Crescent Point Energy Corporation - CPG-T

[j831robert]

A new subject only to get the status right. I first acquired this one in 2006 and have added to my holding several times since. News released yesterday (12 May 2010) published in Globe and Mail and on company web-site that Crescent Point will purchase all of a privately held firm -Shelter Bay Energy at what appears to be a record price per flowing barrel. Shelter Bay was created by Crescent Point in 2008 which owns 21 percent of Shelter Bay and has representation on Shelter Bay's Board. I understand (and understood and applauded at the time of formation) the rationale and purpose (long term) of this action but can't today escape the suspicion that some senior people at Crescent Point are about to realize a very great deal of personal financial gains from this transaction. Is there cause for concern or am I just naturally dubious where large amounts of money are involved.?

[Subby]

Interesting perspective j831 but are you entirely surprised?

It's just one of those things that as a shareholder (or prospective one) that I need to determine for myself, if this is something that I am willing to accept. I don't doubt that there is some rather favourable terms to the agreement that will make some key people a few dollars in the transaction.

In my specific case, I am willing to consider the terms at face value and move forward from there. I am still looking for an initial entry point with this company. I believe that CPG is overall, well run and does consider shareholder value. I appreciate their assets in the Bakken. I also believe the valuation is a touch rich however, the current dividend in my opinion should be safe although I don't see a whole lot of dividend growth over that period of time.

[Butler]

Saw Eric Nuttall raving about this company on Market Call the other night. Stockchase has a lot of recommends and the stock has been doing well. I know P/E ratios tend to be higher in this industry, but doesn't a P/E ratio of 57.64 (forward P/E 72.88) make this prohibitively overvalued?
Merged with existing thread
ModW

[Nemo2]

Saw Eric Nuttall raving about this company on Market Call the other night. Stockchase has a lot of recommends and the stock has been doing well. I know P/E ratios tend to be higher in this industry, but doesn't a P/E ratio of 57.64 (forward P/E 72.88) make this prohibitively overvalued?

We bought some in May 2009, (it was CPG.UN at that time), @ $28.89 and are currently up ~ 60% on it.......haven't thought of adding any at its current price, but, as you say, it gets 'air time'.

[Sensei]

Hi,

There was some chatter about CPG elsewhere on FWR and concern shown about the lack earnings. Several posters were concerned about the high P/E. However, as was pointed out, cash flow is the place to look. (Not sure if I agree or not, but I'm a financial statement challenged individual.) If we take TDW's info to be correct, Price to cash flow is 10.7x implying 4.31 per share, so there is a big difference between cash flow and earnings and the two ratios. FWIW, my entry point was about $38.

[j831robert]

Sensie: Market news today announced Cres Pt is buying up the immediate neighbours in Southern Sask to the tune of Cdn $770 millions - rather large statement available at the company news site claiming all is accretive. Interesting comments also on plans of the selling company to form a new junior company on retained land in the same area. Might be worth a peek.

[AltaRed]

Hi,

There was some chatter about CPG elsewhere on FWR and concern shown about the lack earnings. Several posters were concerned about the high P/E. However, as was pointed out, cash flow is the place to look. (Not sure if I agree or not, but I'm a financial statement challenged individual.) If we take TDW's info to be correct, Price to cash flow is 10.7x implying 4.31 per share, so there is a big difference between cash flow and earnings and the two ratios. FWIW, my entry point was about $38.

Generally speaking, it is cash flow that drives the health of resource companies with respect to their re-investment capability and that is what analysts and investment managers look at for sustainability on a forward basis. Earnings is a measure of the effectiveness of management's deployment of capital over a longer period (i.e. the DD&A component that is mostly measured on UOP (unit of production) basis which is reserves depletion over 20-30 years). Cash flow is the most critical element on a go forward basis. Clear as mud, eh?

P.S. With my 4Q2011 ECA purchase, I am watching their cash flow, not earnings, because what happened 10 years ago (in the development of their reserves)is not of the greatest interest to me today. I personally think 10 times cash flow for any significant O&G company is overly rich but may be okay provided the company outperforms (priced in). I prefer to see P/CF in the <6 range before I would buy (I used to buy and sell O&G assets at one time).

[Sensei]

j831, thanks. I'll take a look.

Alta: Interesting rationale and good guide for the rest of us. Any thoughts on debt, debt to equity? What is acceptable based on your experience?

[Sensei]

Hi,

I buzzed through the press release. I didn't see anything (with my untrained eye) that really seemed like a red flag. I don't think taking on Wild Stream is going to stress the company financially. The dividend appears to be covered. They say a 56% payout ratio. Still, the tax pool concept bothers me a bit. This seems to be an opaque area. I'd like to know if future dividends will be the same or higher and completely covered by organic earnings. How much of this tax pool supports the dividend would be my concern. One of the attractive points is that CPG is NOT involved in the oil sands. There is almost nothing that I admire about production companies in that area.

[AltaRed]

Any thoughts on debt, debt to equity? What is acceptable based on your experience?

It depends, although the lower the better. I say it depends because sometimes 'project financing', i.e. ring fenced debt can be acceptable to get a project off the ground, e.g. an oil sands facility or LNG facility. But overall, I get uncomfortable at D/E ratios >0.5. That is for O&G resource companies, not pipelines nor utilities. Canadian O&G companies seem to carry higher D/E ratios than US multinationals such as Chevron or Exxon which are in the 0.1-0.2 range. I believe (but not certain) that several years ago, Exxon, in particular, had more cash on hand than debt, for a 'negative' debt position.

[Descartes]

Crescent Point is buying assets from Petrobakken for 427M today.

..to acquire certain assets in the proposed waterflood area of the Viewfield Bakken light oil resource play in southeast Saskatchewan (the "Bakken Waterflood Assets") for cash consideration of $427 million. The assets are primarily in the Company's proposed waterflood units and include more than 2,900 boe/d of production and more than 25 net sections of land in the Viewfield Bakken resource play. The Bakken Acquisition is expected to help accelerate Crescent Point's waterflood program in the Viewfield Bakken resource play

(As I've said in the past, I'm a stockholder of the former.)

[Descartes]

Crescent Point buying Utah-focused oil and gas producer Ute Energy for $861M

Cash instead of stock this time.

Under the terms of the Ute Acquisition, Crescent Point has agreed to pay US$784 million of cash
consideration for Ute and expects to assume approximately US$77 million of Ute net debt. The Ute
Acquisition is expected to close on or about November 30, 2012.
The acquisition is consistent with the Company’s strategy of acquiring large oil-in-place assets with highnetback
oil production and long-term upside through the application of vertical and horizontal infill drilling
using multi-stage fracture stimulation. Crescent Point believes there is also significant potential upside in
Ute’s large undeveloped land base, which is located in the centre of the Uinta Basin resource play and has
attractive land tenure terms.

[jeremy]

Crescent Point buying Utah-focused oil and gas producer Ute Energy for $861M

Cash instead of stock this time.

That article left out the bought deal financing that was also announced:

Crescent Point also announces that it has entered into an agreement, on a bought deal basis, with a
syndicate of underwriters co-led by BMO Capital Markets, RBC Capital Markets and CIBC, and including
Scotiabank, TD Securities Inc., FirstEnergy Capital Corp., National Bank Financial Inc., GMP Securities
L.P., Macquarie Capital Markets Canada Ltd. and Peters & Co. Limited for an offering (the “Offering”) of
18,750,000 Crescent Point shares at CDN$40.00 per share to raise gross proceeds of approximately
CDN$750 million. Crescent Point has also granted the underwriters an over-allotment option to purchase,
on the same terms, up to an additional 2,812,500 Crescent Point shares. This option is exercisable, in
whole or in part, by the underwriters at any time up to 30 days after closing. The maximum gross proceeds
raised under the Offering will be approximately CDN$863 million, should this option be exercised in full.
Closing is expected to occur on or about November 21, 2012, and is subject to customary regulatory
approvals.

[Webber22]

So this time around they again issue shares at $1.50 or so below the current price. But this time it's before earnings next week, so with good earnings will the price rise from $40 back to $42? Or will the earnings be so dismal that there would be no way to issue at $40? ........ To buy or not to buy ......

[Descartes]

That article left out the bought deal financing that was also announced

I should have suspected. It is their modus operandi.
I'm a little disappointing with this company over the last couple of years. No dividend growth and they deplete any gain in price with their periodic buying sprees. I've been waiting a while for their acquisition hunger to subside.

[j831robert]

I note the Market price this morning takes in the dilutive effect of the basket full of new shares (as expected) but I remain ignorant and a happy camper with their $2.76 per annum per share against my CPS of $20.97. Seems to me to be a smart move to acquire more proven sites south of the border in view of the political aims of some to encourage 'oil self-sufficiency' within the ol' Yew Ess of Aiy. Others here more knowledgable than I may debunk my 'expectations' but I think I'll hold on with my shares.

[AltaRed]

Hard to know. Even fund managers are getting tired of this company continuing to go to the trough for more equity. This strategy will only work until one of their acquisitions turns out poorly. Remember Renaissance?

[j831robert]

Thanks AltaRed. CPG is my only "oilie" holding and represents only 6.4% so I'll hold but keep checking. Lotsa pipelines though. Checked back and didn't find a Renaissance in my Junk n' Dispair folder so I guess my luck holds thus far.

[GWN789K]

http://seekingalpha.com/article/974401- ... ndervalued

The above is a link to an article about CPG and their issuance of new shares to pay for purchases.

Quick valuation but the point the author makes is that at $40 per share, CPG oil production is valued at $150,000 per flowing barrel.

He states that CPG perhaps feels it makes sense to the company to buy production for $114,000 per flowing barrel paying for it through issuance of new shares that are valued at $150,000 per flowing barrel.

[AltaRed]

Be careful with valuations. They rarely work out as planned. The acquirer always feel they are buying lots of drilling locations and thus reserves while in real life, it rarely works out that way except as a result of significant technology improvements or price gains, or both. I do not believe in either $114000 or $150000.

[JaydoubleU]

Quote:
In spite of promises to myself to never touch another energy producer after a string of disappointments, I picked up some each of BTE and CPG.


* I'll venture forth the speculation that the string of disappointments has to do with the selection criteria
* Crescent Point was a stock I ran in comparison to Imperial Oil when doing my imperial oil analysis.
* One analysis method was "run off earnings"; a hypothetical scenario in which the company stopped expanding, and just kept producing off of its existing assets until they were fully depleted. The net earnings yield for Crescent point under this scenario is minus 3.9% per year. Suncor came in at positive 10.6% and Imperial Oil at 9.9%. My preferred is Imperial oil, I have more confidence in their management and their assets.

So, at 38.98, the price at time of analysis, the total market cap was 14.6 billion. Net shareholder equity was 7.8 billion. So you are paying 6.8 billion over book price. Now looking at that book price consists of, we have 10.5 bil of property, plant and equipment, which would last 8.75 years at current depreciation rates. This PPE is producing a measly 200 million per year of profit. So 200 million/year of profit times 8.75 years of PPE = 1.75 billion of profit over the next 8.75 years after which their assets are depleted. So you are paying 14.6 billion to buy something that has 7.8 billion of equity and will earn 1.75 billion in profit over the next 8.75 years, so in 8.75 years you will own a company with equity of 9.55 billion and depleted assets. For this you will have paid 14.6 billion.

Obviously there's a lot more to it than that, I.E. value of undeveloped property, etc., whatever, and these are really rough numbers. But the above calculation is quite an eye opener. How many people would want to invest 14.6 billion for 8.75 years and get 9.55 billion back after 8.75 years?

It has a P/E of 50, you are letting yourself get sucked in and seduced by the high dividend. A P/E of 50 means an earnings yield of 2%. Ask yourself these questions;
- Doesn't it seem a little peculiar that a company with an earnings yield of 2% is able to pay a 7% dividend yield?
- Are you afraid to ask yourself this question
- Are you afraid of the answer
- Did you already know the answer, some part of your brain was saying "wait a second, something is weird here" but the other part saying "yum yum 7% dividend yield" is overwhelming the first part?
- Hit yourself on the head already. Maybe something will shake loose and start functioning again

Hehe

This stock is a form of ponzi scheme supported by a high dividend yield and a lot of hype and promoting. Look at their press releases over the past years and take note of how they constantly have to raise capital and issue more shares. This is how they support the dividend; they keep getting more suckers to pile in.

IMO you need to have criteria for selecting stock that go far beyond letting yourself be seduced by a high dividend yield.

If you want a pair of energy stocks that I've bought in the past two weeks that have an earnings yield of 18% and 20% (as opposed to 2%...), buy Calvalley Petroleum (symbol CVI.A) or Lukoil (symbol LUKOY). If you like to stick to Canadian, Imperial Oil has an earnings yield of 11%, probably going to rise to around 14-15% over the next couple quarters.

At the time of this writing CPG is 38.80, Calvalley is 2.08 and Lukoil is 62.34, Imperial is around 42ish

Good luck

I thought I would take this discussion here since it no longer relates to BUYS but specifically to CPG.

Mike, I appreciate your taking the time to write. I think you were bang on with JE, and its subsequent share price performance demonstrates that. With CPG, however, I am not so sure. CPG did not issue new equity only in order to finance their dividend, but to finance acquisitions. In so doing, they have managed to increase their asset base by a factor of 4.6X in five years and now have one of the lowest debt to cash flow ratios of all energy producers in Canada at 1.0X (because they did not issue debt). They have around 12 billion barrels of oil in their asset base and have only recovered about 5% of that to date. They should therefore be able to grow organically by 5-8% for the foreseeable future.

Most energy producers rely on CFFO rather than earnings, not only to calculate debt obligations but to fund dividends and capital programs. Cash flow is the lifeblood of oil. On this metric, CPG increased CFFO in 2012 by 24%, significantly less so on a per share basis because of new share issuance. The payout ratio on CFFO, however, is still 57% because of the increase in CFFO.

When I look at Baytex, I get a similar picture of a reasonably conservative managed oil producer doing a good job of increasing and hedging production at attractive prices. I was leaning more towards BTE over CPG simply because it has an ROE of around 20% and a P/E closer to 20. They appear to be a more efficient manager of capital.

A few more points to make. When I run a share price chart on BTE, CPG and IMO vs TSX, I get five-year returns of 84%, 33%, MINUS 21% and MINUS 4%. Hmm. I think I would have wanted to have invested in the former two five years ago.

The other point is this: I like to look carefully at what major funds are holding. I look at lots of them. I figure, I'm not a CFA--and certainly not an oil man--so I like to look at what the pros are buying and holding. (I noted last year that funds all over were dropping JE like a hot potato, so you were right on there). But CPG is the top holding of Eric Sprott's Energy Fund, and it is a core holding of others such as Sentry Energy Income, Norrep Energy, and even XEG. I wonder if the managers of these funds know what they are doing? I am inclined to think that they do. Not that I blindly follow fund managers into investments, only that I look to see what they are into and up to. I like to read their commentary, even when it is a few months behind the market. Many were discouraged by CPG's frequent visits to the market, but now they are encouraged by indications that this will stop for awhile as CPG focuses on organic growth.

I might give them the benefit of the doubt.

[JaydoubleU]

For those interested in this topic, there's a Q&A discussion with Mason Granger, manager of the Sentry Energy Growth & Income Fund, over at Globeinvestor. Both CPG and BTE are mentioned.

http://www.theglobeandmail.com/globe-in ... e10174247/

[zinfit]

Quote:
In spite of promises to myself to never touch another energy producer after a string of disappointments, I picked up some each of BTE and CPG.


* I'll venture forth the speculation that the string of disappointments has to do with the selection criteria
* Crescent Point was a stock I ran in comparison to Imperial Oil when doing my imperial oil analysis.
* One analysis method was "run off earnings"; a hypothetical scenario in which the company stopped expanding, and just kept producing off of its existing assets until they were fully depleted. The net earnings yield for Crescent point under this scenario is minus 3.9% per year. Suncor came in at positive 10.6% and Imperial Oil at 9.9%. My preferred is Imperial oil, I have more confidence in their management and their assets.

So, at 38.98, the price at time of analysis, the total market cap was 14.6 billion. Net shareholder equity was 7.8 billion. So you are paying 6.8 billion over book price. Now looking at that book price consists of, we have 10.5 bil of property, plant and equipment, which would last 8.75 years at current depreciation rates. This PPE is producing a measly 200 million per year of profit. So 200 million/year of profit times 8.75 years of PPE = 1.75 billion of profit over the next 8.75 years after which their assets are depleted. So you are paying 14.6 billion to buy something that has 7.8 billion of equity and will earn 1.75 billion in profit over the next 8.75 years, so in 8.75 years you will own a company with equity of 9.55 billion and depleted assets. For this you will have paid 14.6 billion.

Obviously there's a lot more to it than that, I.E. value of undeveloped property, etc., whatever, and these are really rough numbers. But the above calculation is quite an eye opener. How many people would want to invest 14.6 billion for 8.75 years and get 9.55 billion back after 8.75 years?

It has a P/E of 50, you are letting yourself get sucked in and seduced by the high dividend. A P/E of 50 means an earnings yield of 2%. Ask yourself these questions;
- Doesn't it seem a little peculiar that a company with an earnings yield of 2% is able to pay a 7% dividend yield?
- Are you afraid to ask yourself this question
- Are you afraid of the answer
- Did you already know the answer, some part of your brain was saying "wait a second, something is weird here" but the other part saying "yum yum 7% dividend yield" is overwhelming the first part?
- Hit yourself on the head already. Maybe something will shake loose and start functioning again

Hehe

This stock is a form of ponzi scheme supported by a high dividend yield and a lot of hype and promoting. Look at their press releases over the past years and take note of how they constantly have to raise capital and issue more shares. This is how they support the dividend; they keep getting more suckers to pile in.

IMO you need to have criteria for selecting stock that go far beyond letting yourself be seduced by a high dividend yield.

If you want a pair of energy stocks that I've bought in the past two weeks that have an earnings yield of 18% and 20% (as opposed to 2%...), buy Calvalley Petroleum (symbol CVI.A) or Lukoil (symbol LUKOY). If you like to stick to Canadian, Imperial Oil has an earnings yield of 11%, probably going to rise to around 14-15% over the next couple quarters.

At the time of this writing CPG is 38.80, Calvalley is 2.08 and Lukoil is 62.34, Imperial is around 42ish

Good luck

I thought I would take this discussion here since it no longer relates to BUYS but specifically to CPG.

Mike, I appreciate your taking the time to write. I think you were bang on with JE, and its subsequent share price performance demonstrates that. With CPG, however, I am not so sure. CPG did not issue new equity only in order to finance their dividend, but to finance acquisitions. In so doing, they have managed to increase their asset base by a factor of 4.6X in five years and now have one of the lowest debt to cash flow ratios of all energy producers in Canada at 1.0X (because they did not issue debt). They have around 12 billion barrels of oil in their asset base and have only recovered about 5% of that to date. They should therefore be able to grow organically by 5-8% for the foreseeable future.

Most energy producers rely on CFFO rather than earnings, not only to calculate debt obligations but to fund dividends and capital programs. Cash flow is the lifeblood of oil. On this metric, CPG increased CFFO in 2012 by 24%, significantly less so on a per share basis because of new share issuance. The payout ratio on CFFO, however, is still 57% because of the increase in CFFO.

When I look at Baytex, I get a similar picture of a reasonably conservative managed oil producer doing a good job of increasing and hedging production at attractive prices. I was leaning more towards BTE over CPG simply because it has an ROE of around 20% and a P/E closer to 20. They appear to be a more efficient manager of capital.

A few more points to make. When I run a share price chart on BTE, CPG and IMO vs TSX, I get five-year returns of 84%, 33%, MINUS 21% and MINUS 4%. Hmm. I think I would have wanted to have invested in the former two five years ago.

The other point is this: I like to look carefully at what major funds are holding. I look at lots of them. I figure, I'm not a CFA--and certainly not an oil man--so I like to look at what the pros are buying and holding. (I noted last year that funds all over were dropping JE like a hot potato, so you were right on there). But CPG is the top holding of Eric Sprott's Energy Fund, and it is a core holding of others such as Sentry Energy Income, Norrep Energy, and even XEG. I wonder if the managers of these funds know what they are doing? I am inclined to think that they do. Not that I blindly follow fund managers into investments, only that I look to see what they are into and up to. I like to read their commentary, even when it is a few months behind the market. Many were discouraged by CPG's frequent visits to the market, but now they are encouraged by indications that this will stop for awhile as CPG focuses on organic growth.

I might give them the benefit of the doubt.

Thanks for the high quality commentary.