Crescent Energy Co

NYSE:CRGY

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the Contango fourth quarter and year end results conference call. At this point, all the participants’ lines are in a listen-only mode. [Operator Instructions].. As a reminder, today’s call is being recorded.

I’ll turn the conference now to Mr. Wilkie Colyer, President and Chief Executive Officer. Please go ahead, sir.

[Wilkie Colyer, President, Chief Executive Officer]

Thanks John. Before we begin, I want to remind everybody that the earnings press release and the related discussion this morning may contain forward-looking statements as defined by the Securities and Exchange Commission, which may include comments and assumptions concerning Contango’s strategic plans, expectations, and objectives for future operations. Such statements are based on assumptions we believe to be appropriate under the circumstances; however, those statements are just estimates, are not guarantees of future performance or results, and therefore should be considered in that context.

Good morning and welcome to Contango’s fourth quarter 2018 earnings call. My name is Wilkie Colyer and I’m the President and CEO of Contango. I’ll assume again this quarter that everyone has had time to read through yesterday’s earnings press release, including the cautionary statements regarding forward-looking information and the non-GAAP measures that apply to the statements on this call, so I’ll avoid repeating what’s in the press release and move on to color around our progress at the company since the last time we talked.

Recall that I discussed a few primary priorities for the company during our last call. The first is to better align our cost structure with the size of our company. To that end, we have reduced headcount, amended our office lease, and cut unnecessary costs that together we believe will result in a reduction in 2019 cash G&A of $7.2 million or 37%. That increase is north of 40% run rate once our existing office lease expires at the end of the month, and that’s without any expected negative impact to our operating capabilities.

Another priority we discussed last quarter was our increase in commitment to hedging. We are hedged [indiscernible] maximum extent allowed on PDP this year and are currently looking to layer on hedges for next year as markets allow. Expect hedging to be an important component of our business model as long as we carry debt on our balance sheet.

The third and ultimately most important priority to long term shareholders is capital allocation. During Q4, we were able to bolt on 1,900 acres near our existing Bullseye asset in Pecos County, which we refer to as Northeast Bullseye, and I believe we’ve put a presentation, a one-pager on the website that you can find in the Events and Presentations which shows the Northeast Bullseye map in relation to our existing Bullseye proper. This is, of course, an area we know well and is a good example of our willingness to be opportunistic in adding to our asset portfolio when the price is right. We have seen impressive results from our competitors in the immediate area, both in the Wolfcamp and in the Bone Spring zones, and hope to emulate their results in our program.

Most of our capital dollars this year will be focused on this area where we plan to drill and complete three to four gross wells during the middle part of 2019. Our first well, the Iron Snake, I believe the press release that was being spudded in late March, and we actually expect to spud that later today. The other wells we definitely plan to drill and complete this year in Northeast Bullseye are the Old Ironside 1H and the Breakthrough State 1H, and you’ll see those three wells denoted with the number 3 on the map on the website.

In addition to capital spend at Northeast Bullseye, we will drill and complete one well in Bullseye, the American Hornet 1H denoted with the 1 on the map, and this is right next to, as you’ll recall, our General Paxton well which we drilled in Q3 that’s been one of our best performers thus far. We plan to complete the Ripper 2H, which is a drilled but uncompleted well denoted 2 later this year. The balance of this year’s CapEx will be spent on two non-op wells in Dimmit and Zavala Counties.

We continue to view development of undeveloped but HBPed inventory in the current environment as unwise, so I don’t expect to add wells to the 2019 drilling schedule beyond what we’ve just discussed.

We continue to work with our advisors on strategic alternatives, as announced during the last call. While we are still early on our process, we believe our asset base, low leverage, and simple capital structure gives us attractive options to take advantage of the current sustained weakness in the energy markets. Insiders continue to be the largest shareholders in this company and we believe there is no better way to properly align management and owners in creating value for Contango.

Thanks for your time today and for your interest in Contango. With that, I’m ready to open the line for questions.

[Operator]

[Operator instructions]

First we’re going to Ron Mills with Johnson Rice. Please go ahead.

[Duncan McIntosh, Johnson Rice]

Hey, good morning guys. This is actually Dun McIntosh on for Ron. I was wondering for the 2019 plan, you talked about $30 million in spending. Is that a good number to think about kind of as maintenance capex or going forward over the year and kind of beyond, how do we think about the spend and growth?

[Wilkie Colyer, President, Chief Executive Officer]

Yes, I wouldn’t -- I don’t think about it as maintenance capex. I think one thing that we think about is how much cash flow will we be generating, and I think what we want to avoid is sort of the persistent cash flow outspend that we’ve had in previous years. When I think about the $30 million, I think about it as how do I put the cash flow that we’re generating to work at the highest possible return and over time the output of that should be growing production, but that’s not the goal. It’s sort of the output and not the input.

[Duncan McIntosh, Johnson Rice]

Okay, thanks. Then congrats on the Northeast Bullseye acquisition. Kind of any other opportunities in Pecos, particularly for kind of [indiscernible]? It looks like you’ve got some one-off sections that are kind of out there, just further opportunities to pick up opportunistically, I guess the acreage here and there, what that looks like?

[Wilkie Colyer, President, Chief Executive Officer]

That’s certainly something we’ll continue to monitor. We try to be very, very judicious in how we think about spending capital, particularly on inorganic assets, and so we do feel like particularly with this addition of Northeast Bullseye, that adds a lot of inventory for us. I think with companies of this size, you always kind of want to maintain a balance between adding cash flow and potentially adding growth assets, and this is certainly a growth asset, so we won’t rule anything out. We think there are certainly opportunities to add to our portfolio, but we just want to be really careful that we’re not adding growth assets too aggressively because we need not just the capital to acquire those, but also the capital to develop them, so we’ve got to think about those -- both of those things in tandem when we think about continuing to add acreage in Pecos.

[Duncan McIntosh, Johnson Rice]

All right, great. Thanks Wilkie, that’s it for me.

[Wilkie Colyer, President, Chief Executive Officer]

Thank you.

[Operator]

Mr. Colyer, no further questions in queue. Any closing comments?

[Wilkie Colyer, President, Chief Executive Officer]

All right, well no further questions. I really appreciate everybody’s time and again interest in Contango, and we look forward to catching back up with you when we’re ready to report Q1 results. Thanks everybody and have a great morning.

[Operator]

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.