Crescent Point Energy (TSX:CPG)(NYSE:CPG) was once a star in the Canadian oil patch, riding the coattails of an energy bull market that would seemingly never end. Now, four years after oil’s downturn, Crescent Point’s recovery efforts continue to be stymied by our home-grown supply glut. However, at a share price cap that’s just a shadow of its formal self, I believe Crescent Point has finally hit the bottom. Based on an improving cash flow profile, buybacks, and a discount to its net asset value (NAV), Crescent is shaping up to be a value story.
Cash flow profile improving
Based on its forward guidance, Crescent Point is expected to generate over $600 million worth of excess free cash flows this year. That is, after accounting for its planned capital-expenditure budget of $1.2-$1.3 billion for 2019, a reduced dividend payout of just $21 million, and an interest expense of about $178 million, Crescent Point will have more than enough cash left over in coffers to weather out the cyclical downturn.
Furthermore, Crescent Point has placed significant non-core assets in the southern Saskatchewan and Manitoba areas up for sale as part of its cash generation and production streamlining efforts. Once these sales are finalized, we can expect the company’s defensive position to improve even more and its +$4 billion debt burden to further decline.
Buybacks will add value and reduce dilution
While many shareholders were quick to throw in the towel after Crescent Point slashed its dividend by 89% over the past year, the company has opted to deploy some of its excess funds towards a large-scale buyback program budgeted for $50/bbl WTI. With approximately 549 million shares outstanding, I believe the buyback offers a flexible and sustainable means by which to return shareholder value, especially as Crescent Point has been criticized in the past for being a serial equity issuer.
With the program set to retire 7% of the outstanding shares, I am happy to see management finally tackle this long-standing issue within the company’s capital structure.
Deep discount to NAV
And finally, no matter how you look at it, Crescent Point is a deep-value story. Based on its 2018 filings, Crescent Point’s proven probable NAV is $24.41 per share, or $13.38 per share based on a more conservative estimate of US$55/bbl WTI. If we take an even more conservative measure and value Crescent Point based only on its proved, developed, and producing reserves, the company’s assets are worth $5.37 per share, or a 23% discount to its latest share price.
The bottom line
2019 will be a key year as Crescent Point’s new management attempts to right the ship. Although the economic backdrop is not exactly conducive towards a share price rally anytime soon, Crescent Point’s new budget, buyback program, and discount to NAV presents a compelling value argument for this once darling of the oil patch.
