Is Crescent Point Energy Corp. Too Bullish on an Oil Recovery?

Crescent Point Energy Corp.’s (TSX:CPG)(NYSE:CPG) 2016 capex plan is fairly aggressive considering the current oil price.

| 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

Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) recently put out its 2016 capex plan, which its CEO called “conservative and disciplined.” On one hand, it’s hard to argue with that because spending is expected to meaningfully decline from last year. That being said, there’s a case to be made that the company’s plan is actually a bit on the bullish side given the growth-focused nature of the plan.

Showing restraint?

Crescent Point expects to spend between $950 million and $1.3 billion on capex in 2016, which is 16-39% below what it spent last year. That will enable the company to live within its cash flow and protect its balance sheet. However, thanks to a more than 30% drop in its well costs, the company’s production will still be 1-5% above what it produced in 2015. Given that the current oil market its oversupplied with crude, growing its production seems rather bullish.

The case could be made that the company should only aim to keep its production steady, if not allow it to decline to aid and not hinder the market’s attempt to rebalance. Having said that, Crescent Point’s production will come down from its 2015 exit rate of 175,000 BOE/d given that its 2016 average will be between 165,000 BOE/d and 172,000 BOE/d.

Still, with its production ahead of last year’s average, all that excess production will only end up in storage until the oil glut dissipates, so it would make more sense for the company to leave that incremental oil in the ground by holding off its growth-focused investments until the market needs more oil and gas.

Walking a fine line

The other issue with the company’s 2016 capex plan is the fact that it doesn’t leave it a lot of wiggle room. While Crescent Point expects to live within its cash flow, it assumes that oil prices will range between $40 and $60 a barrel in 2016. If oil keeps heading lower from its current price in the low $30s, Crescent Point could be in trouble because only 34% of the company’s production is hedged, which leaves it fairly well exposed should prices keep falling.

In fact, the low end of the company’s 2016 capex plan would see it spend $950 million, which would equal 100% of its available cash flow at a $40 oil price. In other words, if oil averages less than $40 a barrel in 2016, then Crescent Point will need to either suspend its dividend, sell assets, or grow its debt to fund the difference.

Growing its debt under that scenario would be tough to do given that its debt-to-funds flow from operations would already be at an elevated 2.8 times at a $40 oil price. That’s almost three times higher than its average debt-to-cash flow ratio over the past decade, which shows just how steeply its cash flow has fallen in the past year.

Investor takeaway

One of the reasons why oil prices continue to fall is because oil producers keep growing production even though there is a glut of oil on the market. This growth has only exacerbated the problem, pushing oil prices lower. That’s why Crescent Point’s plan to grow its production in 2016 might not be the best idea. The company really shouldn’t be investing to grow production in a market that doesn’t yet need any more oil.

Instead, it would be better off conserving cash and keeping that oil in the ground until the price of oil is meaningfully higher.

Should you invest $1,000 in Cardano Aud right now?

Before you buy stock in Cardano Aud, 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 Cardano Aud 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 $18,750.10!*

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 35 percentage points since 2013*.

See the Top Stocks * Returns as of 1/22/25

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 Matt DiLallo has no position in any stocks mentioned.

If You Thought Apple and Microsoft Were Big, You Need to Read This.

The steel industry produced the world's first $1 billion company in 1901, and it wasn't until 117 years later that technology giant Apple became the first-ever company to reach a $1 trillion valuation.

But what if I told you artificial intelligence (AI) is about to accelerate the pace of value creation? AI has the potential to produce several trillion-dollar companies in the future, and The Motley Fool is watching one very closely right now.

Don't fumble this potential wealth-building opportunity by navigating it alone. The Motley Fool has a proven track record of picking revolutionary growth stocks early, from Netflix to Amazon, so become a premium member today.

See the 'AI Supercycle' Stock

More on Energy Stocks

Trans Alaska Pipeline with Autumn Colors
Energy Stocks

Got $1,000? 3 Pipeline Stocks to Buy and Hold Forever

Here are three top dividend-paying Canadian pipeline stocks you can buy right now and hold for as long as you…

Read more »

man touches brain to show a good idea
Energy Stocks

3 No-Brainer Energy Stocks to Buy With $1,000 Right Now

Given their solid underlying businesses and healthy growth prospects, I am bullish on these three energy stocks.

Read more »

oil pump jack under night sky
Energy Stocks

Top Energy Sector Stocks to Invest in for 2025

Here are three top Canadian energy sector stocks that look like solid buys in 2025 for those looking to ride…

Read more »

A meter measures energy use.
Energy Stocks

Got $2,500? 3 Utility Stocks to Buy and Hold Forever

These utility stocks are known for their solid earnings and consistent dividend growth, making them compelling investments.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Got $2,500? 3 Energy Stocks to Buy and Hold Forever

Along with capital gains, many Canadian energy stocks often pay dividend or enhance shareholder value through share buybacks.

Read more »

Oil industry worker works in oilfield
Energy Stocks

Canadian Investors: Should You Buy Canadian Natural Resources Stock While Under $50?

If there's one thing I love, it's a deal. And right now, CNQ stock looks like it could be a…

Read more »

Trans Alaska Pipeline with Autumn Colors
Energy Stocks

Better Pipeline Stock: Enbridge vs. TC Energy?

Enbridge and TC Energy are two pipeline stocks that offer shareholders tasty dividend yields in January 2025.

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

2 TSX Stocks to Invest $20,000 and Create $2,597.60 in Passive Income

Need income? We got you, with these two top dividend stocks due for more solid growth and passive income.

Read more »