Crescent Energy Q3 2023 Earnings Call Transcript

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November 7, 2023

There are 8 speakers on the call.

Operator

Ladies and gentlemen, good morning, and welcome to the Crescent Energy Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, This conference is being recorded. It is now my pleasure to introduce your host to Lee Du Bo, SVP of Finance at IR.

Operator

Please go ahead.

Speaker 1

Good morning and thank you for joining Crescend's 3rd quarter conference call. The prepared remarks today will come from our CEO, David Rocacharli and CFO, Randy Kendall our Chief Accounting Officer, Todd Falk And our Executive Vice President of Investments, Clay Rynd, will also be available during the Q and A session. Today's call may contain projections and other forward looking statements within the meaning of federal security laws. These statements are subject to risks and Commodity price volatility, global geopolitical conflicts, our business strategies and other factors that may cause actual results to differ from those 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, which are available on our website.

Speaker 1

With that, I will turn it over to our CEO, David.

Speaker 2

Good morning, and thank you for joining us to discuss our Q3 results. Our message is simple and direct today. This was a record quarter for the business, both operationally and financially. We are doing what we said we would do, generating strong free cash flow, investing capital with disciplined great returns, Delivering exceptional operating performance, including meaningful capital efficiencies and reductions in emissions, with a focus on continuous improvement of our operations, including stewardship of the environment and the communities in which we operate. We're growing through accretive, opportunistic acquisitions, including the successful integration of $850,000,000 of total transactions this year in our core Eagle Ford operating area.

Speaker 2

We're maintaining our strong balance sheet and growing capital markets presence as we continue to scale the business significantly, and we're consistently returning capital to our investors. This quarter's record results solidify that we have the right strategy, Today, I plan to cover 3 key items in more detail: 1st, our operational performance second, our compelling acquisitions 3rd, our sustainability success. 1st, let's discuss operations, where the business is outperforming. We've realized substantial efficiencies on the drilling and completion side as improving cycle times and completion speed have improved well costs by 10%. You will recall that we came into the year with a focus on flexibility, and this has worked strongly in our favor.

Speaker 2

As a reminder, we reduced our full year capital guidance last quarter and with continued solid execution, Not only are we able to deliver our original capital program at lower cost, but also our meaningful outperformance this year in drilling and completion We've been able to do more with less as we are able to accelerate some activity as our drilling returns have improved while still investing less capital

Operator

this year.

Speaker 2

These capital efficiencies are materially enhancing the returns on our development program, where we are consistently earning in excess of 2 times cash on cash returns on a full cycle basis. Importantly, these capital efficiencies have not come at the expense of well performance. Across Nuinta, Our assets have materially outperformed our predecessors due to the higher completion intensity, but we've improved oil recoveries by approximately 25% since taking over OpRegio. Complementing our high returning development program, Our substantial long life producing reserve base consistently provides us with predictable performance. The cash flow stability of our low decline balanced production base Tremendous value proposition relative to our peers.

Speaker 2

Our unique skill set operating both conventional and shale assets allows us to combine stable cash with attractive reinvestment opportunities. Today, we are the only U. S. Focused company generating more than 150,000 barrels of with the lower capital intensity required to maintain production output at Crescent. This intentional portfolio construction, coupled with continuous outperformance on production and capital spend, drives this quarter's record free cash flow as well as our expectations for substantial free cash flow looking ahead to 2024 and beyond.

Speaker 2

Now turning to M and A. Since the Q2, we have closed on 2 previously announced Eagle Ford acquisitions totaling $850,000,000 First, Through our $600,000,000 acquisition of operatorship of the Western Eagle Ford position in July and second, through the acquisition of incremental Western Eagle Ford working interest for $250,000,000 in October. Together, the assets represent approximately 32,000 barrels of oil equivalent per day of liquids weighted net production with a low 16% decline rate and more than $1,000,000,000 of proved developed PV-ten value. The 2 deals doubled our Eagle Ford production and inventory And quadrupled our legacy non operated interest in the Western Eagle Ford to a current operated working interest of 63%. Furthermore, we now operate greater than 90% of our interest in the Eagle Ford, adding scale and operational control in a core region for Crescent.

Speaker 2

To simplify our M and A growth strategy, when evaluating opportunities, we have 2 key objectives. 1st, To buy assets we understand at attractive value, targeting cash on cash returns in excess of 2 times our money. And second, to make those assets better to drive incremental return to shareholders. Regarding this first objective, In our view, the entry prices of our recent acquisitions are highly compelling for 3 key reasons. First, it's nice to buy more of what you already own at a great price.

Speaker 2

We acquired over $1,000,000,000 of proved Developed PV-ten value of $850,000,000 during this summer's pullback in commodity prices. And these assets, we know well through our 6 years as a non operated partner. 2nd, The assets provide us with a significant backlog of high returning Lower Eagle Ford inventory as well as Upper Eagle Ford and Austin Chalk Upside. As outlined on Page 10 of our investor deck, this is a compelling resource base with the Lower Eagle Ford EURs on this asset having outperformed the basin average. That provides us the ability to compound our invested capital And earn in excess of 2 times your money on low risk development.

Speaker 2

In many other recent industry transactions, Buyers have had to ascribe material purchase price value to undeveloped resource, which is part of full cycle returns. And we think our disciplined and opportunistic approach to M and A gives us a leg up on full cycle economics. 3rd, the assets are highly complementary to our existing business, at the lowest decline production, driving financial accretion and providing tangible Operational synergies, which will deliver a return in excess of our underwriting expectations. Turning to the 2nd M and A objective of our growth through acquisition strategy, we seek to bring improved operational execution to the assets we require. Following the closing of the Western Eagle Ford acquisition, we fully integrated the assets ahead of schedule and immediately began to realize synergies, starting with a 20% reduction in well costs relative to the previous operator.

Speaker 2

These cost savings are driven by the same improved cycle times and completions efficiencies, driving down costs across our existing Central Eagle Ford operations. The speed with which we have incorporated the as well as the unique benefits of acquiring assets we know well. To summarize, the Western Eagle Ford acquisitions reflect our strategy in action, adding to our successful track record of buying assets at attractive value and making those assets better. Looking ahead, we will continue to execute on our growth strategy. We saw a huge opportunity for continued accretive acquisitions and firmly believe we have the ability to become an investment grade company over time.

Speaker 2

To us, that means adding size and scale with financial discipline. As we pursue our disciplined growth strategy, we anticipate we will be highly active in the M and A market over the next 12 to 24 months. We expect to be an active participant in the ongoing wave of consolidation in the sector, particularly across our core operating areas in Texas and Rockies. Furthermore, we also believe that we are uniquely positioned to participate on the front and back side of energy sector consolidation activity, Leveraging our broader investment and operational expertise to acquire attractive assets that may be less core to pro form a companies following large cap merger and acquisition activity. Now before handing the call back over to Brandy, I'd like to discuss sustainability, an area that's core to our long term business strategy.

Speaker 2

Yesterday, we published our annual sustainability report. We made substantial progress on our EPS initiatives last year, reducing our absolute Scope 1 emissions to 27%. We monitor and evaluate all of our assets to identify opportunities for improvement and our 2020 progress is primarily achieved Through a carbon sequestration project in Wyoming and the replacement of pneumatic devices. In Wyoming, we are now capturing and sequestering carbon dioxide that was We continue to progress opportunities in our portfolio to increase cash flow from our carbon dioxide business. Within our portfolio, we remain particularly focused on methane emissions and further improving our measurement capabilities.

Speaker 2

As one of the first U. S. Companies to join the GMV 2.0 in early 2022, Our measurement efforts have increased tremendously. Last year, we implemented biannual flyovers across nearly all of our assets, allows us to both expedite and enhance our emissions measurement and detection capabilities. As a company focused on growth through acquisitions, That inherently means acquiring more emissions, but our organization wide emphasis, the proper stewardship ensures we will remain committed to reducing the emissions Randy?

Speaker 3

As David mentioned, we achieved record production and cash flow this quarter, averaging 157 MBOE per day, generating $290,000,000 of adjusted EBITDA and $160,000,000 in levered free cash flow. Importantly, This quarter's results were only inclusive of the impact of the first of our 2 Western Eagle Ford acquisitions, the latter of which will be reflected in the 4th quarter. On capital, we spent $94,000,000 which will be our lightest quarter of the year due to timing of wells turned to sales. During the quarter, we brought online 10 gross operated wells in the Eagle Ford, which are posting strong early time results and are expected to generate in excess of 2 times our Capital invested at current commodity prices. In Q4, we expect both production and capital to increase, bringing our full year results near the midpoint of our capital guidance range by the increase in activity for the year.

Speaker 3

While we are still finalizing our outlook for 2024, as David mentioned, the capital efficiencies we've achieved to date sets us up well as we expect preliminary production of 155 to 160 MBO per day and consistent capital spend to this year, which equates to a 2 to 3 rig program. Maintaining capital spend at today's levels despite a 20% increase in year over year production At these levels, we expect to generate substantial free cash flow for the remainder of 2023 into 2024 and beyond. As highlighted on Pages 1516 of our investor presentation, Crescent's peer leading decline rate and capital efficiency results and significant free cash flow generation at a compelling valuation based on cash flow metrics. Our levered free cash flow over the next 5 years is greater than our current ARPU cash, which is reflected in our approximate 25% free cash flow yield, nearly 50% higher than our peers. With that free cash flow, we expect to maintain our rigorous Commitment to cash flow priorities 1A and 1B, shareholder returns in the balance sheet, while continuing to grow the business opportunistically through a period of acquisition.

Speaker 3

Alongside earnings, we announced a quarterly dividend payment of $0.12 per share, consistent with our publicly stated expectations for 2023 and generating an attractive 4% yield based on recent trading levels. From a balance sheet and capital markets perspective, we have had sustained success in raising capital to We exited the quarter with leverage of 1.4 times and $1,100,000,000 of liquidity, bodes well within our targets. Pro form a for closing the First Western Eagle Ford acquisition, our bank syndicate reaffirmed our $2,000,000,000 borrowing base and $1,300,000,000 ETA. We feel great about where we sit from a balance sheet perspective and we'll continue to use excess free cash flow in the near term to reduce absolute leverage. In the Capital Markets, we successfully raised $600,000,000 of debt and equity in the Q3 to finance the Western Eagle Ford acquisition.

Speaker 3

In September, we priced $155,000,000 primary equity offering, including the overallotment. The offering represented Crescent's inaugural primary issuance and was extremely well received as we were able to upsize the transaction 10% with strong investor demand. The offering demonstrated increased access to capital markets for accretive transactions. Our stock trading up 8% to 9% in the days following and the GreenShoe option exercised less than a week after the shares priced. In addition, we raised $450,000,000 of incremental 20 28 senior notes during the quarter across 2 separate transactions, further enhancing our liquidity profile and in line with our stated preference for longer duration capital in lieu of the bank market.

Speaker 3

The offerings continued our momentum in the bond market and the strong demand is reflective of the benefit from our recent upgrades to BB credit. In summary, we are pleased with our efforts to efficiently access the capital markets to facilitate accretive growth through M and A and advance our strategic goals. Finally, to provide a brief update on our hedging activity. In line with our strategy for serving returns on capital, We layered on additional hedges along with the signing of the 2 recent acquisitions. As we look into 2024, we are less than 6% hedged through a mix of fixed swaps and collars.

Speaker 3

We continue to like our long term commodity exposure, particularly given the low decline, long duration nature of our production base. With that, I'll turn the call back over to David.

Speaker 2

Thank you, Brandy. There are three things we hope you take away from today's call. First, our 3rd quarter performance was exceptional. Record production, record cash flow. We are demonstrating operational efficiencies that will make us stronger and more profitable in 2024 and beyond.

Speaker 2

2nd, We have proven our ability to grow Credo. We have captured high value transactions and financed them in a fashion that maintains a strong balance sheet Highlighted by long term capital, strong liquidity and credit metrics, rating agency upgrades and inclusion in the BB bond. We've created scale, doubling our business in less than 3 years and are well equipped to continue to do so. And lastly, We have a simple value proposition. We believe Crescent is the best risk adjusted stock to own for long term exposure to oil and gas prices.

Speaker 2

We have a lot of ambition and a lot of work ahead, but we are pleased with what we have accomplished to date and we intend to continue to do exactly what we say we're going to do. With that, I'll open it up for Q and A. Operator?

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question is from Michael Schaller with Stephens Inc. Please go ahead.

Speaker 4

Good morning, everybody. It sounds like you have a lot of visibility on free cash flow over the next few years. As you look at 2024, say, absent any additional M and A, is it fair to think that Vast majority of that goes to the balance sheet. Then beyond 2024, you can think about returning more cash to shareholders or are you thinking about

Speaker 2

differently. Yes. Hey, thanks for the question. It's David. I would say, Number 1, thanks for raising it.

Speaker 2

We're all about generating free cash flow. That's the investment proposition for the business. As you probably heard us say, our number one capital allocation priority is return of capital to investors. And as you said, that to us means taking care of the balance sheet. So certainly debt reduction and also paying a cash dividend.

Speaker 2

We're sticking with the capital framework we have today. So yes, I'd guide to sort of more of the same, Just sticking with the same strategy and free cash flow certainly take care of the debt, but we are committed to making sure we maintain a dividend strategy that's appropriate for the market and the investors.

Speaker 4

Okay. And then pretty impressive reduction in your Eagle Ford well costs, immediate 20% reduction there. Is there any Color you can add, I know you have a slide in your deck talking about some of the improved efficiencies. Was any of that Contractual or any major changes in well designs made there?

Speaker 2

Yes. I'd say the good news is That's pretty straightforward. We've been active in the Eagle Ford for a long time. We think we're good at what we do. And this is a great example of taking over an asset we know well and just continuing to execute the way we were on our own assets.

Speaker 2

So we've seen improvement in our business this year, and we were able to apply those improvements further to this acquisition. So I think Operating really well. Nothing specific other than just great execution, but also a really good example of what we're trying to do with the M and A strategy, which is get a great acquisition and value and then enhance that value by doing what we know how to do well. So nothing Unusual there other than just doing a good job. Okay.

Speaker 4

Thank you, David.

Operator

Thank you. Our next question is from Neal Dingmann with Truist Securities. Please go ahead.

Speaker 5

Good morning, all. Nice quarter, as you said, David. My first question is on your reinvestment rate. What I want to ask is, it seems to me that Your solid reinvestment rate often gets overlooked as driven by that low base decline and the efficiencies you all talked about. I just wondered, David, Could you talk about sort of maybe your future expected reinvestment rate and how this will ultimately drive the production free cash flow and shareholder return?

Speaker 2

Yes. I'll start it and then if Brandy wants to add to it, that would be great too. But really good question. I would say that generating free cash flow, maintaining a low reinvestment rate relative to peers is just core to what we do. We've done it For 10 years, we've historically been in about a 40% of EBITDA reinvestment rate.

Speaker 2

It's ticked a little higher recently, mostly with the what I would call the price run up, for the last couple of years, And it gets masked by our hedge program as those hedges are rolling off. 1, I think more cash flow for investors. But secondly, it puts the reinvestment rate more in context. So we've still maintained a 40% to 50% reinvestment rate typically. But I would expect in a levelized world, we're going to outperform peers on that just by the nature of our strategy and commitment to it.

Speaker 2

I think thinking about us in a 40% to 50% range is reasonable.

Speaker 5

Brandi, anything we're hoping to ask if the question will be done?

Speaker 3

Yes. I think David answered it well. I mean that 20% Decline rate that we have is purely dang that translates to a really a capital efficient business that's just much less intense Relative to the broader market, I know we've talked about before, Neil, we're running a 2 to 3 rig maintenance program and That's relative to roughly $155,000,000 a day go forward basis, which I think is pretty unique Relative to the broader market.

Speaker 5

Yes, I would agree. And then just a quick second one on capital and then maybe another shot at capital allocation. David, I appreciate that quarterly dividend focus and the leverage on debt and the quarterly dividend. I guess my question is, do you think it makes any sense to try to buy back any shares given the sort of notably low valuation despite The limited float on the shares?

Speaker 2

Yes. Good question. Happy to Drill down a little more there. The fundamental response, and I'll let Brandy give you some more detail, is we absolutely do consider What I would call share buybacks is part of a solid return of capital program. As you know, we've still got An up fee structure with Class B shares and so that's a place where we've historically done that.

Speaker 2

But I Definitely would highlight that we do think of dividends, taking care of the balance sheet, debt reduction and opportunistic buyback is something that is A well rounded program, but Brandy, you may want to just address the buyback a little more directly.

Speaker 3

Yes. And we've been consistent with how we've talked About our capital markets priorities since we went public almost 2 years ago now, which really was to increase our flow in trading liquidity being one of those Key objectives, I think we've made a lot of progress with half of the company now being floated, trading liquidity up nearly 200%, but still aren't That's really where we are where we want to be from a liquidity standpoint relative to peers, which likely makes a Class A buyback Less actionable in the immediate term. We obviously can still buy back our Class B private shares, which we've done in the past, And we expect to do so in the future, which accomplishes the same objectives of reducing the total number of shares outstanding.

Speaker 5

Great details. Thank you all.

Speaker 3

Thanks, Neil.

Operator

Thank you. Our next question is from Roger Read with Wells Fargo. Please go ahead.

Speaker 6

Yes, thanks. Good morning. Maybe Follow-up on your comments, David, in the opening on the ability to continue to do acquisitions. Maybe just give us an idea Of what the market looks like out there, I mean, something similar to what you've been doing, a step out into a different area as a possibility. And then as an addition to that higher interest rates and what you faced in the 1st couple of years of this strategy, how does that Factor in how you think about funding transactions?

Speaker 6

Or are you seeing valuations adjust to a higher interest rate environment?

Speaker 2

Yes. Great questions. And again, thanks for joining us, Roger. I'll And Brandy and Clay are here with me as well and very actively involved in that part of the business and can contribute after I finish. A couple of things.

Speaker 2

We still see a very active market. It's consistently been a $50,000,000,000 to $100,000,000,000 a year market, my whole career and we You'll see that. And frankly, activity by others tends to create more activity. And so one of the things we did try to highlight This time is large cap consolidation is likely to be good for us. We feel very good.

Speaker 2

So I think we have a good pipeline of opportunities looking forward, and we do like where the macro is as well. Turning to operationally and your comments around portfolio and focus. I think we're very good and getting better in our core areas, and there's a lot still to do there. So I think you can assume we'll continue to do what we have shown we would do, which is Expand our core areas. We are value driven.

Speaker 2

And so if we are good at something, have the skills to do it and we can Find great value. We certainly think that we have the broadest ability in the sector in terms of scope of what we look at. But I wouldn't take that as a hint that we're going to get distracted. I think we like what we're doing. And then lastly, I'd say a couple of things on the financial markets.

Speaker 2

We believe as long as you're patient, the valuations, both on the equity and debt will translate into the M and A market and they typically do relatively swiftly. We're starting to see that happen. And I'd say one of the great things about The way we're positioned today, we've proven our ability to access the public markets. We've grown our presence there. And while the Cost of debt has gone up.

Speaker 2

We're a BB company now, and we've been able to push our relative cost of capital down over the time period as a public company. So I think you should just expect that we're continuing to try to do all of those things. And the only reason we will transact is because We think it will create significant value enhancement for the shareholders.

Speaker 6

Great. Thank you.

Speaker 2

Great. Thank you.

Operator

Thank you. Our next question is from the line of John Abbott with Bank of America. Please go ahead.

Speaker 7

Hey, good morning and thank you for taking Our only two questions are really about 2024. So in terms of your sort of production outlook, So based off your results during this quarter and for your 2023 guidance, And you're pulling activity, some activity in from 2024. And Brandon, you gave us a range of 100 and 5,000 to 160,000 BOE per day for 2024. Just given the acceleration of activity into 20 23? Why wouldn't we think that you shouldn't be at the high end of that production range?

Speaker 3

For 2023? No, 2024.

Speaker 7

Before into 2024. A lot of earnings out there. So Yes. You have accelerated activity into 2023 and your guidance range for 2024 is 155,000 to 160,000 BOE per day. Was the accelerated activity, why wouldn't you be at the high end of that production range?

Speaker 3

Hey, John, it's Brandy. So I think As David hit on, right, we've had great operational execution all year from a drilling and completion standpoint. I think that sets us up incredibly well As we look into 2024. So I mean, I think it's we feel comfortable just given where we sit with Our preliminary budget at the $155,000,000 to $160,000,000 makes sense relative to A capital program of roughly $600,000,000 which is in line with what we spent this year, despite the base production is higher. So I think that's still a fair range.

Speaker 3

I think if you end up somewhere in that range, that's good. But yes, I think there's a chance that we could Yes, the top end of the range. But we'll look to provide more formal guidance in the next couple of months on 2024. Okay.

Speaker 7

Maybe I'm reaching a little bit here. But for 2024, any it looks like And it looks like your end has been a high point in terms of production in 4Q 2023. So any sort of color on the trajectory Production in 2024?

Speaker 3

Yes. I would expect it to be relatively consistent both from a production and capital Standpoint over the course of next year, ultimately it will be impacted on when wells are coming online. But I think for now, If you modeled it fairly consistent throughout the year, I think that's a good assumption.

Speaker 7

All right. Thank you very much for taking our question.

Speaker 3

Thanks, John.

Operator

Thank you. As for further questions, the conference of Crescent Energy has now concluded. Thank you for your participation. You may now disconnect your line.

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