Crescent Energy: Now with a 5% dividend yield (NYSE:CRGY)

Imaginima

Suffering is one of the great masters of life. -Bryant McGill

Today, we’re going into the energy sector and profiled a mid-cap energy producer whose stocks have been on a rollercoaster ride lately. Stocks saw extensive insider activity lately and the shares now have a five percent dividend yield. A full analysis follows below.

Stock chart

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Company presentation

Crescent Energy Company (NYSE: CRGY) is a Houston-based independent energy company focused on the production, development and acquisition of oil, natural gas and NGL reserves in onshore basins in five states, including Eagle Ford, Rockies, Barnett and Permian. The company held pro forma YE21 proven reserves of 598 million barrels of oil equivalent (MMBoe) worth approximately $8.6 billion (PV-10), consisting of 55% liquids and 83% of proven developed reserves, with approximately 65% ​​of its revenues derived from oil. . Crescent was born from the merger of publicly traded Contango Oil & Gas Company and Kohlberg Kravis & Roberts (KKR) Independence Energy in December 2021 with its first trade executed at $15.10 per share. Its stock trades around $13.50 per share, which translates to a market capitalization of $2.55 billion.

Company profile

May Company presentation

The company is capitalized by two classes of shares. The 42.0 million publicly traded Class A shares provide an economic advantage and one vote per share. The 127.5 million privately held Class B shares (by KKR) confer no economic interest, one vote per share and transferability into Class A shares on a one-to-one basis.

Company footprint

May Company presentation

Approach

Since both Contango and Independence used acquisition growth strategies prior to the merger, their combination allowed Crescent to pursue larger assets in an environment with many properties on the market and few buyers. interested, due to the current geopolitical milieu and longer term secular trends. As proof, the management is offering for sale the 150 to 200 assets that it will assess during 2022.

Company vision

May Company presentation

Unlike many of its competitors, the company is well capitalized and targets a net leverage ratio of 1.0 (vs. an industry average of 3.1 since 2014) with acquisitions aimed at generating strong free cash flow and foreseeable in a very volatile sector with low visibility. . Specifically, M&A activity is designed to generate returns greater than twice its invested capital with payback periods of less than five years. Management focuses on mature assets with low decline rates in low risk areas with strong intermediate support, usually where it has an existing position so that administrative and operational synergies can be realized. The capital is then returned to the shareholders in the form of dividends which is generally equivalent to 10% of Adj. EBITDAX (ie EBITDA before exploration costs). Using this approach, Crescent and its predecessors have completed 25 acquisitions since the start of 2017.

Company reserves

May Company presentation

Its most recent acquisition (March 2022) is an extension of this philosophy. The company has purchased approximately $1.1 billion in reserves (NYMEX price sensitized PV-10 June 30, 2022) and production of 30,000 boe/d (~65% oil) from 145,000 contiguous acres in the Uinta Basin (of the Rocky Mountains) for a cash consideration of $690 million. Management believes the acquisition is accretive, increasing the scale of its production base in the region while reducing its unit cost structure. Uinta Basin assets did not change the company’s net debt, which remained at 1.3, with expectations that it would return to its target of 1.0 by YE22. Crescent has three platforms in total dedicated to its Uinta and Eagle Ford properties, which are responsible for about 85% of its oil production.

To support the stability of its short-term cash flows, the company engages in an active strategy of continuous hedging, although it has long-term exposure to oil and gas prices.

Stock prices

Admittedly, these growth-by-acquisition and hedging strategies are easier to execute in a period of lower oil prices and no offset compared to higher oil prices with a large offset, because sellers will want to be paid on the current market prices (or at least somewhere). while large sums of money are left on the table to hedge in booming markets. The brief history of Crescent is a good example. West Texas Intermediate [WTI] closed at $72.36 a barrel on the day the new company was created by merger at $15.10 per share on Dec. 8, 2021. But within a week, CRGY shares began trading below $15 and did not close above $15.10 until the Ukrainian oil rally was in full force on March 4, 2022 with WTI closing at $115.68 a barrel, $43.32 higher than December 8. This important ‘underperformance‘ could be somewhat attributed to its derivative strategy which had 70% of its oil production and 71% of its natural gas production hedged; but it was also a function of the investment community not knowing or caring about Crescent, due to its low free float and lack of Street coverage until early April 2022.

With oil consistently in the triple digits starting in mid-March until recently, Crescent captured an offer and traded mostly between $16 and $19 per share until June 10, 2022, when it closed at $18.01. On that same date, the company filed an amended S-1 to sell five million shares. The market took notice and repriced CRGY shares down 11% in the following trading session to $15.96, triggering a more than three-week decline to an all-time closing low of $11.28. on July 6, 2022, despite the fact that the secondary offering has just taken place recently. The simultaneous drop in crude prices below $100 a barrel for the first time in three months did not help CRGY owners at the time. Oil just fell below $80.00 a barrel over the weekend.

2Q22 results and outlook

Although Crescent shares rebounded slightly, they remained mostly in the $13 area until the company released its financial results on August 9, 2022, reporting net income of $225.6 million (non- GAAP), Adj. EBITDAX of $373.3 million ($640.2 million unhedged) and leveraged free cash flow of $137.2 million on revenue of $908.4 million versus a loss of $9.3 million (non-GAAP), Adj. EBITDAX of $194.9 million ($370.7 million unhedged) and leveraged free cash flow of $89.5 million on revenue of $598.9 million in the prior quarter (1Q22) . The Adj. EBITDAX and leveraged free cash flow results represented sequential improvements of 92% and 53%, with the quarter reflecting the addition of the Uinta property – increasing production sequentially from 94,000 boe/d to 142 000 boe/d – and rising commodity prices. [Levered free cash flow is EBITDAX minus cash components (interest, taxes, and development costs).]

Needless to say, hedging was exceptionally expensive, with Crescent losing $177.2m in 2Q22 ($850.7m in HY22) as it realized a price of $78.84/bbl crude vs. 104 .23 $/bbl unhedged and 3.51 $/MMcf of natural gas against 6.40 $/MMcf unhedged .

Management maintained its FY22 outlook – which it had increased alongside its 1Q22 report to reflect Uinta – expecting Adj. EBITDAX of $1.35 billion and leveraged free cash flow of $575 million with production of 141,000 boe/d, all based on range midpoints.

Report and commentary from analysts

A portion of the available cash will be allocated to Crescent’s quarterly dividend of $0.17 (5% yield), with the balance going towards debt reduction (assuming no acquisitions additional). The company’s net leverage ratio stood at 1.2 as of June 30, 2022 with access to $508 million in cash. Its $1.5 billion debt will not mature until 2025. Proved developed reserves (PV-10) covered net debt by a factor of 4.8. In an attempt to improve (or at least maintain) its visibility in the market, the CFO and board wisely chose not to pursue a share buyback program due to its already low free float. The company priced five million shares at $15.00 each via a secondary offer earlier this month.

Cash flow model

May Company presentation

The only Street analyst covering Crescent stocks is Neal Dingmann at Truist. He launched the hedge in April 2022 with a Buy rating and a price target of $24.

After the 2Q22 earnings report, CRGY shares rallied to close above $14, which they are currently still trading. And then, in what appeared to be a coordinated effort, seven different insiders, led by CEO David Rockecharlie, acquired 85,666 shares of CRGY between $15.25 and $16.25 per share from Aug. 12-16. Last week, two beneficial owner entities reduced their holdings of CRGY by 5.75 million shares each.

Verdict

As his industry faces broad inflationary pressures and supply chain constraints in the current low oil price environment, Crescent is vexed by the anonymity. As a result, its stock can go up and down dramatically with little or no news – and sometimes without any correlation to energy prices – adding complexity when investing. Additionally, it’s hard to give credit to the company’s stable cash flow approach when its hedging strategy has cost it $1.82 billion on a pro forma basis over the past 18 years. months, including $970.7 million the year before the Ukrainian conflict. Likewise, it’s hard for a preoccupation with the word “energy” as part of its nickname to receive credit in an environment of falling oil prices, especially when wallowing in relative obscurity.

That said, its approach is sound – despite suboptimal timing – and it trades at reasonable valuations: EV/FY22E Adj. EBITDAX of 2.8 and leveraged EV/FY22E cash flow of 6.5. And because of its volatility, it enjoys large option premiums – which, coupled with its 5% yield, would make Crescent more attractive as a covered call to play. Unfortunately, although there are options available against stocks, they are not liquid enough to deploy this strategy. Therefore, as commodity prices continue to fall and global growth slows materially, we are giving up any investment recommendations around Crescent at this time despite its strong performance.

Some people would rather die in their pride than live in humility.. -Anthony Liccione

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