Crescent Energy Co

NYSE:CRGY

Earnings Call Transcript 2024-Q1

[Operator]

Greetings and welcome to Crescent Energy Q1 2024 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Reid Gallagher, Investor Relations. Thank you, Mr. Gallagher, you may begin.

[Reid Gallagher]

Good morning and thank you for joining Crescent's First Quarter 2024 Conference Call. Our prepared remarks today will come from our CEO, David Rockecharlie; and CFO, Brandi Kendall. Our Chief Accounting Officer, Todd Falk; and our Executive Vice President of Investments, Clay Rynd, will also be available during Q&A.

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 conflict, 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 have no 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 a reconciliation of 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 our CEO. David?

[David Rockecharlie, executive]

Good morning and thank you for joining us. We have another great quarter to go over today, and we are eager to get started. Before we get into the details, I want to begin with a few things I hope you all take away from this call.

Number one, 2024 is off to a great start. We continue to execute our consistent strategy, doing what we said we would do. Our scaled, low-decline production base is generating significant free cash flow, which we are returning to our shareholders. We are reinvesting in proven high-return capital projects and our attractive long-life development inventory. We are actively focused on our returns-driven M&A strategy through accretive acquisitions and opportunistic divestitures to compound capital for our investors and further enhance our portfolio. And we have delivered on our goals in the capital markets, improving the float and trading liquidity of our business, enhancing our peer-leading return of capital framework and maintaining our balance sheet strength.

Number two, our assets continue to outperform. We saw record production this quarter with continued gains in well productivity complemented by stronger realizations and best-in-class operational execution.

And number three, Crescent has never been better positioned. We believe Crescent is the best stock to own for long-term exposure to oil and gas prices as we uniquely offer the discipline, stability and capabilities of a large-cap business, combined with the value and high-growth potential of a proven mid-cap company. Following those quick highlights, I will now discuss things in a bit more detail.

We had strong financial performance this quarter, beating consensus expectations on both EBITDA and free cash flow driven by improved realizations and strong asset performance. On the operations side, our team has continued to outperform, generating record production this quarter with sustained gains in well productivity and continued efficiencies on the capital side. With the strong outperformance that we are seeing, we have increased our full year production guidance while maintaining the same level of capital spend.

Our stable low-decline production base continues to generate consistent free cash flow, and we've been able to further improve our margin profile through a combination of proactive oil marketing efforts and the benefits of our balanced gas basis exposure. We've talked about this a bit before, but one of the highlights of our recent Western Eagle Ford acquisitions was the complementary marketing overlap with our existing Central Eagle Ford position. Since acquiring the asset, we've implemented a successful blending campaign across our combined footprint to realize a premium across both assets. Or said another way, the whole of our Eagle Ford position today is greater than the sum of its parts from before we took control of operations in the Western Eagle Ford last year.

These recent marketing gains represent further value on top of the capital savings we've discussed to date: our improvements to well performance and our ongoing efforts to reduce operating costs across the asset. These all represent meaningful synergy gains as they were not included in our acquisition underwriting. And they are also excellent examples of our continued enthusiasm about the value-creation potential across our Eagle Ford footprint with the scale we've built over the last few years.

We are big believers in the value of scale-driven efficiencies and profitability in our sector, and we are focused on increasing our footprint in our core regions to continue compounding value for our shareholders through complementary and accretive M&A.

Speaking more on our capital savings, our team has been able to drive further improvements to our drilling and completions program by implementing simul-fracs across our Eagle Ford portfolio, which has increased the efficiency of our completions program. Our completions are now 40% faster than just 2 years ago. If we look at what our team has accomplished to date, I could not be prouder. With all the gains our team has driven over the past several years, our D&C performance is now among the best in the basin. We are developing our resources safely, consistently and more efficiently than nearly anyone in the Eagle Ford.

As I touched on with our increase to guidance, we are seeing consistent outperformance from our recent wells in both the Western Eagle Ford and Uinta. In the Western Eagle Ford, we are seeing a roughly 100% increase in early time well performance versus the prior operator, which combined with our D&C cost performance represents a massive shift in capital efficiency on the assets.

In Utah, we are seeing equally exciting results from our most recent completion design optimization. We touched on this last quarter, but when we acquired this position, the only horizontal development on the assets utilized a legacy, smaller completion design with roughly 1,500 pounds of proppant per foot.

As we've implemented our operational approach, we are seeing significantly enhanced returns and improved capital efficiencies through larger completions, which we've doubled to roughly 3,000 pounds per foot. The results of this change and long-term implications for our asset are becoming clearer and clearer over time as productivity remains strong.

With a bit more than 150 days of production data, we are seeing a roughly 60% uplift versus the previous completion design with only minimal increases in our D&C costs. These results are still early time, but the data supports our optimism about the long-term value-creation potential of our inventory and the value potential for Crescent.

Building on the capital investment into our own business this quarter, we are always focused on creating further value through opportunistic and accretive M&A. To us, that means investing with financial discipline and a focus on compounding capital, improving our cash flow profile, executing our operational plans and enhancing our overall portfolio. We've had a successful track record to date of acquiring assets at attractive value and generating incremental returns for our shareholders through improved operations, which you can see most recently through the results on our Western Eagle Ford and Uinta positions.

We are constantly in the market and looking for opportunities to invest at attractive risk-adjusted returns. Recently, there have been a number of large-cap deals making headlines, but we are vigilant and patiently looking for opportunistic value, large or small, that fits our skill set.

This quarter, we executed on an attractive bolt-on to our existing minerals portfolio in the Eagle Ford with a small $25 million asset in Karnes County. These complementary assets generate a compelling cash flow yield and enhance our existing minerals portfolio. Our minerals footprint today covers approximately 73,000 net royalty acres; focused across the Eagle Ford and Rockies; produces roughly 6,000 barrels of oil equivalent per day; and generates roughly $70 million in annual cash flow, which we don't believe is fully appreciated by the market.

When we talk about adding value through M&A, that doesn't only mean through acquisitions. We are constantly watching our portfolio and the market, looking for opportunities to accelerate value through portfolio management, including by divesting noncore assets from our business.

To that effect, we have divested more than $100 million of noncore assets over the past 18 months, crystallizing attractive value for our shareholders and simplifying our asset portfolio. This quarter, we signed an additional opportunistic divestiture of noncore assets in the Permian Basin for roughly $20 million, which we expect to close in the second quarter.

Looking forward, we have one of the largest pipelines of M&A opportunity in our recent history. With our successful track record of asset integration, strong operating and financial performance and solid balance sheet, we remain confident that we are well positioned for accretive growth and further value creation over the remainder of 2024 and beyond.

With that, I'll turn the call over to Brandi to provide more detail on the quarter. Brandi?

[Brandi Kendall, executive]

Thanks, David. As David mentioned, performance has been extremely strong with another quarter of record production and significant cash flow, averaging approximately 166,000 barrels of oil equivalents per day, generating $313 million of adjusted EBITDA and $66 million in levered free cash flow. We had $193 million of capital expenditures during the first quarter, which we expect to be our heaviest quarter of spend for the entire year. We brought online 20 gross operated wells in the Eagle Ford and 4 gross operated wells in the Uinta, all of which are posting strong early-time results and are expected to exceed our returns target of 2x our capital invested at current commodity prices.

Turning to our outlook for the remainder of 2024. As David mentioned, we increased production guidance to 157,000 to 162,000 barrels of oil equivalent per day, which represents a roughly 7% increase relative to 2023 production levels while reaffirming our full year capital guidance of $575 million to $625 million. At today's commodity prices, we expect to generate substantial free cash flow in 2024 and beyond.

As you all know, our top priority is creating value for our investors. In addition to our strong financial and operational performance, we've executed on that goal in a number of different ways in the capital markets as well. We have truly transformed our positioning in the capital markets since we became public just a few years ago. Through a series of transactions on the equity side, we've more than doubled our public float and trading liquidity and effectively eliminated our private investor overhang as we work towards a more simplified corporate structure. We've proven our access to both equity and debt capital to fund accretive growth, and we've meaningfully increased investor followership with the addition of 10 new research analysts.

Creating value more directly, we've announced another dividend under our recently enhanced framework, which provides certainty and simplicity to our shareholders with a peer-leading yield. We also executed on a portion of our authorized share buyback program, further increasing returns to our shareholders with the repurchase of roughly 2.3 million shares at an average price of $9.87 per share. Now that our private overhang is eliminated, we will look to use the remaining $125 million authorization to opportunistically repurchase both Class A and Class B shares.

During the quarter, we also successfully refinanced both our 2026 notes and our credit facility, improving our already strong credit profile and ensuring significant flexibility and liquidity to continue executing on our growth strategy.

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

[David Rockecharlie, executive]

Thank you, Brandi. Before we wrap up, I want to highlight again a few key takeaways from this quarter. First, we have continued to demonstrate consistent performance towards our strategic priorities, doing what we've said we were going to do. As Brandi alluded to, 2023 was a strong year for Crescent and 2024 is off to a great start. I couldn't be prouder of our accomplishments to date. We've continued our peer-leading dividend framework, strongly positioned the business through accretive M&A, and we've achieved our initial goal of establishing a capital markets presence in line with a company of our size with investor and equity analyst followership, a liquid public float and a demonstrated track record of prudent capital access.

Second, our assets continue to outperform. We saw record production this quarter with impressive well performance, stronger realizations and best-in-class operational execution, driving a significant free cash flow beat. We've increased production guidance without a change in capital spend.

And finally, Crescent has never been better positioned for further value creation. We have an attractive asset profile with a stable decline rate and advantaged capital efficiency, which allows us to generate significant free cash flow relative to our peers, which we don't believe is reflected in our current valuation.

We have momentum in the capital markets and a vision to make Crescent a must-own mid-cap company. We have the unique combination of operating and investing expertise required to execute on a growth-through-acquisition strategy and believe Crescent is the best stock to own for long-term exposure to oil and gas prices with the discipline, stability and capabilities of a large-cap business, combined with the value and high-growth potential of a proven mid-cap company.

With that, I'll open it up for Q&A. Operator?

[Operator]

[Operator Instructions] The first question comes from the line of Neal Dingmann with Truist Securities.

[Neal Dingmann, analyst]

Nice quarter. David, my first question for you or Brandi just on capital allocation, specifically, as you look at your stock price today, which to me seems still quite discounted versus what you see out there with potential Eagle Ford or other deals, do you all have a strong opinion of where you believe it makes more sense to lean or focus in maybe the remainder of the year?

[David Rockecharlie, executive]

Yes. Thanks for the question. I think the best thing is just to keep it simple. And as you know, the first thing we do with the free cash flow from the business is focused on the investors, which to us is the balance sheet and the dividend. So I think we feel very good about the current positioning there.

And then after that, it's really opportunistic. And again, I think the thing we've highlighted this quarter is we feel like we've done what we needed to do in the capital markets, and we have the buyback program available to us. But to your question, I think we're just looking for value and starting with the balance sheet and the dividend.

[Neal Dingmann, analyst]

Yes. Makes a lot of sense. And then just secondly, on capital structure, specifically now that you've simplified the balance sheet, I'm just wondering will the shareholder return just -- I guess, will that continue to be just a mix of the base div and [ opco ] repurchases and regular stock repurchases, just a sort of a combination like we saw just this last quarter, more of the same? Or should we think about that any other way?

[Brandi Kendall, executive]

Yes. So just more of the same. As a reminder, right, we enhanced our dividend framework last quarter, moved to the fixed dividend of $0.12 per share. And then, as you mentioned, we'll opportunistically repurchase both Class A and Class B shares. When we came out with the buyback, initially, it was directed towards the Class B shares. As David mentioned, we've made a lot of progress from an equity positioning standpoint and now view that the private investor overhang is gone. So really, we'll look to use it opportunistically on both classes of shares going forward.

[Operator]

Next question comes from the line of Oliver Huang with TPH.

[Hsu-Lei Huang, analyst]

Congrats on the nice quarter. We're kind of looking at the revised guidance laid out for 2024 on volumes. Just wondering if you all are able to kind of walk through the moving pieces that constitute the 2,500 Boe per day that is being attributed to operational outperformance. Really just trying to understand how much of the uplift that has been seen in the new Q1 wells is rolling through forward the new wells that are planned for the remainder of the year in this update. Any color there would be helpful.

[Brandi Kendall, executive]

Oliver, it's Brandi. So as we highlighted in the prepared remarks, we increased the full year production guide by 2,000 barrels a day net and 2,500 barrels a day, if you adjust for the small divestiture. The drivers of the increase is really the [ same ] performance that we're seeing both out of the Western Eagle Ford as well as the result of the more intense completions in Utah. So we believe that [ the updated ] guidance reflects the performance trends that we're currently seeing. So I would point you towards the midpoint of the new guidance range for the time being.

[Hsu-Lei Huang, analyst]

Okay. That's helpful. And maybe a follow-up just on the buyback. I know the equity for us continues to screen fairly undervalued on our numbers, and I'm sure you all would agree as well. But just kind of looking at what you all repurchased in Q1, is there any color that you all are able to offer up in terms of the pace or aggression of buybacks beyond that opportunistic commentary, especially as we kind of see free cash flow start to inflect higher as we kind of move throughout the year?

[Brandi Kendall, executive]

Yes. I mean I won't say anything other than we view it as an opportunistic tool. For us, our capital allocation framework remains a [indiscernible] the dividend and the balance sheet and then it's return-generating opportunities, whether that's M&A or our organic program. So we view the buyback as after those 2 items. But as we see value in our stock, right, again, it's a great tool to have for us.

[Operator]

Next question comes from the line of Jarrod Giroue with Stephens.

[Jarrod Giroue, analyst]

Congrats on a strong quarter. Well, a couple of quick questions. I was hoping you could maybe give a little color on the production and capital cadence for the remainder of the year.

[Brandi Kendall, executive]

Jarrod, it's Brandi. So I'll maybe start on the capital side. So similar to what we would have talked about in March alongside year-end earnings, we still expect to be front half-weighted, so 60% of capital towards the first half of the year, and expect this to be our heaviest quarter of capital spend to date at the $193 million.

From a production standpoint, we expect to be down kind of low single digits quarter-over-quarter and then relatively flat [ updated ] midpoint. We do expect our oil production, though, to trend upwards over the course of the year just as we're bringing on our oil-weighted inventory.

[Jarrod Giroue, analyst]

Perfect. And then in terms of the Austin Chalk, I think the original plan was to drill 4 Chalk wells this year. Just curious if that was still in the drilling schedule.

[John Rynd, executive]

Yes. That's right. And what we'd tell you is early-time results, we feel really excited about the opportunity set there. But that's still the plan.

[Operator]

Next question comes from the line of John Freeman with Raymond James.

[John Freeman, analyst]

Nice quarter. Just a follow-up on the last question in your response, Brandi. So when thinking about the production cadence, the 24 wells that came on in 1Q were they sort of just ratable through the quarter? Was there any back-end sort of weighted nature to those wells? Just anything about 1Q and the timing of how those came on?

[Brandi Kendall, executive]

John, good question. So I would say a handful of those wells came online towards the end of the quarter. So they didn't contribute much to this quarter's production outperformance.

[John Freeman, analyst]

Got it. Perfect. And then just the other follow-up for me, in the slides where you all are highlighting the huge drilling and completion efficiency gains that you all had in the Eagle Ford and Uinta, would it be possible to kind of quantify what that would mean in terms of cycle times? I mean, obviously, I see the footage per day and then fluid pumped per day. But is there any way to sort of just ballpark kind of say what that translates to from cycle times just for comparison purposes?

[David Rockecharlie, executive]

Yes. So John, it's David. I think maybe the way you're asking it, we'd respond that it would save us a couple of days a well in the full cycle there. So pretty meaningful improvement given the performance we already were having, call it, a year ago.

[Operator]

Next question comes from the line of Hanwen Chang with Wells Fargo.

[Hanwen Chang, analyst]

With the ongoing efficiency gain in D&C activities you highlighted on Slide 8 and 9, could you discuss the flexibility of your 2024 capital plan? Specifically, would you consider accelerating activity if targeted goals are achieved ahead of schedule?

[David Rockecharlie, executive]

It's David. Great question. I think maybe the best way I can answer that is just as a reminder, our view is that we want to manage the company based on returns on capital, first and foremost. When we deploy capital, we want to make sure we're getting the returns we expect. And our business plan is to maintain or slightly grow production through the drill bit and then really drive our outsized growth opportunistically through M&A.

So in that context, the way we think about rising prices and the opportunity in our asset base, we would not look to accelerate activity into that. I think our basic guidance of a 2- to 3-rig business today is going to remain intact, and that extra free cash flow will come to the benefit of investors in a rising price environment.

[Hanwen Chang, analyst]

Regarding the recent Eagle Ford mineral acquisition, could you elaborate on your appetite for investment in mineral or low-decline conventional assets?

[John Rynd, executive]

This is Clay. So I think we've been consistent on this. We look at everything, in particular focused on our existing kind of footprint. So I think as we think about the mineral acquisition, that was opportunistic, value-driven, within our footprint, an area we know well and accretive. So it kind of checked all the boxes for us from an investment opportunity perspective, most importantly, kind of financially, a strong return opportunity.

And then clearly, we've highlighted the low-decline kind of conventional business as something that we think of as a core strength. And so that's an area where you would expect us to continue to kind of look for opportunity going forward. And if we can find opportunities that fit our framework, expect us to add those where they make sense.

[Operator]

Next question comes from the line of Tarek Hamid with JPMorgan.

[Nevin Mathew, analyst]

This is Nevin on for Tarek. I was wondering if you could touch a bit more on the current acquisition environment, both in the Uinta and the Western Eagle Ford. And which of the 2 is more active from what you're seeing?

[John Rynd, executive]

It's Clay. As David mentioned in the opening remarks, this year has been a very active year, if you look at just M&A activity in the space, but it's been very focused on some just very kind of large corporate transactions.

We'll certainly see, I think, a pickup in activity. We've had a very active year in looking at opportunities across our footprint. We've highlighted through this call the efficiencies and the excitement we're having on the synergy side on the Eagle Ford assets that we acquired last year. So I would clearly expect us to lean into that opportunity from an acquisition perspective where we see value. And so certainly excited about that.

But I'd also say across our asset base, we're excited where we can add where we already operate at value. So I think we're active across the board. But clearly, the efficiency that we're seeing on the recent Eagle Ford side would give us the excitement to find opportunity there.

[Operator]

Ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to David Rockecharlie for closing comments.

[David Rockecharlie, executive]

Great. Thank you all again for joining the call and for supporting the company. And we appreciate the opportunity every quarter to catch up with all of you and look forward to speaking again next time.

[Operator]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.