Stocks in the Canadian oil and gas sector have been sent into the penalty box by investors from Canada and outside this country.
The collapse in oil prices five years ago caused a gradual suspension of interest in these stocks. That loss of interest became solitary confinement for oil and gas stocks about a year ago when investors decided collectively that Canada just can’t build pipelines to move oil to overseas markets.
Crescent Point Energy, a former oil patch investor darling with high dividend payments and growing series of acquisitions until 2014, was avoided by analysts before the oil price crash.
These analysts viewed the growing debt — from $1.74 billion in 2013 to $4.04 billion in 2017 — as a potential concern and they were upset at dilution of share value as acquisitions were funded by trading new shares for assets.
Many retail investors ignored the warnings, lured by the eight per cent return from dividend distributions.
Crescent Point share values suffered, falling to a low of $4.06 earlier this year from a high of $46.77 pre-crash. Currently they are $5.17.
The recent share price increase comes from a little more confidence in the company as new management has tried to rein in debt and expenses. That goal comes with job cuts, sale of non-core assets to pay down debt and share purchases to improve value.
The Saskatchewan-based company has sold the Utah gas interests, some Saskatchewan gas properties and just took $500 million for gathering and processing infrastructure. Drilling and expansion investment have been set to just maintain production.
Debt after accounting for cash has been slashed to $2.3 billion from $4 billion in two years.
Most significant, the lower debt as a portion of annual cash left over after the bills are paid, has been cut to 1.4 times from 2.3 times.
According to oil patch financial standards a ratio of 1.5 times debt to cash flow is reasonable. A one-to-one ratio is the gold standard.
On that count Crescent Point has engineered a clear turnaround.
Share buybacks have reduced outstanding shares by about two per cent with another 10 per cent planned.
Operating costs run around $12.60 an oil equivalent barrel leaving about $34 a barrel for a return on investment. Operations will flow more than $1.5 billion into the bank this year.
So why is Crescent Point selling at 45 per cent of the $11 book value?
The two-fold answer is simple. The oil patch is still in the investor penalty box. Analysts have a show-me attitude to companies like Crescent Point that have made decisions showing poor management foresight.
Once Crescent Point has run operations this way for a year, analysts will start to nibble on shares. Greed is a great motivator.
In a year once foreign investors smell awesome oil patch bargains and see the building of a pipeline; they too will return to the game.
Some well-known vulture investors are circling the oil patch as you read this.
CAUTION: Remember when investing, consult your adviser and do your homework before buying any security. Bizworld does not recommend investments.
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.
