Crescent Energy Company (NYSE:CRGY) Q1 2023 Earnings Call Transcript May 11, 2023

Operator: Greetings, and welcome to Crescent Energy First Quarter 2023 Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Emily Newport, Senior Vice President of Finance and Investor Relations. Thank you. You may begin.

Emily Newport: Good morning, and thank you for joining Crescent’s first quarter conference call. Our prepared remarks today will come from our CEO, David Rockecharlie; and CFO, Brandi Kendall. Todd Falk, Chief Accounting Officer; and Ben Conner and Clay Rynd, both Executive Vice Presidents are also here today and available during our Q&A session. Today’s call may contain projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties, including commodity price volatility, global geopolitical conflicts, our business strategies, and other factors that may cause actual results to differ from those expressed or implied in these statements and our other disclosures.

We disclaim any obligation to update any forward-looking statements after today’s call. In addition, today’s discussion may include disclosures regarding non-GAAP financial measures. For reconciliation of these historical non-GAAP financial measures to the most directly comparable GAAP measure, please reference our 10-Q and earnings press release available on our website. With that, I will turn it over to David.

David Rockecharlie: Great. Thanks, Emily. Good morning, and thank you for joining us today as we close out another solid quarter. We continue to generate significant EBITDA and operating cash flow through our maintenance level development program, allowing us to prioritize returning cash to shareholders and maintaining a strong balance sheet. Our base business is performing well, and we are highly encouraged with how our team continues to find innovative ways to safely reduce costs and maximize the value of our development program. Before jumping into the first quarter results, let me spend a few minutes on our recently announced bolt-on acquisition. Last week, we announced an accretive acquisition of operatorship and incremental working interest in our existing nonoperated Western Eagle Ford assets from Mesquite Energy for $600 million.

We acquired the original nonoperated interest in the Western Eagle Ford over 6 years ago. So we know the assets incredibly well. We have a long history in the Eagle Ford, and we are pleased to increase our ownership and bring our operating skills to these assets. Today, the assets represent approximately 75,000 largely contiguous net acres primarily in Dimmit and Webb counties with current net production of 20,000 barrels of oil equivalent per day, roughly 70% of which is liquids. Pro forma will own an approximately 50% interest in the assets adding an incremental 35% working interest to our existing 15% nonoperated interest. The acquisition cements our position as the leading consolidator in the Eagle Ford and is consistent with the proven acquire-and-exploit strategy that we’ve been executing for the past decade.

And on a stand-alone basis, the Eagle Ford acquisition checks all of our investment criteria fitting our strategy financially, operationally and strategically. We believe the $600 million purchase price represents an attractive value, adding more than $700 million of PDP PV-10, at $70 oil and $3.50 gas and approximately 250 gross or 150 net operated Lower Eagle Ford locations with significant upside from the Austin Chalk and Upper Eagle Ford. The transaction is highly accretive to key metrics, including operating cash flow, free cash flow and net asset value per share. Through the transaction, we will maintain balance sheet strength and our investment-grade credit metrics while remaining below our publicly stated maximum leverage guidance of 1.5 times.

Operationally, the Mesquite assets add meaningful high return, lower Eagle Ford inventory at the current development pace. Over the last 6 years as an active nonoperated partner we’ve developed a deep knowledge about the asset base, evaluated over 250 lower Eagle Ford well proposals and consistently shared our operational insights with the operator. The high quality of the resource base is evident in recent well performance, which was achieved using the latest approaches to drilling, completions and well spacing. Such recent performance is both significantly improved and quite competitive with Eagle Ford development basin-wide. We will also highlight the recent encouraging results from the Austin Chalk formation, both on the acquired assets and closely offset suggests significant upside on our acreage.

However, we did not ascribe any value to this resource in our underwriting of the assets. Lastly and importantly is the strategic fit. We will benefit from increased scale in the Eagle Ford and expect to find new and valuable synergies with our existing operations. Following the transaction, Crescent will hold over 200,000 net acres in the Eagle Ford and operate approximately 90% of our pro forma Eagle Ford position. Notably, the assets at scale in a complementary way adding 20,000 BOE per day of production with an expected next 12-month decline of 17%, further improving our peer-leading decline rate. We believe the acquired assets enhance our existing portfolio and view this transaction as an excellent example of our acquire-and-exploit strategy, adding scale, long-life reserves and proven inventory in area where we have existing operations and a competitive advantage.

Over the last year, we’ve evaluated many acquisition opportunities, particularly in the Eagle Ford, but we have remained patient given the heightened commodity price environment. Ultimately, we focused on strengthening our base business during that period of time, reducing our leverage to 1 times post the Uinta acquisition, maintaining substantial liquidity and continuing to core up our portfolio through a number of small asset divestitures. Relative to other opportunities we’ve seen, we believe this transaction fits us best due to the combination of significant low decline production and cash flow, meaningful proven inventory and the deep operational insights our team brought to the table. We also like the attractive purchase price at this point in the commodity price cycle.

Across the broader A&D market, we expect it to be an active year and are focused in areas where we can add meaningful scale with an emphasis on our existing footprint across Texas and the Rockies. Going forward, we are well positioned as an acquirer of assets, particularly in the Eagle Ford, which remains the most fragmented of the major baselines across the lower 48 states. With its relatively low base declines, well-delineated development, attractive realizations and balanced commodity mix, further growth in the Eagle Ford complements our business well. And we envision it will continue to play a key role in our acquisition strategy. But as always, we’ll evaluate all future opportunities through our returns-driven framework first. As a reminder, our attractive existing business with a low decline rate and large inventory of economic drilling locations ensures we will continue to be disciplined with our capital as a flexible operator and patient acquirer.

As Brandi will cover in more detail, the base business continues to perform well, which allows us the flexibility to focus on returning capital to shareholders, preserving balance sheet strength and pursuing attractive investment opportunities. From there, we can capture synergies and enhance operations as we continue to scale and transform our business, all in a way that drives value to our shareholders. With that, I will turn the call over to Brandi to cover our first quarter financial results. Brandi?

Brandi Kendall: Thanks, David. For the quarter, we outperformed expectations on both production and EBITDA and saw continued operational efficiencies across our business. We announced the first quarter cash dividend of $0.12 per share, in line with our strategy to distribute 10% of EBITDA to our shareholders, bringing around our guidance price act at $70 oil and $3.50 gas. For the quarter, we produced 137 MBoe per day and generated $232 million of adjusted EBITDAX. Production in the quarter was slightly impacted by minor downtime related to winter weather. On revenue, our gas differentials outperformed this quarter due to exceptionally high in West Coast gas realizations with Crescent realizing 150% of benchmark prices. Our elevated price realizations reflect the benefits of our exposure to different end markets.

Our operating expenses were also impacted by higher cost residue gas related to increased natural gas prices. However, these higher costs were more than offset by higher realized prices. Adjusted operating expenses, including production and other taxes averaged $16.57 per BOE for the quarter, which is above our initial guidance range. Adjusting for these commodity line costs, Crescent’s adjusted operating expense per BOE was in line with expectations, and we anticipate our beginning of the year cost guidance to remain intact. We invested $202 million in the first quarter, drilling 15 and bringing online 18 growth outrated wells across the US and Eagle Ford. Due to operational efficiencies, this reflects a higher level of activity during the first quarter than our initial expectations.

Taking into consideration the accelerated activity at the end of the quarter, we still expect to remain within our full year 2023 capital and production guidance. More broadly, we’re continuing to see inflation moderate, as more stable commodity prices have decreased service cost pressures but have not experienced a material decrease in costs from levels incurred over the last 6 months. We continue to offset the higher cost environment for longer laterals decreased cycle times and continual improvements in completion efficiencies. We expect strong returns from our development program continue to operate 1 rig in both the Eagle Ford and Uinta Basins. Switching over to the balance sheet. Our balance sheet remains strong with net LTM leverage of 1.0 times, in line with our stated long-term leverage target.

We were well positioned in the first quarter given our focus on existing operations and debt reduction during last year’s period of higher commodity prices as well as our February high-yield offering to defer out a portion of our RBL debt. With over $1.1 billion in liquidity, we were prepared for the change in the market environment, which allowed us to post the recently announced Western Eagle Ford transaction. Also in line with our acquisition risk management strategy, we executed additional hedge volumes for the balance of 2023 and full year ’24 in connection with the transaction to protect our expected returns on invested capital and maintain a strong balance sheet. Assuming a midyear close of the Western Eagle Ford acquisition and approximately 20 MBoe per day of crude production, we are roughly 60% hedged for the remainder of 2023.

With that, I’ll turn the call back over to David.

David Rockecharlie: Great. Thanks, Brandi. As Brandi highlighted, the base business continues to perform well. And coupled with our capital markets efforts and our patients through last year’s elevated commodity price environment, our business performance has afforded us the flexibility to pursue attractive M&A opportunities, such as the accretive Western Eagle Ford acquisition. And to reiterate, the transaction checks every box that we look for in an investment opportunity. First and foremost, we are returns-driven investors. We believe the assets were acquired at an attractive valuation, and the transaction is immediately accretive to key per share financial metrics. Acquiring proven assets with meaningful reinvestment opportunity at a discount to PDP value is a good strategy to create value in our industry.

Second, the transaction was highly strategic, enhancing our Eagle Ford scale and increasing our operational control in an area that we know well through our existing interest and offsetting Eagle Ford operations. Third, the assets are complementary to our portfolio and investment strategy, adding stable low decline production with substantial cash flow and reserves. Fourth, the assets at low-risk development inventory with significant potential for resource expansion and synergy opportunities. And finally, we continue to grow the business while maintaining our strong balance sheet and investment-grade credit metrics. In summary, the Eagle Ford transaction is a great example of our strategy at Crescent. We utilized our team of experienced operational and investment professionals to create value while protecting the balance sheet and remaining focused on shareholder value.

With that, we will open the call up for questions.

Q&A Session

Operator: [Operator Instructions] Our first question is from Bertrand Donnes with Truist. Please proceed.

Operator: Our next question is from John Abbott with Bank of America. Please proceed.

Operator: Our next question is from Roger Read with Wells Fargo. Please proceed.

Operator: Our next question is from Tarek Hamid with JPMorgan. Please proceed.

Operator: We have reached the end of our question-and-answer session. I would like to turn the conference back over to David for closing comments.

David Rockecharlie: Great. Thank you all again. We are, as always, focused very heavily on value creation for our investors. Another good quarter from our perspective. But we continue to feel we’ve got a lot of opportunity and a lot of work to do and look forward to continuing to deliver results and keep you up to date on a regular basis. So thank you very much.

Operator: Thank you. This will conclude today’s conference. You may disconnect your lines at this time. And thank you for your participation.