Crescent Point Energy (TSX:CPG)(NYSE:CPG) is another Canadian oil and gas producer that’s had its stock hammered the last five years. It used to be one of the favourite stocks of investors on the TSX, but like many of its counterparts, high debt loads coupled with a massive reduction in commodities prices have forced many in the industry to re-strategize.
In Crescent Point’s case, it has cut the dividend numerous times throughout the last five years, in total 90% from pre-2014 levels. The company has had to commit to a new capital plan that sees a lot of the free cash flow going to debt reduction but also share buybacks, because management believes the value is so low.
In addition, Crescent Point has also been improving its free cash flow by reducing capex relative to its expected net operating income.
The company has high-quality assets and does about 80% of its production in crude oil, this has helped it to achieve a decent recycle ratio but may hinder it if liquids prices stay lower.
Crescent Point produced more than 172,000 barrels of oil equivalent per day (BOEPD) in Q2, however, guidance was revised lower for the rest of the year, down to 168,000-172,000 BOEPD. This is due to a non-core asset sale the company completed early in the quarter for approximately $60 million.
The recent sale of non-core assets continues management’s plan to refocus its operations on the core locations. In addition to the disposition in Q2, Crescent Point also sold $355 million of assets in 2018.
Q2 earnings were better than expected, and the company was able to reduce its net debt by more than $450 million in the first half of 2019. Furthermore, adjusted operating cash flow came in above $500 million.
Crescent Point has managed to reduce its net debt from over $4 billion to $3.55 billion in the first half of the year. Net debt as a percentage of enterprise value now stands at 60% down from 64% at the end of 2018. It also bought back nearly three million shares in the first half of the year, with management reiterating they would like to continue.
Whether that is a good decision or not remains to be seen. Conservative and risk-adverse investors would probably rather see more of the money going to pay down debt, rather than doing both. Although the company deserves credit for its work so far to reduce net debt, it’s still a substantial amount, leaving the company in a position of vulnerability. In my opinion, it still seems too risky.
It has low cash costs for production, but full-cycle costs are a lot higher near $60 WTI. In addition, it’s not replacing its reserves as it grows production, as evidenced by the reserve-replacement ratio at only 98%.
At end of Q2, currently liabilities were over $783 million to just $460 million of current assets. The company is also paying almost $40 million a quarter in interest expense.
Although Crescent Point’s assets are attractive, the risk to reward at the moment is still too high. A few more quarters of solid execution and debt reduction may change my thinking, but for now, I would remain on the sidelines. There are just too many factors to wait and see how they go. In the meantime, the only thing that could really help Crescent Point would be a major uptick in oil prices.
