CPG - Crescent Point: Growing Through Acquisition Of Montney Assets

2023-04-14 12:32:20 ET

Summary

• The company has recently announced the acquisition of Spartan Delta’s Montney assets in Alberta worth $1.7 billion in cash.
• I estimate that the company might distribute an annual dividend of $0.33, representing a high dividend yield of 4.25%.
• After comparing the forward P/E ratio of 5.57x with the sector median of 8.63x, I think the company is undervalued.

Investment Thesis

Crescent Point Energy ( CPG ) is an oil and gas company operating in Western Canada and the United States. It has recently announced the acquisition of Spartan Delta’s Montney assets which can increase its production capabilities and help it to strengthen its position in the competitive market. The company also has a high dividend payout which makes it an attractive investment opportunity for the yield-hungry and risk-averse investors

About CPG

CPG deals in developing, exploring, and producing oil and gas. It owns and operates light and medium crude oil, natural gas liquids, and natural gas reserves in Western Canada and the United States, with an asset base comprising long-life, operated properties. The Corporation owns crude oil and natural gas properties in Saskatchewan, Alberta, British Columbia, and Manitoba, along with North Dakota and Montana. It sold approximately 59% of its liquid volumes in Saskatchewan, 26% in Alberta, 14% in the U.S., and 1% in Columbia in 2022. In 2022, the company produced around 41% tight oil, 28% natural gas liquids, 16% shale gas, 11% light oil, 3% heavy oil, and 1% conventional oil. The company’s major oil and gas properties inclu de Kaybob Area, North Dakota Area, Viewfield Area, and Shaunavon Area. Kaybob Duvernay's production is a mix of natural gas liquids and natural gas, with natural gas liquids accounting for around 59% of the total. It recorded average gross production of 37000 boe per day in the previous year. In the year 2022, the corporation acquired certain Duvernay assets from Repsol Oil and Gas Canada Inc. to expand its Kaybob Duvernay assets. In North Dakota, the company is developing the Bakken resource play, which produces high-quality light oil through multi-stage fractures in horizontal wells. It reported average gross production of 19000 boe per day in the previous year. The Viewfield resource area includes development in both the Bakken and conventional plays, such as the Frobisher and Midale, in Southeastern Saskatchewan. Its gross average production in the previous year reached up to 31000 boe per day. The Shuanavon resource area, located in southwest Saskatchewan, is undergoing development in the Upper and Lower Shaunavon resource zones, as well as conventional Upper Shaunavon pools, all of which are medium-quality oil. In 2022, it reported gross average production of 19000 boe per day.

Acquisition of Spartan Delta’s Montney Assets

The oil and natural gas industry is experiencing strong demand due to the crucial role of natural gas in the clean energy transition. This rising demand has created significant opportunities for all the participants in the industry. The industry has also become competitive due to increasing demand where the competent compete based on acquisitions of assets, access to drilling rigs, and overall production capacity. Identifying these competitive scenarios, the company has recently announced the acquisition of Spartan Delta’s Montney assets in Alberta worth $1.7 billion in cash. As a result of these acquisitions, the company will now have over 20 years of drilling locations in its inventory, bringing its corporate total to 15 years of drilling locations. In addition to being located in a volatile oil fairway, the acquired lands also have similar resource characteristics to the adjacent Kaybob Duvernay play, where the company has demonstrated positive operational performance. It will also be adding 600 net Montney locations with well licenses and key infrastructure. These assets include approximately 38000 boe/d and the land of 235,000 net acres in Alberta with Montney rights. I believe this acquisition can act as a primary catalyst to boost the company’s growth as it will be significantly increasing its production levels which can facilitate it to capture the additional growing demand in the industry. In addition, this acquisition can strengthen the company’s position in the competitive market as it will be increasing its access to key locations and assets. As per my analysis, the increased production levels can significantly improve the company’s cash flows which can further help it to increase its dividend payout. The company is also optimistic about this upside potential and that's why it has recently updated its guidance after the acquisition. Based on the company’s five-year plan, production is expected to reach 195,000 boe/d by 2027. It is expected by the company that this forecast will generate approximately $3.6 billion and $5.2 billion of cumulative excess cash flow ($6.53 and $9.57 per share), at US$65/bbl to US$75/bbl WTI, representing an increase of approximately 20% over its previous projections. In addition to its base dividend, the company will keep returning to investors 50% of its discretionary excess cash flow, or around 60% of its surplus cash flows. It will also be utilizing its excess cash flow to pay down debt and strengthen its balance sheet. I believe this acquisition can make the company financially strong and help it to grow rapidly.

Dividend Yield

The company started distributing dividends in 2019 and experienced tremendous growth in the payouts over the years which signals its well-positioning in the market. In the previous year, the company distributed a cash dividend of $0.034 in the first quarter, $0.049 in the second quarter, $0.060 in the third quarter, and $0.060 in the fourth quarter. In addition, it distributed a special dividend of $0.026 in November, which makes the total annual dividend $0.229, representing a high dividend yield of $2.95%. In the current year, it distributed a dividend of $0.075 in the first quarter along with a special dividend of $0.024. I believe we can expect strong dividend growth this year as a result of the recent acquisition of Spartan Delta’s Montney assets which can highly increase its cash flows as a result of increased production levels. I estimate that the company might distribute an annual dividend of $0.33, representing a high dividend yield of 4.25%. I think, the company is on growth-spree and we can expect consistent dividend growth in the coming years which makes it an attractive investment opportunity for yield-hungry and risk-averse investors.

What is the Main Risk Faced by CPG?

Oil and natural gas production volumes highly depend on factors beyond the company’s control. Several factors influence its business, including the availability, distance, and capacity of oil and gas gathering systems, pipelines, and processing facilities, as well as the availability of rail loading facilities and railcars. These factors can be affected due to various reasons such as general economic conditions, processing and transportation, regulation of oil and gas production, and tax and energy policies. If the production declines due to any of the above reasons, it can negatively impact the company’s revenues by further contracting its profit margins.

Valuation

The company has recently acquired Spartan Delta’s Montney assets which have huge potential of accelerating the company’s financial performance as it is boosting its production levels in the coming times. After considering all the above factors, I am estimating an EPS of $1.39 for FY2023 which gives the forward P/E ratio of 5.57x. After comparing the forward P/E ratio of 5.57x with the sector median of 8.63x, I think the company is undervalued. I believe the company might gain significant momentum as a result of its recent acquisition of Spartan Delta’s assets which can help it to trade above its sector median. I estimate the company might trade at a P/E ratio of 8.90x, giving the target price of $12.37, which is a 59.62% upside compared to the current share price of $7.75. Disruption in production activities can affect the financial performance of the company. I believe in that case, it can contract the profit margins and EPS of the company.

I believe in the bear case scenario of reduced production levels, the EPS of FY2023 might be $1.31 and estimate that the company might trade at a P/E ratio of 8.82x, which gives a target price of $11.55, representing an upside of 49.08%

Conclusion

The company has recently acquired Spartan Delta’s Montney assets which can boost the company’s financial performance by increasing its production capacities. This growth can be sustained for a long time due to the tailwinds in the oil and natural gas industry. It is exposed to the risk of disruptions in production activities which can contract its future profit margins. The company pays a high dividend which is expected to increase in the coming quarters as a result of its recent acquisition. This high dividend makes the company an attractive investment opportunity for yield-hungry and risk-averse investors. The firm is currently undervalued and we can expect strong growth of 49%-59% as a result of its recent acquisition. After considering, all the above factors, I assign a buy rating to Crescent Point Energy.

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