Watch List Addition: Crescent Energy (CRGY)

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Notes below are from TPH & Co. Equity Research 4-10-2024 which is highly respected in Houston and normally conservative in their stock valuations.

Initiating Coverage on CRGY with a BUY, $18/shr PT
Disciplined investment, low-decline assets allow for more efficient capital spend, with upside towards value accretion through future M&A and upside intervals
Sector: Upstream | Ticker: CRGY | Recommendation: Buy | Target: $18 | Close: $12.00 | Market Cap: $2.2B | Analyst: Oliver Huang

Crescent Energy Co. is an upstream company formed in late-2021 following the combination of Independence and Contango. The company holds a diversified asset base with low declines and ops primarily focused in the Eagle Ford (EF) and Rockies regions.
> The company is expecting to produce ~155-160mboepd on $550-$625MM of capex based off their FY’24 outlook (TPHe reasonable guideposts).
> From a valuation perspective, we see the equity trading at a discount on a couple of key valuation metrics with FCF-to-EV at ~12.9% and EV/EBITDA at 2.9x while offering a ~7.8% return via the base dividend and buyback (recently announced in early-March) vs. SMID-cap peers (CHRD, CIVI, MGY, MTDR, PR, and SM) on average at ~9.3% / 3.9x / 5.8%, respectively at $79.91/bbl WTI and $2.40/mcf HHUB in 2024.
> Looking ahead to 2025, we see ~13.3% FCF-to-EV (comps at 10.2%), a 2.6x EV/EBITDA (comps at 3.9x), and ~8.0% returns (comps at 6.6%) at $74.43/bbl WTI and $3.50/mcf HHUB.

Our positive view is driven by the disciplined capital investment (essentially maintenance), management’s ability to carry out their accretive acquisition growth strategy by taking over underappreciated assets (Uinta and Western EF over last couple of years as prime examples, while maintaining a leverage profile at 1.2x YE’24 ND/EBITDA) and driving better results (lower costs, better productivity from utilizing an enhanced, more optimized completion design) which have started to be reflected in early time results out of both basins, and a low-decline asset base (~19% e/e on a BOE basis) that helps significantly lessen the capital investment relative to peers.

Upside intervals act as an option value (TPHe $3-4/shr) that isn’t included in our 3P NAV. Historically, the elevated private ownership has acted as a headwind (largely minimized following recent secondaries) and the hedge book in 2024 has capped some of the upside from constructive commodity prices YTD; bottom line remains – we like the value of the business / asset base from a fundamental perspective (discounted valuation vs. peers, TPHe 50% upside to our $18/shr PT), and is one that should start to close the gap to fair value with continued execution for investors in it for the long-haul.