Since the beginning of 2009, it’s been good to be a shareholder in Crescent Point Energy Corp. (TSX: CPG)(NYSE: CPG). Shares have rallied more than 50%, even after getting crushed lately with the rest of the energy sector. Plus, investors got paid a generous monthly dividend of 23 cents per share. Including dividends, that works out to a nearly 14% annual return.
The company has been a growth by acquisition machine, seemingly making a notable acquisition on pretty much an annual basis. Most recently, it acquired assets from Lightstream Resources Ltd. (TSX: LTS) for $378 million. The company knows its home turf well, concentrating its asset purchases to southern Manitoba and Saskatchewan, where it produces light and medium oil. It boasts one of the highest netbacks in the sector, proof management knows what it’s doing.
And for the most part, it’s been successful. Revenue has jumped from $1.16 billion in 2010 to nearly $2.9 billion in 2013, a growth rate in excess of 40% per year. Earnings have also skyrocketed, growing from $51 million to $145 million in the same time frame. And, to top it all off, the company grew that much without even issuing a ton of debt, which rose from $1 billion to $1.7 billion, which is a pretty reasonable debt load for a company with a $16.4 billion market cap.
So, what’s the problem?
On the surface, it seems like Crescent Point Energy is doing a pretty good job. The company is growing like crazy, debt is under control, and it pays a nice dividend of 7.4%. What exactly is the problem?
It can’t afford the dividend.
In 2013, Crescent Point paid out $1.07 billion in dividends. It earned just $145 million, and free cash flow was $226 million. Those numbers don’t even get close to adding up. How does it do it?
It’s simple. Investors get a 5% bonus if they take their dividends in the form of more shares. Thus, for most investors, the $2.76 annual dividend really turns into $2.90 per share.
Thanks to encouraging investors to take shares instead of cash the company paid out just $422 million in actual cash dividends in 2013. That’s still nearly double free cash flow, but it’s a much more manageable number.
How this could turn out very badly
As long as the market continues to have confidence in Crescent Point, this shouldn’t be such a bad deal for investors. Investors can opt to take the stock dividends and cash out periodically, especially considering how low transaction costs are these days.
Still, it’s alarming just how quickly the company’s share count is exploding. At the end of 2010 it had nearly 239 million shares outstanding, which increased to 410 million at the end of Q2, 2014. And that doesn’t even count the dividend dilution since, nor does it include the 17.3 million shares the company sold to pay for the Lightstream acquisition, which raised $750 million. Remember that it only paid $378 million for Lightstream’s assets. The rest will inevitably go towards paying dividends.
If the market suddenly turns bearish on Crescent Point, this could turn out very badly, leaving it no choice but to cut the dividend. Considering the fall in oil prices lately, I sure wouldn’t want to stick around to find out. Investors would be much better off to choose an energy company with a safer yield. We’ve got a recommendation I think you’ll like.
