Don’t Trust Crescent Point Energy Corp.’s 9% Dividend

It’s likely that Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) won’t be able to support its dividend past this year.

| 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

Like many of its peers, Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) is in survival mode. Oil has fallen to under $35 a barrel, and the company posted a $240 million loss last quarter. Over the last 12 months shares have declined nearly 50%.

In response to lower prices, Crescent Point has slashed capital expenditures (the amount it spends on oil projects). This year spending is expected to be between $950 million and $1.3 billion. That’s 16-39% lower than last year. While this should save enough money for the company to stay solvent, it’s causing production growth to be the smallest it has been in a decade.

It seems that Crescent Point management would rather save the capital to fund its dividend, which costs the company over $600 million a year.

At about 9%, many income investors may be tempted to buy shares, hoping for more upside if oil prices improve. As we’ll see, that outsized yield may not be very reliable.

Putting everything on the line

When earnings turn negative, it’s typically the dividend that is first to be cut.

By keeping the dividend payment so high while experiencing negative earnings, Crescent Point is making it very difficult to continue boosting production or to pay off its massive debt load of about $2.5 billion. That debt is costing the company almost $100 million a year in interest expenses.

The company’s strategy is a bit confusing. It has a database of 7,500 locations where it would like to drill, and with lower capital spending this year, only 630 wells are planned for 2016. Limiting production growth seems consistent with the expectation that oil prices will stay lower for longer. If this were the case, however, one would think Crescent Point would lower its debt position to strengthen the balance sheet in preparation for the next bull market. By affirming its high dividend payment, the firm is unable to boost production or pay down debt.

When hedges roll off, things get much trickier

Regardless of whether or not management believes oil will rise in the short term, the company’s financials will start to feel considerable strain if they don’t improve by next year.

Crescent Point has been a big beneficiary of previous hedging actions by management. This year over a third of production is hedged at over $70 a barrel. This is an incredible advantage as the company can sell a considerable amount of oil for a 100% premium. This is one of the biggest reasons why Crescent Point can continue paying out $600 million a year in dividends. By 2017, however, only 11% of production is hedged. By 2018, that number is only 6%.

If oil doesn’t improve dramatically by then, the security of the dividend will be severely in question. The only way it would be sustainable would be to tack on more debt or sacrifice long-term production. Both of these options would destroy value for shareholders, even if the company is somehow able to maintain its dividend.

Should you invest $1,000 in Slate Grocery Reit right now?

Before you buy stock in Slate Grocery Reit, 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 Slate Grocery Reit 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 Ryan Vanzo 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 Dividend Stocks

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

How I’d Allocate My TFSA Contribution to Canadian Value Stocks This Year

I’d split my $7,000 TFSA contribution across solid dividend-paying stocks from different sectors

Read more »

dividend growth for passive income
Dividend Stocks

Why I’d Invest in Canadian Value Stocks for Both Stability and Growth

Three Canadian value stocks are buying opportunities for investors looking for stability and growth.

Read more »

investment research
Dividend Stocks

Got $15,000? 3 Blue-Chip Stocks Every Canadian Should Consider

Here's why investing in blue-chip TSX stocks such as CNQ and CNR should derive outsized gains in 2025 and beyond.

Read more »

protect, safe, trust
Dividend Stocks

Where I’d Allocate $20,000 in 2 Safer High-Yield Dividend Stocks for Retirement Needs

Here are two safer, high-yield dividend stocks I'm looking at for my retirement needs.

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

3 Reasons I’m Considering Enbridge Stock for a $5,000 Investment This April

I'm considering Enbridge stock to provide some defensive appeal and a juicy dividend to my long-term portfolio.

Read more »

monthly desk calendar
Dividend Stocks

A 9.2% Dividend Stock Paying Cash Every Single Month

With one of the highest dividends out there, this dividend stock deserves attention in your portfolio.

Read more »

Happy golf player walks the course
Dividend Stocks

Build a Powerful Passive Income Portfolio With Just $20,000

If you are worried that the bear market could reduce your savings, these stocks can build a powerful passive income…

Read more »

Hand Protecting Senior Couple
Dividend Stocks

How I’d Use My $7,000 TFSA Contribution to Start Retirement Planning

These TSX stocks have solid fundamentals and are well-positioned to deliver significant tax-free total returns over time.

Read more »