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A decent dividend yield, but a lot of debt seems to be what Crescent Energy Company (NYSE:CRGY) is offering right now, I think. The company has seen the cash position decline heavily over the last couple of quarters and is more or less nonexistent right now at around $3 million. All the whilst, the debt has climbed to $1.3 billion instead. CRGY focuses on adding more low-declining assets to its portfolio that it leverages into future earnings, and, hopefully, enough ones to fund future expansion without diluting shareholders too much.
The premium based on earnings that CRGY has right now is not indicative of a buy, not when you pay over 10% premium. The company does offer a good dividend yield, which seems sustainable given the asset base and portfolio the company has built up so far. This should hopefully help ensure the current yield for the foreseeable future if demand for oil and gas continues, as I expect it will. This translates to CRGY being a hold in my eyes.
CRGY has a solid position in the energy market where it focuses on collecting low-decline assets strategically positioned in established regions throughout the United States. The company commands a substantial cash flow underpinned by a dependable foundation of production. With a steadfast commitment to excellence in operations and responsible resource management, Crescent Energy is dedicated to investing in energy assets that yield superior returns. Their mission revolves around maximizing the value of these assets and upholding a strong record of environmental stewardship.
The company has managed very well over the years to grow the returns for shareholders and currently boasts a dividend yield of over 4%. The payout ratio continues to be quite low at just over 10% right now. That seems very manageable, in my opinion, especially when you consider that the long-term outlooks for both natural gas and crude oil remain strong. Demand is outweighing the supply and even though more are shifting towards renewable energy, the sheer capital and spending necessary to make the full switch I don’t think will be possible in the coming decades at least.
The cash position for CRGY seems to be diminishing steadily from the top of over $100 million just a couple of quarters ago. The dividends paid out in the last 12 months have a price tag of $29.4 million, but this has been easily covered by the net income of the company during that period. Instead, it seems that CRGY is continuing to use some of the cash for investing in property and equipment, which has climbed to $7.9 billion.
Looking at the debts instead for the company, they have been steadily climbing all the whilst the cash has declined as we saw above. The debt position now sits at $1.3 billion and will likely be a thorn in the side of CRGY in terms of growth projects in the future. The rising interest rates have caused the interest expenses to climb to all-time highs of $114 million. What worries me about the declining cash position above here is the lack of coverage it offers for the debt that CRGY has right now.
Assessing The Dividend
One of the key factors about my hold rating for CRGY comes down to the appealing dividend yield that it has. With a low payout ratio of just 10% right now and a bottom line that seems to be growing steadily, I would assume that the over 4% dividend is possible to maintain for quite a long time.
Looking at the financial performance of CRGY, they have drastically raised the ROE over the last few quarters, netting over 20% right now. This sort of operational performance will yield CRGY a better earnings pool to tap from and fund new expansions and dividend raises.
Expectations are that CRGY will be able to continue raising the dividend in good fashion as well. In 2024, expectations are that it will be $0.72, which would be a yield of over 5%. As we saw in the last report from the company, the results were very solid, I think. The levered FCF they achieved was $46 million, which could single-handedly fund the last 12 months’ dividend by itself, as it’s just $29 million.
The guidance from the company also seems to indicate that they are on their way to achieving stronger and stronger production levels. The updated guidance anticipates a total production (Mboe/d) of 143 – 148 in total. This increase in production will likely yield stronger FCF, which can be diverted to shareholders through dividends, in my opinion. Hopefully, it could also help CRGY in not having to dilute shares to raise capital in the coming years.
Historically, CRGY has been diluting shares to raise capital to fund expansions it seems from the surface. What makes me confident that it won’t be able to pay out the dividend is that CRGY still generates strong net incomes, which are sufficient to give investors an intriguing yield. The company is strategically positioned with its assets and interests in two of the most prolific shale plays within the United States. Even in the event of a potential U.S. economic downturn, the likelihood of commodity prices maintaining a level that supports ongoing production remains high. CRGY remains well-positioned to thrive in such circumstances.
What keeps me from suggesting that CRGY could be a buy right now stems from the valuation lacking a good enough discount.
When looking at the FWD p/e ratio for the company, it has quite quickly risen in the last few months as the market has become increasingly optimistic about the sector, I think. The FWD p/e for CRGY is 10.94, in comparison to the sector average of 10.51 which indicates a premium of nearly 5%. When I make investments, I tend to look at the p/e first, and it’s a good way to weed out any stocks without potential. Looking at the p/e, I look at the FWD basis first and foremost. I would like to get a discount of about 10 – 15% at least based on earnings to the sector, which would mean that CRGY needs a p/e of 9 – 9.5 to make it appealing. That puts a price target of $10.64 for CRGY right now based on p/e alone.
The p/s has also risen quite quickly for CRGY and right now has an FWD multiple of 0.422. Based on this metric, CRGY looks very undervalued as it has a discount of nearly 70% in comparison to the sector’s 1.55. The p/s is something I don’t weigh so heavily on, as it is heavily dictated by commodity prices for companies like CRGY, and predicting them is incredibly difficult. I’d rather focus on the actual earnings of the business, because the margins are something that CRGY, for instance, has more control over. With that said, I have a price target of $10.64 for the company and will be viewing it as a hold until it goes below that, I think you’d be getting a good price, and certainly a good dividend yield as well.
Regarding risk, in their most recent 10-Q filing, they successfully issued $400 million worth of senior notes carrying a rather hefty 9.25% interest rate, with maturity set for 2028. These funds were promptly funneled into repaying a portion of their secured revolving credit line. While this maneuver may appear to be a means of extending their debt obligations into the future, it’s crucial to assess the broader financial strategy and implications. The 10-Q document does not explicitly mention whether the 2028 bonds are callable or not. Ideally, they would be callable, enabling the company to explore the possibility of refinancing when interest rates become more favorable. I don’t think this should weigh too heavily over the company, though, as the market position it holds should enable it to benefit from growing demand and increased production capabilities.
In the scenario of a global conflict or a significant supply disruption, the company possesses the capability to significantly increase production, leveraging its strategic presence in two of the nation’s major shale plays. Essentially, this positions the company to thrive amidst market uncertainties, showcasing its adaptability and resilience in the face of potential disruptions. Such flexibility to respond to unforeseen events is a valuable asset, ensuring that the company can navigate various challenges and maintain a stable operational outlook. I think this is where the reward lies, and right now it outweighs the risks in my opinion.
The dividend of CRGY I think is very solid and is supported by the strong asset base of the business. However, the price lacks any incentives to buy right now, and that leads to a hold rather than a buy. For investors that seek a value play, they may want to look elsewhere. An earnings discount of around 10 – 15% would possibly make for a buy case as the upside would outweigh the risks. For now, though, a hold makes the most sense.