Crescent Energy Co
NYSE:CRGY
Earnings Call Analysis
Q4-2023 Analysis
Crescent Energy Co
Crescent is delighted with the 2023 outcomes, achieving or surpassing goals, suggesting robust business health. Heading into 2024, the firm remains poised for growth, bolstered by a focus on generating strong free cash flow and leveraging acquisitions for value creation.
The company has strengthened its position through $850 million of strategic acquisitions in the Western Eagle Ford, transitioning nonoperated interests into significant operated roles, a move that bodes well for Crescent's growth trajectory.
Crescent is witnessing notable operational success, particularly in cost savings, performance improvements in well outputs—up 60%, and overall capital efficiency. This operational prowess is yielding substantial incremental cash flows, showcasing the company's adeptness in asset management.
A 27% reduction in Scope 1 greenhouse emissions signifies Crescent's dedication to environmental responsibility, forming an integral part of its operations and strategy, which could appeal to sustainability-conscious investors.
Crescent anticipates year-over-year production growth without raising annual CapEx, illustrating operational ingenuity and an effective use of resources. This positions Crescent as a capital-efficient entity in the sector, stressing its unique capability to manage both conventional and shale assets.
An evolved return of capital framework featuring fixed dividends and a share buyback program has been unveiled, evidencing the company's steadfast approach to rewarding shareholders and enhancing shareholder value.
Exiting the year with a healthy leverage of 1.3x and notable liquidity, Crescent is strategically hedged for both gas and oil market volatility, which underscores the company's prudent financial planning and risk management prowess.
Ultimately, Crescent's 2023 activities serve as a foundation for continued success and growth through acquisitions. Their strategy for generating value and prioritizing returns to shareholders via dividends and a buyback program encapsulates the company's promise of combining large cap discipline with mid-cap growth potential.
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Greetings. Welcome to the Crescent Energy Q4 and Full Year 2023 Results Conference Call. [Operator Instructions]. Please note this conference is being recorded. I'll now turn the conference over to your host, [ Reid Gallagher], Principal of Investor Relations. You may begin.
Good morning, and thank you for joining Crescent's fourth quarter and year-end conference call. Our prepared remarks today will come from our CEO, David Rockecharlie; and CFO, Brandi Kendall. Our Chief Accounting Officer, Todd Falk; and our Executive Vice President 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 conflicts, our business strategies and other factors that may cause actual results to differ from those expressed or implied in these statements and our other disclosures. We 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 a reconciliation of historical non-GAAP financial measures to the most directly comparable GAAP measure, please reference our 10-K and earnings press release available on our website. With that, I will turn it over to our CEO, David.
Good morning, and thanks for joining us. We have lots of good things to discuss today, and we're eager to get started. So I'll jump right in with 3 simple messages. Number one, we're extremely proud of our 2023 performance where we met or exceeded our goals across the board. Number two, we are very optimistic about 2024 and our ability to drive value for investors. We will stay focused on strong free cash flow generation, enhancements within our existing asset base and execution of our accretive acquisition growth strategy. And number three, Crescent has never been better positioned. We believe Crescent is the best stock to own for long-term exposure to oil and gas prices as we uniquely offer the discipline and capabilities of a large cap business, combined with the value and high growth potential of a proven mid-cap company. Following that brief introduction, I will discuss these key themes in a bit more detail. Beginning with 2023 performance, we delivered on all of our strategic priorities. We had strong financial performance, raising guidance midyear and beating the increased expectations, in particular, outperforming on production, CapEx and free cash flow for the year. Our operations team drove significant efficiencies on our assets, doing more with less. We advanced our commitment to environmental stewardship through our operations, reducing Scope 1 greenhouse gas emissions by 27% and receiving the oil and gas methane partnership Gold standard for a second consecutive year. We successfully executed on our growth through acquisition strategy with 2 accretive and complementary transactions in our core Eagle Ford operating area. And we continue to improve our value proposition for our investors through the capital markets, significantly improving our trading liquidity, nearly doubling our public float, terming out debt, strengthening our credit ratings and paying a consistent dividend. And last night, we announced an enhanced and simplified return of capital framework, which will now consist of a committed fixed dividend plus the authorization of a share buyback program. This year's impressive results highlight our consistent strategy and commitment to creating significant long-term value for our shareholders. I will now discuss more about our operations, where we've had a lot of success this year. We continue to build upon the drilling and completion efficiencies we've talked about over the past few quarters. We reduced our full year capital guidance midway through the year despite incremental activity from acquisitions. And with continued execution, we came in at the low end of our improved capital guidance while hitting our increased production targets. The solid execution this year allowed us to generate outstanding free cash flow and improved returns on our invested capital. These efficiencies, especially associated with the acquisitions in our core areas, not only helped us perform in the second half of 2023, they've also positioned us extremely well for continued success in '24, where we are expecting year-over-year production growth without an increase in annual CapEx. We are extremely pleased with the portfolio we've built and what it provides to our investors. Our unique skill set, operating both conventional and shale assets allows us to combine stable low decline cash flows with attractive reinvestment opportunities, positioning Crescent as one of the most capital-efficient platforms in the sector. Now I will highlight how our operations performance can also drive M&A success, a key tenet of our growth strategy. We successfully executed on our acquisition strategy again this year with $850 million of complementary and accretive acquisitions in the Western Eagle Ford. This year's acquisitions allowed us to transform an existing nonoperated interest into a scaled, high-quality operated position in a core area of operation for Crescent. The acquisitions added significant production and reserves to our portfolio which we've grown in a disciplined way at a 20% and 15% compounded annual growth rate, respectively, over the last 3 years. When evaluating acquisition opportunities, we have 2 key objectives. First, to buy assets that fit our portfolio at attractive value, targeting cash-on-cash returns in excess of 2x our money, and second, to drive incremental returns through the application of our operating expertise. We've talked a lot about the attractive valuations on our 2023 acquisitions over the last few quarters. So I won't repeat myself. But I do want to spend a bit more time talking about the second objective, both as it relates to our recent Eagle Ford acquisitions as well as our 2022 acquisition in the Uinta Basin. Now that we've had the time to integrate the assets and begin implementing our operating strategy across both areas, we are generating meaningful value above what we initially underwrote in our investment evaluation and business plan. I'll begin in the Western Eagle Ford. While it is still early in our efforts, the outperformance has been significant. We talked last quarter about the immediate 15% to 20% cost savings we were seeing on the D&C side with Crescent now the operator managing development, and that has continued across all of our recent activity. Most importantly, these savings aren't coming at the cost of performance. In fact, our team is generating significantly better performance from all wells brought online since we took over operations in September. While still early in our efforts, we are seeing a 60% increase in well performance to date with 15% lower costs across the program, which represents a massive shift in capital efficiency on the assets. Over time, we expect to more clearly demonstrate the quality of the acquired assets in our hands. This improvement in well performance is only a piece of the incremental value we expect to drive on these assets under our ownership. We've also targeted and begun to capture a variety of synergies through better operating practices including production costs and marketing, which combined with the improved well performance, represent an opportunity for $30 million to $50 million of incremental annual cash flow compared to our original underwriting. I will now move to our 2022 Uinta acquisition, where we've continued to drive strong performance through improved well designs. When we acquired this position, the only horizontal development on the assets utilized to legacy smaller completion design with roughly 1,500 pounds of proppant per foot. As we have implemented our operational approach, we are seeing significantly enhanced returns and improved capital efficiencies through larger completions, which we've doubled to roughly 3,000 pounds per foot. The early results from our updated design, which we implemented over the last 9 months are significantly better than the previous design. Importantly, in optimizing the D&C program, our team has managed to keep the new D&C costs generally flat versus the prior operator despite the significant increase in job size. The Uinta Basin is an active area for the industry, where development was historically focused on the Uteland Butte formation. It is worth noting that adjacent operators across the basin have invested significantly in derisking multiple additional productive formations beyond the Uteland Butte, including the Douglas Creek, [indiscernible] and Castle Peak. In addition to our high-quality existing inventory, we see significant runway and upside development potential on our acreage in incremental formations beyond the Uteland Butte which was the primary source of production when we underwrote and acquired the assets. Looking ahead, we believe our operations team will build on these recent successes and continue driving meaningful efficiencies across our entire asset base. Importantly, we are also ready to apply our operating techniques to any new assets we acquire and integrate into the portfolio. This is great news because we currently have one of the largest pipelines of M&A opportunity in our recent history, which gives us confidence we are well positioned for operational value creation and accretive growth in 2024 and beyond. With this backdrop, I will also reiterate that we firmly believe in our ability to become an investment-grade company over time. To us, that means adding size and scale with financial discipline and a focus on compounding capital and shareholder value over time. We are investing in assets to generate attractive full-cycle cash-on-cash returns and we expect to be an active participant in the ongoing wave of consolidation in the sector, particularly across our core operating areas in Texas and the Rockies. We believe that we are uniquely positioned as a leading acquisition growth company, employing our proven investment and operational expertise and supported by our strong balance sheet to acquire attractive assets accretively. Next, I'd like to discuss sustainability, an area that's core to our operations and long-term business strategy. We continue to make improvements in our greenhouse gas and methane emissions and we're proud to report a 27% decrease in absolute Scope 1 emissions in 2022 relative to our baseline. In December, we were awarded the gold standard pathway rating by the oil and gas methane partnership for the second consecutive year. This designation is the highest reporting level under the OGMP initiative and signifies we have a credible multiyear plan to accurately measure our methane emissions. Crescent was one of only 4 U.S.-based upstream companies to receive this rating for a second consecutive year. As one of the first U.S. onshore energy companies to join OGMP 2.0 in early 2022, we firmly believe that accurate measurement of emissions is imperative as we seek to most effectively improve our emissions profile. Again, we are proud of our 2023 performance. We're optimistic about 2024, and we believe Crescent has never been better positioned. Our differentiated growth strategy, combining investment and operating expertise continues to deliver a strong value proposition for our investors. With that, I'll turn the call over to Brandi to provide more detail on the quarter and our strengthening return of capital framework. Brandi?
Thanks, David. As David mentioned, performance has been extremely strong with another quarter of record production and significant cash flow, averaging approximately 165,000 barrels of oil equivalent per day, generating $276 million of adjusted EBITDA and $102 million of levered free cash flow. This quarter's results are the first to include the impacts of both of our 2 Western Eagle Ford acquisitions. We had $134 million of capital expenditures during the fourth quarter, which has positioned us well for 2024. During the quarter, we brought online 17 gross operated wells in the Eagle Ford and 3 gross operated wells in the Uinta which are all posting strong early time results and are expected to generate in excess of 2x our capital invested at current commodity prices. Turning to our outlook for 2024. As David mentioned, the capital efficiencies we've achieved to date alongside our accretive acquisitions, set us up for continued strong performance. Our production is expected to be 155,000 to 160,000 barrels of oil equivalent per day which represents a roughly 6% increase relative to 2023 with consistent capital spend supported by a 2 to 3 rate program, maintaining capital spend at current levels despite the year-over-year production growth is a testament to the quality of our operating team and the efficiencies they've been able to drive across the asset base. At today's commodity prices, we expect to generate substantial free cash flow in 2024 and beyond. The unique stability of our asset base and cash flow generation have allowed us to return significant capital back to our shareholders with a consistent dividend for more than a decade. This quarter, we are excited to announce an even firmer commitment to shareholder returns by transitioning our current $0.12 per share dividend into a truly fixed quarterly dividend, providing even more certainty of returns to our shareholders at an industry-leading yield of roughly 4%. On top of this announcement, we also authorized up to $150 million for share buybacks, which will initially be focused on our Class B shares. At current trading levels, we believe investing in our own business offers a compelling return and focusing on the Class B shares highlights our continued commitment to simplifying our corporate structure over time. To further emphasize our progress in this regard, we have successfully increased our public float by nearly 80% this year, significantly improving liquidity for our public investors. Moving to our balance sheet. We are exiting this year from a position of strength as we look forward to another active year in the M&A and A&D markets. We exited the year with leverage of 1.3x and $1.3 billion of liquidity on an almost completely undrawn RBL facility. Finally, to provide a brief update on our hedging activity. In line with our strategy of preserving returns on capital, we layered on additional hedges alongside the signing of the 2 Western Eagle Ford acquisitions. As we look into 2024 and 2025, we are well protected from the current gas market volatility with roughly 50% of our production hedged through a mix of fixed swaps and collar floors of around $3.50 to $4.50 per MMBtu. On the oil side, we're well hedged in 2024, but maintained attractive long-term exposure given the long duration nature of our production base. With that, I'll turn the call back over to David.
Thank you, Brandi. Before we wrap up, there are a few things we hope you take away from today's call. First, our 2023 performance was extremely strong. We met or exceeded our increased guidance across the board and meaningfully beat on free cash flow. Our 2023 activity and execution have positioned us well for continued outperformance in 2024 and beyond. Second, we continue to execute on our growth through acquisition strategy. Our 2 acquisitions this past year plus our Uinta Basin acquisition in 2022 are generating significantly more value than we underwrote and we are unlocking incremental value through our operating capabilities. We've grown the business accretively as production has grown at a 20% compounded annual growth rate over the last 3 years and we fully expect to continue on that trajectory. Third, we are committed to a peer-leading return of capital strategy and have strengthened our framework to include a significant fixed dividend and a new share buyback program. And lastly, we have a simple value proposition. We believe Crescent is the best stock to own for long-term exposure to oil and gas prices as we uniquely offer the discipline and capabilities of a large cap business, combined with the value and high growth potential of a proven mid-cap company. We have a lot of ambition and hold ourselves to a high standard but we are pleased with what we have accomplished to date, and we intend to continue to do exactly what we say we're going to do. With that, I'll open it up for Q&A. Operator?
[Operator Instructions]. Our first question comes from the line of Neal Dingmann with Truist Securities.
David, my first question for you and Brandi, I'm just wondering is on capital allocation, specifically -- could you speak to how you're thinking about the opportunistic buybacks will fit in with the continued M&A especially if the share price remains so highly discounted as I believe it is.
Neal, it's Brandi. Thanks for the question. And I would say no change in how we think about capital allocation. 1A and 1B continue to be the dividend and the balance sheet then return-generating opportunities, whether that's our D&C program or M&A. And that's really where the bulk of the opportunity set is. If you will -- if you think about we're spending plus or minus $600 million, and we have a multibillion-dollar M&A pipeline, the $150 million buyback is going to be small in comparison, but we do think it's helpful just with respect to allowing us to continue to simplify our corporate structure, obviously focused on the private Class B shares initially.
Got it. That makes sense. And then just maybe looking at Slide 12 or 13, my second one is just a bit on operational efficiency. It seems like you're seeing nice sort of efficiencies and even the synergies in the Eagle Ford after the deals. I'm just wondering, could you talk about are the what I call operational synergies you're seeing? Is that sort of balance between seeing similar upside both in the Eagle Ford and the Uinta? Or is it more in one? And what's driving that? Is it just continue to be improvement in D&C? Or is there something else you all would point to?
Yes, Neal, it's David. We'd say a couple of things. And as you could tell, the theme is sort of enhancing and simplifying right now. And to keep it simple, we think we've got a great team, and we think they're doing their job. So we kind of wake up every day just saying how can we be better, how can we do our job. In this case, in particular, we've been able to take over assets, apply our techniques to them, and that's starting to show through now that we've integrated things. So we're seeing the immediate kind of returns on what I'll call doing our job on the drilling and completion side. And that's just really getting more efficient as we get into what I'll call the regular rhythm in our program, but also just doing things better. When we see the industry moving forward, we're trying to do the best we can to come in first place all the time. So on the drilling side, we're drilling wells faster. On the completion side, we're pumping jobs quicker and more effectively. And so I'd say it's a combination of all those things. But in simple terms, we're just bringing what I'll call the latest technology to assets that have not been optimized, and we're seeing that both on the drilling and completion side. And I think you'll continue to see us as we move through the year and into next year, also apply better techniques to the production side of things on the assets we've acquired. We're really pleased with what I'll call the last 3 or 4 years of acquisition activity and everything has been integrated well. And what you're seeing is now we're getting to go to work on making everything better. Maybe too long an answer for you, but hopefully, it gives you some sense of the optimism we have for what we're continuing to do.
No, that makes a lot of sense. If I could sneak one last one. It just seems like your baseline decline continues to be a big advantage over others. Could you just talk very quickly just does that still remain as well as ever?
Yes. It's a fundamental premise of how we invest in this sector. So I think you can expect us to continue to stay committed to managing a portfolio of assets that has that as a differentiating perspective. We're not going to go chase what I would call production growth through the cycle with drill bit. We think keeping the business steady and generating great returns when we can is the way to go, and that's just going to continue to keep us in a great place in terms of lower decline rate, more predictable development programs and a lower decline rate, which is frankly just better for everybody.
Our next question comes from the line of John Abbott with Bank of America.
Really appreciate the efforts to further try to simplify the story. Just given the stock performance today, part of that will be capital efficiency, part of that may be the move to fixed dividend and also buybacks further simplify the story. When you think about the stock reaction, what are your thoughts about the longevity of the noneconomic Series 1 preferred? Does it still make sense to maintain that?
Yes. John, it's David. I appreciate the question. I'd say a couple of things to that. One, as you know, the #1 thing that we're proud of in terms of the business strategy is that it stayed the same, and we're going to continue doing what we said we were going to do. We feel like the business model that we've been pursuing for the last 10-plus years as a management team is still the right place to go. And as you know, the sector has kind of chased different strategies throughout that time period. So when I look at our current situation at the company, we definitely want to simplify things. I appreciate that you're recognizing that we're trying to do that every quarter. And with regard to your specific question around the Series 1 preferred I'd just say 2 things. The Board of Directors today at Crescent has representatives related to 40% of the stockholding. And so we think there's really strong alignment there and we really like waking up every day, knowing that we've got support from the shareholders and from the Board to continue to pursue the same strategy. So we view it as a positive, not a negative. And I think over time, as the sector continues to chase different strategic alternatives, I think Crescent being committed to a successful and stable strategy is going to be a great thing. So that's how I'd answer that question.
Appreciate the color. And then when you think -- for the second question, when you think about your CapEx and productivity gains and you think about what your CapEx budget is this year, as you peer into 2025, I mean, just how do you think about spending on a year-over-year basis? I mean, is it a little bit higher this year? Or how do you sort of think about capital spend potentially appearing into 2025, just given what you've achieved?
John, it's Brandi. Thanks for the question. So we would view our '24 program is maintenance pro forma for our most recent acquisitions. That's the $155 million to $160 million, plus or minus $600 million of capital. So I think it's fair to assume that, that's a good maintenance capital level for us going forward.
And our next question comes from the line of Tarek Hamid with JPMorgan.
With the transformation in the Utica design, just wondering kind of how that changes how you think about the Uinta, sorry, as a target for further acquisitions?
Yes. Tarek, it's Clay. Listen, I think we're obviously very encouraged about the results we're seeing with the updated completion design and allocating half our capital there this year. So we're excited about the organic opportunity on the capital side. Certainly, it's a unique place for further M&A given how we ultimately came in ownership of the asset we own there today. So it's a place we're paying attention to, as you'd expect, but there's obviously unique dynamics around it as well that we're cognizant of. So an area we love to continue to invest behind while being prudent in terms of how we think about it.
Got it. And then I guess just turning over to the new capital return framework. You guys have always been very, very thoughtful about returning capital to shareholders. So just love a little bit more context on why the decision to go from your kind of historical sort of 10% of EBITDA philosophy to this new updated philosophy?
Yes, great question. Obviously, we -- we've had a lot of dialogue around this. The number one thing I would say and kind of reiterate about the way you asked your question is we're definitely not changing anything. In terms of strategic approach, which is take care of the balance sheet and deliver a dividend so that we're taking care of the investors first. We do -- we've sort of lived as both a private and a public company and had that same strategy and approach consistently for over a decade now. And long story short, we just think that this is enhancing and simplifying. And so anything we can do to make things simpler, make the business more predictable and more credible we think is good. And so again, we were not in a hurry to change anything given we still are a leader in return of capital in the sector, both when you look at the balance sheet and the dividend policy. So we think this is just more of the same, but more predictable and more value really to the business.
Do you really think about just the predictability of the fixed dividend as being kind of the one thing that you sort of said made life easier for shareholders?
Yes, I think that's right. I think it's the same too, though, in terms of predictability for the balance sheet as well. I know we would get questions around is 10% a target? How do you think about 10%? What's the percentage? And so I think just telling everybody, hey, we're committed to it, no change to the commitment. Priorities 1A on B balance sheet and dividend and just making sure everybody knows. We've been paying $0.12 for the last year, and we feel very comfortable continuing to pay that $0.12 this quarter, obviously, and defining that as our framework going forward. But other than that, no change. So I think the main takeaway should be this team has been doing the same thing as it relates to return on capital and taking care of the investors both through the balance sheet and the dividend and we'll continue to do so.
And our next question comes from the line of Hanwen Chang with Wells Fargo Securities.
The first question is on the Western Eagle Ford asset. Could you give us some colors on the Austin Chalk potential? Do you have any testing projects planned for 2024? And what have you learned from recent offset activity?
Yes. We are drilling 4 Austin Chalk wells this year. So we have a small amount of capital allocated to the Austin Chalk. We are we're watching others. We're excited about the opportunity on the Western Eagle Ford asset. As you know, there's a lot of industry activity down there right now. And so I think, as always, on kind of more on risk capital, we're going to be fast followers, but we're focused on the opportunity set and excited about the potential.
The second question is on the Uinta Basin. We have seen strong production growth in the Uinta Basin in 2023. What's your overall outlook for the basin-wide activity and production growth in the next few years?
Yes, it's David. And I'll just cover this at a high level. It's a tremendous resource across the basin. And I think we're, as an industry, starting to see better and better performance from a level that was already good. So as we mentioned, just in our opening remarks. We're excited about how we were able to enter that basin and the value that we think we've developed there, we were targeting a proven area that had significant horizontal development both on our position and across others and that's only gotten larger. So I'd say a couple of things. in specific response to your question, we see activity continuing to accelerate as the resource expands. So the way we think about it is there's more production and longer reserve life in that basin than there's ever been and it looks like that's going to continue. At the same time, as you know, we are a business that's focused on really growth through acquisition and maintenance of the business with the drill bit and really mindful of capital allocation and use of cash flow. So what I would say is we see very significant opportunity there. We think others growth will outpace ours because of a different business philosophy and strategy. But as Clay mentioned, we're going to get to see a lot of development around us and also participate in it. And I think that's going to be great for us. So I don't think we're going to see a step change from here, but I think continued investment and growth in that basin with us pursuing a strategy similar to the one we've pursued across the business for the last 10 years and likely not leaning into growth as much as others might, but benefiting from the same resource potential and really just given us a more predictable, longer reserve life asset.
And we have reached the end of the question-and-answer session. I'll now turn the call over to David Rockecharlie for closing remarks.
Great. Thank you all again for joining us today and for supporting the company. As we said, quite simply. We think 2023 was outstanding performance we're proud of. We're very optimistic about what's ahead in '24 and beyond. And in our opinion, Crescent has never been better positioned than it is today to deliver on the value proposition we have. So we look forward to staying in touch and talking to you again next quarter. So thank you.
And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.