Canadian energy stocks remain out of favour, despite crude soaring in recent weeks to see the North American benchmark West Texas Intermediate (WTI) up by around 30% since the start of the year and trading at over US$60 per barrel.
One-time dividend darling Crescent Point Energy (TSX:CPG)(NYSE:CPG), which has virtually eliminated its dividend since the oil slump began, has gained a paltry 6%, despite WTI’s solid rally. This is because the market is concerned about not only the uncertain outlook for crude but the difficult operating environment which exists in Canada and the driller’s own problems.
Is the driller’s outlook improving?
Crescent Point has a long history of being a serial diluter of existing shareholders, having used large swathes of equity to fund a range of questionable acquisitions in the lead-up to the 2014 oil crash. The sustained decline in oil prices also caused cash flow to fall significantly, leading to concerns that the driller’s balance sheet was deteriorating. This was a key motivation for management to slash Crescent Point’s dividend multiple times since 2014 to leave a token monthly payment of $0.01 per share and yield of less than 1%.
To address these and other issues, which were potentially threatening the company’s survival in the current difficult operating environment, management instituted a strategic review in 2018. That saw a program implemented that aims to improve Crescent Point’s cash flow, boost the return on capital invested, and strengthen its balance sheet.
While first-quarter 2019 oil output of 175,955 barrels daily was flat year over year and Crescent Point’s net back declined by almost 2% to $33.95 per barrel, its net income of $1.9 million was a significant improvement over the $91 million loss reported for the equivalent period in 2018.
Crescent Point has made significant inroads with its plans to strengthen its financial position with net debt at the end of the first quarter falling by 11% year over year to be 2.1 times cash flow. It also reported a 15% improvement in capital efficiencies for the first quarter when compared to spending in 2017.
At an average 2019 WTI price of US$55 per barrel, Crescent Point expects to generate around $400 million in free cash flow, which with the latest oil rally certainly appears achievable. In fact, for every US$5-per-barrel increase in the average price of WTI, Crescent Point’s free cash flow grows by around $200 million.
Those successes bode well for the driller’s outlook and full-year performance.
Management has also instituted a share-buyback program, where it plans to buy up to 7% of Crescent Point’s public float, because it believes that its market price doesn’t correctly reflect its value. That will help to bolster earnings per share — by reducing the number of shares outstanding — and Crescent Point’s market value.
The company is also focused on boosting profitability by reducing costs. This includes targeting a 10% reduction in general and administrative expenses for 2019 as well as a stricter control of capital.
While Crescent Point’s inability to grow oil production is disappointing, especially in an environment where crude is rising, the ongoing progress with reducing costs, strengthening the balance sheet, and bolstering the return on capital bode well for the driller’s long-term outlook.
Once Crescent Point has met its targets, it is feasible, because of the high quality of its oil acreage, that production will steadily expand, leading to higher earnings and stock price. For those reasons, now is the time for investors to buy Crescent Point.
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Fool contributor Matt Smith has no position in any of the stocks mentioned.