Crescent Energy Company (CRGY) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to the Crescent Energy Conference Call. [Operator Instructions] I will now hand the conference over to Reid Gallagher, Investor Relations. Reid, please go ahead.

Thank you, operator, and good morning, everyone. We appreciate you joining us to discuss Crescent's announced acquisition. With me today are our CEO, David Rockecharlie; our COO, Joey Hall; and our CFO, Brandi Kendall. Our Executive Vice President of Investments, Clay Rynd, will also be available during Q&A. A replay of today's call will be available by webcast and accessible from our website. Please note that the information reported on this call speaks only as of today, October 8, 2026, and therefore, time-sensitive information may no longer be accurate as of the time of the replay listening or transcript reading. In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of Crescent's management. However, various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener is encouraged to read our annual report on Form 10-K, our current reports on Form 8-K as well as our quarterly reports on Form 10-Q to understand those risks, uncertainties and contingencies as well as to review additional disclosures associated with the pending acquisition. The pending acquisition, which is currently expected to close in the fourth quarter of 2026 or early 2027 is subject to customary closing conditions and receipt of required regulatory approvals, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Act. Now I would like to turn the call over to David.

Good morning, and thank you for joining us. Today, Crescent announced an agreement to acquire Devon Energy's Eagle Ford Assets for a net purchase price of approximately $3.85 billion. This is another logical and valuable step forward for Crescent, and it is a continuation of the same strategy we've executed consistently for more than a decade. acquire high-quality assets at attractive returns, apply our proven operating strategy to improve performance and create long-term value through free cash flow. By combining both investing and operating expertise, we have built Crescent into a top 10 independent operator with a world-class Eagle Ford position, where we will now be the second largest producer. We have a streamlined portfolio of scaled assets across the Eagle Ford, Permian and Uinta Basins, and we have significant operational upside embedded in our portfolio. You've seen us deliver on that upside so far this year with operational improvement on a unique trajectory in our sector. We are driving down well costs and enhancing margins to extend our inventory life, reduce our breakevens and increase free cash flow and returns across our portfolio. As we highlight our operational capabilities, I want to recognize the hard work and outstanding performance of everyone on Team Crescent, who has helped us deliver on our integration and operational value creation year-to-date. Crescent is strongly positioned, and we were ready to seize this opportunity. Our ability to acquire these assets accelerates and expands the operational value creation potential within our business today. And this addition to our portfolio solidifies Crescent's position in the Eagle Ford as truly world-class. As we integrate these assets and continue to drive operational value creation, our measure of success remains the same. We want to deliver multiples on invested capital. Crescent already presents a differentiated value proposition in the sector, and we believe this acquisition enhances our ability to achieve that goal. With that, I want to begin with a few key takeaways about the acquisition. First, the strategic fit is truly differentiated. We have owned royalties under these assets for more than a decade and have operations directly offset. We know the acreage, the geology and the operating environment as well as any asset in our own portfolio today. The acquisition adds approximately 68,000 barrels of oil equivalent production per day, nearly 40,000 barrels of oil production per day and more than 600 net locations in the Karnes Trough with economics that compete with anything in the Lower 48. Second, the acquisition returns are compelling and the accretion is meaningful. We are acquiring premier assets for approximately 3x EBITDA and adding Tier 1 inventory for less than $2 million per net location. We expect base returns in excess of our 2x multiple on invested capital target and significant accretion across all key metrics, including cash flow, free cash flow and net asset value. Third, this acquisition accelerates and expands our operational value creation efforts that are already underway. Pro forma Crescent has lower breakeven inventory, higher margin cash flow and lower capital intensity, all driving enhanced free cash flow generation. We see significant opportunity to make these premier assets even better and have identified approximately $140 million in annual synergy potential. And finally, this acquisition is transformational for our market-leading royalties platform. Our existing minerals ownership overlaps substantially with the acquired assets and the transaction includes approximately $50 million of incremental royalties EBITDA. In addition to the added scale, we will now operate a significantly higher portion of the Crescent Royalties portfolio, meaningfully improving visibility into future development and cash flow generation. Pro forma for the transaction, Crescent Royalties is a bigger, better business and well positioned in both scale and quality versus public royalties peers. In summary, this is a very attractive addition to our portfolio, but it is more than just an asset acquisition. It is another major step on our journey to create a leading energy company. Over the last 3 years, Crescent has built a world-class position in the Eagle Ford. Since June 2023, we've announced 9 major Eagle Ford acquisitions and realized more than $200 million of annual synergies. We have a proven track record in the basin, acquiring assets at attractive value, integrating them efficiently and improving their operating and financial performance. We have lowered well costs, increased lateral lengths, improved completion efficiency, optimized field operations and captured commercial benefits from our growing scale. And we have a lot more operational value creation still ahead of us. This transaction gives us the opportunity to expand our proven playbook in the heart of our core operating area. With that, I'll pass the call over to Joey.

Thanks, David, and good morning, everybody. Building on that introduction, these assets accelerate and expand Crescent's opportunity to create value through operational improvements. We're adding high-margin production and more than 600 Tier 1 net locations to our portfolio, driving a step change in capital efficiency and free cash flow generation. The Karnes Trough is one of the lowest breakeven oil resources in the Lower 48, and Devon's recent well results demonstrate the potential of these assets. Pro forma for the transaction, Crescent will have approximately 6 years of sub-$50 breakeven inventory, approximately 10 years of sub-$60 breakeven inventory and more than 15 years of total inventory life. And while these assets are extremely high quality, we see a significant opportunity to improve the performance by executing our playbook. We have identified approximately $140 million of synergy potential across drilling and completions LOE and marketing. The clearest example of operational upside here is development optimization, where we see significant potential to improve well cost and increase capital efficiency through longer lateral development and surface design efficiencies. This isn't new for us. Across our 5 most recent acquisitions of scale, we've increased average lateral length by more than 25% versus previous operators, driving a step change in cost structure, increasing returns and lowering breakevens. With this change alone, we expect to deliver approximately $100 million in annual synergies from the Devon assets. Our message today is straightforward. These are premier assets that clearly expand Crescent's upside, and our track record demonstrates our ability to make them even better. On a personal note, while today's focus is on the business merits of this transaction, I want to recognize the hard work and dedication of the Devon Eagle Ford team. I look forward to meeting you soon and welcoming those of you who will join us here at Crescent. And with that, I'll turn it over to Brandi.

Thanks, Joey. We are acquiring these assets for a net purchase price of approximately $3.85 billion with a July 1 effective date and an expected closing in the fourth quarter of 2026 or early 2027. We expect to fund the acquisition through a balanced combination of debt and equity, designed to preserve balance sheet strength and support efficient deleveraging. As part of the equity financing, KKR, a long-standing investor and strategic partner has committed $500 million in support of the transaction. From an investment perspective, the transaction is consistent with our disciplined underwriting framework. The existing production base provides meaningful valuation support, including approximately $2.3 billion of proved developed PV-10 plus significant royalty cash flow, while the acquired Tier 1 inventory and identified operating improvements provide additional upside. We expect returns exceeding our 2x NYC threshold, a payback period of less than 5 years and meaningful accretion across all key metrics. Importantly, these assets also improve the capital efficiency of the entire Crescents business. We expect the pro forma company to maintain approximately 170,000 barrels of oil production per day with approximately $1.8 billion of annual development capital, representing a maintenance reinvestment rate of approximately 5% lower than our standard stand-alone business. The combination of high-quality inventory, lower capital intensity and increased margins translates into greater free cash flow capacity. This is important not only for long-term shareholder returns, but also for our ability to reduce debt following closing. Turning to the balance sheet. Our acquisition financing maintains our strong financial position and our near-term capital allocation priority will continue to be deleveraging. We intend to maintain our fixed dividend and preserve strong liquidity while directing excess free cash flow toward debt reduction. Our hedge strategy is an important part of protecting the capital we invest and our deleveraging path. We've added meaningful incremental hedges alongside the acquisition to lock in attractive commodity prices and increase cash flow visibility during the initial debt reduction period. Combined with the strong free cash flow capacity of the pro forma business and our disciplined financing approach, this supports our target of approximately 1.5x leverage at year-end 2027 and approaching 1x at year-end 2028 based on current strip pricing. We believe the increased scale, stronger free cash flow generation and clear path to deleveraging support continued progress toward an investment-grade credit profile. With that, I'll turn the call back to David.

Thanks, Brandi. In summary, this acquisition represents another logical and valuable step forward for Crescent as we add high-quality assets at attractive value in the heart of our core operating area. I'd like to leave you with our key takeaways. First, this acquisition solidifies Crescent's world-class Eagle Ford position and the strategic fit is truly differentiated. We have a proven track record of Eagle Ford value creation, and we have owned royalties under these assets for more than a decade. We also have existing operations directly offset these assets. This gives us differentiated conviction in the opportunity and our ability to execute. Second, the returns are compelling and the accretion is meaningful. We're acquiring premier assets for approximately 3x EBITDA and adding Tier 1 inventory for less than $2 million per net location. Third, this acquisition accelerates our operational value creation efforts. Pro forma Crescent has lower breakeven inventory, higher margins and lower capital intensity. These are Tier 1 assets, but we see significant opportunity to make them even better. And finally, this acquisition is transformational for our market-leading royalties platform with greater scale, increased operatorship and enhanced development visibility. We have built a business that is very well positioned versus public peers. Pro forma for the transaction, Crescent will produce approximately 400,000 barrels of oil equivalent per day with approximately 170,000 barrels of oil per day and will be the second largest operator in the Eagle Ford. We have a streamlined portfolio of scaled assets, and we have significant operational upside embedded in our portfolio. As we integrate these assets and continue to drive operational value creation within our business, our measure of success remains the same. We want to deliver multiples on invested capital. Crescent presents a differentiated value proposition in the sector, and we believe this acquisition enhances our ability to achieve that goal. Before we go to questions, I'd like to once again recognize everyone on Team Crescent, including our investors and the communities where we operate. We are building something special, and we remain focused on safe and efficient operations that will continue to drive long-term value for our investors. And lastly, as Joey said earlier, to the Devon Eagle Ford team, we look forward to welcoming you to Team Crescent. We have a great opportunity ahead of us. With that, we'll open it up for Q&A.

[Operator Instructions] Your first question comes from the line of Neal Dingmann with William Blair.

Congrats for fantastic assets you're adding. David, my first question is just you mentioned in the prepared remarks that I'm sure nothing changes about the free cash flow focus you all have. Could you talk about activity? I know I think they were running kind of 2 to 3 rigs. You add those to yours. Do you anticipate kind of the same type of program? Or I guess my sort of follow-up question with that is how much is that predicated on higher prices? Because I would assume you could get to that if prices stay at these very solid levels, you can get to that 1x leverage much quicker if you would be a little bit more active, but wondering how you feel about that?

Yes. Great question. Good news, very simple answer, same as always. We're about maximizing free cash flow and returns. So we're effectively going to keep activity at about the same level. But I think the highlight is that by folding this into the company, we see significant capital allocation flexibility. So we think we're going to deliver effectively the same production with less capital, just more capital efficiency, which is greater free cash flow for investors.

Great to hear. And then just secondly, just you mentioned very quickly on the royalties. Is that something now that you guys are getting now to have a pretty decent sized position that you could spin that off or somehow just doesn't seem like you're getting a ton of value for that quite yet. And now with this addition, is there something you could do to, I don't know, monetize or get some value in that much quicker?

Neal, it's Clay. I think we hit it in the prepared remarks, but this is a total game changer for the royalties business. So when you think about our royalties business, we've been talking to the market about it being a $200 million a year EBITDA business. We highlight in the slides, this grows the cash flow by more than 20%. So we're highlighting about $250 million of cash flow generation. But I think more importantly, we take a business where we were the operator on about 10% of our cash flow, and we make it 40%, right? Because we already own royalties on this position and then we're buying a number of royalties on this position. And so now that we control the drill bit, we have line of sight on cash flow of about half of our kind of cash flow today, which we think is really compelling strategically. So I think what we'd say is it's clearly a super high-value part of the business, and we are committed to maximizing that value for our shareholders here. And we think this transaction just kind of further enhances that.

And then I'll just finish [indiscernible] David. We announced in the first quarter that we were going to take 12 to 18 months to kind of evaluate our minerals position. As Clay said, this is a game changer. And you should assume that we're on the same or faster time line than we were in the first quarter.

Your next question comes from the line of Noah Hungnes with Wells Fargo.

For my first question here, I wanted to ask on the refrac opportunities. You all spoke about the 600 Tier 1 net locations, but how can we think about the amount of refrac opportunities you have on the asset?

It's Clay. I think as we -- one of the things we love about this asset is Joey mentioned the quality of the resource. So as we think about those 600 locations, that does not include refracs. So that is full D&C across the asset. We certainly think the opportunity for incremental resource here is plentiful, but that's upside for us today. And those 600 locations don't include refracs.

Great. That's helpful. And then the next question is on just your hedge book. Is there a certain percent that you'll be looking to hedge via the pro forma production? Or is it like a floor that you'd be looking to lock in? Just kind of how are you thinking about that given where the strip is today?

Now, it's Brandi. So I had mentioned in the prepared remarks that we've been active hedging into signing of the purchase agreement to really protect the deleveraging pathway. As we sit here today, we're roughly 50% hedged on oil for 2027. And I would say of that position, roughly 2/3 are swaps and 1/3 are collars.

Your next question comes from the line of John Abbott with Wolfe Research.

First question, right, the deal comes with 600 locations. Based on your commentary, it seems like these assets would receive a greater amount of activity. So how do you think about inventory with the asset? How should we think about oil production on this asset versus other areas in your Eagle Ford sort of going forward?

Yes. Great question. Happy to take it. As you know, John, we're very focused on maintaining stable levels of activity to gain efficiency, and we're not looking to go accelerate here. But we think this has a huge depth of inventory. As we said, it's also a very high-quality inventory. The other thing you're seeing throughout the course of the year to date on Crescent is we're making significant progress lowering our cost structure, lowering breakevens and even adding to our existing inventory. So long story short, in the presentation, we disclosed approximately 6 years of sub-50 inventory, 10 years of sub-60. And then we think we see significant upside beyond that as we continue to execute.

Appreciate it. And then just one follow-up question here. You talked -- you called out about $140 million savings in the presentation. How have you sort of risked that number?

I mean this is $140 million worth that we feel fairly confident in. The reason I say that is the majority of that is on the D&C side and the majority of that is in our ability to increase lateral lengths. This puzzle is pretty simple. You're taking 5,000-foot lateral length blocks and adding them together or ______ 22:23 6,000-foot lateral length blocks and adding them together. We know Devon has had some early success in drilling these longer laterals. We've had success in drilling these longer laterals. So I mean that's the primary way that we're going to achieve these synergies. The other one is that any time you increase scale, you include opportunities to improve your cost structure. And so we know that's a given as well. And so I would put high confidence in the $140 million.

And maybe what I'd add, these are all areas where we have a really strong track record of executing and capturing in prior acquisitions, and we expect to capture the entirety of the $140 million throughout the course of 2027. So fully captured in our run rate as we exit next year.

Your next question comes from the line of Phillip Jungwirth with BMO.

Congrats on the deal. Wondering how you see the base decline on the Eagle Ford for oil and gas, and then just how you are thinking about base decline at the corporate level now just given the changes to the portfolio over the years?

Yes. Great question. Also an easy answer. We always target lower decline rates than is typical in the industry and the way we operate naturally allows those declines to settle in. So you've seen us really settle the decline in, on the acquisition we made in the Permian last year. These assets come in with a modestly higher decline rate, but our view, the overall portfolio will stay on the same trajectory, moderating down towards 25% decline over time.

Okay. Great. And then you've also streamlined the portfolio through divestitures quite a bit. Just with the larger Eagle Ford scale, #2 in the basin now, do you think it makes sense to look at additional pruning? Or are you pretty happy with where the legacy assets sit at this point?

Yes. We -- as you recognize, we made a transformational step to exit noncore assets last year. The exit of those assets has gone great in terms of operational efficiency and what I'll call capturing incremental value from just consolidating around these core positions. So we like what we have today, and we're going to stick to it, and we think it's just a great portfolio.

Your next question comes from the line of Tim Rezvan with KeyBanc Capital Markets.

As the first one, I know some of the prior were addressed. I know the funding structure is still a work in progress as you evaluate capital markets. Can you talk about the assumptions behind that year-end '27 and year-end '28 leverage targets? And obviously, it sounds like there's no asset sales being contemplated. So can you just kind of roughly talk about how you get there, that 1.5x again next year?