MENU

First Brexit… then Trump… Now, it’s time for Pro

Is your portfolio really prepared for what’s coming next?

To help investors like you navigate this historically uncertain — yet high-flying — market and prepare for an inevitable downturn, we’re re-opening our Motley Fool Pro Canada service to a select few new members for a short time.

To discover how Pro Canada could help you to increase your upside potential… reduce your downside risk… and earn paycheque-like income in the process, simply click here — before the small number of spots we have left are all gone!

Oil Has Broken $50/bbl: What This Means for Crescent Point Energy Corp.

It would seem that OPEC’s much-lauded production cuts are having the opposite of their intended effect. According to media outlets, U.S. commercial crude supplies have been rising for nine straight weeks in response to the oil price rally, culminating in the production of 528.4 million barrels last week.

Moreover, Wednesday’s surprise build of an 8.2-million-barrel increase from the week prior signaled that cash-strapped North American producers are not slowing down anytime soon, and oil’s supply glut might continue into the near future. This, of course, doesn’t bode well for Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG), whose twice-slashed dividend forecast is based on $52/bbl oil.

Preparing for the worst-case scenario: a dividend suspension/cut

Even before the recent sell-off, Canada’s most prolific driller was already trading at a discounted valuation (25% to peers according to Barclays’s estimates) thanks to the company’s reputation of being a serial equity issuer. Now that oil is once again below $50/bbl, there is another infraction from Crescent Point’s past that might come back to haunt the company: a suspension or a further cut of its dividend.

Let me explain.

When Crescent Point cut its dividend from $.10 per share to $.03 per share in early 2016, its funds flow from operations payout ratio was roughly 62%. Recently, Crescent Point targeted a 100% payout ratio for 2017 based on WTI at $52/bbl. Moreover, according to company filings, Crescent Point’s exhibits a +/- $50 million sensitivity to per-dollar changes in the price of oil, meaning that if oil were to once again hit $45/bbl (or lower), Crescent Point’s funds flow from operations will come in $350 million lighter, and the dividend could very well be in jeopardy with an already restrictive payout ratio.

Furthermore, the potential of a dividend cut or suspension is all the more reasonable, given that Crescent Point is effectively barred from further equity raises (unless it wishes to further erode investor confidence, following the last bought deal in September 2016), and management has been hesitant to take on further debt.

There are silver linings

Although a dividend suspension would, of course, be the absolute worst-case scenario for shareholders, there are a few factors that make Crescent Point a worthwhile investment, even at sub-$50 oil.

Firstly, Crescent Point has a great liquidity position of some $3.5 billion in net debt for a 1.9 times debt-to-cash flow ratio, which is in line with the rest of the industry.

Secondly, management has made no made no secret that it is exploring asset sales, and while divestitures were only $30 million in 2016, we can expect bigger asset sales if oil prices continue to decline.

Finally, Crescent Point has improved tremendously from a cost-efficiency standpoint with 2016 costs coming in at $11.27/boe (8% better than target) and 40% below FY 2014.

The bottom line

Once again, we have to prepare for oil to be lower for longer; for Crescent Point, this means we have to consider the very real possibility of a dividend suspension. Of course, countering the worst-case scenario is the company’s solid balance sheet and strong operational fundamentals. With that being said, if you’re looking to take advantage of the oil sell-off (and Crescent Point’s discounted valuation), then the shares are looking like a great buy here — just as long as you are prepared for the worst.

The proven "return accelerator" for dividend stocks!

If you love dividend stocks or are in need of retirement income, we have a brand-new, exclusive report that's a must-read for any serious investor.

Written by celebrated Canadian journalist Jonathan Chevreau, this report outlines one of the 'wonders of the investment world' - how to use it, capitalize on it, and make money as best you can.

Click here now to claim your copy!

Fool contributor Alexander John Tun has no position in any stocks mentioned.

NEW! This Stock Could Be Like Buying Amazon In 1997

For only the 5th time in over 14 years, Motley Fool co-founder David Gardner just issued a Buy Recommendation on this recent Canadian IPO.

Stock Advisor Canada’s Chief Investment Adviser, Iain Butler, also recommended this company back in March – and it’s already up a whopping 57%!

Enter your email address below to claim your copy of this brand new report, “Breakthrough IPO Receives Rare Endorsement.”

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.