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 WTIâs 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 drillerâs own problems.
Is the drillerâs 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 drillerâs balance sheet was deteriorating. This was a key motivation for management to slash Crescent Pointâs 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 companyâs survival in the current difficult operating environment, management instituted a strategic review in 2018. That saw a program implemented that aims to improve Crescent Pointâs 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 Pointâs 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 Pointâs free cash flow grows by around $200 million.
Those successes bode well for the drillerâs outlook and full-year performance.
Management has also instituted a share-buyback program, where it plans to buy up to 7% of Crescent Pointâs public float, because it believes that its market price doesnât correctly reflect its value. That will help to bolster earnings per share — by reducing the number of shares outstanding — and Crescent Pointâs 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.
Foolish takeaway
While Crescent Pointâs 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 drillerâs 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.
