The U.S. is set to see a significant shift in its energy policy with the return of Donald Trump to the presidency. 

His administration is expected to prioritize traditional fossil fuels like oil and natural gas, rolling back several initiatives aimed at advancing renewable energy and electrification. 

Trump’s plans include lifting restrictions on liquefied natural gas (LNG) exports, supporting domestic drilling, and possibly eliminating tax credits for electric vehicle purchases. 

These changes align with his broader agenda of boosting energy independence, reducing regulatory burdens, and revitalizing the fossil fuel industry.

This policy direction, combined with Trump’s promise to declare an energy emergency to bypass Congressional hurdles, signals a favorable environment for oil and gas companies. 

Crescent Energy (CRGY) is one such company, uniquely positioned to benefit from a policy environment that prioritizes fossil fuels.

The company specializes in the acquisition, development, and production of crude oil, natural gas, and natural gas liquids. 

Its diverse portfolio includes both unconventional and conventional assets, primarily located in the Eagle Ford and Uinta Basins.

The company focuses on low-decline, cash-flow-oriented assets with long reserve lives and a substantial inventory of high-return development opportunities.

In addition to upstream operations, Crescent owns and operates various midstream assets, providing comprehensive services to its customers.

A significant milestone for the company was the acquisition of SilverBow Resources this year, valued at $2.1 billion. 

This transaction positioned Crescent as the second-largest operator in the Eagle Ford Shale, enhancing its production capabilities and operational scale.

Additionally, the acquisition was finalized when natural gas prices were near their cyclical lows. 

By acquiring significant natural gas production capacity at a low cost, Crescent positions itself to benefit from an eventual recovery in natural gas prices by improving the supply-demand balance and increasing export capacity.

Furthermore, the company’s management structure adds a unique element to its operations. Crescent operates under a management agreement with KKR, a firm known for its expertise in real assets. 

Nearly the entire executive team comes from KKR’s real assets division, ensuring a focus on growth and shareholder value. 

KKR makes most of its oil and gas investments through Crescent, aligning the interests of the management team with those of its shareholders. 

While this arrangement may appear complex, it gives Crescent access to a level of expertise and resources rarely available to companies of its size.

Despite these factors and favorable tailwinds, the market has concerns about acquisition-related costs and cyclicality.

We can see this through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market predicts that the company’s Uniform ROA will fall to around 3%, below the cost of capital…

Acquisition-related costs are a temporary issue. As the effects of these acquisitions settle, the company’s financials should provide a clearer picture of its profitability and growth trajectory.

Crescent’s debt is currently on the high side of acceptable, but management is focused on deleveraging. 

A recovery in natural gas prices could accelerate this process, improving the company’s financial flexibility. 

Additionally, Crescent has hedging strategies in place to mitigate the impact of short-term commodity price volatility.

For investors willing to weather short-term concerns, Crescent offers an opportunity to invest alongside industry veterans in a company poised for growth.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research

This analysis of Crescent Energy (CRGY)’s credit outlook is the same type of analysis that powers our macro research detailed in the member-exclusive FA Alpha Pulse.