It can be a little scary for investors to consider re-investing in oil stocks. They have not exactly been the most friendly to portfolios, especially with the way oil prices have behaved over the past few years. But in tough times, there are companies that make the sacrifices necessary to turn around. Is Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) one of those companies?
A big part of that depends on where the price of oil goes. And all signs point to some movement in a reduction in supply. On December 10, a pledge was signed by 24 OPEC and non-OPEC nations to cut production of oil by 1.8 million barrels a day for six months. And so far, they have been able to achieve a 1.5 million cut.
As you can imagine, this has had a pretty big impact on the price of oil. At the end of November, with talks about an agreement swirling, the price of WTI Crude increased from under US$45 per barrel to US$53. And by the time the agreement was signed, the price had pushed over US$56 a barrel before moving into a trading pattern between US$52 and US$55. This is good news for Crescent Point because the higher it moves, the higher the margin.
The question is if the price will remain in this tight range. Management seems to believe so because its guidance for 2017 is highly dependent on the price of oil, resting at approximately US$52.
On the production side, Crescent Point expects to generate approximately 183,000 barrels of oil equivalent per day, which is a 16,000 boe/d increase. This 10% improvement is, in part, thanks to the $1.45 billion in capital expenditures the company is budgeting for. However, there was one sentence in the guidance that made me a little nervous:
Based on Crescent Point’s currently monthly dividend of $0.03 per share and aforementioned capital expenditure plans, the Company expects a total payout ratio of 100 percent in 2017 at a WTI price of US$52.00/bbl.
This concerns me because Crescent Point has already been forced to cut its dividend twice — first from $0.23 to $0.10 and then again to the current $0.03 per share per month. While this 2.28% yield is certainly rewarding, a 100% payout ratio means that all of its available cash flow is returned to investors with no wiggle room.
In the guidance, management offers the following good news: “The company estimates increased funds flow from operations of approximately $50 million for every US$1.00/bbl WTI, providing flexibility for increased production growth.” With the price of WTI at US$53, the company should have a little cushion to cover the dividend. And Crescent Point adding 13,500 bbl/d to its oil hedges should limit the downside a bit, even if WTI crashes again.
Is Crescent Point a safe stock to acquire?
While it’s certainly not my favourite oil stock, it has made many necessary moves to be in a stronger financial position. It has made a series of acquisitions that strengthen its core business, which should allow future years to be even stronger.
However, its payout ratio of 100% makes me nervous. Nevertheless, if oil prices stay north of US$53, like they are right now, the company should be in a fine position. I wouldn’t load up, but starting a small position is worth any downside risks.
