Q3 2022 Civitas Resources Inc Earnings Call
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Good morning, My name is Julie and I will be your conference operator today at this time I would like to welcome everyone to <unk> resources third quarter 2022 earnings Conference call.
At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question you will need to press star one on your telephone to withdraw. Your question you will need to press star one again in the interest of time, we ask that analysts. Please limit themselves to one question and one follow up thank you.
If you require operator assistance at any time, Please press star Zero I would now like to introduce Mr. John Wren.
Please go ahead your line is open.
Thank you operator, and good morning, everyone. Thanks for joining our third quarter conference call today, I'm joined by our CEO , Chris Doyle, our CFO Marianne <unk>, our COO, Matt Owens and Brian Kane, our Chief Sustainability officer by now I Hope you've had a chance to review our earnings release, our 10-Q.
Our investor Slide deck, all of which are available on our website on today's call. We may make forward looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from projections. Please read our full disclosures regarding forward looking statements in our 10-K and other SEC filings. We may also refer to certain non-GAAP .
Financial metrics reconciliations to certain non-GAAP metrics can be found in our earnings release, and our SEC filings as well after a brief prepared remarks, Chris and other members of our leadership team will be happy to take your specific questions. Please limit your time to one question and one follow up today. This will allow us to address more of your questions I'll now turn the call over.
Chris.
Thanks, John Good morning, everyone and thank you for joining US we have a lot of good news to share with you today and look forward to taking your questions. Shortly our team here at <unk> has done a fantastic job of delivering on our promises while navigating a pretty challenging macro environment this year and positioning us for success in 2023.
So before highlighting our third quarter results I want to reiterate the key strategic pillars of our business model, which shape capital allocation and are designed to generate free cash flow and deliver strong returns. These pillars are fundamental to creating long term value for investors.
The first pillar is to generate free cash flow, we firmly manage our assets to maximize free cash and it starts with asset quality and scale, which optimize our cost structure and position us to be a low cost operator, we're blessed in the DJ to have both high quality rock and scale. Thanks to active consolidation over the past 18 plus months.
Our reinvestment ratio today is among the lowest in the industry. In fact, we expect that this year's capital investments will be less than 40% of our unhedged EBITDA and we've generated nearly $1 billion in free cash flow through the end of the third quarter, that's approximately 17% of our market cap during that nine month period.
Third quarter free cash flow alone was about $350 million and sure we're living well within our means and generating significant cash, which we can in turn give back to our shareholders.
View this as a sustainable model.
The second pillar is ensuring we maintain a premier balance sheet, obviously with $400 million of total debt outstanding against nearly $700 million of cash sabotage has one of the strongest balance sheets in our space today, it's important to be a through cycle company and for us that means a long term net leverage target of under half a turn.
The third pillar is committing to return cash to shareholders earlier. This year, we published a dividend framework to do exactly that this.
This quarter following another period of strong performance and execution the board elected to increase our fixed dividend by 8% to <unk> 50 per share and pay a variable dividend of $1 45 per share.
The total dollars 95 per share represents a 10% increase over last quarter's dividend by.
By yearend, we will have returned more than $530 million to investors through basin variable dividends, including about $165 million to be paid in December .
We have one of the industry's highest payout ratios and our stock offers an 11% yield at today's price.
Our final pillar is ESG leadership.
From the boardroom to our headquarters to the field, we believe our approach to ESG is unique and the right thing to do it guides our business decisions and is fundamental to our success within the Colorado regulatory environment. We're proud to be Colorado's first carbon neutral E&P company on scope, one scope two basis and committed to attaining our goal of 50% reduction in tow.
Scope, one emissions by 2027, and reducing methane emissions below the newly implemented IRA tax threshold before 2024.
Lastly, we understand the importance of best in class corporate governance.
And are pleased to announce yesterday several shareholder friendly corporate governance measures, including majority voting for uncontested director elections.
Shareholder ability to call special meetings proxy access and shareholder action by written consent.
Now, let me move on to our strong third quarter results.
I direct you to our release for updated 2022 guidance, but let me share a few highlights from the quarter.
Total production was more than 176000 BOE per day includes over 78000 barrels of oil per day, both well ahead of expectations are.
Our production base is proven to be resilient, thanks to minimal downtime in the field and strong well performance from our recent turn in lines.
Despite industry wide inflation third quarter capital investments came in below expectations at $237 million that includes $16 million on land and midstream.
For the year, we reduced total capex guidance to be between $970 million.
Just over $1 billion.
Our team continues to partner with Colorado regulators to ensure that we have ample permits in hand to support our development program we.
We had three Oh GDP is approved during the quarter, we had a 4% GDP approved last week, that's a total of seven this year.
We have the box elder cap hearing tomorrow, and we just submitted our next cap the Lowry count, which has a nameplate of 174 wells.
As we think about next year over half of our plan is approved as permits are a GDP is another 20% to 30%.
I have been submitted are complete and will be heard in the fourth quarter and the remainder will be submitted by year end early 2023.
While we don't plan to issue 23 guidance until early in the year be assure that this team. This board and this company will be focused on four things driving strong free cash flow, maintaining our premier balance sheet, returning significant cash to shareholders and leading ESG.
It strikes me here on November one.
On the anniversary of our formative transaction.
How much this team has accomplished in the past 12 months.
Closing accretive transactions have built scale and established us as a low cost operator to executing on the 2022 program that prioritizes free cash flow, allowing us to protect our premier balance sheet and return significant cash to our shareholders first.
Our first 12 months of a new similar to us have been exceptional.
And I look forward to sharing of the team's accomplishments in the future. Thank you again for joining US. This morning, operator, we're now ready for Q&A.
As a reminder to ask a question you will need to press star one on your telephone.
Our first question comes from Neal Dingmann from <unk> Securities. Please go ahead. Your line is open.
Good morning, all thanks for all the details.
Chris just maybe just the first sort of type of Azure, that's all capital allocation specifically.
Could you talk how you all would consider combining potential stock buybacks with the continued that you obviously the dividend speak for themselves.
And I'm just wondering if your stock continues to trade at what we bought.
Going to be one of the cheapest in the group.
Would you think about combining these.
Sure I think.
Neil I would tell you that we look at it holistically.
Everything is on the table, whether that's a buyback and increase in the fixed dividend as we did this quarter special dividend all of those things are under consideration as well as.
Looking for accretive transactions that can extend the duration of our business model.
We've said for the past couple of quarters, and we'll continue to do so.
We see a few opportunities that could meet that hurdle.
To make us interested in chasing them and if if we bring them and fantastic if not we will consider any combination and all of the above to make sure that we return cash to shareholders.
Great to hear.
Can you just talk I want to make sure you went through kind of first just on the permits now you've got like the 174 nameplate <unk> got a lot coming up just wondering when you and Matt look it sounds like what I think third quarter was the first where you've actually had more permits than the wells drilled could you just talk about where youll kind of sit at year.
And and maybe even sort of mid next year. It seems like you're really starting to get ahead of things.
Sure. Good question, Neil and we've said in the past and it's taken some time with the new regulations for both the <unk> and the industry and ourselves included to get our legs under us small victory in the third quarter is a significant one which is really starting to hit that run rate of being able to support.
Two to four rig program.
We see us doing that again this quarter the box elder cap, which will be heard this week. The low recap that came in we said before the end of the year. The team submitted last week, we're starting to build that momentum as we look ahead into next year and keep in mind, we're really focused on.
On.
Keeping production broadly flat and will be somewhere in that two to four rig.
Piece will have most of this either approved or at least submitted.
For the end of the year and I think as you get these caps approved and it should be clear that the <unk>.
Fox Elder cap gets approved this week, let's say, we still have <unk> on the back end of this that should be administrative because we've gone through the preliminary citing but there is still that process on the backend, but we're feeling confident.
Certainly.
Year over year, we're probably a quarter ahead of where we were.
And look look to continue to work progressively and actively with the <unk> and underpin.
A conservative, but a strong development plan.
Our next question comes from Tim <unk> from Keybanc. Please go ahead. Your line is open.
Hi, Good morning, everybody and thank you for your time, Chris I was hoping you could walk me through some of the changes.
In the guidance production.
<unk> increased pretty healthy increase the number of wells Youre drilling is.
Is down 15, and the number of completion.
And excuse me is down five.
I was hoping if you could kind of frame what that is going to look like this change over the next couple of quarters because your guidance is inferring.
That ticked down in production in the fourth quarter. So how should we think about it.
Theres changes meant and what that means for the next few quarters.
Sure and we won't get into specifics for 2023, but as we think about 'twenty two.
And looking at keeping production broadly flat, what we've seen in the second and third quarters as productions actually outpaced our own expectations again gave us quite a bit of flexibility in the fourth quarter to slow down a bit we were building up a bit of a DUC backlog.
<unk> brought in a third frac crew in the third quarter. We continue to have it active this quarter youll see that we pulled down capital guidance in line with that and look we're not focused on growing production.
Focus on maximizing free cash the plan for 2022 has been executed to date extremely well and will continue something similar.
As we head into 2023, no anything Additionally, touch on in terms of guidance Tim. The other thing I would say is keep in mind, we're heading into the winter.
We have just healthier downtime assumptions in the fourth quarter late fourth quarter early first quarter than we all might work for that.
A lot about what youre seeing I mean my guidance from us.
And then on the on the cost side another quarter of really strong cost leadership.
Did bring GTP.
But that's in relation to a lower oil deck.
We continue to see.
We get get barrels marketed to maximize margins. So another quarter, where we got to see a lower differential than we were initially expecting so.
Like I said the business model is a pretty simple one and the team continues to execute very well.
Okay, I appreciate that color and I guess, one more on <unk>.
On the cap.
Just on.
What you learned from the box elder processed it looks like you're coming to the finish line here you mentioned you submitted the Lowry cap.
Can you give any broad brush.
Expectations on when that could get to the finish line.
At some point in 2023.
Sure.
I'll kick it off and then pass it over to Brian for some of the detail and again I would say.
We are approaching the finish line with the box elder.
Looked at get approval. This week, we'll follow that up with individuals GDP of renewals, which should be administrated.
As as Colorado's first cap with preliminary citing this as a process thats, taking taken over a year and a half allow recap which was submitted we're not pursuing preliminary siding and so we'll get to see these two different processes parallel.
<unk> approvals.
What that means what it should mean is sooner earlier approval on the Lowry cap upfront and then a little bit longer on the backend as we pull these odp's through the through the system I would tell you we continue to learn as in history as a company and <unk> as the regulator, but Brian .
Those would you add.
Chris I think you hit on it.
Certainly the important parts.
The only thing I would add is that there is some precedent for caf without preliminary siding.
<unk>.
And we're very encouraged by allowing its one landowner.
Nothing within in terms of residential business units, rather residential buildings within 2000 feet.
For that caps.
We think that that is going to be a pretty smooth process going off the precedent that we've seen on a cap without preliminary siding.
It should take months, rather than rather of the year as Bob Howard.
The only other thing.
I would add is this is an area that we really really like it's an area that's been outperforming.
Expectations has led to some that resilient production in the second and third quarter as well as the stay on plateau longer.
Matt and the team have had real success up spacing development there.
And so we're excited about.
Adding another project bounce out.
Okay. Okay. Thank you for that.
Comments.
Sure.
Our next question comes from Leo Mariani from <unk> Partners. Please go ahead. Your line is open.
Hey wanted to follow up a little bit on the permitting side here.
Just first off.
So the number I may have missed it but.
As you look into next year.
What kind of percentage of kind of where you are permanent today kind of a third permitted for next year are you roughly have permitted for next year and then.
The box elder count assuming that get approved here.
I assume that you guys will get GDP for that in 2023 so.
Wherever that might put you in terms of where you were Permian for 'twenty three would that take care of a lot of the large part of the 22 program if it gets approved.
Sure Leo.
Right now currently we have over half of our 2023 planned permitted either under approved or GDP or approved permit.
We have another 20 or 30% of next year's plan. That's been submitted <unk> are complete and they have hearing schedule. Then we will be heard before the end of the year. The other 10%, 20% or so that will be submitted by the end of the year, maybe early next the box elder cap.
We see.
Wells coming in later next year, it could potentially help us accelerate a bit.
But we're not planning on it and so we're starting to build some cushion I think I've said on an earlier call we'd like to have that 12 to 18 months of permits in hand the team is.
It's starting to build that cushion and certainly we feel.
A lot better today standing here than we did probably a year ago and thats on the efforts of the <unk>.
Brian regulatory team, Matt and the guys getting permits and getting out in front and working collaboratively with the with the <unk>.
Okay. That's helpful. So it sounds like box elder would get you pretty darn good start in 2024, and I think when it gets approved here.
Absolutely.
I wanted to just wanted to follow up a little bit on the M&A piece here you kind of intimated Q deals that you are still looking at.
In the basin there could you just provide maybe a little bit more.
Color on that Brian anything around website in terms of barrels a day or whatever.
On those deals and yet you kind of pretty far down the line on negotiations with some of these are just kind of a matter of price I know that commodity markets have been pretty pretty volatile here Blake.
Elliot.
I know, we don't give you the the map any longer but the names within the basin are pretty well known.
I wouldn't say two deals I would say there are a handful of deals that are out there that we continue to have dialogue around we have throughout 2022, we have a very good view of what those assets could mean for this company I would tell you that we're not focused on getting bigger we would be focused on optum.
<unk> capital allocation to the extent that any of these.
With good strong inventory that and an operation that folds into our existing asset base.
They're willing to consider but we're going to be conservative.
Our scaled business and again this is an 18 months ago, when you're starting down the path of consolidation. This is one of the larger companies within the basin I will tell you. We'll continue to have those those conversations in that dialogue and if we see an opportunity that makes sense for our shareholders.
Then we will lean in otherwise.
We could be done with in basin consolidation.
Leo This is Maria if you look at the two deals we've done this year they haven't been they havent been transformative one lesson March DIY with in July you can look at those are pretty.
Pretty good case study of the type of accretion we're looking at right now in 2020 tail.
<unk> worked on primarily Pvp came from some of them develop but if you look at the returns on the PDP alone, we're talking about high double digit right.
Opportunities that come with little to no integration risk.
So just very easy decision from our perspective itself for the <unk> deal.
We are comfortable with what the scale of what we are right. We don't have to deal with transaction.
We will do it where it makes sense and in both cases it was a very easy decision and then what it might not be we just wondering sockets, it's not something that we have to do but I point you to it does two deals given those were an extremely attractive entry point.
Yes, that's great additional color and then are you guys looking at anything out of based on M&A.
Yes, that's a pretty high hurdle given the asset quality.
We have within the DJ if we if we were to look at something.
Outside of base and it would have to compete for capital.
To underpin really those four pillars of being able to generate significant free cash.
While protecting our balance sheet and enable and accelerate returning cash back to shareholders. So I.
I would tell you that.
We would consider going into another basin, but it is a pretty high hurdle.
Our next question comes from Nicholas pulp from Seaport Research. Please go ahead. Your line is open.
Good morning, everyone.
Good morning.
I was hoping you guys could give a little detail on.
On the other income line item and kind of what we should expect going forward from whatever that is.
The $12 million I think that was kind of shown that showed up in that in the income statement this quarter.
Sure Nicholas I can address that so the bulk of that was $9 2 million in net proceeds received during the quarter.
From a litigation from one of our legacy companies had been outstanding for a long time it has to do with a refund of taxes.
It's been outstanding for a long time, and we finally close that that also that with net proceeds to us.
What I had modeled an additional 12 million going forward all for us would be pretty minimal it should it be related to interest.
I hate it when our cash balance.
Got it and is that related there was a there was an AD valorem liability that's kind of been building on the.
On the balance sheet as well as that connected in some way I was kind of curious why why we're kind of seeing that line item increases.
No.
It's not connected at all the <unk>.
$9 2 million in net proceeds what pre closing claims that.
That we purchased for one of our legacy companies.
Totally outside of period.
The AD valorem inquiry.
Because.
We paid two years in arrears.
The liability would've been increasing oil prices right. So that the tax Bill for example that we will pay in 2023.
Well be related to 2021 production and sell it became a tactical that we just made in 'twenty two I'm, sorry, it's obviously pretty low oil prices.
If you look at oil prices in two years in a rigorous that should give you a pretty good sense of the momentum that AD valorem liability given its 50 every April looking back two years.
Got it I appreciate it.
The thing.
As you.
As you kind of have progressed with kind of a consolidation of these different assets and you look at.
The midstream business, that's kind of still within <unk>.
And as production has been growing I'm curious what the thoughts are at this point how are you thinking about that asset.
You may look at kind of how youre looking at progressing that asset if you want to keep it a go and expand it if you're happy with kind of where where it is right now on the midstream side.
Sure. So we like owning those midstream assets.
Give us a bit of control on our on our production and.
To enhance our margins.
There is just following on upstream consolidation you can see a couple of transactions potentially.
Potentially.
Boeing are indicating the start of consolidation on the midstream side I would tell you that we would consider participating on either side of that really is that allows us to accelerate value of those midstream assets.
Or to look at additional assets to bring in under the <unk>.
We would consider both.
And then given where we trade and given the strength of the of our upstream business, it's a pretty high hurdle to compete for capital.
As we currently execute the business model, but it's something that we would consider.
Got it makes sense, that's all I had appreciate the time everyone.
Okay. Thank you.
Our next question comes from Phillips Johnston from capital. One. Please go ahead. Your line is open.
Hey, guys. Thanks, just a question on the inventory snapshot on slide four if I remember correctly, the non op. French Lake locations are not included so just wanted to confirm that and also just to get it.
General update on essentially.
Whether or not you have any plans for that area in 'twenty three.
Sure. We did update this just this quarter as we're starting to see we have the approval of that cap, we're supportive of development there.
It's good rock. So we have included those in that skyline.
But ill, let me kick it to Matt just as an update on partnering with oxy and what how we see that playing out.
Like Chris said, they did get their cap approved you can see it on the Skyline chart that eastern wells on the Western side, if you compare that to our own.
The left hand side of the.
Skyline charts compare that to previous presentations.
But they are working on midstream development or midstream partnerships out there right now and who is going to build the gathering system out and they're looking at potential spuds as early as the end of next year. So that's why we felt adequate to move that into our Skyline chart, because we view that as some of the best inventory that we have even though it's a non op position currently.
Okay, great and roughly.
How many locations would be included in that essentially carrier.
Roughly 100 and our across the whole.
Whole French Lake cap, our working interest is about mid 30%, 35% 37%.
Yeah, Okay perfect. Thanks, Scott.
Thanks, Phil.
Our next question comes from Noel Parks from Tuohy Brothers. Please go ahead. Your line is open.
Hi.
Hi, good morning.
No.
Couple of things.
Wondering sort of.
Big picture in the current cycle.
Maybe if we compare back to say 2014.
The oil boom cycle.
How do you think the visibility is for product prices oil gas Ngls.
At this point I assume seasonal factors are are less dominant than before.
Yeah.
Yes, I would say personal that we plan our business on longer term view on commodity prices.
We are constructive across the board on the oil and gas we see the importance of of the commodities to underpinning our economy global economy.
And importantly, we've got an industry that is developing and bringing these important commodities to market in a very responsible way and we embrace R. R.
Our part in that.
As we think about sort of short term commodity swings.
The beauty of the importance of this business model, which is really to protect your balance sheet with leverage where we had it with a very conservative development plan.
One aspect of what we're seeing currently as commodity prices actually weakened over the past couple of quarters.
Youre still seeing some tightness in the service market and so a bit of a disconnect with with service costs from where we were probably call. It six months ago.
We'll see I've said in the past service costs are typically sticky on the way up and sticky on the way down we will see as activity continues to develop.
Where we end up.
But again, our model is not based on calling oil price or gas price, where it is headed over.
The short to medium term. This is a very conservative and sustainable business model based on longer term views on oil and gas and importance to pay.
They bring to our economy.
Great.
I'm just wondering.
If you had any thoughts on carbon sequestration efforts in the basin.
Far as either things you know, what's your thought of or just what you what you see happening.
Sure I'll kick it off maybe maybe pass to Brian for additional color.
Zinc thing and coming into civitas, where we've committed to be carbon neutral in scope. One scope. Two is that we've established the cost of carbon within our business.
By doing so we can now make very clear decisions around.
Accomplishing what we're all focused on which is <unk>.
Reducing our carbon emissions, we're making great progress on that front.
As we highlighted in some of the prepared remarks.
But there will be a residual carbon footprint and as we continue to see the market for offsets and credits develop.
Wood carbon capture and sequestration will be something that we would consider in basin or close to our operations I would say, yes, and again, it's that commitment to be carbon neutral that will drive those commercial decisions.
I think it's the right approach.
I understand it's a bit different than others, but again much like how we think about capital allocation. It is.
It is an allocation of capital too.
To optimize that equation, while maintaining carbon neutrality commitment.
Yes, Chris I would just add this is Brian we believe strongly in Decarbonising our industry long term, we think that clearly oil and natural gas is something that will be needed for decades into the energy transition. There clearly is no transition with our fossil fuel and so.
We have infrastructure in place for a very reliable.
System.
Yes.
<unk> delivers our energy to us that's necessary for modern life and so.
We think that as the transition continues companies like ours that are looking to significantly reduce scope, one and two emissions associated with production from our hydrocarbon molecules will be the ones left standing decades from now so all of these options are on the table for us carbon sequestration certainly on the table.
For us it is something that we are exploring and we will continue to explore we're also looking into producing.
Rather generating our own voluntary carbon offsets, which is something that we have line of sight to as well. So all of those options are on the table.
Great. Thanks, a lot.
Thanks, Don.
As a reminder, if you have any additional questions. Please press star followed by the number one on your telephone keypad.
Our next question comes from Bill does woman from Titan Capital. Please go ahead. Your line is open.
Thank you a couple of questions from the income statement the $1 8 million unit merger transaction cost is that for our perspective or completed transactions.
Data for completed transactions.
Specifically the one closed in July .
Correct and it still keep in mind that would still be cost and their related tail to a smaller extent yes.
Rents associated with legacy companies that we still have one outstanding.
Deferral of transition costs, while we still have contracts that are helping us.
Still to this day.
Those are really small scale will be a lot of it to your point would've been when that transaction two transactions that we did earlier this year and we're trying to put that is clean of a D&A number as possible from that perspective.
Great. That's helpful. Thank you and then speaking of G&A at the $5 5 million.
Hi, there.
Non recurring G&A expense what was that.
On the nonrecurring side, we would still have a lot of duplicate.
Software licenses that we were continuing tail spend we still have also a lot of things site.
Contractor costs professional services.
We try to break those out.
And if you look at from a G&A perspective, the trends so far this year has been very positive.
We're currently sitting at about $775 million of actual cash recurring costs and that's what's implied in the fourth quarter guidance.
You look at what that was for example in the fourth quarter, a little north of eight <unk>.
So we've really done a good job I think team.
Really prioritize extracting as quickly as possible access costs, where we can like I said, we break those out because we want to be able to provide transparency in what the.
Run rate G&A cockpit.
Great that is helpful and congratulations on a solid quarter.
Thank you I appreciate it.
We have no further questions I would like to turn the call back over to Chris Doyle for closing remarks alright.
Alright. Thank you again, everyone for joining us this morning, and thank you for your continued interest in <unk> have a safe day.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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Okay.