Crescent Point Energy: Sneaking In The Back Door

Crescent Point Energy (NYSE:CPG) management took over this Canadian company (that reports in Canadian dollars unless otherwise noted) when the company was way overleveraged. Management has since reshaped the company into an industry juggernaut to be reckoned with. One of the things that this company did was enter into one of the more prolific basins after many others discovered the basin. Management did so one opportunistic deal at a time. But now came a big chance when commodity prices slumped to expand that position considerably. So, management has jumped at the chance. Given the past record of this management at the helm, this is likely to be yet another bargain purchase that will enhance shareholder value.

History First

Back in 2021, when nobody had any idea what fiscal year 2022 would be like, management purchased an initial position in the Kaybob Duvernay from Shell (SHEL). (source)

Shell is yet another company known for dumping non-core properties at some darn good deal level prices. Notice that management noted they got all the money back in two years. That is the kind of management you want to consider investing in because any cash flow after that is "on the house" type cash flow. It is definitely a sign of management that keeps operating costs low.

Shell, on the other hand, could have waited for a period of stronger commodity prices. In a cyclical industry, that kind of more favorable environment always comes around sooner or later, and Shell has the balance sheet to wait for a more favorable environment. You wait because then as management you get more money for assets sold for shareholders.

In the meantime, management noted in the same presentation that they made a bolt-on acquisition or two and also farmed-in some wells to learn more about the area. This management has also kept its focus on condensate production because condensate is in short supply in Canada. Canada often imports condensate to meet its needs. Besides, premium priced products often hold up better in cyclical downturns than discounted products like heavy oil. No guarantees of course. But nothing wrong with going with the odds that history will keep repeating until the story changes.

The Current Opportunity

Management announced a sizable acquisition of acreage in this same area from Spartan Delta (OTCPK:DALXF). This is the largest acquisition to date in this area for management. But in a certain sense the acquisition has been derisked by the experience that management gained through the previous acquisitions and the farm-in. (source)

Management is using what it expects to be a conservative WTI price of $75. With the ongoing banking panic, this should signal that at least one insider is public expecting some decent prices going forward. If they are wrong, well the other significant acquisition has been paid for. That cash flow provides a safety cushion "just in case" something unexpected happens.

The key here is that management actions speak louder than words. Also, these actions are the actions of people in the industry, often for decades. These actions match other companies I follow and that is largely to purchase. A careful observer may notice that this acquisition activity picked up the minute oil and natural gas prices slumped.

All of a sudden, this company has a material position in one of the better basins in North America. This management has moved very fast to take advantage of one deal after another.

The actions are in sharp contrast to a lot of news coverage about inflation, bank issues and a recession on the way (with sure disaster to follow). Now oil and natural gas prices are known to be volatile. So, the ride ahead could be very rocky to say the least. But insiders are telling you the future has more upside than downside potential even if we end up going down first. As a long-term (especially the buy and hold crowd) investor, this is what you want to consider paying attention to.

Before We Talk Specifics

Let's remember that this management always has some "aces" in its negotiating pocket.

Management is only going to go after deals where they can improve the operating performance as well. That does not mean every single well on the property will automatically improve materially because it is not economical to redo the total existing operations. But it does mean selective reworks and new wells going forward will gradually improve the performance of the acquired acreage. This is yet another way for the acreage to pay for itself at lower prices should lower prices unexpectedly prevail in the future.

These wells' results do not yet refer to the latest acquisition that just closed. Remember that management gained a fair amount of experience before making a large purchase in the area.

Now Let Us Look At The Deal

Not taking into account all the management steps before this acquisition was announced, the deal itself is accretive on a per share basis.

(Note that management took this presentation down. So, I will refer to the original announcement.)

Management is paying only three times net operating income. Notice that most deals would use EBITDA instead. So, this is a much more conservative measure. Management is now building upon its original entrance to the basin with its largest acquisition in this basin to date.

Things that can improve the deal are the things discussed before we looked at these terms. Many of those things are overlooked by investors. Those items include superior operating ability and strengthening commodity prices.

Meanwhile, steps taken to protect against downside risk include knowledge gained from the previous acquisitions and farm-in as well a relatively good price using what management believes are conservative commodity price valuations. The prices used here have shown up elsewhere in other acquisitions made. Time will tell how that guidance works out.

The bottom line is that this is yet another acquisition that could be paid off in two years or less if management guidance (and improvement possibilities) happens. On the other hand, should lower prices prevail, then the first acquisition has been paid off. So that cash flow could help to carry this acquisition in an unforeseen downturn.

Debt Goals

Like many in the industry, this management intends to deleverage very fast.

Management has a goal to return 50% of cash flow to shareholders under current conditions. That of course would be revised in a downturn. On the other hand, this management has found a way to reward shareholders with the approval of Mr. Market while growing production per share, which Mr. Market also likes.

The debt ratio is decent for current conditions. But the fast deleveraging will make sure that the debt ratio is decent for a wide variety of industry conditions. Should commodity prices weaken considerably and stay weak, the low breakeven point of these wells would be a considerable safety shield during such a time.

Also, the emphasis on premium products like condensate and light oil also helps a company weather a downturn.

In the meantime, it still appears that a lot of insiders expect commodity prices to either hold where they are now or improve throughout this year despite a lot of well publicized coverage to the contrary. There is of course risk to any view in this very low visibility industry. But that is well worth noting as a lot of panic articles continue to appear.

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I analyze oil and gas companies like Crescent Point Energy and related companies in my service, Oil & Gas Value Research, where I look for undervalued names in the oil and gas space. I break down everything you need to know about these companies -- the balance sheet, competitive position and development prospects. This article is an example of what I do. But for Oil & Gas Value Research members, they get it first and they get analysis on some companies that is not published on the free site. Interested? Sign up here for a free two-week trial.