Crescent Point Energy: Hedges Will Roll Off In 2023, Priced At 3x FCF, Dividend Yield To Increase

Jun. 06, 2022 6:10 AM ETCrescent Point Energy Corp. (CPG), CPG:CA91 Comments20 Likes

Summary

  • Crescent Point Energy is priced at 3x its 2023 free cash flows.
  • Crescent Point will reach a near-term debt target of $1.3 billion by Q3 2022. At that point, Crescent will upwards revise its 30% excess free cash flow capital allocation strategy.
  • Crescent has a 2% yield, but this will be meaningfully increased within 2 quarters.
  • The same as I did two months ago, I rate CPG stock a buy.
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Investment Thesis

Crescent Point Energy (NYSE:CPG) is an attractive investment opportunity. It has been 2 months since I previously rated this stock as a buy.

CPG rating

Author's coverage

While not all my stocks have performed this well, I do believe that Crescent Point Energy remains attractively priced.

I declare that with WTI above $80 this stock is a home run. Furthermore, I discuss how Crescent's hedges will substantially roll in 2023, and how this will allow Crescent to be even more cash flow generative in 2023.

Crescent Point Energy Near-Term Prospects

Two months ago I wrote an article titled, Anything Above $80 WTI And This Is A Home Run. In that article, I explained that WTI at $80 was the number to look out for.

Since that article, management has now turned its focus to $100 WTI.

Crescent Point Energy Available Funds Flow

CPG Q1 2022 presentation

Crescent Point Energy now highlights to investors that if WTI stays at $100 investors would see Crescent report approximately CAD$1.4 billion of free cash flow in 2022.

However, keep in mind that Crescent Point Energy is substantially hedged.

Crescent Point Energy Hedging

CPG Q1 2022 presentation

On the one hand, you don't want to invest in an energy business that is largely hedged. On the other hand, Crescent's CAD$1.4 billion free cash flow figure is after its losses on commodity derivatives, after its hedged book.

What's more, the icing on the cake here has to be that by Q1 2023, Crescent's hedged book falls to just 20% of production.

That means that in 2023, Crescent will be much better positioned to benefit from high oil prices.

In fact, even if oil prices were to dip back down to $80 WTI, given that Crescent will have a much smaller hedge book, the business will actually make more free cash flow.

In fact, in 2023, with WTI at $80, Crescent will make more free cash flow than in 2022 when WTI is around $110 to $115, as it is now.

Indeed, consider Crescent's 5-year outlook:

Crescent Point Energy Excess Cash Flow and Net Debt / Funds Flow

CPG Q1 2022 presentation

To repeat what I described 2-months ago - If WTI stays above $80, Crescent will make at least CAD$2.2 billion of free cash flow.

CPG consolidated tax pools

CPG Q1 2022 presentation

Furthermore, given that Crescent has such significant tax pools, that means that Crescent isn't going to pay anything in the way of taxes in 2023. Further strengthening my bullish thesis.

Crescent Point's Capital Allocation Strategy

Crescent has some debt on its balance sheet.

Crescent Point net debt target

CPG Q1 2022 presentation

That being said, Crescent believes that by Q3 2022, it will have reached $1.3 of net debt.

This is the company's target debt profile, after which Crescent will look to massively ramp up its capital allocation strategy.

Crescent Point Debt Profile

CPG Q1 2022 presentation

Crescent has been decidedly tight-lipped about its preferred capital allocation strategy.

Crescent only notes that it will go beyond 30% of its free cash flow allocation yet it comes up short of laying out a concrete capital allocation policy.

Nevertheless, I believe that the stock is cheap enough, that this may not be such a big deal. All options for shareholders will be favorable.

CPG Stock Valuation - Cheaply Valued

Before drilling down into Crescent Point Energy let's keep in mind its balance sheet.

Crescent Point Senior Note Maturity Schedule

CPG Q1 2022 presentation

Approximately 80% of Crescent's debt is senior notes. In 2023, Crescent has approximately $500 million worth of debt due.

However, given that Crescent is going to make at least CAD$2.2 billion, this implies that Crescent will have absolutely no problems in paying down its debt.

Moreover, if we assume that Crescent makes around CAD$2.2 billion in 2023, this puts the stock priced at approximately 3x next year's free cash flows.

The Bottom Line

The main investment risk to keep in mind is that nobody can predict the price of WTI. That's the unavoidable truth.

The other meaningful investment risk to keep in mind is that it's difficult to know whether or not Crescent's management team will be prudent capital allocators. For that, investors will need to wait until Q3 earnings are out.

Management may decide to ramp up production rather than deploy capital back to shareholders. This would dramatically change the investment thesis and it would be something for shareholders to keep an eye on.

Nevertheless, with those risks in mind, I'm still bullish on this investment. And rate this stock a buy.

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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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