Fitch Ratings has affirmed Crescent Energy Company's and Crescent Energy Finance LLC's (Crescent) Long-Term Issuer Default Ratings (IDRs) at 'B+' and revised their Rating Outlooks to Positive from Stable.

Fitch has also affirmed the company's first-lien secured reserve-based loan facility (RBL) at 'BB+'/ 'RR1' and senior unsecured notes at 'BB-'/ 'RR3'.

Crescent's rating reflects its multi-basin operational scale, below-average production decline rate, midcycle leverage slightly above 1.0x, improved liquidity profile and conservative hedging program. The rating also considers Crescent's lagging operating netbacks that make it sensitive to falling oil and gas prices. The company maintains a hedging program that can cushion its FCF decline during a downcycle. The Positive Outlook is based on Fitch's expectation of gross debt decrease and production growth.

Key Rating Drivers

Growth Dominated by M&A: Crescent has grown mainly through acquisitions. In 2023, it increased ownership of the previously non-operated asset in the Eagle Ford area through two transactions with a $850 million total value. The transactions were effectively funded by the unsecured notes, a $146 million equity raise and FCF. Crescent maintained its proforma leverage within 1.5x, and Fitch expects it will materially reduce debt after the transactions are closed.

Fitch expects Crescent will achieve a production level of 158 thousand barrels of oil equivalent per day (kboe/d; 61% liquids, 45% oil) in 2024, up from 138 kboe/d in 2022. Fitch expects Crescent will continu production volume growth after 2024 either through acquisitions or acreage development.

Consistent Leverage Discipline: Crescent has publicly articulated its strategy targeting leverage of 1.0x with a maximum of 1.5x. Fitch forecasts the company will be within this band through the forecast period, and 1.1x adjusted EBITDA leverage at midcycle. Crescent has historically maintained low leverage with an approximately company calculated 1.2x average dating back to 2013 under its predecessor company.

Fitch expects Crescent will have partially repaid debt in 4Q23 and will continue reducing debt in 2024-2025. Fitch will focus on Crescent's EBITDA leverage before dividends paid to non-controlling interests (NCI) because Crescent Energy Finance LLC, the debt issuer, does not suffer from NCI dividend leakage at its level despite the NCI dividends reported by its parent and financials filer, Crescent Energy Company.

Improved Availability Under RBL: Crescent increased RBL availability in 2023, which significantly strengthened liquidity. The company reduced RBL debt drawdown to $392 million at Sept. 30, 2023 from $559 million at YE 2022, issued a $150 tack-on bond in 4Q23 primarily to repay RBL, and Fitch expects that it applied part of 4Q23 FCF towards RBL repayment. Fitch expects Crescent's elected RBL commitment of $1.3 billion will be almost fully available in 2024. RBL's borrowing base is $2 billion.

Lower Decline Rate Assets: Crescent projects its 2024 decline rate at approximately 20%, below the shale producers' typical rate of above 30%. A considerable share of the company's operations is located in more mature plays, which usually require lower capex due to their older vintage wells. These wells experience lower decline rates than recently developed ones. Low decline assets contribute 40% to Crescent's production. When it comes to shale plays, Crescent estimates that it has 8 to 10 years of low risk inventory life with a two- to three-rig program. The company had healthy proved reserve life of 11 years at YE2022.

Positions in Multiple Basins: Crescent's asset base is more diverse than peers of its production size. This reflects a history of targeting risk-adjusted returns with less focus on specific core basins. However, Crescent's production has gradually become more focused on the Eagle Ford area and Rockies, including Uinta and Wyoming conventional assets.

Fitch expects Crescent to produce around 55% of 2024 volumes in Eagle Ford and 40% in Rockies, with drilling rigs located in Eagle Ford and Uinta. The company also has assets in Permian, Barnett and small positions in other areas. The company has significantly reduced the share of production coming from non-operated assets in 2023 as it focused on key shale areas.

Extensive Hedge Program: Crescent has lower operating netbacks than oil-focused peers due the presence of mid-life assets in its portfolio. This leads to increased sensitivity to oil and gas price downswings. To offset that, Crescent's hedging program is more intense than those of many other comparable upstream companies, particularly with its liquids hedges.

Crescent hedged approximately 63% of its 4Q23 oil and gas production, providing relatively strong cash flow visibility. Crescent's hedge program extends into 2025, including hedges on roughly 60% of 2024 oil and 45% of natural gas volumes at Fitch forecast production levels. Downside risk is also reduced by Crescent's flexible dividend policy of 10% of EBITDAX.

KKR Relationship: KKR & Co. Inc. (KKR), which owns approximately 15% 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.

Crescent has an ESG Relevance Score of '4' for Governance Structure as KKR affiliates own Crescent's non-economic preferred share. This share has 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. Crescent is one of several KKR's assets held without a targeted exit plan.

Derivation Summary

Crescent reported an average production of 157 kboe/d in 3Q23, making Crescent one of the largest by production in the 'B' rating category, although it mainly produces liquids. This in line with higher rated operators such as SM Energy (BB-/Stable; 154 kboe/d), which benefits from the strong economics of its Permian Basin weighted asset base, and Baytex Energy (B+/Positive; 151 kboe/d).

Crescent's production is ahead of Callon Petroleum (B+/Positive Watch; 102 kboe/d), MEG Energy (BB-/Stable; 102 kboe/d) and Vermilion Energy (BB-/Stable; 83 kboe/d). 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 EBITDA leverage of slightly above 1x. This is close to the typical leverage of its peers.

In 3Q23, Crescent generated an unhedged cash netback of $21.7/boe. This falls materially below the peer group of SM, Baytex. Callon, and MEG due to significant presence of more mature assets in Crescent's portfolio. Vermilion's netback was the closest with $25.2/boe. To compensate for higher-cost profile, Crescent hedges more than its peers.

Key Assumptions

West Texas Intermediate of $75 per barrel (bbl) in 2024, $65/bbl in 2025, $60/bbl in 2026 and $57/bbl thereafter;

Henry Hub of $3.25 per thousand cubic feet (mcf) in 2024, $3.00/mcf in 2025 and $2.75/mcf thereafter;

Production of 158 kboe/d in 2024 and gradually increasing thereafter;

Capex of $550 million per annum in 2024-2027;

Dividend policy of 10% EBITDAX in effect through the forecast;

$250 million 2026 note prepayment assumed in 2025;

No M&A included in the forecast.

Recovery Analysis

Key Recovery Rating Assumptions

The recovery analysis assumes Crescent would be reorganized as a going concern (GC) in bankruptcy rather than liquidated. Fitch assumed a 10% administrative claim.

Going-Concern Approach

Crescent's GC EBITDA estimate reflects Fitch's view of sustainable post-reorganization EBITDA, 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 leads to a lower capital program and production decline.

The $650 million GC EBITDA assumption reflects reduced EBITDA in the latter years of the forecast, when commodity prices start to move towards midcycle conditions. 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 to 7.0x, with an average of 5.0x and a median of 4.5x;

Multiples for 'B' category rated comparable companies Baytex Energy Corp. (B+/Positive; 4x), Callon Petroleum Company (B+/Positive Watch; 4x), Northern Oil and Gas, Inc. (B/Positive; 3.5x) and Moss Creek Resources LLC (B/Stable; 3.25x).

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 PV-10 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.

The maximum of these two approaches was the going-concern approach with $2.3 billion EV. Fitch assumed the RBL facility debt at 80% of the $1.3 billion current elected amount and $1.7 billion of senior unsecured notes.

Under the waterfall allocation, the first lien RBL has an 'RR1' Recovery Rating and is notched up three levels to 'BB+' from the Long-Term IDR. Crescent's senior unsecured notes have a Recovery Rating of 'RR3' and are notched up one level from the Long-Term IDR.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

Capital allocation involving debt reduction or credit-accretive M&A;

Midcycle EBITDA leverage before excluding NCI dividends below 1.5x;

Continued improvement in netbacks towards median peer levels.

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Deterioration in liquidity including sustained high revolver utilization or large negative FCF;

Midcycle EBITDA leverage before excluding NCI dividends above 2.0x;

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

Liquidity and Debt Structure

Healthy Liquidity: At Sept. 30, 2023, Crescent did not have any scheduled maturities in 2023-2025. It had $700 million of senior unsecured notes maturing in 2026 and $1 billion senior unsecured notes due 2028. Crescent's RBL facility balance was $392 million; however, Fitch expects that it will reduce by the end of 2023. Letters of credit drawn were $11 million. The RBL had a 1.3 billion elected commitment and a $2 billion borrowing base. This expires in 2027 but has a springing maturity in January 2026 if more than $100 million of 2026 notes are outstanding. Crescent also had $267 million of cash. Its liquidity is supported by Fitch-projected positive FCF in 2024-2027.

Issuer Profile

Crescent is a public oil and gas company with 3Q23 production of 157 kboe/d (62% liquids). Most of Crescent's production is in the Eagle Ford area, Uinita basin and from the Wyoming conventional assets. The remainder of its production consists of smaller US onshore positions.

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.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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