Crescent Point Energy Corp. May Be Worth Buying After its Dividend Cut

I have argued numerous times that Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) should cut its dividend again after slashing it last August. And on Wednesday, the oil company did exactly that, lowering its per-share monthly payout from $0.10 to $0.03. This time last year, that same number was $0.23.

So why exactly was the cut so necessary? And what does it mean for the company going forward?

Why the cut was needed

Crescent Point is very well known for its dividend, but there are some positive aspects of the company that are easy to forget. First of all, most of the company’s oil comes from southern Saskatchewan, which has some of the most favourable geology in all of North America. Better yet, Saskatchewan has very reasonable royalty rates, and the low Canadian dollar lowers costs even further.

But the dividend complicated matters. Even after the cut last August, the company still needed oil prices of US$50 to maintain the payout over the long term. With oil prices much lower than that level, Crescent Point’s balance sheet was being slowly eroded. And the situation would only worsen as the company’s hedges expire.

What it means

Now that Crescent Point has cut its dividend, the company is on much more solid footing. Even at US$35 oil, cash flow is high enough to support both the capital program and the dividend. As oil rebounds, the story gets even better–at a US$55 price in 2017, the company would generate an additional $600 million ($1.18 per share) of additional free cash flow.

That extra cash could be put to work in a number of ways.

Crescent Point could increase its drilling program, which would be very economic at US$55 oil. Or perhaps the company make some acquisitions, assuming the price is right. Debt could be paid down, which would obviously strengthen the balance sheet and give Crescent Point more options down the road.

If the company’s stock continues to trade cheaply, share repurchases become an option. Finally, if prices rebound enough, and Crescent Point can’t find any good uses for its capital, then it could raise the dividend once again.

In the meantime, Crescent Point’s shareholders don’t have to worry about a prolonged oil slump. The company’s low dividend obligations, reasonably strong balance sheet, and robust hedging program offer strong protection in case oil prices take a long time to recover.

Despite these positives, Crescent Point’s share price has actually decreased following the announcement. So at this point, this company should be a serious consideration for anyone looking to invest in this sector.

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Fool contributor Benjamin Sinclair has no position in any stocks mentioned.

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