Crescent Energy Company — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Although the request labels the period “2021 Q4,” this is an annual 10-K; quarterly information is included, but the summary below focuses on the full year. The December 7 merger combined Independence and Contango under Crescent. FY2021 results include only 25 days of Contango’s operations, so comparisons are affected by acquisition timing and the retrospectively combined reporting basis.
Business context and key financial metrics
Crescent is a U.S. oil and gas producer with working interests, mineral and royalty interests, and midstream assets across the Eagle Ford, Rockies, Barnett, Permian and Mid-Con. Its stated strategy emphasizes cash flow, reinvestment discipline, acquisitions and commodity hedging.
| Metric | FY2021 | FY2020 | Change / context |
|---|---|---|---|
| Revenue | $1,477.0 million | $754.2 million | Up 96% |
| Operating income (loss) | $483.7 million | $(373.6) million | 2021 operating margin was approximately 32.7% |
| Net income (loss), consolidated | $(432.2) million | $(216.1) million | Includes $866.0 million derivative loss in 2021, versus a $195.3 million gain in 2020 |
| Net loss attributable to Crescent | $(19.4) million | Not applicable | 2021 only; much of consolidated loss was attributed to the Predecessor and noncontrolling interests |
| Adjusted EBITDAX | $520.1 million | $465.1 million | Up 12%; non-GAAP measure |
| Levered free cash flow | $276.7 million | $309.3 million | Down 11%; non-GAAP measure |
| Net cash from operating activities | $233.1 million | $411.0 million | Down 43%; includes cash paid for early derivative settlement |
| Production | 94 MBoe/d | 86 MBoe/d | Up 9%; acquisition contributions partly offset declines in existing assets |
| Development spending | $194.8 million | $110.1 million | Excludes acquisition spending |
Liquidity, debt and reserves
- At year-end, cash and cash equivalents were $128.6 million; total current assets were $479.6 million and current liabilities were $616.1 million.
- Balance-sheet long-term debt was $1,030.4 million, net of unamortized discount and issuance costs. Principal consisted of $543.0 million drawn on the revolving facility and $500.0 million of 7.25% senior notes due 2026. The revolver had a $700 million commitment, a $1.3 billion borrowing base and $20.7 million of letters of credit outstanding; it matures in 2025.
- In February 2022, Crescent issued an additional $200 million of 7.25% notes. The filing also reports a proposed $815 million cash acquisition of Utah assets, with certain hedges assumed, and anticipated a revolver amendment in connection with that transaction.
- Proved reserves at December 31, 2021 were 531.6 MMBoe, about 54% liquids, compared with 359.7 MMBoe in 2020. Standardized measure was $5.0 billion and PV-10 was $5.2 billion; these reserve valuations are not estimates of market value.
- Asset retirement obligations were $266.0 million. Net commodity derivative liabilities were approximately $387.0 million.
Material changes and unusual items
- Revenue growth primarily reflected higher realized commodity prices and acquired production. Average realized prices before derivative settlements rose 78% for oil, 108% for natural gas and 121% for NGLs. Total sales volumes increased 9%.
- Hedging materially affected reported earnings and cash flow. Crescent recorded $535.7 million of realized derivative losses, including a $198.7 million early settlement of 2022–2023 oil hedges, and $330.4 million of noncash derivative losses. The settlement used cash and revolver borrowings; replacement hedges were entered into at then-prevailing prices.
- General and administrative expense increased to $78.3 million from $16.5 million, mainly due to $39.9 million of equity-based compensation and $24.1 million of nonrecurring and transaction expenses. No oil and gas property impairment was recorded in 2021; the company recorded $247.2 million in 2020.
- Acquisitions and transactions included the Contango merger, the $60.4 million Central Basin Platform acquisition and the $60.8 million DJ Basin mineral acquisition. The company also sold Arkoma properties, recognizing an $8.8 million gain.
- Reserve additions included acquired reserves and positive price-related revisions, offset by removal of certain PUD locations from the post-merger five-year development plan. The company spent $86 million converting 11.2 MMBoe of PUD reserves to developed reserves.
Outlook, risks and contingencies
- 2022 capital program: Management expected $375–$425 million of development capital, excluding acquisitions and acquisition-related development. It expected to fund the program from operating cash flow and retained flexibility to adjust spending.
- Dividend: Crescent stated a target of future dividends equal to 10% of Adjusted EBITDAX, subject to board approval, financial needs and debt restrictions. In March 2022, the board approved a $0.12-per-share quarterly dividend for Q4 2021.
- Acquisition: The proposed Utah transaction was expected to close in the first half of 2022, subject to conditions; completion and planned financing were not assured.
- Principal risks: Commodity-price volatility, hedge losses and counterparty risk, acquisition integration, rising service costs, reserve-estimation uncertainty, borrowing-base redeterminations, transportation and water availability, environmental and climate regulation, and reliance on non-operated assets and the external KKR manager.
- Concentration and governance: Shell Trading US Company accounted for 18.3% of 2021 revenue; the company also identified a month-to-month contract with a significant purchaser. KKR-affiliated holders control board appointments through preferred stock, and the company pays a management fee under a three-year initial agreement.
- Contingencies: A New Mexico regulator issued a February 2022 notice proposing a $913,200 penalty, plugging of certain inactive wells and other operating restrictions; discussions were ongoing. Merger-related shareholder litigation remained pending, with no related reserve recorded at year-end. Management said it was unaware of proceedings expected to have a material adverse effect.
- Controls and audit: Management reported effective disclosure controls. Because of the December 2021 merger, the company omitted management’s internal-control assessment and the auditor’s internal-control opinion for 2021; management stated it expected to provide them in its 2022 10-K. Deloitte issued an unqualified opinion on the financial statements and highlighted reserve estimates and Contango acquisition valuation as critical audit matters.
Most important facts for investors to verify
- Reconcile the $432.2 million consolidated net loss with the $19.4 million loss attributable to Crescent, and assess the realized versus noncash components of the $866.0 million derivative loss.
- Review hedge volumes, settlement terms, future hedge exposure and the potential effect of commodity-price changes on cash flow and borrowing capacity.
- Assess the comparability of FY2021 results given the merger’s December 7 closing and only 25 days of Contango contribution; review the final purchase-price allocation and integration results.
- Confirm the Utah acquisition’s closing, funding, assumed hedges and revolver amendment, and evaluate resulting leverage and liquidity.
- Track the New Mexico notice of violation and merger-related litigation, including potential costs, operating restrictions and resolution status.
- Evaluate the external-management agreement, fee escalation, incentive-share dilution and KKR-related governance and opportunity-allocation provisions.