Crescent Energy's Q3 2025 Earnings Call: Contradictions Emerge on Divestiture Strategy, Oil and Gas Allocation, and Minerals Business

Guidance:

• Company is enhancing its full-year outlook for the second consecutive quarter.
• Vital acquisition expected to close before year-end and to be immediately accretive, targeting >2x cash-on-cash returns.
• Plan to cut Vital drilling to 1–2 rigs at close (≈60%–70% reduction in rig activity/capital on those assets).
• 100% of divestiture proceeds to repay RBLs and reduce debt; RBL to be repaid before year-end.
• Pro forma adjusted cash OpEx ~ $11.50/BOE and reinvestment rate targeting ~50%; dividend maintained at $0.12/share.

Business Commentary:

* Strong Financial Performance: - Crescent Energy Company reported approx. $204 million of levered free cash flow for the third quarter, demonstrating strong free cash flow generation. - The results exceeded expectations on all key metrics, leading to enhanced full-year outlook for the second consecutive quarter. - The company's success is attributed to its consistent focus on free cash flow generation and operational excellence.

• Transformative Acquisition and Market Expansion:
• Crescent Energy announced a transformative acquisition of Vital Energy, marking its accretive and scaled entry into the Permian Basin, establishing itself as a top 10 U.S. independent oil and gas producer.
• The acquisition is expected to generate immediate accretion across all key metrics and deliver attractive cash-on-cash investment returns.

• The strategic move enhances Crescent's value proposition with more scale, focus, and opportunity in the Permian Basin.

• Noncore Divestitures and Debt Reduction:

• Crescent Energy completed over $700 million of noncore divestitures this quarter, bringing the year-to-date sales to over $800 million.
• The divestitures were executed at very attractive valuations, representing more than 5.5x EBITDA and a significant premium to year-end proved PV-10.

• The proceeds will be used to maintain a strong balance sheet through significant debt reduction, improving Crescent's financial health.

• Operational Efficiency and Cost Management:

• Crescent Energy achieved 15% savings per foot on capital in the Eagle Ford versus last year's program, along with a rate of change on well productivity outperforming prior activity by more than 20%.
• The company's successful operations are driven by its ability to increase well productivity and find ways to win operationally, leading to stronger returns for investors.
• The focus on capital efficiencies and operational excellence has significantly contributed to Crescent's ongoing financial success.
  
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management called Q3 "another impressive quarter of execution," noted results "exceeded expectations on all key metrics," reported ~$204M levered free cash flow and ~$487M adjusted EBITDA, announced a transformative Vital acquisition expected to be accretive, and >$700M of divestitures signed this quarter (>$800M YTD).

Q&A:

• Question from Neal Dingmann (William Blair & Company L.L.C., Research Division): Are you changing your development plan with the expanded Eagle Ford and upcoming Permian footprint (larger pads or different approach) or will D&C efficiency remain the key driver?
  Response: No fundamental change — continue the same strategy; focus remains on driving D&C efficiencies at greater scale.

• Question from Neal Dingmann (William Blair & Company L.L.C., Research Division): On M&A, what are your current parameters and would you consider entering another basin?
  Response: No change in underwriting — seeking strong multiples and quick paybacks, prioritizing Eagle Ford and Permian opportunities.

• Question from John Freeman (Raymond James & Associates, Inc., Research Division): How are you thinking about next steps to reduce leverage toward the ~1x target?
  Response: Balance sheet strong; will use divestiture proceeds and free cash flow to pay down debt (RBL repaid pre-year-end) and target further note retirements to reduce leverage.

• Question from John Freeman (Raymond James & Associates, Inc., Research Division): How do divestitures change stand-alone Crescent assumptions like maintenance CapEx and decline rates?
  Response: Go-forward plan remains lower capital intensity and ~50% reinvestment; will materially cut Vital capital/activity to 1–2 rigs (≈60%–70% reduction).

• Question from Timothy Rezvan (KeyBanc Capital Markets Inc., Research Division): With divestitures and potential Vital contribution, what should we assume for Q4 '25 production (slide shows 4,000/day impact — is that 16,000/day to Q4)?
  Response: Reaffirmed legacy Crescent production guidance; divestitures remove roughly a 16,000 boe/d impact to Q4; Vital contribution before close is immaterial.

• Question from Timothy Rezvan (KeyBanc Capital Markets Inc., Research Division): Should we expect a change in oil mix (SKU) this quarter from the sales?
  Response: No material change — guiding to roughly 39% oil in Q4.

• Question from Timothy Rezvan (KeyBanc Capital Markets Inc., Research Division): How will you allocate between gas and oil in 2026 given South Texas dry gas activity?
  Response: Allocation remains returns-focused and flexible; 2026 commodity allocation expected to look similar to 2025.

• Question from Michael Scialla (Stephens Inc., Research Division): Where does the divestiture program stand — finished or any remaining opportunities (including in core areas)?
  Response: Program highly successful; most material sales done, with some smaller assets remaining for opportunistic sales.

• Question from Michael Scialla (Stephens Inc., Research Division): Slide 11 shows Eagle Ford well performance bucking industry degradation — reasons and outlook?
  Response: Outperformance driven by optimizations (spacing, increased completion intensity, landing-zone changes) from acquiring and improving assets; expect continued outperformance versus prior operators.

• Question from John Abbott (Wolfe Research, LLC): Is the minerals business on the table after the divestiture program or are you keeping/growing it?
  Response: Minerals are a core business today, not part of the divestiture program, and no plans to sell.

• Question from John Abbott (Wolfe Research, LLC): Do the >$700M divestitures affect future cash taxes?
  Response: Transactions broadly tax neutral long term, but expect a ~$30M–$40M cash tax payment on the divestiture closings.

• Question from Michael Furrow (Pickering Energy Partners LP): What drove the strong realizations this quarter — structural changes or a one-off?
  Response: Improved marketing and contract renegotiations produced incremental realization gains that accumulated this quarter.

• Question from Michael Furrow (Pickering Energy Partners LP): Were some dry-gas turn-ins included in the 31 turn-in-line count late in the quarter and can you quantify?
  Response: A handful of dry-gas tie-ins came online very late in the quarter; contribution was minimal.

• Question from Hsu-Lei Huang (Tudor, Pickering, Holt & Co. Securities, LLC, Research Division): Is 6 rigs (combined with Vital) still a good baseline for planning and what could prompt stepping down to ~5 rigs?
  Response: At current strip, combined activity similar to this year is appropriate; team remains flexible and will reduce rigs if returns warrant.

• Question from Hsu-Lei Huang (Tudor, Pickering, Holt & Co. Securities, LLC, Research Division): On pro forma adjusted cash OpEx ~ $11.50/BOE and Vital blending — what should we assume and is there further downside opportunity?
  Response: Pro forma divestitures yield ~10% OpEx improvement to roughly $11.50/BOE; Vital expected in a similar range and there are additional opportunistic cost improvements over time.

Contradiction Point 1

Divestiture Strategy and Impact

It involves differing statements on the divestiture strategy and the impact of divestitures on the company's financials, which could influence investor expectations and strategic planning.

Will you adjust your development strategy toward larger pads or projects with the expanded Eagle Ford and upcoming Permian operations, or will operational efficiencies remain the primary focus? - Neal Dingmann(William Blair & Company L.L.C., Research Division)

2025Q3: We've completed the initial phase of our divestiture program, which was designed to enhance the commitment to a more disciplined capital allocation approach, and to address our balance sheet concerns. - David Rockecharlie(CEO)

What is the strategic rationale behind the Q1 divestitures and potential future asset sales? - John Christopher Freeman(Raymond James & Associates, Inc., Research Division)

2025Q2: And I think that it's fair to say that we're in the process of -- we're just really in the beginning of that process. So I don't think we're done yet. - David Rockecharlie(CEO)

Contradiction Point 2

Oil and Gas Allocation Strategy

It highlights a shift in the company's strategy regarding the allocation of capital between oil and gas, which could affect future production and financial performance.

How do you plan to allocate capital between gas and oil for 2026? - Michael Furrow(Pickering Energy Partners LP)

2025Q3: We're 100% returns-focused with flexibility. We expect 2026 to be similar to 2025, maintaining strong returns and flexibility. - David Rockecharlie(CEO)

How realistic is the 1x leverage target over the next 1-2 years, and what debt level is appropriate for your company size? - Timothy A. Rezvan(KeyBanc Capital Markets Inc., Research Division)

2025Q2: I would say in terms of timing, I think the most important thing we highlight is we can change the allocation of capital in the down market pretty quickly. - David Rockecharlie(CEO)

Contradiction Point 3

Minerals Business Strategy

It involves a disagreement regarding the company's minerals business strategy and its role in the divestiture program, which could impact future growth and financial decisions.

Is the minerals business part of the divestiture program, and what are the growth plans? - John Abbott(Wolfe Research, LLC)

2025Q3: Minerals are a core business, never part of the divestiture program. It's an area for future growth but remains a strong core business. - David Rockecharlie(CEO)

Given current commodity prices, is Crescent Energy positioned at the low end of the oil-focused range and high end of the gas-focused range for capital allocation? What factors could push capital allocation beyond these ranges? - Albert Wang(TPH and Company)

2025Q1: Our strategy focuses on returns, with flexibility in capital allocation across oil, natural gas, and mixed inventory. - David Rockecharlie(CEO)

Contradiction Point 4

Divestiture Impact on Cash Operating Expenses

It involves differing expectations regarding the impact of divestitures on cash operating expenses, which could affect the company's financial performance and cost management strategies.

How have adjusted cash operating expenses changed after divestitures and Vital integration? - Hsu-Lei Huang(Tudor, Pickering, Holt & Co. Securities, LLC, Research Division)

2025Q3: Divestitures bring a 10% improvement in adjusted operating costs, with Vital expected to align in a similar range. Opportunities exist to improve costs over time through optimization. - Brandi Kendall(CFO)

Can you update us on the status of your Eastern JV and whether there are any existing contractual agreements or timing constraints? - Unidentified Analyst(KeyBanc Capital Markets)

2025Q1: We are committed to driving out costs through strategic initiatives that generate more than $30 million in savings annually and further efforts for greater operational efficiency. - Brandi Kendall(CFO)

Contradiction Point 5

Capital Allocation Strategy

It involves the company's strategic approach to capital allocation, which directly impacts the distribution of resources across different projects and potential acquisitions, affecting future growth and profitability.

How will you allocate capital between gas and oil in 2026? - Timothy Rezvan (KeyBanc Capital Markets Inc., Research Division)

2025Q3: We're 100% returns-focused with flexibility. We expect 2026 to be similar to 2025, maintaining strong returns and flexibility. - David Rockecharlie(CEO)

Will you continue investing in dry gas development given current gas prices, and can you pivot to liquids if necessary? - Michael Furrow (Pickering Energy Partners LP)

2024Q4: We allocate capital to the highest returning opportunities, currently favoring gas in a strong price environment. We maintain flexibility to adjust capital allocation as needed. - Brandi Kendall(CFO)