Crescent Point Energy Corporation Analysis

Introduction

Crescent Point Energy Corporation (described as Crescent Point or the company henceforth) is an oil and gas company based out of Alberta, Canada. The company was founded in 2001 and has continually grown throughout the years. The company’s main objective is to explore, produce, and distribute oil and gas. They strive to create sustainable and value-added growth into their reserves. Currently they have 3 main oil basins which are located in southern Saskatchewan and northeast Utah. Presently, Crescent Point has 544,640 million shares outstanding on the Toronto Stock Exchange. These shares are being traded at $14.41/share which gives the corporation a market capitalization of $7.82 billion.

The oil and gas industry is one of the largest sectors in Canada. In 2016 the oil and gas sector contributed $132 billion to the Canadian gross domestic product (GDP). This amount is equivalent to 8% of the total GDP in 2016 and is higher than the finance, construction, and health care industries. The sheet size of the industry can be distinguished through the huge amount of oil exported. Canada exported 3 million barrels of oil a day in 2015 which rounded out to about $57 billion.

Investment Risks

Price

The main risk when dealing with a volatile commodity such as oil is the fluctuation in price. This stems from the power of the Organization of the Petroleum Exporting Countries (OPEC). The main goal for OPEC is to stabilize the oil markets and regulate the supply of petroleum. They can do this because they have the ability to set and maintain oil production levels. This risk can be demonstrated through OPECS decision to flood the oil market in 2014. OPEC decided not to cut production and allowed the price of crude oil to drop in an effort to drive US producers of shale oil out of business. Due to Canada not being on the board at OPEC, Crescent Point does not have any options to mitigate this risk.

Political

Limited government regulation plays a huge role in the success of Crescent Point. The oil and gas sector is always under heavy scrutiny from environmentalist. This is due to the fact that oil and gas development will almost certainly cause contamination in the air, water, and soil. This could play a factor in more restrictive government regulations in the future.

Exchange Rate Risks

Exchange rate risk is a form of risk that arises when the price of one currency rapidly fluctuates against the value of another currency. This is highly relevant to Crescent Point energy as they are exposed to copious amounts of foreign currency. Particularly, they are highly exposed to the United States Dollar. For example, if there is a huge drop in value in the United States Dollar in comparison to the Canadian Dollar, Crescent Point could be adversely affected.

Shareholder Deficit

The shareholder deficit currently being shown on the Crescent Point balance sheet should be another area for concern. In this situation, the company has continually accumulated losses in previous years. Usually, total assets would be equal to the sum of total liabilities and total equity. However, liabilities have increased in value due to the numerous losses which has resulted in the deficit. Crescent Point energy has had a shareholder deficit for more than 5 years now and this should be a huge concern to potential investors.

Ratio Analysis

Conducting a ratio analysis is crucial in fully understanding the financial statements. Using ratios will make it easier to distinguish trends overtime. This will make it easier for the company to compare its current numbers to their historical numbers.

Ratio 2016 2015 2014

Current 0.47893175 1.01339553 0.87049766

Debt to Equity 0.68525315 0.73985185 0.62064384

Return on Equity -10.34% -8.59% 5.01%

Asset Turnover 0.15766908 0.15895777 0.25566581

Current Ratio

The current ratio is a liquidity ratio which aims to measure a company’s ability to pay short-term obligations. This ratio is calculated by taking current assets and dividing them by current liabilities. A ratio over 1 is optimal as this is indicative of a firm that can pay off short-term obligations. However, Crescent Point has not met this standard in