Every now and then an opportunity will present itself to investors that is almost too good to pass up. In the movie The Big Short, the character Michael Burry explained his thesis for shorting the housing market prior to the 2008 crash by stating one simple fact: “I looked into it.” Essentially he read the prospectus of the products he was taking a short position on, and it worked out extremely well for him.
In today’s market north of the 49th parallel, Canadian investors are being offered a substantial amount of value in names such as Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG), which, after pulling back over the past few weeks, is currently trading at a price of approximately $8.75 per share.
For those who are not familiar with the name, the company is in the oil business and has the potential to make a substantial amount of net profit when the price of oil is above the US$70 mark. The problem, however, is that the company is also one of the highest cost producers in the market, which translates to losses during times of low oil prices.
Over the past several years, patient investors have continued to be paid a $0.03 per share dividend every month while the price of oil has recovered and shares have shown some hope. Before we evaluate the potential for capital appreciation, however, investors must first understand what is being offered to them and remain patient until oil returns to a higher price.
At current levels, investors who buy shares today will receive a dividend yield of 4.1% paid on a monthly basis. By comparison, government bonds are currently offering investors a 2% yield paid semi-annually.
For those wishing to invest their money in Crescent Point Energy Inc., they will begin with cushion of 2% (downside protection), and in the process own a piece of a company that’s currently trading at close to 50 cents on the dollar. At current levels, shares trade at approximately half the amount of tangible book value listed on the balance sheet. The reason for this is due to the deterioration of assets, which are being depreciated on an annual basis in order to generate the revenues that are being produced. Investors must also realize that it is because of this depreciation that the company may not profitable, but is cash flow positive for the year.
Although interest rates have increased, putting more strain on the expenses of the company (through higher interest payments), investors need to appreciate the long-term benefits of this increased burden.
As the cost of undertaking new projects (and restart old ones) has increased due to the higher cost of borrowing, there will be fewer barrels of oil produced at lower oil prices, which will put upward pressure on the price of oil. After all, the production of oil is driven by the basic supply / demand factors, and a higher cost of production will limit supply.
