Crescent Point Energy (CPG) common stock is now off to the races. The movement of this stock since the last article gives rise to the belief that it is easier for a $1 stock to become a $2 stock than it is for a $100 stock to become a $200 stock. Most of the time the market only needs one or two of these stocks for the casino to open up for players to place their bets.

Source: Seeking Alpha Website November 19 2020.

The stock has risen nicely over the last slightly more than two months. The last article was in early October. So the return shown above is decent considering its only been a little over 2 months.

This stock has far more going for it than many “penny stocks” though. For starters the stock is listed on both the NYSE and the Toronto markets. Secondly this company does business both on the United States side and the Canadian side of the border. Therefore at least some money is made in the form of United States dollars.

Operating Margins

More importantly, this company has some of the best margins in the business.

(Canadian Dollars Unless Otherwise Noted)

Source: Crescent Point Energy Third Quarter 2020, Sedar Filing Report.

What needs to be noted here is the rather robust margins even though the operating expenses run a little bit higher than many competitors due to a considerable exposure to secondary recovery. This company has long had good margins and enough volume for a robust cash flow.

(Canadian Dollar Unless Otherwise Noted)

Source: Crescent Point Energy Third Quarter 2020, Sedar Filing Report.

Not only was cash flow more than adequate, but the company reported adjusted earnings despite some abysmal prices in the current fiscal year. Much of the industry is not able to report profits in any way, shape or form.

More to the point, the second quarter was an “outlier” quarter that probably represented the worst of the current round of trouble. That second quarter was a market bottom that much of the industry never wants to ever repeat. So the third quarter adjusted earnings are a nice recovery number heading into what should be a far better year than the current year.

READ ALSO  US states sound alarm on soaring Covid-19 hospitalisations

That makes the stock price fairly cheap. Unless the company reports far worse adjusted earnings from operations in the fourth quarter, the stock price of $1.67 would be a little more than 5 times the adjusted annual earnings for the fiscal year of C$.30 per share. Even taking into account the weaker Canadian dollar that is still very cheap. The company earnings are certainly depressed and will undoubtedly be far more robust in the future.

This stock, which began at $1 not only has a great chance to make the $2 level, it has (in fact) a chance to run much higher than that as the coronavirus demand destruction challenges fade.

Long Term Debt

The company made major progress on its long term debt in the current fiscal year.

Source: Crescent Point Energy Third Quarter 2020, Sedar Filing Report.

Management managed to sell assets to get the debt under control just in time for the coronavirus challenges. The result is one of the strongest debt ratio calculations (given the awful second quarter) in the industry. Admittedly the Funds Flow in the calculation above is non-GAAP and adjusted. But that still represents a very fine job by management in what has to be one of the more challenging years in history.

Source: Crescent Point Energy October 2020, Corporate Presentation.

Management also has no debt due for 3 years. The market is going to demand that this company demonstrate that its debt laden ways are a thing of the past. The current management attitude appears to confirm that the priority for the future will be a strong balance sheet. As long as a track record develops that demonstrates a low debt track record with conservative balance sheet ratios, then a major market concern will quickly fade in the near future.

READ ALSO  Bitcoin Is The "Ultimate Anti-Lockdown Investment" Says Nigel Farage

This company previously piled up the debt with some of the best debtors in the industry. Most companies with a debt pile comparable to this company are now memories. This management was very lucky to “live to tell about it”.

Operations

One of the reasons that this company has a lower than average production decline ratio is due to the exposure to secondary recovery. Many secondary recovery projects have very low decline ratios. They also tend to have a higher cost structure. So far this company has managed to have a more than satisfactory netback and enough production volume to assure decent cash flow and profitability.

Source: Crescent Point Energy October 2020, Corporate Presentation.

This is the kind of investment that when fully operational, often requires minimal capital to maintain production. The result is a low decline rate and relatively high cash flow (as in free cash flow) when compared to other projects. The project itself is not that large when compared to some of the other company projects.

But a project like this, with minimal capital expenditures needed is “worth its weight in gold” when commodity prices literally “fall through the floor”. When a project like this one does not cash flow, it often means a lot of wells are shut in and there are major losses throughout the industry. Most waterflood projects have a major capital investment in the beginning. Therefore they can cash flow at lower commodity prices than many more conventional (or unconventional) projects.

Source: Crescent Point Energy October 2020, Corporate Presentation.

The company has several key areas. Of these areas, the North Dakota part of the business is in a fairly early stage of development. Like many Bakken operators, management wants to decrease the costs before going “full speed ahead” with development.

On the Canadian side the reserves per well are often smaller. But the deposits are often shallower than North Dakota. So the profitability calculations are materially different in Canada.

Summary

Management has done a nice job of getting out of a potential debt jam by reducing debt while retaining sufficient cash flow and profitability.

READ ALSO  Cuban authorities backtrack on talks with protesters

Source: Crescent Point Energy October 2020, Corporate Presentation.

It now appears as though management will emphasize operations and balance sheet strength. Previously the strategy appeared to be “leverage to the hilt”.

Mr. Market wants a track record before rewarding this company with a decent stock price. That would be just fine with this management. Potential investors can make quite a bit of money by just waiting for that track record.

This company is now in fine financial shape with ratio that compare with some of the better financed companies in the industry. As long as management stays away from the debt market, this company should do extremely well over the next several years.

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.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in cpg over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: I am not an investment advisor (or a lawyer), and this article is not meant to be a recommendation of the purchase or sale of stock. Investors are advised to review all company documents, and press releases to see if the company fits their own investment qualifications.



Via SeekingAlpha.com