UnderTheRadar wrote:
Crescent Point: Valuation Still Compelling If You Expect $65 Oil
Summary
- Crescent Point Energy is up over 50% since the last time we wrote on it.
- The path was not smooth and likely required copious amounts of antacid.
- We examine the events since then and the outlook for this oil and gas firm.
When we last covered Crescent Point Energy Corporation (CPG), we had a strong bullish view. Specifically we said,
That kind of free cash flow yield (30%) alongside a 1.2X debt to EBITDA is rather hard to imagine but it is exactly what will be offered here should CPG execute its infrastructure sale and we are right about oil. The risks are there, especially if we are materially wrong on oil prices, but the upside should be rather substantial as CPG starts buying more and more shares.
Source: The Asset Sale Has Made The $13 NAV Achievable
The total returns from that point have been good, but it has been an exceptionally tumultuous path getting here.
Data by YCharts The COVID-19 crash and the recovery have made it harder for the company to execute its plan, but it has done a reasonable job by outperforming its Canadian peers since then.
Data by YCharts Let's look at where this one stands and what the valuation tea leaves are saying today.
2020
CPG, like other oil and gas firms had a difficult 2020 but still managed to deliver excellent cash flow, thanks to moderately heavy hedges. Hedging added $5.52 per barrel on average in cash flow and created an exceptional buffer during the second and third quarters. Cash flow per share amounted to a $1.61. Total funds flow during the year was $864 million and the firm just spent $660 million on capital expenditures. Deleveraging was exceptional as it divested half a billion of assets and exited 2020 in a stronger position.
2021
Things definitely are looking up for the firm here with expected funds flow now breaching past $1.45 billion for the year and capital expenditures expected to be just $650 million. But CPG did throw one unusual card into the mix. They made a $900 million acquisition.
The Company has acquired Shell Canada Energy's Kaybob Duvernay assets in Alberta (the "Assets") for $900 million (the "Acquisition").
This strategic Acquisition enhances Crescent Point's core principles of balance sheet strength and sustainability. In particular, these Assets, which are situated in the heart of the condensate rich fairway, are expected to enhance the Company's free cash flow profile, inventory depth and include key infrastructure that is expected to lower future capital requirements.
Based on 30,000 boe/d of production, the purchase price reflects an attractive Acquisition metric equating to less than 3.0 times net operating income of approximately $330 million at US$50/bbl WTI, or approximately 2.3 times net operating income of approximately $400 million at current commodity prices of US$60/bbl WTI. These assets are also expected to enhance Crescent Point's free cash flow generation as approximately $180 million of annual capital expenditures are required to sustain 30,000 boe/d of production. The Company will seek to further enhance returns through potential cost efficiencies.
Source: News Wire
CPG paid for this predominantly with cash and the total consideration consisted of $700 million in cash and 50 million common shares. All in all, the net debt should remain about flat in 2021. Our thoughts here are that the acquisition was fair considering the price paid. CPG avoided share dilution by paying the bulk of the amount in cash.
2022
CPG's plans for 2022 include a fully funded capex plan at $45/barrel. This includes the recently raised dividend.
Source: CPG Presentation
It is interesting here to note that WTI is currently trading even above the high end of that presented graph. While those numbers do look great, we would note that capex is up significantly than what was spent in 2020 and what the guidance is for 2021. Some of this is due to the acquisition mentioned above which was concluded in 2021 after the normally capex heavy first quarter of the year. But some of this is also because the lower level capex consisting of enhancing production via water flooding is reaching its limit. In other words, CPG is now normalizing its capex levels.
2023 & Beyond
Investors though will be happy to know that CPG's bump in capex is a one-time normalization and it expects to sustain production with the 2022 planned capex.
Source: CPG Presentation
At $55/barrel the cumulative free cash flow after capex will be about $1.60 billion.
Data by YCharts
Annually this works out to about an 8.5% free cash flow yield. At $65/barrel this jumps to a 18.7% free cash flow yield. The futures strip is not very liquid after 12 months but at least currently, the market sees over $65.00 for the 2022-2023 time frame.
Source: CME
Upside to even these oil prices remains enormous. At $75/barrel, the free cash flow yield moves 28%. Clearly none of those latter numbers appear sustainable. The market is pricing in a $55/barrel environment for CPG. Should even $65/barrel turn out to be the average, CPG likely delivers exceptional returns from this point.
Valuation & Verdict
Despite the stunning performance so far this year, CPG remains one of the cheapest names we cover in the oil and gas space.
Data by YCharts
Of course everything in the oil and gas space is cheap and even the most expensive names trade at very reasonable free cash flow yields.
Looking beyond the valuation, CPG also has significant liquidity to execute its plans.
Source: CPG Presentation
Alongside that, its weighted cost of debt is very low.
Source: CPG Q2-2021
This is a very important consideration as firms which appear even cheaper, like Athabasca Oil (OTCPK:ATHOF), tend to become far less investable when you examine the cost of the debt. ATHOF refinanced its debt at 9.75% and offered a large amount of warrants. CPG does not seem to have an issue here as banks love to finance this company. It has also intelligently hedged into a rising price environment and this reduces its risk of a temporary drop in commodity prices.
Source: CPG Presentation
If there is one thing that stands against the investment case is that there is a serious chase on currently to get exposure to E&P firms. This makes it harder to find less risky entry points and the case for CPG is no different. That said, since we expect at least $65/barrel average prices over the next 5 years, we are still stamping this with a "Buy". We qualify that statement by saying that we won't be adding to our position at this point.