Q2 2024 Civitas Resources Inc Earnings Call

Operator: All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. At that time, you may press star 1 on your telephone keypad to ask a question. To withdraw your question, press star 1 again. Thank you. Please be advised that today's conference is being recorded. I would now like to hand the call over to Brad Whitmarsh, Head of Investor Relations. Please go ahead.

Brad Whitmarsh: Thanks, Jessica. Good morning, everyone, and I appreciate you joining us this morning. Yesterday, we issued our second quarter earnings release, our 10-Q, and also provided some supplemental materials for your review. These items are all available on our website, and they may be helpful for this morning's call. I'm joined today by our CEO Chris Doyle, CFO Marianella Foschi, and COO Hodge Walker. After our brief prepared remarks, we will conduct a question and answer session.

Brad Whitmarsh: As always, please limit your time to one question and one follow-up, so we can work through the list efficiently. We'll make certain forward-looking statements today, which are subject to risk and uncertainties that could cause actual results to differ from projections. Please read our full disclosures regarding these statements in our most recent SEC file. We also may refer to certain non-GAAP financial metrics. Reconciliations to these can also be found in yesterday's release and SEC filings as well. With that, I'll turn the call over to Chris.

Chris Doyle: Hey morning everyone, and welcome to our second quarter call. Before I address our quarterly results and our improved outlook, I think it's important to reflect on how we fundamentally transformed our business over the past year. This started with our entry into the Permian Basin, which increased and enhanced our portfolio's scale and quality, provided important capital allocation flexibility, and created a more durable and sustainable business. Today, our Permian assets are fully integrated within Civitas and producing more than 185,000 BOE per day.

Chris Doyle: Importantly, production is ahead of plan, oil is ahead of plan, well costs are below expectations, and reduced operating costs are enhancing cash margins, all while maintaining top quartile safety and environmental performance. In a short amount of time, our team's executing faster.

Chris Doyle: [inaudible] At the same time, we continue to deliver exceptional results in the DJ base and recent highlights, including completing our non-core asset sales and an accretive valuation, helping to secure a broad-based regulatory agreement that increases development clarity for years to come, and driving exceptional performance from our inventory-rich Watkins area. Simply put, there's no question that Civitas is stronger today, and we're better positioned than ever to drive differentiated returns for shareholders. And moving to our second quarter results, starting with production, total volumes were above plan as premium production was up about 12%. Oil was up 5%.

Chris Doyle: This is driven by strong oil performance and continued cycle time acceleration, more than offsetting the impact from non-core asset sales and some temporary third-party facility downtime that occurred in the DJ. Cash operating expenses were 2.5% lower than the first quarter and less than $9 a BOE.

Chris Doyle: Our teams remain laser focused on driving down the cost structure across all bases. On the capital side, our drilling completions teams have done a fantastic job delivering efficiency improvements to result in less capex than planned in the quarter. Well-cost reductions are outpacing our initial plan, highlighted by a 10% reduction year-to-date in the Midland Basin. Free cash flow is right in line with our expectation for the quarter as our operating capital cost efficiencies offset the impact of weak natural gas pricing in the period.

Chris Doyle: For the quarter, we returned just under $275 million to our shareholders, about $150 of that in dividends and $125 million in share buybacks. A portion of our buybacks during the quarter was utilized to continue reducing concentrated ownership, and the remainder went to open market purchases.

Chris Doyle: Lots of progress has been made over the past year, as evidenced by another strong quarter. I'd like to shift now, however, to three areas that have me really excited about what's to come. First, operational execution is absolutely improving the business every single day. Second, our second half outlook reflects the strength of our asset base and our team's capability. And third, our enhanced capital return framework will provide additional flexibility to maximize shareholder value.

Chris Doyle: Starting with operational execution and our supplemental materials, we highlight the impact of reduced costs on improving returns and driving down breakeven. For example, a 10% well cost reduction in the Midland Basin increases well returns by 12% and reduces break-even by 7%. Across the Permian, these achievements are increasing the number of low break-even locations by 20 to 30% and Extending High-Quality Inventory Life. Savings are coming from all areas, whether it's optimizing, drilling, and completion designs, high-grading our service providers and utilizing more efficient equipment, or standardizing facilities for capturing the benefits of having scaled positions in multiple basins.

Chris Doyle: This team is rapidly establishing a strong track record of execution and performance. Now, if we'd said a year ago that within six months of establishing Permian operatorship, we would be where we are today, I'm not sure that many on this call would have believed it.

Chris Doyle: It's still early days, we get it, but the combination of a culture of continuous improvement and the team focused on the value we can create together has me super excited for the years ahead. Now, leveraging that strong operational execution, our outlook for the remainder of 2024 continues to improve. Full year capex was lowered by $50 million, and operating costs decreased by approximately $25 million.

Chris Doyle: We've raised sales volume expectations by 3% from our original guidance, adjusting for assets. Looking forward, we expect total volumes and oil to grow quarter over quarter through the end of the year. Recent extreme summer weather in Colorado, certainly with record high temperatures, will defer some of that third quarter DJ basin growth into the fourth.

Chris Doyle: But a strong second half of the DJ will be driven by walk-ins. We recently drilled and completed 13 four-mile wells, the longest laterals ever in Colorado. This is a testament to a talented team that continues to safely push the boundaries of what's possible. Importantly, while still early, we're encouraged by the initial productivity, which confirms production contribution across the full lateral. In the Permian, I'm particularly excited to see upcoming production for our first fully designed, drilled, and completed Civitas wells. Trends are in line with our expectations, but second half 2024 tills will target the core zone development and slightly wider lateral spacing than previous operators.

Chris Doyle: Due to the strength of our business and continued execution, we anticipate second half free cash flows of over $900 million, which will be deployed to the balance sheet and to our shareholders. Finally, a true reflection of the strength of our business is our best in class shareholder return. Since the beginning of last year, we've turned nearly $1.5 billion to our shareholders via dividends and share repurchases. This represents more than 20% of our current market cap. We remain fully committed to returning 50% of our free cash flow to shareholders after the base dividend. Based on second quarter results, our board approved a $1.52 dividend to be paid in September.

Chris Doyle: In addition, the board enhanced our capital return program to add flexibility in the way we return the variable component to shareholders. Beginning with the third quarter, the variable return will now be provided through a combination of share repurchases and dividends. As part of this enhancement, the board also approved a new $500 million share repurchase plan, which replaces the prior program. We will remain disciplined in executing our buyback strategy, but we traded at a very compelling valuation when compared to our peers and when compared to recent asset transactions.

Chris Doyle: At Civitas, we believe that cyclical businesses should be run with low leverage. So we'll continue to execute on our hedging strategy to support the pace of our delivery efforts. And this capital return enhancement will prioritize our balance sheet with the remaining 50% of our free cash. Wrapping up, we've made tremendous progress in the first half of the year. Our entire team is excited to demonstrate what our transformed company is capable of delivering. Thank you for your interest in Civitas Operator. We're now happy to take it.

Operator: Thank you, and just a reminder, if you would like to ask a question, press star one on your telephone keypad. To withdraw your question, press star one again. And your first question comes from the line of Kevin MacCurdy with Pickering Energy Partners. Kevin, your line is open.

Kevin MacCurdy: Hey, good morning, team. I wanted to start off by asking about the execution of the newly increased buyback. When deciding the amount of free cash flow to allocate to buybacks versus the variable, what will be the main criteria? Are you looking at recent share price dislocation, NAV, or maybe the low multiple that you highlight in your deck?

Chris Doyle: our capital return framework, much like any other capital allocation decision, and this is something we discuss regularly with our board. I think the move to add that flexibility is really tied to exactly what you talked about, and that is a continued disconnect with how we are valued.

Chris Doyle: Look at underlying NAV, look at NAV at various commodity prices, look at how we trade versus peers, and look at the asset market. This is not the asset market that we entered the Permian in. You know, a year after our entry, the asset market is up a full, you know, one and a half plus turns, and in some cases, that's for lower quality assets. So, you know, the valuation as we see it today does not reflect the quality. And, ultimately, I don't think it reflects the tailwinds that we've seen in terms of regulatory and the DJ.

Chris Doyle: So you've got a business here that's executing on really high-quality assets, trading at a 20% free cash flow yield. That's, that's a super compelling opportunity as we see it. That's driving the change, and we're excited to dig in and allocate resources to this business. We're super excited, super proud of what we've built. It hasn't been reflected yet, but it will be. And I appreciate the question and think, you know, the other thing to highlight about the shareholder return framework is that we can protect our equity but at the same time not lose sight of our de-levering targets and maintaining a strong balance sheet. So we're super excited for the adjustment. We think it fully enhances the framework, and we know that this team is fully aligned with shareholders as we go through that calculation.

Kevin MacCurdy: Great, thank you for that answer. And I think that's what the market wants to hear. Shifting maybe to well costs, you know, when I look at slide 10 in your investor deck, what do you need to do to cut the extra 5% out of well costs in the Midland? And just to clarify, does the new CAPEX run rate factor in the 76 or $765 per foot in the Midland Basin, or is it using $725?

Chris Doyle: Yeah, yeah. A good question, Kevin.

Chris Doyle: So our current forecast for seven and a half capital assumes our current cost structure at 765 in Midland. You know, as we look back again, as we took over for established operators in the basin, there are a lot of questions around whether we can continue that level of performance. And we knew fundamentally that we would improve upon it, but we'd like to stack some skins on the wall. And I think that's what this team did for a couple quarters, just as we did in the DJ.

Chris Doyle: What has got us to where we are today really is a mix of benefits of scale, driving down service costs, that's probably about 30% of that delta. You know, design changes to how we complete wells, how we design how we drill wells, that's probably 20%. The other half is really just continued optimization and efficiency gains. So what will take us from 765 to 725 is just continued relentless digging in and driving additional efficiency gains.

Chris Doyle: We're not built to build any additional deflation or any weakness in the service market. This is about the team stepping back and looking for ways to claw back every dollar and every inch. And, and look, again, very early two quarters in. But this is a team that has made a living doing exactly this in the DJ. And we're doing it there in the Permian as well.

Kevin MacCurdy: I appreciate the answer. I might hop back in the queue.

Operator: And your next question comes from the line of Neal Dingmann with Truist Security. Neal, your line is open. Thanks for the talk.

Neal Dingmann: Thanks for the time. Thank you all for the time and nice remarks.

Chris Doyle: Chris, my first question is really just on your anticipated oil production growth. Specifically, it seems that given your non-core sales and oil production reiteration, you're suggesting that production should continue to trend higher. I'm just wondering, could you speak to the potential growth in both plays and maybe factors impacting this remaining?

Chris Doyle: [inaudible]

Chris Doyle: Thanks Neal, I appreciate the question, and I appreciate you highlighting the divestments as well. That was a..., as we announced last quarter, a massive transaction for us, trading at a full turn above these are non-core assets in the DJ trading at a full turn above our entire enterprise. So we hit that bid, and it did impact our second quarter results, right 5000 BOE a day, two to 3000 barrels of oil a day. So take that, and put that back into the mix.

Chris Doyle: And you saw quarter over quarter, strong oil growth as a company. So I would say as we look at, I would point to the Permian first. Second quarter over first quarter, we saw oil up. We see both basins into the third quarter growing, as evidenced by our reaffirmation of our oil guide, even taking out the divestment. So we'll see a step up in both, both basins. You know, we have a front-half loaded capital program; about two-thirds of our tills are coming on in the second and third quarter.

Chris Doyle: And that's going to really support and drive oil growth in the back half of the year. You know, a couple of things that we'll talk about in the DJ are some headwinds. We saw them in the second quarter, some third-party facility downtime. We're past that. I was temporary. June is the I think June went down as the second hottest June in the history of Colorado. So I don't know where July is going to come from, but it's going to be up somewhere.

Chris Doyle: And so certainly that's impacting some of our operations out there, but that's temporary. You know, the other thing that's going to drive growth into the second half that we're really excited about is the continued outperformance of the Watkins wells. Whether it's the four milers, every well that we're drilling down there is really performing exceptionally well against expectations. So both teams are hitting expectations, evidenced by a reaffirmation of our oil guide. So we are very confident and pleased with how we've set up for the second half.

Chris Doyle: A great answer, Chris. And then, secondly, I just wanted to ask you a question on the OFS cost.

Chris Doyle: You all seem to be indicating maybe a little bit of pressure there, unlike some others that are seeing things flatten out. I'm just wondering, Chris, was that, maybe I want to make sure I understand that right. Were you saying that, you know, some of the costs were lower, or maybe you were just seeing reductions based on efficiency? Yes, so when we entered the year in the

Chris Doyle: Yeah, so when we entered the year in the Permian, we were running nine rigs, so we rationalized the rig fleet, we rationalized the frack fleet. What that allowed us to do was upgrade crew, upgrade iron, and that drove efficiency. It also allowed us to capture some of the weaknesses that we've seen beyond just consumables but some of the OFS weaknesses that we've seen.

Chris Doyle: When you look at a top-tier rig a year ago, it was probably trending fairly close to 40, and it's now in the mid to high 20s, and so there's certainly been some weakness in that market. I would caution, however, companies that will only focus, in fact, some of the prior operators focus on the day rate and lose sight of how a higher-tier rig and much more efficient, higher-tier crew can deliver. And so we are seeing a little bit of softness, and that's good, but we're not planning on that. This is a team that's going to continue to drive efficiency and fight for every inch. If OFS continues to weaken a little bit, you'll see us pull some more capital out or redeploy that capital.

Operator: And your next question comes from the line of Scott Hanold with RBC.

Scott Hanold: Thanks. Good morning, all.

Chris Doyle: My first question is, in the Permian Basin, those first designed and drilled Civitas wells, you talked a little bit about obviously modifying the spacing and zone targeting to get better performance. So two questions on that. Number one is, what kind of improvement do you think this can make in the performance of the wells? You're talking like, just give us some scale, like 5%, 10%, or like, what is the size that you're expecting? And just out of curiosity, is that uplift factored into your budget and your outlook?

Chris Doyle: Yeah, great, great question. Yeah, that as I said, you pointed to being super excited to get to the city design wells online.

Chris Doyle: Yeah, the example, there was a previous operator that we think we feel like over drilled one of the pads. They're performing as expected, but we know that it wasn't the best cash on cash return development design. And so we take a little bit of a different approach. I think a lot of operators do too, or you look at that incremental well and what that does to overall returns. And so we're super, super focused on cash on cash returns. I would tell you that the uplift there is not insignificant.

Chris Doyle: We've built in what we believe are conservative but attainable results going forward, and this is a team again that, even with prior operators, has fully hit our expectations. But you'll see, you'll see a bit of a step up now rock changes, East, West, North, South, we get all that, and the mix will change. But we're super excited about what this team can do when we have fully our hands on the wheel.

Chris Doyle: Understood. Thanks for that.

Chris Doyle: And, you know, switching to the asset market, obviously, you guys have been, you know, very involved over the last, you know, few years. Can you give us a sense of what you're up to? There are, there's a lot of transactions that continue to go through the Permian. And, you know, give us a sense of how you think about incremental activity in the Permian, along with how much opportunity you have in your existing assets to swap and trade to expand your inventory.

Chris Doyle: Sure. And, you know, we pointed last quarter to a really, really great trade that was made in the Midland Basin that allowed us to extend laterals, drive for higher returns, and really push costs down on a per foot basis. There are more opportunities like that that the team continues to deliver. What's interesting is that with scale positions on both sides, we've got operator overlap on both sides where we could trade out of Midland into Delaware or Delaware into Midland.

Chris Doyle: We are seeing those opportunities as well. We'll let value really guide us in terms of the asset market. Again, I take us back to where we entered a year ago with the first two transactions and then followed closely by the third transaction. Any of those assets come to market today, and you're talking about a much different entry point. So timing is absolutely critical.

Chris Doyle: Now, in terms of whether there are opportunities we would pursue potentially in the asset market to think about going after, I think we'd always look for ways to enhance our business. You're going to hear every CEO out there talk about how high the bar is. I will tell you, I would say we probably have the highest bar out there with where we trade and the disconnect between the quality of what we've got versus what's on the market.

Chris Doyle: Some of the things that we've seen trade, we've looked at. We'll continue to look at deals, but anything that we do has to compete against turning around and buying a business that's trading at three times when the market's one and a half times higher than that. So we have built a strong business. We're ahead of schedule in terms of how that business is performing, and we're super proud and excited about the future ahead for us.

Chris Doyle: Scott, I'd also underpin, like Chris was saying earlier, when we look at our buy-buy proposition, it's obviously an incredibly compelling opportunity. We kind of focus more on intrinsic value. When you look at our business, you know, we have a free cash flow generating machine that, over a five-year period, equates to our entire market cap, and that's just really hard to not say impossible to find in the market right now, whether public or private.

Scott Hanold: I appreciate those comments. Thank you.

Operator: Your next question comes from the line of Phillips Johnston with Capital One. Phillips, your line is open.

Phillips Johnston: Hey, thanks for the time. Just to follow up on Kevin's question on the return of capital, is it safe to say that the board wants to be very aggressive on the share repurchase program in the near term? And maybe just a corollary to that, with the prior framework, you've been repurchasing stock in addition to the 50% variable formula. So I guess the total cash return effectively has been greater than 50%.

Phillips Johnston: So I'm wondering if you will be limiting the total return to the 50% formula with the other 50% earmarked for reduction of debt. Or would you view that as more sort of a minimum 50% promise with the potential to exceed that amount when you see opportunities in the market? Yeah, I will

Chris Doyle: Yeah, I'll kick us off here. I think the board and management will be super focused on whatever generates the highest shareholder return and strengthens our business. Now, today, specifically, and today more generally, does that mean we might more heavily allocate that return to buybacks? I think that's probably a fair assessment.

Chris Doyle: I would say on the question of, hey, before we were really limited to the other 50% of the cash flow post the base dividend and post the variable dividend component for buying back our shares. What that didn't allow us to do, and I think the company's done a really good job of opportunistically working down some of that concentrated ownership at the top, but what it didn't allow us to do was address and accelerate our delivery plan.

Chris Doyle: And so that's why I think this is a really strong enhancement to the overall program where we can protect and lean in on a buyback, and at the same time, not stretch our leverage and really progress towards our leverage target.

Chris Doyle: Okay, thanks for that. And then just on the four mile laterals, sounds like so far, so good. Can you maybe talk about what's embedded in your production guidance regarding that fourth mile? Are you giving it some sort of a haircut? And if so, what are the specifics there?

Chris Doyle: You know, I'll take us back to the approach we had last year with the three-milers, and that was, we were very confident in the first two miles, the third mile we had risked. You saw that play out quarter over quarter towards the end of the year, where those wells actually performed in line with the two-milers. And we were so super excited with how those three-milers executed. Now it's replaying itself on the four-milers. Very strong performance, above the type curve expectations, but we are confident in the We are risking that fourth mile still being as conservative as we are. And so that's going to show up, or could show up, towards the end of the year.

Chris Doyle: I would tell you the tie curves that we have on these four milers are quite compelling in terms of returns. And so any type of outperformance, now all of a sudden, you've got potential game changers. You know, we're focused on letting these things produce. We're focused on upsizing infrastructure in the area to unleash these wells. And we're super excited, not just from an operational execution perspective but to see contribution throughout the lateral.

Chris Doyle: You know, I think the team's just done a phenomenal job of efficiently executing and bringing these things online. And then the results are just, you know. The proof will be in the pudding, but the results are really, really exciting. And so I, you know, in terms of going forward, you know, that's some, that's some tailwinds if it plays back. Remember, the fourth mile on these wells is going to some of the best rock.

Chris Doyle: I think it's interesting that we talked about the ground game in the Permian quite a bit. You know, there's a ground game in the Rockies as well. That you've got a team here that I think is a differentiated weapon within the DJ in terms of what we can execute, long-reach laterals and effectively delivering oil from four miles away is fantastic. So, super excited with the teams done and really excited to see these wells continue to perform.

Phillips Johnston: Sounds good, Chris. Thank you.

Operator: Your next question comes from the line of Gabe Dowd with TD Cowan. Gabe, your line is now open.

Gabe Dowd: Thanks, morning, everyone. Thanks for taking my questions. Chris, maybe any thoughts you could share right now on 2025 and just capital allocation across the two plays relative to this year's capital allocation and also capital allocation within the Permian, specifically Delaware versus Midland. Sure.

Chris Doyle: Sure, you know this is coming into this year, the calculus was pretty difficult because we didn't know how the team would perform. I think as we look ahead, and certainly it's too early to guide where we're going to be in 2025, but as you look ahead, the challenge that this team's going to have is this: real-time improvements and enhancements throughout the Permian and in the DJ. The game is changing in both basins, and so there are a lot of moving pieces that will drive relative capital allocation between the DJ and the Permian.

Chris Doyle: Keep in mind, we'll also have, again, the tailwinds on the regulatory side with compromise that gives us into 2028 good clarity on developing the asset, and that's going to impact how we think about capital allocation. There's a lot going on.

Chris Doyle: And then in the Permian specifically, as you think about Delaware versus Midland, certainly we're more levered to Midland, both in terms of scale and production and inventory, some of our best returns on the Delaware side. Now, we have, I think we mentioned in the past, a previous operator was looking to develop some one-milers and good returns. Don't get me wrong, good returns, but the team is taking the time to say, "Look, how do we extend these into two-mile developments and drive some additional efficiencies?"

Chris Doyle: And so we're working that through the system, really excited to start allocating to Delaware. Just given the scale and everything, we're going to be more weighted to the Midland, and we're super excited about that as well.

Chris Doyle: I think while it's early for 2025, I'll just take us back to how we are going to run this business. We are going to run this business to maximize free cash flow, keep production broadly flat, and generate as much free cash, get it back to shareholders, and get it back to our balance sheet as we can. I think that business model is really interesting because it does a really important thing. These men and women are finding more and more ways to improve returns, and so it's going to be a lot of fun as we set up for 2025, but there is a lot of noise in the system.

Gabe Dowd: Understand, understood. Thanks, Chris. Obviously, a bit too early still for 25, but that's helpful.

Gabe Dowd: And then, just as a follow-up, just going back to well design and spacing in the Permian relative to the prior operator or operators. Can you maybe just remind us, in broad strokes, what the spacing or well section assumptions are in Midland right now? And is that, like, that little bit of a wider spacing relative to the prior operator, is that embedded in your inventory number?

Hodge Walker: Yeah, thanks for the question. This is Hodge. And as Chris mentioned earlier this year, we

Hodge Walker: We've had some pads come on from prior operators that we feel they probably didn't drill them at all.

Hodge Walker: is contemplated within this section has to be competitive from a returns basis.

Hodge Walker: We look at this on a well-by-well incremental returns basis, and within the Midland Basin. In our sections, that's like four to five wells per section. But bench to bench, those things vary. We don't have a cookie cutter across the whole thing. We make sure that we understand, as rock changes north to south, east to west, and what benches we're operating in, we're going to make sure that we're as efficient with that incremental capital on every well bore.

Gabe Dowd: I understand. That's very helpful. Thanks, guys.

Operator: And your next question comes from the line of Tim Rezvan with KeyBank. Tim, your line is open.

Tim Rezvan: Good morning, folks. Thank you for taking my question. I want to start on the balance sheet. So from your presentation, it looks like you have about $475 million left on the deferred venture payment. And, you know, using, you know, big numbers, maybe a billion and a half of free cash flow, half of that for the balance sheet. So what I'm getting at is we see leverage kind of hanging on north of one times here for several quarters, looking forward.

Tim Rezvan: So as you, you know, adjusted your cash return framework, and Chris, I was wondering if you could speak from the board's perspective. Why is there a need to return 50%? And how does this kind of debt paydown factor into value creation? I'm just curious how they're thinking about that.

Chris Doyle: Yeah, let Marianella take this. Okay, good morning.

Marianella Foschi: Hey, good morning. I mean, look, we remain extremely committed to our balance sheet, right? And we have one of the more conservative leveraged targets out there at 0.7 times, 0.75 times. You know, as you know, we took debt to finance the Permian transactions. And that was an incredibly deliberate decision we took to de-risk our corporate outlook. And it was the right one.

Marianella Foschi: You know, we're no question a stronger enterprise today. Like I've said in prior quarters, for us, it's more about taking meaningful steps and taking meaningful progress towards delivering and de-levering every single day. You know, this is why you've seen us come out and take steps like complete our asset sale program earlier this year to accelerate that de-levering process. And then, further to your point, this update we just announced to the shareholder return policy will also continue supporting and underpinning our balance sheet initiatives.

Marianella Foschi: You know, we carefully balance those capital allocation decisions between paying down debt and returning that cash to shareholders. You know, when we look out, and we see our plan, we're comfortable with the pace of de-levering or de-levering efforts, and can't ignore the tremendous opportunity that our stock presents to us right now. I mean, even levels well north of where we're currently trading. So we're really balancing all those components in our four pillars in a way that delivers maximum value to our shareholders.

Tim Rezvan: Okay, yeah, that makes sense with where the stock price is today, so I appreciate that.

Chris Doyle: And then, as my follow-up, Chris, can we share your views on some of the sort of surprising valuations we've seen for some of the M&A deals? So, is that it? You know, as you think of kind of future opportunities, is it just this idea that I'm just curious if you know what sort of is driving that? Is there some sort of new scarcity value or these, you know, 500 million plus packages? It's trying to get any insight because oil has been, obviously, you know, pretty stable here for a year. Kind of curious what's driving that. Yeah, to your point, you've seen oil has been fairly stable.

Chris Doyle: Yeah, to your point, you've seen oil has been fairly stable. You see a little bit of weakness going into 2025. So what's driving those valuations? I'm not sure if it's scarcity. I don't know exactly how others are bidding on these assets, but I can tell you how we underwrite them. And that's conservative; it's how we underwrote the entry with Taprock, Hibernia, and Vincer. Again, timing is everything.

Chris Doyle: And again, it's just look at our DJ package as well. These were non-core assets trading at a full turn above where our whole company is trading. It's a bit of a head scratcher why that's not reflected better in our value. And that's this team's job to close that gap. I think scarcity could have something to do with it.

Chris Doyle: And we'll remain disciplined. And we're generally a conservative buyer. I think that's the way you win in the long term. And that means we may miss out on some things. And that's okay.

Chris Doyle: I will say how our underwriting has been in the past is also changing. As you have a team where you've got confidence, hey, we can deliver mid 700s on CapEx. We see line of sight going to the low 700s in the Midland Basin.

Chris Doyle: That changes our ability to underwrite. But at the end of the day, everything that we do, you're going to come back and say, okay, well, why don't you just go buy this one asset here? It's got a couple thousand wells and an inventory of high-quality stuff, and it's trading at three times the normal price. And that's called Civitas. And so again, this change in the shareholder framework is going to be helpful, and I think it will drive home that point even further that, hey, we've got a great opportunity within the walls of Civitas. And teams on both sides of the company are really executing at a very high level.

Operator: Your next question comes from the line of Leo Mariani with Roth Capital. Leo, your line is open.

Leo Mariani: Yeah, I wanted to follow up a little bit on some of this downtime that you guys had in the DJ. I was hoping you could kind of, you know, quantify that for the second quarter. Was this kind of a couple thousand BOE per day? And it sounds like you have some expectations that are going to be present as well in 3Q. So I don't know if you guys have a rough estimate of what that might look like in 3Q as well.

Hodge Walker: Yeah, Leo, this is Hodge.

Hodge Walker: As Chris mentioned, we've had some extreme temperatures here in Colorado. We saw some impacts in June, and we saw impacts in July. And I think today we're probably going to be 98 degrees today. So we're definitely seeing some impact on production. I think it's in that ballpark that

Hodge Walker: that you're referring to. It's transitory. This isn't lost production. This is production that kind of

Hodge Walker: [inaudible]

Hodge Walker: What you'll see is a little shift from what we had talked about earlier on production from the third quarter into.

Hodge Walker: This is something that will work through; it's not lost production.

Leo Mariani: Okay, and then obviously you've done a great job, you know, reducing well costs, most prominently on the Midland side, and clearly you've got targets to reduce those costs a little bit further. You know, I guess assuming that you guys were able to get to those, you know, new well cost reduction targets, which I guess is a handful of more percent, depending on the basin, where do you see that kind of putting in maintenance capex for the company? I know that you still have a goal of being broadly flat, it sounds like, over the next

Chris Doyle: Thanks for the question. As we entered 2024 with nine rigs in the Permian, we knew we were going to be really front and front half loaded on capex. And so we've got a couple of things that are really making 2024 a little bit noisier than we would like. We came off the high capital spend, but two-thirds of our capital, or 64% of our capital, hit in the first half. Now that is setting up the back half growth, with second and third quarter tills representing about two-thirds and the DJ as an example in the first half. I think we tilled just under 50 wells in the second half will till over 70. So we're excited about how the second half has set up.

Chris Doyle: But when we entered, we knew 195 as a company was not a maintenance level. You know, we were taking over private assets, these guys were really ramping up activity; we needed to moderate that, and we would moderate that. And so 195 not as a maintenance capital level going forward. I think what's changing, and what's really interesting is where that maintenance level is because with capital costs coming down as significantly as they are, you know. The one thing I would point to is we've got a 10% target out there, a 10% realized 15% target on the midland, a little bit less on the Delaware. That's really about we've had a ton of swings at the plate in the midland. We're super excited about what the team delivered. On the Delaware, we've had fewer swings at the plate.

Chris Doyle: So as we dig in on the Delaware side, I think you'll see some additional cost savings that we can work through the system. So there's a lot of noise in the overall capital allocation system that we'll work through as we head into 2025. But again, we'll figure out what that maintenance level capex is. I think importantly, in 2025, you'll see us try and baseload activity a little bit cleaner throughout the quarter now that we're fully in control of the assets, and we'll see where we end up. But it's going to be targeting broadly flat production year over year.

Leo Mariani: Okay, that's a helpful color. I mean, it sounds like certainly the punchline is it's gonna be below 195, and I guess we'll see where it comes out. And I guess, just lastly for me on taxes, you guys did take down your cash tax estimate a little bit here in 2024. Wanted to get maybe a high-level sense of what you guys are seeing as we roll into 25.

Marianella Foschi: Are you still able to defer the preponderance of tax?

Marianella Foschi: Leo, this is Marianella. We did take down the guidance by about 12% at the midpoint on cash taxes. That was primarily related to somewhat a slightly conservative assumption on cash taxes for the year as we completed an acquisition in the first quarter. The actual cash tax moved down a little bit, but perhaps not as materially. And then as you look into next year, you know, obviously having lost a little bit of the tax shield with not having an acquisition next year, right? It's expected to trend up year over year.

Leo Mariani: Okay, and is that going to trend up? A lot of you still think there's still a decent amount of shields. It's probably going to trend down a meaningful amount.

Marianella Foschi: It's probably going to trend out a meaningful amount. You're probably looking at somewhere in the $75 million range or so, $75 to $100 at a $75 oil price.

Operator: And your next question comes from the line of John Abbott with Wolfe Research. John, your line is open. OK.

John Abbott: Thank you very much for taking our questions. Chris, I just want to go back to this discussion about production being broadly flat year over year, and I just want to make sure that you understand. So oil production is expected to increase gradually from 3Q to 4Q. It sounds like you want a more level-loaded program next year.

Chris Doyle: I understand the idea is to maximize free cash flow. But I'm trying to understand the cadence, the potential cadence in 2025. So it's flat year over year. Why not hold the 4Q production rate flat? And why is that not a possibility, or how do you sort of think about it?

Chris Doyle: Yeah, I think, thanks for the question, John. You know, the broadly flat, that's, that's the overall guideline, but we're going to look at multiple, multiple iterations, whether that's keeping exit flat, or year over year flat, or I would point us back to 2023. When we entered the end of the year, we saw a big disconnect between service costs and commodity prices, and we said, Hey, we're going to let production moderate a little bit. And the team ended up outperforming and keeping production flat again.

Marianella Foschi: So I would say flats the starting point, but we're going to gut check the model and the cap allocation to see if it makes sense to keep the exit flat or go a different direction. But we'll have a lot of work to do this fall as we get ready for 2025. And I am excited to ultimately have a little bit of a more steady state program going forward.

Marianella Foschi: We'll look at all paths to allocate capital to drive long-term shareholder value. And the second question is on hedging, so it sounds like you want to add more hedges. As you sort of sort of look at the oil macro out there, how are you thinking about the extent to which you want to be hedged in 2025?

John Abbott: John, this is Marianella. Thanks for the question. You know, we have a hedging program that underpins our balance sheet delivering initiatives, right? And with that, we want to de-risk the pace at which we're delivering on a go-forward basis. You know, right now, our hedging programs have, basically, as long as we're above our leverage target of 0.75x, we will continue to see us roll through a 30 to 40% of our expected next two months on the hedging side.

John Abbott: We just recently rolled in Q3 of 2025 at very attractive prices about a couple of months ago when all of us were at least front month within the low 80s. You know, look, I'll say we have a structural hedge in our business, right, with the low-cost structure that we have that we continue driving down lower. And when you combine that with a curve that's backward-aided, along with the meaningful progress that we expect to make on leverage, we don't expect to have to really want to or need to add hedges beyond a 12-month period at this point. I think all those components leave us extremely comfortable with our goal. [inaudible] I appreciate it. Thank you for taking our questions.

Operator: And just as a reminder, if you'd like to ask a question, please press star one on your telephone keypad to get your question into the queue. Our next question comes from the line of Oliver Hwang with TPH. Oliver, your line is now open.

Oliver Hwang: Good morning all and thanks for taking the questions. For my first question, for my first question. I know this stuff is always lumpy and it's still pretty early to be thinking about 2025, but as we approach the back half the year, any sort of early thoughts in terms of how you all are thinking about picking back up activity to ensure the 2025 program is coming along at optimal levels, just kind of thinking about how this year's program was front and weighted on a capital side and how you all have been talking about wanting to level load it a little bit more going forward.

Chris Doyle: Sure. Thanks for the question.

Chris Doyle: 2024 is a little bit of an anomaly. I think what's interesting and as we head into the second half, what's not baked in is, are there additional gains on the capital side where we could step back, redeploy that capital, rather than, as we did this quarter, reduce overall CapEx by $50 million, redeploy that capital to strengthen, maybe not hit production in 2024, but to strengthen the exit, strengthen as we head into 2025.

Chris Doyle: I think that's the beauty of what this team is delivering, is that we can lean in, just as we did with the DJ. This is a highly functioning team that, now that we've got confidence, we can lean on as we head into 2025. So capital savings could come back to additional free cash flow to take on the balance sheet, or it could be redeployed. And we'll look for opportunities to redeploy that capital and do whatever's best for long-term shareholder value. But all eyes for us are on 2025 to strengthen what we can, and if the opportunity is there to reallocate some of that capital, we'll take it.

Oliver Hwang: Okay, that makes sense. And for my second question, I know you all haven't talked about this too much, but I just wanted to kind of hit on maybe if you could provide some color on how you all are thinking about simulfrac operations in the Permian, especially in the Midland. Is this an opportunity set or something that could get implemented in the coming quarters in a more fullsome way to kind of drive more savings?

Hodge Walker: Yeah, Oliver, this is Hodge. Thanks for the question. You know, going back and looking at where we were building this team out and what this team...

Hodge Walker: What I think you've seen through the capital efficiencies, the operating efficiencies, is this team really leaning in on the way operations were being done, optimizing the equipment, optimizing the designs, and really building a strong track record of delivery and continuous improvement. To your point and to your question, now, what are the incremental things that we can bring to the table for continuous improvement on the completion side? And we are in the process of putting plans in place to move towards Simultrac by the end of this year.

Hodge Walker: Okay, perfect. Then would any sort of savings from Simulfrac be embedded into the target that you all outlined today already? Or would that kind of be in that plus category?

Oliver Hwang: The savings to date at that 765 number are they're...

Hodge Walker: 165 number They're not in there yet that that will be incremental savings on a go-forward basis

Oliver Hwang: Okay, thanks for the call.

Operator: All right, and your final question comes from the line of Noel Parks with the Tui Brothers. Noel, your line is open.

Noel Parks: Hi, good morning. Um, one thing I was wondering is, with the series of acquisitions in the Permian, has your use of service vendors remained largely consistent versus the ones you inherited there? And I was sort of wondering because, from what I'm hearing, as people head toward looking at 2025 contracting for services, I feel like I'm hearing more negotiations happening earlier, but maybe going slower. So just sort of wondered where you stood with your roster of providers.

Chris Doyle: Sure, you know, it's changed, I'd say quite significantly from the beginning of the year. When you go from nine rigs to start to four or five rigs today, when you really hone in on who are your service partners that you want to align yourself with on the drilling side and completion side, you know, that's very different from the previous operators, and we're super excited to have the partners that we have on those bases. I would say what's interesting, and again, this is what will show up at the negotiating table, is that guys, this is a team that's executing exceptionally well.

Chris Doyle: We built off seven days per well in the Midland as an example of drilling and completion efficiencies. That means they can be much more efficient. That means their margins are improving, and we can lean into that and really be successful together. I think the other thing, we've seen this in the past, right, is companies have entered basins and entered subscale. We had some discussions of, "hey, do you just dip your toe in and then start building scale around that?" No, you don't.

Chris Doyle: You go in big, you establish scales as quickly as you can. That's what we did in the Midland. It's what we did in Delaware, and so now you step back and say, here's a company that's got scaled positions in three basins, and we can lean and work together with our service providers in D.J., Midland, and Delaware to say, look, here's a high-functioning team. How do we win together? We weren't in that position at the beginning of the year, right, because we weren't ready to underpin and underwrite what we felt like was going to be a high-functioning technical business.

Chris Doyle: Great, thanks, really interesting. And just to circle back to something that was asked about earlier, in terms of how you change your development approach, you know, being a little bit more, I guess, judicious about infill drilling and so forth. So is the development pattern your biggest philosophical difference technically with the prior operators? And just in broad strokes, is that more engineering or a better understanding of the rock driving that? Yeah, I think, you know, as we look at it, it's a little.

Chris Doyle: Yeah, I think, you know, as we look at it, it's a little bit of both, right? It's Res 4 engineering, but it's tied to our understanding of the subsurface.

Chris Doyle: It's tied to how we believe wells will interact with one another. That is a big philosophical change. There are companies out there that, gosh, we've got an inventory number, and we've got to expand inventory, so let's drill eight wells in a section, and guys, look at the seventh well. Look at the eighth well. Those are money losers.

Chris Doyle: Peel off a couple of wells, increase your cash on cash return, that's a better solution for our shareholders. Don't focus on inventory; focus on return, so that's a big change. I think the other big change is, look, lean in to new ventures, lean in to the land team. Take one mile wells, push them to two, and bring in the DJs. Look to swap into pads where you've got four mile wells versus three that other operators in the basin can't do as we have done.

Chris Doyle: Use that operating team to your advantage, and don't focus on, hey, we've got to drill these wells right now. Take a mile, make it a two. That's another big change. And then the final change is, again, hey, look at me.

Chris Doyle: I've got a low day rate. That's great. The iron's not great. The crew's not great.

Chris Doyle: So let's upgrade. Let's spend a little bit more on a day rate, get better iron, and get better crews. And whoa, you got 20%, 50% efficiency gains overnight. It's amazing how that works. And so I think really digging in on all facets of the business, peel yourself back a little bit and figure out what drives long-term shareholder value, and then go attack. That's what we did with the DJs, and what we're doing with the Permian.

Noel Parks: Thank you. This does conclude our Q&A session. At this time, I will hand the call back over to Mr. Whitmarsh for closing remarks. Yes. Thank you, Jeff.

Brad Whitmarsh: Yep, thank you Jessica, and I appreciate everybody for joining us and for your interest in Civitas. We'll be on the road quite a bit here in the third quarter, so we look forward to seeing you at conferences and at roadshows.

Operator: Please don't hesitate to reach out if you have any additional follow-up, and have a great day, and please stay safe. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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