A Gusher of Profits Ahead

09/19/2011 10:30 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Canadian drillers haven’t suffered the same fate as many of their US brethren, and this company promises to continue its path of growth for many years, observes Roger Conrad of Canadian Edge.

A growing business is the best guarantor of a high yield. And it’s the hallmark of Crescent Point Energy Corp (Toronto: CPG, OTC: CSCTF).

I’ve had my eye on Crescent Point since mid-2009, when the then-income trust announced it would convert to a corporation while maintaining its monthly distribution of 23 (Canadian) cents. Prior to that, the company was one of three oil and gas producers in my coverage to avoid a distribution cut during the 2008-09 market crash/credit crunch/recession, when oil prices crashed from over $150 per barrel to below $30.

Crescent weathered both of those challenges in part because of conservative financial policies, but also because of a strong reserve position in the Bakken region. And the resulting surge in its stock price in 2009 opened the door to completing a series of transforming acquisitions financed with its high-flying stock.

Producing at a rate of 66,112 barrels of oil equivalent per day (boe/d) in the second quarter, Crescent has emerged as one of the larger intermediates. That was 20.4% above last year’s level of output.

The company is on track to achieve annual guidance of 72,500 boe/d and an exit rate for the year of 76,500. That number was revised up from 75,000 during the company’s second-quarter conference call.

Also with the earnings release, Crescent lifted its 2011 capital budget from C$800 million to C$1 billion. This will be devoted almost entirely to boosting and developing the company’s inventory of light and medium-weight oil properties, which currently account for roughly 92% of overall output.

These include more than 6,500 “low-risk” drilling locations in four large resource plays, with 450,000 boe/d “risked potential production additions.”

The company holds a dominant position in the Viewfield Bakken—the Canadian portion of the North Dakota Bakken—and the Lower Shaunavon in southwest Saskatchewan. The latter is the third-largest resource pool ever discovered in Canada…and the company owns 90% of the land.

It’s also acquired land in the Swan Hills area of west central Alberta, which Vice President of Engineering and Business Development Neil Smith asserted during a recent presentation “could potentially double our current net asset value in the next three to five years.” Smith put overall investment opportunities at $12 billion, with potential returns from 50% to 500%.

Crescent has been a major beneficiary of high oil prices in recent years. And it has locked in prices between C$83 and C$101 per barrel of oil equivalent (boe) for 55% of expected 2011 output and 49% of 2012 production, as well as 37% and 19% of output for 2013 and 2014, respectively.

The company typically hedges up to 65% of planned output. That limits some of the cash-flow exposure to the ups and downs of oil prices.

So does the company’s torrid rate of output growth, and its ability to control costs. Operating costs were cut 5% per boe from year-earlier levels, a major factor lifting second-quarter funds from operations by 35.7%.

And the company has the potential to boost recovery factors at its Bakken wells with water flood technology to greater than 30%, from primary recovery of 19%. That promises to further lift output and cut costs.

Realized selling prices for oil were 33% higher than a year ago at roughly C$95 per boe. That number could be a bit lower in the second half of 2011, after black gold’s recent pullback. Current natural gas prices, however, are roughly flat with second quarter realized natural gas prices, so there should be little if any drop-off there.

As for finances, debt-to-annualized cash flow is among the industry’s lowest at just 0.88-to-1. The company has no outstanding debt maturities until its revolving credit agreements come up for renewal in 2014. And as of the end of the second quarter, it had C$965 million in unused credit with which to help finance future acquisitions.

That picture of cash-flow stability and robust output growth stands in contrast to the stock’s lackluster performance this year, as well as a recent swoon that’s pushed up the yield up toward 7%. It’s clear that Crescent Point, like other oil-producer stocks, is going to fluctuate with crude prices going forward.

That’s likely to be a very good thing in my view, however, and the market’s turmoil is a great time to lock away shares of this solid company. Buy Crescent Point Energy up to US$48.

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