Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) has always been a stock with strong bull and bear arguments. The bullish argument for Crescent Point Energy is familiar for many investors. Through a strategy of accretive acquisitions, Crescent Point has been able to amass a portfolio of extremely high-quality light oil assets, strategically located in four of the seven top light oil plays in Canada.
The success of this strategy becomes evident by looking at the company’s operational data. Crescent Point has hiked its production from around 10,000 barrels per day (b/d) in 2004 to its 2015 guidance number of 152,000 b/d, and between 2011 and 2014, production numbers grew at an impressive compound annual growth rate of 19%. Most impressively, Crescent Point has been able to maintain a TSX-leading dividend yield while maintaining this steep growth trajectory.
This is all very positive, but, as you may have been expecting, there is a cost. Crescent Point has been funding both these acquisitions and over half of its dividend not through its own cash flows but through excessive equity issues. The result has been dilution for shareholders.
With the pros and cons of being a Crescent Point investor firmly in mind, there is question as to how the recent oil price plunge affects this balance. Counter-intuitively, the drop in oil prices adds to the bull thesis for Crescent Point and represents an opportunity rather than a risk. Here are three major reasons why.
1. Crescent Point is well protected from the decline
Thanks to Crescent Point’s high-quality portfolio of assets, pristine balance sheet, and industry-leading hedging program, the company has a relatively low sensitivity to crude oil price declines.
High-quality assets represent a huge competitive advantage for E&P companies, as solid assets allow a company to recover the maximum amount of oil for low production costs. Crescent Point has this advantage, and as a result, it has been able to generate industry leading netbacks. With netbacks of nearly $60 per barrel, Crescent Point is near the top of its peer group and is able maintain solid returns even with a decline of prices.
In addition, Crescent Point has an industry-leading hedging program, with over 50% of its 2015 oil production hedged above $90.00/bbl and 53% of its natural gas production hedged with an average price of $3.60/GJ.
With a below average net debt/enterprise value of only 21%, strong hedges, and solid netbacks, Crescent Point shares have low downside risk due to oil, allowing investors to collect its 8.6% yield at a lower risk than its competitors. One analyst corroborates this view, expecting Crescent Point to realize a decline of only 8% earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2015, which ranked second in the entire peer group analyzed.
2. Low oil prices will present acquisition opportunities for Crescent Point
Not only are the company and its shares well insulated from downside risk, but low oil prices could provide attractive acquisition opportunities. CEO Scott Saxberg said Crescent Point is seeking out distressed companies with strong assets and weak balance sheets.
For a company that has done more acquisitions than any other Canadian oil company, the recent oil decline represents a fantastic opportunity to buy assets at attractive valuations. With its strong balance sheet, Crescent Point is well prepared to take advantage of these opportunities as soon as they present themselves.
3. The price decline has made Crescent Point more attractively valued
For the past five years, Crescent Point shares have traded in a tight trading range between $35 and $45 per share. Given Crescent Point’s lower downside risk relative to its peers, the recent price decline represents an opportunity to pick up Crescent Point shares at a bargain and profit from both its dividend and a potential oil price rebound.
Currently, Crescent Point is trading at an enterprise value (EV)/EBITDA of 7.08. Historically, Crescent Point has not traded at a multiple this low since it hit 4.42 during the last oil price decline in 2008. In fact, the five-year average EV/EBITDA is 13.09, and investors who purchased during the last major multiple decline in 2008 would have profited handsomely.
