Crescent Point Energy (TSX:CPG)(NYSE:CPG) stock rallied big yesterday, as the company reported third-quarter results that were strong on many fronts, increasing investors’ confidence in the stock.
Funds from operations increased 21%, as operating netback increased 64% and cost-reduction initiatives continue to take shape.
Back in 2008 when the energy crisis hit, Crescent Point was an income trust that investors relied on to fund their retirement. When the time came to ditch the income trust structure, investors were worried.
But in the end, after the conversion back to a dividend-paying corporation in 2009, Crescent Point became stronger than ever; investors continued to rely on CPG stock to provide them with a healthy income stream.
The more things change, the more they stay the same.
Low-risk plays and low-risk development opportunities define Crescent Point and have from the start — and that is Crescent Point’s secret weapon.
But this notwithstanding, Crescent Point stock has seen a steady decline since its heydays in 2009 to 2014, falling from highs of over $45 to current levels of well below $10.
Years of focusing on production growth rather than shareholder returns finally caught up to the company.
Over the last 10 years, the company has had a history of issuing equity in order to make acquisitions, effectively diluting shareholders in the process. And now this has all come to a head, as Cation Capital, a private investment firm, has taken action and succeeded in overturning certain key management roles and has attempted to insert its own candidates onto the board of the company.
All this is in order to effect changes to the company’s management compensation and strategy from one that is focused on growing production to one that is more focused on shareholder returns.
The business
With 90% of its production being oil, Crescent Point Energy is exposed to the price of oil in a big way.
And the company does have an enviable resource base, with exposure to large resource plays in lucrative areas, such as the Bakken, that have low-risk development opportunities with strong economics.
Extracting value out of this best-in-class resource base has not been an easy thing for the company, and as such, a new capital-allocation strategy and IRR hurdle rate has been proposed by Cation Capital and seems to be taken up by the new CEO, in what could be a new beginning, one of value creation for all.
But Cation is still demanding further changes at the company, so stay tuned.
Production continues to increase and — notwithstanding the fact that investors are and should be skeptical with regard to Crescent Point’s history — the company is currently in good shape. The stock has a dividend yield of 5.46%, which is well covered by cash flow.
