Q2 2022 Crescent Energy Co Earnings Call
Greetings welcome to Cressa Energy's second quarter 2022 results conference call at this time, all participants are in a listen only mode.
A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Brandy Kendall Chief Financial Officer. Thank you you may begin.
Good morning, and thank you for joining Creston <unk> second quarter 2022 earnings call.
Our prepared remarks today will come from our CFO , David Rocket, Charlie and myself, Todd bulk Chief Accounting Officer, and Ben Connor and play rendered that was executive Vice President are also here today and available during Q&A.
Today's call may contain projections and other forward looking statements within the meaning of the federal Securities law.
These statements are subject to risks and uncertainties, including commodity price volatility. The continued impacts of COVID-19, geopolitical conflict, including in Russia, and Ukraine, our business strategies and other factors that may cause actual results to differ from those expressed or implied in these statements and other disclosures, we disclaim any obligation.
To update any forward looking statements after todays call.
In addition, today's discussion may include disclosure regarding non-GAAP financial measures.
A 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 David.
Thank you Brandy and good morning, everyone. We appreciate your joining us today for our second quarter 2022 earnings call.
It's been less than a year since we began trading publicly crescent energy and we continue to be excited about the market opportunity ahead of us.
For over a decade, our organization has maintained a consistent strategy based on cash flow risk management and investment returns with the goal of creating long term value for shareholders through commodity cycles.
We believe now more than ever that crescent remains exceptionally well positioned to execute on this strategy we.
We are pleased to share with you today's results as this is our first full quarter, including our recent Uinta Basin acquisition.
As a reminder, we will also take your specific questions at the end of our remarks.
Overall, our second quarter results were in line with our performance expectations as we focused on operations of our existing assets and the successful integration of our highly accretive Uinta Basin acquisition.
Additionally, you went to assets has significantly increased the scale of our production base reduced our per unit cost structure and added high margin oil inventory, which has resulted in significant growth in our business.
Relative to our first quarter results net production has increased 18% and adjusted EBITDA has increased 92% offering. Another tangible example of our acquisition strategy, creating value for shareholders.
In the second quarter, we continued to generate significant free cash flow and strong returns on invested capital allow.
Allowing us to maintain a healthy balance sheet and return capital to shareholders through our fixed quarterly dividend structure.
Operationally, we continue to execute on our 2022 capital program.
<unk> maintained three rigs across the Uinta and Eagle Ford and brought on line 13 gross operated wells for the quarter.
Additionally, we participated in nine gross two net wells drilled across our non operated assets in the Eagle Ford.
Crescent large held by production resource position has always allowed us to make returns driven development decisions and then today's commodity environment, our quality multi year inventory continues to see exceptional returns on capital with short payback periods.
While operational performance has been strong and the business continues to grow significantly crescent remains relatively new to the public markets.
We believe it's critical that we continue to increase market awareness of the company.
Our strategy and our proven track record of generating shareholder value.
As I said earlier, we describe our strategy is focused on cash flow risk management and returns.
We generate significant free cash flow from our large diversified and low decline producing asset base.
We manage risk through a portfolio approach to asset selection and by maintaining our strong balance sheet supported by our hedge program.
And we seek to deliver strong returns on invested capital both through internal development and complementary accretive acquisitions.
All in order to drive profitable long term value for shareholders.
This is the same strategy we've executed on for the last decade in the private markets across commodity cycles, and we continue to believe it's the optimal approach to creating value in our sector.
Turning to the market backdrop, we would highlight that following years of underinvestment in the oil and gas sector. We are in a period of unique volatility, which has been driven by the rapid recovery of global economy post pandemic and exacerbated by unprecedented geopolitical dynamics.
While sustained higher commodity prices have bolstered our overall outlook.
Broader inflationary pressures and supply chain constraints continue to manifest across the oil and gas industry and will remain a key theme for the remainder of this year at least.
And the A&D market, we're on pace to evaluate around 150 to 200 opportunities this year.
We firmly believe provides us with a differentiated view of the opportunity set available today.
Given the heightened commodity price environment, we've seen a significant increase in assets on the market in 2022.
Private sellers look to capitalize on higher prices and certain publics look to rationalize their portfolios of noncore assets.
In our view the volatility in commodity prices alongside the steep backwardation in the forward curve has widened the bid ask spread and the A&D market and will likely lead to more failed sales than usual.
We believe crescent is well positioned to create significant shareholder value through this environment, given our differentiated investor mindset and broad operational capabilities, covering both conventional and unconventional assets, which expands our list of actionable opportunities.
Ensuring we can find attractive risk adjusted returns that complement our existing portfolio.
And given the nature of our business today, our low decline rate and multi year inventory of high returning locations allows us to be patient and evaluating new transactions, while remaining well positioned to capitalize on compelling opportunities as they arise from within the large volume of assets on the market today.
On new acquisitions, we remain focused on generating attractive returns through the disciplined criteria that has underpinned our investment philosophy for over a decade.
First and foremost we emphasize M&A activity that generates returns in excess of two times, our invested capital with sub five year paybacks.
Second we look for strong downside support through a large producing base and financing that maintains balance sheet strength.
And finally, we prioritize opportunities in basins with proven reserves, where we have an existing position or do we see an ability to scale efficiently, allowing us the opportunity to benefit from both administrative and operational synergies.
Throughout our continual portfolio construction over many years, we believe we have proven our ability to capture attractive assets integrate them into our portfolio and apply our strong operating skills to find synergies and create value for shareholders.
Our recent Uinta acquisition offers a prime example of the benefits of the Crescent platform.
With our differentiated business model, including a unique combination of operating financial and investment expertise, we were well positioned to move quickly.
Complex sales process dynamics and to capitalize on our large and compelling opportunity for our shareholders.
While maintaining pro forma leverage of one three times, we closed on the acquisition in March for total cash consideration of $690 million.
Very attractive headline value for assets with $1 billion of proved developed P. P tab at Nymex pricing as of March 31st.
And substantial development upside.
We executed three years of hedges on a portion of PDP volumes that clothing and <unk>.
During strong downside protection, while maintaining significant commodity upside on the large base of unhedged reserves.
The assets are a fantastic addition to our existing Rockies footprint and was 65% oil and low operating costs, they significantly enhance our overall margins and inventory of high returning development locations.
Since closing the Uinta acquisition on March 30th.
We've made significant progress on integration.
We are actively engaged with all stakeholders on our current and future operating plans.
Operationally, we plan to run one rig in the Uinta for the remainder of the year.
The reduction in activity allows us to manage development timing, while our midstream provider adds additional capacity to our infield gathering system to support future volume growth from us and other operators, who continue active development programs.
Additionally, this allows us to validate both our spacing and completion design optimization relative to the previous operator, which we believe will create more shareholder value overtime.
All capital projects, especially in today's environment, where real operational constraints exist. There are risks of delays, which could negatively impact some of our planned development activity in the latter part of this year.
Furthermore, as I noted earlier, we continued to see the same broader inflationary pressures and supply chain constraints as the rest of our industry, which remain a byproduct of the higher commodity price environment.
While Brandi will review capital guidance in a little more detail I want to emphasize our team has done an exceptional job mitigating these headwinds and our capital guidance for the year remains unchanged.
I will now turn to ESG, which is an integral part of everything we do and deeply ingrained in our long term organizational outlook.
We plan to issue our 2021 ESG report later this year.
Which will include both short and long term ESG targets with a focus on E H S and emissions.
As touched upon during our first quarter earnings call in January of this year, we joined the oil and gas methane partnership two point O initiatives or Oh G M P to point out.
We believe reducing methane emissions is critical to slowing the impact of climate change and the first step and methane reduction high quality measurement data.
The rigorous O G. M. P 2.0 framework will aid our efforts to create targeted programs to reduce emissions accurately.
Accurately report, our data and help us to be positioned as an industry leader in emissions reduction overtime.
Our inaugural implementation plan and annual report to the O G. M. P to point out was rated the highest level gold standard, which means we both adequately adhered to their methane emissions reporting standards as well as outlined a clear path for identifying and reducing methane emissions above and beyond the current ripped.
Requirements.
We were pleased to see that additional U S operators, such as Conocophillips, Devon and pioneer have joined the O G M P to point out as well.
Ensuring that we are in good company as we strive to identify and reduce emissions as an industry.
We will continue to keep you updated on our progress in this area and look forward to discussing our sustainability report once formally published.
In short our acquisition strategy operational performance and a supportive commodity backdrop have all contributed to the strong results posted this quarter.
<unk>, our substantial free cash flow generation.
With that I'm happy to turn the call over to Randy to cover our second quarter 2022 financial results and 2022 outlook Brady.
Thank you David.
We are pleased with our results through the first half of this year as we are successfully integrating our accretive do you went to the acquisition, while maintaining a rigorous commitment to cash flow priorities, one a and one b.
Shareholder returns in the balance sheet alongside earnings we announced a quarterly dividend payment of 17 cents per share consistent with the second quarter we.
We intend to pay 17 cents per share quarterly for the remainder of the year generating an attractive 5% yield based on recent trading prices.
On the balance sheet, we exited the quarter with LTM leverage at 1.2 times and over $500 million in liquidity.
As we continue to generate significant free cash flow for the remainder of the year, we expect to reduce leverage to our target level of 1.0 times EBITDA.
Absent any potential acquisitions for.
For the second quarter 2022, our first full quarter. Following the you went to acquisition. We produced over 140000 net barrels of oil equivalent per day in line with our previous guidance. Additionally, we generated 373 million of adjusted EBITDAX and $137 million of Levered free cash flow, which represents a 92% and 53.
Per cent quarter over quarter increase respectively.
Our strong second quarter results underscore the relative strength of the business and quick integration. After you went to assets within our broader portfolio.
Operating expenses, excluding production and other taxes for the quarter were $14.68 per Boe, an 8% decrease quarter over quarter.
Proof minutes credit into the addition of high margin you went to volumes, partially offset by higher commodity linked costs.
For the remainder of the year, we continue to expect operating cost to trend lower on a dollar per Boe basis, which we anticipate will result in full year Opex per BOE, we around the high end of our previous guidance range.
The addition of the you went to assets is also modestly increased our differentials given its production prices as a percentage of W. G I, which has been more than offset by the higher oil weighting of our portfolio, increasing our total realizations.
Adjusted recurring cash G&A totaled $1 40 per BOE, which was in line with previous expectations and represents an 18% quarter over quarter decrease. This decrease was primarily driven by synergies associated with the Uinta basin acquisition, which added significance to get to scale to the broader business, while contributing minimal incremental.
G&A.
Note. This calculation excludes certain nonrecurring expenses that we incurred associated with the contango merger. So you went to acquisition and the formation of Crescent energy as a public company and we expect an incremental $10 million of one time expenses for the remainder of 2022, including post merger integration and other transaction related costs.
Moving onto capital spending we invested 193 million in the second quarter drilling 16 gross operated locations in the Uinta and nine in the Eagle Ford.
Additionally, we brought online four gross wells and then you went to a nine and the Eagle Ford.
Our wells brought online during the quarter, our posting strong early results.
We expect them to pay back in less than 12 months and generate more than two times, our capital invested at current commodity prices.
Today, we are continuing to operate one rig in the Eagle Ford and two rigs and then you want to add.
As David mentioned, we plan to ship to one rig and then you went to based on in this upcoming quarter as we implement and monitor our optimized spacing and completion design and manage volumes ahead of our third party gas gatherers plant expansion.
Our 2022 capital guidance is unchanged at $600 million to $700 million with more than 80% of allocated to the operated development in the Eagle Ford and you went to the basin.
Like our peers, we are seeing inflationary pressures and potential for logistical and other process delays across the business and we continue to find new ways to mitigate some of these pressures.
Based on what we know today, we believe our castle arrange continues to accurately account for expected inflation as our February guidance incorporated a 10% to 15% increase in capital costs year over year.
Given we are seeing additional pressure of around 10% for the remainder of the year, we anticipate our total capital spend to trend towards the mid to high end of our expectations, but still within the targets we outlined in guidance.
Moving to our capital markets activities, we continue to engage with the market to expand our followership improve our float and increase equity research coverage.
As we touched on last quarter, we recognize that the current market positioning and awareness of pricing is not yet at a level consistent with peers of similar size.
And more nuanced aspects of the business such as impact hedges have on near term cash flows are not full.
Really appreciate it and are reflected in our current valuation.
Market visibility and education is a key piece of our strategic plan for 2020, two and beyond and we are committed to an active approach to building awareness of our story and accessibility to invest in the stock through increased liquidity over time.
But that being said, we continue to monitor and balance our intention is to increase market presence with the state of the broader equity markets, which as you. All know had on her undergone a period of extended volatility over the first half of the year.
Given our initiative to increase market exposure, we do not intend to pursue a share buyback program like many of our public company peers, which we believe would run counter to the creation of long term value that increased float and market presence would provide.
Additionally, we believe the relative shareholder returns of our ongoing development program alongside preserving balance sheet strength and maintaining ongoing quarterly dividends as a more attractive use of excess cash flow.
In summary, Crescent continues to perform in line with our expectations and remains well positioned to create shareholder value in today's market.
We're focused on generating cash flow, making disciplined investments, maintaining our strong balance sheet and returning cash to investors.
That I will turn the call back to David.
Thanks, Brandy before moving on to the Q&A, Let me quickly summarize today's key highlights.
We are very pleased with our second quarter performance.
<unk> differentiated business model is working and crescent benefits from a number of key and important characteristics.
Number one we.
We're big we've made seven accretive acquisitions in the last 18 months and grown adjusted EBITDA to $1 $5 billion on a hedged basis and $2 $6 billion on an unhedged basis.
On an annualized basis for Q2.
We continue to deliver strong free cash flow, which supports our high quality balance sheet and dividends.
Number two we have a low decline PDP asset base at 22% with a proved developed PV 10 value of $7 billion as of 630.
Number three.
We have a proven high quality multi year development inventory.
Number four we have excellent alignment with supportive and proven investors as long term insiders.
Number five we believe our stock will gain momentum in the market as our legacy acquisitions hedges roll off and we continue to increase market awareness trading liquidity and float in our shares over time.
And finally number six we continue to believe Crescent presents a compelling long term value proposition for shareholders.
Thanks, again for joining us today and as always for your interest in our company, we will now be happy to take your questions.
Thank you if he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up the handset before pressing the star he's.
Our first question is from Neal Dingmann with truly Securities. Please proceed.
Thanks for the time My first question, Dave is probably a strategy question for you and you brought up the topic de jure and specifically I wanted to get a sense of you know.
Now that you guys are making obviously a great. Some great progress how are you thinking about future shareholder.
Returns you know really really besides that I think it's fair to say, you're certainly going to maintain its basically a beta which is great to see but I just wanted to see sort of beyond that I wanted to get it says and how you're thinking about allocating the remaining free cash flow do you think these days as it does to you.
Mentioned that good a buyback.
Buybacks I agree with that but not paying more back to investors either variable or whatever reason or would you think about more organic growth or would you build dry powder for further deals that you've been very successful.
Okay.
Yeah, great. Thanks for thanks for the question happy to take that you know.
The the most important thing is as we consider that question is just.
Ultimately, we're stewards of capital. So we can be patient, we don't have to do anything other than you know produce the assets we have efficiently.
And to your question I think the first thing as we think about are the investors and so that's the balance sheet and in the current dividend strategy we have.
What I would say that that's differentiated about us and we think presents a really compelling opportunity.
Is the rest of the industry faces higher decline rates faces you know a lot of pressure to return on capital given what's happened in the public markets over the last decade.
And in some senses, we see other companies really liquidating the assets they have and so at a time when equity capital in particular scarce in the sector. We do think our acquisition strategy, which has been proven over many years.
Should deliver us a really compelling opportunity to continue to grow the company.
So I would say again just to repeat that number one we're focused on the balance sheet and the existing dividend, where just patients with the excess capital we have in and in an ideal world will find really attractive acquisitions, while others are focused on on a different strategy than we are on all of that said, though we are.
Number one as I said focused on Investor returns and so as this market evolves, we'll be happy to consider what I would call.
A more traditional uses of the free cash flow we're generating.
Got it Okay, and then just second.
Second question, maybe for brand New work for you David just on kind of intertwined. What you were just talking about given the improved finances also.
Hedges I noticed you haven't put too much on lately, but again wanted more on the hedging strategy is it still I understand if you'd buy something you'll probably still hedges with more on existing on the go forward would you you know what you can.
With the same sort of entry level.
Yes, Randy so no change in our position quarter over quarter was the last time, we executed hedges was really in relation to signing the PSA for the USA transaction.
Feel really good about where the balance sheet sits today.
New hedges to come in in the context of ACA.
Sure.
Got it got it and then I can squeeze one last thing just on the winter. It sounds like things are going from two to one rig but it sounds like.
Now post deal all the synergy everything kind of maybe David you can talk about anything there that unexpected or really sounds to me like things are going pretty much as expected, but I didn't know if anything stood out to you on that.
Yeah, I'll, let Ben Congress take that one.
Yeah look I think the overall message is that we've been pretty pleased with the you know.
The overall transition and the integration of the assets. So you know obviously when you take over things there are certain things that you know, but you'll learn along the way, but nothing notably surprising and everything kind of really in terms of overall our investment thesis is really playing out as expected. It's early days, but I think what we're most excited about is how quickly we were able to.
Some of the operational changes, particularly around the development of the asset and so the results are early but they are encouraging and so we'll be excited to talk about that in future quarters, but all in all nothing nothing surprising in and things are going pretty well.
Great to hear thank you.
Our.
Our next question is from to Recommit with J P. Morgan. Please proceed.
Good morning.
Hey, Todd.
Just wanted to ask around the acquisition environment. We've also seen a number of trade in the last couple of weeks one reasonably large one in the Eagle Ford. So just wanted to get a sense of sort of what are you guys seeing and do you think you know we sort of hit a price point.
On strip, we're sort of transactions are a little bit more viable than they were maybe a few months ago.
Yeah, Hey, Hey, it's quite happy to take this one I think I think David did a good job of kind of laying out our thoughts in our in the opening comments, but certainly.
I think the ball.
Volatility has made it tough to get things done you, obviously referenced deal that got done.
The one in Eagle Ford that happened.
Certainly seems odd.
More strategic deals get done.
The operator has done a couple.
Alright.
I'd say the market is playing out as we expected right. We're seeing a ton of asset supply there hasnt been as much capital formation relative to that asset supply and volatility is high.
It's creating some more certainty around transactions. So I don't think we view that kind of an individual deal or a couple of us as a signal to a broader market. We expect things to start getting done as we head into the fourth quarter. If we kind of have some stability here.
This is the market kind of we expected and do you think it plays well to our strengths.
Yeah.
Got it.
And then you touched on this I think everybody in the industry has touched on just the broader inflation narrative any sort of particular items that are worth highlighting in terms of where you think there's a little bit more risk on the cost side.
Yeah, I mean look I think it's been a pretty dynamic market than you know I think a lot of places where we've seen it in your part of it is around steel pricing diesel, obviously, just given where oil and gas prices have been sand has been a particular a notable item and then.
And you know just with the Titan service market, you just kind of staying steady creep as you think of rig rates, which are a smaller part of the capital cost as well as just the availability of our completion crews. So it's really kind of been steady in certain places you've seen higher growth, but I think what we're starting to see particularly with the pullback in oil and again, it's too early to call. It.
Just some stability starting to shake up in kind of the the day to day commentary, but it's really been across the board, but it's really kind of steel a diesel pricing in and and sand is where I'd say, we've seen the most notable price increases.
Sorry. This is David just one other thought on that which is.
In terms of things.
<unk> the way we expected we really we built our portfolio over the last seven eight year downturn.
To be heavily production weighted in lower decline and anticipating inflationary environment like this where the increase in commodity price environment. We do from a production perspective just have less.
Exposure on.
On the opex side to inflation than than the typical D&C side that a lot of the industry faces. So we feel really good about the overall portfolio positioning.
Despite the.
General industry trends, which obviously, we expect to continue.
Well, that's great color, David Thank you I'll hop back in the queue.
Great. Thanks.
We have reached the end of our question and answer session I would like to turn the call back over to management for closing comments.
Okay.
Great well. Thank you all again for joining us and for all the support and attention you have given the company.
We are as you hopefully heard today hard at work are continuing to try to deliver exceptional.
Exceptional results and we look forward to staying in touch and we'll talk to you next quarter.
Thank you. This does conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
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