Grab Shares Of Crescent Point Energy Corp.

| About: Crescent Point (CPG)

Summary

The recent sale of shares plus management's forecast of a production decrease should pressure the shares into bargain territory for a short time.

Well payback is often around 12 months or less for many of the projects. Operational improvements are still projected and could improve this in the future..

Long term debt is approximately 2 times cash flow, a fairly conservative figure and the recent stock sale will lower that ratio over time..

Production growth is projected into the future by a management that expects the company to thrive with oil prices of roughly WTI $35 or anything in the thirties.

The stock appears cheap when compared to second quarter cash flow and forecasts of future production growth.

Every now and then a company gets to the bargain bin and the consumer can purchase shares in a large well run company at a considerable discount. As one of Canada's larger producers, this stock trades on both the Toronto Exchange and the NYSE which should provide a variety of purchase and sale options. Crescent Point Energy Corporation (NYSE:CPG) has just sold stock and then management guided that production will decrease in the third quarter comparison because of a lack of drilling in the second quarter. These two factors should produce a swoon that will enable nimble investors to purchase this company cheaply.

About 33.7 million shares were sold before the overallotment. The company has about 507 million shares outstanding before the sale. So with the overallotment, there could be as many as 550 million fully diluted shares. Normally a sale such as this weakens the stock price for a time period after the sale. Management believes that it received a good price in the sale of common stock, so at least a temporary slide in the stock price is to be expected. That slide from the C$19.30 per share has already begun. The extent and the duration is unknown.

Helping the slide will be a negative production comparison in the third quarter. Production will decline from the second quarter for sure and may show a negative comparison with the previous year. Normally the weather in Spring and sometimes Summer is not particularly helpful. So with strong first quarter production, management shifted about C$100 million or so into the second half of the year. That shift may take advantage of the recent commodity price rally. So now the company management plans to spend most of the capital budget in the second half of the year.

So while management anticipates a strong production year overall, the market may not care when the third quarter is reported. There is always a portion of the market that could care less about what happens long term but cares a lot about what is currently happening. If somehow management manages to lower expectations to the point they score a "beat" then the stock could rally, but that is not the usual outcome. So there is a good chance that the next few weeks (maybe even a few months) could provide a chance to purchase a stock at a discount from the recent stock sales price of C$19.30.

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Source: Crescent Point Energy Corporation October, 2016 Corporate Presentation

Crescent Point Energy Corporation is a company with operations on both sides of the United States-Canadian border. The company has several different kinds of oil and gas operations including conventional, water flooding, and unconventional. Management emphasizes oil production in its projects. This company generally grows by acquiring acreage near currently owned acreage so that it can use the experience gained on the new acreage. Two such acquisitions were disclosed in the second quarter earnings report.

Expect this management to continue to make opportunistic acquisitions that add to established projects. Even though the latest share offering stated that the proceeds were for increasing the capital budget. That extra equity also gives management more flexibility to acquire suitable bargains as they appear. The conservative balance sheet is a large advantage when competing for bargain acquisitions in the current low commodity price atmosphere.

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Source: Crescent Point Energy Corporation October, 2016 Corporate Presentation

Generally, the company drills wells with a very fast payback as shown in the top slide. These wells are also very profitable. This kind of well is far easier to hedge because the capital invested is returned quickly and a reasonable profit can be assured without hedging years into the future. Forecasts are far more certain and major writeoffs when commodity prices plunge will be smaller than with the high decline wells that payback much more slowly. So these type of wells are less risky. Cash flow will grow faster with a quick payback.

The industry is also cutting costs at a record pace. Investors may not see the cost cutting occurring right now again for a generation, if ever. So wells that pay back quickly run less risk of serious losses in the future when competing against the new lower cost wells of the future. In the current cost cutting atmosphere, payback rises in importance until costs and selling prices stabilize.

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Source: Crescent Point Energy Corporation October, 2016 Corporate Presentation

The company further removes risk by having a strong balance sheet. Not only is the debt low, but the cash flow can pay off that debt in about two years. This year has had lower commodity prices than many in recent memory, even so the cash flow is comfortable. Management has stated that they want the company to thrive when the oil price is WTI $35 (give or take some). This is an attitude that is similar to that expressed by the Murphy Oil (NYSE:MUR) management. Companies that expect the worst are going to be conservative, have low costs and probably survive some of the worst industry conditions imaginable. The commodity price gyrations are risky enough without companies adding more financial risk to the equation.

Even when the company decides to upscale its activity, the activity level will increase conservatively. The company sold stock and will deposit the proceeds in the bank to lower the debt outstanding temporarily. The funds will then be reborrowed as needed to finance the increasing activity level. This company has plenty of credit available, and another Canadian billion on the credit line would not have been a problem. But this company guards its balance sheet strength jealously and does not like to see the long term debt at more than two times cash flow. Hence the stock sale.

Investors should note that this company does not carry a cash balance. So some of the traditional accounting ratios will be inaccurate. Instead, this company deposits all receipts against its credit line balance, and then reborrows the cash as it is needed to be spent. Therefore what looks like a weak current ratio is the result of a cash flow management choice that probably minimizes interest expense.

The second quarter conference call indicated an 18 rig activity level in the third quarter. Management can increase the rig number depending upon the optimistic outlook of management. There were different communications where 20 rigs were discussed, so the next conference call should clarify the progress. Clearly this management has not taken a relatively bullish stance on the profits outlook of the company.

Management also used the time to increase the hedging program, so there is no doubt that the new production will be hedged to protect the minimal return of the capital budget. Such a program would "guarantee" cash flow growth from the new production, although other factors from the unhedged production could certainly offset that "guaranteed return and cash flow growth". Still this company is using a strategy that a few of the more risky stocks probably should emulate to reduce risk.

This is a company with a decent production growth record. Companies managing to grow throughout the latest industry downturn are hard to find. When they are found, they usually have above average profitability. That appears to be the case with is company. This management has proven that it has the discipline to continue to grow without sacrificing the key values from its history that enabled the company to come through hard times.

The latest cash flow figure was C$.79 per share for the latest quarter. Annualized, investors are paying about six times cash flow for above average profitability. There are many companies more speculative with higher operational costs that sell for a much higher multiple of cash flow. This bargain probably will not last long.

Disclaimer: I am not an investment advisor and this is not a recommendation to buy or sell a security. Investors are recommended to read all of the company's filings and press releases as well as do their own research to determine if the company fits their own investment objectives and risk portfolios.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.