Thursday, December 13, 2012

Crescent Point Energy Corp

I do not own this stock (TSX-CPG, OTC- CSCTF). I got this idea from My Own Advisor blog.

This company started as a junior oil and gas oil and gas company engaged in exploration for and development of oil and gas in western Canada. The stock symbols were TSX-CPG.A and TSX-CPG.B. It converted to an Oil and Gas income Trust on September 5, 2003 with stock symbol of TSX-CPG.UN. In July 2009, this company converted from a Trust to a Corporation with the present stock symbol of TSX-CPG.

When I started to review a new stock, the first question I have is "Have investors made any money?" In this case, the answer is a definite yes. Those that started with this company in 2001 have made a tremendous amount with the stock up 66.29% per year. Some 39.15% per year of this increase is in capital gains. Some 27.14% per year of this increase was in distributions. However, the company is an entirely different one from what it started out as. People interested in dividends generally do not buy junior oil and gas companies.

If you look at the company over the past 5 years, the total return is still wonderful at 31.45% per year. The distributions counted for some 10.85% per year of this return and capital gain was 20.60% per year. This is, of course, excellent.

However, past returns do not and cannot show what the future holds. I would expect the returns to be lower. One reason is that the dividend yield is coming down. Even 5 years ago, yields were in the 10% to 15% range. The current range is 5.7% to 7.4%. Yields are only half what they were just 5 years ago.

Another thing I like to check when I look at a stock to review is dividend growth. The 5 and 10 year dividend growth is at 2.8% and 4.4% per year. This is decent growth with a current yield of 7.5%. I like companies that increase their dividends yearly. This company does not do this. They seem to increase every few years, but they have not increased the dividend at all since the last increase in 2009.

If you look at what the current shareholders' yields are on their original investments 5 and 10 years ago, you get median values of 16% and 85%. However, if you look at dividend increases over the past 5 years and extend that for 5 and 10 years, you get yields on current investment of 8.6% and 9.9% after 5 and 10 years. The return on this stock is going to be a lot lower going forward.

The next thing I like to check is the balance sheet and the Debt Ratios. The Liquidity Ratio for 2011 is quite low at just 0.45. This means that current assets cannot cover current liabilities. Part of this problem is solved with the good cash flow, but even with cash flow, the Liquidity ratio is still rather low at 1.22. However, they can cover the current liabilities with current assets and cash flow.

The Debt Ratio for 2011 is far better at 3.02. This is a very good ratio. The Leverage and Debt/Equity Ratios for 2011 are also good at 1.49 and 0.49.

The next thing to look at is the Dividend Payout Ratios. For 2011, the DPR for earnings is 383%. The DPR for cash flow is better at 60%. Since this was an income trust, I look at the DPR for Funds from Operations (FFO). This is also around 60%. These are good ratios, but I do worry about the DPR from earnings. I have a couple of ex-trust stocks that are struggling to get the DPR ratios for earnings into some sort of reasonable shape. I will not buy this as I do not need another such stock.

Outstanding shares have grown a lot. In recent years the increases have been for cash, to make acquisitions and because of the Dividend Reinvestment Plan (DRIP). There seems to be a big increase via DRIP. For example in 2011, 4.17% of the 8.26 increase was due to DRIP.

The last think I looked at was return on equity. For the financial year ending in 2011 it is very low at just 3.4%. I took a look at the ROE covering the last 12 months and it is even lower at just 2.4%.

No one knows what the future holds, but I would suspect that future returns on this stock is going to be a lot lower going forward. However, with the yield at 7.5%, you do not need much capital gain to get a decent 8% per year return on this stock.

Crescent Point Energy Corp. is a conventional oil and gas income trust with assets focused in properties comprised of light oil and natural gas reserves in Western Canada. They acquire, exploit and develop high-quality, large resource-in-place assets and manage risk through a solid hedging program and a clean balance sheet. Its web site is here Crescent Poin. See my spreadsheet at cpg.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.

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