I analyze oil and gas companies like Crescent Energy and related companies in my service, Oil & Gas Value Research, where I look for undervalued names in the oil and gas space. The investor is warned about this guidance by the word "initial". Additional disclosure: Disclaimer: I am not an investment advisor, and this article is not meant to be a recommendation of the purchase or sale of stock. The acquisition provided significant exposure to the premium condensate market that exists in Canada. The way that management gets deals is because they occupy a niche where sellers far outnumber demand for the "product". This is a very conservative management that ran into an unfortunate future occurrence that no one saw coming. Get analysis on under followed Oil & Gas companies with an edge. If you have an ad-blocker enabled you may be blocked from proceeding. I/we have a beneficial long position in the shares of CRGY either through stock ownership, options, or other derivatives. I have no business relationship with any company whose stock is mentioned in this article. Accounts receivable soaked up a fair amount of cash flow because sales prices climbed in the first quarter. That few years though has lowered costs considerably to make previously uneconomical acreage economic while moving other acreage into Tier 1 territory. with an emphasis in Accounting and an MBA (for which I studied Finance, Economics, and Management) I passed the CPA exam on the first try and am a retired CPA in the state of Maryland. That is good news for an industry that has managed to surmount several challenging downturns. Newer production tends to be a lot more profitable than older production. Management is running the company in a very conservative fashion. In summary, this company will grow by opportunistic acquisitions combined with some organic growth and a lot of operational optimizations of acquired properties. So many do not realize that the market determines profitability of cyclical companies by their performance throughout the business cycle. These assets represent the majority of the old EP Energy (OTCPK:EPEG) company. In the meantime, management is able to spend the generous cash flow to optimize acquired operations while drilling new production to increase the performance of the properties acquired. Such an event would be corrected with an impairment charge at the industry cyclical bottom. Disclosure: I/we have a beneficial long position in the shares of CPG either through stock ownership, options, or other derivatives. Disclosure: I/we have a beneficial long position in the shares of REI either through stock ownership, options, or other derivatives. This new company combines. The good news for shareholders is that the market will notice the unexpected debt progress sooner rather than later. I am a high school teacher for a decade. Interested? Further indications of future outperformance come from the emphasis of cash flow at much lower commodity prices and a focus on the debt ratio at those lower prices. The company is likely to grow quickly. That did not happen in the Eagle Ford where the oil was generally sold at a premium to the corresponding benchmark. Therefore, the logistics challenges of growing fast can be very formidable. A large acquisition like this could take some years because of the size. This management team has accomplished a lot in the time it has been in control of the company. I have no business relationship with any company whose stock is mentioned in this article. That happens to be just fine with this group because they are not shy about naming a bargain price. Investors have a chance to participate right alongside some very experienced "big boys" in the deal making world. Sign up here for a free two-week trial. The outlook at Ring Energy is very good for the first time in a few years. This increases the chances of financial outperformance during the next industry downturn. Right now, it looks like that may happen again. That also means as a public shareholder you do not get to elect the directors (and hence really have no say in the company operations). I break down everything you need to know about these companies -- the balance sheet, competitive position and development prospects. But the real test of many of these acquisitions will be the performance of the assets during the next industry downturn. Since really no one in the industry saw the currently strong pricing on the horizon at the time they made the hedge, many in the industry are now selling production at the hedge price with limited exposure. I have no business relationship with any company whose stock is mentioned in this article. The decline in hedging will lead to cash flow growth. Therefore, the amount of receivables from customers also rose along with the prices. This is a company that probably needs a year of the current prices to really get itself back on track. The big deal is the advantage of entering a market without a lot of competition. The beauty of operating here is that "everyone" wants to be in the Permian to the point that the Permian had bottlenecks that led to significant pricing discounts in the last business cycle. Furthermore, a selling price environment like the current one provides a fairly quick (if unexpected) payback of the sizable costs needed to begin secondary recovery in the first place. The second quarter pricing for all oil and gas companies, including Ring Energy (NYSE:REI), was even better than the first quarter. That adjustment represents an opportunity cost in that the hedges represent the cost of forward selling the production for the price listed in the hedge. The only thing that can happen is too many profits were stated during the boom times. This new company combines two parties with impressive track records of investment gains in a rare public vehicle. Now let us see what the future holds. The low debt allows management to shut-in any unprofitable production while waiting for the next pricing recovery. That appears to be the case with this acquisition. Management has purchased a lot of older production that will be more expensive to operate. The last deal involving the Unita Basin acquisition is looking very good because prices have risen considerably above the assumptions used for the acquisition. Before that I was an analyst (operations and financial) and for a short time a Controller I have a B.S. Please disable your ad-blocker and refresh. I wrote this article myself, and it expresses my own opinions. (Note: This article appeared in the newsletter on May 10, 2022, and has been updated as needed with current information.). They then scramble to reduce costs a lot more during the next cyclical downturn. Interested? I am not receiving compensation for it (other than from Seeking Alpha). That can be a lot riskier because management does not hedge unless they think they need to. This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. To ensure this doesnt happen in the future, please enable Javascript and cookies in your browser. Cost reductions and an emphasis on cash flow at lower selling price levels signal an outperformance during the next downturn. So that will have priority. Disclosure: I/we have a beneficial long position in the shares of CRGY either through stock ownership, options, or other derivatives. Losses are far worse when the discount often expands during a cyclical downturn to produce an overall lower level of profitability than is the case with light oil. As those results become apparent, Mr. Market may look at the company in a far more positive light than has been the case in the past. For those where this type of investment is their "cup of tea", then it's time to consider getting in and fastening their seatbelts for a very exciting ride. That often means switching strategies. In the meantime, management will use the latest techniques and future technology improvements to continue to lower costs. There is additional cost reduction progress in the form of continuing technology advances throughout the industry. Most likely, the asset story of the value of the leases is back in operating order in the current environment. The properties to be sold have some older production that is likely more expensive to produce than the company average. Management has an advantage in the form of some competitive secondary recovery prospects that have very low production decline profiles to lower the company average production decline each year. What is left out of the discussion is that there needs to be enough production at that wonderful netback to enable a decent return on investment and return on capital. Management sees a lot of potential bargains in the market. Crescent Energy Company (NYSE:CRGY) has made several accretive acquisitions. The company also in effect "went public" through that acquisition. Every single company in the industry will benefit from rising commodity prices. ), was even better than the first quarter. The current environment should allow for a very fast return of the purchase price. (Note: This article was in the newsletter May 19, 2022, and has been updated as appropriate). Also, as the company becomes larger, each acquisition will become less material to the company so that recurring operations begin to dominate results. That is an unusual strategy that may not be properly valued by the market. Get analysis on under followed Oil & Gas companies with an edge. Please disable your ad-blocker and refresh. ) I am not receiving compensation for it (other than from Seeking Alpha). Investors are advised to review all company documents and press releases to see if the company fits their own investment qualifications. Occassionally write articles for Rida Morwa''s High Dividend Opportunities https://seekingalpha.com/author/rida-morwa/research, Occassionally write articles on Tag Oil for the Panick High Yield Report, https://seekingalpha.com/account/research/subscribe?slug=richard-lejeune. Now it always takes a few years for new techniques and technological advance to predominate. The problem with a lot of companies that filed was the market often focused on the production decline rate as well as the lack of cash flow in the history. Mr. Market clearly has some doubts about all of this as seen in the post-merger price. This was probably to be expected as the company grew and was able to acquire larger deals. Therefore, the reduction in cash flow may not be quite as significant as some investors expect. I am not receiving compensation for it (other than from Seeking Alpha). The near term was updated with the second quarter report. The dividend does have priority. I am not receiving compensation for it (other than from Seeking Alpha). The management does have a decent history in the oil and gas business. They are not the only ones either, as a lot of development stage and companies converting to operating stage were caught in the consequences of fiscal year 2020 challenges. But now Mr. Market demands proof of the ability to pay investors while growing the business profitably. The industry has largely moved past that several years back. To ensure this doesnt happen in the future, please enable Javascript and cookies in your browser. Right now, though, I like the chances of management to succeed with this acquisition. Crescent Energy Financial Conservatism Description (Crescent Energy Fourth Quarter 2021, Earnings Slide Presentation). Management has kept the focus on extra cash flow at considerably lower prices. That is combined with the risk of fast growth. Before that I was an analyst (operations and financial) and for a short time a Controller I have a B.S. This means that there is less maintenance capital needed to maintain production than is the case with competitors that are strictly unconventional. In the current environment, the banks may allow a second rig, as was originally planned, to operate. Two years would be even better. I analyze oil and gas companies like Crescent Point Energy and related companies in my service, Oil & Gas Value Research, where I look for undervalued names in the oil and gas space. Management increased the second quarter dividend. Now conditions are allowing a gradual return to the original plan. I wrote this article myself, and it expresses my own opinions. Additional disclosure: Disclaimer: I am not an investment advisor, and this article is not meant to be a recommendation of the purchase or sale of stock. So, when this company sells itself, investors will have a good idea that a market top is somewhere in the neighborhood time period. I break down everything you need to know about these companies -- the balance sheet, competitive position and development prospects. Crescent Energy Production Growth Strategy In Eagle Ford And Uinta (Crescent Energy First Quarter 2022, Earnings Conference Call Slides). As long as prices do not head back in the $40 range for oil, this company should recover nicely enough to be able to put the challenges of the past few years aside. That means that initial profits from this acquisition should run above budget as long as commodity prices remain stronger than the assumptions used for the acquisition. Please. It could easily be replaced by operating a second rig for a little while without using all the sales proceeds. This management has done a lot for the company over the last few years. Is this happening to you frequently? This usually continues until the older wells no longer generate cash flow. This article is an example of what I do. That means any investor has to have a fair amount of faith in the ability of this management to do a decent job. Crescent Point Energy Second Quarter 2022, Change In Adjusted Funds Flow (Crescent Point Energy Second Quarter 2022, Management Discussion And Analysis). That consideration alone may allow the company at some point to entertain more debt to get that production to the minimum optimal amount that is cost-effective. Is this happening to you frequently? There are always risks to growth by acquisitions in that the acquisitions fail to meet desired goals or management pays too much for the acquisition. What would remain unaffected is the early payback of expensive secondary recovery project costs. The continuing cash flow is likely to result in more returns to shareholders through higher dividends and share repurchases. The result is a very valuable company going forward with a stock price that is likely to match. In fact, at some point, the company could be acquired now that it is in far better shape than was the case a few years back. with an emphasis in Accounting and an MBA (for which I studied Finance, Economics, and Management) I passed the CPA exam on the first try and am a retired CPA in the state of Maryland. Crescent Energy Explanation Of Management Choice Of Acquisition Strategy (Crescent Energy Fourth Quarter 2021, Earnings Conference Call Slides). It is, therefore, very easy to justify drilling wells while keeping an eye out for any hint of pricing weakness. Probably the largest progress by far is the growth in cash flow before the changes in operating assets and liabilities. This management has been digging the company from a debt hole for some years. But Mr. Market will still want to see that outperformance during an industry downturn. Smaller brethren can often add a rig or sometimes half a rig and show tremendous growth from a smaller established production base. Kaybob Duvernay Acquisition Benefits (Crescent Point Energy Second Quarter 2022, Earnings Conference Call Slides). That will leave management a lot of options to grow this company for the benefit of shareholders. To ensure this doesnt happen in the future, please enable Javascript and cookies in your browser. I am not receiving compensation for it (other than from Seeking Alpha). That means this acquisition will payback faster than expected. I am a high school teacher for a decade. Most wells drilled in the current environment pay back within months. I wrote this article myself, and it expresses my own opinions. Those opportunities may be somewhat offset as older production ages. Therefore, management was able to acquire properties for some extremely low prices. So, they have a whole lot of incentive to raise the price of the common stock a lot. Investors should be expecting steady revisions throughout the fiscal year as opportunistic acquisitions are made (and maybe an occasional sale). This article is an example of what I do. All management has to do is fix up the properties acquired and report that they meet budgeted goals. Management has some drilling opportunities to go with the original older production purchases. Crescent's Uinta acquisition is looking more profitable than originally projected by management. That points to a far above average management. I wrote this article myself, and it expresses my own opinions. Therefore, the market is likely to look favorably upon continuing profit improvements as the cycle progresses. As growth proceeds and cash flow meets management's objectives, there should be a relaxation of the lender attitude towards debt repayments. That makes the change in cash flow real important. That is not an option for this company. with impressive track records of investment gains in a rare public vehicle. Occassionally write articles for Rida Morwa''s High Dividend Opportunities https://seekingalpha.com/author/rida-morwa/research, Occassionally write articles on Tag Oil for the Panick High Yield Report, https://seekingalpha.com/account/research/subscribe?slug=richard-lejeune. Please. But the oil price drop in 2015 followed by the 2019 decline (then came the OPEC Pricing War and the coronavirus demand destruction) has thoroughly disillusioned this crowd. Current prices have the debt ratios well within allowable territory. Hence, this is an unusually profitable opportunity to take advantage of while it lasts. But for Oil & Gas Value Research members, they get it first, and they get analysis on some companies that is not published on the free site. Both of those have changed considerably in the last few years. That should happen without any extraordinary actions of management. I analyze oil and gas companies like Ring Energy and related companies in my service, Oil & Gas Value Research, where I look for undervalued names in the oil and gas space. The first thing to notice is that the company is organized to delay the tax consequences of potential sellers. Management is free to issue as much of these securities as is necessary because all of the voting power is with the preferred shareholders. The company has projects on both sides of the border to minimize any adverse effects of currency exchange swings. I am a high school teacher for a decade. Occassionally write articles for Rida Morwa''s High Dividend Opportunities https://seekingalpha.com/author/rida-morwa/research, Occassionally write articles on Tag Oil for the Panick High Yield Report, https://seekingalpha.com/account/research/subscribe?slug=richard-lejeune. (Crescent Energy First Quarter 2022, Earnings Conference Call Slides), (Crescent Energy Press Release February 2022.). I break down everything you need to know about these companies -- the balance sheet, competitive position and development prospects. This is a Canadian company listed on the NYSE and the TSX that reports in Canadian dollars unless otherwise noted.). This managing is changing to an opportunistic hedging. The stock price will respond to steady progress. That outperformance is likely to continue well into the future. The guidance above refers to the company "as is". made. But the ability to generate some very good cash flow should remain. I wrote this article myself, and it expresses my own opinions. But management is not going "all the way" to opportunistic hedging. This has been going on for as long as I can remember and it appears to be continuing for the foreseeable future. Investors can bet that this management will be watching positive cash flow very closely. In the meantime, high commodity prices will provide the necessary cash flow to optimize this acquisition faster than was expected to be the case. I am not receiving compensation for it (other than from Seeking Alpha). I personally think the Eagle Ford may yet come out on top at the top of the business cycle one more time. I wrote this article myself, and it expresses my own opinions. In this case, management appears to be in a very good position because that older production was purchased either in bankruptcy court or during a time of considerably lower prices. That means this company goes into the next cyclical downturn with the initial secondary costs paid back (regardless of what the accounting reports). If you have an ad-blocker enabled you may be blocked from proceeding. Time will tell how much the market values this management style. Production growth will allow for a far superior cash flow stream, even if commodity prices drop significantly from current levels. I have a high school teaching credential and an MA in Math Education. Management has wisely pursued growth as well as debt repayment. The good news is the current prices also allow for that full time rig as well. Therefore, they are very likely to benefit the common investors.
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