I promised a quick dive into Crescent Energy Group (CRGY) on Friday. This company emerged from a deal between private equity firm KKR, and Contango Oil and Independence Energy. At $15 per share, there might not be a better risk-reward trade in the space than Crescent. Many energy companies are staying on the sidelines despite WTI oil prices climbing to nearly $100 per share. The key motivation – the most important incentive – that drives companies to drill for oil is “price.”
But even in this environment of high prices, several companies are struggling to get their crude out of the ground. The reason is that the cost of capital for energy and production companies has risen. Shareholders of oil production giants in the shale space remain ticked off about losses in recent years, so the free cash flow is being used to buy back shares or hike dividends. In addition, government and activist investor pressure are also driving up costs.
So what are these companies going to do? Many of them will become acquisition targets if they have little debt and strong cash flow. They’ll be attractive takeover targets for leveraged buyouts. And that brings us to the private equity space.
Crescent Shines Right Now
At a time that oil inventories are falling and crude prices are rising, a number of producers will need to fill the gap. Companies that can start acquiring smaller producers will start to build an arsenal of smart portfolio plays that capitalize on this environment.
That brings us to Crescent. As consolidation starts to heat up, it takes a leadership team with ample experience buying and selling companies in the energy patch. Oil billionaire John Goff has partnered with private-equity giant KKR to form an acquisition monster that will start buying up assets and putting them to work. With deep pockets, CRGY takes the capital concerns off the table and can start snapping up assets across the continental United States.
This is a buyers’ market in the energy patch, and the company plans to engage in several deals per year as it builds its energy empire. Low cash-flow multiples will become cash-generating bargains for the bigger company. More important – the company is focusing on purchasing assets that have established production in place. We’re talking about a company that can grow at a breakneck pace and deliver outsized returns in an industry where investment is drying up.
What’s The Downside?
Well, there’s the very fact that any reversal in oil prices would challenge the narrative. As I’ve noted however, there is about a $500 billion gap between the expected demand for oil by 2025 and the amount of capital needed to deliver supply to meet that demand (according to JPMorgan).
Second, anyone who buys this stock will not have a vote on the company’s direction. Effectively, KKR – the PE firm – will elect the board of directors and effectively control the operations.
I’m fine with that. However, I’m not an energy billionaire like Chairman John Goff (of Contango) or a market-leading expert like CEO David Rockecharlie, who runs KKR’s Energy Real Assets business and acts as Chairman of KKR’s Energy Investment Commit.
Right now, shares are trading north of $15 per share. We can blame Russia and the ongoing worries around geopolitics for now. There could be some choppiness over the next few weeks, but use any dips as an opportunity to buy.
In addition, you can go onto the options chain and sell puts at your chosen level at a price you have set. It’s worth looking at trying to sell puts at much lower levels just in case someone buys them from you. Don’t be afraid to set your own price. I’ll show you how to do that on Wednesday.