Crescent Energy Company — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Crescent is a U.S. oil and gas producer with assets focused in Texas and the Rockies. It operates through an Up-C structure, and Crescent owned approximately 29% of OpCo at quarter-end.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $590.1 million | $598.9 million |
| Income (loss) from operations | $150.6 million | $262.8 million |
| Consolidated net income (loss) | $255.6 million | $(406.0) million |
| Net income (loss) attributable to Crescent | $59.8 million | $(85.0) million |
| Net cash provided by operating activities | $240.1 million | $137.3 million |
| Adjusted EBITDAX, non-GAAP | $232.0 million | $194.9 million |
| Levered Free Cash Flow, non-GAAP | $1.5 million | $89.5 million |
| Long-term debt, carrying value | $1,244.6 million | $1,247.6 million |
Sales volume increased 14% to 137 thousand Boe/d, primarily reflecting the Uinta acquisition; management said volumes from the existing asset base declined. Revenue fell 1% as higher natural gas revenue was offset by lower oil and NGL prices. Average realized prices before derivative settlements declined 25% for oil and 36% for NGLs, while natural gas prices increased 8%.
Operating expenses rose 24% and depreciation, depletion and amortization rose 48%, with Uinta contributing to both increases. Interest expense increased 77% to $29.3 million. The quarter’s consolidated net income included a $150.3 million derivative gain, including a $197.5 million unrealized gain; Q1 2022 included a $673.5 million derivative loss. These mark-to-market results make the reported earnings comparison unusually sensitive to commodity-price movements.
Cash, debt and liquidity
- Operating cash flow was $240.1 million. Cash development spending was $190.5 million; development expenditures including accrual and other non-cash adjustments were $201.7 million.
- Levered Free Cash Flow fell to $1.5 million, principally because development spending increased. This is a company-defined non-GAAP measure and excludes acquisition spending and asset-sale proceeds.
- Cash and cash equivalents were $2.9 million; cash, cash equivalents and restricted cash totaled $16.6 million. The company reported $1.1 billion of available revolver borrowings, with $164.0 million drawn and $9.7 million of letters of credit outstanding.
- In February 2023, Crescent issued $400 million of 9.25% senior notes due 2028 and used the proceeds to repay revolving debt. It also had $700 million of 7.25% notes due 2026. The revolver’s borrowing base was $2.0 billion and maturity was September 2027, subject to specified conditions that could accelerate maturity.
- Management reported compliance with debt covenants and expected continued compliance. Revolver borrowings bear variable interest; the weighted-average rate was 7.17% at quarter-end.
Outlook, material developments and risks
- Management expected 2023 capital spending of $575–$650 million, excluding acquisitions, primarily funded by operating cash flow. The program is flexible and may be adjusted for commodity prices, well economics, costs, equipment availability and other factors.
- On May 2, 2023, Crescent agreed to acquire Eagle Ford assets for approximately $600 million, subject to customary adjustments; closing was expected in Q3 2023. This is a subsequent event, not a Q1 completed acquisition.
- On May 10, the board approved a $0.12-per-share quarterly Class A dividend, or $0.48 annualized, payable June 7. The company had paid $0.17 per share on March 31. Future dividends remain subject to board approval, financial performance and debt-document restrictions.
- Management cited commodity-price volatility, inflation and higher operating and service costs, interest rates, banking-market disruption, geopolitical events and potential recessionary effects as risks. Hedging covered 62% of oil, 58% of natural gas and 41% of NGL production in Q1. The hedge portfolio’s net fair-value liability was $145.7 million at March 31.
- The company said the Inflation Reduction Act’s methane charge, scheduled to begin in 2024, could raise costs; it did not expect the corporate alternative minimum tax to materially affect near-term taxes.
- Asset retirement obligations were $370.9 million, including the current portion. Management reported no known legal proceedings expected to materially affect financial position, results or cash flows, but said it could not estimate a range of reasonably possible losses. The company reported compliance with a New Mexico order, including no late or missing C-115 reports as of March 31.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Most important facts for investors to verify
- How much of reported earnings came from non-cash derivative valuation changes, and how Q1 hedge settlements affected realized cash flows.
- Whether operating cash flow can support the planned capital program, debt service and distributions given Q1 Levered Free Cash Flow of only $1.5 million.
- Funding, financing terms and expected returns for the approximately $600 million Eagle Ford acquisition, including any effect on leverage and liquidity.
- The effect of the lower approved dividend, and the extent to which distributions to OpCo unitholders and management-related costs affect cash available to Class A shareholders.
- Commodity-price exposure, inflation-driven cost changes, hedge coverage and revolver borrowing-base redeterminations, as well as the company’s continuing covenant compliance.