Topic: Value Stocks

Takeovers add to Crescent Point Energy’s growth potential when oil recovers


Today, we look at an oil and gas stock that we regard as a value stock with strong potential to grow when energy prices recover. Crescent Point Energy focuses much of its production in the Bakken light oil development in Saskatchewan and 91% of it on oil. The company is taking advantage of lower prices by acquiring energy firms in financial difficulty. Partly due to such acquisitions, Crescent Point will increase its overall production this year. And this former energy trust pays a monthly dividend of $0.10, which yields 6.0% and appears secure.

CRESCENT POINT ENERGY CORP. (Toronto symbol CPG; produces oil and natural gas in Western Canada, with a focus on its Bakken light oil development in southeastern Saskatchewan. Its output is 91% oil and 9% gas.

In the three months ended June 30, 2015, Crescent Point’s cash flow fell 17.7%, to $524.3 million from $636.7 million a year earlier. The company raised its daily output by 10.4%, but lower oil and gas prices offset that increase.

Cash flow per share declined 26.5%, to $1.14 from $1.55, because the company issued shares to pay for acquisitions. That includes $1.5 billion for Legacy Oil + Gas in June 2015.

Crescent Point bought heavily indebted Legacy Oil + Gas for $563 million plus the assumption of $967 million in debt. Activist investors put a lot of pressure on Legacy to complete a deal.

The move adds about 22,000 barrels of oil a day to Crescent Point’s current output of 150,000 barrels. About 15,000 barrels of Legacy’s output is in Crescent Point’s core Bakken area.

As well, these properties are in Saskatchewan, beyond the reach of Alberta’s new NDP government, which could increase royalties or impose new environmental regulations. Crescent Point’s debt stands at $3.6 billion, or just 28% of its market cap, so it can easily afford to buy Legacy and other distressed producers. Even so, it plans to sell shares to raise $690 million to pay off most of Legacy’s debt.

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Crescent Point’s 2015 output due to rise even with lower exploration and development spending

Like many oil and gas producers, Crescent Point has cut back on exploration and development spending. This year, it will devote $1.45 billion to this purpose, down from $2.17 billion in 2014.

Even with the lower spending, its 2015 output should rise to an average of 163,500 barrels of oil equivalent a day from 140,800 in 2014. But with oil now under $50 U.S. a barrel—and gas near four-year lows at $2.40 U.S. per thousand cubic feet—Crescent Point’s per-share cash flow will likely fall 25.9% this year, to $4.24 from $5.72.

The stock now trades at 4.7 times this year’s forecast cash flow per share. That’s reasonable for a company with strong potential to grow when oil and gas prices recover. The shares yield 6.0%.

Recommendation in Canadian Wealth Advisor: BUY

For a profile of another stock we believe has strong potential to rise with a recovery in commodity prices, read Finning International prepares the ground for a commodity rebound. For a recent report on an oil and gas services stocks we believe is well positioned for a rebound in oil prices, read High-quality rigs give Precision Drilling first crack at an energy rebound.

Beside low oil prices, does the presence of an NDP government in Alberta give you a reason to avoid oil stocks?


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