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November 27, 2023
Outperform
TSX: CPG; CAD 9.58
Price Target CAD 13.00
Crescent Point Energy Corp. The Dust Settles - Notes from the Road
Our view: Our recent roadshow with CEO Craig Bryska & CFO Ken Lamont featured an energized management team, with focal points mainly encompassing the recent Hammerhead transaction combined with the resulting broader long-term corporate outlook. CPG is now done large scale M&A, and we see multiple expansion (and/or strong per-share estimate growth) as largely tied to field execution on the path to become what we expect will be a more broadly accepted 'Montney player'.
Key points:
• Hammerhead transaction - investors coming up the type curve. The majority of discussions revolved around CPG's $2.6 billion acquisition of Hammerhead Energy, with a mix of investor education combined with asset-level specifics as investors become more familiar with the strike area and company plans. Investors were broadly supportive of the transaction given a strong strategic fit, with areas of pushback being higher leverage to complete the deal combined with uncertainties related to productivity on the largely-undeveloped Eastern lands. The Duvernay took a back seat amid the discussions, with investors generally more focused on the company's Montney prospects for now.
• Brick by brick - Establishing a Montney oil core. Development on Hammerhead lands features ~35-40 wells per year, or ~$400mm in annual investment on a two-rig plan and is forecast to reach 80 mboe/d by 2026. Importantly, the CPG team will be applying updated completion techniques such as higher tonnage (3 T/m), fluid volume (15 m3/m) and tighter (50m) frac stages to enhance productivity. CPG could potentially drill on the Eastern flank in 2024 (which we support) in order to validate a larger portion of the company's ~800 field-wide locations.
• Investor sentiment - Time and execution set to drive multiple expansion. Given CPG's discounted valuation (2.5x EV/DACF, peers 3.2x) suggest that investors are applying a level of risk to our outlook; in our minds we see simple, solid execution as the key avenue to multiple expansion or simply higher estimates. Our numerous discussions with investors post-deal suggest to us that CPG is now piquing the interest of many, though rapid change combined with a new (and less known) operating area could take a bit of time and execution to fully appreciate.
• Financials - Delivering the buffet approach. CPG is set to generate roughly $1.1 billion in FCF in 2024 (at futures strip) set to be allocated to debt repayment ($450 million), common dividends ($275 million) and buybacks ($400 million). All-told, we see go-forward annual production per share (debt adjusted) growth of 15-20% on our strip outlook (see Exhibits 1 and 2), which compares favorably amid the peer group and other Montney producers. Additionally, non-core dispositions also appear to be a likely avenue at the right price - perhaps to the tune of $500 million or so over the next couple of years - and would aid in the effort to re-establish the $2.2 billion debt target.
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