Crescent Energy Co

NYSE:CRGY

Earnings Call Transcript 2023-Q2

[Operator]

Greetings, and welcome to Crescent Energy's Second Quarter 2023 Results Conference Call. [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, IR]

Good morning and thank you for joining Crescent's second 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 President, will also be available during the Q&A.

Today's call may contain projections and other forward-looking statements within the meaning of federal securities laws. These statements are subject to risks and uncertainties, including commodity-side volatility, global geopolitical complex, 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'll turn the call over to David.

[David Rockecharlie, CEO and Director]

Good morning, and thank you for joining us today. Our outstanding second quarter results continue the strong momentum that we've created since entering the public markets. Crescent remains uniquely positioned to navigate the current energy market dynamics, and we're excited to share our recent achievements with you today. Our second quarter results exceeded estimates across key categories due to strong operational performance and efficiencies achieved on our development program. Our successful execution allows us to raise our full year outlook, increasing production and cash flow expectations with significantly less capital investment.

Importantly, we achieved several strategic objectives since our last update, adding to our scale and operated position through the closing of the accretive Western Eagle Ford transaction and improving our capital markets presence through increased float and opportunistic notes offering.

Let me discuss the quarter under 3 key themes: financial, operational and strategic. First, let's cover our financial results. Our second quarter results outperformed expectations with net production of approximately 140,000 barrels of oil equivalent per day and $50 million of levered free cash flow. We invested $150 million of capital during the quarter, coming in lower than expected and beating estimates as we continue to realize efficiencies through improved cycle times and optimized completions, both of which I'll touch on in more detail.

Improving capital efficiencies are allowing us to realize a 10% reduction in drilling and completion cost per foot relative to 2022 levels. Additionally, we generated EBITDA of $225 million, also above estimates, reflecting higher production through strong well performance and our oil cut ticking higher to 46%. Our strong performance year-to-date has allowed us to raise our 2023 outlook. To give you the punchline, we are doing more with less, generating more production with significantly less capital. Our revised guidance increased net production to 146,000 barrels of oil equivalent per day at the midpoint, while capital expenditures, excluding acquisitions, decreased by 10% to $600 million at the midpoint.

With the majority of our CapEx incurred year-to-date at current commodity prices, we expect to generate significant free cash flow for the remainder of the year, which we intend to allocate to debt repayment and the dividend. Second, I'll provide an update on operations. We are seeing strong well performance, D&C cost reductions and sustainable capital efficiencies, improving cycle times in the Eagle Ford, which has decreased by as much as 20%, are continuing to drive down costs.

And on the completion side, while we touched on improving efficiencies in the past, we're beginning to see those translate into cash flow. In the Uinta, our completion designs continue to generate consistent well productivity at reduced costs, increasing our return on capital. On top of our improving efficiencies, we're beginning to see some softening in the service market, which could lead to further upside to our capital costs. Today, we are well positioned to benefit due to the short-term nature of our service contracts, which would allow us to more quickly realize cost efficiencies and capture capital savings in a deflationary environment.

Lastly, I'll touch on some of our recent strategic accomplishments. In early July, we closed on the acquisition of the Western Eagle Ford assets and are safely and effectively integrating the assets into our operations. While it is still early, we anticipate a smooth process, given our long-standing involvement in the assets as a non-operated partner and our institutional knowledge from our offsetting Eagle Ford operations.

Across the market more broadly, this past quarter was highly active for upstream A&D, and we continue to keep our pulse on the market for value-accretive opportunities. We remain focused on areas where we can add meaningful scale with an emphasis on our existing footprint across Texas and the Rockies.

We are a natural acquirer of assets in the Eagle Ford, which remains the most fragmented of the major basins. Like the Western Eagle Ford acquisition, any opportunity we pursue must meet our returns-driven framework with an emphasis on cash-on-cash returns and accretion, all while maintaining our strong balance sheet. The transaction remains an excellent example of our opportunistic growth strategy to add scale, long-life reserves and proven inventory in areas where we have existing operations and a competitive advantage.

Relative to other opportunities on the market, we believe this acquisition was an attractive way to add cash flow and reinvestment opportunities. Across recent Permian transactions in particular, where many assets faced steep production declines and undeveloped inventory continues to see real value allocation for buyers, we believe our expected returns will be highly competitive on a full cycle basis.

I'll turn the call over to Brandi, who will discuss recent strategic accomplishments, including recent capital markets activity and an update on our balance sheet. Brandi?

[Brandi Kendall, CFO and Director]

Thanks, David. We made great progress in the capital markets and improved access to both the equity and debt capital markets while maintaining our strong balance sheet. The recent Class A conversion, which increased our public float from 29% to 45% was a highly strategic transaction and in line with our stated priorities to increase our float, research coverage and market awareness. We expect that conversion to drive incremental demand from passive investors and believe it represents a key step towards simplifying our corporate structure.

Importantly, there was no dilution to existing shareholders, and the Class A shares were distributed to predominantly large institutional investors with experience in managing public equity space.

The Class A shares are subject to customary legal trading obstructions associated with restricted securities.

KKR do not participate directly in the conversion and remains a long-term holder and alongside our Chairman, John Goff, continue to jointly hold their significant 22% entire ownership in the business. Following the close of the Western Eagle Ford acquisition and completion of the Class A conversion, we received a ratings upgrade from S&P. And we're added to the BB high-yield index, which means we will have a positive impact on our liquidity and future cost of capital.

This follows the upgrade we received from Moody's earlier this year. And we are pleased that the agencies recognize the strength of our business and our consistent execution. Following the upgrade, we executed an upsized $300 million cap-on note offering with proceeds used to repay a portion of our revolver borrowings associated with the acquisition.

Over the long term, we remain focused on achieving our goal of becoming an investment-grade company, which requires increasing our scale in a financially prudent way.

Now to provide an update on the balance sheet. Following the close of the $600 million Western Eagle Ford acquisition and associated cap-on notes offering, we maintained our strong financial position with an estimated net LTM leverage ratio below 1.5x and approximately $800 million of liquidity.

This is in line with our goal of remaining between 1.0x and 1.5x on a net leverage basis with more than $500 million of liquidity. We expect our strong outlook for free cash flow will allow us to further reduce absolute debt in line with our long-term leverage target of 1.0x net debt to EBITDA.

Alongside the closing of the acquisition, our leverage reaffirmed our $2 billion borrowing base and $1.3 billion electric commitment amount. Our strong banking relationships have been critical in helping us navigate recent volatility in the bank market over the last few months.

Additionally, consistent with our hedging practices, we added derivatives amount by the announcement of the acquisition to further preserve the returns on our invested capital. Pro forma for the closing of the transaction were approximately 45% hedged for the balance of 2023 and less than 30% hedged for 2024 and only 6% of our total proved developed reserves hedged today. We continue to like our long-term exposure to commodity prices.

Lastly, we announced the second quarter cash dividend of $0.12 per share, which represents a 4% annualized yield. Our shareholder return continues to compare favorably to our peer group and remains a key part of the value proposition we offer investors today.

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

[David Rockecharlie, CEO and Director]

Thank you, Brandi, and thank you all for dialing in today. In summary, our solid performance year-to-date sets us up well for the balance of 2023, and we expect to enter 2024 with significant momentum. Going forward, we intend to continue to do what we have always done, execute on our long-term proven strategy to deliver stable cash flow, opportunistically grow the business through accretive M&A while maintaining financial strength. In doing so, we'll continue to hold ourselves to our guiding principles of cash flow, risk management and returns.

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

[Operator]

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

[Neal Dingmann, Truist Securities]

My first question is on well productivity specifically. Certainly, it was a nice ramp or noticeable ramp in the oil cut and just overall margins that we show. Just wondering, could you talk maybe, Dave, for you or Brandi, I was just wondering, was this driven more in one area over the other? Like you went over the Eagle Ford, and was there anything different operationally that drove this?

[Brandi Kendall, CFO and Director]

We were running one rig in both basins during the quarter. Those are oily reservoirs. So as you mentioned, right, it really was our development program there driving the oil cut from 43% last quarter to 46% this quarter.

[Neal Dingmann, Truist Securities]

Okay. Great to see. I mean, certainly, those will increase. And then my second was just on that Slide 23, really interesting to see about the amount of CO2/CCUS-related to upside. I'm just wondering, can you all speak to the -- I know this more still hypothetical a bit, but just the cash flow potential of your -- when looking at the CO2 pipeline and storage assets and just when thinking about the cash flow potential and maybe what options are?

I mean, is it to partner? It looks like there's a lot of big operators around here, how you are seeing the opportunities and potential upside.

[Clay Rynd, EVP of Investments]

Neal, it's Clay. Yes, listen, I think you hit it. It's clearly early up here, but there's some obvious enthusiasm around the activity, in particular out of some of the bigger operators, as you know, and our opportunity here.

So I think the intention of putting that out was just to highlight that our Rockies conditional business is currently capturing and selling CO2. We're transporting it on a pipeline that we own, and we're sequestering it for EOR and fields that we operate.

So we're kind of in all phases of the opportunity set. And I think too early for us to say specifically on cash flow, but we're moving a fair amount of the molecule. And we think the combination of the infield kind of assets and infrastructure plus kind of the commercial mindset and investor focus we bring to the business positions us really well to capture opportunity here as we move forward.

[Operator]

Our next question comes from the line of John Abbott with Bank of America.

[John Abbott, Bank of America]

The first question is for you there, David. Just wanted to sort your latest thoughts. We liked kind of the conversion of the B shares into A shares that you did. What are your latest thoughts on further simplifying the corporate structure at this point in time?

[David Rockecharlie, CEO and Director]

Yes. Thanks, John, and good to hear from you. I think hopefully, what we've demonstrated since we've gone public across the whole business is that we do see opportunities to simplify as we scale. So as you know, we've continued to grow in core areas in our acquisitions.

And I think you can look at the recent step to convert those B shares into A shares as a further demonstration that we think we'll simplify that dual class up fee structure over time.

So I think the way we've always said it is this type of structure generally goes away over time, and you're seeing us take steps to do that. Again, it doesn't impact the business at all, but we do recognize that it's valuable to continue to consolidate the business in a lot of different ways. And I think you just expect that we'll continue to do that.

[John Abbott, Bank of America]

Appreciate it. And then just for the follow-up question here. I mean just given the efficiency gains that you saw during the quarter, it's still kind of early, but what are your sort of high-level thoughts as you sort of look to 2024 and how you sort of think about production, CapEx and those sorts of items at this point in time?

[Brandi Kendall, CFO and Director]

John, it's Brandi. I'll take this. So I'll just start by caveating that it's still really early into the integration process with the new acquisition, and we still haven't finalized our '24 program. But at a high level, we'd expect our business to still be a 2- to 3-rig maintenance program across the Eagle Ford and the Uinta and that equates to roughly a $600 million to $700 million capital program and plus or minus 150 a day on production going forward.

[Operator]

There are no further questions in the queue. I'd like to hand it back to David Rockecharlie for closing remarks.

[David Rockecharlie, CEO and Director]

Great. Thank you all again for joining us and for supporting the company. You can count on us to continue to execute the strategy that we've set forward and continue to do what we said we're going to do. So look forward to keeping you updated and talk to everybody next quarter.

[Operator]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.