Crescent Energy Co

NYSE:CRGY

Earnings Call Transcript 2020-Q2

[Operator]

Good day and welcome to the Contango Second Quarter 2020 Results Conference. At this time, I would like to turn the conference over to Wilkie Colyer. Please go ahead, sir.

[Wilkie Colyer, President and Chief Executive Officer]

Thank you. Good morning, and welcome to Contango's second quarter 2020 earnings call. My name is Wilkie Colyer and I'm the Chief Executive Officer of Contango. I'm joined by Farley Dakan, the Company's President, and Joe Grady, the Company's Chief Financial Officer.

I hope everyone has had time to read through yesterday's – this morning's earnings press release, including the cautionary statements regarding forward-looking information and non-GAAP measures that apply to the statements on this call.

On our last quarterly earnings call in late June, we reiterated Contango's internal or organic goals for the year, which had not changed. One, free cash flow generation, still our biggest focus and still expected over the course of this year in the current commodity price environment.

Two, LOE reductions. This has been a huge focus for us, as evidenced by the beat this quarter on operating costs. Partially, this is due to our reduction in workover rig during the quarter, but we were still able to beat the high end to production guidance in spite of the workover reduction. The added benefit for LOE reductions is an increase in reserve value, none of which is reflected in our year end 2019 reserve values.

Three, hedges. Our hedge book remains valuable and core to our operating strategy. Importantly, because we came into the pandemic well hedged, we were able to avoid incremental hedging at the low prices experienced in the second quarter. We are 70% and 67% hedged on forecasted oil GDP this year and next.

Four, storage. Our latent storage capacity in Central Oklahoma allowed us to avoid selling unhedged barrels into a very weak crude market in Q2. We are now selling those barrels this quarter at a materially higher spot crude price.

During Q2 and subsequent to the quarter, we have been working diligently in integrating the Mid-Con Energy Partners assets and human capital into our platform. We are proud to have enhanced our management team via the appointment of two Mid-Con executives, Chad Roller and Chad McLawhorn to the positions of Chief Operating Officer and General Counsel, respectively.

In addition, we have hired several technical professionals from Mid-Con. I have relationships with these people dating back several years and we are excited to add their expertise in enhanced oil recovery assets to Contango, which is a niche asset class in upstream that we have interest in pursuing. Enhanced oil recovery assets are typically very low decline and long lived, making them ideal assets to own in a rising crude environment.

Now, I'd like to spend some time talking about our pipeline of opportunities. In the last several months, we have evaluated a pre-reorganization distressed Mid-Con player, a first lien loan outright purchase at a discount, bond purchases, in court reorganizations, 363 sales, as well as M&A. We are less concerned with the existing structure of the investment and more concerned with the underlying asset value, how to get to it and how to maximize that value for our shareholders.

The number of opportunities has increased substantially over the past quarter, and we are actively tracking bankruptcies, missed interest payments and debt defaults. As of July 31, 2020, there have been 32 bankruptcies with an aggregate debt balance of $49 billion. Each one of these situations is unique, and we believe our flexible mandate, permanent and supportive capital structure, and long term investment horizon gives us a competitive advantage in these types of situations.

For our counterparties, our ability to be flexible with how we transact, coupled with the elimination of standalone G&A, and restructuring expenses make us an attractive option. In certain cases, we may elect to wait until post reorganization to transact to minimize friction costs and the unpredictability of the outcome for Contango. In either case, we believe that the Contango platform is well-positioned to capitalize on these opportunities.

I'd also like to comment on the recent share registrations statements filed by the company on behalf of certain insider individuals, including myself. These registration statements relate to the issuance of preferred stock from the private placement capital raises in 2019. Although the phrase selling shareholders is used to describe the holders of stock covered by these statements, it does not necessarily mean that those individuals or entities are selling or will sell any stock. And none of the insiders, meaning, Goff, Dakan or Colyer have sold any shares of stock dating back to our active involvement with Contango, as we believe in a strategy in the direction of the company.

These preferred shares were pari passu in right of liquidation with the common shares, paid no dividend, and given the illiquid nature of the security would probably be considered inferior securities relative to common shares. We issued them because it allowed us to raise equity capital when our authorized share count wouldn't allow us to issue incremental common shares, and in a way, so as not to disadvantage minority shareholders, we now have no outstanding preferred shares as all have been converted to common.

I'd like to end my prepared remarks by thanking all the employees of Contango for their hard work and dedication to the company during these difficult times in our industry and country, and welcome the new employees at Contango, who came over from Mid-Con and elsewhere. Thank you for your time this morning and for your interest in Contango.

With that operator, we are ready to open up the line for questions from the analyst community.

[Operator]

Thank you. [Operator Instructions] We will now take our first question. Please go ahead.

[Unidentified Analyst]

Hey, Wilkie. It's Mike with DWS. Can you just address your ability to get your debt below $75 million by September 30, per your revised borrowing base with your lending consortium?

[Wilkie Colyer, President and Chief Executive Officer]

Yeah. Hey, Mike. Thanks. So as you pointed out, we do have a borrowing base to drop down from $85 million to $75 million in the end of September, and I would just say that, you know, as you might imagine, we worked with banks in sort of drafting these during the spring re-determinations. And we have every confidence that those are achievable drop downs, and look forward to hopefully higher-priced decks, the next time we revisit the borrowing base season here in the fall. Hope that helps.

[Unidentified Analyst]

Great, yeah. Thank you.

[Operator]

We will now take our next question. Please go ahead.

[Brett Hendrickson, Nokomis]

Hi. This is Brett Hendrickson with Nokomis. Can you guys hear me?

[Wilkie Colyer, President and Chief Executive Officer]

Yes, we can hear you.

[Brett Hendrickson, Nokomis]

Hey, good morning. Thanks for taking my question. I was just curious in terms of plugging and abandonment, cash needed to be spent on that over the next 12 or 18 months, is that is very material? Do you line of sight on that?

[Wilkie Colyer, President and Chief Executive Officer]

Yeah, thank you for the question. It is not. You know, unlike a lot of guys who have big well counts, especially when it's offshore, you can end up having pretty big P&A obligations, we have very little of those. And I think, offshore is really the place where you have to focus on at the most. As you know, we had single-digit active well count offshore. And so we have no offshore P&A scheduled this year and very minimal P&A scheduled this year and next.

[Brett Hendrickson, Nokomis]

Okay. And then do you have - if I'm just calculating your leverage ratio here, I think it's - I think, obviously, you're hoping to get the EBITDA via some things with MCEP and so forth. But if I just annualize the 7.5, I think you're at about 2.7 times leverage. So do you have plans to do either further action in the capital markets or some other action to get to work that leverage ratio down? I know it's not going to be with the drill bit, but at least for the next few quarters. So I was wondering what your plans are there?

[Wilkie Colyer, President and Chief Executive Officer]

Yeah. No, it's a fair question. Look, I’d just say that Q2, if you annualize that, for a lot of people, it's pretty ugly number, just given the strip that you saw during that quarter. So fortunately, we use trailing 12 month leverage ratios as we look at – as we look at it internally and then with our lending and equity partners. So we don't see leverage as being an issue and that number is - you know, the number you just mentioned was materially higher than anything that we'd be looking at on a rolling 12 month basis.

[Brett Hendrickson, Nokomis]

Good point. And then just want to understand the borrowing base steps down to $75 million, but is there any other - I think I read in the release something that implied there was a few million - is the actual availability going to be $75 million or is it going to be somewhat less? Is there something else in that calculation that we're missing?

[Wilkie Colyer, President and Chief Executive Officer]

There's a small difference there. The only difference between sort of borrowing base availability and the actual borrowing base number is letters of credit outstanding. So we have - I believe it's about $1.9 million in a letter of credit outstanding across the company. And that's the only thing that would reduce that. Now, if that's lifted at some point, that would be incremental, but it's relatively minor.

[Brett Hendrickson, Nokomis]

Okay. And you said that's just a $1 million and change right now?

[Wilkie Colyer, President and Chief Executive Officer]

Yes.

[Brett Hendrickson, Nokomis]

Okay. Okay. Thanks for your time.

[Wilkie Colyer, President and Chief Executive Officer]

Thank you.

[Operator]

There are no questions in telephone queue at this time.

[Wilkie Colyer, President and Chief Executive Officer]

Awesome. Well, thank everyone for taking the time and for your interest in Contango this morning. Anyone who has follow-up questions, please feel free to reach out to any of the three of us on the phone. And otherwise, we look forward to talking to you again in November. Thanks.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.