Crescent Point Energy: Should You Buy?

Crescent Point Energy (CPG) is not in the best of health this year due to the weakness in the oil market. This is the reason why the company announced second-quarter adjusted net operating earnings of C$40.4 million, down 77% from the year-ago quarter.

However, Crescent Point posted average production of approximately 151,636 boe per day during the quarter, comprising of nearly 91 percent of light and medium crude oil and liquids. The production for the quarter translated into 10%, or over 14,000 boe/day growth as compared to the second quarter 2014. The production volumes exceeded expectations partly due to superior than estimated spring break-up in southern Saskatchewan.

But then, Crescent reported significant year-over-year decline in the bottom line, primarily due to a mix of factors including, reduction in the average selling price, strengthening US dollar and weaker global crude demand putting downward pressure on crude pricing and eating into the margins of the oil and gas drilling major, although this was somewhat offset by the year-over-year increase in production volumes for the quarter.

Strong liquidity and balance sheet

Crescent has substantial amount of liquidity and financial flexibility on the its balance sheet with an overall bank credit facility of $3.6 billion and an unutilized credit capacity of approximately $1.5 billion and no significant debt maturities due in the near-term.
In addition, Crescent has strategically entered into cross currency interest rate swaps on US dollars senior guaranteed notes to freeze the US dollar amount of the notes for interest and major repayments purposes at estimated rates.

Also, Crescent is expected to be uniquely maintaining strength of its balance sheet by hedging the key financial transactions through cross currency interest rate swap agreements against the US dollar. The continued strengthening of its balance sheet has encouraged the company to develop significant un-booked inventory of impressive assets, low-risk and high-return plays which is estimated to deliver significant long-term profitability for the company.

The company has also developed unique capability to shift 2017 and 2018 hedges towards 2016 with an estimated hedging benefit of nearly $144 million at US$40/bbl WTI for an exchange of US$/Cdn$0.74 for 2016.

Drilling in the right areas

Moreover, Crescent is maintaining low-risk, superior-return plays and solid asset base with huge upside. Crescent is believed to be having more than 12 years of strategic drilling inventory, or nearly 7,460 internally recognized drilling locations. Out of the net internally recognized drilling locations, a total of 2,391 are proved and 934 consolidated are probable.

Crescent’s notable drilling inventory with enhanced capital efficiencies, strategically positioning the company for sustainable long-term growth given slow but steady improvement in the global commodity pricing environment will lead to better times. In the second quarter, Crescent drilled 35 wells including, 32.9 net oil wells in the Viewfield Bakken resource play in Southeast Saskatchewan and Manitoba. The company has a net of 52 water injection wells operating in the Shaunavon resource play including, the newly drilled 22 (22.0 net) oil wells in the play.

Crescent is strategically employing hedging technique at all the key resource plays to counter the significantly volatile oil and gas pricing environment and maintain profitability through efficient allocation of the capital.

Crescent strategically acquired productive capacity of nearly 3,200 boe/d of superior-netback light oil and over 500 net sections of land, considering the planned acquisition of Coral Hill Energy which improves the long-term underlying value of its core assets by allowing the company with complete control and ownership in the development at the core play.

Crescent is observed to keen on optimizing its balance sheet by controlling the non-core expenses while strategically improving its production through new acquisitions and offering improved shareholder returns in line with its commitment to deliver improved investor returns.

Conclusion

Despite these positives, investors are advised to stay away from Crescent Point Energy as of now due to its poor valuation and weak growth prospects. It has trailing P/E and forward P/E ratios of 85.25 and 122.45, respectively, depicting an overvalued stock. As such, given the uncertainty in the end market, it makes sense to stay away from Crescent Point.
Published on Oct 6, 2015
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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