There was once was a time when Crescent Point Energy (TSX:CPG)(NYSE:CPG) was the darling of the Canadian oil patch, riding the coattails of an energy bull market that would seemingly never end. Now, three years later, the stock is a shadow of its former self, trading at all-time lows. For value investors Crescent Point is beginning to look like a bargain at these levels, but buyer beware, Crescent Point does pose some dangers, even at these levels.
Better realized oil prices than most
Crescent Point’s last-quarter earnings had some bright spots as well as some shortcomings.
First, the good: despite Canadian heavy oil trading at a sharp discount to U.S. crude, Crescent Point managed to avoid most of the sector’s pricing woes, as the company realized higher prices from its Utah and North Dakota assets, which, of course, have exposure to American benchmarks. Moreover, Crescent Point also managed to realize higher prices compared to Western Canadian Select from its Saskatchewan plays due to historical premiums for crude out of that region.
Second, while the third quarter saw a slight decrease in overall year-over-year production (174 thousand barrels of oil equivalent per day versus 176 thousand last year), in the first nine months of this year, Crescent Point’s production has gone up to 178 thousand barrels of oil equivalent per day compared to 175 thousand last year.
With higher realized prices than its Canadian counterparts as well as an uptick in year-over-year production, Crescent Point, it seems, makes a clear case for the value investor.
However, the reality is not that evident.
Crescent Point’s credibility and dividend
First, Crescent Point’s reputation with investors is less than stellar. Prior to the departure of its CEO Scott Saxberg earlier this year, the company gained an unenviable reputation as a serial equity issuer and diluter of shareholder wealth. The timeline prior to Saxberg’s departure was also an ugly affair, featuring a proxy battle with an activist hedge fund and total loss of management’s credibility with investors stemming from the previously mentioned equity raises as well as paltry returns on invested capital.
With a new CEO at the helm, it’s currently a wait-and-see scenario, as the market looks to determine if the new management team can turn the company around.
Second, Crescent Point is a highly leveraged company with over $4 billion worth of debt on the books. This heavy debt burden translated to interest expense of $136 million for the nine months so far this year compared to $120 million last year. Furthermore, net debt is over twice as much as funds flow from operations, which begs the question of just how sustainable the company’s dividend really is. Note also that Crescent Point currently pays a yield of over 7%, and even with a lowered capital expenditure budget this year and 2019, Crescent Point’s capex adjusted payout ratio is north of 100%.
So, is Crescent Point a buy at these levels? Well, it depends on how much you trust the new management team and whether you believe the dividend is sustainable. While I leave the former conclusion to you, I believe that a dividend cut or suspension is not out of the question should we see a further downturn in oil’s prices.
With the entire Canadian oil sector in a bear market, investors should simply pick the best of the worst names. In that regard, as a turnaround story (think no near-term growth prospects) with a large debt balance and a dividend that is precariously high, Crescent Point simply does not make the cut.