Q2 2022 Civitas Resources Inc Earnings Call
Total quarterly dividend. This is comprised of our base dividend of <unk> 46 in a quarter per share plus our variable dividend, which was increased to $1 30 per share. This quarter. This represents about a 30% quarter over quarter increase in one of the highest payout ratios in the industry and our current share price implies roughly a 12% yield.
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As the business continues to create significant free cash flow, we will evaluate the best use of cash where that's reinvesting in our business through the drill bit launching share buybacks, extending the runway with additional acquisitions or increasing dividends back to our shareholders.
The relative merits of each of these options shift the shift continually.
Especially in a market as volatile as what we've seen over the past quarter, but this management team our board and our largest shareholders are fully aligned and we're committed to getting it right.
On the permitting and regulatory front. Our 2022 plan is largely permitted at this point looking ahead into 2023, roughly 20% of our programs under fully approved Gdp's permits another 30% permits submitted with majority of those being complete simply awaiting hearing dates and will continue to submit the remainder as we approach year end.
And into the first quarter in total we have 575 wells working through what we call our permanent pipelines.
I'd also like to highlight the box elder cap as expected. This was deemed complete during the quarter and we have a hearing set for early November .
Quick note on our updated 2022 guidance, we've increased our production guidance to account for outperformance year to date and the small acquisition that we closed in early July that adds about 1000 Boe per day to 2022.
On Capex, we have increased the midpoint of our 'twenty two guidance slightly due mainly to cost inflation. What are importantly, staying within the high end of the original guidance.
Our operating cost guidance has been updated our oil differential guidance was updated and decrease from $6 to between four and $5 per barrel.
We also are now guiding $75 million to $125 million of 2022 cash income taxes and that assumes oil averages $100 per barrel for the remainder of the year.
As Colorado's largest pure play E&P and first carbon neutral E&P company on scope, one scope two basis.
<unk> is well positioned for future success within Colorado, and the industry more broadly.
We're a young company we've come together over the past 18 months and there is certainly more work to be done, but the pride that the team's deals after integrating five companies is well earned and that challenge can't be overstated by I'm confident in saying we are in the early innings of optimizing this business and I look forward to sharing our continued <unk>.
<unk> and execution in the quarters to come.
Thank you again for joining the call this morning, and ill pass it back over to the operator for Q&A.
Thank you if you'd like to ask a question. Please press star followed by the number one on your telephone keypad to withdraw your question. Please press star one again.
For a moment to compile the Q&A roster.
Our first question comes from Neal Dingmann from Trust Securities. Please go ahead. Your line is open.
Good morning, all fantastic quarter. My first question is really on capital allocation I'm, just wondering given the what appears to be substantial free cash flow going forward. Chris I'm. Just wondering could you discuss how share buybacks will play into the mix along with you certainly mentioned the dividends they understand that as well in the mix, but also.
Potentially even more hopefully more accretive deals like this latest non op purchase.
Yes, Neal. Thank you for the question and in the comments. So I would I would say that we're in a great position and we have a tremendous amount of optionality and flexibility, we're going to look opportunistically for opportunities as you said to do accretive deals like the one that we did.
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But we will also consider whether that's a buyback.
A special dividend or.
Or other acquisitions all of those are in play and as we've guided most of the year.
A few in basin opportunities within the DJ that will continue to run to ground we've been running.
Brown, but disciplined in our approach and we'll be opportunistic.
We take most of those.
Over the course of the next quarter or so.
And as you said, we are generating significant free cash and the board is really focused and the team is focused on what the best use of that cash is going to be.
Great and then second just for Chris, but you are Matt maybe on permitting.
So I'm just wondering how long of a runway do you all anticipate is prudent in order to continue to have the efficient.
D&C pace that you all are sort of laid out.
Yeah, I'll start and then I'll kick it to Tim that I like I like to add 12 to 18 months of permits in front of us always in the Q and that allows us to optimize our capital allocation.
I would say we're early days with both.
The Seo GCC and industry is more broadly if you think back Neil to Appalachia early days. It takes some time for operators to get their feet under them. It takes some time for for the regulators to get their feet under them as well I think we're getting there, but ultimately like to have a year to 18 months of permits in hand, yet.
Yes, I think thats, a great number and thats permits in hand, so that's why when you look at that new slide five that we have we're showing a lot more than that.
600 permits that we have in the queue because we want to have that 18 months runway that is approved.
We've got a lot of projects that we're working on internally Chris mentioned in his prepared remarks that we did get our first cap deemed complete earlier in the quarter and we hope to have our second one submitted by the end of this year.
Great. Thanks for the details guys.
Thanks. Our next question. Our next question comes from Michael Shah from Stifel. Please go ahead. Your line is open.
Michael from shallow your line of Michael <unk> from Stifel. Your line is open.
Our next question comes from Leo Mariani from <unk> Partners. Please go ahead. Your line is open.
Okay. Thanks.
Hey, I was hoping you can talk a bit more about.
Some of these kind of pending.
M&A deals I know that you guys have kind of had a few of these privates in your sights for quite a while now they've kind of been sitting there in the slide deck.
I guess, there is still kind of undergo negotiations here or are they kind of.
Heavy or is it just kind of getting difficult to transact here at the right price trying to get a sense of how you're thinking about M&A right now.
Sure I would say we're in continuous dialogue with multiple folks within the basin. Obviously, it's a rapidly consolidating basin. Thanks to the efforts of this company and others.
It's not a difficult discussion to have quite honestly as long as we are disciplined and we have been coming back to how do we make this company better not just bigger.
And so what you saw in the second quarter as we were disciplined and we didn't we didn't get anything over the finish line other than the small transactional we highlighted in the comments.
But that's the that's the right approach we are to a point now 18 months and where we are a scaled position or larger operators one of the most active operators in the basin and we can be selective and we will continue to be selective.
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We're not going to pull down acquisitions that simply make us bigger unless they do.
Four things for us unless they allow us to to create more cash flow and get that back to shareholders protect our balance sheet and lead the way in ESG and it's as simple as that.
Okay.
And I guess just is there any kind of.
High level sort of timeframe or yet you feel like at some point, we had these things in our sights and an ongoing dialogues where that just becomes exhausted where it's just clear maybe there's not going to be a deal at some point for one on one of these targets and at that point would you pivot to just a higher return on our capital you obviously have no net debt at this point.
Strong base dividend the variable was up a lot this quarter, but still a lot of excess free cash flow above that you did mentioned buyback in your prepared comments just trying to get a sense of some of these deals don't come to fruition.
Should we be expecting any buybacks come into play here.
Sure.
Thanks, Thanks again Leo.
I would say timeframe, we're always going to be in the market within the DJ certainly looking at opportunities.
Well no I would say in the next quarter or certainly by the year end will be sitting on significant free cash and we will deploy.
And what will determine working with the board and the management team is the best use those funds, but I think from a time perspective, Leo I'm thinking the next quarter.
Possibly to the end of the year.
Okay, and then just wanted to ask on the production here.
Obviously very strong outperformance in the quarter.
Now historically the company has kind of talked about trying to keep volumes fairly steady and you know there was some benefit from the bison deal, but volumes are up a lot more than that can you just provide a little bit of color around that.
But you're going to get a lot more wells on maybe they came on early in the quarter to see better well performance what kind of drove the performance there and do you expect second quarter to kind of be the peak on production do we kind of start following the rest of the year. When you look at the guidance it kind of implies that.
Yes.
Great question I would say.
You look at first half.
We're essentially flat to the second half the second quarter.
Water then came in higher than what we expected a lot of that's due to early but outperformance and Watkins area longer plateaus and good execution by the team we think production moderates as reflected in our in our guidance.
But comfortable with with our update in that.
And only thing I'd add is remember we had a bunch of capital that we spent in the fourth quarter last year accelerating a bunch of docs a lot of those wells were in our earlier areas like Watkins by Chris mentioned and out in the legacy brands accrete position. Those wells are the type that go on those oil plateaus on production for a couple of quarters and we just frankly.
Our outperformance due our completion design and on those plateaus and it really manifested in the second quarter oil numbers.
Okay. That's good color. Thanks.
Yes.
Our next question comes from Nicholas Pope from Seaport Research. Please go ahead. Your line is open.
Good morning, everyone.
Good morning.
I was hoping you guys could talk a little bit about that.
Kind of shift mentioned in and crude marketing.
I'm kind of I guess.
Longer term plans there is a big jump in.
In transport costs, but obviously you saw it in the realizations.
I guess what is the what is the bigger picture, what's the long term plan with how you guys are planning to kind of move all this oil.
And how those costs kind of play into those realized pricing.
Yeah. Great question. So are our better realized prices has mostly come from having opportunities to sell our crude and basin. We are the largest producer of low gravity crude in the DJ now after this consolidation effort, we've gone through so pretty much we control the supply of sub 42 oil.
We're able to sell that at a premium invasive when the markets are there.
Because of the restructuring of several of the previous companies that have created sabotage we were able to remove legacy contracts and have the ability to sell that crude in basin. So as we continue developing especially in our southern area. We will have more volumes that we're able to sell in basin potentially at these better prices like we saw in the last two quarters.
We also have a large.
Volume commitment with NGL that rolls off in 2023 that was associated with the legacy Bonanza Creek position, which would free up another 25000 barrels a day of low gravity crude that we would then be able to access these invasive markets with so as long as those in basin market stays strong we should be able to continue taking advantage of these prices.
Got it I appreciate that.
That's all I had thank you.
Yeah.
Our next question comes from Noel Parks from Tuohy Brothers. Please go ahead. Your line is open.
Hi, good morning.
Good morning.
Right.
A couple of questions.
I was wondering with.
All the free cash flow you generated.
We've been doing any work in terms of.
Looking at.
Additional benches secondary targets.
On your on your players.
Yeah.
Now that most of the.
Asian with different companies.
Under your belt.
Yeah great.
Great question Noel.
I would say that's exactly where you start right I mean, you start with the performance of your existing asset how do you optimize base declines how do you optimize completions, but then you go up and down the Wellbore and look for other opportunities I would say, we're early days of thinking about that but exploration within the D. J.
<unk> is an area that could we could allocate some capital to if we see a real opportunity.
It would be an easy tuck into our ops.
Yes, the only other thing I'd add is we're.
Really focused on new formations at this point in time, but there are there are alternate benches like you mentioned and some of our areas that haven't been adequately tested.
As we test those I don't think it will add a new formation in total for us to develop but it will allow us to kind of develop on a little bit tighter chevron pattern. If we are able to squeeze a few extra wells and because we see productivity and those those new benches. So thats kind of what we're looking at right now.
Great and.
Just thinking about the <unk>.
Continued.
Well, just the long process of integrating the five companies and.
I just wonder if there is anything.
Happened recently or on the horizon as far as.
Different types of service contracts rolling off reconciling.
Agreements with some of the component companies had to to what the.
Now combined company having.
Either on the sort of the.
Cost side or or.
In terms of operationally or even effect with Q&A.
Yes, I think.
When you look at G&A quarter over quarter, a significant decrease as we continue to peel off costs and rationalize our systems and.
And put integrated process and systems in place.
I would say we're very early in that process. The team has done a very good job.
We are shifting some things around we are bringing in some new folks in.
And we will continue to drive further integration of the business, but don't lose sight of five companies coming together and the complexity with.
With which the team has really executed extremely well.
Really impressive from my my viewpoint three months in.
No I don't know if you've anything to add on.
Jan integration I would say in general no.
We've been very impressed at the speed at which we've been able to extract midstream synergies. It's an area that we didn't really underwrite or significantly quantified in nd and the various acquisition due diligence.
On the G&A side like Chris mentioned were down 18% quarter over quarter. We're currently about $20 million for the second quarter and got a lot more than that on a per unit basis. We're not done yet I think that just the rollout of the companies in the access services. We continue to shave off G&A is complete Mccann and <unk>.
We are in the year with only the guidance that we gave with a little bit more appropriate, but we're definitely making meaningful strides on both those items.
Yes.
Great. Thanks, a lot.
Thank you. Our next question. Our next question comes from Michael <unk> from Stifel. Please go ahead. Your line is open.
Hey, good morning, everybody and I apologize for joining the call late.
Any of these questions have been asked previously apologize for that but.
I was wondering on slide 14 looking at your.
Activity level for the year it looks like in terms of wells drilled completed and brought online a little bit lower than what you're guiding to previously and just wondering is that.
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Any impact from the.
Higher working interest that you haven't in some of these wells are just how is that.
Consignor.
Because you kept.
Yeah.
No change on the production forecast.
Yeah. Thanks, Michael I would say a couple of things one the assets outperforming on a production basis, and allowing us to generate significant free cash flow, which is our number one focus more so than activity.
We did update those numbers were on the lower end of.
The previous guidance some of that's related to the.
The working interest that we picked up that obviously pulled in a $10 million of capital into into our program. It is allowing us to beat our production guidance with lower activity and we floated between two and four rigs. This year. We're at three right now and you say, we would average around 30 for the year, we're still there.
But really happy with how the b assets performing and if we can.
Can deliver our deliver on our promises with less activity that's a win for the team and win for our shareholders.
Anything any other color you'd other no. Besides the acquisition. The only other thing is we've had some success with our internal leasing program and just setting up organically our working interest in a few pads. So I think thats helped played into it as well being able to hit our production numbers with slightly less activity.
Okay that sounds good.
And then wanted to ask on the inflation reduction Act.
Sure.
That becomes law, what impact that might have on civitas.
And particularly with your methane emissions there is a methane emission fee attached to the bill or any other aspects of the bill would be positive or negative for the company.
Yes, I would say that and this goes to the fourth pillar, we talked about in our prepared remarks is we will as a company to lead the way in environmental social and governance.
That means for us, becoming the first carbon neutral company in Colorado, and we think Thats the right thing to do for our shareholders shareholders to ensure the longevity of this of this business, we will be very aggressive in our reductions in overall emissions, including methane.
Simply because we are allocating capital out the door too to be carbon neutral.
And so we can talk about potential impacts, but I will tell you we were going to lead the way in terms of ESG and Brian I don't know if you want to add anything yes. We have so this is Brian we have aggressive emissions reduction programs in place over the next three years, we're going to be spending about $6 million a year to retrofit.
Nomadic devices, which at about year three should result in a 30% to 40% reduction in emissions and that in addition to some of the other sources that we've that we've found in looking through the portfolio of five companies.
We are targeting a 50% reduction by 2027%. So as Chris said, we have an extremely aggressive program. We are not net zero by 2050 or in 30 years or something like that we are we're carbon neutral today, and we are making investments today to significantly reduce emissions in the short term.
To your point, we see that regulations, and particularly regulations around <unk>.
Air quality, they tend to get tougher and not easier and so we are taking the proper steps to be ahead of that.
Yes.
Very good thank you guys.
Thanks, Brian .
Our next question comes from Bill <unk> from Titan Capital. Please go ahead. Your line is open.
Thank you Chris in your opening remarks, you had mentioned that you are in the early early.
Early innings of integrating the five companies would you. Please give us some examples of really what you are referring to there given that it appears as though you have integrated the five companies.
Sure.
I would say we're early innings of optimizing the business the companies are fully integrated as evidenced by.
Great quarter, great string of quarters quite honestly.
But the business I would if we were looking around this table and walking the halls, we know there is more.
That can be done to optimize our production base to optimize our performance in all aspects I would highlight a couple of things that.
That are continuing to get attention I think.
Not necessarily reflected in future guidance I think is could.
Could be some some potential upside.
To me. This is if you think back 18 months ago and the individual constituents of this company. We are now a five plus billion dollars company.
What that means is the addition of clear process clear Accountabilities clear systems integration I think can yield a lot of value.
Were not in place previously I would say we're early innings. There. We are now 170000 barrel a day company and it's a massive base production much bigger than any of the constituent parts and so really focusing in on base production, not just drilling and completing wells, but based production.
Think we're early innings, and we've reorganized a bit to put more focus in on that and I think more broadly we have everything plugged in together to your point, we're fully integrated.
But optimizing process optimizing systems getting the right folks in the right spots everyone aligned to one central mission.
We're early days and we're going to get there and I think thats, what I wake up every morning really excited about is how the assets performed how the team's performing.
In the wake of five companies coming together, knowing that there is much more to come I get really excited about.
Okay.
And I recognize this sort of <unk>.
It is never complete but when would you expect the.
Bulk of this optimization process.
The businesses that you have acquired to be.
Far enough down the path that that there is a noticeable difference to the and to the outside world.
Sure.
<unk>.
I would say there should be a noticeable difference.
Visible to the outside World based on our second quarter results, but I would also say have this discussion a year from now we're not going to be done we may be closer to the middle.
Biddings, but we will as a company continuously improve every aspect of our business, we will drive out as much cost as we can to maximize free cash flow and get that back to shareholders and protect our balance sheet and so I would say in the company is doing a phenomenal job of this is.
We will not accept where we are today, we will continuously drive improvement throughout our throughout our company throughout our business.
Great. Thank you for the color I appreciate it great quarter. Thanks, Bob Thank you. Thanks.
Our next question comes from Michael <unk> from Stifel. Please go ahead. Your line is open.
Just had a follow up on just wondering if you could give any guidance or if you did previously again apologize, but on where current taxes, maybe for the remainder of the year.
Sure and I'll start off and kick it to.
Previous quarters.
We had guided at $75.
We would not expect to pay cash income taxes, what we've put out there assuming $100 for the rest of the year is between 75 to 125, and we think that is.
Good idea to put that out there given where commodity prices have been and look to be for the remainder of the year, but let me kick it to NOLA.
Yeah. Thanks, Michael for your question I would say consistent with our prior messaging.
Look at where commodity prices have been kind of around the first quarter and about 85% to 90 range.
Our 2000, and our NOL for 2020 to fully offset our taxable income.
When you look at oil averaging about 108 for the second quarter and using our assumption of $100 a barrel the resulting cash impact is essentially all up 25% effective rate of that incremental revenue. So that's why we guided to about a midpoint of $100 million based on that incremental loyalty.
Got it thank you for that.
Yes. Thank you.
We have no further questions in queue I'd like to turn the call back over to Chris Doyle for closing remarks.
Okay.
Sure.
I'd like to thank everybody for being on the call today and your continued interest in <unk> have a great day and be safe. Thank you.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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