Crescent Point Energy (NYSE:CPG) is well set up to return at least 12.5% combined total return in 2023.
I go through many of the nuances affecting WTI prices. And ultimately show how even at an average of $75 WTI, CPG is still likely going to return to investors a very attractive return in 2023.
While at the same time, I highlight for investors the way that a multiple expansion is already slowly underway.
Multiple Expansion Coming?
Consider the following chart, which compares CPG’s share price in the past few months, with the change in the price of oil.
What you see here is that in the past several weeks, oil prices have tumbled hard, with oil prices breaking through that ”mental” threshold of $75 WTI.
And the last time that WTI hit $75, CPG’s share price imploded. That was in late September, and you can see above, the reaction in the share price at that time.
So, this is my argument. It appears to me, at least for now, that there’s a ”slight” uncoupling between oil prices in the stock market and oil-related equities.
More specifically, it appears that oil equities are getting a ”multiple expansion” relative to underlying earnings potential in an indirect way.
Rather than oil equities rallying higher, as WTI remains stable, instead, it’s oil equities that are remaining relatively stable, for now, while WTI appears to be sliding.
Why is WTI Sliding?
I’ve heard all kinds of passionate, intelligent, precise, and well-reasoned articulations for why WTI prices are showing weakness. And rather than rehash them, I think it’s easier to admit instead that no one really knows why WTI prices are sliding with such vigor.
Because this is how we see it.
For several years the early 2010s, WTI prices were in the mid $80s WTI and higher, and these high prices didn’t cause any slowdown in demand.
What’s more, those figures don’t consider the impact of inflation on those decade-old prices. What’s more, we also know that in the past decade global GDP has grown significantly.
Accordingly, the total spend on oil early in the decade was a considerably higher proportion of discretionary income, and that didn’t stop oil demand from being so high.
Hence, with WTI lower today, not only in an inflation-adjusted environment but as a proportion of wallet share, there’s no reason to expect a fall in demand for oil in 2023.
Put another way, my argument is that even if there’s a global recession, there shouldn’t be demand destruction, because WTI as a percentage of discretionary income is lower.
And yet. Next, let’s discuss what investors actually want.
Getting Paid vs Increasing Future Earnings
I’ve declared several times that equity investors in oil and gas companies simply don’t believe that this energy bull market is going to last. The best way to see this play out is the following.
- Mega caps are getting a premium valuation relative to small and midcaps.
- High dividend-paying stocks are getting a premium relative to companies that favor buybacks.
You can check these two assertions yourself. Moreover, until small and medium-cap stocks get rewarded by investors with a high multiple, investors are demonstrating that they prefer to get their capital return, rather than see their companies drilling for oil. Thus altogether, this will make the oil market remain tight.
With that in mind, let’s dig into CPG specifically, and why I’m bullish on this stock.
CPG Stock Valuation — 5x Free Cash Flow
CPG declares that if WTI averages approximately $75 WTI, it will make approximately C$1.1 billion. This figure takes into consideration some impact of higher inflation hitting oil services and how this will percolate into higher capex spend for CPG.
Thus, we are reminded that CPG has a low breakeven of $50 WTI price. This figure includes its base dividend of C$0.32 annualized. And that in the mid-70s WTI, investors will get amply rewarded.
This is my point. CPG presently has a 3.1% base dividend. Beyond its base dividend, CPG is eager to return 50% of its free cash flow back to shareholders.
In summary, if we assume that next year’s WTI averages $75, that means that investors will get CAD$0.32 per share, which equates to approximately a 3.1% base dividend yield.
Plus, 9.4% combined capital return, or 50% of CAD$1.1 billion. That means that all else equal, investors will get a 12.5% combined total return. Even with WTI an average of $75.
Furthermore, keep in mind that as CPG repurchases its total share outstanding, its total dividend payout will go up on a per share basis, as the dividend payout is spread over fewer shares. That means that it’s entirely possible that CPG’s total combined return could reach close to 14%.
The Bottom Line
My main charge throughout is that there’s a lot of volatility in the underlying oil market. And that for now, this weakness hasn’t been reflected in CPG’s equity price.
Hence, indirectly, CPG appears to be getting a multiple expansion in the most unlikely manner. It’s as if investors are starting to buy into the ”oil bull story”, even as the oil prices are falling lower.
Consequently, I hope that once WTI rebounds higher, CPG would be able to keep its multiple expanded and its share price would trend higher.