Despite earning $0.51 a share last quarter, Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) cut its monthly dividend to $0.03 a share, down from $0.10. The company had already slashed its payout by 57% last August. Management also dropped its capital expenditure budget to $950 million, which is 39% below 2015 levels.
After the latest cut, shares yield only 1.9%. Still, there’s reason to believe that Crescent Point could greatly reward dividend investors over the long term.
Even at its previous rate, Crescent Point would have had no issue sustaining its dividend. The company has no material near-term debt maturities and still has $1.4 billion in unused credit facilities. Net debt is only $4.3 billion versus a market cap of $9.5 billion. Meanwhile, most of its wells have positive profitability down to just US$35 a barrel.
With such a strong financial backing, why was the dividend cut?
First and foremost, Crescent Point’s management team has always focused on maintaining long-term viability over short-term profits. Nearly every year, it matches its inflows and outflows to remain cash flow neutral. For example, despite a continued ability to sustain a much higher dividend, management decided to pare the dividend and capital spending to be cash flow positive this year, even at US$35 oil. Next year, it should generate excess cash even at US$45 oil.
It’s not always appreciated, but this conservative strategy has allowed Crescent Point to trounce its competition during industry downturns. On many metrics, the company has a higher profitability than nearly every other competitor in the space. Even with such downside protection, it’s not like shares won’t run if oil prices rebound; funds flow will increase by $400 million in 2016 and $600 million in 2017 for every US$10 increase in oil.
Still positioned for the long term
While the dividend cut may scare off some income-oriented investors, don’t let it fool you into thinking Crescent Point is a lousy long-term investment. By remaining overly conservative, the company is ensuring that it can continue to reward shareholders over the next few decades, not just the next quarter.
Crescent Point has 15.5 years left of proved and probable reserves, all with industry-leading profitability. Most of its wells take less than two years to recoup its investment costs.
Profit margins should continue expanding given the company’s relentless focus on realizing cost efficiencies. For example, last year it realized a 30% reduction in drilling and development capital costs. This year, management targets an additional 10% reduction. In its latest investor presentation, the company stresses that these “efficiencies are expected to be retained as commodity prices increase.”
Improving cost effectiveness on high-quality assets is a certain recipe for long-term profits. In the past, shares routinely yielded over 10%. Given management’s proven ability to drive high shareholder returns over the entire business cycle, don’t be surprised to see the company re-implement an impressive dividend a few years down the road.