CRGY - NYSE

Greetings, and welcome to Crescent Energy First Quarter 2023 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. [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.

Good morning, and thank you for joining Crescent's first 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 Presidents are also here today and available during our Q&A session. 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 conflicts, 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 disclaim any obligation to update any forward-looking statements after today's call. In addition, today's discussion may include disclosures regarding non-GAAP financial measures. For reconciliation of these 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 David.

Great. Thanks, Emily. Good morning, and thank you for joining us today as we close out another solid quarter. We continue to generate significant EBITDA and operating cash flow through our maintenance level development program, allowing us to prioritize returning cash to shareholders and maintaining a strong balance sheet. Our base business is performing well, and we are highly encouraged with how our team continues to find innovative ways to safely reduce costs and maximize the value of our development program. Before jumping into the first quarter results, let me spend a few minutes on our recently announced bolt-on acquisition. Last week, we announced an accretive acquisition of operatorship and incremental working interest in our existing nonoperated Western Eagle Ford assets from Mesquite Energy for $600 million. We acquired the original nonoperated interest in the Western Eagle Ford over 6 years ago. So we know the assets incredibly well. We have a long history in the Eagle Ford, and we are pleased to increase our ownership and bring our operating skills to these assets. Today, the assets represent approximately 75,000 largely contiguous net acres primarily in Dimmit and Webb counties with current net production of 20,000 barrels of oil equivalent per day, roughly 70% of which is liquids. Pro forma will own an approximately 50% interest in the assets adding an incremental 35% working interest to our existing 15% nonoperated interest. The acquisition cements our position as the leading consolidator in the Eagle Ford and is consistent with the proven acquire-and-exploit strategy that we've been executing for the past decade. And on a stand-alone basis, the Eagle Ford acquisition checks all of our investment criteria fitting our strategy financially, operationally and strategically. We believe the $600 million purchase price represents an attractive value, adding more than $700 million of PDP PV-10, at $70 oil and $3.50 gas and approximately 250 gross or 150 net operated Lower Eagle Ford locations with significant upside from the Austin Chalk and Upper Eagle Ford. The transaction is highly accretive to key metrics, including operating cash flow, free cash flow and net asset value per share. Through the transaction, we will maintain balance sheet strength and our investment-grade credit metrics while remaining below our publicly stated maximum leverage guidance of 1.5 times. Operationally, the Mesquite assets add meaningful high return, lower Eagle Ford inventory at the current development pace. Over the last 6 years as an active nonoperated partner we've developed a deep knowledge about the asset base, evaluated over 250 lower Eagle Ford well proposals and consistently shared our operational insights with the operator. The high quality of the resource base is evident in recent well performance, which was achieved using the latest approaches to drilling, completions and well spacing. Such recent performance is both significantly improved and quite competitive with Eagle Ford development basin-wide. We will also highlight the recent encouraging results from the Austin Chalk formation, both on the acquired assets and closely offset suggests significant upside on our acreage. However, we did not ascribe any value to this resource in our underwriting of the assets. Lastly and importantly is the strategic fit. We will benefit from increased scale in the Eagle Ford and expect to find new and valuable synergies with our existing operations. Following the transaction, Crescent will hold over 200,000 net acres in the Eagle Ford and operate approximately 90% of our pro forma Eagle Ford position. Notably, the assets at scale in a complementary way adding 20,000 BOE per day of production with an expected next 12-month decline of 17%, further improving our peer-leading decline rate. We believe the acquired assets enhance our existing portfolio and view this transaction as an excellent example of our acquire-and-exploit strategy, adding scale, long-life reserves and proven inventory in area where we have existing operations and a competitive advantage. Over the last year, we've evaluated many acquisition opportunities, particularly in the Eagle Ford, but we have remained patient given the heightened commodity price environment. Ultimately, we focused on strengthening our base business during that period of time, reducing our leverage to 1 times post the Uinta acquisition, maintaining substantial liquidity and continuing to core up our portfolio through a number of small asset divestitures. Relative to other opportunities we've seen, we believe this transaction fits us best due to the combination of significant low decline production and cash flow, meaningful proven inventory and the deep operational insights our team brought to the table. We also like the attractive purchase price at this point in the commodity price cycle. Across the broader A&D market, we expect it to be an active year and are focused in areas where we can add meaningful scale with an emphasis on our existing footprint across Texas and the Rockies. Going forward, we are well positioned as an acquirer of assets, particularly in the Eagle Ford, which remains the most fragmented of the major baselines across the lower 48 states. With its relatively low base declines, well-delineated development, attractive realizations and balanced commodity mix, further growth in the Eagle Ford complements our business well. And we envision it will continue to play a key role in our acquisition strategy. But as always, we'll evaluate all future opportunities through our returns-driven framework first. As a reminder, our attractive existing business with a low decline rate and large inventory of economic drilling locations ensures we will continue to be disciplined with our capital as a flexible operator and patient acquirer. As Brandi will cover in more detail, the base business continues to perform well, which allows us the flexibility to focus on returning capital to shareholders, preserving balance sheet strength and pursuing attractive investment opportunities. From there, we can capture synergies and enhance operations as we continue to scale and transform our business, all in a way that drives value to our shareholders. With that, I will turn the call over to Brandi to cover our first quarter financial results. Brandi?

Thanks, David. For the quarter, we outperformed expectations on both production and EBITDA and saw continued operational efficiencies across our business. We announced the first quarter cash dividend of $0.12 per share, in line with our strategy to distribute 10% of EBITDA to our shareholders, bringing around our guidance price act at $70 oil and $3.50 gas. For the quarter, we produced 137 MBoe per day and generated $232 million of adjusted EBITDAX. Production in the quarter was slightly impacted by minor downtime related to winter weather. On revenue, our gas differentials outperformed this quarter due to exceptionally high in West Coast gas realizations with Crescent realizing 150% of benchmark prices. Our elevated price realizations reflect the benefits of our exposure to different end markets. Our operating expenses were also impacted by higher cost residue gas related to increased natural gas prices. However, these higher costs were more than offset by higher realized prices. Adjusted operating expenses, including production and other taxes averaged $16.57 per BOE for the quarter, which is above our initial guidance range. Adjusting for these commodity line costs, Crescent's adjusted operating expense per BOE was in line with expectations, and we anticipate our beginning of the year cost guidance to remain intact. We invested $202 million in the first quarter, drilling 15 and bringing online 18 growth outrated wells across the US and Eagle Ford. Due to operational efficiencies, this reflects a higher level of activity during the first quarter than our initial expectations. Taking into consideration the accelerated activity at the end of the quarter, we still expect to remain within our full year 2023 capital and production guidance. More broadly, we're continuing to see inflation moderate, as more stable commodity prices have decreased service cost pressures but have not experienced a material decrease in costs from levels incurred over the last 6 months. We continue to offset the higher cost environment for longer laterals decreased cycle times and continual improvements in completion efficiencies. We expect strong returns from our development program continue to operate 1 rig in both the Eagle Ford and Uinta Basins. Switching over to the balance sheet. Our balance sheet remains strong with net LTM leverage of 1.0 times, in line with our stated long-term leverage target. We were well positioned in the first quarter given our focus on existing operations and debt reduction during last year's period of higher commodity prices as well as our February high-yield offering to defer out a portion of our RBL debt. With over $1.1 billion in liquidity, we were prepared for the change in the market environment, which allowed us to post the recently announced Western Eagle Ford transaction. Also in line with our acquisition risk management strategy, we executed additional hedge volumes for the balance of 2023 and full year '24 in connection with the transaction to protect our expected returns on invested capital and maintain a strong balance sheet. Assuming a midyear close of the Western Eagle Ford acquisition and approximately 20 MBoe per day of crude production, we are roughly 60% hedged for the remainder of 2023. With that, I'll turn the call back over to David.

Great. Thanks, Brandi. As Brandi highlighted, the base business continues to perform well. And coupled with our capital markets efforts and our patients through last year's elevated commodity price environment, our business performance has afforded us the flexibility to pursue attractive M&A opportunities, such as the accretive Western Eagle Ford acquisition. And to reiterate, the transaction checks every box that we look for in an investment opportunity. First and foremost, we are returns-driven investors. We believe the assets were acquired at an attractive valuation, and the transaction is immediately accretive to key per share financial metrics. Acquiring proven assets with meaningful reinvestment opportunity at a discount to PDP value is a good strategy to create value in our industry. Second, the transaction was highly strategic, enhancing our Eagle Ford scale and increasing our operational control in an area that we know well through our existing interest and offsetting Eagle Ford operations. Third, the assets are complementary to our portfolio and investment strategy, adding stable low decline production with substantial cash flow and reserves. Fourth, the assets at low-risk development inventory with significant potential for resource expansion and synergy opportunities. And finally, we continue to grow the business while maintaining our strong balance sheet and investment-grade credit metrics. In summary, the Eagle Ford transaction is a great example of our strategy at Crescent. We utilized our team of experienced operational and investment professionals to create value while protecting the balance sheet and remaining focused on shareholder value. With that, we will open the call up for questions.

[Operator Instructions] Our first question is from Bertrand Donnes with Truist. Please proceed.

Just wanted to start off on the acquisition. It's got a bit higher liquids content than the legacy Crescent. Was that a driving factor in this deal? Or was this deal process maybe started before gas prices went down? Or could you just maybe talk about how you approach the deal.

It's Ben. Yes, one of the things we liked about the deal is this exposure to liquids, both gas and NGLs, as we talked about, greater than 60% liquids. So I think we evaluate every asset just on an overall risk return basis, but certainly have a favorable macro view around oil here. as well as NGLs. So we're pretty excited about acquiring stable production and PDP at a discount that has liquids waiting in this macro environment. So certainly wasn't the driving factor, but it certainly informed our view and influence how we think about the risk return around this one.

And then I guess the other part of that, that I was trying to get at is, does that drive more activity in the near term in the acquired asset rather than legacy Crescent?

We're not going to be talking about guidance until we closed the acquisition, but fair to say we're running a rig both on this asset currently and on our existing operated position, and we'll continue that current activity in the near term.

And then my second question the payout ratio, you haven't changed the ratio, so it's still 10% of adjusted EBITDA. Just wanted to understand, does an announcement for this quarter imply the rest of the year will likely be at that dividend level? Or is there if commodity prices move intra year, are you looking this step didn't change it? Or are we looking for May of next year as the next level set?

Bertrand, it's Brandi. So as a reminder, we intend to set our return on capital framework once a year alongside our guidance pricing. So that was $70 million and $350 million, which equated to the roughly $0.12 per share that we just announced last night. So from our perspective, we would intend to pay out at that level throughout the rest of the year. And then as Ben mentioned, just specifically with respect to Mesquite, no change in return on capital framework, but we intend to provide updated guidance. in early Q3 upon closing.

Our next question is from John Abbott with Bank of America. Please proceed.

I want to go back to stay with the theme of the shareholder returns. And you did reduce your dividend, and that's consistent with your framework. But when you think about this variable return policy, is that the right framework for Crescent Energy. How do you think about that?

John, it's David, and thanks for the question. It's actually a good question around Crescent to your point, but it's clearly a topic where energy investors are still trying to reach consensus. And while you asked a specific question on the dividend, if you don't mind indulging me, I think I'd like to put it in a little broader strategic context. First, I'll reiterate that Crescent is all about cash flow and investment discipline for the benefit of our investors. And as you know, our number one capital allocation priority is return of capital to investors. And to us, to Crescent that means taking care of the balance sheet and paying a cash dividend. We have a 10-year track record of doing this, and we aren't going to change that strategy in and of itself. However, your specific question on variable dividends and optimizing value for custom shareholders, again, is a good one. Crescent's strategy and value propositions based on 2 things: first, the cash flow generating power of the existing assets. And then secondly, our ability to generate additional future cash flow through disciplined and accretive capital investing in acquisitions. And I think this quarter, you've seen us continue to do that. We think both of those things will be more fully appreciated by our investors over time as we continue to execute. But going back to the specific dividend, our current policy is based on a percentage of EBITDA. We created this approach 10 years ago, really with a focus on uniquely delivering value to investors. It is variable. But I'd also say that the variability of it delivered a 4% yield to investors last year versus a peer-based yield that we see about 1% in the industry. So substantially better cash return and many of our peers only recently kind of embraced this return of capital concept. So we think it's a great piece of the Crescent value proposition. It is just a piece, as I mentioned. And so while you are hearing from us, we're going to continue with this approach for now. We certainly remain engaged with investors and are really focused on value creation and what the industry is starting to reach consensus on. And I think it's also worth highlighting again in the context of the dividend question that we do think of it as an entire value proposition for investors, and we think the management of the assets and the disciplined investing is also continuing to deliver great value here. So we'll see that over time. And I think, again, for now sticking with the program. But the commitment to cash is there, and we'll continue to take good feedback from folks.

The second question, I think here is for Brandi. It's on cash taxes. And I realize that you're not going to give guidance until the acquisition closes. But can you provide any color on when you perceive yourself as potentially a full cash taxpayer for stand-alone Crescent and then possibly post the acquisition, if you can, to the extent that you're able to speak about it?

John, so we guided at the beginning of the year based on our $70 million and $350 million guidance price that we were not going to be a material cash taxpayer. So we guided to $0 to $30 million for full year '23. We do not expect the Mesquite transaction to materially change our views in the near term around our payment of cash taxes. So nothing material in this year based on current prices and nothing material we would expect in 2024.

Our next question is from Roger Read with Wells Fargo. Please proceed.

Yes. Just maybe getting a little bit ahead of it. I recognize you don't want to give a lot of guidance on our property you don't own yet. But given that some of the comments were along the lines resource expansion above and beyond just what you're paying for or what you're acquiring. Is that -- as we think about it, a combination of factors? Is that refracs? Is it tighter drilling spaces here is missed pockets in here? I mean it's not a new asset to you. So I presume you have a pretty good level of insight on what the opportunities are.

Yes, Roger. Around the resource expansion comment, I think where we focus our -- not only just our existing business but around this acquisition is around kind of the proven inventory in front of us, which is the Lower Eagle Ford. Again, we didn't pay for that in this acquisition. We thought this accounts PDP PV. But when we refer to the resource expansion, it's really beyond the Lower Eagle Ford that's proven and in front of us today that we've been actively developing over the last couple of years. But it relates to both the Austin Chalk mainly and the Upper Eagle Ford that have not been actively developed on our acreage, but that are getting capital in this area more regionally. And we do believe that we've got prospective acreage on our position, and we've developed a handful of wells. So that's what we're talking about. And I think we'll talk about it more over the course of time, but our strategy really is to be discipline, be a fast follower followed the data versus kind of accelerate into something that on a relative basis is less proven to date, but we're pretty excited about it. So hopefully that answers your question.

Yes, I think so. I mean, we'll get deeper into it after you close. The other question I have, and David, this was in your opening comments about the high prices, better cash flows last year set you up for acquisitions this year. But I'm curious, we typically think of a high price environment is a tougher one to get the bid as spreads together. Now we're in a obviously depressed gas market and a, I would describe, more mid-cycle oil market. So as you look at the let's say, the opportunities in front of you after you get this transaction closed, is it more better -- or excuse me, more or less or the same in terms of the attractive opportunities going forward?

Yes, it's David, and I'll start, and then I'll let Clay give you some additional color as well. Strategically, though, to your question, I think you've accurately assessed how we view what I'll call the cyclicality of the market. As you know, we do have a macro view through the cycle that we pay attention to. And I think it was just notable that over that period of time that prices were high, what we were able to do was get some assets sold. So I think we're able to find, I'll call it, where the bid-ask works for us. And then you look at this year, we certainly feel really excited and fortunate to have been prepared to transact quickly in this market environment. So I think that broad macro perspective, hopefully, is what we're trying to do. But I'll let Clay cover the really specifics that I know you were also looking for.

Yes. Roger, certainly, as you note, Q1 pretty slow due year, I think the back half of last year into the high prices pretty slow from a transaction volume perspective. So as we look forward you have a little bit of pullback in prices, that inventory of assets is still there. So we're pretty excited about the market environment we're in from a go-forward M&A perspective. Certainly, the recent volatility will probably dampen things in the immediate term. But we think as we look out over the second half of this year, '24, there's lots of opportunity for us. Our pipeline is pretty full and I should expect we're going to be looking at within our financial framework to find opportunities.

Our next question is from Tarek Hamid with JPMorgan. Please proceed.

I'd love to ask about just on the quarter itself about some of your gas realizations in the West? I know you talked about it a little bit, but sort of your thoughts on sort of how that has evolved for the last few months and kind of how that affected the quarter on both the sort of revenue line and the OpEx line?

Tarek, it's Brandi. So I think we hit on this in the prepared remarks, but we sell roughly 25% of our gas into the Northwest Rockies markets just due to some extreme weather in California, specifically in January and February, right, that resulted in us realizing 150% of benchmark prices. We also know there are some commodity linked expenses tied to that, given we have to purchase some of that higher cost fuel to run some of our operations. So net-net, still definitely a cash flow positive for the business, but it did result in roughly $20 million or $1.50 BOE of incremental cost that I view as kind of nonrecurring and directly linked to those additional gas realizations that we incurred or incurred during the quarter.

And I guess just on the Western Eagle Ford acquisition, and you had some slides this effect, and I know you sort of mentioned it a little bit. But kind of any more perspective you can offer on some of the differences in how the historical operators looked at the assets, both in terms of well time, but also just strategically, how they view those assets versus how you guys are looking at those assets and viewing them over time?

Yes. Tarek, it's David. I'll just give you some quick thoughts. This is a really high-quality acreage position that was put together by Anadarko many years ago. Their historical development was actually very good. It was on much tighter spacing, which most of the industry was pursuing almost a decade ago now. There's close to 2,000 wells that have been drilled on the vision. And so there's just great history here the really important point to note, and you've mentioned it, it is something we try to at least give some indication and highlight in the slides is that there were incremental approaches tried on this asset following Anadarko's divestiture. We were a non-op owner during that period of time. As we've noted in some of our remarks. We've been very, what I would call, active on the non-op side, not just evaluating data and making decisions that were put to us, but also sharing insights that we have from other assets where we operate. And so long story short, there's been significant performance improvement over time and quite recently on this asset that we would say aligns with our approach to operations in general. And so there's been, I'll call it, a number of different stories that could be told about this asset, but we're really excited about it. It's a high-quality resource. And if you look at the most recent data, I think that gives you a great indication of what we think we can do with it both from the existing operations and also ways to expand the resource over time as we talked about earlier.

We have reached the end of our question-and-answer session. I would like to turn the conference back over to David for closing comments.

Great. Thank you all again. We are, as always, focused very heavily on value creation for our investors. Another good quarter from our perspective. But we continue to feel we've got a lot of opportunity and a lot of work to do and look forward to continuing to deliver results and keep you up to date on a regular basis. So thank you very much.