Q1 2023 Crescent Energy Co Earnings Call
Speaker 2: And.
Speaker 3: Greetings, and welcome to Crested Energy First Quarter 2023 Results Conference Call.
Speaker 4: At this time, all participants are in a listen-only mode. A brief 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce Emily Newport.
Speaker 5: Senior Vice President of Finance and Investor Relations. Thank you. You may begin.
Speaker 6: Good morning and thank you for joining Crescent's first quarter conference call. Our prepared remarks today will come from our CEO , David Rockacharli, and CFO , Randy Kendall. Todd Fulp, Chief Accounting Officer, and Ben Connor and Clay Rind, both Executive Vice Presidents, are also here today.
Speaker 7: and available during our Q&A session. Today's call may contain projections and other forward-looking statements within the meaning of the federal security laws. These statements are subject to risks and uncertainties, including commodity price volatility, global geopolitical conflicts, our business strategies, and other
Speaker 8: and other factors that may cause actual results to differ from those expressed or implied in these statements and our other disclosures.
Speaker 9: 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 10Q and earnings press release.
Speaker 10: available on our website. With that, I will turn it over to David.
Speaker 11: Great. Thanks, Emily. Good morning and thank you for joining us today as we close out another solid quarter.
Speaker 12: 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.
Speaker 13: 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.
Speaker 14: Before jumping into the first quarter results, let me spend a few minutes on our recently announced bolt-on acquisition.
Speaker 15: Last week, we announced an accretive acquisition of operatorship and incremental working interest in our existing, non-operated, Western Eagleford assets.
Speaker 16: from Mesquite Energy for $600 million.
Speaker 17: We acquired the original non-operated interest in the Western Eagleford over six years ago.
Speaker 18: So we know the assets incredibly well.
Speaker 19: We have a long history in the Eagleford and we are pleased to increase our ownership and bring our operating skills to these assets.
Speaker 20: Today, the assets represent approximately 75,000 largely continuous net acres, primarily in Dimmitt and Webb counties, with current net production of 20,000 barrels of oil equivalent per day, roughly 70% of which is liquids.
Speaker 21: Proforma will own an approximately 50% interest in the assets.
Speaker 22: adding an incremental 35% working interest to our existing 15% non-operated interest.
Speaker 23: The acquisition cements our position as a leading consolidator in the Eagle Fruit and is consistent with the proven acquire and exploit strategy that we've been executing for the past decade.
Speaker 24: And on a standalone basis, the Eagleford acquisition checks all of our investment criteria, fitting our strategy financially, operationally, and strategically.
Speaker 25: We believe the $600 million purchase price represents an attractive value, adding more than $700 million of PDP PV10 at $70 oil and $350 gas, and approximately 250 gross or 150 net operated lower Eagleford locations.
Speaker 26: with significant upside from the Austin shock and upper eagle fruit. The transaction is highly accretive to key metrics including operating cash flow, free cash flow, and net asset value per share.
Speaker 27: Through the transaction, we will maintain balance sheet strength and our investment-grade credit metrics.
Speaker 28: while remaining below our publicly stated maximum leverage guidance of 1.5 times. Operationally, the Mesquite assets add meaningful, high-return, lower Eagleford inventory at the current development pace.
Speaker 29: Over the last six years, as an active, non-operated 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.
Speaker 30: which was achieved using the latest approaches to drilling, completions, and weld spacing. Such recent performance is both significantly improved and quite competitive with Ebelford Development Basin-wide. We would also highlight the recent encouraging results from the Austin Chalk Formation.
Speaker 31: both on the acquired assets and closely offset, suggest significant upside on our acreage.
Speaker 32: 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 Eagleford 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 Eagleford and operate approximately 90% of our pro forma Eagleford position.
Notably, the assets add 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.
given the heightened commodity price environment.
Ultimately, we focused on strengthening our base business during that period of time.
reducing our leverage to one times post the UN to acquisition.
maintaining substantial liquidity, and continuing to core up our portfolio through a number of small asset domesticures. 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 inquire of assets, particularly in the Eagleford, which remains the most fragmented of the major basins across the lower 48 states. With its relatively low-based declines, well-delineated development, attractive realizations, and balanced commodity mix.
Further growth in the Eagleford 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 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 a first quarter cash dividend of 12 cents per share in line with our strategy to distribute 10% of EBITDA to our shareholders, framed around our guidance price tag of $70 oil and $3.50 gaps. For the quarter, we produced 137 MBUE per day and generated $232 million of adjusted EBITDAX.
$15.57 per BOE for the quarter, which is above our initial guidance range.
for the quarter, which is above our initial guidance range.
Crescent's adjusted operating expense for BOE was in line with expectations and we anticipate our beginning of year cost guidance to remain intact.
We invested $202 million in the first quarter, drilling 15 and bringing online 18 growth operated wells across the Uinta and Eagleford. Due to operational efficiency, 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 six months. We continue to offset the higher cost environment through longer laterals, decreased cycle times, and continual improvements in completion efficiencies. We expect strong returns from our development program and continue to operate one rig in both the Eagleford and Uinta basins.
But you know where 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 reductions during last year's period of higher commodity prices as well as our February high yield.
offering to term 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 first do the recently announced Western Eagle for a transaction. Also in line with our acquisition risk management strategy, we executed additional hedge volumes for the balance of 2023 and fully year 24 in connection with the transaction to protect our expected returns on invested capital and maintain a strong balance sheet.
Assuming a mid-year close at the Western Equal Product position and approximately 20 and daily per day of current production, we are roughly 50% hedge for the remainder of 2023. With that, I'll turn the call back over to David. Great. Thanks, Brandy. As Brandy highlighted, the base business continues to perform well and coupled with our capital market efforts and our patients through last year's elevated commodity price.
We believe the assets were acquired in 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 Eagleford scale, and increasing our operational control in an area that we know well through our existing interest and offsetting Eagleford operations.
Third, the assets are complimentary 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 the best way.
Thank you. If you 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 you would like to remove your question from the queue and for a participant choosing speaker equipment and maybe necessary to pick up the handset before pressing the star keys. So if you would like to ask a question, please press star one on your telephone keypad.
Our first question is from Bertrand Dones, which truest, please proceed.
Good morning. Just wanted to start off on the acquisition. You know it's got a bit higher liquids content than the Legacy Crescent. Was that a driving factor in this deal or you know was the steel process maybe started before gas prices went down or you know could you just maybe talk about how you approach the deal? Hey it's Ben.
Yeah, 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-
you know, 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 informs 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, you know, does that drive more activity in the near term in the acquired asset rather than legacy crescent? You know, we're not going to be talking about guidance until we close the acquisition, but fair to say we're running a rig both on this asset currently and on our existing operating position and we'll continue that current tech.
level or is there, you know, if commodity prices move interyear, are you looking to step in and change it or are we looking for May of next year as the next level set? Hey, Perj and it's Brandy. So as a reminder, we intend to set our return to capital framework once a year alongside our guidance. Thank you everyone for joining us this evening.
So that was $70,350, which equated to the roughly 12 cents 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 Ms. Steed, no change in return of capital framework, but we intend to provide updated guidance.
from John Abbott with Bank of America, please proceed.
Thank you for taking our questions. I want to go back to stay with the theme of the shareholder returns. And you know 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? Yeah, hey John , it's David and thanks for the question.
It's obviously 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, you know, 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 Crescent shareholders again is...
capital investing and 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 want to focus on
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. 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 you know we'll continue to take good feedback from folks. I appreciate the color David. The second question I think here is for Brandy.
It's on cash taxes, and I realize that you're not going to give guidance until
It's on cash taxes. And I realize that you're not going to give guidance until the acquisition closes.
So can you provide any color on when you perceive yourself as potentially a full-cached taxpayer?
for standalone Crescent and then possibly post the acquisition if you can to the extent that you're able to speak about it.
Hey John , so we guided at the beginning of the year based on our 70 and 350 guidance price that we were not going to be a material cash taxpayer. So we guided
zero 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 no material and...
you know, this year based on current prices and nothing material we would expect in 2024.
All right, I appreciate the color and thank you for taking our questions. Our next question is from Roger Reed with Wells Fargo. Please proceed.
I don't want to live give a lot of guidance on a property you don't own yet but given that some of the comments were along the lines of resource expansion Above and Beyond is what you're paying for or what you're acquiring
Is that, as we think about it, you know, a combination of factors? Is that refracts? Is it tighter drilling spaces? There's 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.
Yeah, hey, 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 yield for it. Again, we didn't pay for that in this acquisition. We bought this.
But when we refer to the resource expansion, it's really beyond the Lower Eagleford that's proven 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 Eagleford 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 perspective 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, what our strategy really is to be.
discipline, be a fast follower, follow 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.
Yeah, 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, you know, 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 as a tougher one.
better or excuse me more or less or the same in terms of the attractive opportunities going forward. Yeah hey 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. I think it was just notable that over that period of time, the prices were high.
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, by what we're trying to do. But I'll let Clay cover the really specifics that I know you were also looking for. Yeah. Hey Roger. Certainly, you know, as you know,
Q1, pretty slow deal here. 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, NNA 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 and into 24, there's lots of opportunity for us. Our pipeline's pretty full, and as you'd expect, we're going to be looking within our financial framework to find opportunities.
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, into 24, there's lots of opportunity for us. Our pipeline's pretty full, and as you'd expect, we're gonna be looking within our financial framework to find opportunities. Thank you.
Our next question is from Tarika Midd with JP Morgan. Please proceed. He comparable to D. J.ORDAN Sensor I.
Our next question is from Tarika Midd with JP Morgan. Please proceed. Good morning.
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 over the last few months and kind of how that affected the quarter on both the sort of revenue line and the OpEx line. Hey, Tarek. It's Brandi. I think we hit on this in the prepared remarks.
We also note there are some commodity-length 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 a piece.
you had some slides to the fact and I know you sort of mentioned a little bit but any more perspective you can offer on you know some of the differences in how the historical operators looked at the asset both in terms of well done but also just strategically how they view those assets
versus how you guys are looking at those assets and viewing them over time. Yeah, hey Tark, 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...
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. So long story short, there's been significant performance improvement over time.
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.
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. That was very helpful. Thank you.
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.
Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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