Well, I guess it's about time to add some exploration and production risk to my Real Money portfolio. With so many options out there, I had to whittle it down based on a few criteria that I had in mind. For starters, I wanted a sole E&P; this slow growth, integrated-behemoth-action that ExxonMobil and Shell bring to the table just won't cut it. Secondly, I wanted exposure to more than just the United States. The oil boom here has taken off beyond what most imaginations ever whispered as possible. I believe that the knowledge gained through this period of prolific production will make its way outside of the States, leading to big returns for foreign companies. Lastly, I wanted yield. It has become a trend in my portfolio, and it's a factor I just can't look past with the market sticking so close to its all-time highs.
Recipe for Success
Boiling this recipe down, along with a few other key ingredients, turned into a hopefully, delicious stock: Crescent Point Energy (TSX:CPG). Now, I know this isn't a large departure from the US marketplace, but this Canadian Bakken leader has a lot going for it at the moment. Need a recent example? Look no further than its second quarter results released earlier this month. One trend that immediately jumps out across the company both financially and operationally is: improvement. Double digit percentage gains litter its quarter, from 31% growth in funds flow to 21% greater overall production than a year ago. With all of the current and proposed projects the company is working on, I expect this trend to stick around much longer than a single quarter.
Welcome to the Team
One of these major projects is the continued development of assets purchased in Utah's Uinta Basin last year. These oil-heavy assets have already performed well beyond expectations. Don't go anticipating a change of pace anytime soon, either. Management already has plans to boost ultimate recoveries and production rates through the use of advanced completion techniques. Furthermore, initiatives like these could pale in comparison to this regions potential success if Crescent Point is allowed to utilize the enhanced oil recovery technique of waterflooding.
The Great Flood
Waterflooding has already been used to early success by the likes of Crescent Point, Legacy Oil Plus Gas (TSX:LEG) and Magnum Hunter Resources (OTC:MHRCQ). In the Bakken, it is expected that waterflooding could double the recovery factor of wells in the area to 30%. Using waterflooding in the Lower Shaunavon could turn that figure on its head by boosting recovery factors from a minuscule 2.7% to a much more noteworthy 15%.
Rail Less Traveled
Some of you might question how the company will move this increase in production should further waterflooding be approved. Well, management's foresight has led to rail transportation capacity of more than 60,000 barrels per day (bpd). Not only will this ensure that its oil has an escape route, but also that pricing differentials won't vary as widely as they would if the company relied solely on pipelines.
Many Golden Years to Come
With 14.2 years or 2P reserves (Proven + Probable) already on its books, enhancements from waterflooding are likely to expand its reserve base. Since 2002, its reserves have grown at a CAGR (Compound Annual Growth Rate) of 18%. I fully expect this to grow, or be maintained at the very least, given the company's current initiatives and Uinta acquisition. What investors are likely to appreciate about the Crescent Point's assets are that they are producing 91% oil which reduces the volatility of more natural gas-heavy competitors.
Sealing the Deal
All told, Crescent Point Energy and its team have been able to grow reserves at a credible clip and production has followed suit – 7% CAGR since 2002 to 117,500bpd. All the while, investors have been treated to a substantial 7.2% dividend yield, made possible by annual cash flow growth of 19% over the past decade.
Moving forward, I feel confident that management's anticipatory measures – exemplified by acquisitions, waterflooding, rail transport, etc... – will continue to enhance Crescent Point's value and, in turn, my Real Money portfolio.
Profiting from the Status Quo
You can follow Taylor on Twitter @t_Muckerman.