Crescent Energy Company (NYSE:CRGY) Q1 2024 Earnings Call Transcript May 7, 2024
Crescent Energy Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to Crescent Energy Q1 2024 Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Reid Gallagher, Investor Relations. Thank you, Mr. Gallagher, you may begin.
Reid Gallagher: Good morning and thank you for joining Crescent’s First Quarter 2024 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 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 a reconciliation of historical non-GAAP financial measures to the most directly comparable GAAP measure, please reference our 10-Q and earnings press release available on our website. With that, I will turn it over to our CEO. David?
David Rockecharlie: Good morning and thank you for joining us. We have another great quarter to go over today, and we are eager to get started. Before we get into the details, I want to begin with a few things I hope you all take away from this call. Number one, 2024 is off to a great start. We continue to execute our consistent strategy, doing what we said we would do. Our scaled, low-decline production base is generating significant free cash flow, which we are returning to our shareholders. We are reinvesting in proven high-return capital projects and our attractive long-life development inventory. We are actively focused on our returns-driven M&A strategy through accretive acquisitions and opportunistic divestitures to compound capital for our investors and further enhance our portfolio.
And we have delivered on our goals in the capital markets, improving the float and trading liquidity of our business, enhancing our peer-leading return of capital framework and maintaining our balance sheet strength. Number two, our assets continue to outperform. We saw record production this quarter with continued gains in well productivity complemented by stronger realizations and best-in-class operational execution. 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, stability and capabilities of a large-cap business, combined with the value and high-growth potential of a proven mid-cap company. Following those quick highlights, I will now discuss things in a bit more detail.
We had strong financial performance this quarter, beating consensus expectations on both EBITDA and free cash flow driven by improved realizations and strong asset performance. On the operations side, our team has continued to outperform, generating record production this quarter with sustained gains in well productivity and continued efficiencies on the capital side. With the strong outperformance that we are seeing, we have increased our full year production guidance while maintaining the same level of capital spend. Our stable low-decline production base continues to generate consistent free cash flow, and we’ve been able to further improve our margin profile through a combination of proactive oil marketing efforts and the benefits of our balanced gas basis exposure.
We’ve talked about this a bit before, but one of the highlights of our recent Western Eagle Ford acquisitions was the complementary marketing overlap with our existing Central Eagle Ford position. Since acquiring the asset, we’ve implemented a successful blending campaign across our combined footprint to realize a premium across both assets. Or said another way, the whole of our Eagle Ford position today is greater than the sum of its parts from before we took control of operations in the Western Eagle Ford last year. These recent marketing gains represent further value on top of the capital savings we’ve discussed to date: our improvements to well performance and our ongoing efforts to reduce operating costs across the asset. These all represent meaningful synergy gains as they were not included in our acquisition underwriting.
And they are also excellent examples of our continued enthusiasm about the value-creation potential across our Eagle Ford footprint with the scale we’ve built over the last few years. We are big believers in the value of scale-driven efficiencies and profitability in our sector, and we are focused on increasing our footprint in our core regions to continue compounding value for our shareholders through complementary and accretive M&A. Speaking more on our capital savings, our team has been able to drive further improvements to our drilling and completions program by implementing simul-fracs across our Eagle Ford portfolio, which has increased the efficiency of our completions program. Our completions are now 40% faster than just 2 years ago.
If we look at what our team has accomplished to date, I could not be prouder. With all the gains our team has driven over the past several years, our D&C performance is now among the best in the basin. We are developing our resources safely, consistently and more efficiently than nearly anyone in the Eagle Ford. As I touched on with our increase to guidance, we are seeing consistent outperformance from our recent wells in both the Western Eagle Ford and Uinta. In the Western Eagle Ford, we are seeing a roughly 100% increase in early time well performance versus the prior operator, which combined with our D&C cost performance represents a massive shift in capital efficiency on the assets. In Utah, we are seeing equally exciting results from our most recent completion design optimization.
We touched on this last quarter, but when we acquired this position, the only horizontal development on the assets utilized a legacy, smaller completion design with roughly 1,500 pounds of proppant per foot. As we’ve 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 results of this change and long-term implications for our asset are becoming clearer and clearer over time as productivity remains strong. With a bit more than 150 days of production data, we are seeing a roughly 60% uplift versus the previous completion design with only minimal increases in our D&C costs. These results are still early time, but the data supports our optimism about the long-term value-creation potential of our inventory and the value potential for Crescent.
Building on the capital investment into our own business this quarter, we are always focused on creating further value through opportunistic and accretive M&A. To us, that means investing with financial discipline and a focus on compounding capital, improving our cash flow profile, executing our operational plans and enhancing our overall portfolio. We’ve had a successful track record to date of acquiring assets at attractive value and generating incremental returns for our shareholders through improved operations, which you can see most recently through the results on our Western Eagle Ford and Uinta positions. We are constantly in the market and looking for opportunities to invest at attractive risk-adjusted returns. Recently, there have been a number of large-cap deals making headlines, but we are vigilant and patiently looking for opportunistic value, large or small, that fits our skill set.
This quarter, we executed on an attractive bolt-on to our existing minerals portfolio in the Eagle Ford with a small $25 million asset in Karnes County. These complementary assets generate a compelling cash flow yield and enhance our existing minerals portfolio. Our minerals footprint today covers approximately 73,000 net royalty acres; focused across the Eagle Ford and Rockies; produces roughly 6,000 barrels of oil equivalent per day; and generates roughly $70 million in annual cash flow, which we don’t believe is fully appreciated by the market. When we talk about adding value through M&A, that doesn’t only mean through acquisitions. We are constantly watching our portfolio and the market, looking for opportunities to accelerate value through portfolio management, including by divesting noncore assets from our business.
To that effect, we have divested more than $100 million of noncore assets over the past 18 months, crystallizing attractive value for our shareholders and simplifying our asset portfolio. This quarter, we signed an additional opportunistic divestiture of noncore assets in the Permian Basin for roughly $20 million, which we expect to close in the second quarter. Looking forward, we have one of the largest pipelines of M&A opportunity in our recent history. With our successful track record of asset integration, strong operating and financial performance and solid balance sheet, we remain confident that we are well positioned for accretive growth and further value creation over the remainder of 2024 and beyond. With that, I’ll turn the call over to Brandi to provide more detail on the quarter.
Brandi?
Brandi Kendall: Thanks, David. As David mentioned, performance has been extremely strong with another quarter of record production and significant cash flow, averaging approximately 166,000 barrels of oil equivalents per day, generating $313 million of adjusted EBITDA and $66 million in levered free cash flow. We had $193 million of capital expenditures during the first quarter, which we expect to be our heaviest quarter of spend for the entire year. We brought online 20 gross operated wells in the Eagle Ford and 4 gross operated wells in the Uinta, all of which are posting strong early-time results and are expected to exceed our returns target of 2x our capital invested at current commodity prices. Turning to our outlook for the remainder of 2024.
As David mentioned, we increased production guidance to 157,000 to 162,000 barrels of oil equivalent per day, which represents a roughly 7% increase relative to 2023 production levels while reaffirming our full year capital guidance of $575 million to $625 million. At today’s commodity prices, we expect to generate substantial free cash flow in 2024 and beyond. As you all know, our top priority is creating value for our investors. In addition to our strong financial and operational performance, we’ve executed on that goal in a number of different ways in the capital markets as well. We have truly transformed our positioning in the capital markets since we became public just a few years ago. Through a series of transactions on the equity side, we’ve more than doubled our public float and trading liquidity and effectively eliminated our private investor overhang as we work towards a more simplified corporate structure.
We’ve proven our access to both equity and debt capital to fund accretive growth, and we’ve meaningfully increased investor followership with the addition of 10 new research analysts. Creating value more directly, we’ve announced another dividend under our recently enhanced framework, which provides certainty and simplicity to our shareholders with a peer-leading yield. We also executed on a portion of our authorized share buyback program, further increasing returns to our shareholders with the repurchase of roughly 2.3 million shares at an average price of $9.87 per share. Now that our private overhang is eliminated, we will look to use the remaining $125 million authorization to opportunistically repurchase both Class A and Class B shares.
During the quarter, we also successfully refinanced both our 2026 notes and our credit facility, improving our already strong credit profile and ensuring significant flexibility and liquidity to continue executing on our growth strategy. With that, I’ll turn the call back over to David.
David Rockecharlie: Thank you, Brandi. Before we wrap up, I want to highlight again a few key takeaways from this quarter. First, we have continued to demonstrate consistent performance towards our strategic priorities, doing what we’ve said we were going to do. As Brandi alluded to, 2023 was a strong year for Crescent and 2024 is off to a great start. I couldn’t be prouder of our accomplishments to date. We’ve continued our peer-leading dividend framework, strongly positioned the business through accretive M&A, and we’ve achieved our initial goal of establishing a capital markets presence in line with a company of our size with investor and equity analyst followership, a liquid public float and a demonstrated track record of prudent capital access.
Second, our assets continue to outperform. We saw record production this quarter with impressive well performance, stronger realizations and best-in-class operational execution, driving a significant free cash flow beat. We’ve increased production guidance without a change in capital spend. And finally, Crescent has never been better positioned for further value creation. We have an attractive asset profile with a stable decline rate and advantaged capital efficiency, which allows us to generate significant free cash flow relative to our peers, which we don’t believe is reflected in our current valuation. We have momentum in the capital markets and a vision to make Crescent a must-own mid-cap company. We have the unique combination of operating and investing expertise required to execute on a growth-through-acquisition strategy and believe Crescent is the best stock to own for long-term exposure to oil and gas prices with the discipline, stability and capabilities of a large-cap business, combined with the value and high-growth potential of a proven mid-cap company.
Operator: [Operator Instructions] The first question comes from the line of Neal Dingmann with Truist Securities.
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