Crescent Energy Company

These are materially enhancing the returns on our development program, where we are consistently earning in excess of two times cash on cash returns on a full cycle basis. Importantly, these capital efficiencies have not come at the expense of well performance. Across the Uinta in particular, our assets have materially outperformed our predecessors due to the higher completion intensity. where we've improved oil recoveries by approximately 25% since taking over. Complementing our high returning development program, our substantial long life producing reserve base consistently provides us with predictable performance. The cash flow stability of our low decline balanced production base is a tremendous value proposition relative to our peers. Our unique skill set, operating both conventional and shale assets, allows us to combine stable cash flows with attractive reinvestment opportunities. Today, we are the only U.S.-focused company generating more than 150,000 barrels of oil equivalent per day of production while running only a two to three rig maintenance program, which is a direct result of the lower capital intensity required to maintain production output at Crescent. This intentional portfolio construction, coupled with continuous outperformance on production and capital spend, drives this quarter's record free cash flow, as well as our expectations for substantial free cash flow looking ahead to 2024 and beyond. Now, turning to M&A. Since the second quarter, we have closed on two previously announced Eagleford acquisitions totaling $850 million. First, through our $600 million acquisition of operatorship of the Western Eagle position in July, and second, through the acquisition of incremental Western Eagleford working interest for $250 million in October. Together, the assets represent approximately 32,000 barrels of oil equivalent per day of liquids weighted net production with a low 16% decline rate and more than $1 billion of approved developed PV10 value. The two deals doubled our Eagleford production and inventory and quadrupled our legacy non-operated interest in the Western Eagleford to a current operated working interest of 63%. Furthermore, we now operate greater than 90% of our interest in the Eagleford, adding scale and operational control in a core region for Crescent. To simplify our M&A growth strategy, when evaluating opportunities, we have two key objectives. First, to buy assets we understand at attractive value, targeting cash on cash returns in excess of two times our money. and second, to make those assets better to drive incremental return to shareholders. Regarding this first objective, in our view, the entry prices of our recent acquisitions are highly compelling for three key reasons. First, it's nice to buy more of what you already own at a great price. We acquired over a billion dollars of approved, developed PV-10 value for $850 million during this summer's pullback in commodity prices. And these assets we know well through our six years as a non-operative partner. Second, the assets provide us with a significant backlog of high returning lower Eagleford inventory, as well as upper Eagleford and Austin Chalk upside. As outlined on page 10 of our investor deck, this is a compelling resource base, with the lower Eagle Fruit EURs on this asset having outperformed the Basin Average. That provides us the ability to compound our invested capital and earn in excess of two times our money on low-risk development. In many other recent industry transactions, buyers have had to ascribe material purchase price value to undeveloped resource, which is part of full cycle returns. And we think our disciplined and opportunistic approach to M&A gives us a leg up on full cycle economics. Third, the assets are highly complementary to our existing business. And we'll find production driving financial accretion and providing tangible operational synergies, which will deliver a return in excess of our underwriting expectations. Turning to the second M&A objective of our growth through acquisition strategy, we seek to bring improved operational execution to the assets we require. Following the closing of the Western Eagleford acquisition, we fully integrated the assets ahead of schedule and immediately began to realize synergies, starting with a 20% reduction in well costs relative to the previous operator. These cost savings are driven by the same improved cycle times and completions efficiencies driving down costs across our existing central Eagleford operations. The speed with which we have incorporated the assets into our portfolio and have improved on legacy well performance is a testament to both the quality of our people as well as the unique benefits of acquiring assets we know well. To summarize, the Western Eagleford acquisitions reflect our strategy in action, adding to our successful track record of buying assets at attractive value and making those assets better. Looking ahead, we will continue to execute on our growth strategy. We see a huge opportunity for continued accretive acquisitions and firmly believe we have the ability to become an investment-grade company over time. To us, that means adding size and scale with financial discipline. As we pursue our disciplined growth strategy, we anticipate we will be highly active in the M&A market over the next 12 to 24 months. We expect to be an active participant in the ongoing wave of consolidation in the sector, particularly across our core operating areas in Texas and the Rockies. Furthermore, we also believe that we are uniquely positioned to participate on the front and backside of the energy sector consolidation activity. Leveraging our broader investment and operational expertise to acquire attractive assets that may be less core to pro forma companies following large cap merger and acquisition activity. Now, before handing the call back over to Brandy, I'd like to discuss sustainability, an area that's core to our long-term business strategy. Yesterday, we published our annual sustainability report. We made substantial progress on our emissions last year, reducing our absolute scope one emissions to 27%. We monitor and evaluate all of our assets to identify opportunities for improvement, and our 2022 progress is primarily achieved through a carbon sequestration project in Wyoming and the replacement of pneumatic devices. In Wyoming, we are now capturing and sequestering carbon dioxide that was previously vented and selling those volumes to an unfavorable party to reduce and increase the cost of recovery. In addition to materially increasing emissions, the project represents our existing carbon capture footprint, and its current operations and capabilities to supply, capture, protect, and transport CO2 polymers. While still early, we continue to progress opportunities in our portfolio to increase cash flow from our carbon dioxide production business. Within our portfolio, we remain particularly focused on methane emissions and further improving our measurement capabilities. As one of the first U.S. companies to join the GMB 2.0 in early 2022, our measurement efforts have increased tremendously. Last year, we implemented biannual flyovers across nearly all of our assets, allowing us to both expedite and enhance our emissions measurement and detection capabilities. As a company focused on growth through acquisitions, that inherently means acquiring more emissions, but our organization-wide emphasis of proper stewardship ensures we will remain committed to reducing the emissions profile of the assets we own and acquire. With that, I'll turn the call over to Brandy to provide more detail on the quarter and our recent capital markets activity. Brandy?

As David mentioned, we achieved record production in cash flow this quarter, averaging 157 MBOE per day, generating $290 million of adjusted EBITDA and $160 million in levered free cash flow. Importantly, this quarter's results were only inclusive of the impact of the first of our two Western Eagleford acquisitions, the latter of which will be reflected in the fourth quarter. On capital, we spent $94 million, which will be our lightest quarter of the year due to the timing of Wells' turn to sales. During the quarter, we brought online 10 gross operated wells in the Eagleford, which are posting strong early time results and are expected to generate in excess of two times our capital invested at current commodity prices. In Q4, we expect both production and capital to increase, bringing our full year results near the midpoint of our capital guidance range, despite the increase in activity for the year. While we are still finalizing our outlook for 2024, as David mentioned, the capital efficiencies we've achieved to date sets us up well as we expect preliminary production of 155 to 160 MBE per day and consistent capital spend to this year, which equates to a two to three rate program. Maintaining capital spend at today's level, despite a 20% increase in year-over-year production, highlights that our business requires less reinvestment to maintain our current output, which is a testament to our capital efficiency as we've realized to date and the quality of our asset base. At these levels, we expect to generate substantial free cash flow for the remainder of 2023 into 2024 and beyond. As highlighted on pages 15 and 16 of our investor presentation, Crest's year-leading decline rate and capital efficiency results in significant free cash flow generation and a compelling valuation based on cash flow metrics. Our levered free cash flow over the next five years is greater than our current market cap, which is reflected in our approximate 25% free cash flow yield nearly 50% higher than our peers. With that free cash flow, we expect to maintain our rigorous commitment to cash flow priorities 1A and 1B, shareholder returns and the balance sheet, while continuing to grow the business opportunistically through free of acquisition. Alongside earnings, we announced a quarterly dividend payment of $0.12 per share, consistent with our publicly stated expectations for 2023, and generating an attractive 4% yield based on recent trading levels. From a balance sheet and capital markets perspective, we have had sustained success in raising capital to support our M&A strategy while maintaining our financial strength. We exited the quarter with leverage of 1.4 times and $1.1 billion of liquidity, both well within our targets. Performing for closing the first Western Eagleford acquisition, our bank syndicate reaffirmed our $2 billion borrowing base and $1.3 billion ECA. We feel great about where we sit from a balance sheet perspective and will continue to use excess free cash flow in the near term to reduce absolute leverage. In the capital markets, we successfully raised $600 million in debt and equity in the third quarter to finance the Western Eagleford acquisition. In September, we priced a $155 million primary equity offering, including the overall allotment. The offering represented Crescent's inaugural primary issuance and was extremely well received as we were able to upsize the transaction 10% strong investor demand. The offering demonstrated increased access to the capital markets for accretive transactions, with our stock trading up 8% to 9% in the days following, and the green shoe option exercised less than a week after the shares priced. In addition, we raised $450 million of incremental 2028 senior notes during the quarter across two separate transactions, further enhancing our liquidity profile and in line with our stated preference for longer duration capital in lieu of the bank market. The offerings continued our momentum in the bond market, and the strong demand is reflected in the benefits from our recent upgrade to a double B credit. In summary, we are pleased with our efforts to efficiently access the capital markets to facilitate accretive growth through M&A and advance our strategic goals. Finally, to provide a brief update on our hedging activity. In line with our strategy of preserving returns on capital, we layered on additional hedges along to the signing of the two recent acquisitions. As we look into 2024, we are less than 50% hedged through a mix of fixed swaps and callers. We continue to like our long-term commodity exposure, particularly given the low decline, long duration nature of production base. With that, I'll turn the call back over to David.

Thank you, Brady. There are three things we hope you take away from today's call. First, our third quarter performance was exceptional. Record production, record cash flow. We are demonstrating operational efficiencies that will make us stronger and more profitable in 2024 and beyond. Second, we have proven our ability to grow credo. We have captured high-value transactions and financed them in a fashion that maintains a strong balance sheet, highlighted by long-term capital, strong liquidity and credit metrics, rating agency upgrades, and inclusion in the BB bond. We've created scale, doubling our business in less than three years, and are well equipped to continue to do so. And lastly, we have a simple value proposition. We believe Crescent is the best risk-adjusted stock to own for long-term exposure to oil and gas prices. We have a lot of ambition and a lot of work ahead, but we are pleased with what we have accomplished to date, and we intend to continue to do exactly what we say we're going to do. With that, I'll open it up for Q&A. Operator?

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start button. Ladies and gentlemen, we will wait for a moment while we poll for questions. Our first question is from Michael Sharla with Stephens. Please go ahead.

Good morning, everybody. it sounds like you have a lot of visibility on free cash flow over the next few years as you look at 2024 say absent any additional m a is it fair to think that the vast majority of that goes to the balance sheet and then beyond 24 you can think about returning more cash to shareholders or are you thinking about it differently yeah hey thanks for the question it's david um

I would say, number one, thanks for raising it. We're all about generating free cash flow. That's the investment proposition for the business. As you've probably heard us say, our number one capital allocation priority is return of capital to investors. And as you said, that to us means taking care of the balance sheet, so certainly debt reduction, and also paying a cash dividend. We're sticking with the capital framework we have today. So yeah, I'd guide just sort of more of the same, just sticking with the same strategy and free cash flow certainly take care of the debt, but we are committed to making sure we maintain a dividend strategy that's appropriate for the market and the investors.

Okay. And then pretty impressive reduction to your Eagle Ford well cost, immediate 20% reduction there. Is there any color you can add? I know you have a slide in your deck talking about some of the improved efficiencies. Was any of that contractual or any major changes in well designs made there?

Yeah, I'd say the good news is... That's pretty straightforward. We've been active in the Eagleford for a long time. We think we're good at what we do. And this is a great example of taking over an asset we know well and just continuing to execute the way we were on our own assets. So we've seen improvement in our business this year and we were able to apply those improvements further to this acquisition. So I think operating really well, nothing specific other than just great execution. but also a really good example of what we're trying to do with the M&A strategy, which is get a great acquisition and value and then enhance that value by doing what we know how to do well. So nothing unusual there other than just doing a good job.

Okay. Thank you, David. Thank you.

Our next question is from Neil Dingman with TruViz Securities. Please go ahead.

Morning, all. Nice quarters, as you said, David. My first question is on your reinvestment rate. What I want to ask, it seems to me that your solid reinvestment rate often gets overlooked as, you know, driven by that low base decline and, you know, deficiencies you all talked about. I'm just wondering, David, could you talk about sort of maybe your future expected reinvestment rate and how this will ultimately drive the production free cash flow and shareholder returns?

Yeah, I'll start it, and then if Brandy wants to add to it, that would be great too. But really good question. I would say that generating free cash flow, maintaining a low reinvestment rate relative to peers is just core to what we do. We've done it for 10 years. We've historically been in about a 40% of EBITDA reinvestment rate. It's picked a little higher. Recently, mostly with what I would call the price run-up over the last couple of years. And it gets masked by our hedge program as those hedges are rolling off. One, I think more cash flow for investors. But secondly, it puts the reinvestment rate more in context. So we've still maintained a 40% to 50% reinvestment rate typically. But I would expect in a levelized world, we're going to outperform peers on that just by the nature of our strategy and commitment to it. But I think thinking about us in a 40% to 50% range is reasonable.

Brandon, you got anything? I've got enough questions we don't.

Yeah, I think David answered it well. I mean, that 20% decline rate that we have is pure leading. That translates to really a capital and efficient economy. business that's just much less intense relative to the broader market. I know we've talked about before, Neil, we're running a two to three rig maintenance program, and that's relative to roughly 150, 560 a day go-forward basis, which I think is pretty unique relative to the broader market.

Yeah, I would agree. And then just a quick second one on capital, and then maybe another shot of capital allocation. David, I appreciate that quarterly dividend focus and the leverage on debt and the quarterly dividend. I guess my question is, do you think it makes any sense to try to buy back any shares given the sort of notably low valuation, you know, despite the limited float on the shares?

Yeah, good question. Happy to drill down a little more there. The fundamental response, and I'll let Brandy give you some more detail, is we absolutely do consider what I would call share buybacks as part of a solid return of capital program. As you know, we've still got an up-to-date structure with Class B shares, and so that's a place where we've historically done that but I definitely would would highlight that we do think of dividend taking care of the balance sheet you know debt reduction and opportunity buyback is something that is part of a well-rounded program but brandy you may want to just address the buyback a little more directly yeah and you know we've been consistent with how we've talked about our capital markets priority since we went public

almost two years ago now, which really was to increase our float in trading liquidity, being one of those kind of key objectives. I think we've made a lot of progress with half the company now being floated, trading liquidity up nearly 200%, but still aren't necessarily where we want to be from a liquidity standpoint relative to peers, which likely makes a Class A buyback a little less actionable in the immediate term. We obviously can still buy back our Class B private shares, which we've done in the past, and would expect to do so in the future, which accomplishes the same objectives of reducing the total number of shares.

Great details. Thank you all.

Thanks, Neal.

Thank you. Our next question is from Roger Reed with Wells Fargo. Please go ahead.

Yeah, thanks. Good morning. follow up on your comments David in the opening on the ability to continue to do acquisitions maybe just give us an idea of what what the market looks like out there I mean something similar to what you've been doing a step out into a different area as a possibility and then as a addition to that higher interest rates and what you faced in the first couple years of this strategy how does that factor in how you think about funding transactions or are you seeing valuations adjust to a higher interest rate environment?

Yeah, great questions and again, thanks for joining us, Roger. I'll start and Brandy and Clay are here with me as well and very actively involved in that part of the business and can contribute after I finish. A couple of things. We still see a very active market it's consistently been a 50 to 100 billion dollar a year market my whole career and we still see that and frankly activity by others tends to create more activity and so one of the things we did try to highlight this time is is large cap consolidation is likely to be good for us we feel very good so I think we have a good pipeline of opportunities looking forward and we do like where the macro is as well Turning to operationally and your comments around portfolio and focus, I think we're very good and getting better in our core areas, and there's a lot still to do there. So I think you can assume we'll continue to do what we have shown we would do, which is expand our core areas. We are value-driven, and so if we are good at something, have the skills to do it, and we can – Find great value and we certainly think that we have the broadest ability in the sector in terms of scope of what we look at but I wouldn't take that as a Hint that we're going to get distracted. I think we like what we're doing And then lastly I'd say a couple of things on the financial markets We believe as long as you're patient that valuations both on the equity and debt side will translate into the M&A market and they typically do relatively swiftly We're starting to see that happen. And I'd say one of the great things about the way we're positioned today, we've proven our ability to access the public markets. We've grown our presence there. And while the cost of debt has gone up, we're a double B company now, and we've been able to push our relative cost of capital down over the time period as a public company. So I think you should just expect that we're continuing to try to do all of those things. And the only reason we will transact is because we think it will create significant value enhancement for the shareholders.

Great, thank you.

Thank you. Our next question is from the line of John Abbott with Bank of America.

Please go ahead. Hey, good morning and thank you for taking our question. Our two questions are really about 2024. So, you know, in terms of your sort of production outlook. So, you know, based off your results during this quarter and for your 2023 guidance, I mean, you're pulling activity, some activity in from 2024. And Brandon, you gave us a range of 155 to 160,000 BOE per day for 2024. Just given the acceleration of activity into 2023, why wouldn't we think that you shouldn't be at the high end of that production range?

For 23? No, 24. Before, into 2024. A lot of earnings out there, so yeah.

So you have accelerated activity into 2023, and your guidance range for 2024 is 155,000 to 160,000 BOE per day. Was the accelerated activity, why wouldn't you be at the high end of that production range?

Hey John, it's Brandy. So I think as David hit on, right, we've had great operational execution all year from a drilling and completion standpoint. I think that sets us up incredibly well as we look into 2024. So I mean, I think it's, we feel comfortable just given where we sit with our preliminary budget that the 155 to 160 makes sense relative to a capital program of roughly $600 million, which is in line with what we spent this year, despite the base production is higher. So I think that's still a fair range. I think if you end up somewhere in that range, that's good. But, yeah, I think there's a chance that we could be at the top end of the range. But we'll look to provide more formal guidance in the next couple months on 24.

Okay. Maybe I'm breaching a little bit here, but for 2024, any you know it looks like okay so you could end up looks like your end has been a high point in terms of production and for q23 so any sort of color on the trajectory of production in 2024 yeah I would expect it to be relatively consistent both from a production and capital standpoint over the course of next year ultimately it'll be impacted on when wells are coming online but I think for now

If you modeled it fairly consistent throughout the year, I think that's a good assumption.

All right. Thank you very much for taking our question.

Thanks, John.

Thank you. As for the questions, the conference of present energy has now concluded. Thank you for your participation. You may now disconnect your lines.