Despite the fears of oil demand destruction and higher interest rates weighing down economic conditions, it seemed that recession or not, higher dividends are coming for Crescent Point Energy (NYSE:CPG), as my previous article highlighted. Upon the release of their second quarter of 2022 results, it saw their net debt target achieved earlier than anticipated, which marks an important milestone to see shareholder returns boosted from their current low dividend yield of only circa 3.50%, depending upon exchange rates. Although disappointingly, it now sees their appeal tarnished elsewhere given their approach to returning cash to shareholders, as discussed within this follow-up analysis that covers their updated shareholder returns policy, along with their recently released results.
Since many readers are likely short on time, the table below provides a very brief executive summary and ratings for the primary criteria that were assessed. This Google Document provides a list of all my equivalent ratings as well as more information regarding my rating system. The following section provides a detailed analysis for those readers who are wishing to dig deeper into their situation.
*Instead of simply assessing dividend coverage through earnings per share cash flow, I prefer to utilize free cash flow since it provides the toughest criteria and also best captures the true impact upon their financial position.
The first quarter of 2022 saw very impressive cash flow performance and thankfully, the second quarter was not a disappointment with their operating cash flow for the first half climbing to C$956m and thus a massive almost two-thirds higher year-on-year versus their previous result of C$589m during the first half of 2021. Since they saw operating cash flow of C$426m during the first quarter of 2022, it means that the second quarter saw an acceleration to C$530m. Given this was driven by the widely discussed booming oil and gas prices, it should not come as too much of a surprise for many investors and thus the bigger story is actually their net debt target already being achieved, as per the commentary from management included below.
“As a result of our significant excess cash flow generation, coupled with proceeds we received from our strategic non-core dispositions, we recently achieved our near-term debt target of $1.3 billion, ahead of our previously anticipated time line.”
“As part of this framework, we are targeting to return up to 50% of our discretionary excess cash flow to shareholders above and beyond the return we are providing through our base dividend. We expect to provide this additional return through a combination of share repurchases and special dividends.”
-Crescent Point Energy Q2 2022 Conference Call.
Apart from the excitement of seeing their net debt target achieved earlier than anticipated that marks an important milestone for higher shareholder returns, it was even more exciting to see special dividends flagged, as they were not even mentioned during their previous conference call for the first quarter of 2022. Even if utilizing their free cash flow of C$799m during 2021, which was generated with broadly middle-of-the-road operating conditions, they would still have a very high 15%+ free cash flow yield given their current market capitalization of approximately C$5.2b. Apart from boosting their potential to fund very large shareholder returns, it also helps lessen the risks posed by a recession on the horizon since they do not necessarily require triple-digit oil prices to reward their shareholders, as was discussed in detail within my previously-linked article. Quite disappointingly, the excitement over their special dividends was tarnished upon reading further into their second quarter of 2022 conference call, which reveals that share buybacks will see a heavier weighting, as per the commentary from management included below.
“So I would expect the bulk of that discretionary cash flow that allocation to be directed towards share repurchases here in the near term with maybe a little bit going -- coming out in the form of a special.”
-Crescent Point Energy Q2 2022 Conference Call (previously linked)
Throughout my library of analysis, I often state my preference for dividends over share buybacks, and unsurprisingly, this time my view is no different. Even though share buybacks are not inherently bad in my eyes when it comes to volatile companies, I prefer a heavier weighting towards dividends since their cyclical earnings and share price risks seeing the majority conducted near cyclical highs, but at least in this situation, the risks are somewhat less pronounced than normal with their market capitalization still down heavily, as the graph included below displays.
It can be seen that despite the recent booming oil and gas prices, their market capitalization of approximately $4b remains well below its highs of circa $15b during 2014 when oil last traded around these levels. As a side note to avoid confusion, the graph included above utilizes their USD market capitalization, whereas the market capitalization of approximately C$5.2b mentioned earlier in my analysis was converted to Canadian dollars. Even though exchange rates fluctuate and thereby affect this comparison, it should remain apt because their earnings are derived from oil and gas that is priced in USD and thus comparing their market capitalization in USD terms should broadly eliminate any material issues.
Whilst a relative valuation is not necessarily perfect, given their very high 15%+ free cash flow yield based upon their more business-as-usual 2021 results, it nevertheless strongly indicates that in this situation, share buybacks are less unappealing than elsewhere, such as other oil and gas companies who see their share price trading at all-time highs. Even though this helps the outlook for their share buybacks, in my eyes, they still tarnish the potential of their shares because cheap or not, their share price will still fluctuate up and down as oil and gas prices ebb and flow. Furthermore, they also face the long-term challenge to navigate the clean energy transition that will eventually see oil and gas demand decline, which creates uncertainty surrounding the value creation of share buybacks, unlike dividends that are easily quantifiable.
Thanks to their even stronger cash flow performance during the second quarter of 2022, their net debt plunged to C$1.545b versus its previous level of C$1.825b following the first quarter, thereby representing a decrease of 15.34%, which is very impressive for only one quarter. This saw them enter the third quarter of 2022 almost at their target of C$1.3b that was subsequently reached thanks to divestitures as quoted earlier, which is not difficult to imagine considering their $214m of assets held for sale as of June 30th, net of associated liabilities. Even though this marks a very important milestone for their shareholders, it nevertheless feels redundant to reassess their leverage and liquidity in detail after only one quarter, especially given the former was already very low and thus poses no material risks.
The two relevant graphs have still been included below to provide context for any new readers and clearly show that after the second quarter of 2022, their leverage was once again easily within the very low territory. This sees their respective net debt-to-EBITDA and net debt-to-operating cash flow of 0.49 and 0.69 well beneath the threshold of 1.00 for the very low territory, as was the case after the first quarter that saw respective results of 0.64 and 0.83. Meanwhile, their liquidity saw its current ratio effectively unchanged at 0.44 versus its previous result of 0.43 across these same two points in time, and whilst still rather low, it was still adequate given their C$2b+ of credit facility availability and ample free cash flow. If interested in further details regarding these two topics, please refer to my previously linked article.
It was exciting to see their net debt target achieved earlier than anticipated with their booming cash flow performance transforming their capital structure, thereby marking an important milestone for higher shareholder returns. Even though their preference for share buybacks will help provide the higher dividends that my previous analysis highlighted, it nevertheless would be preferable to see a heavier weighting towards special dividends, and thus, despite their otherwise positive fundamental improvements, I only believe that maintaining my buy rating is appropriate as their appeal is tarnished. If not for their preference for share buybacks over special dividends, this would have been upgraded to a strong buy rating.
Notes: Unless specified otherwise, all figures in this article were taken from Crescent Point Energy’s SEC Filings, all calculated figures were performed by the author.
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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.