It has been a wild ride for Canadian stocks in the energy sector. At the onset of the pandemic, oil prices hit decade lows and there was serious concern about the viability of the industry.
Many of the oil & gas majors are saddled with high debt loads and require certain floor prices to generate positive free cash flow. This is important not only to sustainable growth through drilling and investing in new projects, but to support lofty dividends.
Crescent Point Energy (TSE:CPG) among energy dividend cuts
Unfortunately, many of the oil & gas companies were required to cut the dividend in 2020. In fact, out of the more than 80 companies which cut the dividend last year, ~30% were from the Energy sector. Among those was Crescent Point Energy (TSE:CPG).
One of the largest producers on the TSX Index, Crescent Point slashed the annual dividend by 75% to $0.01 per share from $0.12 previously. At the time, its share price was trading at $1.07 per share.
Bottom feeders would have been well rewarded. Now, that the price of oil has rebounded quite significantly, Crescent Point is trading close to $5.00 per share which is equal to a 359% return since that dividend cut announcement.
Pre-pandemic dividend revived
On Monday, September 13, 2021, shareholders were once again rewarded for their patience as the company raised the dividend to $0.12 per share – inline with pre-pandemic levels. From the $0.01 per share level, that is equal to a 1,100% raise. While many pre-pandemic shareholders are just returning to previous levels, anyone who bought stocks in the company after the dividend cut in March of last year are likely very happy shareholders.
The company's share price skyrocketed on the news, up 14.42% on the day of the dividend announcement. While this was certainly a positive catalyst, the company also announced its preliminary outlook for Fiscal 2022.
Crescent Point to "add further protection in the context of commodity prices”
The company expects to achieve production of 131,000-135,000 boe/d and generate excess cash flow of $625-875M after dividends. These projections are based on capital expenditures of $825-900M and makes the assumption that oil (WTI benchmark) will trade between US$65-75 per barrel. The company also indicated it remained on track to achieve its optimal leverage target thanks to impressive cash flows.
Although the company won’t formalize its budget or formalize additional guidance until end of year, it was a strong and welcomed company update. The company has already hedged 30% of its production for 2022 and it “will continue to add further protection in the context of commodity prices”.
What does the oil market look like?
Oil prices are likely to remain in the $70 range for a little while yet as another hurricane is yet again threatening US Oil assets. Hurricane Nicholas has already cause the evacuation of U.S. Gulf of Mexico oil platforms and onshore refiners are beginning preparations.
If one is comfortable with the volatility, then investing in the oil & gas industry may yield further short-term upside. The macro environment for oil is looking strong enough to support these higher prices and the economy is slowly returning to pre-pandemic levels. These prices bode well for companies like Crescent Point which stand to generate considerable cash flows at these levels.