2023-06-22 17:55:41 ET
Summary
- Crescent Energy Company realized commodity prices outperformed unrealized commodity prices due to hedging.
- Cash flow from operating activities before changes in working capital grew materially.
- Operating costs appear to be set to continue to offset inflation and possibly then some.
- Crescent Energy's accretive Eagle Ford acquisition should increase the percentage of oil produced by the company.
- The balance sheet ratios are likely to remain conservative.
Crescent Energy Company ( CRGY ) actually realized prices that were similar to the previous fiscal year (same quarter) because of the hedging program.
Sometimes the market expects a materially worse performance because commodity prices dropped, as was the case in the current quarter when compared to the same quarter last year. However, a hedging program can produce a materially different comparison as shown above. In fact, the company realized a slightly better post hedging average per barrel price than was the case in the previous fiscal year (same quarter) as well as the fourth quarter realized price.
The whole program put the company in a position to report higher cash flow before changes in non-working capital and other accounts. The only reason that free cash flow did not climb is because the company achieved efficiencies that allowed for more progress than planned with the capital program.
Nonetheless, management reiterated that they are not increasing the capital program at this time. That guidance will likely be reviewed after the acquisition is completed. Should the acquisition not go through, current guidance would suggest far lower capital expenditures in each of the remaining quarters. That would make the free cash flow back end loaded assuming first quarter results hold up the rest of the fiscal year.
Management expects to acquire an operated interest in non-operated properties in the Eagle Ford for about $600 million. The acquisition is about $30K per flowing barrel using the production listed in the announcement. There are additional upside potential intervals on the leases.
Probably the material idea of the announcement is that these properties move from non-operated to operated. That makes the leases more valuable and allows management to control the rate of development of these leases. The acquisition will also likely raise the company percentage of oil produced.
Should oil and liquids prices increase the second half of the fiscal year as some expect, then this acquisition could add considerably to cash flow in excess of current market expectations (before the acquisition).
Many in the industry are reporting gains that are offsetting increasing service costs. There seems to be a lot of ways to achieve those gains as different operators appear to report gains from different issued that were focused upon. To me, this implies a lot of potential gains ahead as once an operator gains in one area of the business, there are often other areas where others have succeeded in lowering costs for an operator to try.
As long as this situation persists, it appears that costs will continue to lower over time. This can be bad news for service companies but very good news for consumers. As industry costs go down, then higher levels of industry activity can be sustained at lower commodity prices. Sooner or later the industry gives into the temptation to increase production enough to bring about the next commodity decline part of the business cycle. All that is needed is some patience.
The comment about the hedge books strongly implies that hedging will be a material part of the future to ensure reliable (minimum amount of) cash flow. The latest acquisition should not materially change the debt ratio.
Many banks do not like the bank line to be used for a material amount of time. Therefore, management will likely repay at least some of the post-acquisition cost with cash flow or will issue long-term bonds if the debt ratio remains within management guidance.
It will take some time as a public company before the company can achieve an investment grade rating. This company does not have a very long track record as a public company with all the acquisitions made. Still, considering the acquisition activity of the past, the debt ratings shown above are pretty decent. They are below investment grade. But not by that much.
Independence Energy, which was the privately held predecessor to Crescent Energy, began paying dividends long before the market demand of returning capital became a major issue. The result of this is likely that investors will always receive a base dividend.
But the priority will remain the previous balance sheet ratio guidance along with opportunistic acquisitions. Therefore, the main profit opportunities will come from appreciation potential. That is normally the case with any KKR managed company.
The growth by acquisition may enable a fairly fast base dividend climb. Therefore, investors who are not retiring soon may consider this one for the retirement account because the original investment could be yielding quite a bit by the time retirement time arrives. As shown above, the dividend has nearly tripled in less than 10 years already.
Share repurchases are likely to happen with spare cash in-between opportunistic acquisitions. Therefore, those results will likely come in lumps. But as the chart shows above, they very likely will have a material impact to per share appreciation.
Key Ideas
KKR is not relying upon a lot of debt to produce a good return for this venture. That is definitely not typical of KKR. Instead, management is banking upon their ability to run acquisitions better than the seller and other upside ideas like future intervals either already commercial or will become commercial as technology advances.
The low debt ratio of this venture combined with the management experience of KKR and John Goff makes this a relatively low risk upstream play that may likely appeal to a wide variety of investors. Rarely do investors get to invest alongside of management of this stature. To me, that makes this stock a strong buy consideration for all but the most conservative of investors.
Future Crescent Energy Company growth is most likely to come from more acquisitions and some organic growth. The time to sell this company is likely when KKR and John Goff both decide it's time to sell. Otherwise, it might be wise for long-term investors to just hang-on to this investment until that time comes.
Management is continuing the transition to a public company with the announcement of a significant increase in public share s. A key point in the announcement is that KKR and John Goff will not sell a single share as a result of this. Now the expansion of public shares is considerable and may result in some price weakness. But in the long run this should add to liquidity.
Typically, investors like John Goff And KKR would like to triple their investment in 5 years to overcome the risk that they take. There is, of course, no guarantee that such a goal would be achieved. But they could miss by quite a bit and the average investor would still do better than normal (especially considering the Crescent Energy Company dividend yield currently).
For further details see:
Crescent Energy: Catching Up