Crescent Energy Co

NYSE:CRGY

Earnings Call Transcript 2019-Q4

[Operator]

Good day, ladies and gentlemen, and welcome to Contango Fourth Quarter and Year-End Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Wilkie Colyer. Please go ahead.

[Wilkie Colyer, President and Chief Executive Officer]

Thank you. Good morning, and welcome to Contango’s fourth quarter 2019 earnings call. My name is Wilkie Colyer, and I’m the President and CEO of Contango. I am joined by Farley Dakan, the company’s Head of Corporate Development; and Joe Grady, the company’s Chief Financial Officer.

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

As noted in our press release last night, the fourth quarter was a very busy one for Contango. Early in the quarter we closed on the White Star and Will Energy acquisitions, expanded our bank group and facility size, and enhanced our management team and Board. Cash at closing for White Star of just under $96 million was significantly less than the headline number of $132.5 million as projected due to customary proposed effective date adjustments. The integration effort of these three businesses is still ongoing and we are deeply appreciative of Contango employees across all disciplines in working together to get the job done.

Late in the quarter, we announced a joint development agreement in the Gulf of Mexico with Juneau Oil & Gas along with our first exploration prospect, the Iron Flea located in the Grand Isle 45 area. During the quarter, we raised over $78 million of equity capital in a very challenging market to help fund our acquisitions. We also brought online three wells in our Northeast Bullseye area and a fourth in January that are performing at or above our expectations in the aggregate.

Subsequent to quarter end, the COVID-19 outbreak has put unprecedented pressure on businesses in general. In the oil and gas business, the outbreak coupled with the Saudi-Russia price war has magnified downward pressure on commodity prices, especially oil. And the speed at which fundamentals have changed is somewhat unprecedented. Fortunately, we are better positioned than most of our peers to weather this storm.

First, we have manageable debt levels and low leverage, and a simple capital structure comprised of only paying debt and equity. Second, we have a solid hedge book in 2020 with 70% of our total forecasted PDP oil production hedged at an average price of $55.13 a barrel and 68% of total forecasted PDP gas production hedged at an average price of $2.57 per MCF. In 2021, we have 67% of total forecasted PDP oil production hedged at $51.71 a barrel and 57% of total forecasted PDP gas production at an average price of $2.49 per MCF. We also added hedges for 75% of total forecasted PDP gas production in the first quarter of 2022 at $2.54 per MCF.

The mark-to-market value of our hedge book as of Friday close was approximately $42 million, which excludes $3.6 million of net realized hedge settlements thus far in 2020. While we believe current commodity prices are unsustainable and short-term in nature, waiting for a rebound isn't a strategy. So what's Contango’s 2020 strategy in response to the changing commodity prices?

Let's start with what hasn't changed. Our number one focus is free cash flow generation, which we expect even at current prices to pay down debt while operating in a safe and responsible manner. Number two is shareholder alignment. Insiders continue to be the largest holders of Contango’s common stock and we will continue to have a goal of maximizing value for our stockholders. Number three is LOE reductions. We will continue to look for ways to operate in a more efficient manner and the recent drop in prices and activity should give us more opportunity to renegotiate these rates. Number four is our commitment to the Iron Flea. This is in our opinion one of the few exploration projects that works at current commodity prices and we plan to spud that well on time and on budget around May 1st.

We are unaware of anything in the U.S. that produces a better return on a success case than the Iron Flea and for such low relative risk with a turnkey dry hole cost of $6.3 million net to our interest. Importantly, we believe we have partnered with a best-in-class group in Juneau to generate attractive rate of return projects on the Gulf of Mexico shelf starting with the Iron Flea.

What has changed? First, workover capital spending. We have cut workover rigs in Central Oklahoma from three rigs to one. Production should be impacted by this decision to some degree, but it also increases the percentage of oil production that had hedged at prices well above current strip. The contribution margin dollars of unhedged production is less critical to us without the burden of unsecured debt or preferred interest payments. Second, we need to get creative. Really the only asset class in the oil and gas industry, which isn't increased in value in the last month, is latent storage capacity which we have in spades.

We estimate that we have roughly three quarters of 1 million barrels of crude capacity between our Cushing and field storage in Central Oklahoma. Even the super-contango that exists in the WTI futures curve currently, one can potentially generate a 20% one month return and a 75% one year return by storing a barrel of crude versus selling it on the spot market. We are evaluating options to store and then sell what unhedged barrels we have in the futures market, sacrificing immediate cash flow in favor of higher cash flow six to 12 months out. This will also increase our percentage of production that is hedged at well above market prices.

Last, how we play offense will change. We believe that while bankruptcies will increase as a result of the decline in commodity and asset prices, transactions will decrease as the high bid at current strip maybe unattainable for creditors to transact at. We will aim to be more creative in coming up with solutions for non-natural owners of assets and are intently focused on opportunities to grow inorganically.

I'd like to end my prepared remarks by thanking all the employees of Contango for their hard work and dedication during a pivotal time in the company's transformation. We've been able to deepen our bench of talent and expertise via the aforementioned acquisitions. We have a phenomenal team from the pumpers all the way up, and they are critical to our company's success, particularly in light of the recent headwinds facing our industry.

Thanks for your time this morning, and for your interest in Contango. With that operator, we're ready to open up the line for any questions.

[Operator]

It appears we have no questions at this time. I do want to turn it back to your speakers for any additional or closing remarks.

[Wilkie Colyer, President and Chief Executive Officer]

Thanks again for everybody's time this morning. And please be safe out there with everything that's going on. If you have any follow-up questions, you know where to find us and otherwise we look forward to updating you at our next quarterly earnings update. Thanks again and have a great day.

[Operator]

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.