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Crescent Energy Company (CRGY -1.26%)
Q1 2022 Earnings Call
May 11, 2022, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings. Welcome to Crescent Energy's first quarter 2022 results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

[Operator instructions] Please note this conference is being recorded. I would now turn the conference over to Emily Newport, senior vice president of finance, and investor relations. You may begin.

Emily Newport -- Senior Vice President, Finance and Investor Relations

Good morning, and thank you for joining Crescent's first quarter 2022 earnings call. Our prepared remarks today will come from our CEO, David Rockecharlie; and our CFO, Brandi Kendall; Todd Falk, chief accounting officer; Ben Conner, and Clay Rynd, both executive vice president, are also here today and available during the 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, the continued impacts of COVID-19, geopolitical conflict, including in Russia and Ukraine, and [Inaudible] strategy.

And other factors that may cause actual results to differ from those expressed or implied in the statements and or 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-Q, and earnings press releases are available on our website.

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With that, I'll turn it over to David.

David Rockecharlie -- Chief Executive Officer

Great. Thanks, Emily. And good morning, everyone. We appreciate you joining us today for our first quarter 2022 earnings call.

This is our first quarter to report full consolidated results after our merger with Contango in December. We've been trading publicly as Crescent Energy for about five months, and we look forward to providing more details today on our results, as well as our outlook for the large and differentiated business we built. We'll also take your specific questions at the end of our introductory remarks. Q1 was another solid quarter for our business.

We generated significant free cash flow and solid investment returns across our asset base. We maintained a strong balance sheet and remain focused on returning capital to shareholders through our fixed quarterly dividend. As a reminder, we paid our first dividend as a public company in March equal to $0.12 per share. Additionally, we're pleased to have closed the highly accretive acquisition of assets in the Uinta Basin at the end of the quarter.

The Uinta asset significantly increased our scale and added high-margin oil production at a very attractive purchase price. Our comments [Inaudible] include the Uinta acquisition for nine months. And I would note that given the March 30 closing date, the operating results of this material and the compelling acquisition will not begin to be reflected in our financial results until the second quarter of Q2. While performance is strong and Crescent continues to grow significantly, our strategy remains unchanged.

We describe our strategy as focused on cash flow, risk management, and returns. We generate significant free cash flow from our large diversified and low decline-producing asset base. We manage risk through a portfolio approach to asset selection and by maintaining our strong balance sheet supported by our hedge program. And we seek to deliver strong returns on invested capital, both through internal development and complementary accretive acquisitions in order to drive profitable long-term growth for shareholders.

This is the same strategy we have executed for the last decade in the private markets across multiple commodity cycles and we're sticking to it. Turning to the market backdrop, following years of under-investment in the oil and gas sector, we are in a period of unique volatility, which has been driven by the rapid recovery of global economies as pandemic and exacerbated by the war in Ukraine. In terms of the conflict's impact on the commodity market, it does not fundamentally alter our view of an already tight global supply demand balance, but it introduces additional volatility and upward price risk. Today, oil and natural gas prices are approaching near-record close.

To reflect today's commodity prices, we've revised our 2022 guidance to $1.35 billion of adjusted EBITDA and $575 million of leverage-free cash flow at the midpoint, assuming $100 WTI and $6 Henry Hub. Again, which guidance includes the Uinta assets for nine months of 2022. Our proven [Inaudible] at 3.31 NYMEX pricing totals $8.2 billion and we have industry-leading first-year decline rates in the range of 20%. We believe the stability of production and cash flow is a key differentiator for Crescent.

It lowers our capital intensity and allows us to pursue profitable growth through the development of our large low-risk resource base and opportunistic and complementary acquisitions. Consistent with our commitment to return cash to shareholders and in the context of closing the Uinta acquisition, today we declared a $0.17 per share dividend payable in the second quarter, representing a 40% increase from last quarter's dividend. Our LTM net leverage remains low at 1.3 times and we are generating significant free cash flow following the close of the Uinta acquisition. From an operational perspective, we continue to operate three rigs as we invest in the development of our high return multi-year inventory in our core Eagle Ford and Uinta positions.

Crescent's large, held production resource base provides the ability to generate strong returns on capital investments while we maintain a moderate growth of production organically. In addition to our stable base business, we continue to look for ways to drive shareholder value through opportunistic, accretive acquisitions that add cash flow and NAV at attractive valuations. While the commodity price environment has changed quickly, we continue to see an attractive backdrop for industry consolidation. As the supply of assets on subscale businesses for sale is increasing steadily or outweighing buyer demand.  As always, we will continue to be disciplined and focused on investment returns in connection with capital investments in our existing assets as well as potential acquisitions.

We believe we have proven our ability to capture attractive assets, integrate them into our portfolio, and apply our strong operating skills to find synergies and create value for shareholders. Following our December 2021 merger with Contango and subsequent Uinta acquisition, we have made significant progress on business integration, while also beginning to better position our large-scale enterprise in the capital markets as a new public company. We anticipate completing our integration efforts and continuing to execute our capital market strategy throughout the remainder of 2022. Brandi will provide some more detail on both of these activities later on the call.

I will now go into a little more detail on the highly accretive acquisition of our Uinta assets, as this is the most recent example of our strong M&A capabilities at work. The assets are a great addition to our existing [Inaudible] footprint and will add substantial cash flow while maintaining our strong balance sheet. The Uinta assets are 65% oil and nearly 100% operated with high margins and low operating costs, enhancing our overall asset portfolio in these areas. Consideration at closing in March was $690 million for assets with a $1 billion of proved developed [Inaudible] at NYMEX pricing as of March 31st, and substantial development upside.

We were able to move extremely quickly to capture these complementary assets in unique situations due to our familiarity with the assets, our existing operating capabilities, and our strong balance sheet. In summary, this acquisition is consistent with our strategy to drive shareholder returns through significant free cash flow generation and profitable growth from strong returns on capital invested in low-risk development and opportunistic acquisitions that are accretive to NAV. Since closing the Uinta acquisition roughly six weeks ago, we have made significant progress integrating the operations of these assets. Up close we took over operations from EP Energy and have maintained their two-rig development program.

While still in the early days, the transition has been smooth thanks to our strong operational leadership and the talented field staff we gained in the acquisition. We are actively engaging with local agencies about our operating plans on practices, including on the [Inaudible] side. Continuing to discuss our assets and operations, I want to reiterate at [Inaudible] is a [Inaudible] part of everything we do. We plan to issue our 2021 ESG report later this year, which will include short and long-term ESG targets with a focus on EHS and emissions.

During the first quarter, we joined the Oil & Gas Methane Partnership 2.0 Initiative, or OGMP 2.0. We believe reducing methane emissions is critical to slowing the impact of climate change, and the first step to methane reduction is high-quality measurement data. The rigorous OGMP 2.0. the framework will aid our efforts to create targeted programs to reduce emissions, accurately report our data, and help us to be positioned as an industry leader in emissions reduction.

We will continue to keep you updated on our progress in this area. I'll now turn the call over to Brandi to cover our first-quarter 2022 financial results and 2022 outlook.

Brandi Kendall -- Chief Financial Officer

Thanks, David, and good morning, everyone. We're off to a great start in 2022. We remain focused on cash flow priorities 1A and 1B, shareholder returns, and the balance sheet. As David mentioned, we announced a $0.17 per share dividend, which is a 40% increase from the prior quarter, consistent with our dividend framework of 10% of adjusted EBITDAX, we intend to pay $0.17 per share quarterly for the remainder of the year, generating an attractive 4% yield based on the recent trading price.

On the balance sheet, we exited the quarter with LTM leverage at 1.3 times. On March 30th, we closed the Uinta Basin transaction for cash consideration of approximately $690 million. In conjunction with the transaction, our lenders authorized an increase of the elected commitment amount under the existing revolving credit facility to $1.3 billion from $700 million. Additionally, we issued a $200 million tack-on during the quarter with proceeds used to reduce RBL borrowings consistent with our strategy of not being overly reliant on the bank's RBL market.

For the first quarter of 2022, we produced 120 net MBoe per day in-line with our previous guidance, excluding Uinta, and generated $195 million of adjusted EBITDAX and $89 million of leverage-free cash flow. As a reminder, these results do not include the contribution from the Uinta assets since the transaction closed at the end of the quarter. Operating expenses, excluding production and other taxes of 1597 per MBoe were in line with guidance adjusted for contractual commodity link costs, costs which increased in the higher commodity [Inaudible]. Recall that our guidance was originally set at $75 barrel, roughly $20 a barrel less than the Q1 oil price.

About $0.25 to $0.50 of our operating costs are contractually index declined prices such as CO2 prices for our Wyoming tertiary recovery assets in certain gathering and processing costs. With these higher contractual commodity dealing costs were more than offset by higher realized prices and improved margin. Our expectation for opex, excluding taxes per MBoe for the remainder of the year is in line with our expectations with the exception of these contractual commodity-linked costs. As we increased our guidance spreads set from $75 barrels to $100 per barrel for the remainder of the year, we increased our cash opex, excluding taxes by $0.50 per MBoe.

Again, this increase in cost is expected to be offset by higher realized prices. And going forward and beginning in the second quarter, we expect the Uinta assets will reduce our operating expense excluding production and other taxes per unit by over 10%. Adjusted recurring cash G&A totaled $1.69 per MBoe, which is in line with previous expectations, excluding Uinta. Going forward, we expect recurring adjusted cash G&A to be roughly $1.50 and the Uinta asset at minimal G&A.

That calculation excludes certain non-recurring expenses, we incurred a 50 with Contango merger, Uinta acquisition, and the formation of Crescent Energy as the new public company, we expect an incremental $10 million to $15 million one-time expenses for the remainder of 2022, including post-merger integration and other transaction-related costs. Invested roughly $85 million in the first quarter. The nine operated Eagle Ford wells, we brought online during the quarter are showing promising early results with an expected payback of less than 12 months in the potential to generate more than three times our investment as safe commodity prices. Our 2022 capital budget is unchanged at $600 million to $700 million dollars with more than 80% allocated to the operated development and Ephrin and Uinta basin.

Like our peers, we are seeing inflationary pressures and potential for logistical and other profit delays across the business. We're closely monitoring the changing landscape as the pressures change month to month. Our people and relationships are some of the best in the industry and we continue to find new ideas to safely offset some of these pressures. Based on what we know today, we believe our capital range accurately incorporates expected inflation, and our February guidance incorporated a 10% to 15% increase in capital costs year-over-year.

We are seeing additional pressure around 5% or so in cost inflation for the remainder of the year; I believe this is covered in our guidance range. Today, we're continuing to operate one rig in the Eagle Ford and two rigs in the Uinta. Our planned second quarter wells are expected to commence production at the end of the quarter, which should drive modest growth in the back half of the year. We expect our capital spend cadence to be fairly even over the remainder of the year.

Hedging is core to our risk management strategy and we utilize hedging to achieve a couple of objectives. First, to protect the balance sheet, second, to lock in expected returns and [Inaudible] capital to drilling or acquisitions, and third, to maintain exposure to future commodity prices. Consistent with the strategy upon signing that Uinta transaction, we entered into additional oil slots covering about 80% of our acquired Uinta PDP for a 3-year period to protect our expected returns on capital invested. Today, more than 50% of our current hedge book was entered into in connection with acquisitions, which means that our recent acquisitions are outperforming from a price perspective relative to how we underwrote that.

For example, we hedged the Uinta acquisition at $70 to $80 per barrel, and the current $100 per barrel oil price environment provides significant upside to our underwriting. We maintain attractive long-term exposure to future client prices and only 12% of our proved developed reserves are hedged today. However, we're hedged today than our mid-size E&P peers with 60% hedged for the remainder of 2022. We know that our 2022 adjusted EPAC is understated relative to peers and meets the strength of our asset base.

Moving to our capital markets priorities, we continue to engage with the market to expand our rollover shift, improve our float, and increase equity research coverage. We recognize that the current market conditioning and awareness of Crescent are not yet at a level consistent with peers of similar size. Since the key piece of our strategic plan for 2022 and we're committed to an active approach to building awareness of our story and our accessibility to invest in the stocks through increased liquidity over time. In summary, we believe Crescent is well-positioned in today's market, we're focused on generating cash flow, making disciplined investments, maintaining our strong balance sheet, and returning cash to investors.

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

David Rockecharlie -- Chief Executive Officer

Thanks, Brandi. Before we take your questions, let me quickly summarize today's key highlights. First, we have a proven strategy to add value. We focus on cash flow, risk, and returns.

We've been successfully executing this strategy for the last decade, and the results are apparent in our first quarter earnings update. Second, we are a large-scale business with $1.35 billion of projected 2022 adjusted EBITDA at a $100 oil, improved [Inaudible] $8.2 billion at the 3-31 strip pricing. Again, this EBITDA guidance includes the Uinta assets for nine months, 2022. We're continuing to run three operated rigs across our deep inventory of low-risk and high-return drilling opportunities.

Scale is incredibly important to be competitive in today's E&P industry. Lastly, we have a proven track record of adding value to complementary acquisitions. Experienced and talented professionals across our entire business are able to identify accretive opportunities, operate safely, capture financial and operational synergies, and maintain our strong capital structure as demonstrated once again this quarter with our acquisition of the [Inaudible] assets. The accretive acquisition added substantial cash flow to a multi-year inventory of high return oil-weighted development.

It increased our oil waiting and the percentage of production that is operated across our portfolio by maintaining a strong balance sheet. We were well-positioned to acquire this asset on an accelerated timeframe with our strong balance sheet and operating model that combines an investor mindset with deep operational expertise. We believe this transaction captures what Crescent is uniquely able to do with our disciplined cash flow-based operating model. Thanks again for joining us today and for your interest in our company.

We will now be happy to take your questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question is from Neal Dingmann with Truist Securities. Please proceed.

Neal Dingmann -- Truist Securities -- Analyst

Good morning, David [Inaudible]. Congrats on the first call. My question is first maybe a little bit on ops, specifically on the Uinta. Can you talk a little bit about how integration has gone and then a few other things on this Uinta? Can you speak to early results there? Are you seeing -- I know you've got a couple of rigs, so it might be too early, but just your thoughts on how the wells are looking versus when you all were modeling looking at the deal, maybe just any more color you could talk about.

As I said, I just don't think the market's fully appreciated that, so might you share more color if you could?

Ben Conner -- Executive Vice President

Sure. Hey, Neal, it's Ben. A good question. As David mentioned in his opening remarks, we're early into the integration, six weeks in, so what we'd say is just we're very pleased with the organization in the field that we've taken over, and all the communications we've had with really all the stakeholders across the asset.

We're still getting in and diving deeper relative to underwriting. What I'd say is performance is as we expected in terms of underwriting. The organization brought on 12 wells during the quarter. It's early in those results, but they look good, and I think what we're more excited about is the opportunities that we're seeing, that we thought, just in terms of being able to get there and continue the program that EP had and seeing opportunities for further value creations.

So what I'd say is it's still early, but as expected, and we're excited about the outlook.

Neal Dingmann -- Truist Securities -- Analyst

Great to hear. [Inaudible] Brandi just don't -- shareholder returns, you got a nice selling base there. Could you just talk about plans for that and what do you think -- how much needed to be pushed out? What do you think is appropriate versus continuing used cash for scale? And just wondering how you think about balancing those two going forward?

Brandi Kendall -- Chief Financial Officer

Hey, Neal. Good morning, it's Brandi. So, I'd say no intention to increase our base dividend for the balance of the year and we plan to use incremental or the incremental free cash flow that we're generating at these higher prices for you to pay down debt or selectively pursue acquisitions that expect to pay out at that $0.17 per share per quarter for the remainder of the year, which as a reminder, was a 40% increase versus Q1.

Neal Dingmann -- Truist Securities -- Analyst

OK, we'll settle with that. And maybe if I can get one last one and then maybe for you David. Just can you talk about [Inaudible] August inflation, I mean, my thought is not so much on some two months -- I'm too worried about just the pure inflation, but just can you talk about logistics and the challenges, I'm just making sure you can continue to get rigs, spreads, drill, pipe, AC, and everything in the future. Just talked about your lock things what does your confidence as you continue to run the [Inaudible] program?

Ben Conner -- Executive Vice President

Yeah. Hey, it's Ben again, and Brandi can cover some of the numbers. I think she hit on it, but certainly experiencing an evolving and tighter market overall. What I say is that with the one rig in the Eagle Ford and taking over a well-planned two rig development.

Overall, it's an operation that we feel really confident about. And I think we highlighted and forecasted the inflation generally that we expected within our guidance. So I'll say we've seen a little bit more tightness in the market that we're managing through, which is really around pipe and sand. And so really just kind of managing ahead and through planning, just making sure that that doesn't impact the logistics and the overall plenty of the operations.

So I'd say we're managing through it and it's well within our capital guidance, but I'd say those are the two heightened areas where we're seeing a little bit more pressure, multiple months.

Neal Dingmann -- Truist Securities -- Analyst

Very good. Thank you.

Operator

Our next question is from Joseph McKay with Wells Fargo. Please proceed.

Joseph McKay -- Wells Fargo Securities -- Analyst

Hey, guys. Thanks for taking the time to my questions. I was just wondering if you could talk about kind of some of the underlying assumptions for the Uinta just in terms of location count, would you characterize them as conservative? And if so, what would offer some potential upside there in terms of location counter well performance moving forward?

Ben Conner -- Executive Vice President

Yeah. Hey. It's, Ben. The first thing I would start out with is that we were able to buy this asset at a pretty interesting valuation based on the underlying production and it certainly came with some high confidence development locations, which we're actively developing today.

We are excited about the prospects of future resources and I think we talked about it when we announced the transaction, we see meaningful development opportunities across the asset base. But we're going to be what I'd say is late followers and some of the exciting things that are happening in the basin. And we're focused really on the [Inaudible] development, which has been the primary focus area across the basin, across the multiple operators. So I think as we continue to look forward, will continue to focus on those areas that have been meaningfully de-risked.

But over time, as other operators continue to do work, and as we see results and continue to do good work on our asset base, I think there is some exciting resource optionality that will continue to follow and track over time. So I think that's where you see it in our hedge at the current moment.

Brandi Kendall -- Chief Financial Officer

And I'll maybe just add a point or so just with what Uinta does to that pro forma business than we had on. We're running one rig in Eagle Ford and two rigs in Uinta. That does result in a fairly even capital spend cadence for the remainder of the year. From a production standpoint, we averaged 120 MBoes per day in Q1 on a stand-alone basis at Uinta and expect Q2 to be 15% to 20% higher production lines when you factor in Uinta, that gives you a context as to what the rest of the year looks like for that pro forma business.

Joseph McKay -- Wells Fargo Securities -- Analyst

Gotcha. Thank you. That's very helpful. Then, one more on the Uinta real quick.

Some of your peers in the basin have explored using rail as a takeaway to get down to the Gulf Coasts. I know it's still early days [Inaudible] in the asset, but do you have any thoughts around that in the longer term in terms of in-basin pricing or expanded takeaway options?

David Rockecharlie -- Chief Executive Officer

Yeah. To your point, I think we're still early days in terms of becoming experts, but rail capacity has meaningfully grown in the basin, and Gulf Coast refiners really like the [Inaudible] there. So I think that's a place where you will continue to see growing takeaway capacity. Our volume, specifically, we do have contracted, and for the most part, are contracted to go to the local refinery.

So we feel good about the visibility there, but the optionality in the basin continues to grow as people continue to invest in takeaway capacity.

Brandi Kendall -- Chief Financial Officer

And then, maybe just specifically on debt. So as a broader business, we had really strong debts for the quarter. They were in the high 90s. We do expect those to drop to the lower 90s pro forma for the Uinta starting in Q2.

Joseph McKay -- Wells Fargo Securities -- Analyst

Gotcha. Thank you very much. That's helpful. That's all from me.

Brandi Kendall -- Chief Financial Officer

Thanks, Joe.

Operator

At this time, we have no more questions in the queue, so I would like to turn the conference back over to management for closing comments.

David Rockecharlie -- Chief Executive Officer

Great. Thank you all again for joining us this quarter and supporting the company. We appreciate it, and we look forward to keeping you all well informed, and speaking again next quarter. Thank you.

Operator

[Operator signoff]

Duration: 29 minutes

Call participants:

Emily Newport -- Senior Vice President, Finance and Investor Relations

David Rockecharlie -- Chief Executive Officer

Brandi Kendall -- Chief Financial Officer

Neal Dingmann -- Truist Securities -- Analyst

Ben Conner -- Executive Vice President

Joseph McKay -- Wells Fargo Securities -- Analyst

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