Introduction
Crescent Point Energy, (CPG)-T is up about 80% since our last article in January. It was a deep dive we do for first time coverage, so for a complete run down of all the company's assets, please give that one a read. In this article we will focus on the Kaybob and Duvernay acreage picked up from Shell earlier this year.
I had targeted a gain to about $5.00 this year, but was a little cautious on the entry price. That seemed to be prescient as the stock didn't break $5.00 until just a couple of weeks ago. As you can see the price action on CPG has been fairly volatile, within a range in 2021.
Now as we lurch toward 2022 it's time to take stock and see if the laggard performance-yes an 80% gain is lagging these days, represents an opportunity as the company accelerates into the New Year. Or should we take a pass and look for other opportunities.
Analysts are somewhat bullish-if that's a term, with 11 of 15 rating it "over-weight." Price targets range from just above present levels at $5.50 to $9.77. So, all over the map for these high-dollar stock prognosticators. Let's see what we think after a quick review.
Note: this article appeared last month in the Daily Drilling Report.
The thesis for CPG
CPG is a small cap Canadian E&P company that has a wide geographic distribution of oil oriented assets (85/15 oil to gas). The bulk of their production, about 55% comes from the Saskatchewan Viewfield water flood asset. Thanks to their pickup of Shell's Montney asset earlier this year this balance will shift somewhat in favor of gas. The oil runs the gamut of the gas light oil and NGL's from the Kaybob and Duvernay to heavy oil production that must be steamflooded out of the ground.
As with many Canadian oil producers, CPG is flourishing with the higher prices driving netbacks into the high $40's, more than doubling from the year before. As I noted in my earlier article CPG is a good steward of capital and resources, having cut a million dollars out of drilling and completion-D&C, costs out of the Kaybob Duvernay in the last six months. That is pretty impressive performance.
So cost cutting, higher netbacks, and the Kaybob-Duvernay acreage pickup form the primary thesis for CPG as we enter 2022.
It is also worth noting the company has nudged production targets up for 2022, due in part to an expanded water flood at Viewfield. It has also hiked their dividend and recently announced a $100 mm share buyback. At current pricing that works out to about 18 mm shares, or a float reduction of about 4%. Things seem to be on the up for CPG. Let's look at some possible catalysts that could drive the stock toward the higher end of analyst expectations.
The Kaybob Duvernay
As the press release noted this asset was expected to be cash flow accretive this year at WTI prices above $50, which we certainly have now. It came with ~30K BOEPD current production yielding approximately $400 mm at $60/bbl, putting the transaction cost at less than 2.3X net income. These assets, which are situated in the heart of the condensate rich fairway, are expected to, among other things, enhance the Company's free cash flow profile. Drilling location with increase and the purchase included key infrastructure that is expected to improve capital efficiency per well.
Ryan Grizfeldt, COO commented in the call about the incorporation of this asset into their capital allocation plans- During third quarter, we entered into a farm-in agreement with a Kaybob Duvernay operator to complete certain wells in exchange for a working interest in these wells and additional land, both in close proximity to our existing assets. This arrangement provides us with the opportunity to further delineate our land position and add locations to our Kaybob Duvernay inventory.
As part of this agreement, we successfully completed a five-well pad in late third quarter, achieving completion costs approximately 20% below those. We had expected when we first entered the Kaybob Duvernay play earlier this year. I'd also note that we achieved these costs reductions despite shifting to a new higher fluid intensity frac design That is more representative of our go-forward plan. Production from these wells is expected to be on stream during fourth quarter of this year.
For those who wonder what "fluid intensity" might mean. They are talking about the pump rate. The goal here is increased velocity which equates to better sand transport. This has to be balanced with the rock strength so that fracture propagation is controlled toward the areas of maximum permeability. I like this idea. It's a lot cheaper than just upping the sand concentration and should promote cost control as it seems to have done. If you know your rock, it's the way to go.
It is also interesting that their success with cost control and completion design has attracted another operator. That's unusual in my experience.
Ken Lamont, CFO noted- I will also note that since closing our Kaybob Duvernay acquisition in the second quarter of 2021, we have already paid off more than 80% of the cash portion of that total purchase price.
Hedging as a catalyst
Hedging cost the company a couple of hundred million in 2021, not extreme by any measure, but still leaving room for tightening up. For 2022, they have increased the percentage hedged and at significantly higher levels for the year.
Q-3
Q-3 results brought significant YoY improvement that largely to oil prices and higher netbacks. Adjusted funds flow-AFF was $394 mm for the quarter with free cash at $180 mm, after capex of $187 mm and the dividend. Debt was reduced slightly to $2.1 bn and remains a primary goal of management. Much of the free cash was used to strengthen the balance sheet, and management was targeting exit 2021 with LT debt under $2.0 bn.
The divided was raised to $0.12 share on an annual basis that represents a ~2% YoC. As noted a stock buyback was announced that would cut the share count ~4% when fully implemented.
Your takeaway
You don't have to look too hard to find one of the main reasons this Montney/Duvernay producer has lagged behind peers. Debt. The company has $2.1 bn of legacy debt that until a year ago had threatened the viability of the company. What a difference the oil price doubling makes!
There was also the concern about the 50 mm Shell shares hitting the market from the Kaybod Duvernay sale. Shell, (RDS.A), (RDS.B) is on a purity kick as I noted in a recent article, and purging its portfolio of carbon-intensive assets has been a priority. That said, Shell is fairly flush with cash right now and may be willing to let those shares roll for a while.
With improved cash flows, and strict adherence to capex outlays, the company should be on track to cut its debt at a rapid pace, likely exiting 2022 at $1.2 bn. That with cash flows that should be coming in 2022, will put CPG in a pretty good light.
One caution might be the widening of the WCS/WTI spread recently, now ~$14.00. That's been holding fairly steady in a fairly narrow band for the past year.
CPG is trading at <3X EV/AFF on an annualized basis. I think with the positive catalyst we've identified for the stock investors will begin to look past the debt and bid up CPG shares in the new year. If the multiple were to go to four (4), a stock price of $9.5 would be in sight. With everything we can see that looks doable given our assumptions for the oil price this year staying in the middle of the $65-85 range it saw in 2021.
Investors with a moderate risk tolerance should consider putting CPG on their shortlist for 2022. The stock has been rising modestly with the turn of the year, but still has room for further improvement given the oil price environment.