2023-05-15 11:55:03 ET
Summary
- Attractive positioning in the Eagle Ford and Uinta basins - while not the lowest cost for producers - does present good opportunities to the savvy operator.
- The company has very few cons, save its high interest debt load and limited growth potential without additional land acquisition.
- Overall, it could make a good add to an existing basket of energy-focused dividend stocks.
Thesis
Crescent Energy ( CRGY ) is a relatively new issue to the NYSE but comes with a solid management team including the crew over at KKR. As they're a new company it's important for any prospective investor to get a sense of the deep fundamentals since we have less to go on numbers-wise.
In this article, we'll go through their positioning in the upstream industry, and see why they're a company dividend investors might want to give some attention to. They're showing a forward yield of 4.55% right now, with the guidance to distribute 10% of their EBITDAX going forward - so that has plenty of room to grow if they can acquire additional land rights.
Company Overview
Crescent Energy is a well-capitalized, independent energy company with a portfolio of low-decline assets in proven regions across the United States. The company generates substantial cash flow supported by a predictable base of production. Crescent Energy's mission is to invest in energy assets and deliver better returns through strong operations and stewardship.
The company has a diverse production portfolio with 90% of the company's production coming out of the Rocky Mountain or Texas Regions in the Uinta Basin and Eagle for Shale, respectively. The company is well diversified producing 45% Oil, 42% Gas, and 13% NGL according to their last investor presentation .
Most of the company's positions are in low-decline asset bases with 55% of their asset base being mid-cycle unconventional plays and the other 45% of the asset base being late-cycle low-decline plays. In fact, the company boasts one of the industry-leading corporate decline rates of approximately 20%.
Crescent Energy's business model is less capital intensive vs. peers as 2-3 rigs can maintain current production levels. Additionally, the company's well-located areas of operation provide lower-cost midstream infrastructure to transport products to market. This location also gives the company access to premium end markets.
Operations
The company operates primarily in two geographic regions - Uinta Basin and Eagle Ford Shale. The company's assets and position in the Eagle Ford region are among the most sought-after, driven by exceptional thickness and pressure. Crescent Energy holds a large, low-decline production base with current production levels around 138 Mboe/d, with 57% of the production being liquids.
Eagle Ford Shale
The Eagle Ford Shale is one of the most prolific shale plays in the United States and somewhere every producer wants to be in with access to premium markets and lower-cost midstream services.
Breakeven pricing is around $59/bbl in the Eagle Ford Shale. Investors can expect the company to maintain current production levels - because even in the event of the looming U.S. recession crude oil price floors should support current production levels. Don't expect the company to ramp up any new drilling activity in this region in the near future.
Uinta Basin
The Uinta Basin is one of the most desirable shale plays in the Rocky Mountain oil and gas region. Industry experts show breakeven pricing in the region between $55-$60/bbl for new wells, depending on specific geographic locations. Investors can expect Crescent Energy to maintain current production levels in this region without any new drilling activity in the near future.
Debt Levels
One of the things that stuck out to me with CRGY is their debt level and the high interest rate. Let's dive in for just a minute and break it down and see if it's serviceable.
According to their latest 10-Q , they issued $400M of senior notes at a blistering 9.25% interest rate - due in 2028. They used the proceeds to pay back a portion of their secured revolving credit line. They're more or less just pushing debt down the road here.
Now their current leverage is only at 1.0x, and that's also their target - so they're within what they can service comfortably, and the interest coverage ratio backs that up. They have a 7.25% note coming due in 2026 and I'd bet dollars to donuts they're betting rates will drop so when they need to kick that can down the road too they won't get stuck with another 9.25% rate.
Now the 10-Q doesn't state whether the 2028 bonds are callable or not. Hopefully, they are so they can refinance when those rates drop. They did recently acquire a large chunk of land in Eagle Ford, so investors are getting a return on this capital. Overall this isn't the biggest issue, but it's definitely something that the savvy investor will want to keep an eye on.
Earnings Call Analysis
In their latest conference call , Crescent Energy announced they returned a roughly 7% yield or $143 million to shareholders through quarterly dividends and an opportunistic share repurchase in September - where the company reduced total outstanding shares by 2%.
Production levels are up 45% from their 2021 levels and current production is at 138,000 MBoe/d. The company's proven reserves increased nearly 10% year-over-year to 573 million barrels of oil equivalent, with oil reserves driving that increase - up more than 15%. Additionally, Crescent Energy maintained its industry-leading low decline rate of 22%, which provides its business increased flexibility and less reinvestment risk relative to peers.
Throughout the call, company leadership discussed their strategy to acquire and exploit additional interests in order to create more value for shareholders. This falls in line with the company's 2023 strategy to prioritize free cash flow generation, exercise prudent risk management, and produce attractive returns on the capital invested. Crescent Energy leadership is allocating roughly 85% of their $575-$650 million capital program to their operated Uinta and Eagle Ford inventory.
John Abbott with Bank of America asked Crescent Energy leadership about the 2023 outlook, including where the company expects production levels to be. Crescent responded that investors should expect a maintenance level of activity with slightly less capital expenditure than in 2022.
Company leadership went on to reinforce its commitment to potential deal activity, saying the company would consider deals of any size. The company is looking at more oil opportunities in its existing assets but would consider gas opportunities in the current environment.
Industry Positioning
Crescent Energy should continue to deliver strong financial results for investors with continued strong dividend results. The company's assets and interests are in two of the most prolific shale plays in the United States and even in the face of a potential U.S. recession, commodity price floors will likely be at levels that call for continued production.
The company is only operating 2 rigs with average production levels of 138,000 barrels of oil equivalent per day. While this pales in comparison to many peers in the industry, the company's financial flexibility and production flexibility are definite positives for investors.
One thing that is mildly troubling is their increase in operating expenses year over year. A quick look at their investor presentation reveals the trend:
Q1 2023 | Q4 2022 | Q1 2022 | |
Operating Expense (Per Boe) | $22.12 | $19.92 | $20.27 |
This is something, like the debt, that investors will want to watch.
Not all companies are going to be majors, and the leadership team at Crescent Energy appears to know exactly who they are and what spaces make sense to operate in so investors should have confidence in leadership and the future of the company.
Conclusion
Crescent Energy maintains a commitment to shareholders and responsible production levels to give the company liquidity and flexibility to roll with any market changes. In the event of a recession, production levels should be largely unchanged and revenues should hold steady.
On the other hand, in the event of a global conflict or major supply interruption, the company would also be able to ramp up production in two of the major shale plays in the country. In other words, the company is well-positioned for whatever uncertainty the market brings.
They're actively looking to expand their rights and are trying to find deals to make this happen. This will be their biggest barrier right now. If they can't find land then this company can't grow their dividend much in the absence of higher energy pricing.
All in all, Crescent Energy should be attractive to investors as a decent, albeit small, dividend play with flexible operations capabilities to take advantage of whatever economic winds may blow. It could make a good add to an existing basket of energy-focused dividend stocks, but personally, I wouldn't use it as a core position in said basket. At a low allocation though, I like it for a buy recommendation.
About this article: When I research stocks I start with a "bird's eye view" of the target company. Many of the things I went through in this article are what I'll look at first.
When this bird's eye view is complete, I'll decide if I want to avoid the company for the time being or if it's a potential candidate for investment. This article that you are reading is the result of my bird's eye view examination.
It is designed to be an overall high-level view of the company that you can read to determine if this company is something that you might consider as a candidate for investment. It is not possible to report everything about a company in the space of a single article, nor is it possible for me as an author to learn every detail about a company in the amount of time allotted to write an article.
You should not take my final conclusion on the company as your sole recommendation for investment, and you should conduct further in-depth research on your own to come to your final conclusions.
As a result of this, my "buy" recommendations come with an asterisk. And that asterisk is that this is only a high-level examination, and in-depth research that can take many hours, or days, of your time is still required. This is why my articles are short and to the point, with no fluff or filler. Just the facts that you need to know to move forward.
For further details see:
Crescent Energy: A Potential Long-Term Play For The Dividend Investor