Q2 2023 Civitas Resources Inc Earnings Call
Good morning, ladies and gentlemen, thank you for standing by my name is Erica.
And I will be the conference operator today at this time I would like to welcome everyone to the Civitas resources second quarter 2023 earnings Conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question answer session. If you would like to ask a question. During this time simply press Star followed followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star One again. Thank you at this too.
Time I'll be turning over every team to John Rats go ahead John .
Thanks, operator, and good morning, everyone and thanks for joining US. This morning, I'm joined today by our CEO , Chris Doyle CFO , Mary Nellix Boesky C O O Hodge Walker and Brian <unk>, Our Chief Sustainability Officer I Hope you have reviewed our earnings release 10-Q, and slide deck, all of which are available on our website.
We will make forward looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially from our projections. Please read our full disclosures regarding forward looking statements in our 10-Q and other SEC filings. We may also refer to certain non-GAAP financial metrics reconciliations of certain non-GAAP metrics can be found.
In yesterday's release, and our SEC filings. After Christmas brief prepared remarks, we will all be available to take your questions. As always please limit your time to one question and one follow up at this allows us to get to more of your questions I'll now turn the call over to Chris.
Thanks, John Good morning, everyone. We've been extremely busy year to date and certainly this quarter in particular, capturing in our closing two transformative deals in the Permian, while continuing to deliver on our DJ business.
You can see that our second quarter financial and operating results are very strong and top consensus estimates for both production and cash flow. In addition, we're managing our investment and activity levels with capital expenditures under expectations for the quarter and allowing us to reallocate some of our capital savings to value added projects in Colorado.
Our teams are laser focused on continuing to build upon our track record of delivering on our promises our results continue to prove that an E&P company with high quality assets can return cash to shareholders through commodity cycles, while also maintaining a strong balance sheet.
Inclusive of our dividend payment next month's civitas will return more than $800 million year to date to our shareholders. One of the highest dividend yields alongside an active stock repurchase program.
When we announced our recent Permian acquisitions, we've reiterated our unwavering commitment to a strong balance sheet, we're well underway with our plans to divest divest $300 million in noncore assets by mid 2024.
The proceeds will allow us to quickly reduce debt while high grading our portfolio away from assets that simply are not part of our near term development plan.
Looking forward, we will target three quarters of a turn of leverage at mid cycle pricing and again maintaining.
Maintaining a strong capital structure is key to building a sustainable business that can deliver top shareholder returns.
Before taking your questions today, let me quickly discuss our recently closed Permian transactions and cover our second quarter highlights.
Our new Permian assets are a perfect fit for <unk> and advance our strategic pillars, the new civitas, a scaled and diversified platform with duration and three of the best oil basins in North America.
These deals create instant scale and provide an accretive entry into the Permian as we said before scale really does matter in this industry, but we're not focused on getting bigger we're focused on sustainably generating free cash and rewarding our shareholders through the commodity cycle. These deals check those boxes.
Our diverse asset base provides us with flexibility in how we allocate capital reduces risk and enhances the certainty of delivering on our metrics.
<unk> now has about a decade of high quality low breakeven locations across three top oil basins in the U S.
Our proven business plan matching high quality assets with scale and a deep inventory provides us with duration and confidence in our ability to deliver value for our shareholders.
In today's deck, we provided production and activity updates for our new Permian assets production was in line with expectations averaged about 107000 Boe per day of which 50% was oil during the second quarter. Currently the assets are running around 100000 Boe per day in the third quarter, which we will look to maintain heading into the fourth and exit the year around 110000.
Bo per day.
There are currently seven rigs running on our Permian assets with close we can now optimize our activity levels and look for ways to best allocate investments across the DJ the Midland and Delaware basins.
We expect to run about six total rigs in the Permian and DJ throughout 2024.
For full year 2023, and we provided preliminary guidance when we announced the transactions. Today's materials include the 'twenty three outlook for production capital investments total cash operating costs production taxes and oil price differentials.
Bottom line, our outlook for Permian production costs were unchanged as the day of announcement.
Our full year capital investments, including five months of our new Permian assets are expected to be about $1 3 billion at the midpoint.
We're encouraged by some of the recent softening we have seen in certain services and consumables includes drilling casing mud and sand.
It's early so we're maintaining our capital guidance for the combined company because as we said coming into this year, we will be opportunistic and disciplined in how we allocate capital and a potential savings or efficiency gains on the back half of the year can be allocated back to our development programs are to our balance sheet or back to our shareholders.
Certainly too early to model deflation heading into 2024, but we like seeing the market beginning to correct.
Since the announcement, we've been planning for integration, we have recent experience, obviously successfully combining companies and this integration in particular is going well, albeit very early innings.
We're very impressed with the teams behind these assets and we look forward to building upon our success.
We have a six month transition service agreement in place with both Hibernia and tap rock to ensure a seamless transition concurrently we are building out the team looking to identify and retain top talent aligned with the broader organization accelerate the transition wherever we can.
Let me quickly summarize our second quarter results.
<unk> delivered free cash flow of about $190 million in the second quarter above consensus expectations, and really driven by strong production lowering expenses and managing capital investments while production the team delivered higher than expected.
Production of 173000 Boe per day.
So for the first half of 2023, we averaged about 166000 Boe per day right at the mid point or just over mid point of our annual guidance.
Our strong oil performance for the quarter was primarily driven by increased productivity, we've seen from our recent 2023 pills.
Including the Watkins development area. We recently turned in line three pads with three mile laterals that have significantly outperformed expectations to date.
It's early but based on our strong performance. We've seen we now expect to be around the high end of our DJ production guidance. This year and continue to target and exited 170000 Boe per day, or 280000 Boe per day, and when combined with the Permian.
On the expense side in the quarter and when you look at the foundation of our cost structure, LOE and cash G&A per Boe were down 10% quarter over quarter as we got out from under the first quarter winter and returned to normal production levels.
Finally, we continue to manage our capital full year expectations for Capex are unchanged capital investments in the second quarter about $230 million were consistent with the first quarter as our activity levels remain relatively flat.
When taken together higher production lower expenses and capital inside expectations, you get higher free cash flow and higher returns to our shareholders.
Finally, we were recently active under our $500 million share buyback authorization and repurchased about $20 million of stock at an average price of $64 55 per share during the quarter.
In total we've now repurchased $320 million in stock year to date and have $480 million remaining under the buyback authorization through year end 2024.
In closing, let me reiterate today's key takeaways first our legacy DJ business is performing exceptionally well our teams continue to find innovative ways to address challenges and safely advance our business and deliver strong results.
Second.
Our recent acquisitions have created a stronger better and more balanced civitas, we have options to invest capital across our portfolio of high return assets in the DJ and Permian or focus on safely integrating those assets and onboarding. Many of the great employees from Hibernia and top rock once we get past our TSA.
Lastly, we know the importance of our premier balance sheet, we're advancing sizable noncore asset sales and have a strong outlook for free cash flow. When combined we expect to return to our optimal leverage ratio of less than one times in 2024. Thank.
Thank you for your interest in Civitas, 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, we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Neal Dingmann from Trust Securities.
Hey, good morning, guys.
Good morning can you give me all right.
Yes, good afternoon.
But quick question on the commodity mix really Couldnt can you speak to how you're thinking about the oil cut both in that the new Permian assets. The DJ I'm. Just wondering specifically is your guide on the new assets assume much change going forward and then secondly also on the DJ doesn't assume that after that oily quarter, you had last quarter.
But the oil cut goes back to a more normalized level there.
Yeah I'll start thanks for the question Neil I'll start with with the D. J.
As I mentioned.
The pads that came on a couple of things going on here. One. This is an watkins area, which is an oily or area of our development, we love what we're seeing.
Two of these were also our initial three mile test.
And so going into the year, we prudently risk both the capital and operational execution, but we also risks.
The performance of that third trial, what we've seen through the quarter early on in the flowback of these pads that came on.
Last month of the first quarter. So we had a full quarter to look at them. What we've seen is the.
The degradation that we had modeled was was overly conservative and so they'd be expectations early in the flowback, it's oiler as well as those wells continue to clean up when we open them up we will see the gas oil ratio increase on those pads and so we've got that modeled into the back half of the year, but I will tell you where X.
Streamline excited about not just the continued performance of this area where about half of our capital is allocated over the next few years, including our two caps, but we're also excited about what we're seeing by extending laterals here in the DJ and we recently just regularly stopped our first four mile well so.
Good news across the board on the DJ and in the Permian I would just point you to the first quarter cut was about 54% second quarter about 50% guidance indicates we will be in that range somewhere around 52%.
Youll see a little bit of Lumpiness as wells come on and off but we're comfortable with that guidance going forward.
Great and then just.
Chris My second I, just wanted to double check on the shareholder return plan.
You have no intention of changing this once I know that the intent is to get this done.
<unk> paid down and mostly then.
Given the free cash needs.
You sort of like we'll be able to do that.
Even somewhat early in 'twenty four once once you get this net new paid you changed that plan and we'll stay on that credit.
But sort of rolling plan.
Yes, I'll kick this off and maybe kick it to nellix or anything anything I Miss I really like the framework that was put in place here at Civitas, we've not changed the formulation.
Like the trailing 12 months calculation it allowed us to maintain our peer leading dividend framework as commodity prices moderated from where they were last year.
I see us continuing with that plan and as we get the Permian.
Basins.
Assets integrated.
As we guided when we announced we see some real strength in extending that dividend plan, but also bolstering it from where we would've been without the assets and then in terms of just how we think about allocating between that the dividends the buyback and debt paydown.
We're committed to getting leverage inside that turn Ryan we want anywhere between half a turn to a turn depending on where we are in terms of deal cycle and commodity cycle.
We are well on our way with the divestments, we think we can potentially accelerate our path to get inside of that at the same time and you saw it in the second quarter as much as we are committed to getting leverage down you see an opportunity to pick up.
And equity and even in a small dose will be opportunistic as as those opportunities come to us and so we did that in the second quarter you could see us do that between now and the end of 2020 forward, where our operation authorization is Neil and I would echo Chris's comments on the balance sheet is truly going to be the governor.
<unk> to everything we do we really really like the last 12 month look at the dividend because it gets some resiliency to the dividend and the shareholder return program.
When you look at this plan.
At $70 oil are at mid cycle prices. There is plenty of access free cash flow after the dividend to hit our balance sheet targets.
And we are further going to complement that with the asset sales to the asset sales are only going to allow us to wheatstone balance sheet sooner, but we really like and we don't anticipate any changes.
The plan going forward.
Okay, Great really deal with that plan. Thank you.
Thanks Bill.
Our next question comes from the line of Timothy <unk> from Keybanc Timothy go ahead.
Hi, Good morning. This is John <unk> on for Tim.
Yeah, John as you mentioned.
As you mentioned your well results in the southern area look strong from both an oil cuts and total Boe perspective.
How much of your drilling will be in this area before you officially start drilling in that box out there.
Do you think.
The recent well results here can be replicated going forward.
Okay.
We're excited about what we see I will say, it's still early days with the box elder cap and with the Lowry cap in this immediate area. When you step back and look at our capital allocation across our two the DJ. This is this is an important area for us.
Assuming two rigs going forward, which is which is really underpinning. Our 24 guide half of that capital is going to be directed to the south we will look for ways to enhance our capital allocation, whether that's within the DJ.
Or to the Midland or to the Delaware, we like having the flexibility of moving capital around and we're Super excited about the results that we continue to see in the walk ins area.
No that's great.
Our next question comes from the line of Philip Johnston from capital One Philip go ahead.
Hey, guys. Thanks, just to follow up on Neil's question.
You said the Permian oil index was 54% in Q1, obviously fell to 50% in Q2 and then.
The guidance for the remainder of the year is 53% to 58% so.
Just wondering what's moving that mix around so much it's a pretty decent base.
Obviously, there is some lumpiness, but it is.
Any decent base.
Curious on that.
Yes, I think in the first quarter with Hibernia assets you had some some new wells come on oil you're obviously as those continue to open up and clean up yet gas oil ratio coming up in the second quarter, and then Youll see youll see that that mix range between those two quarters as you allocate capital and as you.
To deploy capital to different areas of of both the high barrier assets in top rock.
Okay, Thanks and.
You guys mentioned that you no longer expect to pay in cash taxes. This year.
Looking out into 'twenty, four and beyond I think you will be <unk> eligible. So can you maybe help us with how we should think about cash taxes in 2004 and beyond.
Sure I can echo <unk> for.
For 2023 that the asset sale treatment for tax yes light, what we would have otherwise expected that got in a lot of that has a lower commodity price given the initial guidance. We gave was at $80 going forward.
<unk> cycled prices for call. It 70, $70 oil you will be looking at about 36%, 4% to 6% of EBITDA and Trump tax cash tax going forward. It's an assumption. That's obviously very sensitive based on our price because it's all incremental.
That would be a good assumption at that pricing on a go forward plan.
Okay, great. Thank you.
Thanks Julien.
Our next question comes from the line of Leo Mariani from Roth MKS.
Oh go ahead.
Yes, hi, guys obviously.
Very strong performance here on the quarter can you maybe give us a little bit more color in terms of what.
Inventory is kind of in this watkins area, where roughly how many wells do you kind of have left to drill down there.
Yes, if you look at our our box elder cap and our Lowry cap Youre talking about a few hundred locations in total.
Oh GDP is in addition to those two those two caps and so it's a large portion of our go forward.
Our go forward plan.
And you look at Skyline, if you look at the skyline previous skyline as you can see sort of the split.
In our southern area, which is really this watkins area.
Okay.
Paul.
Wanted to ask just around the asset sales you've got the platform yes.
Yes, $300 million kind of noncore stuff is that all just kind of.
Producing assets. There also maybe some some midstream there just can you provide a little more color around kind of what that is and then just sticking on kind of M&A. I mean, obviously you guys have done a great job rolling up the DJ basin over time now in the Permian and into the sub basins here.
Sure lots of unpack there, but thank you for the question first of all on the on the divestment plan.
<unk> our bank.
We are launching that process currently the first wave of assets are really as I mentioned in my remarks areas on the right side of the Skyline that just don't compete for capital and went up against Watkins in our western area in the Midland and Delaware basins.
And so it will include some production as well as some inventory.
And then.
In terms of midstream, we would consider a partial or monetization of our midstream assets I think with the with the strength in the commodity we have a menu of options to hit our target and position us and Delever us.
As we've laid out and so we feel good where we are we certainly are not going to cut into any muscle.
And if we were to consider monetizing anything on the midstream side, we've obviously protect our underlying business.
But I think the team has shown in the past that we can be creative.
And that we can be on our front.
<unk>.
To not only to hit our targets, but also surpassed I'm. So excited about the.
The current progress to date on the divestment plan and look forward to sharing more on that in terms of M&A you hit it I mean, our focus really is integrating these two assets.
We will continue to look for ways to enhance our positions in the Midland and Delaware.
This question is a year from now it's an it's an easier answer then.
<unk> two of integrating.
Hibernia and tap rock and so I would tell you that we'll continue to look at would need to be accretive on a number of metrics for our shareholders. Just as we did with with Hibernia and top rock. So I wouldn't say that we're completely on the sidelines, but it will have to be quite compelling to us.
Come back onto the field.
Thanks.
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.
If you'd like to ask an additional question.
Our next question comes from the line of Nicholas Pope from Seaport Research Nicolas go ahead.
Good morning, everyone.
Good morning.
Just hoping you guys could talk a little bit about credit facility.
I guess credit facility utilization post the close of the deal.
And how you're kind of planning on manage managing that were.
Where current rates are kind of post post the close of this just trying to understand how that is going to get paid down over the over the near term.
Sure Hey, Nick this is Mary.
So this is something that we as you might imagine spent a lot of time I think we're thinking of financing. These acquisitions, just where rates are what do we want our balance sheet to look like in terms of fixed versus variable debt among other items in the balance sheet back.
So where we and we have a slide in the investor presentation.
We wanted to make sure our liquidity with was very solid and in looking through that makes the cost. We know we want to pay down our outstanding quickly we.
Essentially it's a 630 pro forma for the deals we estimate will be at $700 million again, that's not as up to date as of September 30 pro forma for that transaction. So if you look at the pro forma elected commitment of $1 eight five that gives us very strong liquidity, our $1 $1 billion to your point, given where rates are.
With excess free cash flow after the dividend and with the asset sales that will likely be the first capital of their first piece of that that we will pay and so our goal is to get that down as quickly as possible continue shoring up our already very strong liquidity as a reminder to our current 5% senior notes.
That becomes callable as well at the.
Second half of the starts around October that will be given given the rate on that that will be lower priority of course repayment Dallas, obviously, given where rates are but hopefully that helps in terms of how we think about pre payable versus versus fixed that in order of priority in terms of debt pay down.
That is helpful.
And how do you think about balancing.
That.
Debt pay down.
With respect to the share repurchase plan.
And that variable dividend is there any thought about.
Great, so I'm, assuming or over 7% on that credit facility.
About some sort of balance there about reducing the share repurchase speed about.
Potentially looking at.
Variable component with respect to that that current rate.
Sure.
From a balance sheet strength perspective, Nick we feel very comfortable with the leverage on liquidity and where we're headed we have put our target out there three quarters of a turn in obviously in looking at our profile for the next six quarters by the end of 'twenty four we feel very confident that we'll get under one times after the dividend in terms of the <unk>.
Back and you saw us do 20 million during the quarter, we will continue being opportunistic.
When we think about what we need to get to our leverage goals.
We will continue executing that prudently and.
When you think about what we need to get there.
The generation of this business is so strong that even after the dividend. We we feel very comfortable we can get there by that point like <unk> like you mentioned that the credit facility and traffic.
It's up there that's certainly a lot higher than the 5% notes. We have we have outstanding. So we will be focused on paying that down as quickly as we can with excess cash on the asset sales.
Got it I appreciate the time and answers. Thank you.
Thank you.
Our final question comes from the line of Timothy Razvan for Keybanc Timothy go ahead.
Yes.
Hi, It's John again, if I can just squeeze another one in.
Really reiterated your intent to sell $300 million of noncore Permian assets.
The goal of doing that by mid 'twenty four.
I'm curious how you landed at that 300, sugar and how you view would change.
<unk> oil prices were.
To continue to show signs of strength there.
Yes, Thanks, John glad to glad to have you back back on and want to clarify the $300 million divestment.
Target that we see currently is primarily in the DJ and these are assets that we know very well that.
Are either fully developed or they have inventory that simply does not compete for capital over the near term.
Let's say you continue to see commodity prices.
Strengthen I think that's a really good day for a lot of folks, including sabotage that doesn't necessarily mean that we would sell fewer assets. It could accelerate the process to delever, which is which is great.
But this is not just about hitting a number and whatever it takes to get to that number. This is more about how do you strengthen the base and the foundation of this DJ business, which is so so strong and competitive across all other basins within within North America as evidenced by <unk>.
<unk> as evidenced by our western assets and so I think what you'd see is that $300 million with some strength in the commodity price.
Could could go up and this is about paring back to a really strong foundation for the go forward company.
That's great context, thanks for that.
I'll hand, it back now.
Thanks, John .
That was our final question I will now turn the call over to Chris Doyle for closing remarks go ahead.
Chris.
Thanks, Erica. Thank you again for your continued interest in <unk>, we look forward to sharing our continued progress on upcoming calls have a great rest of your day and please be safe.
Ladies and gentlemen that concludes our call today. Thank you for joining you may now disconnect.
Okay.
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