CRESCENT ENERGY COMPANY
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to provide the reader of the financial
statements with a narrative from the perspective of management on the financial
condition, results of operations, liquidity and certain other factors that may
affect the Company's operating results. The following discussion and analysis
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form 10-K
for the year ended December 31, 2021 ("Annual Report"), as well as our unaudited
condensed consolidated financial statements for the three months ended March 31,
2022 and 2021. The following information updates the discussion of our financial
condition provided in our previous filings, and analyzes the changes in the
results of operations between the three months ended March 31, 2022 and 2021.
The following discussion contains forward-looking statements that reflect our
future plans, estimates, beliefs and expected performance. The forward-looking
statements are dependent upon events, risks and uncertainties that may be
outside our control. Our actual results could differ materially from those
discussed in these forward- looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, commodity price
volatility, capital requirements and uncertainty of obtaining additional funding
on terms acceptable to the Company, realized oil, natural gas and NGL prices,
the timing and amount of future production of oil, natural gas and NGLs,
shortages of equipment, supplies, services and qualified personnel, as well as
those factors discussed below and elsewhere in this Quarterly Report and in our
Annual Report, particularly under "Risk Factors" and "Cautionary Statement
Regarding Forward Looking Statements," all of which are difficult to predict. In
light of these risks, uncertainties and assumptions, the forward-looking events
discussed may not occur. We do not undertake any obligation to publicly update
any forward-looking statements except as otherwise required by applicable law.
Business
We are a well-capitalized
Our approach employs a unique business model that combines an investor mindset and deep operational expertise to pursue a cash flow-based investment mandate focused on operated working interests with an active risk management strategy. We pursue our strategy through the production, development and acquisition of oil, natural gas and NGL reserves.
Merger Transactions and Reorganization
OnDecember 7, 2021 , we completed a series of transactions, pursuant to which the business ofContango Oil & Gas Company ("Contango") and the business ofIndependence Energy LLC ("Independence") combined under a new publicly traded holding company named "Crescent Energy Company " (the "Merger Transactions"). Our Class A common stock, par value$0.0001 per share ("Class A Common Stock") is listed onThe New York Stock Exchange under the symbol "CRGY." The combined company is structured as an "Up-C," with all of our assets and operations (including those of Contango) indirectly held by our operating subsidiary,Crescent Energy OpCo LLC ("OpCo").Crescent Energy Company ("Crescent") is a holding company, the sole material asset of which consists of economic, non-voting limited liability company interests in OpCo ("OpCo Units"), and is responsible for all operational, management and administrative decisions related to OpCo's business. We are the sole managing member of OpCo. Crescent consolidates the financial results of OpCo and its subsidiaries. Former Contango shareholders own shares of Class A Common Stock, which have both voting and economic rights. The former owners of our predecessor,Independence Energy LLC , own economic, non-voting OpCo Units and corresponding shares of Class B common stock, par value$0.0001 per share ("Class B Common Stock," together with Class A Common Stock, the "Common Stock"), which shares of Class B Common Stock have voting (but no economic) rights. OpCo Units may be redeemed or exchanged for Class A Common Stock or, at our election, cash on the terms and conditions set forth in the Amended and Restated Limited Liability Company Agreement of OpCo. In connection with the Merger Transactions, we underwent a reorganization (the "Crescent Reorganization"), whereby Independence merged with and into OpCo (the "Isla Merger"). The financial statements include the accounts of Independence from the date of the Isla Merger, which is the date the Company obtained a controlling financial interest in Independence on a consolidated basis. Because the Isla Merger resulted in a change in the reporting entity, and in order to furnish comparative financial information prior to the Isla Merger, our financial statements have been retrospectively recast to reflect the historical accounts of Independence, our accounting predecessor (the "Predecessor"), on a combined basis. COVID-19 impact
The global spread of the COVID-19 virus during 2020 and 2021 had a negative impact on the global demand for oil and natural gas and caused significant commodity market volatility. While the increase in domestic vaccination programs and reduced
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spread of the COVID-19 virus has contributed to an improvement in the economy
and higher realized prices for commodities, the current price environment
remains uncertain as responses to the COVID-19 pandemic and newly emerging
variants of the virus continue to evolve. Given the dynamic nature of these
events, we cannot reasonably estimate the period of time that the COVID-19
pandemic and related market conditions will persist. While we use derivative
instruments to partially mitigate the impact of commodity price volatility, our
revenues and operating results depend significantly upon the prevailing prices
for oil and natural gas.
Conflict in Ukraine
In February 2022 , Russia launched a large-scale invasion of Ukraine that has led
to significant armed hostilities. As a result, the United States , the United
Kingdom , the member states of the European Union and other public and private
actors have levied severe sanctions on Russian financial institutions,
businesses and individuals. This conflict, and the resulting sanctions, have
contributed to significant increases and volatility in the price for oil and
natural gas, with the posted price for WTI reaching a high of $123.64 per
barrel. Such volatility may lead to a more difficult investing and planning
environment for us and our customers. While the near-term impact of these events
resulted in higher oil and gas prices in the first quarter of 2022, the
geopolitical and macroeconomic consequences of this invasion and associated
sanctions cannot be predicted, and such events, or any further hostilities in
Ukraine or elsewhere, could severely impact the world economy and may adversely
affect our financial condition.
Acquisitions and divestitures
Acquisitions
InMarch 2022 , we consummated the acquisition contemplated by the Membership Interest Purchase Agreement datedFebruary 15, 2022 (the "Purchase Agreement" and the transactions contemplated therein, the "Uinta Transaction") between certain of our subsidiaries, including OpCo, andVerdun Oil Company II LLC , aDelaware limited liability company, pursuant to which we purchased all of the issued and outstanding membership interests ofUinta AssetCo, LLC , aTexas limited liability company that held all development and production assets of, and certain obligations of,EP Energy E&P Company, L.P. ("EP") located in theState of Utah (the "Utah Assets"). Such assets include an aggregate approximately 145,000 net acres, primarily located inDuchesne andUintah Counties,Utah , with approximately 400 currently producing wells. Upon closing of the Uinta Transaction onMarch 30, 2022 , we paid$621.3 million in cash consideration and related transaction fees and assumed certain commodity derivatives. The Uinta Transaction was funded with cash on hand and borrowings under our Revolving Credit Facility. In connection with the closing of the Uinta Transaction, we entered into an amendment to our Revolving Credit Facility to, among other things, increase the borrowing base to$1.8 billion and the elected commitment amount to$1.3 billion . We incurred financing costs of$13.1 million associated with this amendment. Subsequent to the closing of the Uinta Transaction, we settled certain acquired oil commodity derivative positions and entered into new commodity derivative contracts for 2022 with a swap price of$75 per barrel for a net cost of$54.1 million , including restructuring fees, during the three months endedMarch 31, 2022 . InDecember 2021 , we acquired from an unrelated third-party certain operated producing oil and natural gas properties predominately located in the Central Basin Platform inTexas andNew Mexico , with additional properties in the southwestern Permian and Powder River Basins, for total cash consideration of$60.4 million , including customary purchase price adjustments (the "Central Basin Platform Acquisition"). The purchase price was funded using cash on hand and borrowings under our Revolving Credit Facility (as defined in NOTE 7 - Debt). We accounted for the Central Basin Platform Acquisition as an asset acquisition. InMay 2021 , certain of our consolidated subsidiaries redeemed the noncontrolling equity interests held in such subsidiaries by a third-party investor in exchange for the third-party investor's proportionate share of the underlying oil and natural gas interests held by its consolidated subsidiaries as part of the "Noncontrolling Interest Carve-out." Additionally, the third-party investor contributed cash of approximately$35.5 million to repay its proportionate share of the underlying debt outstanding under our prior credit agreements and other liabilities. The percentage ownership of these certain consolidated subsidiaries owned by the third-party investor ranges from 2.21% to 7.38%. InApril 2021 , certain minority investors exchanged 100% of their interests in our Barnett basin natural gas assets for 9,508 of our Class A Units, representing 0.77% of our consolidated ownership pursuant to (the "April 2021 Exchange"). Since we already consolidate the results of these assets, this transaction was accounted for as an equity transaction and reflected as a reclassification from noncontrolling interests to members' equity with no gain or loss recognized on theApril 2021 Exchange. 29 -------------------------------------------------------------------------------- InMarch 2021 , we acquired a portfolio of oil and natural gas mineral assets located in theDJ Basin from an unrelated third-party operator for total consideration of$60.8 million (the "DJ Basin Acquisition").The DJ Basin Acquisition was funded using cash on hand and borrowings under our prior credit agreements. We accounted for the DJ Basin Acquisition as an asset acquisition.
Divestitures
InFebruary 2022 , we contributed all of the assets and prospects in theGulf of Mexico formerly owned by Contango toChama Energy LLC ("Chama"), in exchange for a 9.4% interest in Chama. Such interest is valued at approximately$3.8 million .John Goff , the Chairman of our Board of Directors, holds an approximate interest of 17.5% in Chama, and the remaining interests are held by other investors. Pursuant to the Limited Liability Company Agreement of Chama, we may be required to fund certain workover costs, and we will be required to fund plugging and abandonment costs related to the producing assets we contributed to Chama. During the first quarter of 2022, we derecognized the assets and liabilities that were contributed to Chama from our condensed consolidated balance sheets. We recorded a$4.5 million gain related to on the deconsolidation of these assets and liabilities and recorded an equity method investment for our interest in Chama. The carrying value of our equity method investment in Chama atMarch 31, 2022 is$3.8 million . InDecember 2021 , we entered into an assignment, conveyance and bill of sale with an unaffiliated third-party that encompassed the sale of certain producing properties and oil and natural gas leases inClaiborne Parish, Louisiana in exchange for cash consideration, net of closing adjustments, of$4.3 million . InMay 2021 , we executed a purchase and sale agreement with an unaffiliated third-party that encompassed the sale of certain producing properties and oil and natural gas leases in theArkoma Basin in exchange for cash consideration, net of closing adjustments, of$22.1 million .
Environmental, social and corporate governance ("ESG") initiatives
We view exceptional ESG performance as an opportunity to differentiate Crescent from our peers, mitigate risks and strengthen operational performance as well as benefit our stakeholders and the communities in which we operate. InDecember 2021 , we released our inaugural ESG report, which included key performance metrics according toValue Reporting Foundation's SASB Standard for Oil & Gas - Exploration & Production and also established our key ESG priorities. We also established anESG Advisory Council to advise management and our Board of Directors on ESG-related issues. We are working to reduce greenhouse gas ("GHG") emissions by implementing aggressive methane reduction targets and eliminating routine flaring, among other initiatives. InFebruary 2022 , we joined theOil & Gas Methane Partnership ("OGMP") 2.0 Initiative to enhance reporting of methane emissions reduction programs.
How we evaluate our operations
We use a variety of financial and operational metrics to assess the performance of our oil, natural gas and NGL operations, including:
•Production volumes sold,
•Commodity prices and differentials,
•Operating expenses,
•Adjusted EBITDAX (non-GAAP), and
•Levered Free Cash Flow (non-GAAP)
Development program and capital budget
Our development program is designed to prioritize the generation of attractive risk-adjusted returns and meaningful free cash flow and is inherently flexible, with the ability to modify our capital program as necessary to react to the current market environment. We expect to incur approximately$600 million to$700 million , excluding acquisitions, for our 2022 capital program. Our program is approximately 95% allocated to D&C (80 to 85% to our operated assets primarily in the Eagle Ford and Uinta 30 -------------------------------------------------------------------------------- basins and 10 to 15% to non-operated activity) and approximately 5% to other capital expenditures. We expect to fund our 2022 capital program through cash flow from operations. Due to the flexible nature of our capital program and the fact that our acreage is 96% held by production, we could choose to defer a portion or all of these planned capital expenditures depending on a variety of factors, including, but not limited to, the success of our drilling activities, prevailing and anticipated prices for oil, gas and NGLs and resulting well economics, the availability of necessary equipment, infrastructure and capital, the receipt and timing of required regulatory permits and approvals, seasonal conditions, drilling and acquisition costs and the level of participation by other interest owners. Sources of revenue Our revenues are primarily derived from the sale of our oil, natural gas and NGL production and are influenced by production volumes and realized prices, excluding the effect of our commodity derivative contracts. Pricing of commodities are subject to supply and demand as well as seasonal, political and other conditions that we generally cannot control. Our revenues may vary significantly from period to period as a result of changes in volumes of production sold or changes in commodity prices. The following table illustrates our production revenue mix for each of the periods presented: Three Months Ended March 31, 2022 2021 Oil 64 % 62 % Natural gas 24 % 26 % NGLs 12 % 12 % In addition, revenue from our midstream assets is supported by commercial agreements that have established minimum volume commitments. These midstream revenues comprise the majority of our midstream and other revenue. Midstream and other revenue accounts for 4% or less of our total revenues for the three months endedMarch 31, 2022 and 2021.
Production volumes sold
The following table presents historical sales volumes for our properties:
Three Months Ended March 31,
2022 2021
Oil (MBbls) 3,985 3,318
Natural gas (MMcf) 30,014 20,823
NGLs (MBbls) 1,827 1,445
Total (MBoe) 10,814 8,234
Daily average (MBoe/d) 120 91
Total sales volume increased 2,580 MBoe during the three months ended March 31,
2022 compared to 2021. The increase is primarily due to the Merger Transactions,
DJ Basin Acquisition and Central Basin Platform Acquisition (collectively, the
"2021 Acquisitions"), which contributed an additional 3,135 MBoe. Sales volumes
from our other assets decreased by 555 MBoe primarily as a result of the natural
decline from our existing asset base.
Commodity prices and differentials
Our results of operations depend upon many factors, particularly the price of commodities and our ability to market our production effectively.
The oil and natural gas industry is cyclical and commodity prices can be highly volatile. In recent years, commodity prices have been subject to significant fluctuations. The outbreak of the COVID-19 virus followed by certain actions taken byOPEC caused crude oil prices to decline significantly beginning in the first half of 2020 and prices remained below pre-pandemic levels for a prolonged period of time. Despite the impact of the COVID-19 virus on the global economy, commodity prices trended higher in the three months endedMarch 31, 2022 compared with the three months endedMarch 31, 2021 , reflecting the ongoing recovery in the oil and gas industry in early 2022 due to increasing demand as more states and countries re-open and national and global economies continue to recover from the global COVID-19 pandemic and a premium due to the 31 --------------------------------------------------------------------------------
reduction in crude oil supply resulting from sanctions imposed on
In order to reduce the impact of fluctuations in oil and natural gas prices on revenues, we regularly enter into derivative contracts with respect to a portion of the estimated oil, natural gas and NGL production through various transactions that fix the future prices received. We plan to continue the practice of entering into economic hedging arrangements to reduce near-term exposure to commodity prices, protect cash flow and corporate returns and maintain our liquidity.
The following table presents the percentages of our production that was economically hedged through the use of derivative contracts:
Three Months Ended March 31,
2022 2021
Oil 75 % 83 %
Natural gas 75 % 87 %
NGLs 51 % 72 %
The following table sets forth the average NYMEX oil and natural gas prices and our average realized prices for the periods presented:
Three Months Ended March 31,
2022 2021
Oil (Bbl):
Average NYMEX $ 94.29 $ 57.84
Realized price (excluding derivative settlements) 93.47 56.93
Realized price (including derivative settlements) 68.36 50.28
Natural Gas (Mcf):
Average NYMEX $ 4.95 $ 2.69
Realized price (excluding derivative settlements) 4.77 3.89
Realized price (including derivative settlements) 3.11 3.88
NGLs (Bbl):
Realized price (excluding derivative settlements) $ 38.97 $ 24.98
Realized price (including derivative settlements) 24.81 16.87
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Results of operations:
Three Months Ended
Revenues
The following table provides the components of our revenues, respective average realized prices and net sales volumes for the periods indicated:
Three Months Ended March 31,
2022 2021 $ Change % Change
Revenues (in thousands):
Oil $ 372,509 $ 188,923 $ 183,586 97 %
Natural gas 143,311 81,043 62,268 77 %
Natural gas liquids 71,179 36,099 35,080 97 %
Midstream and other 11,911 11,796 115 1 %
Total revenues $ 598,910 $ 317,861 $ 281,049 88 %
Average realized prices, before effects of
derivative settlements:
Oil ($/Bbl) $ 93.47 $ 56.93 $ 36.54 64 %
Natural gas ($/Mcf) 4.77 3.89 0.88 23 %
NGLs ($/Bbl) 38.97 24.98 13.99 56 %
Total ($/Boe) 54.28 37.17 17.11 46 %
Net sales volumes:
Oil (MBbls) 3,985 3,318 667 20 %
Natural gas (MMcf) 30,014 20,823 9,191 44 %
NGLs (MBbls) 1,827 1,445 382 26 %
Total (MBoe) 10,814 8,234 2,580 31 %
Average daily net sales volumes:
Oil (MBbls/d) 44 37 7 19 %
Natural gas (MMcf/d) 333 231 102 44 %
NGLs (MBbls/d) 20 16 4 25 %
Total (MBoe/d) 120 91 29 32 %
Oil revenue. Oil revenue increased $183.6 million , or 97%, in the three months
ended March 31, 2022 compared to the three months ended March 31, 2021 . This was
driven primarily by higher realized oil prices that resulted in an increase of
$145.6 million (an increase of 64% per Bbl) and a $38.0 million increase in
sales volume (7 MBbls/d or 19%). The increase in sales volumes primarily related
to our 2021 Acquisitions, which contributed an additional 995 MBbls, partially
offset by the natural decline from our existing asset base of 328 MBbls.
Natural gas revenue. Natural gas revenue increased $62.3 million , or 77% in the
three months ended March 31, 2022 compared to the three months ended March 31,
2021 . This was driven primarily by higher natural gas prices that resulted in an
increase of $26.4 million (an increase of 23% per Mcf) and a $35.9 million
increase in sales volume (102 MMcf/d, or 44%). The increase in sales volumes
were primarily related to our 2021 Acquisitions, which contributed an additional
10,391 MMcf, partially offset by the natural decline from our existing asset
base of 1,200 MMcf.
NGL revenue. NGL revenue increased $35.1 million , or 97%, in the three months
ended March 31, 2022 compared to the three months ended March 31, 2021 . This was
driven primarily by higher realized NGL prices that resulted in an increase of
$25.6 million (an increase of 56% per Bbl) and higher production of $9.5 million
(4 MBbls/d, or 25%).
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Midstream and other revenue. Midstream and other revenue increased $0.1 million ,
or 1%, in the three months ended March 31, 2022 compared to the three months
ended March 31, 2021 , driven primarily by higher midstream revenue.
Expenses
The following table summarizes our expenses for the periods indicated and includes a presentation on a per Boe basis, as we use this information to evaluate our performance relative to our peers and to identify and measure trends we believe may require additional analysis:
Three Months Ended March 31,
2022 2021 $ Change % Change
Expenses (in thousands):
Operating expense $ 219,239 $ 139,263 $ 79,976 57 %
Depreciation, depletion and amortization 99,019 83,869 15,150 18 %
General and administrative expense 22,522 6,629 15,893 240 %
Other operating costs (4,699) 56 (4,755) NM*
Total expenses $ 336,081 $ 229,817 $ 106,264 46 %
Selected expenses per Boe:
Operating expense, excluding production and
other taxes $ 15.97 $ 13.72 $ 2.25 16 %
Production and other taxes 4.30 3.20 1.10 34 %
Depreciation, depletion and amortization 9.16 10.19 (1.03) (10) %
* NM = Not meaningful.
Operating expense. Operating expense increased $80.0 million , or 57%, in the
three months ended March 31, 2022 compared to the three months ended March 31,
2021 , driven primarily by the following factors:
(i)Lease and asset operating expense increased $47.7 million , or 75%, compared
to the three months ended March 31, 2021 . Additionally, lease and asset
operating expense per Boe increased $2.56 per Boe from $7.75 per Boe to $10.31
per Boe. This increase was driven primarily by higher production during the
three months ended March 31, 2022 , due in part to the 2021 Acquisitions, which
contributed $36.3 million to the increase, and certain costs that are indexed to
oil commodity prices, such as CO2 purchase costs related to our CO2 flood asset
in Wyoming . These contractually commodity indexed operating expenses move in
tandem with oil commodity prices, and as oil price increases, higher
contractually commodity-linked operating costs are offset by higher
realizations.
(ii)Gathering, transportation and marketing expense increased $5.1 million , or
12%, in the three months ended March 31, 2022 , compared to the three months
ended March 31, 2021 . This increase was driven primarily by higher expenses
associated with our processing contracts that are indexed to commodity prices,
partially offset by lower sulfur processing and transportation expenses.
(iii)Production and other taxes increased $20.2 million , or 77%, in the three
months ended March 31, 2022 , compared to the three months ended March 31, 2021
and increased $1.10 per Boe, an increase of 34%, to $4.30 per Boe. This increase
was driven primarily by higher oil and natural gas revenues, which increased the
tax base upon which production and other taxes are calculated.
(iv)Workover expense increased $7.7 million , or 340%, in the three months ended
March 31, 2022 , compared to the three months ended March 31, 2021 . This increase
was driven primarily by higher well workover activities that meet our internal
return thresholds due to the higher commodity price environment.
(v)Midstream operating expense decreased $0.7 million , or 18%, in the three
months ended March 31, 2022 , compared to the three months ended March 31, 2021 .
Depreciation, depletion and amortization. In the three months ended March 31,
2022 , depreciation, depletion and amortization increased $15.2 million , or 18%,
compared to the three months ended March 31, 2021 , driven primarily by $30.8
million of additional depreciation, depletion and amortization due to our 2021
Acquisitions, partially offset by a lower depletion rate on increased reserves
of our other assets.
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General and administrative expense. General and administrative expense ("G&A")
increased $15.9 million , or 240%, for the three months ended March 31, 2022
compared to the three months ended March 31, 2021 , primarily driven by (i) an
increase in equity-based compensation expense of $7.8 million due to awards that
were granted as part of the Merger Transactions and the increase in fair value
of the Company's liability-classified profits interest awards, (ii) $2.5 million
in additional transaction and nonrecurring related expenses due to our
transactions and (iii) $3.3 million related to expense payable under the
management agreement with KKR Energy Assets Manager LLC , which is the pro-rata
portion of the Manager Compensation borne by us. While only the portion borne by
us impacts our consolidated statements of operations, we include the full
Manager Compensation in the calculation of Adjusted EBITDAX and Levered Free
Cash Flow (the difference between the Manager Compensation and the amount
presented in G&A is represented by "Certain-redeemable noncontrolling interest
distributions made by OpCo related to Manager Compensation").
Three Months Ended March 31,
2022 2021 $ Change % Change
General and administrative expense (in
thousands):
Recurring general and administrative expense $ 8,263 $ 2,648 $ 5,615 212 %
Transaction and nonrecurring expenses 3,144 644 2,500 388 %
Equity-based compensation 11,115 3,337 7,778 233 %
Total general and administrative expense
$ 15,893 240 % General and administrative expense per Boe: Recurring general and administrative expense$ 0.76 $ 0.32 $ 0.44 138 % Transaction and nonrecurring expenses 0.29 0.08 0.21 272 % Equity-based compensation 1.03 0.41 0.62 154 % Other operating costs. Other operating costs include exploration expense and gain on sale of assets. Other operating costs changed by$4.8 million compared to the three months endedMarch 31, 2021 , primarily driven by a$4.8 million gain on sale of assets recognized during the three months endedMarch 31, 2022 .
Interest expense
In the three months endedMarch 31, 2022 , we incurred interest expense of$16.5 million , as compared to$7.4 million in the three months endedMarch 31, 2021 , a 124% increase. This increase was driven primarily by higher interest rates associated with the issuance of the Senior Notes (as defined below) and an increase in our weighted average debt outstanding during the period.
Gain (loss) on derivatives
We have entered into derivative contracts to manage our exposure to commodity
price risks that impact our revenues and interest rate risks on our variable
interest rate debt. The following table presents gain (loss) on derivatives for
the periods presented:
Three Months Ended March 31,
2022 2021 $ Change
Gain (loss) on derivatives (in thousands):
Gain (loss) on commodity derivatives $ (673,486) $ (246,827) $ (426,659)
Gain (loss) on interest rate derivatives - 13 (13)
Total gain (loss) on derivatives $ (673,486) Our loss on commodity derivatives during the three months endedMarch 31, 2022 increased$426.7 million , or 173%, compared to the three months endedMarch 31, 2021 primarily due to higher commodity prices. The derivative losses that were realized were offset by the higher revenue prices that we received during the three months endedMarch 31, 2022 .
Adjusted EBITDAX (non-GAAP) and Levered Free Cash Flow (non-GAAP)
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Adjusted EBITDAX and Levered Free Cash Flow are supplemental non-GAAP financial
measures used by our management to assess our operating results. See "-Non-GAAP
Financial Measures" below for their definitions and application.
The following table presents a reconciliation of Adjusted EBITDAX (non-GAAP) and Levered Free Cash Flow (non-GAAP) to net income (loss), the most directly comparable financial measure calculated in accordance with GAAP:
Three Months Ended March 31,
2022 2021 $ Change % Change
(in thousands)
Net income (loss) $ (406,007) $ (166,268) $ (239,739) 144 %
Adjustments to reconcile to Adjusted EBITDAX:
Interest expense 16,524 7,383
Realized (gain) loss on interest rate derivatives -
3,628
Income tax expense (benefit) (21,725)
13
Depreciation, depletion and amortization 99,019
83,869
Exploration expense 91
56
Non-cash (gain) loss on derivatives 497,685
209,120
Non-cash equity-based compensation expense 11,115 3,337 (Gain) loss on sale of assets (4,790) - Other (income) expense 1,499 102 Certain redeemable noncontrolling interest distributions made by OpCo related to Manager Compensation (10,064)
-
Transaction and nonrecurring expenses (1) 11,559
644
Adjusted EBITDAX (non-GAAP)$ 194,906 $ 141,884 $ 53,022 37 % Adjustments to reconcile to Levered Free Cash Flow: Interest expense, excluding non-cash deferred financing cost amortization (14,927)
(6,533)
Realized (gain) loss on interest rate derivatives -
(3,628)
Current income tax benefit (expense) (4,950)
(13)
Current tax-related redeemable noncontrolling interest distributions by OpCo -
-
Development of oil and natural gas properties (85,480)
(24,827)
Levered Free Cash Flow (non-GAAP)$ 89,549 $ 106,883 $ (17,334) (16 %) (1)Transaction and nonrecurring expenses of$11.6 million for the three months endedMarch 31, 2022 were primarily related to legal, consulting and other fees incurred for the Uinta Transaction, related restructuring of acquired derivative contracts, legal settlements and severance costs subsequent to the Merger Transactions. Transaction and nonrecurring expenses of$0.6 million for the three months endedMarch 31, 2021 were primarily related to legal, consulting and other fees related to the formation of Independence, the acquisition ofTitan Energy Holdings, LLC (f/k/aLiberty Energy LLC ) (the "Titan Acquisition") and the related reorganization transactions. Adjusted EBITDAX increased by$53.0 million , or 37%, in the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 , primarily driven by higher revenue associated with our oil, natural gas and NGL production as a result of increased (i) realized prices and (ii) sales volume driven by our 2021 Acquisitions. This increase was partially offset by a corresponding increase in operating costs due to higher production volumes and commodity prices, as well as higher realized losses on our commodity derivatives. Levered Free Cash Flow decreased by$17.3 million , or 16%, in the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 , primarily driven by$60.7 million of increased capital expenditures related to an increase in our 36 --------------------------------------------------------------------------------
reinvestment activities following the increase in commodity prices. The increase in capital expenditures was mostly offset by our increase in Adjusted EBITDAX.
Liquidity and capital resources
Our primary sources of liquidity are cash flow from operations and borrowings under a senior secured reserve-based revolving credit agreement (as amended, restated, amended and restated or otherwise modified to date, the "Revolving Credit Facility") withWells Fargo Bank, N.A. , as administrative agent for the lenders and letter of credit issuer, and the lenders from time to time party thereto. Our primary use of capital is for dividends to shareholders, debt repayment, development of our existing assets and acquisitions. Our development program is designed to prioritize the generation of meaningful free cash flow and attractive risk-adjusted returns and is inherently flexible, with the ability to scale our capital program as necessary to react to the existing market environment and ongoing asset performance. Our 2021 capital program reflected that flexibility; our capital expenditures incurred during the second half of 2021 were higher than the first half of 2021 as we elected to increase capital spend as the commodity price environment improved. We plan to continue our practice of entering into economic hedging arrangements to reduce the impact of the near-term volatility of commodity prices and the resulting impact on our cash flow from operations. A key tenet of our focused risk management effort is an active economic hedge strategy to mitigate near-term price volatility while maintaining long-term exposure to underlying commodity prices. Our commodity derivative program focuses on entering into forward commodity contracts when investment decisions regarding reinvestment in existing assets or new acquisitions are finalized, targeting economic hedges for a portion of expected production as well as adding incremental derivatives to our production base over time. Our active derivative program allows us to preserve capital and protect margins and corporate returns through commodity cycles.
The following table presents our cash balances and outstanding borrowings at the end of each period presented:
(in thousands) March 31, 2022 December 31, 2021 Cash and cash equivalents$ 112,548 $ 128,578 Long-term debt 1,626,873 1,030,406 Based on our planned capital spending, our forecasted cash flows and projected levels of indebtedness, we expect to maintain compliance with the covenants under our debt agreements. Further, based on current market indications, we expect to meet in the ordinary course of business other contractual cash commitments to third parties pursuant to the various agreements described under the heading "Contractual obligations" in our Annual Report, recognizing we may be required to meet such commitments even if our business plan assumptions were to change. Cash flows
The following table summarizes our cash flows for the periods indicated:
Three Months Ended March 31,
(in thousands) 2022 2021
Net cash provided by operating activities $ 137,291 $ 126,251
Net cash used in investing activities (713,394) (93,939)
Net cash provided by (used in) financing activities 561,517 (34,852)
Net cash provided by operating activities. Net cash provided by operating
activities for the three months ended March 31, 2022 increased by $11.0 million ,
or 9%, compared to the three months ended March 31, 2021 primarily due higher
EBITDAX partially offset by the restructuring of certain oil commodity
derivative contracts acquired in connection with the Uinta Transaction.
Net cash used in investing activities. Net cash used in investing activities for
the three months ended
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acquisitions of oil and natural gas properties in 2022, driven by the Uinta
Transaction, and an additional
Net cash provided by (used in) financing activities. Net cash provided by financing activities for the three months endedMarch 31, 2022 was$561.5 million , as compared to a$34.9 million use of cash in the three months endedMarch 31, 2021 . This change was primarily due to net cash inflows as a result of the issuance of our 7.250% senior notes due 2026 (the "New Notes") inFebruary 2022 and additional borrowings from our Revolving Credit Facility to fund our Uinta Transaction. Debt agreements Senior Notes OnMay 6, 2021 ,Crescent Energy Finance LLC ("Crescent Finance") issued$500.0 million aggregate principal amount of senior notes due 2026 at par (the "Original Notes"). InFebruary 2022 , Crescent Finance issued an additional$200.0 million aggregate principal amount of our senior notes due 2026 at 101% of par (the "New Notes" and, together with the Original Notes, the "Senior Notes"). Both issuances of the Senior Notes are treated as a single series and vote together as a single class, and have identical terms and conditions, other than the issue date, the issue price and the first interest payment. The Senior Notes bear interest at an annual rate of 7.250%, which is payable onMay 1 andNovember 1 of each year and mature onMay 1, 2026 . The Senior Notes are our senior unsecured obligations, and the notes and the guarantees issued in connection with the issuance of the Senior Notes rank equally in right of payment with the borrowings under the Revolving Credit Facility and all of its other future senior indebtedness and senior to any of its future subordinated indebtedness. The Senior Notes are guaranteed on a senior unsecured basis by each of our existing and future subsidiaries that guarantee the Revolving Credit Facility. The Senior Notes and the guarantees are effectively subordinated to all of our secured indebtedness (including all borrowings and other obligations under the Revolving Credit Facility) to the extent of the value of the collateral securing such indebtedness, and structurally subordinated in right of payment to all existing and future indebtedness and other liabilities (including trade payables) of any future subsidiaries that do not guarantee the Senior Notes. We may, at our option, redeem all or a portion of the Senior Notes at any time on or afterMay 1, 2023 at certain redemption prices. We may also redeem up to 40% of the aggregate principal amount of the Senior Notes beforeMay 1, 2023 with an amount of cash not greater than the net proceeds that we raise in certain equity offerings at a redemption price equal to 107.250% of the principal amount of the Senior Notes being redeemed, plus accrued and unpaid interest, if any, to, but excluding the redemption date. In addition, prior toMay 1, 2023 , we may redeem some or all of the Senior Notes at a price equal to 100% of the principal amount thereof, plus a "make-whole" premium, plus accrued and unpaid interest, if any, to, but excluding the redemption date. If we experience certain kinds of changes of control accompanied by a ratings decline, holders of the Senior Notes may require us to repurchase all or a portion of their notes at certain redemption prices. The Senior Notes are not listed, and we do not intend to list the Senior Notes in the future, on any securities exchange, and currently there is no public market for the Senior Notes.
Revolving Credit Facility
In connection with the issuance of the Senior Notes, Crescent Finance entered into the Revolving Credit Facility. The Revolving Credit Facility matures onMay 6, 2025 . AtMarch 31, 2022 , we had$941.0 million of outstanding borrowings under the Revolving Credit Facility and$20.7 million in outstanding letters of credit.
In connection with the closing of the Uinta Transaction, we entered into an
amendment to our Revolving Credit Facility to increase the borrowing base to
Borrowings under the Revolving Credit Facility bear interest at either a (i)U.S. dollar alternative base rate (based on the prime rate, the federal funds effective rate or an adjusted secured overnight financing rate ("SOFR")), plus an applicable margin, or (ii) SOFR, plus an applicable margin, at the election of the borrowers. The applicable margin varies based upon our borrowing base utilization then in effect. The fee payable for the unused revolving commitments is 0.50% per year. Our weighted average interest rate on loan amounts outstanding as ofMarch 31, 2022 was 3.16%. The borrowing base is subject to semi-annual scheduled redeterminations on or aboutApril 1 andOctober 1 of each year, as well as (i) elective borrowing base interim redeterminations at our request not more than twice during any consecutive 12- 38 -------------------------------------------------------------------------------- month period or the required lenders not more than once during any consecutive 12-month period and (ii) elective borrowing base interim redeterminations at our request following any acquisition of oil and natural gas properties with a purchase price in the aggregate of at least 5.0% of the then effective borrowing base. The borrowing base will be automatically reduced upon (a) the issuance of certain permitted junior lien debt and other permitted additional debt, (b) the sale or other disposition of borrowing base properties if the aggregate net present value, discounted at 9% per annum ("PV-9") of such properties sold or disposed of is in excess of 5.0% of the borrowing base then in effect and (c) early termination or set-off of swap agreements (x) the administrative agent relied on in determining the borrowing base or (y) if the value of such swap agreements so terminated is in excess of 5.0% of the borrowing base then in effect. The obligations under the Revolving Credit Facility remain secured by first priority liens on substantially all of our and the guarantors' tangible and intangible assets, including without limitation, oil and natural gas properties and associated assets and equity interests owned by us and such guarantors. In connection with each redetermination of the borrowing base, we must maintain mortgages on at least 85% of the PV-9 of the oil and gas properties that constitute borrowing base properties. Our domestic direct and indirect subsidiaries are required to be guarantors under the Revolving Credit Facility, subject to certain exceptions. The Revolving Credit Facility contains certain covenants that restrict the payment of cash dividends, certain borrowings, sales of assets, loans to others, investments, merger activity, commodity swap agreements, liens and other transactions without the adherence to certain financial covenants or the prior consent of our lenders. We are subject to (i) maximum leverage ratio and (ii) current ratio financial covenants calculated as of the last day of each fiscal quarter. The Revolving Credit Facility also contains representations, warranties, indemnifications and affirmative and negative covenants, including events of default relating to nonpayment of principal, interest or fees, inaccuracy of representations or warranties in any material respect when made or when deemed made, violation of covenants, bankruptcy and insolvency events, certain unsatisfied judgments and a change of control. If an event of default occurs and we are unable to cure such default, the lenders will be able to accelerate maturity and exercise other rights and remedies.
Prior Credit Agreements
Certain of our subsidiaries had revolving credit facilities with syndicates of lenders with original expiration dates between 2022 and 2024 (the "Prior Credit Agreements"). The amounts we were able to borrow under each of the Prior Credit Agreements was limited by a borrowing base, which was based on our oil and natural gas properties, proved reserves and total indebtedness, as well as other factors, and was consistent with customary lending criteria. OnMay 6, 2021 , we terminated the Prior Credit Agreements with the proceeds from the issuance of the Senior Notes, the redemption of certain noncontrolling equity interests in exchange for a third-party investor's proportionate share of underlying oil and natural gas interests held by its consolidated subsidiaries and borrowings under our Revolving Credit Facility.
Capital expenditures
Our acquisition and development expenditures consist of acquisitions of proved and unproved property, expenditures associated with the development of our oil and natural gas properties and other asset additions. Cash expenditures for drilling, completion and recompletion activities are presented as "Development of oil and natural gas properties" in investing activities on our condensed consolidated statements of cash flows. We expect to fund our 2022 capital program through cash flow from operations. The amount and timing of capital expenditures on development of oil and natural gas properties is substantially within our control due to the held-by-production nature of our assets. We regularly review our capital expenditures throughout the year and could choose to adjust our investments based on a variety of factors, including but not limited to the success of our drilling activities, prevailing and anticipated prices for oil, natural gas and NGLs, the availability of necessary equipment, infrastructure and capital, the receipt and timing of required regulatory permits and approvals, seasonal conditions, drilling and acquisition costs and the level of participation by other interest owners. Any postponement or elimination of our development drilling program could result in a reduction of proved reserve volumes, the related standardized measure and conversions of proved undeveloped volumes to proved developed volumes. These risks could materially affect our business, financial condition and results of operations.
The table below presents our capital expenditures and related metrics that we use to evaluate our business for the periods presented:
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Three Months Ended March 31,
(in thousands) 2022 2021
Total development of oil and natural gas properties $ 85,480
8,336 4,553
Cash used in development of oil and natural gas properties 93,816 29,380
Cash used in acquisition of oil and natural gas properties 620,342 64,090
Non-cash acquisition of oil and natural gas properties - 6,437
Total expenditures on acquisition and development of oil and
natural gas properties $ 714,158 $ 99,907
Our development of oil and natural gas properties was higher during the three
months ended March 31, 2022 , compared to the three months ended March 31, 2021 .
Due to the low commodity price environment experienced throughout 2020 resulting
from the COVID-19 pandemic and the actions from OPEC , we significantly reduced
our development capital expenditures starting in the second quarter of 2020 but
resumed development activities in the second half of 2021 as commodity prices
recovered. During the three months ended March 31, 2022 , commodity prices
remained at or above levels prior to the COVID-19 pandemic. Our budget for 2022
reflects the current price environment. We used cash of $620.3 million in 2022
for the acquisition of oil and natural gas properties, primarily related to our
Uinta Transaction, as compared to $64.1 million in 2021, primarily related to
our DJ Basin Acquisition (see Notes to condensed consolidated financial
statements, NOTE 3 - Acquisitions and Divestitures in Part I, Item 1. Financial
Statements of this Quarterly Report).
Contractual obligations
As of
Dividends
Our future dividends depend on our level of earnings, financial requirements and other factors and will be subject to approval by our Board of Directors, applicable law and the terms of our existing debt documents, including the indenture governing the Senior Notes.
We paid our first quarterly cash dividend of
OnMay 10, 2022 , the Board of Directors approved a quarterly cash dividend of$0.17 per share, or$0.68 per share on an annualized basis, to be paid to shareholders of our Class A Common Stock with respect to the first quarter of 2022. The quarterly dividend is payable onJune 7, 2022 to shareholders of record as of the close of business onMay 24, 2022 . OpCo unitholders will also receive a distribution based on their pro rata ownership of OpCo Units. The payment of quarterly cash dividends is subject to management's evaluation of our financial condition, results of operations and cash flows in connection with such payments and approval by our Board of Directors. In light of current economic conditions, management will evaluate any future increases in cash dividend on a quarterly basis.
Critical accounting policies and estimates
This discussion and analysis of our financial and results of operations are based upon our unaudited condensed consolidated financial statements. A complete list of our significant accounting policies is described in Note 2 - Summary of Significant Accounting Policies in our audited financial statements as of and for the year endedDecember 31, 2021 in our Annual Report. Refer also to "Critical accounting estimates" in Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report. There have been no changes to our significant accounting policies and critical accounting estimates as ofMarch 31, 2022 .
Non-GAAP financial measures
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Our MD&A includes financial measures that have not been calculated in accordance
with
•Adjusted EBITDAX; and
•Levered Free Cash Flow
These are supplemental non-GAAP financial measures used by our management to assess our operating results and assist us make our investment decisions. We believe that the presentation of these non-GAAP financial measures provides investors with greater transparency with respect to our results of operations, as well as liquidity and capital resources, and that these measures are useful for period-to-period comparison of results. We define Adjusted EBITDAX as net income (loss) before interest expense, realized (gain) loss on interest rate derivatives, income tax expense, depreciation, depletion and amortization, exploration expense, non-cash gain (loss) on derivative contracts, impairment of oil and natural gas properties, non-cash equity-based compensation, loss on sale of assets, other (income) expense, certain redeemable noncontrolling interest distributions made by OpCo related to Manager Compensation, transaction and nonrecurring expenses and early settlement of derivative contracts. We believe Adjusted EBITDAX is a useful performance measure because it allows for an effective evaluation of our operating performance when compared against our peers, without regard to our financing methods, corporate form or capital structure. We exclude the items listed above from net income (loss) in arriving at Adjusted EBITDAX because these amounts can vary substantially within our industry depending upon accounting methods and book values of assets, capital structures and the method by which the assets were acquired. Adjusted EBITDAX should not be considered as an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP, of which such measure is the most comparable GAAP measure. Certain items excluded from Adjusted EBITDAX are significant components in understanding and assessing a company's financial performance, such as a company's cost of capital and tax burden, as well as the historic costs of depreciable assets, none of which are reflected in Adjusted EBITDAX. Our presentation of Adjusted EBITDAX should not be construed as an inference that our results will be unaffected by unusual or nonrecurring items. Our computations of Adjusted EBITDAX may not be identical to other similarly titled measures of other companies. In addition, the Revolving Credit Facility and Senior Notes include a calculation of Adjusted EBITDAX for purposes of covenant compliance. We define Levered Free Cash Flow as Adjusted EBITDAX less interest expense, excluding non-cash deferred financing cost amortization, realized gain (loss) on interest rate derivatives, current income tax benefit (provision), tax-related redeemable noncontrolling interest distributions made by OpCo and development of oil and natural gas properties. Levered Free Cash Flow does not take into account amounts incurred on acquisitions. Levered Free Cash Flow is not a measure of performance as determined by GAAP. Levered Free Cash Flow is a supplemental non-GAAP performance measure that is used by our management and external users of our financial statements, such as industry analysts, investors, lenders and rating agencies. We believe Levered Free Cash Flow is a useful performance measure because it allows for an effective evaluation of our operating and financial performance and the ability of our operations to generate cash flow that is available to reduce leverage or distribute to our equity holders. Levered Free Cash Flow should not be considered as an alternative to, or more meaningful than, net income (loss) as determined in accordance with GAAP, of which such measure is the most comparable GAAP measure, or as an indicator of actual operating performance or investing activities. Our computations of Levered Free Cash Flow may not be comparable to other similarly titled measures of other companies. Adjusted EBITDAX and Levered Free Cash Flow should be read in conjunction with the information contained in our condensed consolidated financial statements prepared in accordance with GAAP.
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