Crescent Energy - Bolt on acquisition

[Petroleum economist]

HOUSTON–(BUSINESS WIRE)–Crescent Energy Company (NYSE: CRGY) (“Crescent” or the “Company”) today announced the signing of a definitive agreement to acquire Eagle Ford assets from Ridgemar Energy for upfront consideration of $905 million plus future oil price contingent consideration, subject to customary purchase price adjustments. The acquisition is directly offset Crescent’s core Central Eagle Ford position and builds upon its significant acquisition activity in the Eagle Ford over the past 18 months, totaling more than $4 billion of accretive M&A. The transaction, which has an effective date of October 1, is expected to close in the first quarter of 2025, subject to customary closing conditions. Additional details have been posted on Crescent’s website at www.crescentenergyco.com.

Highlights

Complementary operations directly offset core position – Adding significant and contiguous scale offset Crescent’s existing footprint in Frio, Atascosa, La Salle and McMullen counties with potential for meaningful operating efficiencies
Attractive valuation and accretive to key financial metrics – The transaction, valued at 2.7x EBITDA, is accretive to Operating Cash Flow, Levered Free Cash Flow(1) and net asset value, with strong expected cash-on-cash returns
Strengthens the Crescent asset portfolio – Approximately 20 Mboe/d of high-margin, oil-weighted production and ~140 well understood, high-return locations that immediately compete for capital and extend Crescent’s low-risk inventory life
Maintains strong balance sheet and Investment Grade credit metrics – Leverage neutral-to-accretive transaction with balanced consideration mix. Crescent’s net debt to trailing 12-month Adjusted EBITDAX ratio expected to be at or below the Company’s publicly stated maximum leverage target of 1.5x(2)
“This transaction continues to highlight our ability to utilize our investing and operating expertise to identify and acquire high-quality assets, efficiently integrate them into our business and drive additional value through improved operations. With accelerated synergies captured from the integration of SilverBow and our recent bolt-on acquisition, our full team is ready and eager to add the Ridgemar assets to our core operating footprint in the Eagle Ford,” said Crescent CEO David Rockecharlie. “These assets contribute meaningful scale, enhance Crescent’s cash margins, increase our oil-weighting and extend our low-risk inventory life, all at an attractive and highly accretive valuation. I remain confident in our ability to capitalize on our strong momentum and continue our profitable growth trajectory towards our investment grade ambitions.”

(1)

Non-GAAP financial measure. Please see “Non-GAAP Measures” for a description of the applicable metric.

(2)

Crescent defines leverage as the ratio of consolidated net debt to consolidated Adjusted EBITDAX (non-GAAP).

Transaction Consideration

The base upfront consideration of $905 million consists of up to $100 million of equity issued to the seller and the remainder in cash. The future oil price contingent consideration of up to $170 million consists of payments by Crescent to seller of (i) $15 million per quarter in 2026 and $12.5 million per quarter in 2027 for which the average quarterly WTI price is greater than or equal to $70 per bbl; and (ii) an additional $15 million per quarter in 2026 for which the average quarterly WTI price is greater than or equal to $75 per bbl.

Advisors

Jefferies LLC served as financial advisor to Crescent in connection with the acquisition and Kirkland & Ellis LLP served as legal counsel. RBC Capital Markets, LLC served as financial advisor to Ridgemar Energy and Vinson & Elkins LLP served as legal counsel.

About Crescent Energy

Crescent is a differentiated U.S. energy company committed to delivering value for shareholders through a disciplined growth through acquisition strategy and consistent return of capital. Our long-life, balanced portfolio combines stable cash flows from low-decline production with deep, high-quality development inventory. Our activities are focused in Texas and the Rocky Mountains. For additional information, please visit www.crescentenergyco.com.

[Petroleum economist]

I assume that the $ 905 M bolt-on Ridgemar acquisition in the Eagleford announced yesterday and the related share issue will not raise cheers from Crescent shareholders. Especially the new shares issued at 7.5% below the latest share price will not receive applause.

With 30% more shares, 15% more locations, 17% more debt and 8% more production (oil +16%), the deal dilutes shareholder interests. Despite this with synergies, the 2025 eps can increase with 7.5% to $ 1.83. Am I missing something?

Reserves
• After their merger in 2024 Crescent and Silverbow have combined 2023 proven reserves of 994 M BoE, equivalent to an industry average 9.5 years of production.
• The reserves replacement ratio (RRR) of Crescent over he period 2029-2023 was a low 0.5. Silverbow RRR was a bit better at 0.9.
• The above means that Crescent could do with a bit more reserves, although the situation is not alarming.
• It is unclear how much proven and probable reserves the Ridgemar acquisition is adding
• Ridgemar adds 140 gross low-risk locations (=15%) to the 930 locations of Crescent.

Production
• Crescent Energy (inclusive Silverbow) roughly produces 250-255 K BoE/d.
• Fluids are 56% liquids (38% oil, 18% NGL).
• The acquisition is 90% liquid-weighted (77% oil, 13% NGL.).
• The acquisition adds 20 K BoE/d (=7.8%).
• The oil production increases with 15 K bbl/d (=16%).

Shares
• As of October 2024, Crescent had 146.420 M A-shares and 65.948 M B-shares.
• The $ 100 M equity issued for Ridgemar equates roughly to 7.1 M extra shares. Although not announced, I assume this will be in the form of A-shares.
• Crescent will issue another 21.5 M A-shares for $ 301 M to pay for part of the $ 805 M cash component.
• The issue price of the shares ($ 14.00) is -7.5% below the most recent share price of $ 15.14.
• The total number of A-shares increases by 7.1+21.5 = 28.6 M shares (=30.4%) to 190.991 M shares.

Long-term Debt
• As per October 2024 long-term debt stood at $ 3,225 M.
• Due to the transaction, debt should grow by 805-301 = $ 504 M (=15.0%) to $ 3,729 M.

Earnings
• With WTI at $ 70/bbl and HH at $ 3.25/MM Btu before the acquisition, I expected 2025 eps of $ 1.70.
• After the acquisition my estimate for the 2025 eps increases by 7.5% to $ 1.83.

[dan_s]

I will update my forecast/valuation model early next week. On vacation in Mexico this week.