Crescent Energy Company

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Crescent Energy Company is a U.S. energy company committed to developing value for shareholders through a disciplined growth-through-acquisition strategy, focusing on energy and commodity prices, and utilizing a mix of conventional and unconventional oil and natural gas operations.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Crescent Energy Company (CRGY) is an independent U.S. energy company that focuses on the exploration, development, and production of oil, natural gas, and natural gas liquids (NGLs). The company operates across various basins in the United States, primarily in the Eagle Ford and Uinta basins, with a strategy focused on acquiring and optimizing existing assets rather than on exploration, as well as on a disciplined approach to capital expenditures, including acquisitions. The company’s approach and business model is heavily influenced by current energy prices and is highly sensitive to market fluctuations.

  • Revenue Distribution:
    • CRGY’s revenue streams primarily come from the sale of oil, natural gas, and NGLs.
    • Production is focused in the U.S., with assets in the Eagle Ford, Permian, and Uinta Basins.
    • Revenue is directly tied to oil, natural gas, and NGL prices, which can be volatile.
  • Trends in the Industry:
    • The oil and gas industry is characterized by volatile commodity prices that are influenced by economic conditions, global events, and geopolitical factors.
    • There’s an increasing emphasis on ESG (environmental, social, and governance) factors, including the reduction of carbon emissions.
    • There’s been a trend towards consolidation in the industry, as companies seek economies of scale and operational efficiency.
    • There is significant uncertainty related to the ongoing political conflicts and their impact on the global energy markets.
  • Margins:
    • Margins are significantly impacted by commodity prices. High prices can lead to substantial profits, while lower prices can result in lower profits or even losses.
    • The company’s ability to maintain a balance between production costs and commodity prices directly affects its overall profitability.
    • The ability to improve operational efficiency and reduce production costs may have an impact on margins.
  • Competitive Landscape:
    • The oil and gas industry is highly competitive, with many companies (large and small) seeking to acquire new acreage, discover new resources, improve production from existing fields and increase profits.
    • CRGY is not one of the most prominent or well-known players in the industry, indicating that its size and scale are generally smaller than that of its competition.
    • The main competition that CRGY faces are other oil and gas producers, including integrated oil companies and smaller independents, along with the potential for new entrants into the industry.
  • What Makes the Company Different:
    • Emphasis on acquiring already producing assets rather than focusing solely on new exploration
    • Focus on enhancing operational efficiency through proven management methods
    • The company has been rapidly changing its portfolio with multiple acquisitions
    • The company has a fairly new management team (appointed in April 2021)
    • Concentration on specific basins such as Eagle Ford and Uinta, which have known geology.
  • Other Relevant Facts:
    • Focus is on disciplined growth through strategic acquisitions with the intent of maximizing shareholder returns.
    • Management also places a high emphasis on managing expenses and maintaining operational efficiency.

Financials In-Depth

Crescent Energy’s financials show the company’s recent growth and ongoing adjustments following the merger, as well as the impact of the volatility of the energy market.

Revenue:

  • The total revenue was $1,057.7M for the nine months ended September 30, 2023, showing a large increase compared to $777.3M for the same period in 2022. This increase is mainly attributable to the rise in commodity prices and increases in total sales volume.
  • Oil production accounted for the largest part of their revenues at 79%, while the rest comes from Natural Gas and Natural Gas Liquids.
  • However, in the three months ended September 30, 2023, there was a decline from the three months ended June 30, 2023, primarily because of the decreases in realized prices for oil and NGL, as well as lower sales volume.

Expenses:

  • The operating expenses for the nine months ended September 30, 2023, totalled $1,075.8 million, with the largest portion being production, gathering and processing expenses ($382.9 million)
  • Other notable expenses include transportation and marketing ($191.3 million), depreciation ($149.3 million) and personnel costs ($123.8 million).
  • Adjusted EBITDAX was $788.1 million for the nine months ended September 30, 2023, whereas it was $689.2 million for same time in 2022. Adjusted EBITDAX is considered a meaningful performance indicator of profitability and cash flow.

Profitability:

  • The company reported net income attributable to Crescent Energy of $-52.1 million for the nine months ended September 30, 2023, as against $311.1 Million for the same period in 2022, largely driven by increased costs on operations and significant nonrecurring items related to acquisitions.
  • For the three months ended September 30, 2023, net income attributable to Crescent Energy was $-12.5 Million (loss), compared to +$209.4 million in profit for the same period last year.
  • The effective tax rate for 2023 (for three months ended September 30, 2023) was 24%, whereas the same figure in 2022 was 35.5%.

Free Cash Flow:

  • The company’s unlevered free cash flow for the nine months ended September 30, 2023, totaled at $165.8 million compared to $190.5 million for the same period in 2022, this was largely because of lower commodity prices.
  • Net cash from operating activities is $375 million for 9 months ended September 2023 compared to $505.8 million for same period last year.
  • The management has stated that the current goal is to allocate cash to reduce debt, repurchase shares, and consider a fixed dividend.

Balance Sheet Health Rating: 4/5 The company has a solid debt-to-equity ratio, with good cash and debt management policies. However, there are some notable risks, which require close attention.

  • While the company’s assets outweigh the liabilities, the debt can become a risk if revenues decline sharply or remain at lower levels.
    • Debt for the nine months ending September 30, 2023, totalled $3.8 billion, while cash and cash equivalents were 112.6 million
  • The company has various borrowing and credit facilities to enhance its financial flexibility. However, these facilities are usually linked with certain operational and financial requirements, which must be maintained.
  • The management also emphasizes that excess cash flow is also used to reduce debt and to pay for acquisitions which may lead to future growth.

Understandability Rating: 3/5 Understanding a business model where the main driver is an external factor (like commodity prices) combined with the financial intricacies of a high-debt and capital-intensive business, makes the business a little complex. However, most investors, who have some understanding of the oil and gas industry, can follow the business operations.

  • The company operates in a complex industry with volatile commodity prices that are subject to market fluctuations and geopolitical changes.
  • The financial statements are also complex, with a few terms related to debt, credit facilities, and valuation that require explanation.
  • The company’s strategy of focusing on acquisitions is clear to understand, but the actual execution of the strategy, including how it chooses its investments, can be tricky.
  • There’s no direct way to predict the revenue or cash flows of the company as the commodity prices are not in the company’s control.

Risks to the Moat & Business Resilience

Crescent Energy’s moat, while providing a measure of competitive advantage, faces certain risks, with their resilience depending on how well management adapts:

Risks to the Moat:

  • Commodity Price Volatility: As the company’s profitability is heavily dependent on oil, natural gas, and NGL prices, dramatic price swings (volatility) can quickly decrease the profitability and valuation of the business.
  • Replication of assets: The company’s strategy of acquiring producing assets can be copied by other competitors. Companies that have enough capital can invest and acquire those assets. The advantage gained by first-mover companies can be reduced as it becomes easier for other companies to copy the same moves.
  • Competition: The oil and gas industry is highly competitive, with many companies also looking for acquisitions. A number of larger players may have more flexibility and may be willing to bid prices that smaller companies, such as CRGY, cannot bid.
  • Technological Disruption: As technology changes, there is always a chance of a substitute product emerging and making the existing oil and gas companies obsolete. The growth of alternative energy technologies can prove a fatal risk for these companies.
  • Changing regulations: The oil and gas industry is heavily regulated by environmental laws. New regulations or stricter enforcement of the existing regulations can significantly increase the operating costs of the company, reducing profit margins.
  • Operational Risks: Operating issues, including equipment failures, geological surprises, and logistical challenges, can all lower production volumes, raise expenses, and reduce earnings and profitability, which may affect valuation.
  • Management Capabilities: Although management has a reasonable track record, new management team can fail to execute on their strategy or have a poor decision-making process that may reduce returns in the long-term.

Business Resilience: Despite the risks mentioned above, CRGY has some degree of business resilience which could be improved:

  • Flexibility and adaptability: The company has a reasonably flexible approach to capital expenditures and investments, but the management needs to prove that they can quickly respond to market fluctuations and reduce spending when required. This flexibility will help the company navigate challenging times.
  • Strategic Acquisitions: Over the past few years, the company has shown an ability to make acquisitions that have been accretive and provided long-term value. They need to continue to make strategic decisions so that value is further increased.
  • Strong Relationships: Building a stronger relationship with their existing customers through quality production and on-time delivery will ensure the long term sustainability of their revenues.
  • Cost Control and Productivity: A continual effort to improve its operational and production efficiency will ensure cost reduction, thereby boosting its profit margins.
  • Diversified asset portfolio: The company has assets in various geographic locations, which provide a diversification strategy so that local or regional conditions have a lesser impact on overall revenue.
  • Balance Sheet Health: A good equity-to-debt ratio and responsible use of credit facilities will help the business remain resilient.

Recent Concerns and Management’s Response

During the recent earnings calls, the company has addressed the following concerns:

  • Impact of Commodity Price Volatility: As of the latest reports, the commodity market has been particularly volatile, with natural gas and NGLs hitting lower prices. This has also impacted the realized prices of crude oil. However, the company is confident that its hedging operations will help them navigate through this volatility. This is a common concern for all oil and gas companies, and will likely remain in the future as well.
  • Integration of Acquisitions: In 2023, they finalized several acquisitions, and these acquisitions added complexity and new assets to the business. The company is focused on improving profitability of these acquired assets by reducing their overhead and improving their operational practices. This is very important for the company’s long-term future, as these acquisitions should prove accretive in the coming years. The management must show they can handle integrations successfully.
  • Production Guidance and Development: Even while the current production and financial guidance is set to remain the same, they will be looking to improve capital and operational efficiency. The goal is to reduce the per-unit costs and increase the profitability of the production while trying to maintain the current output.
  • Increased expenses: Due to acquisitions, various one-off payments, transition expenses, and other charges, total expenditure of the company increased, and may impact its profitability. The management is focused on finding and implementing cost-reduction measures which may bring long-term profits.

The management is also confident in their ability to continue their operations effectively, while creating value for their shareholders.

  • The management focuses on maintaining consistent operating efficiency and improving its operations.
  • They plan to maintain a moderate level of growth while taking advantage of growth opportunities where possible.
  • They will also be looking to reduce their debt and improve their credit rating.

Summary

Crescent Energy Company is a US energy producer that is focused on acquiring and optimizing producing properties, especially in the Eagle Ford and Uinta Basins, and is heavily dependent on prevailing energy and commodity prices, and their business model relies a lot on acquisitions. It has a relatively new management team and a moderate level of debt. While the company’s business is not inherently complicated, the financial figures and valuation require deeper knowledge. While the company has some amount of competitive advantage by virtue of its operations and location of its assets, it is also exposed to major risks such as commodity price fluctuations and strict regulations.

Recommendation

An investment in CRGY is best suited for investors with significant understanding of the intricacies of the oil and gas industry and the global economic factors affecting it, and who are willing to bear higher volatility in exchange for potential returns. The company is focusing on profitability, but the heavy dependence on external factors and the volatility of its finances make it less suitable for conservative investors. A moderate moat of 2/5 is indicative of the structural competitive advantage while highlighting the risks associated with the business. This requires constant evaluation and a long-term perspective.