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Crescent Point Energy Corp.: Potential Value With Continued Risk

In the oil and gas industry, many names are currently trading at levels that value investors assert are “discount” levels, given the cyclical nature of the sector and the fact that an oil rebound is right around the corner.

While I am unsure if an oil rebound is around the corner — in fact, I believe lower-for-longer scenario is more likely than an oil rebound in the next 12-24 months — it is true that at current levels, Crescent Point Energy Corp.  (TSX:CPG)(NYSE:CPG) is a very interesting name to consider.

Calling a bottom on an oil and gas concern may be difficult to do at current levels. A true consensus on where the price of oil is headed is somewhat of a mystery, and the analyst range for where the price of oil could be headed over the next 12 months is quite large.

What entices me about Crescent Point is not a potential oil rebound, but rather the free cash flow generated by Crescent Point at current oil price levels. If an investor were to assume that the price of oil was to remain lower for longer, hovering between, say, $40 and $60 for the next year, we can see from Crescent Point’s performance over the past two years that the company has indeed been able to generate free cash flow at very similar levels to 2013 and 2014, when the price of oil hovered around $100 per barrel.

What has allowed the company to maintain similar levels of free cash flow, despite a massive reduction of oil prices, is primarily a (1) massive dividend cut; (2) large capital-expenditure cuts; and (3) reductions in investments and acquisitions.

Crescent Point’s stock has taken a hit in recent years primarily due to the fact that the company has slashed its dividend from $0.23 per month in 2015 to $0.10 per share and more recently cutting the dividend to $0.03 per share in 2016. As a company that has built a reputation on returning significant value to shareholders in the form of dividends, Crescent Point’s share price has understandably taken a hit as income investors took their money elsewhere for yield.

Bottom line

At current levels, Crescent Point’s dividend appears to be manageable, and the company’s focus has shifted from leveraged growth to profitable growth — a significant and notable difference. Additionally, the company has devoted a significant amount of its cash from operations to pay down a debt load which, until 2015, had been climbing every year.

At a current price of just below $12 per share, I believe value exists with this name given the strength of the management team in being able to shift directions swiftly toward profitability and debt reduction. That said, risks related to oil prices moving forward and potential downward pressure on this company from investors looking for other income-related opportunities remain.

Stay Foolish, my friends.

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Fool contributor Chris MacDonald has no position in any stocks mentioned.

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