Crescent Point Energy: Anything Above $80 WTI And This Is A Home Run

Mar. 23, 2022 7:49 AM ETCrescent Point Energy Corp. (CPG), CPG:CA33 Comments

Summary

  • Crescent Point Energy is going to have a very strong year if WTI prices stay above $80.
  • Assuming $80 of WTI, this business is going to rake in $1.1 billion of free cash flow.
  • This investment offers investors tremendous upside potential.
  • Further, management is going to repurchase 10% of CPG stock this year.
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Investment Thesis

Crescent Point Energy (NYSE:CPG) is a North American oil producer. With oil prices rapidly soaring past triple digits, this company can be expected to make a significant amount of free cash flow this year.

Crescent estimates for 2022 that for anything higher than $80 WTI, Crescent's ability to make more than $1.1 billion of free cash flows steadily increases.

Crescent, like all these oil producers, has significant operating leverage. This means that once we overcome their fixed costs, whatever revenues Crescent makes, it all drops to the bottom line.

As it stands right now, the company is priced at roughly 4x free cash flows (in USD).

Also, management is buying back roughly 10% of its shares this year.

Investor Sentiment Rapidly Increasing For Crescent Point Energy

Crescent Point vs Whitecap Resources vs Baytex Energy price
Data by YCharts

There's a boom in the energy market. Countless energy stocks are soaring. You don't even need to pick ''the winner'', they are all likely to be winners here for as long as oil prices remain high.

The challenge here isn't to participate in the upside. But to have the fortitude to sit on one's hand and stay for the ride.

Crescent Point's Revenue Growth Rates Will Improve

Crescent revenue growth rates

Crescent revenue growth rates

Looking back to Crescent's revenue growth rates will not add much to the investment thesis here. Looking back to where revenues were, tells you very little about where revenues are headed.

Our best indication comes from the price of WTI on the spot market.

Price of WTI

Price of WTI

As of right now, WTI is around $110. And if it remains above $90, Crescent's ability to make strong free cash flows will be very strong. But obviously, nobody on the planet can predict where the price of oil will be in 6 months' time. However, as you'll read, anything above $70 WTI, and this investment can work out very favorably.

Crescent Point's Profitability Profile Set to Improve

Before discussing its profitability, let's in the first instance turn our focus to Crescent's balance sheet.

Crescent Point Senior Note Maturity Schedule

Crescent investor presentation

As you can see above, the higher the price of the WTI, the more cash flows Crescent will make. If WTI prices remain above $80 for the remainder of the year, Crescent's ability to make strong free cash flows means that it will rapidly improve its balance sheet.

As of right now, Crescent expects to achieve a near-term debt target of $1.3B-1.4B over the next six months, meaning that its net debt profile will move from 1.4x net debt leverage to 1.0x by the summer, and perhaps sooner.

Next, let's get stuck in what we are truly interested in here, Crescent's potential free cash flows.

Crescent Point Cumulative 5 year excess cash flow

Crescent investor presentation

A few aspects to keep in mind, the above assumptions are in $CAD. For example, at $80 WTI in 2022, Crescent believes that its free cash flows can reach $1.1 billion of excess cash flow in 2022.

What's more, using the high end of Crescent's capex assumptions for 2022 and extrapolating this out to 2023, we can reasonably assume that Crescent's capex would probably reach $1.5 billion.

For this estimate I've considered the fact in 2021 and 2022, capex requirements were around $900 million.

CPG Stock Valuation - Cheaply Priced

As it stands right now, Crescent's market cap is priced at approximately $4.3 billion (in USD). This puts the stock priced at approximately 4x this year's free cash flows.

Compared with prices outside of commodities, this is clearly cheap. On the other hand, you have the risk that the WTI prices are highly volatile and likely to retrace back at a moment's notice.

On the other side of the argument, consider how volatile tech stocks were in 2021? Surely, this is no different?

For their part, Crescent's management believes that the stock offers a tremendous bargain, and like many commodity players, they are aggressively repurchasing their shares.

In fact, earlier this month, Crescent stated that it intends to repurchase approximately 10% of its shares over the next year.

For a business that's likely to make more than $1.1 billion of free cash flows this year, deploying around $450 million towards repurchases is certainly feasible.

The Bottom Line

Investing in commodities is never easy. There's always the mantra that you don't buy commodities when the multiples are low because that's typically the end of the commodity cycle.

What's more, Crescent has very little control over the price of WTI on the spot market. Yes, it does have some hedges in place, but its assumptions of making $1.1 billion of free cash flow this year are very much out of management's control.

To preempt your question, I don't have shares here. But I do have shares in other similar opportunities. And I reserve the right to change my mind. Whatever you decide, good luck and happy investing.

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Offering high potential upside versus the broad market
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

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