CRESCENT ENERGY COMPANY
Fitch Ratings has affirmed
In addition, Fitch has affirmed Crescent's senior secured Reserve Based Loan (RBL) at 'BB+'/'RR1' and existing seniors unsecured bonds as 'BB-'/'RR3', and has assigned a 'BB-'/'RR3' rating to
Crescent's ratings reflect its multi-basin operational scale, history and forecast leverage between 1x- 1.5x, improved liquidity profile, conservative hedging program and relatively low decline rate. The ratings also reflect the company's below average half cycle netbacks and material portion of operations where Crescent is not the operator.
Key Rating Drivers
Reduced Revolver Reliance: The application of net proceeds from Crescent's planned
Liquidity could remain a concern if the revolving facility is relied on for future operational uses or M&A, but a favorable maturity schedule, with its next maturity in 2026, supported by Fitch's FCF forecast of over
Consistent Leverage Discipline: Crescent has publicly articulated its strategy targeting leverage of 1.0x with a maximum of 1.5x. Fitch forecasts the company to be within this band through its forecast period. Crescent has historically maintained low leverage with an approximately company calculated 1.2x average dating back to 2013 under its predecessor company.
Positions in Multiple Basins: Crescent's asset base is diverse given its production size. It reflects a history of targeting risk-adjusted returns with less focus on specific core basins, most recently reflected in its 1Q22 Uinta basin acquisition at under 2x estimated 2022 adjusted EBITDA. Crescent's Rockies position, which consists of its Uinta and
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, these wells 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 is a larger part of their production base than typical 'B' rating category issuers, but likely to decline over time as capital is allocated to operated positions.
Active M&A Program: Since 2017, Crescent and its predecessor company have completed 25 separate acquisitions, and most recently during 4Q22, divested a small non-core Permian position. Crescent's acquisition strategy has been more agnostic to specific plays and more value opportunity focused than typical. This level of M&A presents heightened execution risk, although Crescent has been successful in integrating acquisitions efficiently to date.
Extensive Hedge Program: Crescent hedged approximately 60% of its 2022 oil and gas production, 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 60% of 2023 natural gas and over 40% of oil at Fitch forecast levels. 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 prior to capital spending, in contrast to a more typical E&P variable distribution structures that relate to FCF.
KKR Relationship:
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.
Derivation Summary
Crescent reported an average production of 150mboepd in 3Q22, making Crescent one of the largest by production in the 'B' rating category. This is ahead of higher rated operators
Crescent's production has been accumulated in a more agnostic manner to specific basins, and has placed more priority on value. As a result, the company has a less concentrated asset base compared to peers that typically focus on one or two basins.
Crescent has a history of low leverage. Fitch believes this will continue, with leverage of approximately 1x, before modestly increasing in 2025 when Fitch's base price deck uses
In 3Q22, Crescent generated an unhedged cash netback of
Key Assumptions
WTI (USD/bbl) of
NGL realizations as a percentage of WTI moderate as a realized percentage of WTI 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
Bolt on M&A transaction funded through equity and cash assumed in 2024.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Improvement in netbacks towards median peer levels;
Material trend of decrease in non-operated position as percentage of total production;
Maintain a reduced reliance on revolver and 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 '
Liquidity and Debt Structure
Reduced Revolver Reliance: At 3Q22, pro forma the closing of Crescent's planned five-year
Crescent has positioned a favorable maturity schedule with no near-term refinancing risk. Crescent has
KEY RECOVERY RATING ASSUMPTIONS
The recovery analysis assumes that Crescent would be reorganized as a going concern (GC) in bankruptcy rather than liquidated.
Fitch has assumed a 10% administrative claim and an 80% draw on the RBL facility. The previous RBL facility draw assumption was 90% and reflected the previously higher revolver utilization of 80% leaving less room for additional draw before a potential borrowing base redetermination.
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
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
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.
Under the waterfall allocation, the First Lien RBL has an 'RR1' Recovery Rating and is notched up three levels to 'BB+' from the IDR. Crescent's senior unsecured notes, including the planned
Issuer Profile
Crescent is a public (NYSE: CRGY) E&P company with 3Q22 production of 150Mboepd (59% liquids). Approximately 2/3rds Crescents production is within the
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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