Crescent Energy Co Q1 FY2025 Earnings Call

Welcome to the Crescent Energy Q1 2025 Results Conference Call. It’s now my pleasure to introduce your host, Reid Gallagher from Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining Crescent’s first quarter 2025 conference call. Today’s prepared remarks will come from our CEO, David Rockecharlie, and our CFO, Brandi Kendall. 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 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 hand it over to David.

Good morning, and thank you for joining us. Yesterday, Crescent posted financial and operating results for the first quarter. In summary, it was a great quarter of continued execution for our business. As always, I want to begin with a few key points that I hope you take away from this call. First, we continue to deliver strong performance across our asset base. This quarter, all key metrics met or exceeded expectations. We are a cash flow-focused company, and I’m pleased to highlight our continued free cash flow generation in excess of $240 million this quarter, which is an annualized free cash flow yield of approximately 45%. Our talented team continues to find ways to create value through efficient operations. Second, we will remain flexible with our approach to capital allocation. We are reiterating our commitment to cash flow, risk management, and returns, which always require flexibility, especially in light of this dynamic macro environment. Our scaled low decline and HBP asset base provides us with unique optionality to allocate capital across both oil and natural gas development. We expect attractive returns on our current capital program in this market environment. However, we continuously monitor both relative and absolute commodity prices, and we will be flexible in our development as we seek to maximize free cash flow and returns on invested capital, whether that be executing on our current plans, shifting further activity across commodities, or reducing overall activity levels. Finally, Crescent was built to succeed through commodity cycles, and we are confident in our ability to outperform through periods of volatility. Both our strategy and core management team have remained consistent for more than a decade. We intentionally built a lower decline and less capital-intensive business with commodity flexibility and a consistent hedge program to generate durable free cash flow. Our strategy and advantage portfolio allow us to create significant value through periods of dislocation like we are beginning to see today. We are investors and operators. And as one team, we continually evaluate opportunities to enhance our portfolio, simplify our business, and deliver long-term value for investors. Following those quick highlights, I will now discuss our results in a bit more detail. We reported impressive financial performance for the first quarter with record production of 258,000 barrels of oil equivalent per day and approximately $242 million of free cash flow, well above Wall Street expectations. Our significant outperformance on free cash flow is largely due to a meaningful beat on capital spend, driven by modest timing shifts in activity quarter to quarter and continued execution from our talented team. With the recent volatility in commodity prices, we’ve remained focused on driving capital efficiencies through improved operations, and we are generating savings of 10% on our current drilling, completions, and facilities costs across our Eagle Ford development this year relative to 2024. Our broader operating plan for the remainder of the year remains focused on strong execution to maximize returns on our capital and free cash flow for our investors. And as always, we will continuously evaluate returns and opportunities while remaining flexible with our capital allocation. By consistently executing our strategy, we’ve demonstrated the benefits of our business model and the advantaged portfolio we’ve built over more than a decade since our inception. Our business is characterized by a low decline production base, lower capital intensity, and the flexibility to invest across both oil and natural gas inventory. As a result, we are uniquely positioned to maximize free cash flow and returns through commodity cycles. We’ve maintained an active hedge program and have approximately 60% of our 2025 oil and natural gas production hedged at a significant premium to current market pricing. All of these facets of our strategy have enabled us to succeed through cycles, paying an average dividend yield of 6% since inception with a reinvestment rate below 50% and average leverage of 1.2 times. The current environment is nothing new, and our business is well positioned. Our guidance at the beginning of the year highlighted the benefits of our commodity flexibility and disciplined capital allocation, and we have remained dynamic in our approach to capital allocation for the year. Our current plan remains in line with our initial guidance with a slightly increased focus on gas-weighted development to optimize returns on our capital program, which despite notable volatility across the oil and gas commodity curves is expected to generate returns in excess of our 2x multiple of invested capital target, supporting our return of capital, strengthening our balance sheet, and maintaining Crescent’s strong positioning for continued growth through opportunistic and accretive M&A. Crescent has a consistent strategy, and we are a team with compelling advantages that come from combining strong investing and operating skills. We are prepared. We are focused. We are proactive. This allows us to view periods of heightened volatility as exciting opportunities, and Crescent has never been better positioned to capitalize on what is in front of us. While traditional A&D markets tend to slow down during periods like this as bid-ask spreads widen, our pipeline remains active. And historically, we’ve been successful capitalizing on periods of volatility to execute on transformative opportunities for our business. These periods also offer time to focus even more on our own business, finding the gold buried within our existing operations and enhancing our value proposition at the ground floor. As we strive to optimize our business, we constantly review our portfolio for non-core divestiture opportunities to maximize value. To that end, we were pleased to have closed on roughly $90 million of accretive asset sales so far in 2025. These divestitures have been in process since our original announcement in late 2024, and their closing further streamlines our portfolio and simplifies our business. Proceeds from the sales will accelerate debt repayment and improve our position for long-term success. We are also pleased to report the successful closing and seamless integration to date of our Ridgemar acquisition. The Ridgemar bolt-on added high margin production and significant low-risk inventory to our business, and early performance has exceeded expectations. There’s no question that we’re seeing increased market volatility, but we’ve been here before, and Crescent was built to succeed through cycles. Our free cash flow-focused strategy remains consistent, and I’m confident that we have the team, the assets, and the balance sheet to capitalize on the current environment and generate long-term value for our shareholders. With that, I’ll turn the call over to Brandi to provide more detail on the quarter.

Thanks, David. Crescent had impressive results for the quarter with approximately $530 million of adjusted EBITDA and approximately $242 million in levered free cash flow across the three months. We had $208 million of capital expenditures during the quarter, notably better than forecast as the team continues to drive improvements in D&C costs and certain projects were shifted to later in the year. We brought online 36 gross operated wells in the Eagle Ford and four gross operated wells in the Uinta, all of which are generating strong initial results. We will look to maintain flexibility over the remainder of the year dependent on both relative and absolute commodity prices to maximize free cash flow and returns, whether that be executing on our current plan, further shifting activity across commodities, or reducing overall activity. Our portfolio is largely held by production, which gives us the flexibility to pace development based purely on reinvestment economics rather than lease obligations. During COVID in 2020, we demonstrated discipline by stopping all drilling and completion activity. This is a real-world example of our willingness to prioritize value over volumes. We exited the quarter with net leverage of 1.5 times, within our publicly stated range of 1 to 1.5 times. We have approximately $1.4 billion of liquidity with no near-term maturities, and we recently reaffirmed our borrowing base, highlighting the strong support from our lender group. We announced another dividend of $0.12 per share and have been actively repurchasing shares in the open market to capitalize on this current market dislocation. Year to date, we have repurchased approximately $30 million worth of stock at a weighted average price of $8.26. Together, our dividend and repurchases year to date equate to an attractive 10% annualized yield. We also made a significant step in the evolution of our business as a public company, with the transition to a single class of common shares and the elimination of our historical structure. This simplification increases investor accessibility and significantly reduces the reporting complexity of our business. With that, I’ll turn the call back over to David for closing remarks.

Thanks, Brandi. Before we wrap up, I want to reiterate our key messages for investors. First, we continue to see strong performance across our assets. All key metrics this quarter were in line or exceeding expectations. We are a cash flow-focused company, and we generated an annualized free cash flow yield of approximately 45% this quarter. Second, we will remain flexible with our approach to capital allocation. Our scaled low decline and HBP asset base provides us with unique optionality, and we will be flexible with our capital dependent on both relative and absolute commodity prices to maximize free cash flow and returns. And finally, Crescent was built to succeed through commodity cycles. We are confident in our ability to outperform during periods of volatility. Our strategy has been consistent for more than a decade. We are focused on generating substantial free cash flow, and we intentionally built a lower decline and less capital-intensive business with advantaged commodity flexibility and a consistent hedge strategy to increase free cash flow durability. We operate in a dynamic sector. We have seen times like this before, and we have a uniquely advantaged portfolio built to capitalize on the current environment. With that, I’ll open it up for Q&A.

First question here is from Albert Wang from TPH and Company.

I know you all touched on this briefly in the prepared remarks already and have a lot of flexibility within the program. But just when we’re thinking about the current commodity price environment and looking at the oily versus hybrid versus dry gas breakouts on capital allocation for the year, is it fair to say we’re sitting at the lower end of the oily targeted range and the higher end of the gassy range? And what would need to really occur to push beyond the bounds of those outlined ranges?

Hey. It’s David. Great question. Really appreciate it. I think the main thing to know about us anytime you think about capital allocation is we think what differentiates us as a firm is we’re investors, and we think we combine investing and operating better than anybody. So to your point, it’s all about returns. We came into the year, you know, the forward curve for oil has been pretty steady and in this level for a long time, so no surprises there. Obviously, spots moved around a lot. We’ve been pretty pleased with the portfolio we’ve been able to build through the cycle. And so long story short, we sit here with heavily oil inventory, heavily gas inventory, and mixed inventory. So we’re really just moving to where the returns are. So again, in this range, we’re making great returns, and we’ll continue to allocate capital within our framework. But we’re also looking at that kind of stuff every day, and it’s not just absolute returns. It’s also where else can we find returns. And so as you know, and we highlighted it a little more this quarter, we’re obviously a growth through M&A company, so we’re always looking at that market environment, and we also view our stock as an M&A opportunity as well at different points in the cycle. So long story short, we like where we are, but we’re absolutely focused on returns and free cash flow generation. And we’ll just kind of continue to manage through a volatile environment, but we like this. We’re good at this.

Okay. Perfect. That’s helpful color. Maybe just for a follow-up question, just on trajectory of the rest of the year, any sort of color you all can provide in terms of expectations for oil volumes and CapEx? Just trying to think through some of the key moving pieces given the significant ramp in tills out of the Eagle Ford late in Q1, those flow through impacts, and that most of the Q4 Eagle Ford tills are probably going to come out of the dry gas window.

Hey, Albert. It’s Brandi. So we expect oil production to increase quarter over quarter. So think kind of low to mid-single digits just given we’ll have a full quarter of owning the Ridgemar asset. From a full-year standpoint, still expect to be towards the midpoint at that kind of 40% to 41% oil cut. And then from a capital standpoint, as David hit on in the prepared remarks, right, we performed well from a D&C perspective, but a big part of the beat was timing. So we’d expect that capital to show up in the second quarter and would expect Q2 to be our highest capital quarter for the year. But as you saw, we also reaffirmed our capital guidance for the year, so no change. It’s just really timing.

The next question is from Tim Rezvan from KeyBanc Capital Markets.

Good morning. This is John on for Tim. Thanks for taking our questions. Just starting off with the Easter and you went to JV. Can you just talk about its current status and whether the JV agreement includes any contractual arrangements, you know, termination clauses, or anything that might require the rig to be maintained in the basin for a specified period of time?

It’s Clay. I can take that. You know, as you know, part of what we hit on in the prepared remarks, but also part of our operating philosophy is not to make commitments and to give ourselves maximum flexibility. So consistent with that, the JV was really set for the single pad. So no commitments to ongoing capital associated with that JV that go forward. And, you know, just to hit on the JV, you know, we disclosed really strong 30-day IPs as part of our Q4 results. I just tell you we’ve continued to be really encouraged by the results around the development there, continue to really outperform the broader basin from a kind of upper acute perspective, and we’re really encouraged about the opportunity it presents for us across the asset base.

Okay. Makes sense. And shifting over to your asset sales, you previously mentioned the market for Merrill’s assets remains active. Would you consider exceeding your asset sale target if you come across some attractive bids for it?

Yes. Listen. As we’ve said, we view ourselves as kind of value creators by both buying assets and selling assets. So where we see opportunity to create value for the business, we’ll do so. I think the asset sales are going to be viewed through that lens. So where we see a market where we can drive accretion to our business, and also we think that some of the assets hold more value in someone else’s hands than ours, we will pursue that. So don’t think of kind of the $250 million pipeline that we put out as a limiter. It’s just really where we see opportunity and where we think there’s a chance to create value for the business through pursuing those sales.

Next question is from John Freeman with Raymond James.

You all are one of the most hedged E&P companies out there, and I’m just curious sort of what kind of a role the hedge is playing in the decision to potentially reduce activity or not or if hedges are sort of viewed as kind of a separate part of the decision process.

Yes. Great question, John. It’s David, and I’ll let Brandi add on to it if necessary. But I think you hit it, which is it’s a completely separate asset. We put hedges in place to protect the balance sheet and the capital we invest but, yeah, we don’t view hedges as implicating the drill bit at all once we’ve got that independent decision. So we love having a hedge asset in times like this, but, no, we don’t link the two.

Great. And then the follow-up for me, just given the attractiveness of your stock at these levels that you all highlighted in terms of what the free cash flow yield is, etcetera, maybe just discuss how you all think about allocating that free cash flow and the decision process between buybacks versus debt reduction?

Hey, John. It’s Brandi. So I think with respect to the buyback, we’ve said this before. It’s 100% opportunistic, and it’s also 100% returns-driven. Fundamentally, no change in how we think about cap allocation priorities. The balance sheet and the fixed dividend continue to be the top priority. But after that, it’s right. We weigh our investment return opportunities across buying back our own assets, right, via the stock, M&A, or drilling wells. You saw a step in quite a bit earlier this quarter by roughly $25 million of stock when it traded off. So, yeah, I think you’ll continue to see us be active within that framework.

And the one thing I would highlight, John, it’s David again. We talk about the M&A market locking up in periods of volatility, this is the one area that trades every day, and we can access what we want.

Next question is from Charles Meade with Johnson Rice.

Good morning, David, Brandi, and the rest of the Crescent team there. David, I want to go back to your prepared comments about and I think you just referenced them there with the M&A market, the bid-ask spread widening out. You know, that’s certainly the conventional wisdom. Can you tell me what you’re seeing on the ask side of it, to the extent that you could share any, you know, thoughts on the way that part of the market is evolving? And can you also give some thoughts on how Crescent’s approach is different during these times of volatility.

Yes. That’s great. Thanks for the question. It’s David. I’m going to go ahead and just pass that one to Clay to answer, but we’ll both cover it if needed.

Hey, Charles. As David mentioned earlier, after periods of substantial volatility, the market tends to stabilize. There’s usually less activity on the ask side and more on the bid side, resulting in a pause in decision-making. We anticipate that over time, this will change, and we will see decisions being made by various parties for different reasons. Our strength in this market opportunity lies in being investment-driven, with a clear focus on returns and a consistent strategy. This enables us to act decisively when opportunities arise in such market conditions. We believe that remaining disciplined and focused on growth allows us to quickly seize the opportunities we identify during these volatile periods.

Got it. That’s helpful. Thank you, Clay. And then oh, I’m sorry. David, do you have anything to say?

No. I think he nailed it.

Okay. Great. And then back to the Uinta. You talked about those you gave us an update on the three wells. I think it’s three wells in the Eastern JV. Any color you can offer on the four operated wells you guys turned to sale, both, you know, where they are on your position and where they are up and down the stack?

Yes. Those are kind of more core and what’s been our traditional development window on the western side of the asset. You’ve reviewed development. I would say early time results there look very good and consistent with where we’ve seen results historically, that part of the play.

Next question is from an unidentified speaker. Any color you can offer on the four operated wells you turned to sale, including their location in your position and where they are in relation to the stack? Yes. Those wells are more central to our traditional development area on the western side of the asset. The early results look very promising and are consistent with our historical findings in that part of the play.

You mentioned the activity some activity shifted from the first quarter to later in the year. I want to see if you could quantify that? And was that all just due to timing, or was there a decision made there to proactively move some activity?

It’s Brandi. I’ll cover this. It was really just a timing. We had a couple of pads that shifted from Q1 to Q2, so I think days. So again, we expect that capital to show up in the second quarter. And as I mentioned earlier, we did reaffirm our capital guide for the year, so still feel comfortable with the 09/25 to 10/25 guide.

Okay. And you were asked about your commitments in the Uinta. Sounds like really nothing there that would dictate any minimal activity. I guess, more broadly, if you were to slow down or needed to slow down because of oil prices or whatever, can you talk about any commitments, whether it be rig commitments or lease expirations that would put a floor under your activity level? Or could you know, Brandi, you mentioned during COVID, you went to zero. Is that is that the floor? Is it zero?

Hey. It’s David. Happy to take it. And I’ll start with where you ended, which is absolutely the floor is zero. We’ve built this business intentionally over the years to be different, to have a lower decline rate, lower operational intensity, as much HBP acreage as we can. So punchline is we’re prepared to drop activity as soon as it makes sense and to your point, there’s very limited requirements that we would have, you know, call it over the rest of this year and even going forward. So there’s always some things you need to do, but I think you can safely assume the floor is zero in our minds.

Next question is from John Abbott with Wolfe Research.

Hey, team. This is Carlos on for John. Thank you for taking our question. I guess we’d like to start where you just ended, David, in terms of how your business has been deliberately made to be hedged in certain ways. And so we’re wondering if you could provide some more color on what you’re seeing on the deal front in terms of size and commodity mix because we’ve seen the two commodities do completely different take completely different directions. And we want to ask if you think it’s possible to get something done given that much volatility on both ends or if you are more likely to see some success in the gas market versus an oil market? Thank you.

Hey, it’s David. Great question. Maybe I’ll just start with a framing of that, which is you're absolutely right the commodities can move independently at any point in time. And so assets do trade through that cycle. Long story short, think what you’ve seen us do is sell some gas-weighted assets into a stronger gas market. And historically, our portfolio is very balanced between oil and gas, but we don’t typically buy an individual asset that looks like our portfolio. We’re managing a portfolio as investors and operators, and so we look to find attractive opportunities through the cycle. So long story short, I do think that you’ll continue to see us look for value across the commodity spectrum. And I’d also say we’re very fortunate because of all the hard work that that everybody in this company has done over the last three plus years as a public company. You know, we’re certainly highlighting this quarter. We’ve also had our stock as an M&A opportunity. And so I think that we’ve got all the tools out there. As Clay mentioned earlier, we’re always in the market looking for value. And so when we find it, we can transact on it and if there’s nothing to do, then we don’t have to do anything at all either. So, hopefully, that’s just good context on what we’re seeing. But we do expect the market to continue to be active over time. But when things move quickly, it locks up in the short term.

Thank you. That makes sense. And then for our follow-up, you’ve made significant strides in simplifying your corporate structure to a single class of shares. What are your thoughts on maintaining the noneconomic preferred?

Yes. Thanks for the question, and thanks for the acknowledgment on the structure. We really have worked hard, and I’ll steal some of Brandi’s words, but to make the stock a lot easier to own. And so, you know, we came from a company with very limited flows and trading volume through reverse merger. And today, you know, we’re a company part of the S&P 600 and, you know, really frankly, a lot easier to own as an investor. So we’re pleased to have simplified the structure, again, at no cost to the company because of how we had set that up. We’ve got a single class stock. And the other thing I would highlight is while the non-economic preferred you mentioned does have some unique attributes, in our view, it all adds stability to the company. And I just also point out again that, you know, we really value the fact that the board members that we have represent 30% of the equity ownership in the company. So we see really strong alignment at the board level and are really pleased with how we’ve been able to apply the structure. But our assumption is that everything else will stay as is, and we think it’s a real value add to the company and its ability long term.

Our next question is from Michael Furrow from Pickering Energy.

Just one quick question for me on operating costs. It looks like there was a slight uptick this quarter in LOE, which I believe was on higher fuel use gas. Is there any way that you can quantify those impacts maybe as a percentage of overall LOE and whether that’s something that we should anticipate seasonally up to fourth quarter as well?

Michael, it’s Brandi. I’ll take this one. Our LOE is always highest in Q1 given winter weather. And as you mentioned, we use some of our gases as fuel. So from our perspective, it’s right in line with expectations. We laid out a guide of 12/25 to 13/25, and we would expect next quarter to be in line with the midpoint.

Next question here is from Arun Jayaram from JPMorgan.

Yes, kind of question, maybe follow-up on the oil mix. Brandi, can you give us a sense for the Ridgemar acquisition? What the oil mix was in those properties? I’m just trying to to think about how your oil mix could trend over the balance of the year.

Hey, Arun. Those assets were roughly 70% oil, so they hit on earlier, we do expect oil cut to increase, again, low single low to mid-single digit percentage-wise quarter over quarter just given the full three months of owning that asset.

Got it. Got it. And maybe, Brandi, just a bit of a follow-up. Have you as you’ve eliminated the structure, could you talk about some of the tangible benefits that you’re seeing from that? And maybe just a clarification, I think in the press release, it did indicate that your longer-term investor KKR has assigned a one hundred and eighty-day lockup. So just thoughts on their you know, long-term your views on their views on the equity and just want to make clarification on that lockup provision.

Yes. Hey. It’s David. Just a couple of quick thoughts. So one, as you know, we’ve had to report certain adjusted metrics. And by the way, that’s standard for all companies that have a dual class structure because of where things end up on the different financial statements. So we’re just really pleased, frankly, to have our accounting team have less to do and have investors be able to look at a consolidated financial presentation in the way you normally would. So I think those are all really value add and then as a reminder, there was no tax receivable agreement or anything like that associated with it. So it was really something we had hoped and expected to get done, but really pleased to have that out of the way. And I think it just streamlines everything, both externally and internally, and there’s what I would call real value to that and then there’s also just the intangible benefit of what I’ll call mind share. And then the second part of the question,

Selling.

Yes. I think one of the questions we get a lot is, you know, what tell us about the overhang. Tell us about who’s selling, what’s KKR’s perspective as well. We view, again, KKR as a long-term owner that never sold a share, and the lockup was really something that we and they both viewed as just a positive indicator. With or without the lockup, there’d be no selling. And so I think you should just take it that way. We expect them to be long-term owners, and the lockup’s just further evidence of that, but not an indication there was any, you know, short-term decision coming.

Our next question is from Tarek Hamid from JPMorgan.

Hi. Good morning. This is Nevin on for Tarek. You guys have shown how D&C costs have declined just from 2024 levels already. How much lower do you think you have room to go? And how would you describe the overall cost environment when you’re balancing lower service costs from declining activity overall as well as OCTG costs potentially going higher?

Hey, Nevin. It’s Brandi. So we did highlight Q1 D&C costs down 10% relative to the 2024 program. So our team continues to do an incredible job in the field from an efficiency standpoint. So I would say the savings are really efficiency versus, you know, any softening from a service cost standpoint. If we look at tariffs and, obviously, it’s a very fluid situation, but the 25% tariff translates to $10 million to $15 million of impact to our capital program that’s embedded in the capital guide that we just reaffirmed. So that’s 1% to 1.5%. So pretty minimal. So I think absent tariffs, I think we’d expect, you know, D&C costs to come down. I think for now, we’re probably assuming they’re relatively flat, but hopeful that we can continue to drive efficiencies in the field.

This concludes the question and answer session. I’d like to turn the floor back to management for any closing comments.

Great. This is David. I just want to thank you all again for your support of the company. We enjoyed the dialogue, and we’ll continue to communicate frequently and inherently about what we’re seeing and doing. And until then, again, we’re going to stick to the strategy we’ve had for a long time. We think the company is well positioned, these are market environments where we tend to do our best work. So thank you again.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you again for your participation.