CPG - Crescent Point Energy: Refocus Almost Complete

2023-10-13 15:01:20 ET

Summary

• Crescent Point Energy Corp. has announced the disposition of its U.S. operations, focusing solely on Canadian operations.
• The company's reduced debt allows it to wait for a cyclical recovery in the industry before resuming drilling and completion activities.
• The company's strong balance sheet and optimization efforts are expected to increase profitability and lower the breakeven point over time.
• This management can likely drill and complete wells profitably during industry conditions when others are idle.  That gives management a cost advantage.
• Comparisons with previous years are hard due to all the acquisitions and dispositions.

Crescent Point Energy Corp. (CPG) recently announced a disposition of the United States operations for about US$500 million . In the future, the company will have only Canadian operations and will report in Canadian dollars . This should set up the company to continue to grow earnings for years to come.

The newly focused areas present an attractive payback period on at least some of the acreage. In addition, management has reduced debt to the point where there is an option to cease drilling and completion activities during times of hostile industry environments to wait for a cyclical recovery.

This presentation may well mark the end of a period where the whole company portfolio was totally rearranged. By this, I mean there were billions of acreages purchased and nearly as much sold. At this point management should have what it wants going forward. Management may well shop around for more bargains because this is definitely a buyers' market. But any sales are going to be (probably) considerably smaller in the future.

Management now has a very profitable choice of what to develop for the foreseeable future. The company is now far more financially strong with a lot of options in the future. This was a zombie corporation years ago when this management took over. That is clearly not the case anymore.

Furthermore, at least some of these areas have stacked possibilities for future development as technology continues to advance and add more acreage to the important "Tier 1" classification that is so attractive to the market.

The only complication is that all the acquisitions and dispositions have made quarterly and annual comparisons just about impossible.

Anytime an investor sees this much activity, it makes comparability a lot of work if it is even possible. The reason is that there are usually significant amounts of production in a fiscal year that is not in the comparable time period. When still more happens, the issue gets compounded to the point that Mr. Market just gives up.

Keep in mind that this was a debt heavy corporation when management took over. Many thought that it had seen its better days (to say the least). Now, you have a cash flow generating juggernaut with a conservative debt ratio. Few believed it was possible when we first looked at the company. Management has done a tremendous job. However, there is no track record for the company as it is now.

As a result, a stock like this may need some history as it is currently put together. Therefore, the market is likely to assign a discount that slowly fades as management demonstrates the ability to run the "new" company.

Fortunately, the very strong balance sheet allows for unforeseen challenges should they appear. In the meantime, it is far more likely that management needs a couple of years to optimize the operation of the newly combined acreage.

The reason that optimization does not happen overnight is because the sizable acquisition needs time for any optimization efforts to become significant, and it also needs time for any higher cost wells to decline in importance to the company reporting.

Many of these companies report superior well design and completion techniques as technology moves on. But it takes time for enough of those wells to be drilled and start producing before the quarterly reports actually demonstrate the benefits management presents as actually existing.

Management hopes to increase company profitability in the future. Some of that hope will end up keeping the company profitable during times when other competitors cannot drill wells profitably. The new acreage will also likely lower the company's breakeven point over time as well.

But the key is that if the wells are as profitable as management states, then drilling and completion will be profitable at a time when service companies are competing for business (cyclical bottoms). That could provide yet another cost advantage that lasts for the life of the wells drilled. In fact, it can be as good as any competitive moat that other industries desire.

The end result for shareholders is a more defensible base dividend, along with the opportunity for variable shareholder returns that are proportionately greater during the good times.

Another huge consideration is that current commodity prices are likely higher than the assumptions may during the negotiations for the properties purchased. That alone, if the high prices persist for a significant amount of time (or management hedges those prices) could significantly raise the return above what management expects. The time value of money means that money received now (from high commodity prices) is more valuable than money received later.

Going Forward

Investors should expect that this relatively large producer should grow in the single digit range in the future. That growth will likely be augmented with an occasional opportunistic acquisition.

Any management that turns a zombie corporation into a cash flow juggernaut deserves the attention of a wide variety of investors. Most likely, this management is just getting started, and the best is yet to come. A whole lot of risks go down when management accomplishes what this management accomplished.

This management had originally taken over a zombie corporation. Yet, management managed to sell enough acreage to bring debt under control while increasing profitability along the way. As a result, execution risks are likely extremely low with this management.

Initially, profitability is likely to grow faster as management optimizes operations. Therefore, profitability is likely to grow faster than production growth in the first few years. This management has done a lot of shopping (and buying). Therefore, management probably has a full plate when it comes to optimization targets.

Nonetheless, this management could choose to grow larger through organic growth, acquisitions, or a combination of the two. Whether that happens remains to be seen.

Now management has what it wants. Therefore, going forward could be very different from the past. This is good management. Therefore, this management is very likely to surprise to the upside in the future.

Key Takeaways

Current management has completely transformed this company that the market left for dead a while back.

The future operations will be located in Canada. The debt is nothing close to the worry it once was. The capital budget now can be easily financed with cash flow, as shown above. There is now plenty left for shareholders as well. All of this is very different from the zombie corporation I once covered.

Furthermore, management is likely to improve on the measures shown above by optimizing operations and benefitting from technological advances. For these reasons, profitability is likely to improve at a faster pace than any production growth for the first few years.

The fact that the picture has improved tremendously speaks volumes about the quality of management of the company. Growth for a company this size is very different from the growth of some of the smaller names I follow. However, management of this quality is very likely to outperform expectations of the market over the long-term.

That probably makes this stock a strong buy consideration for those wanting to own a quality upstream company without that small company risk. This Canadian company is listed on the NYSE. That should give it far more exposure than the typical Canadian company that usually trades on one of the OTC markets. That exposure should result in a better valuation and less of a "Canadian discount."

The combined return of dividends, variable dividends and some growth is likely to be in the middle teens for about 5 years or so. After that, the market can see what this management is planning to do with the company.

People ask me all the time about takeover possibilities. The biggest thing is that any buyer wants a deal with few problems. Therefore, any well-run company is likely to be a takeover candidate. That is especially true for one with low debt like this company.

High debt companies often incur debt during "high-cost" times, and the debt does not decline with the stock price. Therefore, those companies are often high cost. If they are not well run as well (because they are low on cash), then there are more costs still. As a result, high-debt companies are often the opposite of what an acquiring company is looking for.

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