There’s good news and there’s bad news. The bad news is for existing investors of Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG). The good news is for potential investors of Crescent Point.
The company is an integrated oil exploration, development, and production company operating in Alberta’s oil patch. The company’s stock has declined by more than 50% over the past 52 weeks and more than 75% over the past five years.
The bad news is that long-term investors have lost a substantial amount of their capital. Given the latest sell-off in oil, shares hit a record low price of $8.99 over the past week and closed on Friday at $9.19 per share.
This large pullback leads us to the good news: at current levels, new investors would receive an annual dividend yield of approximately 4% on a monthly basis should they accept the potential risk/reward offered by this security.
As there is a significant amount of risk in the oil space, investors must realize that this name is not for everyone. After seeing the company cut the dividend on multiple occasions in the past few years, investors must go into this investment with a long time frame and be willing to hold for the long term.
Clearly, the 4% dividend yield is a nice bonus, but the return from this investment will be coming from the capital appreciation and not from dividends alone.
Similar to many oil companies in the exploration part of the industry, shares are currently trading at a significant discount to tangible book value. By taking all assets and subtracting all liabilities and goodwill, the value on a per-share basis is nothing short of $17.27.
Investors currently have the opportunity to buy assets for approximately 53 cents on the dollar. The bonus is that those assets are not only worth something, but they are also productive assets with the ability to produce profits.
The danger faced by investors when investing based on the balance sheet first and the income statement second is the risk that cash flows and profits may not be there in the foreseeable future to support the price paid for each share.
In this case, the cash flows will be dependent on the recovery in the price of oil. Since oil hit a peak in 2014 and has since declined to less than US$45 per barrel, shares of Crescent Point have fallen from a high of more than $47 per share to the current price near $9 per share.
Depending on the price of the underlying commodity, companies in the oil patch stand to benefit. The challenge is finding and waiting patiently with the right investment that carries the proper amount of risk and reward.
Although this integrated oil company trades at a discount to tangible book value, most companies involved only in the exploration phase of the industry may be even cheaper.
