Like any other notable industrial “trend” or activity, “all the players” tend to move in the same direction. But shareholders pay management to find a deal or an inexpensive way that the general public can’t find. Crescent of energy (NYSE:CRGY) is a major consolidator that doesn’t follow the crowd. This direction rather seeks sellers in areas where there is a lack of buyers. Shareholders can therefore expect that this direction will not be taken in a bidding competition, because there are always better offers that do not attract attention. While many companies I follow acquire permits in the Permian, this company’s management will only do so if the deal is comparable to those management makes elsewhere. This won’t happen often.
This management has long built an attractive position within Eagle Ford. The only other company I’m following long term is Baytex Energy (BTE) and Silverbow (SBOW). The advantage of consolidating into Eagle Ford is that few names are there. Purchase prices will therefore be much more reasonable than in the Permian (where everyone “knows” what the best surface area is).
Management is in no rush to acquire more properties. The result is that management made accretive acquisitions and then extended the benefits of those acquisitions by making operations more efficient. Continued advances in technology will likely increase this efficiency for some time to come.
Eagle Ford’s operations generally ended up outperforming Permian operators in the past (when talking about acquisitions) because Permian often had delivery capacity and other strained resources (like service companies and issues water).
The Eagle Ford is on the rainy side of Texas and therefore has access to more water while the Permian is located in a largely arid area. Therefore, water recycling is a high priority in the Permian, as work completion can be delayed due to a lack of water.
The problem of takeout constraints has long led to price reductions and sharp increases in trucking. None of this was mentioned during the acquisitions in the two basins. In contrast, Eagle Ford production often enjoys a premium over the reference price.
Operational improvements are evident on both the cost and production side. This constitutes a two-pronged strategy to reduce costs in the long term.
Management can drill cheaper wells immediately, as discussed above. This does not automatically reduce the cost of acquired production. But that gives any new well a big cost advantage, even as production ages. Therefore, as new production replaces acquired production, average production costs should decrease over time. At the very least, the savings noted above should offset general inflation as well as the inflation costs of service businesses.
The second way to reduce costs per barrel is to improve well performance. In this case, management not only reduces drilling and completion costs, but also recovers more salable product in the process.
This part of technology continues to advance. There is therefore every chance that management will report continued improvements in this area for some time to come. There is always a risk that technology will stop progressing “tomorrow”. But so far, no one in the industry is betting on anything close to that outcome.
It is also worth noting that many managements are also considering using carbon dioxide in a secondary recovery process in order to recover more oil when the time comes. There may also be tax credits, as this will likely be considered permanent storage of carbon dioxide in the ground, as part of the continued “green revolution” to reduce carbon dioxide pollution .
It’s been a very long time since this company was a public company. Therefore, the debt ratings obtained so far are quite good considering the lack of history as a public company as well as the rapid growth in acquisitions.
This company often looks for “unnatural sellers.” This is different from acquisitions made by companies that specialize in energy and therefore know the sector well and keep up to date with the latest practices until they sell the company.
This company will pursue bankrupt properties and banks (for example) that are left with foreclosed properties in an attempt to avoid “head-on” competition for properties and bidding wars. Around 2020, this was a great strategy because there were no buyers (and even fewer buyers for specialized situations). This still seems like a decent strategy, although it would appear that many sellers have lowered their expectations in hopes of getting rid of their long-held inventory.
As noted above, management has a rating just below investment grade. There is a wide open banking line which further facilitates flexibility when searching for deals. Management has also started selling bonds in the debt market to further improve liquidity.
Management will carry out land exchanges to create contiguous farms whose development is much more profitable than is the case with dispersed areas. All of this, coupled with KKR’s reputation for managing leveraged situations, gives the firm a major advantage when seeking some of the largest deals in these “off-prime runway” locations that are still very profitable.
The major shareholders of this company are known for creating and selling companies. But they only sell when they can get their price. Therefore, the timing of selling a business is uncertain to say the least. These shareholders rarely sell their shares and the company remains public.
The Company has access to KKR’s resources for the duration that KKR manages this Company. These resources are considerable for a company of this size. KKR has a significant stake in the company.
The other thing is that the company is structured so that the selling owners can avoid paying taxes on any sales to that company as it acquires properties. This means that the shares will rise from time to time in the public arena, as management shows in the latest presentation. Management periodically repurchases shares as blocks of stock become public to support the stock price as shares become public from the private setup.
This company has gotten great prices on the properties it operates simply by avoiding “hot spots.” Shareholders can continue to expect these bargain hunters to find great acquisitions where everyone is looking. This is actually what shareholders pay managers to do, but many managers don’t do it.
There is always the risk that a transaction will be accompanied by unexpected difficulties and therefore fail to meet expectations. But this management is very experienced in the industry. This experience should significantly reduce the risk.
The other consideration is that this is not a typical KKR venture as leverage is low and it is advisable to reduce it. Many companies that tried leverage got badly “burned” during the 2015-2020 period, as the boom period came to an end.
Today, the emphasis is on technological advances with the “gamble” of making these advances do what financial leverage once did. Combine this idea with the idea of finding bargains mentioned above and major shareholders expect to do as well as they would with leverage. Time will tell how well this idea works and there is no guarantee of success.
But the idea remains a strong buy with the idea that major shareholders know what they’re doing and will execute accordingly. Rarely do investors have the opportunity to invest alongside major shareholders of this quality. While the timing of the assessment is uncertain. Usually, investors of this nature get involved when they can triple their money over five years to compensate for the risk they are taking. The future looks promising even if the timetable is uncertain.