Crescent Energy Q2 2024 Earnings Call Transcript

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August 6, 2024

There are 10 speakers on the call.

Operator

Ladies and gentlemen, greetings and welcome to the Crescent Energy Q2 twenty twenty four Results 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, Reed Gallagher.

Operator

Please go ahead.

Speaker 1

Good morning, and thank you for joining Crescent's Q2 2024 Conference Call. Our prepared remarks today will come from our CEO, David Rockacharli and CFO, Randy Kendall our Chief Accounting Officer, Todd Falk and our Executive Vice President of Investments, Clay Rynd, will also be available during Q and A. Today's call may contain projections and other forward looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties, including commodity price volatility, global geopolitical conflict, 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.

Speaker 1

In addition, today's discussion may include disclosure regarding non GAAP financial measures. For 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 will turn it over to our CEO, David.

Speaker 2

Good morning, and thank you for joining us. We have another great quarter to go over today, and we're eager to get started. Before we get into the details, I want to begin with a few key points I hope you take away from this call. 1st, our stand alone business continues to produce strong results, generating significant cash flow and attractive returns on our invested capital. We are increasing standalone guidance for production for the 2nd time this year and improving our expectations for capital spend as the team continues to capture efficiencies in our development program.

Speaker 2

2nd, we closed on our transformative acquisition of SilverBow Resources. We are grateful for the trust from our original Crescent shareholders and our new SilverBow shareholders who voted almost unanimously to approve our merger and elected to take equity consideration in order to participate in the go forward company, highlighting their belief in the value proposition ahead. This complementary and accretive combination represents another major step forward for our business, creating a premier growth through acquisition company with one of the largest positions in the Eagle Ford. Today, we are focused on rapidly integrating our new assets and personnel and delivering on the significant synergies we've identified. The SilverBow assets enhance our overall business profile, which combines a substantial base of long life, low decline production and a deep inventory of proven development locations to drive advantaged stability of production and free cash flow generation.

Speaker 2

And finally, Crescent has never been better positioned. Through disciplined investing and operations, we've delivered profitable growth of both production and cash flow, tripling the size of our business over the last 4 years. And I'm confident in our ability to continue executing on our strategy going forward. Crescent offers investors a compelling value proposition with a scaled and balanced portfolio of high quality assets, substantial free cash flow with a disciplined capital allocation framework and a demonstrated track record of accretive returns driven growth through M and A. We believe we've established Crescent as a must own mid cap company, which uniquely combines the discipline, stability and capabilities of a large cap operator with the value and growth potential of a proven mid cap business.

Speaker 2

The SilverBow transaction represents a significant step change for our business. Today, we have a leading position in the Eagle Ford and we are just getting started. Following those quick highlights, I will now discuss things in a bit more detail, beginning with our standalone second quarter results. We had solid financial performance this quarter, beating consensus expectations again on both EBITDA and free cash flow, driven by strong operational execution. Our team continues to deliver impressive results with another quarter of production outperformance alongside our ongoing improvements in capital costs.

Speaker 2

With this quarter's outperformance and the consistent execution from our team, we have increased full year production guidance for the standalone Crescent business for the 2nd consecutive quarter with lower expected capital expenditures. In the Eagle Ford, we've continued to build momentum and increase capital efficiency, delivering more production and cash flow for less capital. We are seeing meaningful and sustained improvements to well productivity since taking over the assets we acquired in the Western Eagle Ford last fall, with average production per well roughly double the results seen by the prior operator to date. We've been able to accomplish this by bringing industry best practices to the field and we look forward to further demonstrating the quality of the assets we acquired. In addition to the improved well performance, we've captured significant synergies since our Western Eagle Ford acquisitions with roughly $60,000,000 in annual cash flow uplift relative to $850,000,000 of combined purchase price, driven by a number of active initiatives across the field.

Speaker 2

1st and foremost is capital execution, where more efficient operations and the introduction of Simulfrac have improved well costs by up to 15% versus our underwriting. This combined with successful oil blending campaign and active field management have generated significant incremental cash flow for our investors. We've also begun to see solid results from our Austin Chalk development in the Western Eagle Ford with early time production generally in line with our lower Eagle Ford performance and investment returns expected to exceed our 2 times multiple of invested capital benchmark. We intend to continue to allocate capital to the Austin Chalk in this area going forward. Moving to point number 2, the closing of the SilverBow acquisition.

Speaker 2

This acquisition is transformative for our business. Not only was it one of the most compelling investment opportunities we've seen in the market with cash on cash returns in excess of our returns hurdles and immediately accretive to cash flow and NAV per share, but it also provides significant strategic benefits with increased scale, substantial synergy opportunities, enhanced operating capabilities, extended inventory life and an improved credit profile. This transaction firmly positions Crescent as one of the largest operators in the Eagle Ford alongside ConocoPhillips and EOG. With a broader portfolio of low decline, long life production and a deep high quality inventory that supports compelling returns through cycles. We were able to close the SilverBow acquisition ahead of schedule and integration is well underway.

Speaker 2

We're very optimistic about the future of our business and what we can accomplish with our high quality asset base and the talented people from both organizations working together. With increased scale and significant operational overlap, we see incredible opportunities for needle moving synergies as a combined company, and we are confident in our ability to create incremental value for our investors. We've already made great strides towards our announced synergy expectations, capturing roughly $35,000,000 or a third of the high end of our target ahead of closing through a successful bond offering and improved cost of capital relative to SilverBow's standalone. SilverBow's business has also continued to generate strong results since we announced our combination in May. With performance in line, we're exceeding expectations for the Q2.

Speaker 2

Coming together, we believe our business is well positioned to continue delivering meaningful value from our growth through acquisition strategy, combining safe, efficient operations with returns driven and free cash flow focused investing. Looking forward, we expect to run 4 rigs across the combined business for the remainder of the year with 3 rigs in the Eagle Ford and 1 in the Uinta. We are still in the early days of operational integration and expect capital allocation to remain largely consistent with Crescent's and SilverBow's standalone business plans for the near term. But we expect to begin realizing both capital and operating cost synergies over the next few quarters as we capture the benefits of the combined asset profile. Crescent has the operational and investing expertise required to execute on our growth through acquisition strategy and we are looking forward to delivering more value from our existing asset base and future acquisitions.

Speaker 2

We are a proven growth through acquisition company and currently we have one of the largest pipelines of M and A opportunity in our recent history. The Eagle Ford in particular remains one of the most fragmented basins in the U. S. And we see meaningful opportunity there. With our increased scale, strong operating and financial performance and solid balance sheet, we've never been better positioned for accretive growth and further value creation over the remainder of 2024 and beyond.

Speaker 2

Crescent's value proposition has never been clearer as we continue towards our goal of being a valuable and industry leading investment grade business. With that, I'll turn the call over to Brandy to provide more detail on the quarter. Brandy? Thanks, David.

Speaker 3

Crescent standalone performance for the quarter builds on our strong first quarter results with production of 165,000 barrels of oil equivalent per day and significant cash flow generating $320,000,000 of adjusted EBITDA and $147,000,000 in levered free cash flow. We had $120,000,000 of capital expenditures during the quarter, less than forecast with meaningful savings to date. We brought online 6 growth operated wells in the Eagle Ford and 5 growth operated wells in the Uinta, all of which are generating strong initial results and are on track to exceed our returns target of 2 times our capital invested at current commodity prices. Turning to our outlook for the remainder of 2024. As David mentioned, we increased standalone production guidance for the 2nd time this year to 160,000 to 162,500 barrels of oil equivalent per day, while improving our full year capital guidance to $550,000,000 to $600,000,000 We also released second half twenty twenty four guidance for our full combined business, pro form a for the closing of our SilverBow acquisition.

Speaker 3

This updated guidance reflects 5 months of SilverBow contribution and highlights the strength of the combined business. At today's commodity prices, we expect to generate substantial free cash flow in 2024 and beyond. In conjunction with our SilverBow acquisition, we were thoughtful about positioning our capital structure to maintain our balance sheet strength and enhance our credit profile. David already mentioned our successful notes offering to refinance a portion of SilverBow's debt outstanding. And we also secured an upside to our existing credit facility of $2,000,000,000 to ensure significant liquidity and flexibility as we continue to execute on our growth strategy.

Speaker 3

Today, we are within our targeted leverage threshold of 1.5 times with no near term maturities and believe the increased scale and asset profile of the combined business positions Crescent for further cost of capital improvements as we look forward, highlighted by our recent corporate ratings upgrade by Fitch. Alongside earnings last night, we announced another dividend of $0.12 per share under our recently enhanced framework, which provides certainty and simplicity to our shareholders with a peer leading yield of around 4%, excluding the impact of our active share buyback program. We've exercised 15% of the total $150,000,000 buyback authorization to date and we continue to view share repurchases as an attractive tool in our shareholder return framework. With that, I'll turn the call back over to David.

Speaker 2

Thank you, Brandy. Before we wrap up, I want to reiterate a few key takeaways from this quarter. First, our standalone business continues to outperform, and we've improved guidance for the 2nd time this year with increased production for less capital. Our advantaged asset profile combining long life, low decline production and high return drilling inventory is generating significant cash flow for our investors. 2nd, our combination with SilverBow provides significant benefits to all of our shareholders and meaningfully enhances the Crescent value proposition for current and future investors.

Speaker 2

Crescent now has one of the largest positions in the Eagle Ford with opportunity for significant synergies and incremental value. And lastly, we are in a great position and we are just getting started. We are proud of how we got here and we've done what we said we would do. Number 1, combined operating and investing expertise to deliver strong free cash flow, risk management and returns on capital. Number 2, transformed the business through accretive M and A.

Speaker 2

Number 3, enhanced our peer leading dividend framework number 4, maintained a strong balance sheet, including achieving BB credit ratings and number 5, accomplished our goal at IPO of establishing a capital markets presence in line with a company of our size. We remain focused on continuing to execute, enhancing our business and generating value for our shareholders. We have the unique combination of operating and investing We believe Crescent offers a uniquely compelling value proposition in our sector. The combined company is the 2nd largest operator in the Eagle Ford. Crescent is a leading mid cap E and P with a scaled balanced portfolio of high quality assets.

Speaker 2

We generate substantial free cash flow with a disciplined capital allocation framework. And we've never been better positioned for future growth through accretive returns driven M and A. Crescent is a great business and we're just getting started. 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 The first question is from Neal Dingmann with Truist Securities. Please go ahead.

Speaker 4

Good morning, David and Randy. Really nice results. David, my first question is on the future, sort of looking at the efficiency gains as you show in the Eagle Ford around Slide 7. And I guess my question there would be, when you look at sort of your future D and C plan that now includes SilverBow in that area, any comments? I'd love to hear what your thoughts are on future efficiency.

Speaker 4

Is just that combination going to add? Is it just the continued trajectory of what that legacy business? I'd just love to hear how you're thinking about those efficiencies in Eagle Ford going forward.

Speaker 2

Yes. Hey, Neil, thanks for the question. I think I didn't count it as I was talking, but one of the things hopefully people hear is that we've executed on synergies in the last Eagle Ford acquisition that we completed last year and we see significant opportunity for synergies from the SilverBow transaction. We to your question specifically would expect to continue to get better at what we do. We've tried to bring the best of both together from the 2 companies.

Speaker 2

We were able to spend a lot of time at a high level planning for an integration, but we really just closed a week ago. So we've just gotten started taking advantage of the combined company's footprint, expertise, personnel. So I think we're performing very well at this point, but we see significant opportunity for improvement both in the actual execution, but also in the knowledge base across the Eagle Ford in particular where we're both bringing history and expertise together. And then I think that remains to be seen, but we're very optimistic about improving the combined drilling and completion practices from both of us. We were both good at what we were doing, but we also had some areas where we were both good in different ways.

Speaker 2

And so when you bring all that together, I would just tell you, I think we're very optimistic about continuing to improve.

Speaker 4

Great to hear. And then just my thought would be maybe for Brandy just on shareholder return. While I know you all plan to continue to focus really on a lot of that debt repayment, Just wondering how do you also combine the opportunistic share repurchases given how incredibly low it looks like the shares now trade on a multiple basis?

Speaker 3

Neal, it's Brandy. Thanks for the question. So as you pointed out, the priorities continue to be the base dividend and the balance sheet. But we do have $125,000,000 remaining on the authorization today. And I think you'll see us look to use it opportunistically when our stock is significantly disconnected to intrinsic value.

Speaker 3

So opportunistic tool that we'll look to continue to use going forward.

Speaker 4

Thank you.

Operator

Thank you. The next question is from Tim Rezvan with KeyBanc Capital Markets. Please go ahead.

Speaker 5

Good morning, folks, and thank you for taking my question. David, I thought your prepared comments were interesting. You put a couple of interesting clues out there talking about your leading position in Eagle Ford, but you're just getting started. And then you talked about the large pipeline of M and A activity. So if the right deal presents itself now or in the near term future, is the organization ready to transact again?

Speaker 5

Or do you believe you're going to need a couple of quarters of integration first? Just trying to understand those comments. Thanks.

Speaker 2

Yes. So good morning, Tim. Thanks for the question. Very simply, we feel like we'll be ready to go when the market presents itself. But more specifically, we've had a long history of making acquisitions and integrating them.

Speaker 2

And I think you have also correctly read that integration for us in the Eagle Ford has been something we've done multiple times and done well. So we expect this integration and transition to happen relatively quickly and allow us to be able to both focus on capturing synergies and making sure things go well. This is an important transaction. It's a large one for us, but also being prepared to opportunistically continue to execute on the M and A strategy. So I think we feel great about where we are.

Speaker 2

We're well prepared to make this integration happen and we're also well prepared to look at

Speaker 6

the market.

Speaker 5

Okay. That's great. Thanks for that color. And then as my follow-up, just wanted to ask about leverage in the presentation. I think the number was 1.5 times.

Speaker 5

And I was curious what your thoughts are on the pace or how kind of rapidly you need to maybe get down to or below one times? And then related to that, is there anything in the portfolio you might consider selling, for example, the minerals portfolio that would likely transact well above where the equity is today? Thank you.

Speaker 3

Hey, Tim, I'll start. It's Brandi from a balance sheet standpoint. So I think overall, we feel really good with where the balance sheet sits today. We exited the quarter at 1.3. Pro form a SilverBow, we're still within our target of 1 to 1.5 times.

Speaker 3

We've been successful in our ability to term out that debt. So feel good. Again, overall balance sheet and where the maturity sits. They range from 28 to 33. Our pro form a business generates a significant amount of cash flow and we've continued to be an active hedger, which allows us to delever closer to the one time target over the next handful of quarters.

Speaker 3

I'll maybe pass it to Clay just as it relates to potential divestiture opportunities.

Speaker 7

Hey, Tim. Listen, we like to say that we're both in the acquisition business and the divestiture business. And so you've seen us divest assets, particularly non core assets over time and do that opportunistically when we think the buyer sees value that we can't capture. And we've sold $150,000,000 worth of assets over the last 18 months. So I think you continue to see us look to be in that market where there's value, where there's opportunity.

Speaker 7

We're not a forced seller of assets, into a tough cave. But certainly, I think over time, streamline the portfolio and capturing value that that way is core to what we do.

Speaker 5

Thank you for the comments.

Operator

Thank you. The next question comes from Oliver Huang with TPH and Company. Please go ahead.

Speaker 8

Good morning, David, Randy and team and thanks for taking my questions. Just wanted to start off on the Austin Chalk. The initial results here look encouraging as you've shown in your updated slides and the wells online earlier this year looked to have seen a positive rate of change year over year on early days, granted it's a pretty small sample set, but was hoping that you all might be able to talk in a little bit more detail about the initial takeaways from your first few wells. And you mentioned in the prepared remarks, David, that it will be garnering capital allocation going forward. But just any way to kind of speak to or quantify what level of step up we might see over the next 12 to 24 months, especially since SilverBow had done a number of wells in that horizon on their western acreage?

Speaker 7

Hey, Oliver, it's Clay. I can take that. So

Speaker 2

you hit a lot of it, right?

Speaker 7

I think we're excited about it. Early results are good and encouraging and consistent with our Lower Eagle Ford, which I think gives us the consistency to feel good about continuing to allocate capital there. And in particular, as you noted on the heels of SilverBow, the combined Western Eagle Ford position certainly sits in a place where the reservoir characteristics are strong, but you've also seen the results be very strong across the horizon. So I think you'll continue to see us prudently allocate capital to the Chalk and be thoughtful about it. And as we go into 20 25 and firm up a capital program there, it would certainly be a piece of it.

Speaker 7

But that we continue to be excited and think there is real opportunity there.

Speaker 8

Okay. Makes sense. And maybe just to follow-up on efficiencies and simulfrac driving better cycle times, should we expect for this to drive any sort of meaningful acceleration versus the initial pace of well counts envisioned in the forecasting at the start of the year? Or was that pretty much already contemplated? And just wanted to confirm that these savings are already being, I guess embedded in the revised lower well costs that you're kind of talking about this morning in the Eagle Ford?

Speaker 3

Hey, Oliver, it's Brandy. So yes, a lot of these savings, both from what we're seeing from a D and C efficiency standpoint, but then also some of the service cost deflation that's captured in the pro form a guidance for the back part of the year and really was the driver for the improvement in the full year capital guide for the standalone crescent business.

Speaker 8

Okay, perfect. Thanks for the time.

Operator

Thank you. The next question is from Michael Scialla with Stephens. Please go ahead.

Speaker 9

Hi, good morning. I just wanted to go back to Slide 10. You've already achieved most of those cost of capital savings you were anticipating right upfront with the SilverBow deal. Just wondering from here, Brent, you mentioned the ratings upgrade. Is there anything else you can do over the next 12 months to take that up to that $45,000,000 number that you were forecasting for the potential savings there?

Speaker 3

Hey, Mike. Good question. I think and I'm not going to speak on behalf of the rating agencies, but I think more time and continued execution for our business, right, is ultimately the answer just from an additional ratings movement. I talked about Fitch improving their corporate rating on us. So we now have 2 BB- corporate ratings from the agencies, but we captured a lot of the low hanging fruit, if you will, with the high yield.

Speaker 3

And then our RBL also contributed to some of the improved cost of capital.

Speaker 9

Right. Then also wanted to ask on Slide 15, which I think you've had in your presentation before, but showing a 5 year free cash flow forecast of something that's about 50% above your market cap right now based on $75 oil and $3.50 gas. Can you talk about some of the other assumptions embedded in that 5 year forecast?

Speaker 3

Yes. Mike, this is Brandy again. It's really just our straightforward existing kind of guidance carried forward. So maintenance program across the pro form a business, taking current service costs and commodity prices just as it relates to the operating cost inputs. So nothing special in the forecast there.

Speaker 3

But as you know, right, our business does generate a lot of cash flow, which ultimately gives us a lot of flexibility on how we ultimately use that cash flow.

Speaker 9

Great. Thank you.

Operator

Thank you. The next question is from John Freeman with Raymond James. Please go ahead.

Speaker 6

Good morning. Thanks. When looking at the original SilverBow synergy guidance that on that same slide that Mike was referring to on Slide 10. One area that you all don't have in there, we have historically seen some pretty nice improvement is from the marketing uplift, just the better pricing with you all's marketing efforts. Is that relevant here with SilverBow?

Speaker 6

And if so, how quickly can that kind of pricing uplift be realized?

Speaker 3

Hey, John, it's Brandy. So I would say definitely relevant. I'll maybe reiterate David's comment earlier, we're less than a week out from closing. So not a lot that we can talk about right now, but would expect to be able to update you all on broader synergies next quarter, including right whether or not we're able to capture or identify additional areas of synergies

Speaker 6

here. Got it. And the last follow-up for me just on the updated cost per foot on the $825 a foot. Can you kind of characterize kind of is that pretty consistent kind of across your like some of the leading edge like materially lower than that? Do you have some operations on your footprint that's meaningfully above that?

Speaker 6

Or is that a relatively tight range to get to that $825,000,000 a foot?

Speaker 2

Yes. Hey, John, it's David. The easiest answer is that kind of all the drilling and completion activities we undertake are pretty similar. So there's not a huge change. What I would say though is in some areas, we're able to get more efficiencies because of the number of wells on a pad or because of existing facilities or other things like that.

Speaker 2

So in general, pretty tight range, which is probably the easiest answer, but we'd let you know that we're also looking for ways to continue to improve that number. It is definitely part of the work that we're able to now begin on the synergy side.

Speaker 6

Great. Thanks. Nice quarter.

Speaker 3

Thanks, John.

Operator

Thank you. Ladies and gentlemen, as there are no further questions, I would now hand the conference over to David Rokacharya for closing comments.

Speaker 2

Great. Thank you all again for joining us today and for the continued support. And hopefully what came through is the business is doing well and we see significant opportunity going forward. So, we're going to get back to work and look forward to talking to you all again next quarter. Thank you.

Operator

Thank you. The conference of Crescent Energy has now concluded. Thank you for your participation. You may now disconnect your lines.

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