Crescent Energy Company — Q1 2022 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2022, Crescent reported as a U.S. independent oil and gas company with assets in the Eagle Ford, Rockies, Barnett, Permian and, following its March acquisition, Uinta Basin. The company completed its merger with Contango and Independence in December 2021. Comparative financial statements were retrospectively recast for the predecessor, but the post-merger corporate structure and ownership mean year-over-year comparisons are not fully like-for-like.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $598.9 million | $317.9 million |
| Income from operations | $262.8 million | $88.0 million |
| Operating margin | 43.9% | 27.7% |
| Net loss, consolidated | $406.0 million | $166.3 million |
| Net loss attributable to Crescent | $85.0 million; $2.03 per Class A share | $0.0 million |
| Adjusted EBITDAX (non-GAAP) | $194.9 million | $141.9 million |
| Levered Free Cash Flow (non-GAAP) | $89.5 million | $106.9 million |
| Cash from operating activities | $137.3 million | $126.3 million |
| Cash and cash equivalents, March 31 | $112.5 million | — |
Revenue increased 88%, reflecting higher realized prices and 31% higher sales volumes. Average daily sales were 120 MBoe/d versus 91 MBoe/d. Oil, natural gas and NGL revenue each grew; midstream and other revenue was broadly unchanged.
The consolidated net loss was primarily driven by a $673.5 million derivative loss, including $497.7 million unrealized and $175.8 million realized losses. These losses largely offset higher commodity revenue; reported realized prices including derivative settlements were below prices excluding settlements. Operating expenses rose 57% to $219.2 million, DD&A rose 18% to $99.0 million, and G&A rose to $22.5 million, including higher equity compensation and transaction-related costs.
Investing cash outflow was $713.4 million, chiefly reflecting the Uinta acquisition and development spending. Financing cash inflow was $561.5 million. At quarter-end, reported long-term debt was $1.627 billion, including $941 million drawn on the revolving facility and $700 million principal of 7.25% notes due 2026, net of issuance costs. The revolving facility had a $1.8 billion borrowing base, a $1.3 billion elected commitment and $20.7 million of letters of credit outstanding. The revolver matures in 2025; the notes mature in 2026.
Material changes versus the prior comparable period
- Revenue rose $281.0 million (88%); higher commodity prices and volumes contributed, with acquisitions a significant source of the volume increase.
- Adjusted EBITDAX increased 37%, while Levered Free Cash Flow declined 16%, principally due to higher development capital spending.
- Derivative loss widened by $426.7 million as commodity prices increased. The quarter-end net derivative liability was $1.012 billion, versus $387.0 million at December 31, 2021.
- Debt increased following the $200 million additional senior-note issuance and revolver borrowing used in part to fund the Uinta acquisition.
Outlook, management commentary, risks and unusual items
- Uinta acquisition: Closed March 30 for $621.3 million of cash consideration and transaction fees, plus assumed derivatives. It added about 145,000 net acres and approximately 400 producing wells. The company also amended its revolver, increasing its borrowing base and elected commitment.
- Capital program: Management expected 2022 capital expenditures of approximately $600–$700 million, excluding acquisitions, funded from operating cash flow. The program was described as flexible and could be deferred depending on prices, well economics, costs, equipment, permits and other conditions.
- Hedging and market exposure: Approximately 75% of first-quarter oil and natural gas production and 51% of NGL production was economically hedged. Management cited commodity-price volatility, inflation and supply-chain constraints, COVID-19 uncertainty, and the Ukraine conflict and related sanctions. A hypothetical 10% commodity-price move would change the quarter-end net derivative position by approximately $309 million.
- Dividends: The company paid a $0.12 per-share Class A dividend on March 31. On May 10, the board approved a $0.17 per-share quarterly dividend, payable June 7, subject to the stated conditions. Future dividends remain subject to board approval, financial results and debt-document restrictions.
- Other notable items: Crescent contributed Gulf of Mexico assets to Chama Energy for a 9.4% interest valued at about $3.8 million and recognized a $4.5 million gain; Crescent may have future workover and plugging-and-abandonment obligations. A New Mexico regulator announced a $0.9 million civil penalty related to Contango infractions; the parties were discussing resolution. Management said it could not estimate a range of reasonably possible legal losses, but was unaware of proceedings expected to have a material adverse effect.
- Management expected covenant compliance based on its forecasts and reported disclosure controls as effective. Risks include commodity prices, hedging outcomes, debt restrictions, borrowing-base redeterminations, production declines, operating costs, acquisitions and reserve-estimate uncertainty.
Important facts for investors to verify
- Whether the Uinta assets deliver the expected production, cash flow and acquisition returns, and how related integration and operating costs develop.
- How the large derivative liability, future settlements and hedge coverage affect cash flow and realized prices as market prices change.
- Available revolver capacity after commitments, letters of credit and any borrowing-base redetermination; also monitor leverage and covenant headroom.
- Whether the $600–$700 million 2022 capital plan is funded from operations while maintaining liquidity and supporting the dividend.
- Potential cash obligations from the Chama contribution, the New Mexico penalty and other legal, environmental and abandonment matters.