3 Reasons Crescent Point Energy Corp. Should Cut its Dividend

Here’s why a dividend cut could send the shares of Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) higher.

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The Motley Fool

Before you start cursing at the computer screen, here me out!

Investors in Crescent Point Energy Corp. (TSX: CPG)(NYSE: CPG) have watched the stock tank with its high-yield peers and are sitting on the edge of their seats every morning, afraid they will open up their favourite finance site and see that Crescent Point has slashed its dividend.

Here are the reasons why I think a dividend cut is the best option right now.

1. Build confidence

The uncertainty around the possibility and depth of a cut is part of the reason the stock continues to fall. Canadian Oil Sands Ltd. and Baytex Energy Corp. already reduced their payouts and the market doesn’t want to get caught on the wrong side of a Crescent Point announcement.

The longer the company waits, the worse the situation gets. Even if management believes the company can weather the storm, it would be better at this point to cut the dividend by a small amount and then confirm the new distribution. This would put a floor under the stock price, restore confidence among income investors, and possible trigger a bounce in the shares.

2. Maintain production

Crescent Point told analysts in early November that capital expenditures would be slightly lower in 2015 compared to this year. The best way for Crescent Point to offset low prices is to increase production, but this requires a strong commitment to exploration, and that means spending money.

A dividend cut would allow the company to shift cash to maintain its strong capital program. The move would also reduce the need to source funds in the capital markets, which is a lot less attractive right now given the current outlook for the industry and the low stock price.

Crescent Point drilled 256 new wells in the third quarter with a 100% success rate. Investors should feel confident that a short-term cut in the payout would bring better returns in the long run.

3. Acquisitions

The bloodbath in the energy sector is a great opportunity for big players like Crescent Point to pick up prime assets at distressed prices. It makes perfect sense in the current situation to take advantage of the carnage and use funds from operations to purchase great properties that will drive much higher cash flow in the long run.

The bottom line

Crescent Point has never cut its dividend, and the business model has always been based on the fact that investors will support dilution of the stock as long as the high payout is maintained. The structure has worked well. Now, the best way to restore confidence in the stock could be to reduce the dividend to a level that the company is confident it can sustain, and invest the money in development and acquisitions that will ultimately put more cash in the pockets of investors.

The volatility in the high-yield energy sector has many investors wondering where they can safely put their money and still get good yield in 2015. If that sounds like you, the following free report is worth reading.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker has no position in any stocks mentioned.

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