Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) is starting to give back some of its recent gains, and investors are wondering if this is a good opportunity to buy the stock.
Let’s take a look at the current situation to see if Crescent Point deserves to be in your portfolio.
Oil prices
Oil has staged an impressive rally since the January low, rising 50% to the all-important benchmark of US$40 per barrel.
What happened?
At the start of the year, it seemed inevitable that WTI oil was destined to take out US$20 per barrel. Producers in the U.S. were proving to be more resilient than expected, and OPEC nations refused to back down in this high-stakes game of chicken.
Then rumours began to emerge that a production freeze agreement between Saudi Arabia, Russia, and Iran might be in the works.
That sent shorts into cover mode, and speculators piled in on the hopes of picking up some nice gains on the relief rally.
Now the chatter seems to be reversing course again. A top Saudi official has said that his country will not freeze output unless Iran and other major producers sign up. Saudi Arabia is also pondering a sale of up to 5% of the Saudi Arabian Oil Company.
That would bring in a boatload of cash and give the Saudis flexibility to extend their fight against higher-cost producers in North America.
As a result, oil prices have pulled back nearly 10% and are approaching their lowest point since early March.
The scoop on Crescent Point
Crescent Point itself is no stranger to rumours and speculation. The former dividend darling of the energy patch was the constant talk around the water cooler regarding the sustainability of its distribution as crude prices plunged.
Management finally cut the monthly distribution from $0.23 per share to $0.10 per share last August. Pundits still debated the company’s ability to maintain the payout, and Crescent Point eventually put the story to bed with the recent reduction of the monthly payout to just $0.03 per share.
Now that the dividend is no longer a point of issue for potential investors, the stock can be evaluated on its value potential.
2016 and beyond
Crescent Point has significantly reduced its capital expenditures for 2016 to $950 million, but production is actually expected to increase compared with last year with the targeted output set at 165,000 boe/d.
Based on these numbers, the company believes it can live within its cash flow at an average WTI oil price of just US$35 per barrel. Oil has been above that level for more than a month.
If oil manages to extend its recovery and averages US$55 per barrel in 2017, Crescent Point figures it would kick off an additional $600 million in free cash flow. That’s some serious cash, and the stock would rally hard in that scenario.
Should you buy?
The name remains volatile and shareholders are at the mercy of fickle oil traders, so I wouldn’t back up the truck just yet.
However, if you believe oil has bottomed and is destined to move higher over the medium term, Crescent Point is a solid pick.
