Crescent Energy Co Q3 FY2024 Earnings Call

Greetings, and welcome to the Crescent Energy Third Quarter 2024 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Reid Gallagher, Investor Relations. Thank you. You may begin.

Good morning and thank you for joining Crescent's third quarter 2024 Conference Call. Prepared remarks today will come from our CEO, David Rockecharlie; and CFO, Brandi Kendall. Our CAO, Todd Falk; and our EVP of Investments, Clay Rynd, will also be available during Q&A. Today's call may contain projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties, including commodity price volatility, global geopolitical conflict, our business strategies and other factors that may cause actual results to differ from those expressed or implied in these statements and our other disclosures. We have no obligation to update any forward-looking statements after today's call. In addition, today's discussion may include disclosure regarding non-GAAP financial measures. For reconciliation of historical non-GAAP financial measures to the most directly comparable GAAP measure, please reference our 10-Q and earnings press release available under the Investors section on our website. With that, I will turn it over to David.

Good morning and thank you for joining us. Yesterday, Crescent posted another solid quarter of financial and operating results. Before we get into the details, I want to begin with a few key points I hope you take away from this call. First, our team continues to execute on our proven and consistent strategy of growing profitably through acquisitions and driving operational efficiencies. Because of that, we have raised our outlook for the year for the third consecutive quarter, reaffirming our production guidance with more efficient capital spending and increased free cash flow. Second, our integration of the SilverBow business is yielding significant synergies even beyond our initial expectations. We've already realized approximately $65 million of annualized synergies or the low end of initial expectations within just a few months of closing. We have successfully integrated the people, the assets and the best practices of both businesses ahead of schedule to drive incremental value. We increased our target for total synergies by more than 20% and are confident in our ability to execute from here. And finally, we see significant opportunity ahead. This has been an active year for us with the SilverBow acquisition and subsequent bolt-on to our core Central Eagle Ford footprint. Crescent has never been better positioned. We've delivered profitable growth of both production and cash flow through disciplined investing and operations, and we have transformed the equity positioning of our business since becoming public. I am confident in our ability to capitalize on recent success and continue executing towards our goal of becoming an investment-grade company and delivering long-term value for our shareholders. Following those quick highlights, I will now discuss the quarter in a bit more detail. We reported strong financial results this quarter with our advantaged low decline production base generating significant free cash flow and our development program outperforming expectations. We had record production of 219,000 barrels of oil equivalent per day this quarter with only two months of SilverBow contribution included in our numbers. The strong execution by our team has allowed us to yet again improve our outlook for the remainder of the year with well performance, synergy capture and capital efficiencies allowing us to hit our production guidance with less capital, generating incremental free cash flow for our investors. In the Eagle Ford, we continue to build momentum as we drive improved capital costs and increased well performance. Across our entire position, we are seeing a meaningful year-over-year uplift in well productivity on both an oil and total volume basis. This is a testament to the depth and quality of our inventory with improving performance on our assets versus industry trends and in these basin peers that have seen a natural degradation in performance. As we've acquired assets over time, a key part of our strategy is to improve operations through our ownership and you are seeing the direct result of this with our recent well performance. On the capital side, we're seeing incremental savings versus the first half of the year, increasing returns and free cash flow. By combining the strength and expertise of our newly integrated organization of talented people, we've been able to drive further efficiencies across our program utilizing the latest available technology. For example, we are planning horseshoe U-shaped wells in select areas to unlock meaningful inventory, where land considerations may not have allowed for traditional development. We've been able to bring Simulfrac completions to the SilverBow assets, meaningfully increasing efficiency and driving down development costs. We've also had great success to date working with our service providers to drive down costs alongside operating efficiencies, which combined has lowered well cost 10% relative to the first half of this year. While the capital savings on the acquired assets are encouraging, they represent only a fraction of the synergies we've already achieved from the SilverBow transaction. When we originally announced the acquisition, we put forward what we believed were significant and ambitious synergy targets and we've been able to deliver far ahead of schedule. With approximately $65 million of annualized uplift realized to date across capital, overhead, operating costs, and interest expense, we've already hit our original target range. As we've spent more time with the assets under our control, we believe there is more opportunity than we originally anticipated, and we have increased our expected synergy range by more than 20%. On the integration front, our 2023 acquisitions in the Western Eagle Ford have also continued to drive strong free cash flow with a dramatic step change in well productivity versus the prior operator and approximately $70 million of annualized operational gains relative to our $850 million of combined purchase price. Through the hard work and dedication of our talented people, we've achieved all this in the first year under our operatorship by bringing industry best practices to the field and we look forward to finding opportunities for further value across our scaled position in the basin. In the Uinta, we continue to see strong results from our development program, which to date has remained largely focused on the proven Uteland Butte formation. The Uinta is at an exciting stage of its evolution and we are pleased to see incremental public activity and recognition of the impressive resource potential and advantaged economics in the basin. We entered the basin in 2022 through a transaction at a discount to PDP value with any development potential generating incremental returns for our investors. While we remain focused on the most proven formations with our current development program, we have begun to allocate prudent capital to incremental horizons now that other operators have spent meaningful capital to delineate and further prove the impressive potential across the play. We've also been active seeking more creative and efficient pathways to derisk the full upside across our position, and recently entered into a small joint venture to test the easternmost extent of our acreage with no upfront capital required. While still early in our evaluation, our initial results have been encouraging, but we will continue to monitor the data both from our wells and from offset operators and be patient as we limit risk and capture the substantial resource upside across our assets. Our consistent ability to improve operations and generate meaningful synergies has given us further conviction on our growth through acquisition strategy, and we see a significant market opportunity ahead of us. SilverBow was the largest acquisition we have completed to date as a public company, and we have followed our proven acquisition and integration playbook with great results. And since we have had another successful closing and integration with our bolt-on in the Central Eagle Ford. The acquisition added incremental assets in a key operating area and represented a uniquely attractive opportunity with low decline oil production, high return inventory and increased operating flexibility with minerals, midstream and substantial surface ownership. We acquired the assets at a cost of capital more typically representative of operated working interest opportunities, but received the additional benefits of the minerals, surface and midstream infrastructure, which we were pleased to add to our portfolio. We have a large pipeline of M&A opportunities ahead of us, but we will remain prudent in our underwriting. We screen 150 to 200 potential transactions a year and have executed zero to three each year consistently. We are focused on compounding significant capital over time at attractive rates of return, and we quickly pass on opportunities that don't meet our underwriting criteria. Despite recent volatility, the market remains active, and with our increased scale, strong operating and financial performance, and solid balance sheet, we are extremely well positioned for profitable growth and further value creation for our stakeholders over the remainder of 2024 and beyond. With that, I'll turn the call over to Brandi to provide more detail on the quarter.

Thanks, David. Crescent's results for the quarter build on our impressive performance over the first half of the year with approximately $430 million of adjusted EBITDA and approximately $160 million in levered free cash flow. We had $211 million of capital expenditures during the quarter better than forecast as the team continues to generate incremental savings in the field. We brought online 27 gross operated wells in the Eagle Ford and 10 gross operated wells in the Uinta, all of which are generating strong initial results. With recent commodity volatility, we are focused on maintaining both operational and financial flexibility and generating attractive returns across our development program. We optimized drilling and completion activity on the SilverBow assets after taking over operatorship to target higher returning liquid weighted development to take advantage of relative commodity pricing. Turning to our outlook for the remainder of 2024, as David mentioned, we have enhanced our guidance for the third time this year and improved our second half capital outlook to $425 million to $455 million, a 10% improvement from the initial guidance provided at the closing of the SilverBow acquisition. This updated outlook reflects five months of SilverBow contribution and highlights the strength of our business and the impressive achievements of our operating team. Looking into 2025, we expect to remain flexible around activity levels and capital allocation if commodity volatility persists, focusing on cash flow generation and attractive returns on the capital we choose to invest. Our balance sheet remains strong coming out of the quarter with net leverage of 1.5x within our publicly stated range of 1x to 1.5x. We have $1.5 billion of liquidity with no near-term maturities. We've also been actively evaluating portfolio optimization opportunities and have divested approximately $50 million of non-core assets this year, generating an attractive return for our investors and also accelerating debt repayment. While we are a growth through acquisition business, we bring an investor mindset to everything we do and are constantly evaluating our portfolio for potential divestitures to maximize value to our shareholders. Alongside earnings yesterday, we announced another dividend of $0.12 per share and further repurchases under our active buyback program, which is now 20% utilized year-to-date at a weighted average share price of $10.07. Together, our dividend and repurchases have equated to a pure leading 5% annualized yield. We have dramatically transformed the equity positioning of our business since becoming public with a simplified and enhanced dividend framework and significantly increased flow in trading liquidity, highlighted by our recent addition to the S&P 600 index. With that, I'll turn the call back over to David for closing remarks.

Thank you, Brandi. Before we wrap up, I want to reiterate a few key takeaways from this quarter. First, our business continues to generate impressive results and significant free cash flow. We've improved guidance for the third consecutive time this year, achieving our stated production targets with more efficient capital spend. Our advantaged asset profile has consistently exceeded expectations and our operating team continues to find more and more efficiencies to maximize cash flow for our investors from both newly acquired and legacy assets. Second, the application of our proven integration process on the SilverBow business has generated value beyond initial expectations. We've combined the strongest talent from both organizations to enhance operations across the business. We are ahead of schedule on synergy capture, achieving our initial target within just a few months of closing and we've increased our total synergy expectation by more than 20%. Finding ways to capture value beyond our acquisition underwriting is a demonstrated strength of our platform. And lastly, we see significant opportunity ahead of us to continue on our profitable growth trajectory. We said last quarter that we are just getting started and that remains true today. We built this business with ambitious goals, and despite our recent successes, we remain focused on operational execution, profitable growth, and long-term value creation for our shareholders. We have the unique combination of operating and investing expertise required to execute on our growth through acquisition strategy, and we will continue to do exactly what we've said we are going to do. We believe Crescent offers a uniquely compelling value proposition in our sector, and we are determined to prove it. With that, I'll open it up for Q&A. Operator?

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

(Question not transcribed)

Tim, it's Clay. Yes. So I think you have it. On testing the eastern extension, we think it's important as we think about our capital allocation framework. We're trying to allocate capital to places that we feel very confident in returns, but we also recognize the resource potential in the Uinta and are excited about it. So we've been focused on the ability to kind of bring forward that opportunity set while allocating capital consistent with our framework. And so, this JV, I think, is a great example of that of kind of bringing capital forward to allow us to accelerate delineation. The focus is it's small near-term, three wells but focused on secondary intervals in that eastern extension. But we do think there's further opportunity to use kind of our capital allocation framework with our creativity to bring forward opportunities around further delineation on a resource position that we are excited about.

(Question not transcribed)

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

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

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

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

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

Brandi here. We do not anticipate providing formal guidance for 2025 until February, when we release our Q4 earnings. Generally, we estimate that the pro forma maintenance levels for the business after the SilverBow transaction will remain between 240,000 to 250,000 barrels of oil equivalent per day, with around $1 billion in capital. We are enthusiastic about the operational efficiencies we've achieved so far and our ongoing efforts to reduce drilling and completion costs. We will consider these factors in our formal 2025 plan, but there are no significant changes to the soft guidance I previously mentioned.

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

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

The next question comes from Michael Scialla with Stephens.

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

Michael, it's Clay. I think we're willing to invest in both oil and gas as you've seen throughout this year, but it's really about the opportunities available. We have a strong pipeline, and the expectations are quite high. We're pleased with how the acquisitions we completed are progressing and integrating. There's a lot of potential ahead, but we have high standards. If you examine the wider asset and development markets, there have been more transactions in oil compared to gas, as the Contango and curve have made it more challenging for the market. Therefore, while we'll consider both commodities in the Eagle Ford, it's likely that there will be more transactions in oil given the current market conditions. We'll see where the opportunities arise and how well we can execute.

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

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

The next question comes from John Freeman with Raymond James.

Great quarter. First, I want to commend you on the impressive job you've done in speeding up synergy capture and achieving efficiency gains. Additionally, your track record of outperforming post acquisitions is noteworthy. I understand it's still early since acquiring the SilverBow assets, but have you noticed anything regarding how SilverBow is completing the wells you've identified that could offer opportunities similar to those from your past acquisitions? Are there any insights on profit intensity, well spacing, or other aspects that could enhance well performance?

John, it's David. I'd say that we've intentionally been very strong about how pleased we are with the integration opportunities around synergies. That is an area where we would expect the overall portfolio to benefit from things that they were doing versus we were doing. I think the great thing though is I wouldn't highlight this as the number one area where there was any significant underperformance. Actually, both companies had a history of making acquisitions and improving the outcome. So I think we will be better together, but we're certainly able to talk about the immediate synergies around drilling and completion costs and implementation. And longer term, I think we've said this on prior calls, we would expect to get the benefit of improved performance on new drilling, and then secondarily improved performance on production optimization. Together, the two companies have a huge production base now that overlaps pretty well. And I think as we're continuing to optimize, we just have more to apply it over and generate significantly more value.

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

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

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

(Question not transcribed)

Yes, from an oil production perspective in Q3, 39% of our output was oil. I expect it to be in a similar range for the fourth quarter. We also reaffirm our production guidance, which places the midpoint of that range in the low to mid 250s overall. That's the reasoning behind my model perspective.

Next question comes from John Abbott with Wolfe Research.

Thank you for your questions. The first question is about strategy. You've expanded significantly through acquisitions, particularly in the Eagle Ford. You've mentioned a potential pipeline of additional opportunities. How do you view future acquisitions while managing your decline rate? In the past, you've acquired conventional assets; are these still significant as you scale up? How do you balance growth through acquisitions with the impact on your decline rate?

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

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

Yes. So fundamentally, everything, as you know, at this company is driven on returns on capital. So we need to see 2x our money or better and the ability to get our capital back in an appropriate timeframe in acquisitions that's five years or less and driven even shorter. So I would just say it's all capital return driven. But as you know, there are a number of different levers that have to be working the right way to make that happen. So in a low gas price environment, no matter how good you are, it's unlikely that you'll generate the return you want. So you're not allocating capital there in a higher price environment that can create that opportunity but there also can be inflation or other things going on. So we feel really good when we look across the portfolio. We have really high-quality inventory. And given the ability to move rigs pretty efficiently that we're able to respond to both price signals but also capital input costs and well performance to make that happen. But long story short, return on capital is the driver.

The next question comes from Michael Furrow with Pickering Energy.

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

Yes. I wouldn't say there's been a structural change. Candidly, with the increased efficiencies that we're seeing, we're just able to do more with fewer rigs, so it's driven by that.

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

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

Question not transcribed.

I think we're consistently focused on where we can add incremental returns across the portfolio. We’re trying to put our best ideas forward to manage risks while driving that value creation could be acquisitions or operational execution, but we prioritize that view within our framework to yield the best outcome for shareholders.

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

(Closing comments not transcribed.)

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