Crescent Point Energy Stock: net debt target achieved (NYSE: CPG)
Despite fears of oil demand destruction and higher interest rates weighing on economic conditions, it looked like recession or not, higher dividends are in store for Crescent Point Energy (NYSE: GIC), like my previous article Underline. When it released its second quarter 2022 results, it saw its net debt target met earlier than expected, marking an important step to see shareholder returns boosted by their current low dividend yield of around 3.50% only, depending on exchange rates. While disappointing, it now sees their appeal tarnished elsewhere given their approach to returning cash to shareholders, as shown in this follow-up analysis that covers their updated shareholder return policy, as well as their recently released results.
Executive summary and ratings
Since many readers are likely short on time, the table below provides a very brief summary and scores for the main criteria assessed. This google doc provides a list of all my equivalent ratings as well as more information about my rating system. The following section provides a detailed analysis for readers wishing to delve deeper into their situation.
*Instead of simply assessing dividend coverage through earnings per share cash flow, I prefer to use free cash flow as it provides the strictest criteria and also best captures the true impact on their financial situation.
The first quarter of 2022 saw very impressive cash performance and fortunately the second quarter was not a disappointment with their operating cash flow for the first half climbing to C$956 million and therefore a massive increase up nearly two-thirds year-over-year from their previous result of C$589 million in the first half of 2021. As they recorded operating cash flow of C$426 million during the first quarter of 2022, this means that the second quarter saw an acceleration to C$530 million. Given that this was driven by the widely discussed oil and gas price spike, this shouldn’t come as too much of a surprise to many investors and so the bigger story is actually that their net debt target has already been met, according to the Management commentary included below. .
“Due to our significant excess cash flow generation, coupled with the proceeds we received from our non-core strategic divestments, we recently met our short-term debt target of $1.3 billion, ahead of our previously scheduled schedule.”
“As part of this framework, we aim to return up to 50% of our discretionary excess cash flow to shareholders beyond the return we provide through our base dividend. We plan to provide this additional return through a combination of share buybacks and special dividends.
– Crescent Point Energy Q2 2022 conference call.
Besides the excitement of seeing their net debt target hit earlier than expected, which marks a milestone for higher returns for shareholders, it was even more exciting to see special dividends reported, as they didn’t even have not mentioned on their previous first quarter conference call. of 2022. Even using their free cash flow of C$799 million in 2021, which was generated under broadly intermediate operating conditions, they would still have a very high free cash flow yield of 15% and more given their current market. capitalization of approximately 5.2 billion Canadian dollars. In addition to increasing their potential to fund very large returns for shareholders, it also helps reduce the risks posed by a recession on the horizon, as they don’t necessarily need triple-digit oil prices to reward their shareholders, as discussed in detail in my previous-linked article. Disappointingly enough, the excitement over their special dividends was dulled upon further reading of their second quarter 2022 conference call, which reveals that stock buybacks will see a heavier weighting, according to the commentary of the direction included below.
“So I would expect the bulk of that discretionary cash flow to be directed to share buybacks here in the short term with maybe a bit of time – in the form of a special offer.”
– Crescent Point Energy Q2 2022 Conference Call (previously linked)
Throughout my library of analytics, I often state my preference for dividends over stock buybacks, and unsurprisingly, this time my view is no different. While stock buybacks aren’t inherently bad in my eyes when it comes to volatile companies, I prefer a heavier weighting towards dividends since their cyclical earnings and stock price are likely to see the majority do near cyclical highs, but at least in this situation, the risks are a little less pronounced than normal with their market capitalization still falling sharply, as shown in the chart below.
It can be seen that despite the recent spike in oil and gas prices, their market capitalization of around $4 billion remains well below its highs of around $15 billion in 2014, when oil traded for the last time around these levels. As a side note to avoid confusion, the graph included above uses their market capitalization in US dollars, whereas the market capitalization of approximately C$5.2 billion mentioned earlier in my analysis has been converted to Canadian dollars. Even though currency exchange rates fluctuate and thus affect this comparison, it should still be appropriate as their revenues are derived from oil and gas which is priced in USD and therefore comparing their market capitalization in USD should eliminate overall any hardware problem.
While a relative valuation isn’t necessarily perfect, given their very high yield of 15%+ based on their more typical 2021 results, it still strongly indicates that in this situation share buybacks are less attractive. than elsewhere, like like other oil and gas companies that are seeing their stock prices trading at all-time highs. Even though it helps the prospects of their stock buybacks, in my eyes they still tarnish the potential of their stocks because cheap or not, their price will still fluctuate up and down as oil and gas prices fluctuate. In addition, they also face the long-term challenge of navigating the clean energy transition that will eventually see demand for oil and gas decline, creating uncertainty around the value creation of share buybacks. , unlike dividends which are easily quantifiable.
Thanks to their even stronger cash performance during the second quarter of 2022, their net debt plunged to C$1.545 billion from its previous level of C$1.825 billion following the first quarter, representing a drop of 15.34%, which is very impressive for only a quarter. This saw them enter the third quarter of 2022 almost to their C$1.3 billion target which was then met through the divestitures cited earlier, which is not hard to imagine given their C$214 million of assets held for sale as of June 30.e, net of associated liabilities. Even if this is a very important step for their shareholders, it nevertheless seems redundant to reassess in detail their leverage and their liquidity after only one quarter, especially since the first was already very weak and therefore does not present no material risk.
The two relevant charts have always been included below to provide context for any new reader and clearly show that after the second quarter of 2022 their leverage was again easily in very low territory. This sees their net debt to EBITDA and net debt to operating cash flow of 0.49 and 0.69 respectively well below the 1.00 threshold for the very low territory, as was the case after the first quarter which saw respective results of 0.64 and 0.83. Meanwhile, their liquidity saw its current ratio unchanged at 0.44 from its previous result of 0.43 on those same two time points, and although it was still quite low, it was still adequate. given the availability of their C$2 billion credit facilities and ample free cash flow. . If you are interested in more details on these two topics, please refer to my previously linked article.
It was exciting to see their net debt target reached ahead of schedule on the back of their blistering cash flow performance transforming their capital structure, marking an important milestone for higher returns for shareholders. Even though their preference for share buybacks will help deliver the higher dividends that my previous analysis highlighted, it would still be better to see a greater weighting towards special dividends, and so, despite their fundamental improvements otherwise positives, I only believe that maintaining my purchase the rating is appropriate as their appeal is tarnished. Without their preference for stock buybacks over special dividends, this would have been upgraded to a solid buy rating.
Notes: Unless otherwise stated, all figures in this article are taken from Crescent Point Energy’s SEC Filingsall calculated figures were performed by the author.