Being that oil is more depressed than your typical Fallout Boy concertgoer, I’ve been spending a little time sniffing around the sector over the last couple weeks. Penn West continues to be my favorite name, but I’m waiting until the inevitable dividend cut happens. It’s interesting how the company is selling off assets to pay down its debt, yet refuses to cut its dividend and divert the $250 million per year it pays back to shareholders towards paying down debt.
But I digress. This isn’t about Penn West. It’s about Crescent Point.
According to the only part of the internet that can be trusted, Wikipedia, Crescent Point was created in 2001. It’s grown by leaps and bounds since, thanks to a series of acquisitions. Operations are primarily located in the southern part of Saskatchewan, but it also has decent enough production in Alberta, Manitoba, North Dakota, and Utah. The company is constantly on the prowl for good light and medium oil assets with a decent amount of success so far.
I don’t want to understate the number of acquisitions the company has made. Highlights include:
- 2003: It merged with Tappit (heh) Resources
- 2005: Acquires land in Saskatchewan
- 2006: Makes an additional 10 acquisitions
- 2007: Pays $628 million for Mission Oil and Gas
- 2008: Buys a 21% equity position in a new oil company started by its own management because sure, why not
- 2010: Makes 4 more acquisitions, including one from Penn West
- 2011: Expands presence in Alberta and North Dakota by making a couple more acquisitions
- 2012: Pays $3 billion for a series of acquisitions
And so on, but I’m bored.
Thanks to the company’s practice of making a major acquisition on practically a yearly basis, Crescent Point doesn’t exactly trade like a regular oil stock. It still largely tracks the price of oil, but investors have given it a gigantic premium compared to some of its competitors. So even though the company’s free cash flow in 2013 was a mere $227 million, the market cap is more than $16 billion.
(Although, in its defense, FCF has increased to $347 million in just the first 6 months of 2014)
Compare that to, say, Suncor, and it’s not really a contest. Suncor has a market cap of $56 billion and 2013’s FCF was $3.3 billion. Just about every oil company is more attractive based on the cash they generate from operations. Crescent Point gets a premium valuation because it’s growing so fast.
I wouldn’t invest in it because of the acquisition risk though. What happens if opportunities dry up or it acquires a dog? Suddenly the high growth premium goes away, the dividend gets cut, and the stock craters.
Most high growth companies don’t pay out dividends. They keep that money aside for investing in the business and for acquisitions. And yet, Crescent Point pays what can only be described as a huge dividend, coming in at 23 cents per share per month, which works out to a pretty large 7.23% yield. Based on the company’s 442 million outstanding shares (according to Google Finance, anyway), that’s a dividend in excess of $1.2 billion each year.
Remember, this is the company that had a free cash flow of just $227 million in 2013, and is on pace for about $700 million of FCF in 2014, even though the decline in oil prices will hurt that somewhat. So how does it manage to keep paying the dividend?
First of all, management offers shareholders a pretty big incentive to take their dividends in the form of shares, not cash. You get a 5% discount (plus a commission free transaction) for taking dividends in the form of shares, which works out to a yield of almost 7.6%. Considering how well the stock has done, it’s been a good decision thus far.
Because of most investors taking the dividend in shares, Crescent Point paid out just $422 million in cash in 2013. That’s still a shortfall of more than $200 million compared to its free cash flow, but it’s a whole lot better than paying out $1.2 billion.
You’d think that Crescent Point is drowning in debt, but it really isn’t. It owes $2.5 billion in long-term debt, which isn’t horrible for a company with a market cap north of $16 billion. So how exactly does it pay for all these dividends and acquisitions?
You probably already figured it out. It issues stock like it’s going out of style. Let’s take a closer look at the share count.
- End of 2010: 266 million
- End of 2011: 288 million
- End of 2012: 375 million
- End of 2013: 395 million
- End of Q2, 2014: 420 million
And to pay for its most recent acquisition, the company just issued an additional 17.3 million shares for proceeds of $750 million. Even though it only paid $328 million for the purchase.
Here’s where this situation compounds. The monthly dividend has stayed the same since 2010, even though the share count is up 64%. Since the company doesn’t get close to making enough to cover it, shares are continuously issued to pay shareholders. So even if you opt to take your Crescent Point dividend in cash, you’re still really getting paid in shares.
Like a Ponzi Scheme, this all works until investors start to lose confidence in the shares. Without the ability to sell more shares, Crescent Point can’t make any new acquisitions, and can’t exactly maintain the dividend either. It would be a disaster. Shares would probably fall an additional 40-60%, and then maybe attract guys like me.
Things are rolling now. Plenty of shareholders are happy to take dividends in the form of shares. The company doesn’t have a problem getting institutional money to buy these private placements. And at some point, the company will eventually mature and stop issuing so many shares. But still, the risk exists, and it’s real. If you’re looking for a big dividend in the energy patch, look somewhere else. Plenty of names are in the 4-5% range these days.