Crescent Energy Company (NYSE:CRGY) Q3 2024 Earnings Call Transcript

Crescent Energy Company (NYSE:CRGY) Q3 2024 Earnings Call Transcript November 5, 2024

Operator: Greetings, and welcome to the Crescent Energy Third Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. A 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 your host, Reid Gallagher, Investor Relations. Thank you. You may begin.

Reid Gallagher: Good morning and thank you for joining Crescent’s third quarter 2024 Conference Call. Prepared remarks today will come from our CEO, David Rockecharlie; and CFO, Brandi Kendall. Our CAO, Todd Falk; and our EVP of Investments, Clay Rynd, will also be available during Q&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.

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 under the Investors section on our website. With that, I will turn it over to David.

David Rockecharlie: Good morning and thank you for joining us. Yesterday, Crescent posted another solid quarter of financial and operating results. Before we get into the details, I want to begin with a few key points I hope you take away from this call. First, our team continues to execute on our proven and consistent strategy of growing profitably through acquisitions and driving operational efficiencies. Because of that, we have raised our outlook for the year for the third consecutive quarter, reaffirming our production guidance with more efficient capital spending and increased free cash flow. Second, our integration of the SilverBow business is yielding significant synergies even beyond our initial expectations. We’ve already realized approximately $65 million of annualized synergies or the low end of initial expectations within just a few months of closing.

We have successfully integrated the people, the assets and the best practices of both businesses ahead of schedule to drive incremental value. We increased our target for total synergies by more than 20% and are confident in our ability to execute from here. And finally, we see significant opportunity ahead. This has been an active year for us with the SilverBow acquisition and subsequent bolt on to our core Central Eagle Ford footprint. The Crescent has never been better positioned. We’ve delivered profitable growth of both production and cash flow through disciplined investing and operations, and we have transformed the equity positioning of our business since becoming public. I am confident in our ability to capitalize on recent success and continue executing towards our goal of becoming an investment grade company and delivering long-term value for our shareholders.

Following those quick highlights, I will now discuss the quarter in a bit more detail. We reported strong financial results this quarter with our advantaged low decline production base generating significant free cash flow and our development program outperforming expectations. We had record production of 219,000 barrels of oil equivalent per day this quarter with only two months of SilverBow contribution included in our numbers. The strong execution by our team has allowed us to yet again improve our outlook for the remainder of the year with well performance, synergy capture and capital efficiencies allowing us to hit our production guidance with less capital, generating incremental free cash flow for our investors. In the Eagle Ford, we continue to build momentum as we drive improved capital costs and increased well performance.

Across our entire position, we are seeing a meaningful year-over-year uplift in well productivity on both an oil and total volume basis. This is a testament to the depth and quality of our inventory with improving performance on our assets versus industry trends and in these basin peers that have seen a natural degradation in performance. As we’ve acquired assets over time, a key part of our strategy is to improve operations through our ownership and you are seeing the direct result of this with our recent well performance. On the capital side, we’re seeing incremental savings versus the first half of the year, increasing returns and free cash flow. By combining the strength and expertise of our newly integrated organization of talented people, we’ve been able to drive further efficiencies across our program utilizing the latest available technology.

For example, we are planning horseshoe U-shaped wells in select areas to unlock meaningful inventory, where land considerations may not have allowed for traditional development. We’ve been able to bring Simulfrac completions to the SilverBow assets, meaningfully increasing efficiency and driving down development costs. We’ve also had great success to date working with our service providers to drive down costs alongside operating efficiencies, which combined has lowered well cost 10% relative to the first half of this year. While the capital savings on the acquired assets are encouraging, they represent only a fraction of the synergies we’ve already achieved from the SilverBow transaction. When we originally announced the acquisition, we put forward what we believed were significant and ambitious synergy targets and we’ve been able to deliver far ahead of schedule.

With approximately $65 million of annualized uplift realized to date across capital, overhead, operating costs, and interest expense, we’ve already hit our original target range. As we’ve spent more time with the assets under our control, we believe there is more opportunity than we originally anticipated, and we have increased our expected synergy range by more than 20%. On the integration front, our 2023 acquisitions in the Western Eagle Ford have also continued to drive strong free cash flow with a dramatic step change in well productivity versus the prior operator and approximately $70 million of annualized operational gains relative to our $850 million of combined purchase price.Through the hard work and dedication of our talented people, we’ve achieved all this in the first year under our operatorship by bringing industry best practices to the field and we look forward to finding opportunities for further value across our scaled position in the basin.In the Uinta, we continue to see strong results from our development program, which to date has remained largely focused on the proven Uteland Butte formation.

The Uinta is at an exciting stage of its evolution and we are pleased to see incremental public activity and recognition of the impressive resource potential and advantaged economics in the basin. We entered the basin in 2022 through a transaction at a discount to PDP value with any development potential generating incremental returns for our investors. While we remain focused on the most proven formations with our current development program, we have begun to allocate prudent capital to incremental horizons now that other operators have spent meaningful capital to delineate and further prove the impressive potential across the play. We’ve also been active seeking more creative and efficient pathways to derisk the full upside across our position, and recently entered into a small joint venture to test the easternmost extent of our acreage with no upfront capital required.While still early in our evaluation, our initial results have been encouraging, but we will continue to monitor the data both from our wells and from offset operators and be patient as we limit risk and capture the substantial resource upside across our assets.

Our consistent ability to improve operations and generate meaningful synergies has given us further conviction on our growth through acquisition strategy, and we see a significant market opportunity ahead of us.SilverBow was the largest acquisition we have completed to date as a public company, and we have followed our proven acquisition and integration playbook with great results. And since we have had another successful closing and integration with our bolt-on in the Central Eagle Ford.The acquisition added incremental assets in a key operating area and represented a uniquely attractive opportunity with low decline oil production, high return inventory and increased operating flexibility with minerals, midstream and substantial surface ownership.

We acquired the assets at a cost of capital more typically representative of operated working interest opportunities, but received the additional benefits of the minerals, surface and midstream infrastructure, which we were pleased to add to our portfolio.We have a large pipeline of M&A opportunities ahead of us, but we will remain prudent in our underwriting. We screen 150 to 200 potential transactions a year and have executed zero to three each year consistently. We are focused on compounding significant capital over time at attractive rates of return, and we quickly pass on opportunities that don’t meet our underwriting criteria.Despite recent volatility, the market remains active, and with our increased scale, strong operating and financial performance, and solid balance sheet, we are extremely well positioned for profitable growth and further value creation for our stakeholders over the remainder of 2024 and beyond.With that, I’ll turn the call over to Brandi to provide more detail on the quarter.

Brandi Kendall: Thanks, David. Crescent’s results for the quarter build on our impressive performance over the first half of the year with approximately $430 million of adjusted EBITDA and approximately $160 million in levered free cash flow. We had $211 million of capital expenditures during the quarter better than forecast as the team continues to generate incremental savings in the field. We brought online 27 gross operated wells in the Eagle Ford and 10 gross operated wells in the Uinta, all of which are generating strong initial results. With recent commodity volatility, we are focused on maintaining both operational and financial flexibility and generating attracting returns across our development program. We optimize D&C activity on the SilverBow assets after taking over operatorship to target higher returning liquid weighted development to take advantage of relative commodity pricing.

Turning to our outlook for the remainder of 2024. As David mentioned, we have enhanced our guidance for the third time this year and improved our second half capital outlook to $425 million to $455 million a 10% improvement from the initial guidance provided at the closing of the SilverBow acquisition. This updated outlook reflects five months of SilverBow contribution and highlights the strength of our business and the impressive achievements of our operating team. Looking into 2025, we expect to remain flexible around activity levels and capital allocation if commodity volatility persists, focusing on cash flow generation and attractive returns on the capital we choose to invest. Our balance sheet remains strong coming out of the quarter with net leverage of 1.5x within our publicly stated range of 1x to 1.5x.

We have $1.5 billion of liquidity with no near-term maturities. We’ve also been actively evaluating portfolio optimization opportunities and have divested approximately $50 million of non-core assets this year, generating an attractive return for our investors and also accelerating debt repayment. While we are a growth through acquisition business, we bring an investor mindset to everything we do and are constantly evaluating our portfolio for potential divestitures to maximize value to our shareholders. Alongside earnings yesterday, we announced another dividend of $0.12 per share and further repurchases under our active buyback program, which is now 20% utilized year-to-date at a weighted average share price of $10.07 Together, our dividend and repurchases have equated to a pure leading 5% annualized yield.

We have dramatically transformed the equity positioning of our business since becoming public with a simplified and enhanced dividend framework and significantly increased flow in trading liquidity, highlighted by our recent addition to the S&P 600 index. With that, I’ll turn the call back over to David for closing remarks.

David Rockecharlie: Thank you, Brandi. Before we wrap up, I want to reiterate a few key takeaways from this quarter. First, our business continues to generate impressive results and significant free cash flow. We’ve improved guidance for the third consecutive time this year, achieving our stated production targets with more efficient capital spend. Our advantaged asset profile has consistently exceeded expectations and our operating team continues to find more and more efficiencies to maximize cash flow for our investors from both newly acquired and legacy assets. Second, application of our proven integration process on the SilverBow business has generated value beyond initial expectations. We’ve combined the strongest talent from both organizations to enhance operations across the business.

We are ahead of schedule on synergy capture, achieving our initial target within just a few months of closing and we’ve increased our total synergy expectation by more than 20%. Finding ways to capture value beyond our acquisition underwriting is a demonstrated strength of our platform. And lastly, we see significant opportunity ahead of us to continue on our profitable growth continue on our profitable growth trajectory. We said last quarter that we are just getting started and that remains true today. We built this business with ambitious goals, and despite our recent successes we remain focused on operational execution, profitable growth and long=term value creation for our shareholders.We have the unique combination of operating and investing expertise required to execute on our growth through acquisition strategy, and we will continue to do exactly what we’ve said we are going to do.

We believe Crescent offers a uniquely compelling value proposition in our sector, and we are determined to prove it. With that, I’ll open it up for Q&A. Operator?

Operator: We will now conduct a question-and-answer session. [Operator Instructions] Our first question comes from Neal Dingmann with Truist Securities.

Q&A Session

Q – Neal Dingmann:

A – Clay Rynd:

Q – Neal Dingmann:

A – David Rockecharlie:

Operator:

Q – Tim Rezvan: Tim it’s Clay. Yes. So I think you have it. On testing the eastern extension, we think it’s important as we think about our capital allocation framework. We’re not we’re trying to allocate capital to places that we feel very confident returns, but we also recognize the resource potential in the Uinta and are excited about it. So we’ve been focused on the ability to kind of bring, forward that opportunity set while allocating capital consistent with how we our framework. And so this JV, I think, is a great example of that of kind of bringing capital forward to allow us to accelerate delineation. The focus is it’s small near-term, three wells but focused on secondary intervals in that eastern extension. But we do think there’s further opportunity to use kind of our capital allocation framework with our creativity to bring forward opportunities around further delineation on a resource position that we are excited about.

A – Clay Rynd: Tim it’s Clay. Yes. So I think you have it. On testing the eastern extension, we think it’s important as we think about our capital allocation framework. We’re not we’re trying to allocate capital to places that we feel very confident returns, but we also recognize the resource potential in the Uinta and are excited about it. So we’ve been focused on the ability to kind of bring, forward that opportunity set while allocating capital consistent with how we our framework. And so this JV, I think, is a great example of that of kind of bringing capital forward to allow us to accelerate delineation. The focus is it’s small near-term, three wells but focused on secondary intervals in that eastern extension. But we do think there’s further opportunity to use kind of our capital allocation framework with our creativity to bring forward opportunities around further delineation on a resource position that we are excited about.

Tim Rezvan: I appreciate that. And then I guess could that be expanded if the three wells leads to promising results or it’s just sort of just a one-time?

David Rockecharlie: I think there’s definitely further opportunity bring capital and delineation forward to the extent we’re excited about it.

Tim Rezvan: And then as my follow-up, I’m not sure if this is for David or Brandi. You did mention some asset sales this year. Are there any formal processes in place? Or do you have some sort of minimum threshold that you’d like to get to? Or are you just sort of letting the market know you’re open to getting calls from buyers? Just curious the thoughts on asset sales.

Clay Rynd: Tim it’s Clay again. I think all of the above. Certainly, we receive inbounds around the portfolio and we’re a willing taker of those inbounds and thinking through whether the market’s putting value on assets at a level above where we can value them or create value go forward. At the same time, we’re always kind of thinking through the portfolio and where we may see an opportunity to whether that’s market an asset or reach out to logical counterparties where they could kind of bring a value forward to us. So I think it’s a kind of across the board approach. Nothing I would highlight today outside of that. We’ve kind of continued to have a methodical approach around it where we’ve seen the ability to kind of monetize things. And we certainly have a volatile market today, but I’d expect to see us continue to have that methodical approach to managing the portfolio.

Operator: The next question comes from Oliver Huang with TPH & Company.

Oliver Huang: Congrats on a solid quarter and thanks for taking my questions. Just wanted to start out on maintenance CapEx, any sort of color that you’re able to kind of provide with respect to where maintenance type of CapEx levels might now sit when contemplating the cost reductions that are flowing through the back half of the year outlook pro-form a for SilverBow?

Brandi Kendall: Oliver it’s Brandi. So I’ll start just with respect to — we don’t expect to provide formal ’25 guidance until February alongside Q4 earnings. But at a high level, we view pro-form a maintenance levels for the business post the SilverBow transaction is still that 240,000 to 250,000 barrels of oil equivalent per day on that plus or minus $1 billion of capital. So yes, I would say we’re excited about the operational efficiencies that we’ve seen to date, our ability to continue to drive down D&C cost and would expect to factor that into our formal 2025 plan but no change at a high level to the soft guide that I’ve previously shared

Oliver Huang: And maybe just on a follow-up to the Uinta, was hoping that you all might be able to provide some color on how initial results on the Uteland Butte seas have tracked relative to expectations given this historically BE dominant program. And also when we’re kind of thinking about primary versus secondary zones given the mix that we’ve seen year to date in that 75, 25 ballpark. Is this considered a fairly optimal mix for capital allocation in the basin when we’re kind of thinking about the next year or two?

David Rockecharlie: It’s David. I’ll start which is I think it is the right way to think about it for Crescent’s business plan. So as you know, we’re much more focused on maintaining low decline, capital efficiency, strong free cash flow. We haven’t been chasing any exploration or significant production growth as a strategy. So I think it’s fairly standard and to be expected from us that we’re going to be highly concentrated on the proven areas where we’ve got a lot of inventory when you look across both the Uinta and the Eagle Ford. But at the same time, we think we hold tremendous resource potential. So we are watching. We are investing some of our own capital and then we also try to find capital efficient ways to do that. So that’s maybe the simplest way to kind of highlight what you’re seeing is just continued execution of what I would call a different and disciplined business strategy from us.

Operator: The next question comes from Michael Scialla with Stephens.

Michael Scialla: David, you mentioned the large pipeline of M&A opportunities in front of you. Just want to get an idea of when you’re looking at future acquisitions, how you’re thinking about oil markets versus gas markets longer term? Does that change your view on where you’ve been focusing in the Eagle Ford? Or do you continue to focus on the wet gas and oil windows versus the dry gas areas?

Clay Rynd: Michael it’s Clay. Listen, I think we’re — as you’ve seen us through the course of this year, I think we’re willing to invest across both oil and gas. But I think for us, it’s all about what the opportunity set is. We do have a robust pipeline. I think the bar is very high today. We’re excited about the execution on the acquisitions we completed and the integration. So we think there’s a lot ahead of us, but bar is high. I’d just say, if you look at the broader A&D markets, there’s just been more transactions in oil than in gas with the Contango and the curve has been a harder place for the market to transact. So I think you’ll see us look at both commodities across the Eagle Ford. But I do think, realistically just given where the markets are, you’d probably expect there to be more transactions in oil as a broad market and we’ll just see where the opportunities lie for us, and our ability to execute.

Michael Scialla: And I wanted to ask about the Central Eagle Ford acquisition you did here recently. Any obvious changes you expect to make drilling or completion wise designed there? And I guess what kind of savings you expect, maybe relative to what you’re seeing with the SilverBow assets? And any thoughts on the development plans there for the remainder of the year? Is that a 2025 development opportunity?

David Rockecharlie: Actually, that that asset was unique for us, speaking we highlighted in the prepared remarks. But the ability to kind of acquire an asset in Eagle Ford that we thought was development ready but also had a low decline production base, I think that was driven by the historical nature of the operator who had been a kind of prudent, developer of the asset. Certainly, I think you’re going to see us execute on the same types of D&C savings that we’re seeing across the broader business. So being able to bring what we think is really kind a leading D&C execution to that asset is a huge benefit to us. We also think the asset is well set up, just to offset our existing Central Eagle Ford acreage for near-term development. So I would expect to see us kind of develop that asset, portions of that asset in 2025 and beyond. So really excited about that tuck-in acquisition.

Operator: The next question comes from John Freeman with Raymond James.

John Freeman: Nice quarter. The first topic, you have obviously done a great job of accelerating the synergy capture and driving the efficiency gains. The other aspect, you all have historically done a really well on is the well outperformance post acquisitions. And I’m just I know it’s still relatively early since you got your hands on the SilverBow assets. But if there’s any anything that you’re seeing from the way that SilverBow is completing the wells that you all have identified that would provide opportunities like you all have seen in some of your prior acquisitions, profit intensity, well spacing, just anything that’s kind of jumped out at you all as potential opportunities to improve well performance?

David Rockecharlie: John, it’s David. I’d say that we’ve intentionally been very strong about how pleased we are with the integration opportunities around synergies. That is an area where we would expect the overall portfolio to benefit from things that they were doing versus we were doing. I think the great thing though is I wouldn’t highlight this as the number one area where there was any significant underperformance. Actually both companies had a history of making acquisitions and improving the outcome. So I think we will be better together, but we’re certainly able to talk about the immediate synergies around D&C costs and implementation. And longer term, I think we’ve said this on prior calls, we would expect to get the benefit of improved performance on new drilling, and then secondarily improved performance on production optimization.

Together, the two companies have a huge production base now that overlaps pretty well. And I think as we’re continuing to optimize, we just have more to apply it over and generate significantly more value.

John Freeman: And then, my follow-up, I believe legacy Crescent was doing about 50% Simulfracs and obviously, SilverBow wasn’t doing any. I know that you aren’t finalized on 2025 plans, but just kind of, like, rough numbers. Is there, like, a reasonable target that you all would sort of think for a percentage of combined company activity in the Eagle Ford that would be Simulfrac next year?

David Rockecharlie: Yes. I wouldn’t provide any direct guidance on that now. I would just tell you that in general, it’s a land exercise as much as a development exercise. So we’re working through all those types of things now, but we clearly see significant benefit from Simulfrac. So I think what you can assume is we’ll continue wanting to drive that percentage higher. But as of now, we’re still in what I would call planning and flexibility phase looking forward into next year.

Operator: The next question comes from Arun Jayaram with J.P. Morgan.

Arun Jayaram:

A – Brandi Kendall:

Q – Arun Jayaram:

A – Brandi Kendall: Yes, if we — just from oil cut standpoint on Q3, we — 39% of our production was oil. I think it will be in a similar zip code for the fourth quarter. We also reaffirm production guidance. So if you just take the midpoint of that range, you’re in this kind of low to mid 250s overall. That’s why I go with the model standpoint.

Arun Jayaram:

A – Brandi Kendall: Yes. That’s right.

Operator: Next question comes from John Abbott with Wolfe Research.

John Abbott: Thank you for taking our questions. First question is really sort of a strategy question. So you’ve increased size and scale to acquisitions. You’ve significantly increased your scale in the Eagle Ford. You’ve talked about a long-term about a potential pipeline of other opportunities in front of you.How do you think about future acquisitions and maintaining your underlying decline rate? I mean, in the past you’ve had brought in conventional assets but do those — are those still important as you sort of increase size and scale? How do you think about that balance of increasing through acquisitions and then your underlying decline on the decline rate?

A – David Rockecharlie: And so for example, if you look back at the history of acquisitions, including SilverBow, some have been acquisitions of assets that were already low decline, whether they were the Eagle Ford acquisition we made last year in the Western side or prior conventional assets a few years ago. We also make acquisitions of assets that are on much higher decline. And what we do is work to bring them into our business plan and style of operating. So the SilverBow business plan prior to the acquisition was more of a growth oriented business, higher production growth, higher reinvestment rate, lower free cash flow and therefore, higher decline rate. So long story short, we would expect to bring those assets into our business plan and the overall business will still maintain a lower decline rate that will settle out to over the next, call it, 6 to 12 months.

So I think that’s a fundamental strategy whether we’re buying high decline or low decline to make sure that the company’s attributes and portfolio decline rate stays in our targeted zip code.

John Abbott: Appreciate it. And then a quick follow-up for me. It was all you just mentioned earlier about the optionality between going between gas and oil in the Eagle Ford. So I guess the question right there, David, is when you sort of think about that gas optionality, is it a price? Is it an oil to gas ratio? How do you think about when you possibly might add additional activity towards the dry gas acreage in Webb County? What would you have to see? As I say, is it a price or is it an oil and gas ratio? How do you think about that?

David Rockecharlie: Yes. So fundamentally, everything, as you know, at this company is driven on returns on capital. So we need to see 2x our money or better and the ability to get our capital back in an appropriate timeframe in acquisitions that’s five years or less and driven even shorter. So I would just say it’s all capital return driven. But as you know, there are a number of different levers that have to be working the right way to make that happen. So in a low gas price environment, no matter how good you are, it’s unlikely that you’ll generate the return you want. So you’re not allocating capital there in a higher price environment that can create that opportunity but there also can be inflation or other things going on.

So we feel really good when we look across the portfolio. We have really high quality inventory. And given the ability to move rigs pretty efficiently that we’re able to respond to both price signals but also capital input costs and well performance to make that happen. But long story short, return on capital is the driver.

Operator: The next question comes from Michael Furrow with Pickering Energy.

Michael Furrow : Congratulations on closing the SilverBow deal. Look. I appreciate all the detail on the improved drilling speeds and completion efficiencies that are translating to lower D&C costs. I noticed that the company’s moved from running 3 to 4 rigs in the Eagle Ford down to 3. So is this an output of improved cycle times, allowing for the same number of turn lines but with fewer rigs? Or should we view this as more of a structural activity change?

David Rockecharlie:

Q – Michael Furrow:

A – Brandi Kendall: It’s Brandi. So I would say no change fundamentally with respect to our capital allocation priorities being the balance sheet and the fixed dividend. I would say we like having the buyback as a tool to buy the stock, right when it’s disconnected from intrinsic value. We bought back as you mentioned $7 million in this quarter at 12.68. To date, we bought back $30 million at 10.07. So, again it’s a nice tool for us to have. But again, it will be relatively smaller, for the time being, again, just given our cap allocation priorities.

Operator: The next question comes from Tarek Hamid with J.P. Morgan.

Unidentified Analyst:

A – Clay Rynd:

End of Q&A:

Operator: Thank you. At this time, I would like to turn the floor back to Mr. David Rockecharlie for closing comments.

David Rockecharlie:

Operator: Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.