Crescent Point caught by oil's rapid fall

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Through much of early 2015, Crescent Point Energy Corp.'s spending and dividend looked unshakeable despite deep cuts its rivals were making in the face of weak oil prices.

In fact, Scott Saxberg, Crescent Point's chief executive officer, and his board were encouraged by a gentle rise in crude last spring, just as the company was busy with two sizable corporate acquisitions and a large share issue.

"I would have said, right to the end of June, that we were in a really good position. At that time, oil was $58-$60 [(U.S.) a barrel] and the view was that it was just starting to march back up again," Mr. Saxberg said in an interview. "We kind of thought the summer would be quiet, and we'd be in that high-$50s to low-$60s price range, with an OPEC cut or some other signal to drive prices back up into the $60s and maybe $70s by the end of the year."

But the opposite happened. In just six weeks, U.S. benchmark crude has slumped by 28 per cent, settling on Thursday at $42.23, its lowest in more than six years, as a global glut appears to be worsening. A deepening discount on Canadian crude, driven partly by the outage of a major BP PLC refinery in Indiana, has made matters even worse for domestic producers such as Crescent Point.

Its shares tumbled as investors began to speculate that a reduction in the dividend looked possible.

Late Wednesday, the company announced it chopped the monthly dividend by 57 per cent, halted a dividend reinvestment plan and cut its capital spending budget by $100-million (Canadian) to $1.45-billion – tough moves that show Crescent Point, one of the industry's stronger players, is digging in for an extended period of depressed prices. It also reported a deep second-quarter net loss, highlighting the stress on the energy sector.

Mr. Saxberg said his company's financial model, drawn up last December, foresaw topping up its balance sheet with about $80-million of debt through 2016, assuming some recovery in commodity markets. With the latest rapid skid in prices, that number ballooned by $525-million, he said.

"It happened so quickly, and you've got to get on the right side of it," he said. "It's just the right decision to protect our balance sheet, and it positions us for when prices turn."

The payout was cut to 10 cents a share from the previous 23 cents. With the drop in spending, it will drill fewer wells than planned, while taking advantage of an overall decrease in operating costs.

In recent months, Crescent bought Legacy Oil + Gas Inc. and Coral Hill Energy Ltd. for a total of $689-million plus debt. When it announced the Legacy deal in late May, it issued shares at $28.50 each. The stock closed down 1.6 per cent at $17.58 on on the Toronto Stock Exchange Thursday.

Several analysts said the cuts are the right medicine, given the darkening outlook for oil prices.

"Although this move came earlier than we had anticipated, the decision is financially prudent," TD Securities analyst Travis Wood wrote in a research note. "Given our revised outlook and the suspension of the DRIP [dividend reinvestment plan], we see strong per-share growth through our forecast period."

Mr. Saxberg said there is a bigger risk that oil prices could be weak into next year, though he does not fully subscribe to a growing school of thought among energy executives that projects depressed prices for several years, known as "lower for longer."

"I still believe that in the fourth quarter, with OPEC there will be some changes that will have to happen," he said. "This price, I don't think is sustainable."

In the second quarter, Crescent Point lost a net $240-million or 53 cents a share, compared with a year-earlier profit of $98.6-million or 24 cents. Excluding unusual items, it earned $40.4-million or 9 cents a share from operations.

Production averaged 151,636 barrels of oil equivalent a day (boe/d), up 10 per cent from the same period in 2014. Its annual production forecast of 163,500 boe/d remains intact, the company said.