Ladies and gentlemen, good morning, and welcome to the Crescent Energy Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Emily Newport, SVP of Finance and IR. Please go ahead.

Good morning, and thank you for joining Crescent's Third Quarter Conference call. Our prepared remarks today will come from our CEO, David Rockecharlie; and CFO, Brandi Kendall. Our Chief Accounting Officer, Todd Falk; and our Executive Vice President of Investments, Clay Rynd, will also be available during the Q&A session. Today's call may contain projections and other forward-looking statements within the meaning of federal securities laws. These statements are subject to risks and uncertainties, including commodity price volatility, global geopolitical conflicts, our business strategies and other factors that may cause actual results to differ from those expressed or implied in these statements and our other disclosures. We have no obligation to update any forward-looking statements after today's call. In addition, today's discussion may include disclosure regarding non-GAAP financial measures. For a reconciliation of historical non-GAAP financial measures to the most directly comparable GAAP measure, please reference our 10-Q and earnings press release, which are available on our website. With that, I will turn it over to our CEO, David.

Good morning, and thank you for joining us to discuss our third quarter results. Our message is simple and direct today. This was a record quarter for the business, both operationally and financially. We are doing what we said we would do, generating strong free cash flow; investing capital with discipline and great returns; delivering exceptional operating performance, including meaningful capital efficiencies and reductions in emissions with a focus on continuous improvement of our operations, including stewardship of the environment and the communities in which we operate. We're growing through accretive, opportunistic acquisitions, including the successful integration of $850 million of total transactions this year in our core Eagle Ford operating area. We're maintaining our strong balance sheet and growing capital markets presence as we continue to scale the business significantly. And we're consistently returning capital to our investors. This quarter's record results solidify that we have the right strategy, the right assets and the right execution in today's market environment to create significant, long-term value for our shareholders. Today, I plan to cover 3 key items in more detail. First, our operational performance; second, our compelling acquisitions; and third, our sustainability success. First, let's discuss operations where the business is outperforming. We've realized substantial efficiencies on the drilling and completion side as improving cycle times and completion speeds have improved well costs by 10%. You will recall that we came into the year with a focus on flexibility, and this has worked strongly in our favor. As a reminder, we reduced our full year capital guidance last quarter and with continued solid execution not only are we able to deliver our original capital program at lower cost, but also our meaningful outperformance this year in drilling and completions has had a multiplier effect. We've been able to do more…

As David mentioned, we achieved record production and cash flow this quarter, averaging 157 MBoe per day, generating $290 million of adjusted EBITDA and $160 million in levered free cash flow. Importantly, this quarter's results were only inclusive of the impact of the first of our 2 Western Eagle Ford acquisition, the latter of which will be reflected in the fourth quarter. On capital, we spent $94 million, which will be our lightest quarter of the year due to the timing of wells turned to sales. During the quarter, we brought online 10 gross operated wells in the Eagle Ford, which are posting strong early time results and are expected to generate in excess of 2x our capital invested at current commodity prices. In Q4, we expect both production and capital to increase bringing our full year results near the midpoint of our capital guidance range despite the increase in activity for the year. While we are still finalizing our outlook for 2024, as David mentioned, the capital efficiencies we've achieved to date sets us up well as we expect preliminary production of 155 to 160 MBoe per day and consistent capital spend to this year, which equates to a 2- to 3-rig program. Maintaining capital spend at today's levels despite a 20% increase in year-over-year production highlights that our business requires less reinvestment to maintain our current output, which is a testament to our capital efficiencies we've realized to date and the quality of our asset base. At these levels, we expect to generate substantial free cash flow for the remainder of 2023 into 2024 and beyond. As highlighted on Pages 15 and 16 of our investor presentation, Crescent's peer-leading decline rates and capital efficiency results in significant free cash flow generation and a compelling valuation based on cash…

Thank you, Brandi. There are 3 things we hope you take away from today's call. First, our third quarter performance was exceptional. Record production, record cash flow. We are demonstrating operational efficiencies that will make us stronger and more profitable in 2024 and beyond. Second, we have proven our ability to grow accretively. We have captured high-value transactions and financed them in a fashion that maintains a strong balance sheet, highlighted by long-term capital, strong liquidity and credit metrics, rating agency upgrades and inclusion in the BB bond index. We created scale doubling our business in less than 3 years and are well equipped to continue to do so. And lastly, we have a simple value proposition. We believe Crescent is the best risk-adjusted stock to own for long-term exposure to oil and gas prices. We have a lot of ambition and a lot of work ahead, but we are pleased with what we have accomplished to date, and we intend to continue to do exactly what we say we're going to do. With that, I'll open it up for Q&A. Operator?

[Operator Instructions]. Our first question is from Michael Scialla with Stephens Inc.

It sounds like you have a lot of visibility on free cash flow over the next few years. As you look at 2024, say, absent any additional M&A, is it fair to think that the vast majority of that goes to the balance sheet and then beyond '24, you can think about returning more cash to shareholders? Or are you thinking about it differently?

Thanks for the question. It's David. I would say, number one, thanks for raising it, we're all about generating free cash flow. That's the investment proposition for the business. As you probably heard us say, our #1 capital allocation priority is return of capital to investors. And as you said, that to us means taking care of the balance sheet, so certainly debt reduction and also paying a cash dividend. We're sticking with the capital framework we have today. So yes, I guide you to sort of more of the same just sticking with the same strategy and the free cash flow certainly take care of the debt, but we are committed to making sure we maintain a dividend strategy that's appropriate for the market and the investors.

Okay. And then pretty impressive reduction in your Eagle Ford well costs, immediate 20% reduction there. Is there any color you can add? I know you have a slide in your deck talking about some of the improved efficiencies. Was any of that contractual? Or any major changes in well designs you made there?

Yes. Actually, the good news is that's pretty straightforward. We've been active in the Eagle Ford for a long time. We think we're good at what we do. And this is a great example of taking over an asset we know well and just continuing to execute the way we were on our own assets. So we've seen improvement in our business this year, and we were able to apply those improvements further to this acquisition. So I think operating really well, nothing specific other than just great execution. But also a really good example of what we're trying to do with the M&A strategy, which is get a great acquisition and value and then enhance that value by doing what we know how to do well. So nothing unusual there other than just doing a good job frankly.

Our next question is from Neal Dingmann with Truist Securities.

Nice quarter, as you said, David. My first question is on your reinvestment rating. What I want to ask is, it seems to me that your solid reinvestment rate often gets overlooked as it's driven by that low base decline and the efficiencies you'll talk about. I'm just wondering, David, could you talk about sort of maybe your future expected reinvestment rate and how this will ultimately drive the production, free cash flow and shareholder return.

Yes. I'll start and then if Brandi wants to add to it that would be great too, but really good question. I would say that generating free cash flow, maintaining a low reinvestment rate relative to peers is just core to what we do. We've done it for 10 years. We've historically been in about 40% of EBITDA reinvestment rate. It ticked a little higher recently, mostly with the, what I would call, the price run-up over the last couple of years, and it gets masked by our hedge program. As those hedges are rolling off, one, I think more cash flow for investors. But secondly, it puts the reinvestment rate more in context. So we've still maintained a 40% to 50% reinvestment rate typically. But I would expect in a levelized world, we're going to outperform peers on that just by the nature of our strategy and commitment to it. I think thinking about us at a 40% to 50% range is reasonable.

Brandi, [indiscernible] the question we dealt.

Yes. No, I think David answered it well. I mean that 20% decline rate that we have is purely [indiscernible] that translates to really a capital efficient business. It's just much less intense relative to the broader market. I know we've talked about before, Neal, we're running a 2- to 3-rig maintenance program and that's relative to roughly 155, 160 a day go-forward basis, which I think is pretty unique relative to the broader market.

Yes, I would agree. And then just a quick second one on capital -- maybe another shot at capital allocation. David, while I appreciate that debt, quarterly dividend focus and the leverage on debt and the quarterly dividend, I guess my question is, do you think it makes any sense to try to buy back any shares given the sort of notably low valuation despite the limited float on the shares.

Yes, good question. Happy to drill down a little more there. The fundamental response, and I'll let Brandi give you some more detail, is we absolutely do consider, what I would call, share buybacks as part of a solid return of capital program. As you know, we've still got an Up-C structure with Class B shares. And so that's a place where we've historically done that. But I definitely would highlight that we do think of dividends taking care of the balance sheet, debt reduction and opportunistic buyback is something that is part of a well-rounded program. But Brandi, you may want to just address the buyback a little more directly.

Yes. And Neal, I mean we've been consistent with how we've talked about our capital markets priority since we went public almost 2 years ago now, which really was to increase our float and trading liquidity, being one of those kind of key objectives. I think we've made a lot of progress with half the company now being floated, trading liquidity up nearly 200%, but still necessarily where we are -- where we want to be from a liquidity standpoint relative to peers, which likely makes the Class A buyback a little less actionable in the immediate term. We obviously can still buy back our Class B private shares, which we've done in the past and would expect to do so in the future, which accomplishes the same objective of reducing the total number of shares outstanding.

Our next question is from Roger Read with Wells Fargo.

Maybe a follow-up on your comments, David, in the opening on the ability to continue to do acquisitions. Maybe just give us an idea of what the market looks like out there, I mean something similar to what you've been doing, a step out into a different area as a possibility. And then as addition to that, higher interest rates than what you faced in the first couple of years of this strategy, how does that factor into how you think about funding transactions? Or are you seeing valuations adjust to a higher interest rate environment?

Yes. No, great questions. And again, thanks for joining us, Roger. I'll start and Brandi and Clay are here with me as well and very actively involved in that part of the business and can contribute after I finish. A couple of things, we still see a very active market. It's consistently been a $50 billion to $100 billion a year market my whole career, and we still see that. And frankly, activity by others tends to create more activity. And so one of the things we did try to highlight this time is large cap consolidation is likely to be good for us. We feel very good to -- I think we have a good pipeline of opportunities looking forward, and we do like where the macro is as well. Turning to operationally and your comments around portfolio and focus. I think we're very good and getting better in our core areas, and there's a lot still to do there. So I think you can assume we'll continue to do what we have shown we would do, which is look to expand our core areas. We are value driven. And so if we are good at something, have the skills to do it, and we can find great value, we certainly think that we have the broadest ability in the sector in terms of scope of what we look at. But I wouldn't take that as a hint that we're going to get distracted. I think we like what we're doing. And then lastly, I'd say a couple of things on the financial markets, we believe as long as you're patient the valuations, both on the equity and debt side will translate into the M&A market, and they typically do relatively swiftly. We're starting to see that happen. And I'd say one of the great things about the way we're positioned today, we've proven our ability to access the public markets. We've grown our presence there. And while the cost of debt has gone up, we're a BB company now, and we've been able to push our relative cost of capital down over the time period as a public company. So I think you should just expect that we're continuing to try to do all of those things. And the only reason we will transact is because we think it will create significant value enhancement for the shareholders.

Our next question is from the line of John Abbott with Bank of America.

I have two questions that are really about 2024. So in terms of your sort of production outlook. So based off your results during this quarter and for your 2023 guidance, when you're pulling activity -- some activity in from 2024, and Brandi, you gave us a range of 155,000 to 160,000 BOE per day for 2024, just given the acceleration of activity into 2023, why wouldn't we think that you shouldn't be at the high end of that production range?

For '23?

No, '24.

Into 2024. A lot of earnings out there. So yes. So you've accelerated activity into 2023 and your guidance range for 2024 is 155,000 to 160,000 BOE per day was the accelerated activity, why wouldn't you be at the high end of that production range.

John, it's Brandi. So I think, as David hit on, right, we've had great operational execution all year from a drilling and completion standpoint. I think that sets us up incredibly well as we look into 2024. And I think it's -- we feel comfortable just given where we sit with our preliminary budget that the 155,000 to 160,000 makes sense relative to a capital program of roughly $600 million, which is in line with what we spent this year despite the base production is higher. So I think that's still a fair range. I think if you end up somewhere in that range that's good. But I think there's a chance that we could be at the top end of the range, but we'll look to provide more formal guidance in the next couple of months on '24.

Okay. And maybe I'm reaching a little bit here. But for 2024, any -- it looks like, at least, if you end -- it looks like you will end potentially on a high point in terms of production in 4Q '23. So any sort of color on the trajectory of production in 2024.

Yes. I would expect it to be relatively consistent, both from a production and capital standpoint over the course of next year. Ultimately, it'll be impacted on when wells are coming online. But I think for now, if you modeled it fairly consistent throughout the year, I think that's a good assumption.

Thank you. As there are no further questions, the conference of Crescent Energy has now concluded. Thank you for your participation. You may now disconnect your lines.