3 Reasons Investors Should Be Nervous About Crescent Point Energy Corp.

Because of its high payout, high debt, and shadowy hedge program, Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) could be a risky move for investors.

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

In the past few weeks I have been diving deep into dividend stocks, trying to find ones that I think are a worthy investment for you to purchase. Along the way, I found a company that makes my greed kick in, but my rational side run away. When companies have high yields, it can easy to fall into the greed trap, but it’s important to dig a little deeper.

Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) is one of the top producers of oil and natural gas in North America. And it is one of the top paying stocks in Canada, which has many investors biting at the bit. But there are underlying problems that should make long-term investors very nervous.

The payout is too high

If we look at last quarter’s results, the company reported a $46 million loss. To top it off, its free cash flow was negative $170 million. Between these two numbers, one would expect that the company might have to cut its dividend.

But it hasn’t, and that has me very nervous because the company is paying out over 200% its earnings in dividends. With a yield of 9.29%, it’s earning investors a significant amount of money, but it’s not sustainable. The company lost money because of low oil prices and as time goes on, that could get worse.

Hedging shields the real problem

What’s amazing is that Crescent Point was able to do as well as it did last quarter—which wasn’t good at all—because of a strategy called hedging. In essence, you sign contracts well in advance for a predetermined number. If the price goes above that the company misses out on revenue. If the price goes below that contractual number, the company ensures it keeps making as much money as it can.

It has a significant percentage of its oil hedged for over $80 a barrel for 2015. That means that it is making over $20 more per barrel than other suppliers. But when 2016 hits and oil prices remain this low, buyers aren’t going to be willing to pay more money for oil if they don’t have to. That could have a significant impact on the business. If it has to suddenly start generating revenue at the $60 a barrel price rather than $80, it may not be able to succeed.

Its debt is unsustainable

Part of how the company is able to pay its dividend is by taking out debt. In the last quarter, net debt increased by 53.1% to $3.54 billion. The company took on $500 million in debt last quarter and then took an additional $300 million in April.

These numbers are unsustainable. While interest rates are low now, the company could experience the perfect storm in which oil prices don’t go up, but interest rates do go up, and then the company is in trouble.

Dividends could get cut

I’m not going to predict if/when the dividend gets cut, but if the perfect storm happens, the company has no choice: it can’t borrow its way out of its problems forever.

There is only one way that the dividends don’t get cut, and that’s if the price of oil jumps up again and stays consistently at high levels. That will allow the company to generate significant returns on investment, which should allow it to keep paying the dividend. But if that doesn’t happen, Crescent Point makes me very nervous for investors.

Should you invest $1,000 in BCE right now?

Before you buy stock in BCE, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and BCE wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Jacob Donnelly has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Energy Stocks

oil pump jack under night sky
Dividend Stocks

Here’s How Many Shares of TRP Stock to Own for $5,000 in Dividends, Even if Energy Prices Swing

Want major income, even if energy prices fluctuate, this could be a strong investment.

Read more »

A plant grows from coins.
Energy Stocks

Unlock $2,700 Yearly: Invest in This High-Yield Dividend Stock

A small-cap, high-yield dividend stock is a compelling opportunity today for income-focused investors.

Read more »

oil and natural gas
Energy Stocks

Where to Invest $10,000 in Canadian Oil and Gas Stocks

These stocks pay good dividends and currently offer attractive potential upside.

Read more »

Oil industry worker works in oilfield
Energy Stocks

Want a Solid Pick for Your TFSA? This Stock Pays a 4.9% Dividend

A dividend-paying oil bellwether is a solid pick against tariff threats and the evolving trade war with the US.

Read more »

Oil industry worker works in oilfield
Energy Stocks

Suncor Stock: Buy, Sell, or Hold in 2025?

Suncor is down 17% in the past few weeks. Is SU stock now oversold?

Read more »

data analyze research
Energy Stocks

Here’s How Many Shares of Hydro One Stock You Should Own for $2,000 in Yearly Dividends

This energy stock doesn't just offer major dividends but a stable future, even within the energy sector.

Read more »

Trans Alaska Pipeline with Autumn Colors
Energy Stocks

Enbridge Stock: Buy, Hold, or Sell Now?

Enbridge recently dropped $5 per share. Is the stock now oversold?

Read more »

A plant grows from coins.
Energy Stocks

2 Discounted Dividend Stocks With Significant Growth Potential

If you’re in search of income and capital appreciation in the long run, here are two discounted Canadian dividend stocks…

Read more »