Crescent Point Energy, (CPG) -T is up about 80% since our last article in January. It was a deep dive we did for the first cover, so for a full rundown of all of the company’s assets please read this one. In this article, we will focus on the Kaybob and Duvernay acreage recovered from Shell earlier this year.
I had aimed for a gain of around $ 5.00 this year, but I was a little cautious about the entry price. This seemed like premonitory, as the stock only broke $ 5.00 just a few weeks ago. As you can see, the price action on the GIC has been quite volatile, within a range in 2021.
Now that we’re heading into 2022, it’s time to take stock and see if performance is lagging behind – yes, an 80% gain is lagging behind these days, represents an opportunity as the business accelerates in. the new Year. Or should we take a pass and look for other opportunities.
Analysts are somewhat bullish, if that’s a term, with 11 out of 15 calling it “overweight”. Price targets go just above current levels at $ 5.50 to $ 9.77. So, all over the map for those high dollar value stock tipsters. Let’s see what we think of this after a quick review.
Note: This article appeared last month in the Daily Drilling Report.
The thesis for CPG
CPG is a Canadian small-cap E&P company with a broad geographic mix of oil-oriented (85/15 oil-gas) assets. Most of their production, about 55%, comes from the Saskatchewan Viewfield flood asset. With their takeover of the Montney asset from Shell earlier this year, that balance will shift somewhat in favor of gas. Oil spans the gamut from light gas oil and NGLs from Kaybob and Duvernay to heavy oil production that needs to be steam flooded from the ground.
As with many Canadian oil producers, CPG is booming with higher prices pushing net earnings into the $ 40 range, more than double from the previous year. As I noted in my previous article, CPG is a good manager of capital and resources, having reduced the costs of drilling and completion-D&C by $ 1 million, as well as the costs of the Kaybob Duvernay over the years. last six months. It’s a pretty impressive performance.
Thus, cost reduction, higher net income and the collection of the Kaybob-Duvernay area constitute the main thesis of CPG at the dawn of 2022.
It’s also worth noting that the company has increased its production targets for 2022, in part due to extensive water flooding in Viewfield. It also increased its dividend and recently announced a $ 100 million share buyback. At the current price, that equates to around 18mm of shares, a free float reduction of around 4%. Things appear to be on the rise for CPG. Let’s take a look at some possible catalysts that could drive the stock higher than analysts’ expectations.
The Kaybob Duvernay
As the press release indicates, this asset is expected to generate cash flow this year at WTI prices above $ 50, which we certainly have now. It came with current production of around 30,000 BOEPD, which works out to around $ 400 million at $ 60 a barrel, which puts the cost of the transaction at less than 2.3 times net income. These assets, which are located in the heart of the condensate-rich fairway, should, among other things, improve the Company’s free cash flow profile. The increased drilling location and purchase included key infrastructure that should improve capital efficiency per well.
Ryan Grizfeldt, COO commented in the call on incorporating this asset into their capital allocation plans-
During the third quarter, we entered into a farm-out agreement with an operator of Kaybob Duvernay to complete certain wells in exchange for a direct interest in those wells and additional land, both close to our existing assets. This arrangement gives us the opportunity to better define our land position and add locations to our Kaybob Duvernay inventory.
As part of this agreement, we successfully completed a five-well pad at the end of the third quarter, achieving completion costs approximately 20% lower than that. We expected this when we first walked into the Kaybob Duvernay play earlier this year. I also note that we have achieved these cost reductions despite switching to a new fluid intensity fracturing design This is more representative of our plan for the future. Production from these wells is expected to start in the fourth quarter of this year.
For those wondering what “fluid intensity” might mean. They talk about the flow of the pump. The goal here is increased speed which equates to better sand transport. This must be balanced with the resistance of the rock so that the propagation of the fracture is controlled towards the zones of maximum permeability. I like this idea. This is much cheaper than simply increasing the sand concentration and should help control costs as it seems to have done. If you know your rock, this is the way to go.
It is also worth noting that their success with cost control and design completion has attracted another operator. This is unusual in my experience.
Ken Lamont, CFO noted-
I will also note that since the closing of our acquisition of Kaybob Duvernay in the second quarter of 2021, we have already repaid over 80% of the cash portion of that total purchase price.
Cover as a catalyst
The hedge cost the company a few hundred million in 2021, which is by no means extreme, but still leaves room for a tightening. For 2022, they have increased the percentage covered and to significantly higher levels for the year.
The third quarter results brought a significant year-over-year improvement, mainly due to oil prices and higher net income. Adjusted-AFF cash flow was $ 394 million for the quarter with cash on hand at $ 180 million, after capital expenditure of $ 187 million and dividend. Debt has been reduced slightly to $ 2.1 billion and remains a primary focus of management. Much of the free cash flow was used to strengthen the balance sheet, and management was targeting the 2021 exit with long-term debt of less than $ 2.0 billion.
The division was increased to $ 0.12 on an annual basis, which is about 2% year-on-year. As noted, a share buyback was announced which would reduce the number of shares by approximately 4% when fully implemented.
Your takeaway meals
You don’t have to look too far to find one of the main reasons this Montney / Duvernay producer has lagged behind his peers. Debt. The company has $ 2.1 billion in inherited debt which, until a year ago, threatened the viability of the company. What a difference the doubling of the price of oil makes!
There was also concern about the 50mm Shell shares entering the market following the sale of Kaybod Duvernay. Shell, (RDS.A), (RDS.B) is on a purity boost as I noted in a recent article, and purging its portfolio of carbon-intensive assets has been a priority. . Having said that, Shell has sufficient liquidity at the moment and may be willing to let these stocks run for a while.
With improving cash flow and strict adherence to capital spending, the company should be on track to reduce debt at a rapid pace, likely exiting 2022 to $ 1.2 billion. This along with cash flow expected to arrive in 2022 will put CPG in a very good light.
One caveat could be the recent widening of the WCS / WTI spread, now at around $ 14.00. This has been held fairly stable in a fairly narrow band over the past year.
GIC trades at
Investors with a moderate tolerance for risk should consider putting CPG on their shortlist for 2022. The stock has risen slightly with the start of the year, but still has room for improvement given the price environment of the market. oil.