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Major Saskatchewan oil producer’s share price not reflecting value

Ron Walter writes about Crescent Point Energy
BizWorld_withRonWalter
Bizworld by Ron Walter

Crescent Point Energy has been in the investors’ penalty box for about six years.

The issue was a matter of trust. The company was growing by acquiring other oil interests. That shouldn’t have been a problem but management kept increasing the debt load with acquisitions while promising to stop.

Lower oil prices since 2014 put pressure on the company to take action. Inevitably the juicy dividend had to be cut and investors sold off shares like stampeding cows in a lightning storm.

Crescent Point became an ugly orphan shunned by all.

Even though the company has come a long way towards redemption in three years, with massive changes the value is under-recognized by investors.

New management focused on core areas with sale of a U.S. shale gas project, no more acquisitions and repayment of debt.

Since the end of 2018 net debt has shrunk 43 per cent to $1.6 billion from $2.3 billion.        

Higher oil prices offset lower production of 122,000 barrels of oil equivalent a day. Lower production has been a result of lower capital expenditures on drilling.

The four core areas of operations are the southeastern Saskatchewan Bakken fields, the southwestern Saskatchewan Shaunavon play, the Kaybob Duvernay field in Central Alberta and the Bakken field in northwestern North Dakota.

Seventy-eight per cent of production is crude oil.

This last year has seen some recognition of Crescent Point’s potential as the share price rose from a low of $1.91 to a current $5.89. Despite a whopping 300 per cent increase the share price is still undervalued.

With nine month earnings of $3.76 a share, shares trade at a mere 1.6 times earnings. A more normal ratio would be three times for $11.28.

Several issues hold investors back from piling into Crescent Point.

Mistrust of company promises after so many years of acquisition is one drawback.

Concern over the stability of current oil prices is another factor keeping investors’ cash in their pockets.

Year to date oil price returns to Crescent Point have been $79.54 Canadian a barrel compared with $41.74 last year.

Investors are concerned the price may not stay up. Twice since the crash from the $100 a barrel level in 2014, oil prices have increased only to fall back.        

Today’s rising oil price reflects growing demand as the global economy builds post-pandemic steam.

Oil prices could fall if we have another prolonged lockdown that reduces travel and industrial production.

And oil prices will fall if American shale producers go back to drilling wells non-stop. Some analysts claim American shale production is constrained by higher costs of finding new pools.

The Saudi Arabians could increase the flow of oil with a turn of the tap but are unlikely to do that.

The Saudis broke $100 oil by turning on the taps and caused immeasurable harm to their own budget in the hundreds of billions.\

According to estimates they need $100 oil to balance the budget.

Crescent Point looks like a winner, but that may be reversed in a few years if the federal government carries out the promise to cut subsidies to oil and gas producers.

Under those subsidies, producers have one-third of revenues exempted from income tax. Decades ago the industry convinced government it needed the break for re-investment to find more oil in the future.

Ron Walter can be reached at ronjoy@sasktel.net      

The views and opinions expressed in this article are those of the author, and do not necessarily reflect the position of this publication.