Liquidation ValueUsing a discount of 25% for accounts receivable, 20% for Property, Plant & Equipment and 100% for Goodwill, the net value per share is about $7.60. Using a 30% discount for PP&E yields $5.74/share.
At the current market cap of C$2.13 billion, the market is discounting PP&E about 40%.
Is this a reasonable valuation of the oil properties that the company owns? In a $30-40 oil world, it might be. In a $50-60 oil world, I doubt it. Oil is going to rise over the next ten years so the current value given to CPG's reserves seems low.
Given the size of the writedown, CPG obviously paid too much for these properties. So I think they're saying: let's just adjust these to today's value which will form a low base. When oil rises to $70 or $80, magically today's impairment becomes an increase in value.
The WTI price used for the impairment estimate was $58.58 for 2019, about $2 higher than the current price. I assume they projected the average WTI price for this year which seems fairly realistic.
The impairment is based on what they estimate the assets could be sold for minus disposal costs. This value is higher than estimated cash flows from the assets. Obviously a lot of assumptions are used for the impairment charge: commodity price, cost of capital, exchange rate, transport issues, etc. CPG has acknowledged that the book value of their properties is not today's market value. That will change as the various elements change.
I think they should have used a lower WTI estimate to really clear the decks.
If oil performs well, these assets will increase in value from either a cash flow standpoint or a sale outlook. So your view of oil prices will inform your view of the value of CPG.
From a cash flow valuation, the company is extremely cheap, trading at 1.25x 2018 cash flow of C$3.16 per share. With an estimated C$400 million in free cash flow available for debt payments and share buybacks, CPG is undervalued.