Even though oil is a decelerating industry, it is still the go-to energy whenever a country faces an energy crisis. Oil prices have been hovering in the US$70-US$100 range for the last two years as the largest consumer of oil, China, faces an economic downturn and the Organization of the Petroleum Exporting Countries’ (OPEC) production cut controls supply and demand. Amid the geopolitical sparring over oil prices, Crescent Point Energy (TSX:CPG) stock has been enjoying a range-bound rally of $8.5 to $11.
Factors driving Crescent Point Energy’s stock price momentum
Recently, Saudi Arabia and Russia, two of the largest oil producers, extended production cuts till the end of the year to keep oil prices high. These countries heavily influence oil prices as they can produce oil below $20/barrel, whereas many Canadian oil companies produce oil at US$35 a barrel. Thusly, Canadian oil stocks move in tandem with global oil prices. These stocks are also influenced by the energy decisions of the United States, which consume over 99% of the oil produced by Canada.
In the energy transition to greener alternatives, the oil industry could gradually decline but still produce steady cash flows for at least a decade. If you look at the broader picture, oil stocks can be used as a hedge against an energy crisis. And a small-cap stock like Crescent Point Energy is a good short-term investment to profit from an oil industry boom.
Crescent Point Energy’s sensitivity to oil prices
Crescent Point Energy is an oil-producing company with a market cap of $4.4 billion. Small-cap stocks are highly volatile and have a lower chance of surviving an economic downturn. If the situation comes to a global recession, the stock could fall steeply from its current level of over $11.
The company has been using the excess cash flows from higher oil prices to repay debt, buy back shares, and pay special dividends. It looks to halve its net debt from $3 billion to $1.7 billion by 2024.
Crescent Point Energy released its five-year outlook, wherein it expects to generate excess cash flow of $4.3 billion, assuming the Western Texas Intermediate (WTI) oil price remains at US$75/barrel. It also plans to spend $1 to $1.2 billion in capital on two oil projects and increase oil production.
Investors have already priced the current US$87 WTI crude price into Crescent Point Energy stock. Irrespective of how much oil the company produces, the stock has little upside unless global oil prices once again cross US$100/barrel.
Should you buy, hold, or sell the oil stock?
Commodity stocks are cyclical, as commodity prices are determined by global demand and supply. Only the market leaders that enjoy lower production costs can thrive. So, oil companies try to keep their debt level to a minimum to sustain in a downturn when lower oil prices slim down their profit margins.
When you understand the economics behind it, you realize that commodity stocks can give short-term cyclical gains but may not generate good returns in the long term. The only motivation to hold oil stocks is dividends.
But for a small-cap stock like Crescent Point Energy, its dividends are fluctuating. It more than halved its dividend in the pandemic and more than doubled it in 2022. CPG stock is a good investment in an upcycle as it can boost your returns through capital appreciation and dividends.
In the 2022 oil supply crisis, Suncor Energy’s stock price surged 36%, and its dividend increased by 79%. Whereas Crescent Point Energy’s stock price surged 43% and dividend increased by 114%.
It is too late to jump into the oil stock rally. These stocks are trading at their cyclical peak and have little upside. If you hold oil stocks, you can start selling them before an economic downturn pulls down oil demand and prices.
Investing tip
If the dividend is your motivation, you can consider investing in natural gas pipeline stocks, which are resilient to economic downturns. And if growth is your motivation, consider investing in hydrogen fuel stocks or tech stocks.
