Crescent Point Energy Is Shifting From Transition To Growth (NYSE:CPG)

Crescent Point Energy (NYSE:CPG) recently announced that management had completed the transition from a zombie corporation to a cash generation machine. I covered this in my last article. Now the company is going to be profitable enough to both grow and pay a dividend. Investors are about to find out the advantages of what management created in the very near future and hopefully for a long time to come.

Earnings

The earnings comparison is influenced by the acquisitions (the money involved is shown at the bottom of the chart below) and the dispositions. Therefore, a quarterly comparison would have to take that into account. What is relevant is that the company is essentially done with that. Therefore, a history of the company as it is now can begin to be established for a meaningful comparison.

(Note: this is a Canadian company that reports in Canadian dollars unless otherwise noted and is listed on the NYSE).

Note at the bottom, the sizable capital acquisitions during the year. The latest was Hammerhead. Now management states that all of the acquisitions were accretive. Overall, the company is certainly in far better financial shape than it was years ago when management first began the transition. But to compare the quarters would involve adjustments for disposals and acquisitions and that is an analytical nightmare. A general perusal is indicated just in case something major happened. But it is hard to make any significant comparisons when management is buying and selling.

What management did here is very rare. Usually, these companies disappear one way or another. This company now appears to be in a position to thrive.

Nonetheless, the company needs a record as it is currently constituted (without continual material acquisitions and dispositions). From all the communication from management that is about to happen.

As shown above, costs are definitely reasonable. But those costs could materially change as management runs an essentially new company. There is also the consideration that acquired assets often have a lot of one-time costs like optimization projects, reworks, and deferred maintenance. Therefore, shareholders do need some patience.

Kaybob Duvernay

Management created a new core area in the Kaybob Duvernay. Later in the presentation, management breaks down this area further.

The one thing that can be stated about the earnings shown before is that in conjunction with the above slide, earnings increasingly reflect the larger emphasis on the core area of the Kaybob Duvernay.

As management runs all the acquisitions (less the divestitures), operational optimizations should lead to cost savings that either slow the effects of inflation or actually show up as lower costs because the savings temporarily exceed inflation.

Management has in place a fairly aggressive growth plan for the fiscal year which could see exit production rates of more than 200,000 BOED while still paying a dividend. If that comes to be, along with longer term management forecasts, than this becomes a growth play with a little bit of income that rapidly grows. That growth is unusual for a company this large.

Costs Going Forward

There is clearly an emphasis on lower operating costs that was not the case before this management took over some years back. The latest budget demonstrates just how low these costs are going to go. The question readers will likely have is just where these low costs will show up because they can show up in depreciation or operating costs (or both).

When one translates that fully funded figure to American companies, this company is well on its way to competing with United States low cost producers. Keep in mind that fully funded budget at WTI $55 anticipates a fair amount of growth. Therefore, the breakeven point for sustained production is considerably lower. It might be lower still if some maintenance can be deferred until commodity prices recover.

What should also be noted is that management considers WTI $75 to be a reasonable average price. That is an insider view of a reasonable average price and frankly it is in a lot of forecasts. It contrasts sharply with the gloomy view of Mr. Market about oil and gas. There may be a contrarian opportunity based upon the idea that the insiders know more about oil and gas than the market.

Payout

The new focus areas appear to have an attractive payout period of about one year at current prices.

The continuing advances of technology make the above guidance safer each year as technology continues to deliver lower costs and better production. As a result, many companies I follow are beating guidance by ever larger margins over time. Now admittedly, this progress could stop at any time (and that is a risk). But no CEO reports an end to technology advances at this time.

This is a relatively new area that has begun to attract attention. Like Texas in the United States, the whole general area has been producing for some time and will likely still be producing long after you and I are gone. However, big areas of Canada have seen an industry revival due to technology advances that include “modern completion techniques”.

As a result, plays that were considered high cost are now considered competitive or sometimes even low cost. In North America, there seems to be this continual industry migration back to places that were once hot spots thanks to new technology.

The third major area for the company is a waterflood project with attractive costs and the typical low waterflood decline rate. It is a great cash flow generator. But it is not a source of future growth.

Balance Sheet

The debt levels are likely to prove to be satisfactory. The reason is that lenders and the bond market usually include a historical contribution from acquired acreage to come up with an adjusted debt ratio. But that ratio often improves because the buyer is often more interested in the property than the seller. Lenders know this and so usually the seller gets some time to bring debt ratios in-line with market expectations.

Management did mention in the press release and in some notes to the corporate presentation that there were some property dispositions that had yet to close. But those should close in the first quarter (if it has not happened already). That money is clearly going towards debt reduction. There is also the expected cash flow this year to bring that debt ratio down to guidance.

Summary

This company is now heading into a growth strategy.

This company has a base dividend that will be additionally protected by production growth and gradual debt reduction. That base dividend is a generous 5% that is well protected in the current environment.

However, any upstream producer like this one is subject to the volatility of commodity prices. Any severe and sustained downturn can put that dividend in danger.

The current guidance would suggest rapid growth for a company of this size for at least the next five years. Currently, the dividend yield is roughly 5%. That is about two-thirds of the long-term return for the average investor. But management plans to grow and that yield suggests there is no growth planned for the current stock price. Therefore, as management executes, this stock could well revalue to a growth stock valuation where the enterprise value heads towards ten times cash flow over time.

That would make this a strong buy with the idea that over time the oil and gas industry will return to historical valuations from the currently depressed values. A company with growth plans like this one that also pays a dividend is likely to be the first to respond as it covers both short-term and long-term concerns of the market. Competitors that only pay a dividend will solely meet the short-term market demands.