Should Crescent Point Energy Corp.’s Investors Be Worried About its New Debt?

Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) recently acquired $1 billion in new debt after acquiring Legacy Oil and Gas. Is it cause for concern?

| 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

On May 26th, Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) announced a highly publicized purchase of Legacy Oil and Gas for a total consideration of $1.53 billion. The market was widely expecting Crescent Point to make an acquisition—likely in Saskatchewan—as the company pursues its acquisition-focused strategy, expands its presence in its core area of southeast Saskatchewan, and takes advantage of huge bargains present due to the recent oil collapse.

Crescent Point’s shares reacted unfavourably

Crescent Point’s acquisition of Legacy allows the company to add 22,000 boe/d of production, about three quarters of which originates from the extremely economic Midale light oil play in southeast Saskatchewan. This will not only be accretive to earnings, but will also expand Crescent Point’s drilling inventory with hundreds of high-return drilling locations.

Despite this, Crescent Point’s shares dropped on the news, indicating that shareholders may be concerned. One potential cause for concern is the fact that Crescent Point will be taking on nearly $1 billion in net debt.

Although this may seem like cause for concern, the acquisition will actually improve Crescent Point’s balance sheet. Here’s why.

The acquisition will not harm Crescent Point’s balance sheet

The total consideration for the Legacy purchase was $1.53 billion, but in reality, approximately $967 million of this was Legacy’s net debt. This means Crescent Point paid $563 million for the actual company, and also agreed to take on the company’s debt.

How is this nearly $1 billion in additional debt not harming Crescent Point’s balance sheet? The company is issuing an extensive amount of equity (which does have its own drawbacks). Crescent Point is paying for the purchase by issuing 18.97 million shares to Legacy shareholders at an exchange rate of 0.095 Crescent Point shares for every Legacy share. This means that Crescent Point is not utilizing their credit facilities or issuing debt to fund this portion of the purchase.

As for the $967 million in debt Crescent Point is acquiring, the company entered into a bought-deal agreement with financial institutions (whereby the group of institutions buy Crescent Point’s shares and issue them on their behalf), for a total of $600 million, or 21 million Crescent Point shares. This deal includes an over-allotment option of 3.1 million shares, or an additional $90 million.

The result is that Crescent Point could be issuing up to $690 million more in equity, on top of the approximately $560 million issued to Legacy shareholders. This $690 million will be used to reduce the $967 million of Legacy’s net debt. The end result is that Crescent Point will only be adding $277 million to their net debt. This would result in Crescent Point’s net debt increasing by 8%.

However, it’s important to note that after financing, total debt will only equal between 18% and 23% of the total consideration for the purchase. Currently, Crescent Point’s overall debt as a percentage of its total capitalization is about 22%, meaning that the new deal can actually lower Crescent Point’s overall indebtedness.

Most importantly, Crescent Point will not see any changes to the important debt-to-cash flow ratio, which is an important means of measuring leverage. Although Crescent Point may assume more debt, the extra production (most of which is highly profitable) will work to increase Crescent Point’s cash flow in excess of the debt acquired.

Should Crescent Point wish to further reduce debt, they also have the option of selling Legacy’s non-core plays (which includes assets in Alberta, North Dakota, and Manitoba—less than half of total land area), which would allow the company to focus on the highly economic southeast Saskatchewan assets.

Should you invest $1,000 in Crescent Point Energy right now?

Before you buy stock in Crescent Point Energy, 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 Crescent Point Energy 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 Adam Mancini 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

golden sunset in crude oil refinery with pipeline system
Energy Stocks

Is Enbridge Stock (TSX:ENB) a Buy for its 5.9% Dividend Yield?

This solid dividend payer has the potential to help investors generate reliable passive income for decades.

Read more »

nugget gold
Dividend Stocks

Recession Stocks Are Back: Consider Buying the Dip This April

Recession stocks are back, and this one could be a solid winner.

Read more »

Person holds banknotes of Canadian dollars
Energy Stocks

Best Stock to Buy Right Now: Suncor vs Cenovus?

Suncor stock's 4.2% dividend yield vs Cenovus Energy's growth potential: Tariff-proof safety or growth gamble?

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

How to Earn $500/Month in Tax-Free Income With Your TFSA

Canadians can earn $500 or a desired tax-free income every month by saving and investing through the TFSA.

Read more »

how to save money
Energy Stocks

1 Canadian Stock Ready to Surge in 2025 and Beyond

This Canadian stock has seen significant growth, but more could come for 2025 and beyond.

Read more »

oil and natural gas
Energy Stocks

Here’s How Many Shares of Enbridge You Should Own to Get $2,000 in Yearly Dividends

Solid dividend stocks like Enbridge could help you generate reliable passive income for decades.

Read more »

Pumpjack in Alberta Canada
Energy Stocks

3 Canadian Oil and Gas Stocks to Watch for in 2025

Oil companies like Suncor Energy (TSX:SU) are doing well this year.

Read more »

Aerial view of a wind farm
Energy Stocks

The Best Renewable Energy Stocks to Buy Before They Take Off

Here are two of the best Canadian renewable energy stocks you can buy today and hold for the long term…

Read more »