Q4 2022 Civitas Resources Inc Earnings Call

Good morning, My name is Chris and I'll be your conference operator today at this.

I would like to welcome everyone to sabotage research fourth quarter.

Excuse me <unk> resources fourth quarter 2022 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there'll be a question and answer session.

If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.

To withdraw your question. Please press star one again.

I'll now hand, it over to John Wren Director of Investor Relations you may begin.

Thanks, operator, and good morning, everyone. We appreciate you joining our conference call today I'm joined by sabotage CEO , Chris Doyle CFO Marino with Boesky C O O, Matt Owens and Brian Kane, our Chief Sustainability officer by now I Hope you've had a chance to review our earnings release, 10-K, and slide deck all of which are.

Available on our website on today's call. We may make forward looking statements, which 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 SEC filings as well after our brief prepared remarks, Chris and other members of the leadership team will be happy to take your questions. However, please limit your time to one question and one follow up and now I'll turn the call over to Chris.

Thanks, John Good morning, everyone. We have a lot of good news to share today, both in terms of our strong finish to 2022 as well as our plans for 2023, we'll get to your questions. Shortly but first I want to highlight three points, which are critical to understanding where we sit today and the tremendous opportunity that lies before us.

Let's start with 2022 as we often discuss our business model is based on the principle that a company in our space and prioritize free cash flow sustainably return that cash to shareholders, maintaining a premier balance sheet and lead on ESG.

In 2022, we delivered across each of these strategic pillars.

We met our original capital guidance for the year, despite significant service cost inflation.

We exceeded the top end of our production guidance and generated a record $1 2 billion and free cash flow, which is about 25% of our enterprise value with.

We demonstrated our commitment to returning cash to shareholders through our base and variable dividends totaling about $530 million last year or $6 29 per share.

In addition, we bought back $300 million in stock last month.

We maintained our pristine balance sheet and exited the year with nearly $770 million in cash against $400 million in total debt and an undrawn facility.

Lastly, we continued our focus on best in class ESG performance initiating an equipment retrofit program to reduce emissions by more than a third by the end of this year and standing up the Civitas Community Foundation scholarship Fund for high school graduates living in our operating areas and nearby communities.

We talk a lot about our commitment to ESG, but it is not just set a toss where I'm on a truly exceptional group of North American oil and gas operators, who are meeting global demand, while producing among the cleanest energy molecules in the World every single day.

Turning our attention to 2023 our approach this year remains consistent we're committed to capital discipline, we're focused on generating free cash flow and we'll return that cash to our shareholders. We've seen a meaningful pullback in commodity prices lately and service costs have yet to adjust utilization remains high as many operators are choosing to sacrifice.

And capital efficiency to keep programs going.

Although the DJ Basin has some of the lowest breakeven in North America I can assure you civitas will not make that mistake.

We started taking action late in the third quarter of 2002, when we dropped a rig and temporarily added a third completion crew to work down our DUC inventory and improve overall program efficiency.

Although we have the permits in hand today to add that third rig back where instead electing to maintain two rigs and two completion crews to maximize capital efficiency and overall program returns.

So for 2023 year over year capital investments will be down cash returns to shareholders are projected higher and production will be broadly flat.

Let me explain how we get this done.

Our capital investments will be $850 million or about 15% lower than last year, and our reinvestment rate will be below 50%.

And the updated slide deck, we show cumulative production for wells vintage by year.

Company delivered a step change in performance in 2021, and you can see our 2022 program delivered that same performance. We don't expect to see degradation in 2020 for each program and we continue to be excited with the results we're delivering in our walk into the Lowry area.

This year's turning lines will be similar to 2022 and production will be relatively flat year over year and exit to exit.

Like others record cold weather in the Rockies will impact first quarter sales, we've had six weeks so far already this year with below zero wind shells, including this week as.

It's whether it's impacted our field operations and we expect volumes will be in the 155 to 160000 BOE per day range in the first quarter versus our full year guide of 160 to 170000 Boe per day.

At current strip prices, we expect to generate roughly $1 billion in free cash. This year, the majority of which will be returned to shareholders due to our unique and resilient return framework with payouts based on the last 12 months of free cash flow, we actually expect total dividends to increase year over year to more than $600 million.

Our commitment to return cash to shareholders is unwavering and yesterday, we were excited to announce a new $1 billion buyback authorization. This is in addition to the $300 million we've repurchased in January .

We believe <unk> has the most compelling cash return framework and industry.

Finally, I continue to be impressed with the talented <unk> team and our collective accomplishments.

We strengthened our business on numerous fronts over the past year, we secured more new pad permits than any other operator in the D. J, we received approval on the state's first cap with preliminary citing.

We were disciplined in our approach to M&A selectively executing on a couple of accretive transactions and we found innovative ways to drive capital efficiency to help counter industry wide inflation.

I'd like to give a special shout out to our field team. This team's executed operationally quarter after quarter. They have delivered these results safely despite record cold temperatures and so I, thank them and our shareholders. Thank them.

Before I close I would be remiss, if I Didnt mentioned the significant contributions to our company's foundation provided by both Bendel and Brian Stech.

Back in 2021. These two former chairman recognize a shared vision driving consolidation within the DJ Basin I want to thank them for their service that proved to be so critical during our first chapter of sabotage.

So I am excited to start a new chapter in our company's history and welcomed outer band Camden and Deborah buyers to our board.

The Civitas team is just getting started and we look forward to delivering differentiated results for our shareholders in the years ahead.

Operator, we're now happy to take questions.

Thank you as a reminder, if you'd like to ask a question. Please press Star then one on your telephone keypad.

First question is from Neal Dingmann with Truth Securities. Your line is open.

Outstanding quarter, Chris I'm glad down investors are recognizing that this morning. My first question is.

Yes.

Looking at the free cash flow or I guess I'd call. It cash investments specifically you all recently announced.

Cereal stock buyback and I'm. Just wondering was this just you all simply looking at now.

I guess you assume the PV of your company value and versus what Youre seeing current deals or what were the other drivers of decision as part of that process.

Thanks, Thanks for the question Neil.

I think you hit on it.

We've been very active looking at in basin M&A what.

What we did last month pulling down $300 million of our stock really is an indication that the most attractive thing we saw in front of us was buying back our own equity as we roll our business model, which is very very simple forward through 'twenty, three and enter 2000 24 billion.

Billion dollar authorization is really a product of looking at the excess cash flow that this company is in this business is going to generate so looking at 'twenty two dividends of of a little over $500 million go into 600 this year.

And $1 billion of free cash this year roll that forward into 2024 in addition to the cash.

The balance that we currently have and.

And we think this could be a really good opportunity and.

And a really compelling investment to buy back additional shares.

Yes, I'm glad to hear that and then second question is on your operating plan that you just touched on specifically I appreciate and agree with your planned solar activity, especially if these costs remain relatively high like oil and gas decline. So I'm just wondering what what would it take for you to ramp this planned backed up or maybe asked another way, maybe just talk a little bit more than.

You already have about how youre thinking about just returning.

Returning shareholder return versus growth.

Sure.

Let me start just by reiterating we're not focused on growth right. We're focused on keeping production is flat as we can.

Minimizing capital to do so to maximize free cash well we saw it if you think back in 2022 prior too.

20, plus percent of inflation in 2002, we actually were more aggressive we drilled a picked up went to four rigs for a short period.

<unk> built up a DUC inventory and we've worked that down through the year.

When we look at where we are today, it's actually the opposite.

Commodity prices oil is down call. It twentyish percent gas is less than half of what it was just a short while ago and yet we're still seeing pressure given where utilization said so.

I think with this environment with the disconnect between service cost and commodity prices.

I think the right thing to do is to sit back a little bit now what will it take.

To lean back in those two things need to align better and so that's either commodity prices up or service costs start to start to soften a bit and I think as you see operators pull back on activity, especially.

Some of the gasior names.

We'll see that how long will that take we'll see but we'll be very disciplined in our approach to how we allocate capital in that that's not just M&A not just buybacks.

Organic investments as well.

Great. Thanks for the color.

Thanks, Dan.

The next question is from Tim <unk> with Keybanc. Your line is open.

Hey, good morning, everybody.

I can dig into that.

Slide eight of your deck a bit.

Youre highlighting lack of degradation and I was just curious kind of.

With these consistent results are result of specific areas Youre drilling was it changes in the in the D&C design and how repeatable.

Do you think these results are over the next few years.

Thanks for the thanks for the question Tim So.

We've pulled in the full year programs for everything in 2020 and before looked at just what was drilled in 21 looked at just what was drilled in 'twenty two.

I'd say the character of the each year's program is starting to shift a bit.

Into Watkins.

Larry area and what we've seen is consistent results and not.

Not just what we show here, but there was a recently published report about a week and a half ago showing consistency in the Watkins area.

From a step change in 2020 to 21, and then again in 'twenty to lay out around 'twenty. One when we look at our 2023 plan. Its a lay up lay down on 2022. So we're seeing a very consistent very repeatable results.

And I would say that that a lot of that is being driven by up spacing and optimizing returns focused on the right things not necessarily how many steps we can drill a year.

But how do we maximize.

Those returns for the company and maximize free cash flow.

Okay. Okay. That's helpful and then if I could pivot back to the repurchase.

Session.

I know there's.

Some folks have argued that having an open ended repurchase that's not being actively utilized is not helpful. So.

Do you believe that you get.

In a steady state world kind of fully utilize this 1 billion over the next two years and do you have a preference over open market repurchases versus sort of negotiate it.

Purchases like <unk> like you did with CPP.

Sure.

I'll kick this off and then maybe you could get to NOLA to add some color.

Yes, our intent with the authorization is to purchase a $1 billion by the end of next year.

How we do that I think everything is on the table on it I would tell you one thing that.

That this team has shown time and time again and the company has shown time and time again is we're going to be disciplined and we're going to attack our attack whatever it is if its a buyback to me.

Maximize returns for our company what we saw in January again was an opportunity to pull down a pretty significant chunk from one of our larger shareholders not impact the overall flow to the equity and do so at a really compelling price and so what that looks like over the next couple of years is yet to be determined but every.

<unk> is on the table.

Kevin I would add to Chris's point, any and all options are alpine I mean, the way we think about it. It's just really the incremental dollar like where the return on that incremental dollar of SME.

Open market repurchases or just more spread out in Pangea Ms. Jackie If you look at some company negotiated like we announced in January that one is more chunky you saw over the last year.

We did a couple of relatively small deals one in January one in July .

Yes. It does it does point to determine what those applications were better than our stock in January we determined that our stock was very compelling.

Its just a continuous evaluation of the relative merits of our stock and an additional asset acquisitions, but we always every time, we do lots of allocation. We look at the valley copper fastener stock and it's just it's a continuous evaluation. So it's hard to say.

Pes or anything format right I mean, that's just the Panther is going to depend on the situation of where the <unk> at this time.

It will be very opportunistic.

Okay, I look forward to seeing what happens thank you.

Great. Thanks.

The next question is from Phillips Johnston with capital one your line is open.

Hey, guys. Thank you just to.

Ask you about the setup for 24, obviously, it's early to be talking about next year.

Obviously, there is no guidance out there or anything like that but it is pretty notable that you guys are going to be bringing about 40 more wells online. This year then the number of wells that Youre drilling would deteriorate program.

I agree with the rationale, but it services costs do remain high and I'm wondering if we're at risk of robbing Peter to pay Paul and essentially.

And free cash flow from 24, 4% by year since you would presumably need to ramp up.

Drilling activity to sort of keep the same tellcase.

Yes, thanks for the question Phillips.

I'll step back for a second and just make the point that no company should be building up docs No company should have hundreds of ducks in my opinion, that's inefficient use of capital. While we saw last year was we entered the year with about 40 docs, we exited with about 60, and so we're working that down in 'twenty three.

Because it's the best use of capital.

As I look from 23 and 24, while there is no guidance there. The guidance is the business model business model is we're going to keep production broadly flat and so.

160, 170 is fine now.

Now how we get there to your point.

<unk> very highly on service costs now in my opinion, why would service costs remain high I think because commodity prices.

We will deem.

Utilization to remain high and so in that case, we would lean into that so I think the the simplicity of our business model focusing on all the right things trying to be as efficient every year as possible.

Is not going to waiver this year next year or over.

Over the foreseeable future so Matt I don't know if there's anything you would add in terms of how we think about capital allocation or Noah.

No nothing for me, but I would I would echo that.

We're not we're not drawing down a significant number of docs like Chris said, we did enter the year with about 40 in the previous year and then going into 'twenty. Three we have about 60. So it wasn't like we built up a massive number and thats what were focusing on going forward, but we should always be kind of normalize right around that 40 ish number depending on just the ebb and flow of that rig schedule.

Okay. It sounds good that's good color.

Maybe just to follow up on Neal's question on the M&A front.

You guys Havent been shy about your efforts to acquire some of the larger privates in the basin. So can you maybe just give us an update there and should.

Should we assume that the more aggressive return of capital plans.

That M&A is less of a priority going forward.

Yes, I wouldn't say that Philips I appreciate the question.

I think it's an indication that all along anything that we do in terms of M&A has to compete against our underlying business. We've been very very active as we said on the M&A side and the most compelling thing. We've seen currently is our own equity and that's a tribute.

The strength of the business model.

And the opportunities versus the opportunities that are out there I would say, we will remain active and look for.

Ways bigger small to continue to optimize our underlying business module model, which is how do you generate the most cash that you can get it back to shareholders without putting your balance sheet at risk and lead on ESG. So we'll remain active it's really just a commitment to investors to say look this is we're not committed.

One way or the other everything has to compete on a level playing field.

Okay.

Great. Thanks, Scott.

Thank you.

The next question is from Noel Parks with Tuohy Brothers. Your line is open.

Hi, good morning.

Good morning.

Just a couple for me.

In the release you talked about.

Setting a record for the.

Yeah.

Two and a half mile lateral I was just curious if you could.

Talk about that.

Assume that record will still not be the well will not be the average or typical in the near term, but I was just curious of the elements of that improvement and I think it was described as being your highest performing rig and I was just wondering how much of that was maybe sort of a crew depend.

As well as Jess.

Our process.

Process consistency.

Yes. Thank you for the question I'll kick this off and then I'll kick it over to Matt.

Its matt's team that is delivering that type of continuous improvement I think what I would highlight for us is not just the record.

One thing that jumps off the slide for me is a 30% improvement over 2017, a 16% improvement over 2019.

A team that is geared to continuously improve and drive cost time cycle times out of the system is that's how you win in a commodity business I would I would say the other thing is that this highlights the underlying capital efficiency of the DJ asset.

Industry and it's not just us has gotten us down to a fine art and we continue to look for ways and find ways to get cost and time out of the out of the system.

The last point is a good one.

There are.

It's beyond just the rig it's the crew in the field, it's the team helping those crews and what we've seen is while we highlight the highest performing rig we're very happy with the performance of all our rigs and.

The last thing I would point out to is to have that type of performance for an entire year with no lost time incidence is is what we can be most proud of so Matt anything to add from your yes. It does.

This was the only rig that we ran for the full year last year, our second rig that we're running all of last year. The second two quarters anyways, we picked up halfway through the year and its not far behind with this rig was in terms of pace now our average two and a half mile well isn't to two days spud to TD, but the averages have been coming down and you can see that in that bullet point.

Chris referenced earlier and the improvement over the prior year. So our goal is to continue bringing down that average closer and closer to what our records are but.

Then if you were to rewind two years and asked if we thought we'd be drilling a two and a half mile well almost 21000 feet spud to TD in to two days I would've thought that would've been a little bit out of reach but we keep finding new ways to innovate and get things done a little bit quicker and a little bit quicker each year.

Great and just wanted to ask about reserves and.

Wondering if you could talk a bit about.

Maybe whether you you saw positive type curve revisions on assuming that with the five year rule not all of those would necessarily be immediately visible in the proved numbers.

And.

If you if you have any.

Any sense of what kind of improvement you might be able to see going forward.

Yeah. Good question. This is Matt again.

I'm, assuming you're referring to that roughly 25 million barrels equivalent of revisions that is showing up in the 10-K.

But if youre looking at that about half of that is due to price and the other half roughly is due to well performance. So we have seen positive well performance compared to what type curves were generated off of a few years ago and a lot of that has to do with what Chris alluded to earlier and our R&R repeatable well results year over year due to different <unk>.

<unk> designs that we think are attributing to our outperformance, but also up spacing. So we generally have spaced across the board and we're seeing positive results and consistent results from that over the last year and a half.

Great. Thanks, a lot.

Thank you.

The next question is from Nicholas Pope with Seaport Research. Your line is open.

Good morning, everyone.

Good morning.

I was hoping you could expand a little bit on.

These big wells that Youre drilling because I see that.

<unk> guidance for 'twenty, three youre talking about average lateral lengths.

We're going to be.

Two five miles is.

I guess, how has that progressed over the last year.

Year in terms of maybe the last two years as you kind of look at the size of the wells you're drilling.

And kind of how sustainable that is to kind of keep those with those bigger.

Longer.

Yes.

Yeah no. Thank you for highlighting that that's that's a big move year over year.

Drilling two milers on average versus two five miles now we're testing longer laterals.

We're very excited about what the team has been able to do in terms of cycle times and being able to extend laterals and it really is just another ingredient to drive additional capital efficiency into the program.

That looking into 2024 that generally longer lateral mix of wells is again, how we will most efficiently key production broadly flat.

I don't know if you want to add anything any other details, yes, I would add our acreage position is different now too, especially in Watkins, where it's nearly an 80000 acre contiguous block, where we can drill these longer laterals down in that area Youll see us drilling a lot more three mile wells, we drilled quite a few three mile wells last year completed and brought them online and we have the ability to you.

Even do four mile wells now going forward.

We anticipate efficiencies to get better with these longer laterals, but the one thing you got to remember that's different about the DJ basin compared to other basins as we can drill the wells. So fast so the vertical section doesn't save us millions of dollars like it does in other basins and only saved us about $1 million to not have to drill that vertical section. So it's not quite as ifs.

<unk> as some other basins, where drilling costs are a lot more expensive.

But it is we still think going to be more efficiencies going forward that we can continue to capitalize on it.

Got it Thats great.

And to kind of switch.

Switch gear, a little bit here.

Yeah.

Kind of curious if you could update.

On the permitting process and I know there is a small piece of 'twenty three that's still kind of outstanding to kind of lockup permitting.

Can you give a little update on where things are and kind of where the expectation is on kind of updates on.

On kind of finalizing everything with 23.

Sure I appreciate the question I'll kick this off and then kick it over to Brian Kane.

So as you highlight we're about 85% of the way through for the 2023 program.

Just on the backs of the hard work of the team highlight how much different place. We are this year than we were a year ago.

Again lots of hard work and collaboration with.

With multiple groups.

At the tail end of last year, you saw our first.

Actually the <unk>.

Cap get approved with preliminary siding.

One of our peer companies in basin, followed us.

We're seeing.

We're seeing the process work and <unk>.

Certainly a much different pace.

What we saw this time last year and so we're focused with that cap and you also saw us.

Submit our second cap.

Talking about 24 2025.

Activity and so the team is getting getting out in front of the rigs, which is exactly what we want to see and continue to work very well with the Seo GCC. So let me kick it to cane and ill give you some additional detail.

Thanks, Chris.

As you said, 85% of our 2023 plan is permitted.

Have enough permits right now to run three rigs if we wanted to.

Obviously choosing not to those those two pads essentially left in the 2023 plan are currently pending those or November December pads, and we believe that they are worth the wait because of because of the value that we assigned to those.

We feel good about our 2023 plan and I would just point out that.

We ended 2022 as you see with nine new pad permits which is more than any other operator in the basin by nearly two <unk>. So we're creating a demonstrated track record of success in navigating this regulatory environment with.

We think exceptional results I would also note that by the end of the first quarter by the end of this quarter, we will have as many oh GDP permits as new pad permits pending as we received and the entirety of last year and so those new pad permits that will be pending would be going toward the 2020.

Forward drilling program longer term, we'd like to have a bank of about 12 to 18 months of permits in hand to provide that maximum flexibility and value acceleration where desired in our development plans and so this year. We are laser focused on working toward that goal and we will be augmenting that.

The.

The patent associated with our improved Boxholder cap and then our next capital Lowery cap, which is which is a very exciting development about 170 wells nameplate, one surface owner and no dissenting owners within 2000 feet. So we remain laser focused in building that bank.

This year for the coming years.

Got it thats.

Very detailed very helpful. I appreciate that and I would also like to add.

I like this slide on the greenhouse gas emissions reduction.

Target you guys have for 'twenty three.

It's a nice big number I'd like to see that.

That's all I have thanks.

Yeah No I appreciate the question I appreciate the comment and certainly that's a massive commitment for the company and we think the right thing to do and excited to see what the team can do throughout the year.

Yes.

Again, Thats star one if you'd like to ask a question. The next question is from Bill <unk> with Titan Capital. Your line is open.

Thank you and congratulations on.

Good quarter and year.

Are you thinking about moving outside of Colorado over the course of the next couple of years.

Sure.

So I think I would take us back to our four pillars really of how we're going to run this business.

And we have an asset that generates significant free cash.

We have returned significant cash to shareholders, we're protecting our balance sheet, we're leading the way in ESG, So I say that because that grounds us to opportunities as we look outside of the DJ perhaps has to be assets that allows us to extend where optimize that business model and so youre talking about asset quality or youre talking about.

<unk>.

Entry into that asset is important as well and so again as we look at options to deploy capital will we consider adding assets in base insurer out of basin, perhaps but we have a fundamentally really strong business going here right now, it's going to take quite a bit too.

To have us.

Have us consider those opportunities, but we've proven ourselves.

As as having a very disciplined approach to M&A and.

We will continue down that path.

I don't know if you want to add anything to that I think thats right I think with this latest buyback announcement.

With <unk> over the last 12 months to execute on opportunities that compete with that I think with this latest buyback announcement, we're making a very clear signal of that everything that we do have to compete with our stock and so that's what you saw in January and definitely you will see us deal pursuant to application of this new newly announced billion dollar program.

Thank you both.

Thank you thank you Mike.

There are no further questions at this time I will turn it over to Chris Doyle for any closing remarks.

Sure. Thank you I appreciate everyone's continued interest in civitas looks.

Looking out looking at the temperature were below zero again, so I really appreciate the hard work of all of the <unk> employees, especially the field.

The field operations group that is making this a super compelling investment in Super compelling business.

Thank you so much for the time this morning.

Look forward to speaking soon be safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

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