CA - Crescent Point Energy: Growth In A No-Growth Environment

2023-07-21 07:00:00 ET

Summary

• This Canadian company Crescent Point Energy Corp. is NYSE-listed.
• The company has operations in both the United States and Canada.
• Growth has been through accretive acquisitions.
• The Crescent Point Energy balance sheet remains conservative.
• The company should be able to continue to grow organically, while returning a generous amount of cash flow to shareholders.

Crescent Point Energy Corp. ( CPG ) is a Canadian company (that reports in Canadian dollars unless otherwise noted) that is also listed on the NYSE and has some business on the United States side of the border in North Dakota. Traditionally, pure-play Canadian companies usually trade at a discount to the United States industry. However, a NYSE listing and a venture into the United States (that is actually longstanding) could change that equation in the future (depending upon how things work out). That allows investors an extra chance to come out ahead.

In the meantime, this company is growing by accretive acquisitions during a time when the market demands a return of capital rather than reinvesting the profits into the business. This market demand has led to a period of slow to no industry production growth. That has put the industry in a good position now that the economies of the world are seen as weakening.

What is interesting (as a side consideration) is that the debt market is relatively wide open to purchases and acquisitions. But that same debt market seems very opposed to funding production growth. That can be considered a "vote" that it is cheaper to purchase production than to organically grow production.

Oftentimes, rising demand is disguised during a time of economic weakness. But that rising demand often shows itself during the next rebound when both governments and consumers yell about high prices. The fact is that the cure for low prices is low prices in a free market economy. But as a country, we have yet to learn that lesson.

Management has operations in the Bakken as shown above on both sides of the Canadian-United States border. The operations in the United States are a relatively small part of the total company operations. But once any company has a foothold, then there is the chance to grow that foothold into something of significant value. It could in the future, change the perception of the company from Canadian to an international company which often results in a better overall valuation.

Right now, management has viewed Canadian acquisitions as a cheaper way to grow. Acreage in Canada often goes for a fraction of the cost in the United States despite some very competitive profitability (as well as industry support by the Alberta and Saskatchewan governments). Therefore, at the current time, operations are rightfully expanding in Canada.

Profitability By Leasing Area

Management is operating in some Canadian areas that have profitability comparable to some really good basins in the United States like the Permian. But the acreage cost is nothing close to Permian acreage cost. Furthermore, the Canadian dollar offers still another cost advantage at the current time over United States costs. But Mr. Market really has not noticed.

A lot of these areas that will be discussed have been producing for a very long time. But recent technology advances of well designs and modern completion techniques have allowed the industry a lot of new production possibilities that were not there a decade or so before.

Even with these advances, many of these basins still have intervals that have not yet become commercial or may be commercial but have not been explored yet.

Alberta Montney Reservoir

The leases have very low breakeven points that allow the company to operate and sometimes grow under very harsh industry conditions.

The current payout for a significant number of prospects is less than one year. So, the company in essence gets all of its money back before the end of the fiscal year to either distribute to shareholders or to drill a second set of wells.

Management has increased the value of these leases since taking over the operations by increasing the percentage of liquids (and to some extent condensate) as a percentage of production as shown above. This is something that has been really reported across the basin.

A lot of the Western basins in Canada were known for natural gas production. But now intervals with liquids are becoming commercial to produce. That has resulted in more value to a lot of leases held by both this company and competitors than was the case when the leases were obtained.

The rapid technology advancement has made a lot of deals look far cheaper in hindsight than was the case when the deal was done. This is especially true for Canada where there are still a lot of lease-able areas that are wide open and often up for auction.

Kaybob Duvernay Reservoir

Similarly, the Kaybob Duvernay area has experienced a revival due to technology advances. Like the previous set of leases, this area has now become much more valuable over the last few years.

Sometimes, in Canada, the volatile oil window and the liquids rich is more profitable than the oil window. It all depends upon the well characteristics and the amount of condensate produced. Condensate in Canada often sells at a premium to light oil because it is used to make heavy oil flow through the pipelines to market. Canada often imports some of the condensate needed for this purpose.

In this case it is clear that the company has some very profitable and low-cost acreage.

Shareholders

The very profitable leases allow for some projected production growth over five years while returning a fair amount of cash to shareholders. The return overall appears to be favorable even if the shares are not in a retirement account (and hence subject to withholding for United States shareholders).

What is good about Canadian stocks is shown here. This company plans to return more than the current stock price over the next 5 years. Now that does assume an oil and gas price that potential investors need to decide the reasonableness of. However, that proposal far exceeds the proposals on the United States side of the border by a wide margin.

Furthermore, the proposed production growth with help to limit downside risk as well as lead to future increases in cash flow returns to shareholders. Not many companies can increase production while returning a fair amount to shareholders.

The structure of the variable returns is likely to be a base dividend that can hopefully be maintained throughout the industry business cycle. This base dividend will be combined with a variable component that will be subject to current industry conditions and stock repurchases on an opportunistic basis.

For those that do not need a steady income on a quarterly basis, this holding could prove very attractive in the long-term. The debt ratio is expected to exit at 1.0 in the current year as long as commodity prices do not dip very severely and maintain that dip.

In any event, this company has fairly conservative finances to go with the low costs. This company can grow production and pay dividends when many others are waiting for an industry recovery.

This upstream company can be considered a strong buy proposal based upon the growth prospects and the cash flow that are seldom matched at the current price. Rarely can an investor find a proposal to return cash that is equal to or greater than the current share price. That is especially true given the size of the company and the NYSE listing.

There is, of course, always a commodity price risk for Crescent Point Energy Corp. But this management has done a wonderful job of turning around what was a zombie corporation when they took it over. Mr. Market has not yet given them credit for that accomplishment. But an investor can take advantage of that.

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