Should You Consider Crescent Point Energy Corp.?

Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) makes enough cash to pay a dividend, but because of poor hedges, it continues to have net losses, leading me to avoid this stock.

| More on:

Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) is one of those stocks that confounds investors. On the one hand, oil has remained relatively strong above US$50 a barrel with WTI currently trading at US$53.99. On the other hand, Crescent Point is trading at near all-time lows. After 12 months, it seems very little has changed for this company.

What investors are trying to determine is whether this stock is worth considering or if they should just turn their backs on it entirely. To answer that, let’s look at the financials.

The good news for Crescent Point was that it exceeded annual average production than had been guided. Its annual average production was 167,764 BOE/day on a $1.10 billion capital-expenditure budget. An increase in production, especially with the price of oil going up, is always a good sign.

And its funds flow from operation, totaling $422 million, or $0.77 per share, shows that Crescent Point is moving in the right direction. With the company only paying out $0.09 per share during the quarter in dividends, its funds are in a good place. Crescent Point had a payout ratio of 89% in 2016 based on $1.14 billion in development capital expenditures and $260.3 million in dividends. This is a good sign because the company was sporting a near-100% payout ratio, which can put a dividend at risk.

Even better, the company continues to become more efficient. Its annual operating costs per BOE was $11.27 — 8% lower than the $12.25 that the company budgeted, allowing it to generate increased margins from every barrel of oil it pumps.

And yet the company had a net loss of $510.6 million for the fourth quarter — up from $382.4 million in the same period of 2015. How can that be? Oil is much higher than it was a year ago, so why isn’t the company generating net income?

Sometimes companies will hedge oil so if the price craters, they can continue to generate money. Unfortunately for Crescent Point, it hedged incorrectly, and that resulted in a $457 million non-cash after-tax net impairment charge. And as oil continues to increase in price, this impairment charge could become even larger, cutting into the company’s net income. But the good thing is that the charge will have no impact on the company’s funds flow from operations.

So, while the company is not profitable, it is generating enough cash flow that it will be in a position to continue paying its dividend.

Crescent Point continues to place hedges. Since Q3 2016, it has hedged 11.8 million barrels. As of February 20, “the company has 39% of its 2017 oil production … hedged at a weighted average market value price of CDN$72.00/bbl.” Because I’m not an expert at predicting where oil will go, this could be a smart move, but it could also hurt the company even more if oil moves higher than that.

At the end of the day, Crescent Point is in a position to pay its dividend. And it continues to bring in enough cash to cover its dividend and investments. However, until it can start pushing toward profitability, I don’t see these shares changing in price much. If the price of oil drops, it could have a serious impact on the company. Holding a small position is fine if you’re an oil bull, but a lot need to be done for Crescent Point to get on even ground.

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 Jacob Donnelly has no position in any stocks mentioned.

More on Energy Stocks

grow dividends
Energy Stocks

1 Small-Cap Energy Stock Could Raise Dividends 6 Times by 2023

The Omicron variant is a threat, but should not cause a significant erosion in oil demand say energy bulls. Rafi …

Read more »

green power renewable energy
Energy Stocks

Are These 2 Undervalued Green Energy Stocks the Best to Buy Now?

As most investors know, this market environment, with stocks selling off significantly, is the best time to buy high-quality companies …

Read more »

oil and gas pipeline
Energy Stocks

Why Obsidian Energy Stock Is up Over 17% This Week

What happened? While tech stocks have continued to teeter lately, energy names have been unstoppable. The small-cap names among them …

Read more »

Oil pumps against sunset
Energy Stocks

Oil Bull Market: 3 Top ETFs to Buy Today

Oil prices continued to gain momentum in early afternoon trading on January 26. The price of WTI crude was up …

Read more »

warning or alert
Energy Stocks

Alert: Bank of Canada Didn’t Raised Interest Rates!

The Bank of Canada has decided not to raise interest rates after today’s policy meeting. That means the Bank of …

Read more »

oil and gas pipeline
Energy Stocks

Enbridge: 7% Yield AND Dividend Growth in One Package!

Enbridge (TSX:ENB)(NYSE:ENB) is the rare dividend stock that “has it all.” A 7% yielder that also has a very high …

Read more »

money cash dividends
Energy Stocks

4 Top Dividend Stocks to Buy Under $30

With the U.S. Federal Reserve signalling to raise its policy interest rate from March, the volatility in the global equity …

Read more »

Group of industrial workers in a refinery - oil processing equipment and machinery
Energy Stocks

Enerflex (TSX:EFX) Dips 16%: Why I’m Buying This Energy Stock Today

Enerflex (TSX:EFX) is a Calgary-based company that supplies natural gas compression, oil and gas processing, refrigeration systems, and electric power …

Read more »