This Canadian Oil Play Is Beloved by Peers; Should Investors Take Note?

Crescent Point Energy is beloved by dividend-paying peers Penn West and Enerplus.

| More on:
The Motley Fool

Last week, Crescent Point Energy (TSX: CPG)(NYSE: CPG) spent $334 million to bulk up its position in the Viking oil play of Saskatchewan. The deal consolidated Crescent Point’s existing Viking land position as it added high-quality, high-netback production. It’s that high-netback, or cash flow rich, nature of the Viking oil play that makes it beloved by dividend payers like Crescent Point Energy, Penn West Petroleum (TSX: PWT)(NYSE: PWE), and Enerplus (TSX: ERF)(NYSE: ERF).

Drilling down into the recent deal

Crescent Point Energy expects its Viking acquisition to provide it with exceptionally high netbacks of more than $85 per barrel. That will yield an $87 million boost to cash flow, which, after investing $35 million to maintain production, will leave the company with $52 million in free cash flow. That free cash flow will reduce the company’s all-in payout ratio in 2015 by another 2%, which will strengthen the company’s dividend.

The deal increases Crescent Point Energy’s land position in Viking by 28%. This includes 258 future drilling locations, which increases the company’s low-risk, high rate of return drilling inventory by 70%. Those future wells are important to the company because Viking wells earn strong rates of return, have a quick payout ratio, and generate substantial free cash flow, which will be used to further bolster the company’s dividend in the future.

Cash flow funds dividends

The free cash flow rich nature of the Viking oil play is why it has become a core asset to Penn West Petroleum. The company is spending $150 million of its $900 million 2014 capital budget on the play, which places it second in the company’s portfolio. Penn West sees the play as a real cash flow generator over the long term, which will give it what it needs to provide some more security to its dividend.

Enerplus also sees the Viking oil play as an important contributor to its cash flow. While the company is focusing on American shale plays like the Marcellus and Bakken to fuel growth, its low-decline Canadian waterflood assets like Viking provide solid base production and cash flow. Overall, the company sees assets like Viking as the free cash flow generators it needs to fund its dividend and its shale development.

The Viking oil play might not hold the astronomical growth potential of the oil sands or Canada’s own shale plays like the Duvernay or Montney. However, it’s a low-decline, high-netback oil play that’s a perfect foundation for fueling dividends. That’s why it will continue to be a beloved oil play by energy dividend payers for years to come.

Fool contributor Matt DiLallo doesn’t hold a position in any of the companies mentioned.

More on Investing

Illustration of data, cloud computing and microchips
Tech Stocks

Kinaxis’s Niche AI Strategy Is Paying Off

Kinaxis (TSX:KXS) is turning specialized supply chain AI into stronger recurring revenue, new customer wins, and a strong long-term growth…

Read more »

truck transport on highway
Dividend Stocks

Here’s a 3% Dividend Stock That Pays Out Safe Cash Monthly

Mullen’s monthly dividend is convenient, but what really matters is that recent cash flow coverage looks solid.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Tech Stocks

I’m Holding These 2 Canadian Stocks in My TFSA for Life

Understand the life cycle of stocks and why some deserve a permanent place in your investment strategy through a TFSA.

Read more »

investor looks at volatility chart
Dividend Stocks

Got $1,000? Here’s What I’d Buy Before the Next Market Dip

Both of these Canadian companies have strong long-term growth potential, making them two top stocks I’d keep ready on my…

Read more »

container trucks and cargo planes are part of global logistics system
Tech Stocks

Meet Kinaxis, the Canadian AI Stock That Actually Makes Money

Kinaxis is an AI-driven supply-chain software company that’s already profitable, but the stock’s valuation leaves little margin for error.

Read more »

An investor uses a tablet
Energy Stocks

I Had to Choose Between Enbridge and Suncor: Here’s My Pick

Enbridge may lack Suncor’s recent share-price momentum, but its 5.6% yield, diversified infrastructure network, and $41 billion growth backlog make…

Read more »

three friends eat pizza
Dividend Stocks

This TSX Stock Pays You Monthly and Yields 6.4%

A monthly dividend can look comforting, but Pizza Pizza just proved the schedule can’t protect you from a cut.

Read more »

woman checks off all the boxes
Investing

TFSA Rules for Holding U.S. Stocks: What Investors Need to Know

TFSA investors can hold VFV for U.S. stock exposure, but a 15% dividend tax applies. Here is what that means…

Read more »