What Does Crescent Point Energy Corp. Need to Rebound?

Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) is down over 50% last year and shareholders are hoping for a better year in 2016. With oil touching $30 a barrel this week, however, that optimism is already beginning to fade.

What does Crescent Point need to stage a comeback this year?

Forget the dividend

Companies are often unduly punished for lowering or eliminating a dividend for a few reasons. First, shares are often held by income-oriented funds. If a dividend is slashed, it often creates a level of forced selling from funds that are required by mandate to hold income-generating stocks. Second, many individual investors bought shares solely for the seemingly attractive yield. Once it comes back to earth, many of these short-term investors are the first to bail.

At the Motley Fool, we believe that a long-term mindset is the best way to create wealth over a lifetime. For now, it looks like Crescent Point management is too short-term oriented by keeping its 9% dividend. That’s the same yield that investors were getting back when oil was priced at $100 a barrel. While the payout may be keeping many shareholders from selling, it doesn’t look like it will create value in the long run.

By continuing to pay over $600 million a year in dividends, Crescent Point has been forced to find savings elsewhere. It lowered project-related spending by about 28% this year, saving an expected $1.1 billion. By investing less in the business, production growth this year will be the smallest in this decade.

The company also has a meaningful amount of oil hedges rolling off at the end of the year, potentially slashing revenues by up to 50% in 2017. On top of all that, throw in a $2.5 billion debt load that costs over $100 million in annual interest expenses.

Unless management anticipates oil doubling this year, the dividend needs to go.

Get the easy savings

One thing that Crescent Point has done well is reducing operating and drilling costs. Corporate expenses this year amounted to only $2 a barrel–25% lower than its peer group. It has also found ways to considerably reduce fresh water usage during drilling, while also using longer laterals to shorten turnaround times and increase output.

While these are notable achievements, they pale in the face of a $600 million cash dividend charge. If combined with a lowered or eliminated dividend, however, Crescent Point will gain the flexibility to position the business for the next decade.

Where will the savings go?

While many are calling for a debt reduction, this doesn’t seem to make much sense in the current environment. Interest expenses are costly, but are by no means crippling. Especially during a period of cheap credit, paying down debt would be yet another short-term-oriented move to appease the market.

Management clearly believes that oil will rise considerably over the next few years. If they didn’t believe that, why would they stick to a dividend policy that requires higher oil prices to be sustainable past this year? If they believe in higher oil, maintaining and increasing production should be the focus.

The company already has a database of 7,500 locations where it would like to drill, but with lower capital spending this year, only 630 wells are planned for 2016. Investors would likely be rewarded if funds were refocused back into boosting output, especially when nearly every other competitor is rapidly slashing capital expenditures.

Last year, global investments in petroleum projects fell by 22% to just $521 billion. Meanwhile, OPEC believes that that $10 trillion worth of investments will need to flow into oil and gas projects by 2040 in order to meet the world’s energy needs.

Long-term Crescent Point shareholders may benefit greatly from a contrarian strategy.

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Fool contributor Ryan Vanzo has no position in any stocks mentioned.

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