Civitas Resources Inc. Q1 2023 Earnings Call
We believe this is the right framework to create and deliver value over the long term.
Second we've created an operational environment focused on continuous improvement, we have tremendous certainty or an ability to execute and deliver on our business plan and.
The efficiency gains that our teams are delivering help offset inflation and ensure we maintain our strong margins and free cash flow.
We highlight a couple of examples in our new slide deck, including a 17% improvement in spud to spud cycle times already this year.
Our completions team delivered 7% higher throughput in the first quarter and that's in the midst of a very difficult winter weather.
Faster cycle times, obviously improved capital efficiency, which lead to higher returns.
And that further strengthens our business model.
Third we are generating exceptional financial results, which underpinned one of the most attractive shareholder return framework and our industry.
<unk> offers one of the highest dividend yields at approximately 12% while also having one of the largest buyback programs in our industry as a percentage of market cap right at 18%.
During the first quarter, we generated about $186 million in free cash flow. After having started the year with $768 million of cash on the balance sheet <unk> returned almost $500 million to owners during the quarter through base and variable dividends and the repurchase of $300 million in stock.
We have the full $1 billion remaining on our buyback authorization and we will continue to be disciplined and opportunistic in our approach to executing this buyback program.
For the second quarter. The board has approved a variable dividend of $1 62 per share. In addition to our 50 fixed dividend.
A total dividend of $2 12 per share will be paid on June 29 to shareholders of record on June 15.
We're executing this shareholder return program, while maintaining one of the strongest balance sheets in the industry at quarter end, we had about $560 million in cash against $400 million in total debt and an undrawn credit facility.
Now, let me talk about the first quarter operations like others record cold weather in late 2022 in early 2023 impacted our field level operations. Despite these headwinds our production of 159000 barrels of oil equivalent per day came in at the high end of our guidance range of 155 to 160000 barrels of oil equivalent.
Per day.
Those weather impacts are behind us and our production has recovered nicely with April production, averaging approximately 165000 Boe per day.
Our low operating costs provide us with some of the highest margins in the industry, our absolute LOE cash G&A and <unk> expense decreased 7% quarter over quarter, despite slightly higher cost on the operational side due to the cold weather in the quarter.
By design, our 2023 capital program and activity levels are front end loaded and as anticipated our capital investments in the first quarter came in at about $237 million.
While we continue to closely monitor service costs, we are maintaining our two rig and two frac crew operational plan at this time, our 2023 development plan is now 100% permitted and we expect to make significant progress permitting the 2024 plan over the next few months, notably with the <unk> inside the box seller cap, which will receive expedited review after being approved a preliminary.
Signing in the fourth quarter of last year.
We currently have eight total GDP permits in process with the <unk> that will make up a significant part of our 2024 program, notably our Lowry cap development continues advancing on schedule with the state and those wells are planned for 2025 and beyond.
Finally, we continue to progress our comprehensive nomadic retrofit project, which will effectively reduce our total scope one emissions by approximately 40% by the end of the year.
That project remains on time and on budget.
Bottom line, we are well on track to deliver our full year targets of 160 to 170000 barrels of oil equivalent per day, and $800 million to $910 million in total capital investments.
Furthermore, with over $4 per share already paid or approved in variable and fixed dividends were also on track to exceed our promise of increased dividend payouts in 2023 compared to 2022.
I want to say, thank you to all of our employees and especially our field team and his team has executed operationally quarter after quarter and they delivered exceptional results safely despite record winter temperatures.
While I am pleased at where we sit today and how we started the year I know, we're just getting started and I remain excited about what we will be able to accomplish together, we look forward to continuing to demonstrate the strength of this company in the quarters and years ahead, operator, we're now happy to take questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad well pause for just a moment to compile the Q&A roster.
Okay.
Your first question is from the line of Neal Dingmann with <unk> Securities.
Thanks, Chris.
Yes.
I'll start out here, you've always had a strict capital discipline mindset I think since you've gotten the seed in fact mentioned it even on the.
Fourth quarter release, where you'd be moderating the capital spend then for the year for this year.
Given the disconnect between commodity prices and service costs I'm, just wondering what's your kind of thoughts on this disconnect.
Maybe for your future capital spend.
Sure. Thanks Neal.
Yes.
As a as a team to.
To come out in a couple months ago with that guidance. There was a time since then that oil floated up.
To 80, and there was some discussion around no more price concessions and we still saw at that point a real disconnect between the service market and commodity prices now with with the weakness that we've seen in oil.
We have further conviction that that disconnect is very real and we have seen the service market adjust a bit certainly on diesel tubular.
And sand, but utilization is is surprisingly.
Hi.
For our service market that was really underpinned by a 100 plus dollar of oil and gases twice, where it is today.
We will continue to be very disciplined.
In our approach to capital allocation and Thats every form of capital allocation and proud that we made the moves that we did last quarter and we will continue to be flexible and make the right call for long term shareholder value.
No it's great to hear I'm glad you're certainly very early on that and then my second question is just some we'd put out why the AD valorem service taxes or nothing that occurred this quarter and nothing new I was wondering can you speak to maybe just any impact it might have on shareholder returns.
Capital allocation this quarter.
Sure all outlet Noah Hey, Neil Thanks, Scott good to talk tails really.
Now going to have a material impact I mean, it's something that no one to your point it hasn't changed if you look at.
At our balance sheet. The long term portion of that will earn tax that should give you an idea of what's coming due in April 2024, alright, like like I said I mean, we continue to be very who have a strong balance sheet.
Nothing has changed we've been planning for it. So it's really we don't see that interacting with the shareholder return proposition.
Your next question is from the line of Tim Tim resin with Keybanc.
Good morning, everyone. This is slate on for Tim today, just two questions for you.
So I thought two weeks ago Governor polis remove some owners air quality provisions as a permitting condition in a bill that was sponsored by environmentalist groups can you talk about any discussions you've had with the state about potential changes to the permitting process and how much confidence you have that the steady state permitting conditions in place today will remain.
Okay sure I'll kick this off and then kick it over to Brian .
A few calls back I mentioned that the goal for this team is to get 12 months to 18 months ahead of each of our rigs we've made a tremendous amount of progress and that's on the backs of the strong relationship with the <unk> and the administration and <unk>.
Lot of work biotech technical teams as evidenced by our cap approval last year with preliminary exciting in the second cap going in so we feel confident we're working on 2020 for 2025 wells.
But ill, let me kick it to Brian and touch on some of the finer points sure Hey, Thanks for the question. So governor Polis put out a letter in late March requiring new Nox targets for industry. We feel these targets are very reachable. We arent we already have some line of sight of how we plan to achieve these reductions from our operations as Chris said earlier, we're always focused on lead.
On ESG and as part of that were frankly kind of ahead of the game on this topic because we've already gained experience with the pilot a dual fuel frac completions fleet. Among other steps will be taken to reduce ozone, causing knock for the benefit of all coloradans. So I think the real news and you mentioned how it affects permit.
As part of his letter the Governor announced that Seo GCC, we'll be standing up a program to incentivize and reward operators, who are leading environmental protection for our state.
It has to be called the environmental best practices, Operator program and were told and includes a path to expedited permitting for companies that meet certain criteria part of which it was specifically announced includes carbon neutrality on our scope one and two basis.
As the only coming in Colorado that carbon neutral on scope, one and two basis. We're obviously very excited about this program. We're excited to participate and we think it could lead to very good things for us and our continued demonstrated capability to gain from it is here.
Okay. That's helpful context, and then just second maybe on the repurchases. It teams team is very committed to repurchases, but your thought process on the form of repurchases seems to be evolving is there a chance you could be repurchasing shares in the open market anytime soon or are we more likely to see a press release about a tender or a negotiated rate.
Yes, what our tracker record has demonstrated is that we will be disciplined and opportunistic in and I would say our philosophy has not changed but some of the market dynamics as chains have changed and we were we were able to pull down a large chunk from our largest shareholder back in January at a discount to where we're trading.
For the quarter. There was all of one day, where we traded below where we struck that and we're still trading at a premium to where we brought that down.
Again that was an example of very opportunistic buying.
I'd tell you that over the course of this year and by the end of next year, while we complete the $1 billion authorization I'm very confident in saying, we're likely to look at every option, whether that's open market tender or or.
These block trades that we've done in the past.
Okay.
Your next question is from the line of Phillips Johnston capital One securities.
Hey, guys. Thank you.
I know, it's early to talk 'twenty, four, but just conceptually with the goal would be to.
Keep production relatively flat to the full year 'twenty, three average or would it be sort of more flat relative to the.
Fourth quarter exit rate, which presumably will be a little bit higher than the full year average.
Yes, we guided.
A couple of quarter or a couple months ago that our fourth quarter and the fourth quarter exit 'twenty two to 'twenty three was going to be relatively flat and so we see exiting the year about 170000 Boe per day, and we're still on track to deliver that as we mentioned on the prepared remarks production in the mid 100, <unk> Youll see that.
Grow to the end of the year.
As we think about 2024, we come back I think I've said on a previous call one of the easiest companies to model because we come back to our proven business plan, which is really focused on how do we generate the most free cash as possible, while maintaining production broadly flat and get that back to shareholders and maintain premier balance sheet that's going.
The story for 2024, and so when we guided this year 160 to $1 70, you can probably lay that down next year I think Philips a lot also depends on this disconnect between service costs in.
And the commodity price when we think about what our.
Our maintenance capital level is that should be changing right with commodity prices moving down from where they've been in the past. So I think that will factor into the calculus as well.
See that rebalance you could see us deploy more capital. If you see this imbalance continue will continue to be very disciplined in how we're allocating capital.
Okay sounds good and then just on the M&A front.
I assume you guys continue to look at opportunities.
Within the <unk>.
DJ Basin.
At this point, how much appetite there again look sort of outside of the basin.
Yes, a couple of people noticed we had a small acquisition in basin. This past quarter, a little over $30 million. So the team has done a very good job of continuing to look for opportunities, whether it's trades are working interest acquisitions or or bolt on acquisitions to further enhance and optimize our DJ.
Position, we will continue to look at every opportunity within the basin.
Interestingly as you as you think about an industry that's faced with some volatility on the commodity commodity price.
Are things, it's companies with our type of balance sheet and the quality of asset that is generating significant free cash it can really optimize and look for ways to further build onto our DJ position now I will say, we have looked and we will continue to look for opportunities outside of the basin.
And that's a very high bar to do that right. We've got to look for the asset quality and scale that allows us to further enhance and extend our business model focused on generating free cash and our ability to get that back to shareholders. It's got to compete with the buyback it has to compete with other opportunities whether that's organically.
<unk> capital or looking inside the basin.
Our track record over the over the past 18 months since formation has been that we've been.
Very disciplined but also opportunistic when the time is right to pick up high quality assets that are accretive that help optimize and extend our business model.
Okay are there any particular areas outside of the basin that look more attractive versus.
Like versus other areas.
The calculus, there as it can be a little bit different right because it does come back down to asset quality and returns, but at the same time, our commitment to maintain a premier balance sheet means we can't go in and out compete and we will not overpay.
For more assets. So we will protect that balance sheet, but look for those assets that that will compete within our portfolio for capital. If they don't compete there is no reason to go after them.
Okay.
Your next question is from the line of Leo Mariani with glass.
I just wanted to follow up a little bit on the M&A.
<unk> here can you talk a little bit more color about the 30 plus million dollars deal. Thank you.
You did here in the quarter.
Come with any production or is it more of kind of an acreage type deal and then just additionally, you talked about continuing to look at all deals in basin can you give us a little more color around.
Potential availability of a things and based on obviously, you've consolidated a lot over the years, but what's kind of the current landscape of what's kind of available in the DJ are there things that are maybe chunkier or is it more kind of small working interest acreage type deals.
Sure. Thanks, Lisa for the question I'll start with this.
Small acquisition that was made the largest part of that was an acquisition of.
Of an opportunity with some development running room.
At 2014.
Gross gross wells 11, net wells fits right into our development.
Very highly accretive.
Transaction for us and again kudos to the team for identifying the opportunity, bringing onboard a very reasonable and accretive valuation.
It is panning glove with our existing operations.
And then your question on additional M&A of size I think I like the approach. The team is taking which is let's go look at the lowest risk integration acquisitions that we can we can bring onboard and thats working interest. It's these types of smaller tuck in acquisitions.
<unk>.
But I do believe and I think I've said in the past we looked at just about everything in basin.
And no the basin, obviously very very well I think it's interesting with where commodity prices are currently.
That could position.
<unk> to take advantage of those opportunities coming back to us.
No idea if that will happen, we'll be ready, but I will say that as our track records.
Demonstrates we're going to be very disciplined and only do it if it if it.
Extends and improves our business model.
Okay I appreciate that and then obviously I know it's early on the 2024, you kind of talked about broadly flat production I think thats basically been the strategy for a handful of years now youre kind of at two rigs and two crews I mean would you see the need for maybe bringing that third rig back.
Next year to kind of stay broadly flat, how do you see activity.
Potentially needed to kind of keep that sort of mode of operating.
Okay.
Sure.
<unk> worth where at two rigs and two frac spreads.
We'll dial that up and back to optimize our capital deployment, obviously and we've done that in the past you saw us last year actually grow there was a short period of time, we went up to four rigs dropped back to three rigs brought in a third frac spread so we will move up and down.
As we see the best path to optimize our capital allocation was going on last year and a lot of that activity was really during a time where industry wasn't facing the amount of inflation that ultimately hit us in the back half of the year with that inflation and then the subsequent weakness in commodity prices you saw us reverse that out.
And I sort of walk through that history, because as you March from where we are today may four 2023, and think about what 2024 looks like we've got to have a view on where commodity prices set and where service costs are I will say if those balance more appropriately.
Then you could see us lean in and allocate more capital to the drill bit and that could mean, bringing a third rig.
Which gets up subsequently made bringing in a third frac crew if that that's the case youre going to see us on the high end of guidance.
If we continue a moderated pace.
It will be broadly flat and happy to be very I think disciplined in the way, we're allocating capital and I think we have built that.
That track or continue to build a track record of delivering on our promises and allocating capital in a very thoughtful way.
Okay.
The next question is from the line of Bill Zelman with Titan capital.
Thank you.
Would you please discuss the $4 $4 million of advisory service costs.
And really I'm, specifically, asking if that is tied to acquisitions that you had been evaluating.
Bill. Thanks for your question I would say on the core four it's primarily like we said on the press release is primarily related to severance and some cost savings advisory that we did in the first quarter primarily related to <unk>.
G&A and alloy cost saving initiatives.
Okay. Thank you and then.
Secondarily.
Or would you say that <unk> is at today culturally realm.
Relative to where you ultimately want to be just given the multiple acquisitions net.
Created the company.
Yes. Thanks for the question Bill I think this is another check in on your part and I think it's a fair one.
Sitting here almost to the date year anniversary and what I've seen from this company.
His tremendous growth.
And most importantly, yet another quarter of <unk>.
During a quarters of delivering on our promises.
I say that because that is becoming a very real part of our culture of the company.
This is a company that to your point brought together four or five other companies and not only executed button in most quarters. Many quarters outperformed expectations, you don't do that without a very strong culture of performance and Thats what were building here I'm very pleased with.
The integration.
Efforts as evidenced by those results.
I am excited about the culture that we're building the excitement around the halls as it's being recognized by the investment community.
And our peers within this space and an outside but also know that there's more to come.
So this is a baseball game I think.
We asked the question earlier was probably second or third inning, maybe we're a bit we're not quite to the stretch.
This is this is a great company and we're getting stronger and a big part of that is continuing to enhance and build on this culture of performance. So thank you for that question.
Thank you and then final question if I may.
Discuss if you would.
The role that you see Hodge plane right.
Going forward now that you've.
Formerly created a CEO role.
Sure in August here in the room with us but all.
I'll kick us off I got to know Hodge last year.
As appear within the basin.
His time spent with chevron and coming off of a long career with with noble and noble. He was he was in charge of all of the onshore assets for that company before the acquisition by Chevron.
Hodges our high integrity.
Continuous improvement DNA collaboration he is a perfect match perfect fit with this with this team.
I am excited for.
Hodge will bring to the table.
Excited to have him as part of that team I truly think that that.
He'll be a big part of continuing to build this this culture. He has been on the job for all of this is weak.
Ish.
And is already making a good impact on our culture and excited to see where we go from here.
Great. Thank you all.
Thank you. Thank you.
Okay.
Thank you I will now hand, today's call over to Chris Doyle for any closing remarks.
Well. Thank you everybody for your interest in Civitas and we look forward to sharing our continued progress and delivery on upcoming calls have a great rest of your day and please be safe.
Okay.
This concludes today's call. Thank you for joining you may now disconnect your lines.