it improves, means the company is de-risking while it waits for this. Large sums of money are not made by buying when its popular, they are made by buying when sentiment is at its lows. It’s not like oil is going away, with demand rising until around 2040. Although the sector seems fairly risky right now, based on a reversion to past valuations, CPG and other names in the oil patch offer huge upside from these levels.