Crescent Energy Co (CRGY) 2021 Q4 法說會逐字稿

Good morning, and thanks for joining Crescent's 2021 Earnings Call. Our brief prepared remarks today will come from our CEO, David Rockecharlie; and our CFO, Brandi Kendall. Todd Falk, Chief Accounting Officer; and Ben Conner and Clay Rynd, both Executive Vice Presidents, are also here today and will be available during the Q&A session.

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, the continued impacts of COVID-19; geopolitical conflict, including in Russia and Ukraine; 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 disclaim any 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 the call over to David.

Great. Thanks, Emily, and good morning, everyone. We appreciate you joining us today on our first earnings call as a public company. For our company, 2021 was truly a transformational year. We issued our inaugural bond offering in April. We announced the merger with Contango in June and were publicly listed in December. Last month, we announced the accretive acquisition of EP's Uinta Basin assets, and we continue to advance our ESG strategy.

Before we discuss our 2021 results and this year's outlook, I want to take a moment to ensure you appreciate our strategy and the attractive and differentiated investment opportunity that Crescent presents. The guiding principles behind all of our decisions are quite simple: cash flow, risk management and returns. Our model is unique, combining an investor mindset with deep operational expertise, and we have successfully executed this strategy for nearly a decade.

Cash flow is the foundation of our business. We have a large diversified and low decline producing asset base that generates significant free cash flow. I hope you've had a chance to review our 2022 outlook and recognize the scale and stability of the business. Assuming 9 months contribution from the Uinta acquisition, our 2022 estimated adjusted EBITDA is nearly $1.2 billion with $425 million of projected levered free cash flow at $75 per barrel of oil.

Our proved developed PV-10 is more than $5 billion at SEC pricing of $66 a barrel of oil, with an industry-leading PDP decline rate of only 21%. We have a proven track record in effectively managing risk to protect asset value, generate strong returns and pursue profitable growth. We maintain low leverage and a strong balance sheet. We utilize hedging to protect cash flows and our capital investment decisions. We acquire and develop a diversified portfolio of low-risk assets, and we don't pursue any exploration.

We also recognize the energy market is in long-term transition, and we're committed to continuous improvement on ESG measures as a core part of our strategy. Disciplined capital investments allow us to generate strong cash returns, and we have a well-defined framework of returning cash to shareholders through consistent dividends. We approach capital decisions from a risk-adjusted returns perspective for both organic and acquisition opportunities. On the organic side, we have 10 years of high-return inventory in the Eagle Ford, and we believe the recently announced Uinta acquisition will provide a similar multiyear drilling inventory.

While we have ample runway on our existing asset base, we do not simply drill to grow production. We focus on generating sustainable returns. This means we scale back our capital program when commodity prices are low or when the returns do not justify the investment. On the acquisition front, Crescent is well positioned to participate in what we believe is an attractive market for industry consolidation. On top of our stable base business and dividend, we continue to see a substantial opportunity to drive shareholder value through accretive acquisitions that add cash flow and net asset value at attractive valuations.

We have completed 9 transactions in the last 2 years or as we think about it approximately 1 per quarter. In line with our acquisition strategy, we are very excited about our accretive entry into the Uinta Basin of Utah. The assets are a great addition to our existing Rockies footprint and will add substantial cash flow while maintaining our strong balance sheet. The Uinta acquisition provides a scaled, largely contiguous 145,000 net acre position in the oil window of the Uinta Basin, with high-margin oil production, low operating costs and substantial cash flow.

The asset is nearly 100% operated with greater than 80% working interest. At $75 per barrel of oil, we project the assets will generate annualized 2022 adjusted EBITDA of roughly $425 million and $100 million of free cash flow. About 85% of expected EBITDA comes from existing production or drilled but uncompleted wells, providing a lot of certainty around the cash flows from the assets. We were able to acquire this asset at an attractive entry point. The $815 million purchase price represents a cash flow multiple of less than 2x 2022 estimated projected adjusted EBITDA and an approximate 1x multiple to our estimated proved developed PV-10 of $800 million, assuming SEC pricing of $66 per barrel of oil.

In addition to substantial PDP, we also acquired a multiyear inventory of high-quality oil-weighted undeveloped locations and see about $1.5 billion of potential future development opportunity on the asset. The Uinta is a well-understood basin with substantial existing production and a significant amount of resource in place. Offset operators have demonstrated the potential across multiple stacked reservoirs and highlighted the opportunity to improve performance and profitability with the application of modern completion designs.

The Uinta transaction aligns well with our goals for any acquisition. From a financial perspective, it is accretive, leverage-neutral and allows us to significantly increase the scale of both our free cash flow and adjusted EBITDA. The transaction also meets our strategic goals of increasing operatorship and production from our Eagle Ford and Rockies regions and maintaining our industry-leading PDP decline. On a combined basis, we estimate that 70% of our 2022 production will come from the Eagle Ford and the Rockies regions.

Before turning the call over to Brandi, let me quickly comment on our commitment to ESG and its integration into our business. We've achieved several important milestones despite only being public for 3 months. In December, we issued our inaugural ESG report in accordance with SASB standards and announced the formation of an ESG advisory council to advance our ESG efforts. In February, we joined the Oil & Gas Methane Partnership 2.0 Initiative, or OGMP 2.0. Reducing emissions is critical to slowing the impact of climate change.

The first step to methane reduction is high-quality measurement data and the OGMP 2.0 framework is among the most rigorous. Our membership will aid efforts to create targeted emissions reduction programs, perform accurate reporting and establish us as a leader in emissions reduction. We view all of this as a core part of our business strategy.

With that, I'll now turn the call over to Brandi to cover our 2021 results and 2022 outlook.

Thanks, David. Before I turn to our results for the 2021 period and our 2022 outlook, I would like to provide an overview of our capital allocation strategy. Priority 1A and 1B is the dividend and balance sheet. We allocate free cash flow to our shareholders and the balance sheet before making any capital investment decisions.

Today, we announced our first dividend as a public company, $0.12 per share for the fourth quarter of 2021. We target a dividend equal to 10% of adjusted EBITDAX, which we refer to as fixed within a framework, given the inherent stability of our business with our low decline rate, our low leverage and a robust hedge book. Unlike many of our peers, our dividend framework is based on a percentage of EBITDA, not free cash flow, so it is not impacted by decisions on our capital program. We've paid consistent dividends to our private investors for 9 years, and we'll continue the same consistent dividend policy as a public company. We expect our quarterly dividend will increase to $0.17 per share upon closing of the Uinta Basin transaction based on our 10% of EBITDAX framework.

On the balance sheet, we exited the year at 1.3x net leverage in line with our long-term goal of 1x. Over the past decade, our leverage has averaged 1.2x, while making consistent acquisitions and facing volatile commodity price environment. We know the importance of a strong capital structure and it allows us to weather the commodity price cycles inherent in this business. Only after the dividend and balance sheet do we think about reinvestment opportunities, both on our existing footprint and through potential acquisitions.

Due to the stability of our business, we are uniquely positioned to evaluate all of our investment decisions on a purely risk-adjusted returns-driven basis. Depending on broader market conditions, we can and have elected to delay drilling when single well returns do not support our targeted return thresholds. In fact, we paused our development activity in 2020 and the first half of '21 when commodity prices were depressed and returns didn't meet our targets. We are uniquely positioned to do this, given our low base decline and high HBP nature of our inventory.

We've historically invested approximately 45% of EBITDAX on average on organic development opportunities. And in stronger commodity price markets, like today, we develop our low-risk inventory and draw on our substantial proven resource base and strong drilling capabilities. Our hedge strategy supports our disciplined approach to capital allocation and the stability in our business.

The hedge program is designed to achieve 2 key goals. First, we focus on protecting our balance sheet. We hedge a portion of our PDP cash flows to allow us to repay our debt with hedged cash flow within the tenor of our hedge book in a downside scenario. Second, we lock in expected returns when we commit capital to drilling or acquisitions. Consistent with this strategy, upon signing the Uinta transaction, we entered into additional oil swaps covering about 80% of our acquired Uinta PDPs for a 3-year period. On a combined basis for the Uinta transaction, we are approximately 60% hedged in 2022. Our hedge book provides near-term downside protection but also provides long-term exposure to future commodity prices. And we only have roughly 10% of our proved developed reserves are currently hedged. We achieved impressive results in 2021. Pro forma for the combination of Contango and independents, we generated roughly $680 million of EBITDAX and $385 million of levered free cash flow in '21 after $230 million of development capital. We exited the year at 1.3x net debt to pro forma adjusted EBITDAX and Crescent produced 116 net MBOE per day in December 2021.

Turning now to the Uinta transaction and combined guidance. We plan to initially fund the transaction with borrowings on the revolver and cash on hand. Our lenders authorized an increase of the elected commitment amount under the existing revolving credit facility to $1.3 billion from $700 million contingent upon closing. We estimate the adjusted purchase price, assuming a March 31 closing date, is roughly $700 million based on customary purchase price adjustments.

We announced the 2022 capital budget of $600 million to $700 million, assuming 9 months of Uinta capital on our books. This budget reflects an approximate 1-rig program in the Eagle Ford, a 2-rig program in the Uinta Basin and modest non-op activity. The operated Eagle Ford program includes 32 to 38 gross wells with greater than 90% average working interest. As I mentioned earlier, we paused the Eagle Ford development in 2020 and early '21 and restarted activity in mid-'21. So the 2022 budget reflects some rollover activity and 1/3 of the Eagle Ford wells will come online towards the end of the first quarter. The impact to production will occur in Q2, and we expect our stand-alone ex Uinta CapEx guidance of $400 million be weighted towards the first half of the year. EP Energy is currently operating 2 rigs in the Uinta and our pro forma capital guidance reflects the drilling phase. Like others, we are seeing inflationary pressures across the business.

Our people are some of the best in the industry, and we are finding new ideas to safely offset some of these pressures. We have factored expected inflation in our outlook today. Crescent is well positioned relative to our peers to weather this inflationary period as our cash flow is weighted towards PDP production, which is less impacted by inflationary pressures than drilling and completion activities.

Specifically on operating expense for BOE. I would note that our guidance includes certain costs that are indexed to commodity prices, including production taxes and certain other input costs such as CO2 purchase costs related to our CO2 flood acid in Wyoming. Our guidance figures for OpEx per BOE are based on $75 per barrel WTI and $3.75 per MMBtu Henry Hub pricing, but a portion of these costs move in tandem with oil commodity prices. These higher costs are expected to be offset by higher price realizations.

On a combined basis for the Uinta acquisition, we project 2022 production of 134 to 148 MBOE per day. Assuming $75 oil and $3.75 natural gas, we would generate $1.15 billion of adjusted EBITDAX and $425 million of levered free cash flow in 2022 at the midpoint of guidance. This transaction would allow us to increase the $0.12 dividend we announced today to $0.17 per share.

In summary, we believe Crescent is well positioned in today's market with significant scale and industry-leading decline rate and an attractive dividend program.

With that, I'll turn the call back to David.

Thanks, Brandi. Before we take your specific questions today, let me quickly summarize today's key highlights. First, we have a proven strategy to deliver long-term value to investors. We've been successfully executing this strategy for the last decade. Our strategy is simple and unwavering. We are focused on cash flow, risk management and returns. Second, we are a large scale business with $1.2 billion of projected 2022 adjusted EBITDA and proved developed PV-10 of over $5 billion at SEC pricing. We have a deep inventory of low-risk, high-return drilling opportunities. Scale is incredibly important to being competitive in today's E&P industry, and this is one of the key factors driving consolidation across our industry.

Lastly, we have a proven track record of adding value through quality acquisitions. Our people are able to identify accretive opportunities that play to our operating strengths, capture financial and operational synergies and maintain our strong capital structure.

Thanks again for joining us today and for your investment in our company. We will now be happy to take your questions. Operator?

(Operator Instructions) Our first question comes from the line of Tarek Hamid with JPMorgan.

So it's obviously a very complicated fourth quarter with the transaction in only a 25-day stub period, but sort of walking through the math, I get to roughly $240 million of kind of true pro forma EBITDA if the transaction would close at the start of the quarter. As I look at that kind of versus the '22 guidance, I just wonder if you could kind of help me understand sort of how to bridge that to the stand-alone guidance. I assume a big part of it is the hedge book versus also guidance being at $35 below strip pricing at this point. But anything you do to help would be appreciated.

Tarek, it's Brandi. Thanks for the question. So we announced pro forma '21 EBITDAX of $682 million. On a stand-alone basis, it's $800 million to $850 million. I would agree with you that it's largely related to an increase in our hedge book. We're hedged at just over $50 a barrel for 2021 and the hedge book increases to 16 in '22, so largely attributed to the increase in the hedge book.

Got it. And then I think you touched on this, Brandi, but in terms of production cadence, I think you had a note in the release that your sort of exit rate was kind of 115, it's probably closer to 120, I guess, if you sort of do the math correctly on the stub period. Can you just maybe just give us a flavor for what that kind of looks like first quarter and then heading into sort of hopefully a closing of the Uinta transaction?

Yes. So I agree that we're probably closer to 120 from an exit standpoint, if you account for the Contango production for the period of time, which we actually owned it. We did mention in guidance that we expect roughly 1/3 of our Eagle Ford wells to come online in the first quarter. I will note that towards the end of the first quarter, so that production and cash flow will really impact 2Q forward.

Got it. And then maybe just a bigger picture question. Obviously, Uinta sort of trade came up relatively quickly. But obviously, in a very interesting environment, I'd say, at least just with commodity prices and sort of buyers and sellers, and kind of any flavor that you guys have in terms of kind of what's out there from a potential transaction target standpoint? And kind of anything that you sort of think is worth kind of highlighting at this point?

Tarek, it's Ben. It's a good question. I'd say the big thing that we've seen coming into the year and expect to see is that there's going to be a large supply of assets continuing to come to the market, with a backdrop of really no capital formation in the space. So we think that, that does continue to set up a pretty interesting acquisition market.

Having said that, though, I would say that, obviously, with the recent volatility, we would expect that to potentially put a little friction on the market just in terms of timing of getting deals done and just bid ask spread in the context of that volatility. What I would tell you is that though we do expect people to be opportunistic and continue to look to find liquidity in this market. And so we do expect to see a large supply. Our focus continues to be around our 2 business segments, which is our low decline conventional as well as our mid-cycle, which is reflective of the Uinta acquisition. We've been very successful over the last 12 to 18 months buying low decline production, where there's really just been less of a bid for those assets, but we expect to see kind of a steady supply kind of in both segments, and we think that our strategy sets up for us to be pretty opportunistic there. And so the curve is still heavily backwardated with our risk management strategy. We think we were able to continue to capture things at interesting risk returns, but we continue to watch the back of the curve, which is certainly moving up here over the last quarter.

Clay, I don't know if you'd add anything else to that, though.

No. I think that's right.

Congratulations on your first earnings call as a public company.

Thank you, Tarek.

Our next question comes from the line of Joseph McKay with Wells Fargo.

Just kind of curious to get your thoughts around how you envision incremental cash flows coming in from higher commodity prices. Just thoughts around the dividend, debt reduction, continued M&A activity. Just any color you can provide there.

Joe, it's Brandi. As we talked about before, just with respect to our capital allocation strategy. Our priority is the balance sheet and the dividend, just a reminder, from a dividend standpoint, we set the annual dividend at the beginning of the year based on guided pricing and our 10% of EBITDA framework. That obviously resulted in $0.12 a share, which we announced earlier this morning. We do generate more free cash flow at higher prices. We'd expect to pay down additional debt and selectively pursue accretive acquisitions. So no intent in the near term to increase the dividend outside of, obviously, the Uinta Basin transaction that we announced as going from $0.12 to $0.17.

Got you. Okay. That helps. And then maybe just kind of touching again on the M&A front. Can you just kind of talk about what you're seeing industries in consolidation mode, just kind of what you're seeing out there in terms of other potential opportunities and how that's being shaped by the higher commodity prices that we're seeing today.

Yes, it's David. I'll give you a quick high level, and then I'll let Ben and Clay be a little more specific. I think one thing to highlight is that we typically see 150 to 200 transactions a year come across kind of the business, we'd expect to be at the high end of that this year. As you've heard us say, we typically, on average, have done 3 or 4 deals a year. So low single-digit percentage of conversion on any of those. So at a high level, the market environment looks attractive from the supply. We have a pretty low probability of getting things done in general and any particular thing we're looking at.

The one thing I would highlight that I think different in this market environment and may specifically address your question. There's sort of 2 sellers in this market environment. They are the sellers who have a very strong keep case and are looking to get paid for $100 oil. And then there are sellers who've been invested for a long time and have decided to reshape either their portfolio or just exit their position, and they just want to get paid for this environment in general relative to a $40 environment that existed before. And so you can definitely assume that what we're looking for is to be patient and sort of find attractive sellers who are looking to just exit into the environment rather than opportunistically top tick things. And that's always a challenge when things move this quickly on the price side.

Our next question comes from the line of Gregg Brody with Bank of America.

Just starting with so for the transactions you announced, the Uinta transaction. What is pro forma your maintenance CapEx for the -- to maintain your whole asset profile? And just as you answer that question, can you talk a little bit how you do think about potentially growing? I know you said where cash will be allocated prioritizing for debt repayment and acquisitions, but do you -- how do you think about allocating more capital to growth -- and is there a point where it makes sense?

Yes. Happy to take the question. Obviously, we're adding an asset where we're -- EP is currently active and we expect to continue to be active. And so as we kind of look at that, look, we continue to maintain a low decline. But as we look at the asset kind of roughly, we kind of -- in this environment, where prices are, it's kind of a $500 million to $600 million type maintenance capital business. And so I think as we've talked about before in our strategy, we're extremely focused on returns on capital and really strong operational execution. So I think as we sit here today, running a rig in the Eagle Ford and 2 in the Uinta is kind of where we would see ourselves continue to be. So -- and from a pro rata perspective, I think that's, between those 2 basins, is largely where our capital will be going for the foreseeable future. I think that's close to 85% of our pro forma capital spend would be between those 2 basins. So I think it's fair to kind of think in this environment, we'd be in a consistent pace and not looking to really expand beyond that.

But that's what -- you said $500 million to $600 million, your budget's $600 million to $700 million this year. So that implies some pro forma growth. Is that right? And then just -- is that -- should we be thinking that you will have a low growth strategy from here into '23 and '24, assuming things stay where we are?

Gregg, it's Brandi. So that doesn't imply some slight growth for the year. I will also just highlight given we just restarted our capital program in the Eagle Ford in the back part of 2021, there is some kind of carryover capital that's coming into 2022, which just makes it a little bit noisy. But I think Ben's right in the $500 million to $600 million range is a good maintenance level for us going forward.

Got it. And as you said, 1 in the Eagle Ford, 2 in the Uinta, that's 85% of your capital. Is the other 15% infrastructure? Or is there -- is that for non-op? Or could you just explain what that is?

Yes, mostly non-op for the remainder.

And when you guide that 85% that you're saying is Eagle Ford, Uinta, that includes equipment and it's a full DC&E number or...

Correct. Correct, full DC&E.

Look, you're public now. Obviously, you have a unique structure. I know management is incentivized with shares. I'm curious if you can think of just kind of help for the new investors here. And how do you think -- how do you benchmark your incentives versus the general public market pluses and minuses. Are you thinking about making any changes? I'd be interested to hear your thoughts now if there's any updates.

Yes, happy to take that. It's David. I'll call it no updates or changes from what's been disclosed. But I'm happy, to your point, to just cover it again from how we think about it. We think that the 2 things are important. One, the absolute level of, I'll call it, cost in the business needs to be in line or better than the market. And then secondly, the incentives to management should be heavily driven by performance. And so in the first case, when we benchmark ourselves and the public data that is out there from the industry, we think that the overall operating cost of the business associated with management are in line or better than the peers. And then on the performance incentive compensation, it's 100% stock based, and it's 100% performance based, which we think is unique in the sector. There's no time-based vesting or anything like that. So just as a reminder for everyone on the phone, 60% of the potential long-term incentive on the equity side is based around total shareholder return, which has a minimum of an 8% IRR. And the second piece of that, which represents 40% of the long-term incentive comp, is a requirement to have strong relative value performance compared to peers. So we feel great about how that compares. We also feel motivated by the opportunity to do good work and have performance for the shareholders and all the investors also be well aligned with how management is compensated.

And you talked about your shareholder return strategy. I appreciate the limited flow makes it difficult to buy back shares. But is there -- clearly, where your stock is trading, it definitely points to that might be a good use of capital. Is this shareholder program is a buyback just not something you can contemplate today? Or is it something maybe in the future you might?

Yes. I think in the current mindset and market environment, we're all about 2 things. One, really transitioning the company from, I'll call it, smaller market capitalization that Contango had premerger into, I'll call it, institutional recognition, both on the research as well as the investor side that would be more typical of a company of this scale. And I think that's, long story short, we're focused on creating incremental liquidity as well as awareness and coverage of the company.

In terms of what we would do with the cash and in particular, obviously, we have a very strong focus on free cash flow. As Brandi said, we're focused on maintaining the historical framework for the dividend, which we've announced now publicly. And so we're very actually excited to deliver the first cash payment through dividends to the public investors of Crescent.

And secondly, it's going to be all about the balance sheet. We think, in this type of environment, the free cash flow available to the business should be really strengthening the value proposition of the company and that includes the balance sheet. So I think you can assume that we're going to be really heavily focused there and no change in that strategy from what we've historically done.

I got it. And last question for you. I think you're assuming some inflation in there. Could you give us a sense of how much you're assuming right now?

Yes. So we are experiencing, as you can imagine, similar impacts as the rest of the industry. We've embedded all of the known inflation into our guidance, I would say, in the range of 5% to 10%. I will note, though, given we have a really large base decline and we're only really running 1 rig today and 3 rigs pro forma for Uinta, our cash flow is weighted towards PDP production, which is less impacted by these inflationary pressures.

And that's $500 million is something like maintenance CapEx, that includes the kind of 10% inflation?

That's right.

Great. Welcome to the public markets.

Thanks. Thank you, Gregg.

At this time, we have reached the end of the question-and-answer session, and that also concludes today's conference call. Thank you, everybody, for participating. You may disconnect your lines at this time. Thank you for your participation.