Crescent – Analysis of Q2 results

[Petroleum economist]

Crescent/Silverbow merger
Crescent Energy announced that it closed the merger with Silverbow on the 30th of July. Crescent will issue 55.5 M shares for Silverbow and pay $ 385 M cash. Some of the impacts of the merger are already evident in the Q2 balance sheet. Silverbow will be included for two out of the three months in Q3. Thus, Q3 will be a transition period. Matters should clarify after the end of Q4.

Summary
Crescent EnergyQ2 production was slightly below expectation. Realized oil prices were higher than expected. Net profit was as per expectation. The balance sheet eroded due to the upcoming Silverbow acquisition. Profitability is good. Shareholder returns for the coming 18 months will be restricted to the quarterly dividend, with no more share buybacks.

In the rest of 2024 and in 2025 Crescent Energy will be in a transition phase. The balance sheet needs restoration and the shareholder returns will be restricted. Production after 2024 will be flat or show a moderate growth. In 2026 shareholder returns can be boosted to higher level which make crescent an attractive share.

Production
• Q2 production (164.5 K BoE/d) was 1.2 K BoE/d below Q1 (165.7 K BoE/d).
• The Q2 production 1.5 K BoE/d below my expectation of 166 K BoE/d. Crescent did not provide a Q2 outlook
• Silverbow production will be included starting 31st of July. Crescent provided a H2 Production outlook, inclusive five months Silverbow of 232-241 K BoE/d.
• I expect a Q3 production of 222-224 K BoE/d, increasing in Q4 to 254-256 K BoE/d.
• Production in the period 2025-2028 can gradually increase to 255-260 K BoE/d.
• Fluids were 44% oil, 18% NGL and 28% gas.
• After the merger. the oil content will drop to 40% and the gas will increase to 32%.

Balance sheet
• The balance sheet at the end of Q2 is in flux.
• Long term debt increased by $ 611 M from $ 1,694 to $ 2,305 M. Crescent took on financing for the Silverbow acquisition. Cash and equivalent increased by $ 775 M from $ 3 M to $ 778 M.
• Q3 reported solvency (48% is below late 2023 (53.4%) but not directly comparable.
• After the merger, with Silverbow included, debt at the end of Q3 will be a high $ 6.1 B and solvency a mediocre 41.2%.
• The balance sheet needs reinforcement and will restrict shareholder returns. The balance sheet can be restored towards the end of 2025/mid 2026.

Profitability
• Unit costs (inclusive interest, depreciation and overheads) are a high $ 36/BoE.
• Unit cost will not change material after the merger.
• Q2 net profit was $ 235 M (eps $ 0.43).
• For 2024, with WTI- $ 70-75/bbl, I expect a net profit of $ 195-230 M (eps=$ 1.64-1.88, PE=5.4-6.2).
• Towards 2028 the eps can increase to $ 1.74-2.29 (PE=4.4-5.9)

Shareholder returns
• Crescent paid a quarterly dividend of $ 0.12 and intends to maintain this dividend.
• Crescent bought back 2.3 M shares in Q1 for $ 23 M, but did not buy back any shares in Q2.
• I do not expect any share buybacks in the rest of 2024 or in 2025
• Shareholder returns in 2024 will be limited to 6.1% and in 2025 to 4.7%.
• From 2026 onwards, share buybacks can restart and shareholder returns with an assumed share buyback of $ 200 M/year can go up to 16.5%.

Conclusions
Q2 production was slightly below expectation. Realized oil prices were higher than expected. Net profit was as per expectation. The balance sheet eroded due to the upcoming Silverbow acquisition. Profitability is good. Shareholder returns for the coming 18 months will be restricted to the quarterly dividend, with no share buybacks.

In H2 2024 and in 2025 Crescent Energy will be in a transition phase. The balance sheet needs restoration, and the shareholder returns will be restricted. Production after 2024 will be flat or show a moderate growth. In 2026 shareholder returns can be boosted to higher level which make crescent an attractive share.

Crescent Energy ranks a decent 23rd out of 80 (it was 81, but I will take Silverbow out). Crecent looks like an attractive investment, but will require patience.

[dan_s]

Keep in mind:
> "Reported Production" is after the Closing Date, but since SilverBow does not pay dividends Crescent Energy shareholders will get all of the cash flow from SilverBow's production this year.
> I cannot stress enough how important and valuable the backing of KKR is to this company.

[ChuckGeb]

Have you performed or seen any analysis of the KKR Management Agreement to see if it is commensurate with typical executive comp packages for a similar size public company?