Crescent Energy Co

NYSE:CRGY

Earnings Call Transcript 2022-Q1

[Operator]

Greetings. Welcome to Crescent Energy First Quarter 2022 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require ussd assistance during the conference, [Operator instructions]. Please note, this conference is being recorded. I would now turn the conference over to Emily Newport, Senior Vice President of Finance and Investor Relations. You may begin.

[Emily Newport]

Good morning. And thanks you for joining CRGY First Quarter 2022 Earnings Call. Our prepared remarks today will come from our CEO, David Rockecharlie, and our CFO, Brandi Kendall, Chief Accounting Officer, Ben Conner and Clay Rynd, both Executive Vice President s are also here today, available during the Q&A. Today's call may contain projections and other forward-looking statements within the meaning of the federal security clause. These statements are subject to risks and uncertainties, including commodity plus volatility to continue the impact of COVID-19, geopolitical conflicts, including in Russia and Ukraine and other strategy.

And other factors that may cause actual results to defer 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 disclosure regarding non-GAAP financial measures. For reconciliation, historical non-GAAP financial measures with most directly comparable GAAP measure, please reference our 10Q and earnings press release available on our website. With that, I will turn it over to David.

[David Rockecharlie, Chief Executive Officer]

Great. Thank you, Emily. And good morning, everyone. We appreciate you joining us today for our first quarter 2022 earnings call. This is our first quarter to report full consolidated results after our merger with Contango in December. We've been trading publicly as Crescent Energy for about five months, and we look forward to providing more details today on our results, as well as our outlook for the large and differentiated business we built. We will also take your specific questions at the end of our introductory remarks. Q1 was another solid quarter for our business. We've generated significant free cash flow and solid investment returns across our asset base. We maintained a strong balance sheet and remain focused on returning capital to shareholders through our fixed quarterly dividend.

As a reminder, we paid our first dividend as a public company in March equal to $0.12 per share. Additionally, we're pleased to have closed the highly accretive acquisition of assets in the Uinta Basin at the end of the quarter. The Uinta asset significantly increased our scale and added high-margin oil production at a very attractive purchase price. Our comments [Indiscernible ] include the Uinta acquisition for nine months. And I would note that given the March 30 closing date, operating results of this material and compelling acquisition will not begin to be reflected in our financial results until the second quarter of Q2.

While performance is strong and Crescent continues to grow significantly, our strategy remains unchanged. We describe our strategy as focused on cash flow, risk management, and returns. We generate significant free cash flow from our large diversified and low decline producing asset base. We manage risk through a portfolio approach to asset selection and by maintaining our strong balance sheet supported by our hedge program.

And we seek to deliver strong returns on invested capital, both through internal development and complementary accretive acquisitions in order to drive profitable long-term growth for shareholders. This is the same strategy we have executed for the last decade in the private markets across multiple commodity cycles and we're sticking to it. Turning to the market backdrop, following years of under-investment in the oil and gas sector, we are in a period of unique volatility, which has been driven by the rapid recovery of global economies as pandemic and exacerbated by the war in Ukraine. In terms of the conflict's impact on the commodity market, it does not fundamentally alter our view of an already tight global supply-demand balance, but it introduces additional volatility and upward price risk.

Today, oil and natural gas prices are approaching near record close. To reflect today's commodity prices, we've revised our 2022 guidance to $1.35 billion of adjusted EBITDA and $575 million of leverage free cash flow at the midpoint, assuming $100 WTI and $6 Henry Hub. Again, which guidance includes the Uinta assets for nine months of 2022. Our proved PGT-M at 3.31 NYMEX pricing totals $8.2 billion and we have an industry-leading first-year decline rates in the range of 20%.

We believe the stability of production and cash flow is a key differentiator for Crescent. It lowers our capital intensity and allows us to pursue profitable growth through development of our large low-risk resource base and opportunistic and complementary acquisitions. Consistent with our commitment to return cash to shareholders and in the context of closing the Uinta acquisition, today we declared $0.17 per share dividend payable on the second quarter, representing 40% increase to last quarter's dividend. Our LTM net leverage remains low at 1.3 times and we are generating significant free cash flow following the close of the Uinta acquisition.

From an operational perspective, we continue to operate three rigs as we invest in the development of our high return multi-year inventory in our core Eagle Ford and Uinta positions. Presence large, held by production resource base provides the ability to generate strong returns on capital investments while we maintain a moderately growth of production organically. In addition to our stable base business, we continue to look for ways to drive shareholder value through opportunistic, accretive acquisitions that add cash flow and NAV at attractive valuations.

For the commodity price environment has changed quickly, we continue to see an attractive backdrop for industry consolidation as the supply of assets on subscale businesses for sale is increasing steadily or outweighing buyer demand. As always, we will continue to be [Indiscernible] and focused on investor returns in connection with capital investments on our existing assets, as well as potential acquisitions. We believe we have proven our ability to capture attractive assets, integrate any portfolio, and apply our strong operating skills to find synergies and create value for shareholders.

Following our December 2021 merger with Contango and subsequent Uinta acquisition, we have made significant progress on business integration, while also beginning to better position our large-scale enterprise in the capital markets as a new public company. We anticipate completing our integration efforts and continuing to execute our capital market strategy about the remainder of 2022. Brandi will provide some more detail on both of these activities later on the call. I will now go into a little more detail on the highly accretive acquisition of our Uinta assets, as this is the most recent example of our strong M&A capabilities at work.

The assets are a great addition to our existing Rockies footprint and will add substantial cash flow while maintaining our strong balance sheet. The Uinta assets are 65% oil and nearly 100% operated with high margins and low operating costs, enhancing our overall asset portfolio in these areas. Consideration at closing in March was $690 million for assets with a $1 billion dollars of proved developed [Indiscernible] at NYMEX pricing as of March 31st, and substantial development upside. We were able to move extremely quickly to capture these complementary assets in unique situations due to our familiarity with the assets, our existing operating capabilities, and our strong balance sheet.

In summary, this acquisition is consistent with our strategy to drive shareholder returns through significant free cash flow generation and profitable growth from strong returns on capital invested in low-risk development and opportunistic acquisitions that are accretive to [Indiscernible]. Since closing the Uinta acquisition roughly six weeks ago, we have made significant progress integrating the operations of these assets. Up close we took over operations from EP Energy and have maintained their two-rig development program.

While still in the early days, the transition has been smooth thanks to our strong operational leadership and the talented field staff we gained in the acquisition. We are actively engaging with local agencies about our operating plans on practices, including on the permanent side. Continuing to discuss our assets and operations, I want to reiterate at USG is an integral part of everything we do. We plan to issue our 2021 ESG report later this year, which will include short and long-term ESG targets with the focus on EHS and emissions. During the first quarter, we joined the Oil & Gas Methane Partnership 2.0 Initiative, or OGMP 2.0.

We believe reducing methane emissions is critical to slowing the impact of climate change, and the first step to methane reduction is high quality measurement data. Rigorous OGMP 2.0. framework will aid our efforts to create targeted programs to reduce emissions, accurately report our data, and help us to be positioned as an industry leader in emissions reduction. We will continue to keep you updated on our progress on this area. I'll now turn the call over to Brandi to cover our first-quarter 2022 financial results and 2022 projections.

[Brandi Kendall, Chief Financial Officer]

Thanks, David. And good morning, everyone. We're off to a great start in 2022. We remain focused on cash flow priorities 1A and 1B, shareholder returns, and the balance sheet. As David mentioned, we announced a $0.17 per share dividend, which is a 40% increase to the prior quarter. Consistent with our dividend framework of 10% of adjusted EBITDA, we intend to pay $0.17 per share quarterly for the remainder of the year, generating an attractive 4% yield based on recent trading price. On the balance sheet, we exited the quarter with LTM leverage at 1.3 times. On March 30th, we closed the Uinta Basin transaction for cash consideration of approximately $690 million. In conjunction with the transaction, our lenders authorized an increase of the elected commitment amount under the existing revolving credit facility to $1.3 billion from $700 million.

Additionally, we issued $200 million tack-on during the quarter with proceeds used to reduce RBL borrowings consistent with our strategy of not being overly reliant on the bank's RBL market. For the first quarter of 2022, we produced 120 net MBoe per day in-line with our previous guidance, excluding Uinta, and generated $195 million of adjusted EBITDAX and $89 million of leverage-free cash flow. As a reminder, these results do not include the contribution from the Uinta assets since the transaction closed at the end of the quarter. Operating expense, excluding production and other taxes of 1597 per MBoe were in line with guidance adjusted for contractual commodity link costs, costs which increased in the higher commodity.

Recall that our guidance was originally set at $75 barrel, roughly $20 a barrel less than the Q1 oil price. About $0.25 to $0.50 of our operating costs are contractually index declined prices such as CO2 prices for our Wyoming tertiary recovery assets in certain gathering and processing cost. With these higher contractual commodity dealing costs were more than offset by higher realized prices and improve margin. Our expectation for OpEx, excluding taxes per MBoe for the remainder of the year is in line with our expectations with the exception of these contractual commodity-linked costs.

As we increased our guidance spreads set from $75 barrels to $100 per barrel for the remainder of the year, we increased our cash OpEx, excluding taxes by $0.50 per MBoe. Again, this increase in cost is expected to be offset by higher realized prices. And going forward and beginning in the second quarter, we expect the assets will reduce our operating expense excluding production and other taxes per unit by over 10%. Adjusted recurring cash G&A totaled $1.69 per MBoe, which is in line with previous expectations, excluding Uinta. Going forward, we expect recurring adjusted cash G&A to be roughly $1.50 and the Uinta asset at minimal G&A that calculation excludes certain non-recurring expenses. We incurred a 50 with Contango merger, Uinta acquisition, and the formation of Crescent Energy as the new public company, we expect an incremental $10 million to $15 million one-time expenses for the remainder of 2022, including post-merger integration and other transaction-related costs.

Invested roughly $85 million in the first quarter. And nine operated Eagle Ford wells. We brought online during the quarter are showing promising early results with an expected payback of less than 12 months in the potential to generate more than three times our investment as safe commodity prices. Our 2022 capital budget is unchanged at $600 million to $700 million dollars with more than 80% allocated to the operated development and Ephrin and Uinta basin.

Like our peers, we are seeing inflationary pressures and potential for logistical and other profits delays across the business. We're closely monitoring the changing landscape as the pressures change month to month. Our people and relationships are some of the best in the industry and we continue to find new ideas to safely offset some of these pressures. Based on what we know today, we believe our capital range accurately incorporates expected inflation, and our February guidance incorporated a 10% to 15% increase in capital costs year-over-year.

We are seeing additional pressure around 5% or so in cost inflation for the remainder of the year; I believe this covered in our guidance range. Today, we're continuing to operate 1 rig in the Eagle Ford and 2 rigs in the Uinta. Our planned second quarter wells are expected to commence production at the end of the quarter, which should drive modest growth in the back half of the year. We expect our capital spend cadence to be fairly even over the remainder of year. Hedging is core to our risk management strategy and we utilize hedging to achieve a couple of objectives.

First, to protect the balance sheet; second, lock in expected returns and [Indiscernible] capital to drilling or acquisitions; and third, to maintain exposure to future commodity prices. Consistent with the strategy upon signing that Uinta transaction, we entered into additional oil slots covering about 80% of our acquired Uinta PDP for a 3-year period to protect our expected returns on capital invested. Today, more than 50% of our current hedge book was entered into in connection with acquisitions, which means that our recent acquisitions are outperforming from a price perspective relative to how we underwrote that.

For example, we hedged the Uinta acquisition at $70 to $80 per barrel, and the current $100 per barrel oil price environment provides significant upside to our underwriting. We maintain attractive long-term exposure to future client prices and only 12% of our proved developed reserves hedged today. However, we're hedged today than our mid-size E&P peers with 60% hedged for the remainder of 2022. We know that our 2022 adjusted EPAC understated relative to peers and meet the strength of our asset base. Moving to our capital markets priorities, we continue to engage with the market to expand our rollover shift, improve our float, and increased equity research coverage.

We recognize that the current market conditioning and awareness of Crescent is not yet at a level consistent with peers of similar size. Since the key piece of our strategic plan for 2022 and we're committed to an active approach to building awareness of our story and our accessibility to invest in the stocks through increased liquidity over time. In summary, we believe Crescent is well positioned in today's market, we're focused on generating cash flow, making disciplined investments, maintaining our strong balance sheet and returning cash to investors. And with that, I'll turn the call back to David.

[David Rockecharlie, Chief Executive Officer]

Thanks, Brandi. Before we take your questions, let me quickly summarize today's key highlights. First, we have a proven strategy to add value. We focus on cash flow, risk, and returns. We've been successfully executing this strategy for the last decade, and the results are apparent in our first-quarter earnings update. Second, we are a large-scale business with $1.35 billion of projected 2022 adjusted EBITDA at a $100 oil, improved EP $8.2 billion at the 3-31 strip pricing.

Again, this EBITDA guidance includes the Uinta assets or nine months, 2022. We're continuing to run three operated rigs across our deep inventory of low risk and high return drilling opportunities. Scale is incredibly important to be competitive in today's E&P industry. Lastly, we have a proven track record of adding value to complementary acquisitions. Experienced and talented professionals across our entire business are able to identify accretive opportunities, operate safely, capture financial and operational synergies, and maintain our strong capital structure as demonstrated once again this quarter with our acquisition of the [Indiscernible] assets.

The accretive acquisition added substantial cash flow in a multi-year inventory of high return oil-weighted development. It increased our oil waiting and the percentage of production that is operated across our portfolio on maintaining a strong balance sheet. We were well positioned to acquire this asset on an accelerated timeframe with our strong balance sheet and operating model that combines investor mindset with deep operational expertise. We believe this transaction captures what Crescent is uniquely able to do with our disciplined cash flow based operating model. Thanks again for joining us today and for your interest in our company. We will now be happy to take your questions.

[Operator]

Thank you. If you would like to ask your question [Operator Instructions]. A confirmation till will indicate your line is in the question queue. [Operator Instructions] if you would like to move your question from the queue. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Neal Dingmann with Truist Securities, please proceed.

[Neal Davies]

[Indiscernible] congrats on the first call. My question is first maybe little bit on ops, specifically on the Uinta. Can you talk a little bit how integration has gone and then a few other things on this Uinta. Can you speak to early results there? Are you seeing -- I know you've got a couple of rigs, so it might be too early, but just your thoughts on how the wells are looking versus when you all were modeling looking at the deal, maybe just any more color you could talk about. As I said, I just don't think the market's fully appreciating that, so might you share more color if you could?

[Benjamin Conner, Executive Vice President, Investments]

Sure. Hey, Neal, it's been a good question. As David mentioned in his opening remarks, we're early into the integration, six weeks in, so what we'd say is just we're very pleased with the organization in the field that we've taken over, and all the communications we've had with really all the stakeholders across the asset. We're still getting in and diving deeper relative to underwriting. What I'd say is performance is as we expected in terms of underwriting.

The organization brought on 12 wells during the quarter. It's early in those results, but they look good, and I think what we're more excited about is the opportunities that we're seeing, that we thought, just in terms of being able to get there and continue the program [Indiscernible ] had and seeing opportunities for further value creations. So what I'd say is it's still early, but as expected, and we're excited about the outlook.

[Neal Davies]

Gregg than [Indiscernible] David and Brandi just don't. Shareholder returns, you got a nice selling base for you to just talk plans for that and what do you think how much needed pushed out? What do you think is appropriate versus continuing used cash for scale? And just wondering how you think about balancing those two going forward.

[Brandi Kendall, Chief Financial Officer]

Hey, Neal. Good morning, it's Brandi. So, I'd say no intention to increase our base dividend for the balance of the year and we plan to use incremental or the incremental free cash flow that we're generating at these higher prices for you to pay down debt or selectively pursue acquisitions that expect to pay out at that $0.17 per share per quarter for the remainder of the year, which as a reminder, was a 40% increase versus Q1.

[Neal Davies]

Okay, we'll settle with that. And maybe if I can get one last one and then maybe the year then, just can you talk now, obviously, Tom, through your on August inflation, I mean, my thought is not so much on some two months -- I'm too worried about just a pure inflation, but just you talked about logistics and the challenges, I'm just making sure you can continue to get rigs, spreads. Drill, pipe, AC, and everything in the future. Just talked about your lock things in what does your confidence as you continue to run nanometer enter program?

[David Rockecharlie, Chief Executive Officer]

And again, Brandi can cover some of the numbers. I think she hit on it, but certainly experiencing an evolving and tighter market overall. What I say is that with the one rig in the Eagle Ford and taking over a well-planned two rig development. Overall, it's an operation that we feel really confident about. And I think we highlighted and forecasted the inflation generally that we expected within our guidance. So I'll say we've seen a little bit more tightness in the market that we're managing through, is really around pipe and sand. And so really just kind of managing ahead and through planning, just making sure that that doesn't impact the logistics and the overall plenty of the operations. So I'd say we're managing through it and it's well within our capital guidance, but I'd say those are the two heightened areas where we're seeing a little bit more pressure multiple month.

[Neal Davies]

Thank you

[Operator]

Our next question is from Joseph Mackay with Wells Fargo, please proceed.

[Joseph Mackay]

Hey, guys. Thanks for taking the time for my questions. I was just wondering if you could talk about kind of some of the underlying assumptions for the Uinta just in terms of location count, would you characterize them as conservative? And if so, what would offer some potential upside there in terms of location counter well performance moving forward.

[David Rockecharlie, Chief Executive Officer]

Yeah. Hey. It's been -- first thing I would start out is that we were able to buy this asset at a pretty interesting valuation based on the underlying production and it certainly came with some high confidence development locations, which we're actively developing today. We are excited about the prospects of future resource and I think we talked about it when we announced the transaction, we see meaningful development opportunity across the asset base.

But we're going to be what I'd say is late followers and some of the exciting things that are happening in the base. And then we're focused really on the development, which has been the primary focus area across the basin, across multiple Operator. So I think as we continue to look forward, will continue to focus on those areas that have been meaningfully de -risked. But over time, as other operators continue to do work, and as we see results and continue to do good work on our asset base, I think there is some exciting resource optionality that will continue to follow and track over time. So I think that's where you see it in our hedge at the current moment.

[Brandi Kendall, Chief Financial Officer]

Let me just add a point or so just with what Uinta does to that proforma business than we had on. We're running 1-rig and you go forward in 2-rigs in Uinta. That does result in fairly even capital spend cadence for the remainder of the year. From a production standpoint, we averaged 120 per day in Q1 on a standalone basis at Uinta and expect Q2 to be 15% to 20% higher production lines when you factor in Uinta, that give you a context as to what the rest of the year looks like for that proforma business.

[Joseph Mackay]

Got you. Thank you. That's very helpful. Then, one more on the Uinta real quick. Some of your peers in basin have explored using rail as takeaway to get down to the Gulf Coasts. I know it's still early days realizing the asset, but do you have any thoughts around that on the longer term in terms of in-basin pricing or like expanded takeaway options?

[David Rockecharlie, Chief Executive Officer]

Yeah. To your point, I think we're still early days in terms of becoming experts, but rail capacity has meaningfully grown in the basin, and Gulf Coast refiners really like the [Indiscernible] there. So I think that's a place where you will continue to see growing takeaway capacity. Our volume, specifically, we do have contracted, and for the most part, are contracted to go to the local refinery. So we feel good about the visibility there, but the optionality in the basin continues to grow as people continue to invest in takeaway capacity.

[Brandi Kendall, Chief Financial Officer]

And then, maybe just specifically on debt, so as a broader business, we had really strong debts for the quarter. They were high 90s. We do expect those to drop to lower 90s pro forma for the Uinta starting in Q2.

[Joseph Mackay]

Got you. Thank you very much. That's helpful. That's all for me.

[Brandi Kendall, Chief Financial Officer]

Thank you.

[Operator]

At this time, we have no more questions in queue, so I would like to turn the conference back over to management for closing comments.

[David Rockecharlie, Chief Executive Officer]

Great. Thank you all again for joining us this quarter and supporting the company. We appreciate it, and we look forward to keeping you all well informed, and speaking again next quarter. Thank you.

[Operator]

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.