Q4 2022 Crescent Energy Co Earnings Call
Greetings and welcome to the question energy fourth quarter and full year 2022 results conference call.
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It is now my pleasure to introduce Emily Newport, Senior Vice President of Finance and Investor Relations. Thank you you may please begin.
Good morning, and thank you for joining <unk> fourth quarter and full year 2022 earnings.
Our prepared remarks today will come from our CEO , David rocket, Charlie and our CFO Randy yourself.
Hi, Chief Accounting officer, and thank hotter labor in those executive Vice President are also here today and available during the Q&A.
Today's call may contain projections and other forward looking statements within the meaning.
Securities laws.
These statements are subject to risks and uncertainties, including commodity price volatility well, both geopolitical conflict our business strategies and other factors that may cause actual results to differ from those.
As expressed or implied in these statements and our other pleasure.
We have no obligation to update any forward looking statements after shapes.
Today's discussion also may include disclosure regarding non-GAAP financial measures reconciliation of historical non-GAAP financial measures to the most directly comparable GAAP measure. Please reference the 10-K and earnings release available on our website with that I will turn it over.
Good morning, and thank you for joining the call today.
We are pleased to share our performance and progress with you as we close out our first full year as a public company and look ahead to 2023.
While we have reached a number of milestones over the last 12 months, we continue to execute the same proven acquirer and exploit strategy that we have successfully pursued over the last decade.
Over this time as both a private and public company, we have managed the business through market cycles and significant volatility to deliver.
Significant free cash flow.
Prudent risk management and attractive returns on investment.
I will summarize our 2022 highlights today under three key themes financial opt.
Operational and business scale.
Our team is delivering across all of these important areas and we will continue building on this momentum let's.
Let's start with our recent financial performance.
First 2022 was an outstanding year for crushing.
We generated $1 $2 billion of adjusted EBITDA, and nearly $500 million of Levered free cash flow.
We demonstrated our commitment to capital allocation priorities, one a and one b returning cash to shareholders and maintaining balance sheet strength.
In 2022, we returned a roughly 7% yield or $143 million to shareholders through quarterly dividends and an opportunistic share repurchase in September where we've reduced total shares outstanding by 2%.
Looking at the balance sheet, our substantial free cash flow generation allowed us to reduce approximately $300 million of net debt subsequent to closing the highly accretive Uinta basin acquisition in the first quarter of 2022.
Today, our leverage ratio is one times in line with our long term target.
In January this year, we completed a successful $400 million notes offering and used the proceeds to reduce additional RV L death.
This significant RV L repayment post acquisition demonstrates our commitment to balance sheet strength.
And our preference for longer term institutional capital.
And today, we have pro forma liquidity greater than $1 billion.
Our capital structure with an aggregate bond complex of over $1 billion, coupled with increased business scale access to the equity markets and consistent business execution has been recognized by the rating agencies with an upgrade from Moody's and a positive outlook from S&P earlier this year.
We've continued to progress our capital market strategy and since going public have accessed the debt and equity markets three times to raise approximately $700 million of capital to strengthen our balance sheet and expand our public shareholder base.
Our inaugural follow on equity offering in September of last year.
Increased our float by 15%, while also expanding our institutional shareholder base going.
Going forward, we remain focused on establishing prominent public presence.
Now, let's move on to our operational performance.
In 2022, we continued to create value from our large resource base and deliver on our business plan.
Despite the industry backdrop of inflation and commodity price volatility during our integration of both the contango and Uinta acquisitions, our production and capital investments remained within our original beginning of the year guidance when adjusted for noncore asset sales.
This is a big accomplishment as our team continues to find innovative ways to combat industry wide challenges, including supply chain constraints infrastructure maintenance and inflation.
For the year, our production averaged 138000 barrels of oil equivalent per day. This is a more than 45% increase from 2021 levels.
Driven by the attractive production based acquisitions, both contango in the Uinta basin assets and incremental production from the further development of our proven resource inventory in the Uinta and Eagle Ford.
We benefited from well productivity gains in both areas, where we are drilling longer laterals, reducing cycle times, and optimizing our well spacing and completion designs.
These operational efforts to help offset inflation and drive investment returns.
Our capex spend in 2022 totaled approximately $625 million at the low end of our guidance more than 80% was allocated to the development of our high return oil plays in the Uinta and Eagle Ford well.
We continue to anticipate our capital program to generate on average one to two year paybacks and over two times, our invested capital assuming current pricing and production trends.
Our proved reserves increased nearly 10% year over year to 573 million barrels of oil equivalent.
<unk> oil reserves were up more than 15% and about 80% of our total reserves are proved developed.
The value of our reserves reflects the increased oil percentage and our deep inventory of proven development locations with a proved PV 10 value at SEC pricing of approximately $9 6 billion at year end.
We maintained our industry, leading low decline rate of 22%, which provides our business increased flexibility and less reinvestment risk relative to peers.
Additionally, we continue to integrate important sustainability initiatives across our business.
Last year, we joined the O G. M. P 2.0 initiatives committing to better methane emissions measurement and we set ambitious targets, including to reduce our absolute scope, one cotwo equivalent emissions by 50% by 2027 from our 2021 asset levels.
While the sector continues to consolidate into financially stronger proven operators I'm confident that our business performance and operational execution will remain differentiated and be recognized by the market overtime significantly benefiting our shareholders.
Lastly, lastly, let me cover our accomplishments as we continue to scale the business and our 2023 opportunity set.
Our acquire and exploit strategy remains unchanged and is a proven approach to creating value for our shareholders.
We're focused on generating free cash flow managing risks and making attractive returns on the capital we choose to invest.
Our contango in Uinta basin acquisitions from over a year ago were transformative. Additionally.
Additionally, we high graded our portfolio selling approximately $100 million of assets over the course of 2022.
The largest of which was our subscale operated Midland basin position.
We have prudently and accretively increased our scale and production reserves and cash flow, while maintaining a strong balance sheet and investment grade credit metrics.
And we will continue to enhance our financial and operating foundation, so that we remain well positioned to scale.
As you know we were one of the most active participants in the A&D market.
In 2022, we evaluated over 150 transactions with a focus on our core areas and the Texas and the Rockies.
Given the number of asset opportunities, we screen each year, we have a unique and valuable understanding of the broader market dynamics.
We look for a confluence of factors and our broader acquisition decision making include.
Including asset supply competitive dynamics cost and availability of capital and oil and gas macro fundamentals.
For example, we were quite active in the M&A market prior to the run up in oil and gas prices.
Which occurred during 2022.
However over the last 12 months, we have been sellers not buyers.
Because of our deep high quality development inventory and low base production declines we can afford to be patient.
We expect the A&D market will be active this year as inflation moderates and oil prices stabilize.
The progress we've made to bolster our balance sheet and successfully access the capital markets will allow us to continue to be an active and disciplined acquirer.
We will continue to remain disciplined and selective when it comes to acquisitions and focus on opportunities, where we can capture synergies and enhance operations and accretive transactions as we continue to scale and transform our business with.
With that I'll turn the call over to Randy to cover our fourth quarter and full year 2022.
Actual results and 2023 outlook.
Randy.
David I'll quickly cover our fourth quarter results, and then turn to our 2023 outlook.
For the fourth quarter, we generated $290 million and adjusted EBITDA and $113 million in Levered free cash flow with 139000 barrels of oil equivalent a day of production.
Also reflected the impact of our $80 million Midland Basin divestiture winter weather and fewer planned turned in line.
We estimate that weather impact reduced volumes by approximately 500 barrels per day during the quarter.
Our oil differentials increased modestly quarter over quarter, primarily due to higher production contribution from the Uinta, whereas gas realizations remained relatively flat.
Given our sizable Rockies footprint, we are well positioned to benefit from the increased natural gas realizations in certain west coast market, particularly in the first quarter of 2023 and higher gas revenues are expected to more than offset a moderate production impact from winter weather.
Our operating expenses per BOE for the fourth quarter were largely in line with annual figures both exceeded our original guidance, primarily due to inflation commodity linked costs.
High return elected Workover projects and weather impact. However, we were in line with original annual guidance on production EBITDA, Capex and free cash flow when adjusted for divestitures and commodity prices.
Turning to 2023.
We remain focused on adhering to.
<unk> disciplined strategy that we've pursued for over a decade in the private and public market, one generate significant free cash flow.
To exercise prudent risk management and three produced attractive returns on the capital we choose to invest.
Our 2023 guidance was constructed around these three areas first we prioritized free cash flow generation roughly 85% of our 575 million to 650 million dollar capital program is allocated to our operated you went to an Eagle Ford inventory as a result, we expect maintenance levels of production of around 134.
And barrels of oil equivalent per day at the midpoint by spending slightly less capital than in 2022.
Today, we are running one rig in the Eagle Ford and one rig in the you went that and expect to maintain this level of activity in the near term we continue to be mindful of inflation and have incorporated our latest expectations into our capital budget in our operating cost guidance.
Next we employ prudent risk management, both oil and natural gas prices have declined in recent months, while service cost have yet to reflect this change. This is a great time to exercise discipline and we have the flexibility to do so with our industry, leading low decline rate and relatively less capital intensive business.
Our cash flow, we generate in today's commodity price environment, well allow us to continue to prioritize returning capital to shareholders and balance sheet strength.
I really want a and one b for Crescent remains the dividend and the balance sheet.
We know the importance of our sustainable cash return model for shareholders to earn a premium valuation cash return frameworks require a well defined strategy and must deliver through commodity cycles.
Our return of capital strategy, which is fixed as a percentage of EBITDA and is a strategy that we have pursued consistently over the past decade.
Insulates, our investors from the impacts of capital inflation relative to a strategy defined as a percentage of free cash flow.
Highlighting our commitment to shareholder returns today, we announced another 17 cents per share dividend.
Third we focused on generating attractive returns on investment.
Our 2023 outlook accounts for what we believe will be an active year for M&A.
We will continue to be selective and screen for accretive deals that can create long term value, but we structured our 2023 capital program to effectively balance okay organic D&C investments into pursuit of attractive A&D opportunities.
In summary, we are pleased with our financial results and look forward to what we anticipate will be a year of continued momentum for our business, but that I will turn the call back over to David.
Thanks Randy.
We're pleased with what we accomplished in 2022 as a team and all areas of the business.
Overall, we continue to scale the business prudently and Accretively.
We generated approximately $500 million of free cash flow driven by our high return oil development.
And participated in attractive M&A.
We continued to execute on our priorities to return capital to investors and maintain our strong balance sheet.
We enter 2023 with a disciplined investment plan designed to maintain flexibility and create value for our shareholders by continuing to execute our proven acquire and exploit strategy and what we see as an attractive market backdrop.
We are fortunate to have purpose built flexibility with our 2023 program stemming from our industry, leading low decline rate multi basin presence deep inventory of high return oil development opportunity and effective risk management practices. We.
We continue to stick to our core strategy and principles.
We are proud to be able to share. This outstanding business performance as we finished our first year as a public company.
I will now open the call up to questions.
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Thank you. Our first question comes from the line of Neal Dingmann with true Securities. Please proceed with your question.
Good morning, Opex for the time, maybe my first question probably for you just on general sort of free cash flow allocation I'm. Just wondering now that you know I look and leverage seems to be down to a comfortable level, you've obviously pay a solid dividend.
Looking out there you're not only does your stock computer.
To me quite cheap, but yes.
You mentioned, a number of potential attractive deals out there so given kind of those four things now how do you do you think about prioritizing free cash flow any differently today than you did maybe a year ago.
Hey, Thanks for the question and good morning.
I think the simple answer is no.
We stick to those priorities <unk> either in your balance sheet and the dividend and then everything else is optimistic and so I think.
One of the things you should expect from US. This year is a strong focus on flexibility.
I'd say last year was was in hindsight pretty obvious and easy for the industry to allocate capital to.
To development as we had.
Entered the year.
At pretty attractive margins with increasing commodity prices and so you're just going to hear from us that we think that this year is going to be more volatile require more.
Focus and attention day to day, and I think we do well in those environments. So same priorities and really just focused on being flexible around finding the best value.
No great to hear and then.
Just a couple more just for you or Brandon just on on hedges generally had been a little bit more on the out year I'm a little bit more hedged just again thoughts is that changed at all or is thinking around hedging given you definitely have even a better balance sheet than.
Very solid balance sheet. So I'm just thinking when you look out a year, you've got pretty decent hedges for this year I think youre about 50% or so I'm just wondering when you look out the out year I think we're close to the 25% so thoughts about adding to that that out here.
And you all know.
<unk> two our hedge strategy, you're right, we're roughly 50% hedged this year at the midpoint at 25% next year for US. It's all about protecting the balance sheet and as you mentioned the balance sheet is really strong today and then secondly, it's protecting returns on the capital that we invest.
The last time, we hedged and any material amount was in connection with the you went to a transaction. So as you see us put capital to work this year whether that's.
Through D&C or or through acquisition I think it's fair to assume that.
We adhere to our historical policy of protecting that invested capital.
Okay, and then one last one if I could just on operations you mentioned, that's pretty good slide on that slide 13, where you are having the upside in the U S up from the optimize well design I'm wondering are you also doing much like in the Eagle Ford are you doing in the Uinta longer laterals and are you seeing better.
Better drilling days, there or really is it just more about you talked about the hybrid and slick water I know that CEO that you've gone to maybe where the upside is being seen in the Uinta. These days operationally.
Yes, Neal it's been certainly taking all the learnings from from the Eagle Ford and applying them more relevant in the Uinta. So I'd say on the operational efficiencies, yes, we're still continuing to get better every day.
In terms of our execution and realizing that.
Through through cost efficiencies as it relates to lateral lengths.
You went to generally pretty well set up from kind of a 10000 foot laterals. That's generally what we're pursuing up there.
So I think you should continue to see kind of that development plan and as you noted you know moving to the slick water completions. We think is both delivered better results as well as reduced capital costs overall.
It's benefited margins and returns.
Thanks, Pat Thanks, Thank you.
Yeah.
Our next question comes from the line of John Abbott with Bank of America. Please proceed with your question.
Hey, good morning, and thank you for taking our questions.
Our first question is on your 2023 production guidance.
Just sort of wanted a little bit more color on the high end and the low end of that production guidance range.
How are you thinking about overall turn in lines for the year and also the cadence of turn in lines for the year.
Hey, John Good morning, it's Randy so as.
We think about our 23 program and as we hit on our prepared remarks, that's really a maintenance level of activity for us right that results in plus or minus $600 million of capital on a full year basis.
So slightly down year over year, we do expect similar til activity other than what we had in 2022, which is our in and around 60 tails on the total <unk>.
Asset base.
From a production cadence standpoint, and we hit on this it slightly in the prepared remarks, we do expect Q1 production to be down slightly in that.
It really is twofold, we experienced some weather events and and Q1 and then also just the timing of when those tools come online in the first quarter it'll be towards the back ended the quarter. So would expect production to be low single digit percentage points down relative to the fourth quarter and then what to expect.
To be back up in line with the midpoint or above the mid point after the rest of the year.
I appreciate it and then for our second question its on deal potential deal activity.
Is there a particular size of deal that you would consider and this is I mean, it's sort of how.
How are you thinking about the potential size of the deal in this market.
No.
What's your willingness to latch.
Net debt to EBITDA metrics move potentially higher.
And then lastly, it sounds like you're looking more at oil opportunities in your existing assets would you consider gas opportunities in the current environment.
Yeah.
Hey, John I'll start and then I'll turn it over to clay. They're just you know maybe as a reminder, as we look at investing in and the sector right one everything to meet needs to meet our underwriting criteria surprised that a few times a multiple of invested capital.
It needs to be accretive to the business from a cash flow perspective.
Then it also just needs to fit within our financial policy framework. So for US and we publicly stated that that means no more than one and a half times in an acquisition.
Scenarios of wet with that I'll turn it over to clay to talk more specifically about the market.
I think we've.
As we as we look at kind of deal size, obviously, it starts with what Randy Randy hit on and making sure it fits within our financial framework of the business, but then from there.
We've been pretty consistent.
In and around our asset base, we're just trying to be as opportunistic as we can and will go on the small deal size too.
<unk>.
If we step away from our existing asset base, we're going to be looking for something that's larger in scale, we don't want to be scattered and so if we're if we're stepping away from the asset base is going to be on kind of the larger end of opportunities for us and looking for places where we can go achieve scale.
And then you mentioned gas versus oil obviously as we came through the fourth quarter of last year, we saw the commodity volatility really ratchet up in deal activity shrinking recalled last year that the year of the failed sale.
Certainly I think we've.
We've been pretty consistent that we'll look at both and just think through value I would certainly expect with.
The volatility in gas, it's a tough market to transact in today so.
The bias is to kind of transact ability higher in the oil market and obviously that clearly that's within our asset base as well. So I think that's where our bias would be but we think this is going to be a really active year, David if Randy hit on that you know I think we said we looked at 150 give or take deals last year. I think we will look at more this year just given how activity is ramping up so we're excited about.
The opportunity set.
Thank you very helpful. Thank you for taking our questions.
Great. Thanks, Tom.
Mr. Arbitrarily. It appears we have no further questions at this time I would like to turn the floor back over to you for closing comments.
Great. Thank you everybody again for joining us and for continuing to support us as we build the business.
Prudent and accretive way and we look forward to continuing conversations going forward.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.