On January 22, Canadian light-oil producer Crescent Point Energy (NYSE:CPG) listed its shares on the NYSE. While the company has been a successful operator for years, now producing 124,000 barrels a day, the new US listing, and the attractive 7% yield, may spark interest from dividend-focused investors. The company reports that its C$2.76/share annual dividend, paid monthly, represents a payout ratio of 53%. However, this payout ratio is far less conservative than it may appear, and may cause some confusion among new investors. The payout ratio reported by the company represents the dividend paid as a percentage of operating cash flow, before any capital expenditures.
To clarify the cash flows of the company, I present below the latest guidance for 2014, announced by the company on December 3, 2013 (in millions of C$). I have supplemented management's release by calculating the cash flow after capital expenditures, and the resultant payout ratio.
2014 Cash Flow Guidance
|Funds flow from operations||2,100|
|Net cash for dividends||350|
|Net cash for dividends per share||$0.88|
|Current annual dividend rate||$2.76|
Obviously 314% is a shocking payout ratio, which requires some explanation. This is not particularly new, as the company has had a high "all-in" payout ratio for years. The company has sustained this payout largely through share issuance, whether via brokered-offerings, or through its monthly dividend reinvestment plan (DRIP). The DRIP allows shareholders to take shares, at a 5% discount to the average market price, in lieu of the monthly dividend.
Similarly if we look to the latest financials, for an IFRS presentation of cash flows, we see that for the nine months ended September 30, 2013, the company generated $1,465 million in cash from operating activities, and spent $1,304 million in investing activities. The difference of $161 million compares to the $807 million of dividends for the nine months. Even cash dividends (excluding those taking the DRIP) represented $259 million for the nine-months, well exceeding the $161 million of cash remaining after capital expenditures. One might ask how long can the company keep this up. Note that the DRIP is only available to Canadian residents. What if US dividend investors become a larger part of the investor base and a much higher proportion of dividends are paid out in cash? Or more Canadian shareholders opt for cash, perhaps in part due to some tweaking of the DRIP announced last October? The company may be forced to take on more debt, curtail its capital expenditure plan, or cut the dividend.
On a more positive note, the company's management team is highly respected within the Canadian energy industry. As highlighted in a recent presentation, since 2002 production has grown at an average rate of 7%, and cash flow has grown at an average rate of 19%. The company has been highly acquisitive, and as a result it has established a dominant position in some large resource plays in south-west Saskatchewan and surrounding areas. I would not short this stock. However, for a dividend-focused investor, looking for a conservative energy investment, CPG may not be as conservative as it first appears.