Crescent Point Energy Corp

Crescent Point Energy Corp. (TSX: CPG) is a Canada-based oil and gas exploration, development, and production company.

Why Investor’s Should Book Profit?

• Falling Natural Gas Prices: Natural gas and its derivatives contributes approximately 10% to the topline of the company. After stupendous rally in the Natural gas prices over the past year, its prices plummeted more than 10% over the past two trading sessions, after Russia's President Putin said Gazprom will send more gas to Europe via Ukraine.
• Uncertainties over Oil Price Sustainability: Some profit booking was witnessed in Crude oil on Wednesday after US Oil inventory increases as per the latest EIA data released on Wednesday. Also, demand concern is still on the cards amid increasing COVID-19 cases in Western World. Therefore, Oil could remain highly volatile as majority of rally is backed by lower oil throughput in the market by OPEC+ cartel.
• Liquidity Issues: Despite top-line growth reported by the company in the recent quarter, its liquidity position still not sufficient to cover its short-term obligations comfortably, as Current Ratio as of June 30, 2021, stood at 0.46x, almost at similar level since December 31, 2020. Also Current ratio is relatively poor compared to the industry median of 0.98x, implies working capital issues.
• Stock Hovering Near 52W High: CPG shares are hovering near 52w high, and leading momentum indicators 14-day RSI oscillating near overbought territory, which indicates that a potential profit booking could take place near the current levels.

Technical Price Chart (as on October 06, 2021). Source: REFINITIV, Analysis by Kalkine Group

Stock Recommendation

CPG shares have recorded a splendid rally over the past 1-year, up approximately 275%. However, majority of rally was backed by gigantic rally in the Crude oil and Natural gas prices. Crude prices had mostly an artificial rally backed by supply squeeze created by major oil producing countries, which is not sustainable in the long-run. Also, increasing COVID-19 cases in North America further posing oil demand uncertainties, which can potentially bring high volatility in the crude oil prices. Hence, we suggest investors to book profit given the significant dependency of stock price on the underlying commodity price movement. Therefore, we recommend a “Sell” rating on the stock at the closing price of CAD 6.12 on October 06, 2021.

Technical Price Chart (as on October 06, 2021). Analysis by Kalkine Group 

Parex Resources Inc.

Parex Resources Inc (TSX: PXT) engages in exploration, development, and production of crude oil. The company brings technology utilized in the Western Canada Sedimentary Basin to South American basins with large oil-in-place potential. Majority of the company's properties are focused in Colombia, where it pays a royalty or tax to the government for its operations.

Why Should Investors Book Profit?

• Increasing uncertainties: The resurgence of Delta variant cases has raised a lot of questions, and it might have an influence on the company's operations and cash flows as the government may tighten some mandatory lockdowns to combat the spread. This could create a volatility in the price and demand of the crude oil.
• Lower average daily production on sequential basis: The company witnessed lower average daily production of Crude oil on the sequential basis at 42,189 (bbl/d) in Q2 2021 compared to 45,079 (bbl/d) in Q1 2021.
• Higher average collection period: The company is having a higher average Accounts Receivable day of 44.0 days, against the industry median of 39.9 days. A higher average collection period indicates that the organization collects payments slower. This may create a difficulty for the company to have enough cash on hand to meet their financial obligations.
• Exhausted technical indicators: Recently, the stock witnessed a healthy rally on the daily price chart and has moved near the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the momentum oscillator RSI (14-Period) is trading at ~74.11 levels, which also indicates that the stock is in overbought zone and there is a deep possibility of price consolidation or correction.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): Price to Cash Flow 

Stock Recommendation

In Q2 2021, the company witnessed lower average crude oil production on a sequential basis, which is not a healthy sign. Furthermore, the resurgence of Delta variant instances is creating a lot of uncertainty, which might have an impact on the company's operations and cash flows if the government enforces certain mandatory lockdowns to combat the spread. Moreover, it is having higher average collection period, which indicates that it is collecting payments slower. Even the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 24.33 on October 06, 2021. 

Precision Drilling Corporation

Precision Drilling Corp (TSX: PD) is Canada's significant player in contract drilling which has expanded into the United States with Grey Wolf and in the Middle East region, with more than 250 land rigs. The company offers completions, workover, maintenance, and abandonment services.

Why Should Investors Book Profit?

• Lower margin profile v/s Industry: In Q2 2021, the company failed on maintaining its pace and witnessed lower performance across operating margin matrix, consisting of EBITDA margin, operating margin, and net margin against the industry, which exhibits the pressure on company.
• Weak liquidity profile: In Q2 2021, the company's quick ratio was 1.5x compared to the industry median of 1.73x, while the current ratio stood at 1.64x against the industry median of 2.02x. These lower ratios against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.
• Long cash cycle days: The company’s Cash Cycle (Days) is increasing compared to the previous sequential quarter, implying the company is taking more days to convert its inventory to cash. In Q2 2021, its Cash Cycle stood at 112.3 days against 96.4 days in Q1 2021.
• Heavily leveraged: The company’s debt to equity ratio at the end of June 2021 stood at 0.94x, which was higher than the industry median of 0.38x. Additionally, its % LT Debt to Total Capital stood at 47.9% against the industry median of 19.4%. These factors imply higher balance sheet risks.
• Exhausted technical indicators: Recently, the stock witnessed a healthy rally on the daily price chart and has moved near to upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the momentum oscillator RSI (14-Period) is trading at ~76.10 levels, which also indicates that the stock is in overbought zone and there is a deep possibility of price consolidation or correction.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to EBITDA 

Stock recommendation

Precision delivered higher revenue of CAD 201 million in second quarter, supported by increased activity and improved pricing resulting from strengthening energy fundamentals and higher oil and natural gas prices. However, the company failed on maintaining its pace and witnessed lower performance across operating margin matrix, which exhibits the pressure on company. On the other hand, the resurgence of delta variant instances is causing a lot of uncertainty, and it might have an influence on the company's operations and cash flows. Furthermore, the company's liquidity ratios are poor, and it is significantly leveraged, implying that the balance sheet is at risk. The technical signal also implies that the stock may be overbought and due for a price correction or consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 52.83 on October 06, 2021.

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.