Canadian energy companies continue to endure difficult times, but contrarian investors are wondering if the sell-off has simply gone too far in some of the heavily punished stocks.
Crescent Point traded for $45 per share and paid out a monthly dividend of $0.23 five years ago when WTI oil sold for US$100 per barrel. Today investors can pick up the stock for $4.50 and the dividend is down to just a penny per month.
WTI oil bottomed out below US$30 in early 2016 before staging a recovery that topped out at US$76 last summer. Right now the price is on another upswing, trading just under US$60 compared to $51 two weeks ago and US$43 last December.
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Crescent Point’s share price bottomed out around $3.25 earlier this year, so the company hasn’t benefited from the recovery in oil prices. Part of the reason lies in the large debt position. Crescent Point finished Q1 2019 with net debt of $3.9 billion, which is a lot for a company with a market capitalization of about $2.5 billion.
Raising capital is a challenge right now, so the only way the company can reduce the debt load is to increase cash flow, which requires higher energy prices and/or increased production. Crescent Point produces both oil and natural gas. Its Q1 oil production was relatively flat compared to the same quarter the previous year, and natural gas production dipped about 12%. Natural gas prices remain weak, while oil is showing signs of a potential rally through the end of 2019.
Higher production comes from a boost in the capital program. Crescent Point isn’t in a position to borrow more money, and selling a big chunk of stock to investors simply won’t work in the current environment. When the company paid out a fat dividend in the past, Crescent Point always found willing buyers for new shares.
Despite the tough situation, Crescent Point could deliver some big returns. In the first quarter, the company managed to reduce debt by $105 million and bought back 5.6 million shares. At the time of the Q1 report, management expected to generate $600 million in excess cash flow in 2019.
Management intends to monetize some non-core assets, and proceeds from the sales would help reduce debt and support the capital program. Crescent Point still owns attractive assets that it acquired over years of aggressive acquisitions. As the energy sector improves, a larger player might decide to bid for the entire company.
Could the stock double?
A surge to $9 per share would require a big move in oil prices. In the first half of 2019, the trade dispute between the United States and China has outweighed fears about potential supply disruptions due to tensions in the Middle East. If the U.S. and China ink a deal, oil prices could take off in the coming months.
I wouldn’t back up the truck, but oil bulls might want to consider nibbling on Crescent Point at this level. While additional volatility should be expected, there is strong upside potential if sentiment shifts.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Andrew Walker has no position in any stock mentioned.