In the past, I have discussed some names in the oil and gas sector that look attractive from a long-term perspective. This is a good time to consider oil and gas stocks with excellent fundamentals as there might not be another opportunity to get some quality names at the valuation these are trading at currently. In this article, I will be discussing one such energy stock, Crescent Point Energy (CPG, Financial) that has the potential to outperform in the medium to long-term.
Crescent Point Energy is involved in acquisition, exploration and production of oil and gas assets and the company is one of Canada's largest light and medium oil producers. The company’s assets are in Bakken, Shaunavon and Torquay plays in Saskatchewan, Canada, as well as the Uinta Basin in Utah. The company’s last reported proved and probable reserves were 753.1mmboe with proved reserves at 490.1mmboe.
The first reason to consider Crescent Point Energy is the fact that the company offers a dividend of $2.76 per share, or a dividend yield of 9.1%. The company’s dividend is sustainable in 2015 and I believe that this is a big reason to consider exposure to the stock at current levels. The company has a strong hedging position for oil and gas production in 2015 and this will ensure that the operating cash flow is robust to pay dividends through 2015.
To put things into perspective, Crescent Point Energy has 53% of 2015 oil production hedged at C$90 per barrel oil. This floor price ensures the company will generate strong cash flows during the year. The company’s confidence is reflected in the point that Crescent Point Energy announced a capital expenditure program of $1.45 billion in January 2015. Therefore, even in difficult market conditions, the company is likely to make strong investments that will translate into strong cash flows in 2015 as well as in 2016.
Therefore, the near-term outlook for the stock is certainly positive even when the stock has been battered due to overall negative sentiments. I must also add here that YTD, the stock has been flat and I believe that this is an indication of a potential bottom in the stock.
From a long-term perspective, the company has a robust drilling inventory of 7,650 locations that imply a 12 year drilling inventory based on current drilling rate. Further, the company’s 5-year weighted average F&D cost is just $17.91 and this will ensure that the EBITDA margin is robust when oil prices trend higher.
Also, from a balance sheet perspective, Crescent Point Energy is well placed with a debt to EBITDA of 1.7. Low leverage is a big positive at a time when oil prices are lower and companies with high leverage have to generate sufficient cash flow in order to service debt. This makes these companies maintain high level of production even at significantly lower oil price.
Therefore, with the positives of high dividend yield, a strong asset base, low debt and a multi-year drilling inventory, Crescent Point Energy is certainly worth considering at current levels. The stock is currently trading at an EV/EBITDA of 6.56 and I believe that these are not expensive levels from a long-term horizon. Also in the near-term, the valuations are attractive and the stock resilience in 2015 is an indication of attractive valuations. I therefore recommend Crescent Point Energy with a 3-5 year investment horizon. I believe that the stock can be a potential catalyst for the portfolio considering this time horizon.
