Crescent Energy Company — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Crescent is a U.S. independent oil and gas producer with assets concentrated in Texas and the Rockies. It reports as an Up-C structure, with substantial operations held through OpCo and a significant redeemable noncontrolling interest.
Financial and operating highlights
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $492.3 million | $908.4 million | $1,082.5 million | $1,507.3 million |
| Net income (loss), consolidated | $57.5 million | $281.9 million | $313.1 million | $(124.1) million |
| Net income (loss) attributable to Crescent | $5.2 million | $54.5 million | $64.9 million | $(30.5) million |
| Operating cash flow | Not separately presented for Q2 | Not separately presented for Q2 | $423.6 million | $398.5 million |
| Adjusted EBITDAX (non-GAAP) | $224.7 million | $350.2 million | $456.7 million | $545.1 million |
| Levered Free Cash Flow (non-GAAP) | $46.0 million | $114.1 million | $47.5 million | $203.6 million |
Q2 operating income was $64.0 million, or about 13.0% of revenue; consolidated net income was about 11.7% of revenue, while income attributable to Crescent was about 1.0%. These comparisons are affected by derivative results and the allocation of income to noncontrolling interests. The filing does not provide a single reported margin measure.
Q2 production averaged 139,000 Boe/d, down 2% year over year; first-half production averaged 138,000 Boe/d, up 5%. First-half oil volumes rose 14%, primarily reflecting the Uinta acquisition, while average realized prices before derivative settlements fell year over year: oil 31%, natural gas 39%, and NGLs 49% for the first half.
At June 30, cash and cash equivalents were $2.3 million, with $68.5 million of current restricted cash, primarily associated with the Western Eagle Ford acquisition deposit and well-abandonment obligations. Long-term debt was $1.332 billion carrying value; gross principal was $1.35 billion. The company had $250 million drawn on its revolver, $9.7 million of letters of credit, and reported $1.0 billion of available revolver borrowings. The revolver borrowing base was $2.0 billion and elected commitment $1.3 billion. Six-month investing cash outflow was $374.9 million, including $383.2 million of development spending; financing cash inflow was $12.0 million.
Material changes and unusual items
- Q2 revenue declined 46% year over year, mainly because of sharply lower commodity prices. Q2 Adjusted EBITDAX fell 36% and Levered Free Cash Flow fell 60%. For the first half, revenue declined 28%, Adjusted EBITDAX 16%, and Levered Free Cash Flow 77%.
- Derivative results swung to a $33.6 million Q2 gain from a $177.2 million loss a year earlier; the first-half gain was $183.9 million versus an $850.7 million loss. These changes substantially affected reported earnings. Cash settlements of derivatives were a $55.8 million outflow in the first half.
- Q2 general and administrative expense increased 109% to $41.2 million, including higher equity-based compensation. The filing attributes $18.0 million of additional PSU expense to the Class A Conversion and resulting increase in target shares.
- In June, a KKR affiliate converted approximately 27.6 million OpCo units and corresponding Class B shares into Class A shares. The conversion changed Crescent’s ownership and reduced redeemable noncontrolling interests by about $618.7 million; it generated no proceeds for Crescent.
- In February, Crescent issued $400 million of 9.25% senior notes due 2028 and used proceeds to repay revolver borrowings. In July, after quarter-end, it issued another $300 million of the notes, with estimated net proceeds of $287.5 million used to repay revolver borrowings.
Outlook, risks, and contingencies
- Management expected 2023 development capital spending of approximately $575 million to $625 million, excluding acquisitions, funded from operating cash flow. The program is flexible and may be adjusted for commodity prices, well economics, operating conditions, and capital availability.
- The approximately $600 million Western Eagle Ford acquisition, announced in May, closed July 3, 2023. The revolver amendment reaffirmed the $2.0 billion borrowing base and $1.3 billion elected commitment. The acquisition therefore occurred after the reporting date.
- The board approved a $0.12-per-share quarterly Class A dividend after quarter-end, payable September 6, 2023. Future dividends remain subject to financial performance, management review, board approval, and debt-document restrictions.
- Management cited commodity-price volatility, inflation and operating-cost pressure, interest rates and access to capital, production and drilling risks, and regulatory and environmental changes, including the IRA’s methane-emissions charge. Hedging covered 58% of Q2 oil, 52% of gas, and 39% of NGL production. The June 30 derivative portfolio had a net liability of $87.2 million.
- The company reported compliance with revolver covenants and expected continued compliance. It reported no known legal proceedings expected to have a material adverse effect and recognized no environmental remediation liability. Management concluded disclosure controls were effective.
Key facts for investors to verify
- Post-acquisition debt, liquidity, and actual purchase-price adjustments for Western Eagle Ford, including how the acquisition affects production and returns.
- Commodity-price sensitivity, hedge volumes and settlements, and the cash-flow impact of the derivative portfolio.
- Whether planned development spending can be funded from operating cash flow while maintaining covenant headroom and supporting dividends.
- The recurring and equity-based costs of the KKR management and incentive compensation arrangements, including potential dilution.
- Use and availability of restricted cash, which is not equivalent to unrestricted cash for general liquidity purposes.