Crescent Energy Company — Q2 2022 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2022. Crescent is a U.S. oil and gas producer with assets in the Eagle Ford, Rockies, Barnett, Permian and Uinta regions. Comparisons with 2021 are affected by the December 2021 merger of Contango and Independence and by acquisitions; prior-period results reflect the accounting predecessor.
Financial performance
| Metric | Q2 2022 | Six months 2022 |
|---|---|---|
| Revenue | $908.4 million, up 175% year over year | $1,507.3 million, up 133% |
| Operating income | $499.8 million; operating margin approximately 55% | $762.7 million |
| Net income (loss), consolidated | $281.9 million | $(124.1) million |
| Net income (loss) attributable to Crescent | $54.5 million | $(30.5) million |
| Adjusted EBITDAX (non-GAAP) | $373.3 million | $568.3 million |
| Levered Free Cash Flow (non-GAAP) | $137.2 million | $226.7 million |
| Cash from operating activities | Not separately provided here | $398.5 million |
| Cash used in investing activities | Not separately provided here | $(864.0) million |
Q2 revenue growth reflected higher realized commodity prices and production volumes. Average daily sales volume rose 51% to 142 MBoe/d; oil, gas and NGL realized prices before derivative settlements increased 61%, 130% and 84%, respectively. Derivative losses were $177.2 million in Q2 and $850.7 million for the first half, significantly affecting reported earnings. For the six months, Crescent reported a net loss despite higher operating income.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $54.6 million; current assets were $673.0 million and current liabilities were $1,290.6 million.
- Reported long-term debt was $1.516 billion, versus $1.030 billion at year-end 2021. This included $829.0 million drawn on the revolving facility and $700.0 million of 7.25% senior notes due 2026. Revolver letters of credit were $17.8 million; elected commitments were $1.3 billion and the borrowing base was $1.8 billion.
- First-half development spending was $278.9 million on an accrual basis; cash development spending was $240.4 million. Cash acquisitions were $627.4 million, primarily the Uinta acquisition.
- The company reported a net commodity derivative liability of approximately $899.0 million. Outstanding variable-rate revolver debt was $829.0 million; management estimated a 1 percentage-point rate change would alter first-half interest expense by approximately $4.1 million.
Material changes and management outlook
- The March 2022 Uinta acquisition added approximately 145,000 net acres and about 400 producing wells. Crescent paid $621.3 million in cash consideration and transaction fees and assumed certain derivatives; the acquisition contributed materially to increased production and debt.
- Management expected 2022 capital spending of approximately $600 million to $700 million, excluding acquisitions, with about 95% allocated to drilling and completion. It expected to fund the program through operating cash flow, while retaining flexibility to defer spending based on prices, returns, costs and operational conditions.
- Management expected to remain in compliance with debt covenants and meet ordinary-course contractual commitments. The company paid $0.29 per Class A share in dividends during the first half; on August 9 it declared a further $0.17 quarterly dividend, payable September 6, subject to board approval and applicable restrictions.
- Management attributed stronger results to acquisitions, higher volumes and higher commodity prices. Higher prices also increased production taxes, workover and certain commodity-linked operating costs. Inflation, rising interest rates, commodity-price volatility, supply constraints, and geopolitical developments including the Ukraine conflict were identified as risks.
Risks, contingencies and unusual items
- Hedges covered 66% of Q2 oil production, 67% of gas and 49% of NGLs. Management stated hedging aims to protect near-term cash flow, but it also limits realization of higher market prices on hedged volumes. A hypothetical 10% commodity-price move was estimated to change derivative value by roughly $279 million.
- Asset retirement obligations were $300.6 million, including a $294.1 million noncurrent balance. The company may also have plugging and abandonment obligations for Gulf of Mexico assets contributed to Chama.
- The filing reported a $0.9 million New Mexico civil penalty under discussion and a $0.7 million EPA penalty related to the acquired EP assets, paid July 11, 2022. Management said it was unaware of legal proceedings expected to have a material adverse effect; it could not estimate a range of reasonably possible losses for contingencies.
- Related-party arrangements include a management agreement with KKR Energy Assets Manager LLC, annual compensation of $13.5 million representing Crescent’s pro rata portion, and incentive compensation. The filing also describes Chama as partly owned by the board chair.
Important facts for investors to verify
- How much of first-half cash generation is sustainable after separating commodity-price effects, working-capital movements, derivative settlements and acquisition-related impacts.
- Uinta’s production, costs, integration progress and contribution to cash flow compared with the purchase price and additional debt.
- Hedge volumes, strike prices, settlement cash flows and potential effects on realized prices and liquidity as contracts mature.
- Available revolver capacity and covenant headroom after considering borrowings, letters of credit, borrowing-base redeterminations and planned capital spending.
- Whether the $600–$700 million capital plan and dividend remain funded under lower commodity prices, inflationary costs or weaker operating performance.
- The final purchase-price allocation for Contango, the status of disclosed regulatory matters, and potential Chama plugging, abandonment and workover obligations.