Fitch Ratings has assigned a first-time Long-Term Issuer Default Rating (IDR) of 'B+' to Crescent Energy Company and Crescent Energy Finance LLC (Crescent).

Fitch has also assigned a 'BB+'/'RR1' rating to Crescent's senior secured Reserve Based Loan (RBL) credit facility and a 'BB-'/'RR3' rating to its senior unsecured bonds. The Rating Outlook is Stable.

Crescent's rating reflects its multi-basin operational scale, historical and forecast leverage between 1x - 1.5x, a conservative hedging program and relatively low decline rate. It also considers the company's below average unit economics, which are likely to modestly improve with the acquisition of assets in the Uinta basin; a significant amount of operations where Crescent is not the operator; and current revolver reliance as a funding source.

Key Rating Drivers

Uinta Improves Lower Unit Economics: In 2021 Crescent generated an unhedged cash netback of $22.5/boe. Crescent's netback is impacted by relatively high per boe production expenses, net of its midstream benefit, of $17.4/boe, and a 39% oil weighting that contributed to lower realized prices compared to liquids weighted peers.

Overall profitability benefits from increasing operational scale post the Uinta transaction with Fitch forecasting FCF generation of nearly $1 billion cumulatively in 2022 and 2023. It then declines in 2024 and 2025 under Fitch's base case, which uses $57/bbl and $50/bbl WTI in 2024/2025. Fitch also expects the Uinta acquisition to benefit Crescent's unit economics due to its approximately 65% oil weighting and relatively lower operating expenses, which the company expects to contribute to lower overall operating expenses, excluding production taxes, of approximately $13.25/boe in 2022.

Consistent Leverage Discipline: Crescent is targeting leverage of 1.0x with a maximum of 1.5x. Fitch forecasts the company will meet this target based on Total Debt / EBITDA measure by the end of 2022 and maintain it through its forecast period. Crescent has historically maintained a low leverage with a company calculated 1.2x average dating back to 2013 under its predecessor company.

Positions in Multiple Basins: Crescent's asset base is diverse for a company of its production size. It reflects a history of targeting risk-adjusted returns with less focus on specific core basins, most recently reflected in its Uinta basin acquisition at under 2x estimated 2022 adjusted EBITDA. Pro forma the Uinta acquisition, which adds approximately 30Mboepd, Crescent expects production of approximately 140Mboepd (58% liquids) during 2022. Crescent's Rockies position, which consists of its Uinta and DJ Basin production, as well as its Eagle Ford trend position are expected to account for 43% and 22% of 2022 production, with operated assets primarily in the Uinta and Eagle Ford receiving over 80% of Crescent's development capex. This diversification benefit is tempered by the relative smaller size of many of Crescent's positions.

Low Average Decline Rate Assets: Crescent has a low projected decline rate of approximately 22% in 2022. Much of its operations are located in more mature plays, which typically require lower capex due to their older vintage Proved Developed Producing (PDP) wells, which are farther along the production curve and experience lower decline rates. The lower decline rate reflects a mature asset base, which may require Crescent to look to more M&A for growth as development opportunities in more mature fields are typically fewer. Future production growth is likely to reduce Crescent's non-operated acreage, which at 30% represents a larger part of their production base than typical 'B' rating category issuers.

Stretched Liquidity Post-Uinta: Crescent funded the Uinta basin acquisition with $690 million of cash proceeds from its revolver. Post-acquisition, with a $1.3 billion elected commitment level, pro forma year-end 2021 and the $200 million senior unsecured tack-on in February 2022, Crescent's revolver is 80% drawn. Fitch expects Crescent to explore equity, debt or a combination thereof financing options to reduce its revolver draw over the short term. On April 8, 2022 Crescent filed a S-1 for a potential $75 million equity offering that would be used to repay revolver debt.

Extensive Hedge Program: Crescent has approximately 60% of its 2022 oil and gas production hedged, providing relatively strong visibility in cash flows. Its hedging program is more extensive than typical comparable public E&Ps, particularly with its liquids weighting. Crescent's hedge program extends into 2024 including hedges on over 40% of 2023 Fitch forecast oil and gas production in place. With 2022 weighted average WTI swaps and NYMEX of approximately $64 of $2.78 respectively, Crescent's 2022 hedges are expected to result in a realized hedge loss in excess of $500 million under Fitch's price deck for 2022. Downside risk is also reduced by Crescent's dividend policy of 10% of EBITDAX. This provides flexibility in distributions during weaker periods in the commodity cycle, although it does so prior to capital spending, in contrast to a more typical E&P variable distribution structures that relate to FCF.

KKR Relationship: KKR & Co. Inc. (KKR), who owns approximately 17% of Crescent's common shares, has a minimum three-year term 'Management Agreement' in place whereby among other services KKR provides the executive management team for Crescent. The annual cost to Crescent for this is captured in the company's G&A costs, which inclusive this remain competitive on a per barrel basis at approximately $1.50/boe.

Derivation Summary

Crescent reported an average of 94mboepd in 2021. Annual production inclusive of its 1Q22 Uinta basin acquisition is expected to increase to approximately 140mboepd in 2022, making Crescent one of the largest by production in the 'B' rating category. This compares for 2021 roughly in line with SM Energy (B+/Stable; 141Mboepd), above Matador Resources (B+/Stable, 86Mboepd) and Callon Petroleum (B/Stable; 95.6Mboepd).

Crescent's production trails DJ Basin focused Civitas Resources, Inc's, (BB-/Stable) pro its consolidation of Bonanza Creek, Extraction and Crestone's operations of 159Mbopepd in 2021. Crescent has accumulated its production in a manner that is more agnostic to specific basins and has placed more priority on value. As a result it does not have the same position concentration benefits of peers that typically focus in one or two basins.

Crescent has a history of low leverage, which pro forma the Uinta Basin transaction, the company expects to increase to approximately 1.4x with Fitch forecasting leverage to then decrease to around 1x by year-end 2022. Strong commodity prices and a general deleveraging trend for 'B' category rated peers that may have historically had higher leverage levels than Crescent have made year-end leverage forecasts comparable. Matador, SM and Earthstone are forecast to end the year around 1x, with Callon around 1.5x and 'BB-' rated Civitas leverage around 0.5x.

In 2021 Crescent generated an unhedged cash netback of $22.5/boe. This falls materially below the peer group of Matador, SM, and Callon, which generated netbacks of $38.9/boe, $35.5/boe and $30.7/boe respectively. This 'B' category peer group are more Permian focused and oil weighted than Crescent, which generally provides a strong netback profile. Against higher rated multi-basin peer Ovintiv (BBB-/Stable), which has a lower netback compared to its own peer group but has a similar liquids cut (51%) and slightly lower oil cut (26%) to Crescent, Crescent's netback is more in line with its $21.1/boe.

Key Assumptions

WTI (USD/bbl) of $95 in 2022, $76 in 2023, $57 in 2024 and $50 in 2025 and longer-term;

Henry Hub natural gas (USD/mcf) of $4.25 in 2021, $3.25 in 2023, $2.75 in 2024, $2.50 in 2024 and longer-term;

NGL realizations as a percentage of WTI moderate from 2021 realized percentage during the forecast period;

Dividend policy of 10% EBITDAX in effect through forecast;

No equity buybacks of offerings during forecast;

Capital allocation to Rockies and Eagle Ford results in increasing portion of production mix during the forecast period.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Improvement in netbacks towards median peer levels;

Profitability reflected by visibility on through the cycle FFO in excess of $900 million;

Material trend of decrease in non-operated position as percentage of total production;

Reduced reliance on revolver while maintaining financial flexibility;

Mid-cycle total debt /EBITDA sustained below 1.5x.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Sustained revolver utilization over 65% or a material deviation from stated conservative financial policies;

A shift to negative FCF;

Mid-cycle total debt /EBITDA sustained over 2.0x;

Evidence KKR is utilizing its voting position to influence governance in a credit unfriendly manner.

Best/Worst Case Rating Scenario

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

Liquidity and Debt Structure

High Revolver Reliance: YE 2021 Crescent had $543 million outstanding on the revolving facility and $20.7 million letters of credit. Pro forma the $200 million of additional senior unsecured 7.25% notes issued in 1Q22, which were applied to reduce RBL drawn and the $690 million cash paid to close the Uinta transaction, Crescent's outstanding RBL draw increased to $1.035 billion. With a $1.3 billion revolving facility commitment, Crescent has approximately $265 million remaining in available draw. Further supporting liquidity is available cash of $129 million at year end 2021 and strong FCF expectations in 2022.

On April 8, 2022 Crescent filled a S-1 for a potential $75 million equity issuance. If this issuance occurs, proceeds are to be utilized to reduce RBL draw.

Crescent has no near-term refinancing risk as its RBL matures in 2025 and its $700 million senior unsecured notes mature in 2026.

KEY RECOVERY RATING ASSUMPTIONS

The recovery analysis assumes that Crescent would be reorganized as a going concern (GC) in bankruptcy rather than liquidated.

We have assumed a 10% administrative claim and a 90% draw on the RBL facility reflecting the high revolver utilization rate proforma the Uinta basin acquisition closed on March 30, 2022.

Going-Concern (GC) Approach

Crescent's GC EBITDA estimate reflects Fitch's view of a sustainable, post-reorganization EBITDA level upon which we base the enterprise valuation.

Crescent's bankruptcy scenario considers a weakened oil and gas environment, resulting in reduced operational and financial flexibility, which is in line with Fitch's stress case assumptions. Fitch believes the lower price environment pressures liquidity and consequently results in a lower capital program to maintain production and manage negative FCF.

The GC EBITDA assumption reflects the stress case EBITDA in the latter years of the forecast, when commodity prices start to move towards mid-cycle conditions. Fitch stress case price deck includes WTI of $32 in 2024, $42 in 2025 and $45 longer-term;

An EV multiple of 3.5x EBITDA is applied to the GC EBITDA to calculate a post-reorganization enterprise value. The choice of this multiple considered the following factors:

The historical bankruptcy case study exit multiples for peer companies ranged from 2.8x-7.0x, with an average of 5.2x and a median of 5.4x;

The multiple is in line with 'B' category rated comps Earthstone Energy, Callon Petroleum, Ranger Resources and Matador Petroleum and slightly above SM Resources (3.25x) and Great Western Resources (3x).

Liquidation Approach

The liquidation estimate reflects Fitch's view of the value of balance sheet assets that can be realized in a sale or liquidation processes conducted during a bankruptcy or insolvency proceeding and distributed to creditors.

In assigning the value for Crescent's assets, Fitch considered Crescent's PV10 value adjusted for a lower-price environment and a blend of comparable M&A multiples by basin reflecting Crescent's footprint for production per flowing barrel, value per acre and value per drilling location within Crescent's asset base. In the Uinta basin where there is little recent M&A outside of Crescent's acquisition, Crescent acquisition was used adjusted for a weaker price environment.

The RBL assumption is to be 90% drawn. Although the current draw pro forma the Uinta transaction is approximately 80%, in the short term Crescent will likely seek financing to reduce it. The company has prepared for a $75 million equity offering with proceeds used to repay revolver debt in conjunction with FCF visibility to reduce revolver drawings.

Under the waterfall allocation, the First Lien RBL, 90% drawn, has an 'RR1' Recovery Rating and is notched up three levels to 'BB+' from the IDR. Crescent's senior unsecured notes have an 'RR3' Recovery Rating and are notched up one level from the IDR.

Issuer Profile

Crescent is a public (NYSE: CRGY) E&P company with midpoint 2022 production guidance of 141Mboepd (about 58% liquids). Approximately two-thirds of its expected 2022 production is within the DJ Basin, Uinta Basin and Eagle Ford trend. The remainder of its production consists of smaller U.S. onshore positions.

Date of Relevant Committee

13 April 2022

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Crescent has an ESG Relevance Score of '4' for Governance Structure as KKR affiliates own all of Crescent's non-economic preferred share class. These shares have enhanced voting rights that provide KKR the ability to appoint the entire board of directors at their discretion. This has a negative impact on the credit profile and is relevant to the rating in conjunction with other factors.

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

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