Reeling under discounted crude prices and pipeline crisis, the Canadian energy sector is struggling to find a path to growth. After touching multi-year highs last October, Brent crude plunged more than 30% on oversupplied market condition and weakening demand outlook. Amid the growing crisis, Calgary-based Crescent Point Energy Corporation CPG chopped 2019 capital expenditure by around C$500 million (or 30%) from the previous year.
Considering the current state of affairs in the Canadian oil industry, a few other Canadian companies like Canadian Natural Resources Limited CNQ and Cenovus Energy Inc. CVE have also slashed their 2019 capital expenditure.
More on the Headlines
Crescent Point forecasts 2019 capex in the band of C$1.2-C$1.3 billion. Further, it anticipates output in the range of 170,000-174,000 barrels of oil equivalent per day (BOE/d), lower than 2018’s forecast of 177,000 BOE/d owing to some of its asset sales last year. However, after adjusting for divested assets, the production guidance of the company for 2019 remains almost flat with 2018.
Markedly, Crescent Point expects to achieve its production guidance for 2018, and that too within its revised capex of C$1.745 billion, lower than previously forecasted investment of C$1.78 billion.
The company plans to allocate approximately 55% (versus 45% in the prior year) of 2019 capex in key plays including Viewfield Bakken, Shaunavon and Flat Lake. Crescent Point intends to direct just 15% (versus 25% last year) of its capex to East Shale Duvernay play and Uinta Basin.
Apart from disciplined capital allocation, the company intends to reduce its general & administrative costs by 10% in 2019 from the 2018 level. Most importantly, while Crescent Point expects to generate free cash flow, it plans to utilize the same for strengthening its balance sheet and ploughing the savings to boost buybacks.
In this regard, the company has slashed its dividend payout from 3 cents a month to just a penny every quarter, representing a massive decline of 89%. While this does not come as pleasant news for the steady income-oriented investors, it will certainly help the company to shore up its financials amid the volatile commodity price environment. In addition to reducing the debt burden, management plans to prioritize share buybacks instead of dividend payouts.
Importantly, the capex budget of Crescent Point is subject to changes in the commodity price environment. Management has stated its plans to ramp up spending levels, in case crude prices in Canada witness a rebound or the energy infrastructure improves. If the commodity price witnesses greater-than expected pullback, the capex may further be revised downward.
As we know, pipeline construction in Canada has failed to keep pace with rising domestic oil, forcing producers to sell their products at a discounted rate. While oil production is surging in Canada, the country's exploration and production companies remain out of favor, primarily due to the scarcity of pipelines. The infrastructural bottlenecks have resulted in a supply glut situation.
Amid such crisis, we appreciate Crescent Point’s decision to cut its capex, while keeping output levels unchanged from the previous year. Moreover, we find management’s decision to slash its dividend in favor of stock buybacks and debt reduction quite prudent for the long term.
Zacks Rank and Another Key Pick
Crescent Point currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Another top-ranked Canadian energy player is TransCanada Corporation TRP, which sports a Zacks Rank #1. Being a quality stock with industry-leading wide moat assets, it has a secured portfolio of C$36 billion in growth projects. This should support the company’s stated annual dividend growth commitment of 8-10% till 2021. Underpinned by long-term contracts, TransCanada’s low risk, recession-proof business model offers investors rock-solid revenues and cash flow stability.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.
Click here for the 6 trades >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Crescent Point Energy Corporation (CPG) : Free Stock Analysis Report
Canadian Natural Resources Limited (CNQ) : Free Stock Analysis Report
Cenovus Energy Inc (CVE) : Free Stock Analysis Report
TransCanada Corporation (TRP) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research