Q1 2025 Civitas Resources Inc Earnings Call

Rochelle: Good day, and thank you for standing by. Welcome to the Civitas Resources' first quarter 2025 earnings conference call and webcast. My name is Rochelle and I will be your operator for today's call. All lines have been placed on mute to prevent any background noise.

Rochelle: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again.

Speaker Change: Please be advised that today's conference call is being recorded. I will now turn the conference call over to Brad Whitmarsh, Head of Investor Relations. Brad, please go ahead.

Brad Whitmarsh: Thanks, Michelle. Good morning, everyone, and thank you for joining us. Yesterday, we released our first quarter of 2025 results, along with some supplemental materials and our 10Q. Hopefully, you've had a chance to look through these materials, all of which are available currently on our website.

Speaker Change: This morning our CEO Chris Doyle will make our prepared remarks and joining us for Q&A is our CFO Marianella Foschi and other members of management.

Speaker Change: We will conduct a question and answer session after our opening comments, and as always please limit your time to one question and one follow-up so we can work through the list efficiently.

Speaker Change: We will make certain forward-looking statements today, and those are subject to risk and uncertainties that could cause actual results to differ materially from our projections. Make sure you read our full disclosures regarding these statements in our most recent SEC filings. Also, we may refer to certain on- GAAP financial metrics.

Chris Doyle: We do provide reconciliation to the appropriate GAAP measures in yesterday's earnings release in 10Q as well. With that, I'll turn the call over to Chris.

Chris Doyle: Morning everyone and thanks for joining us. First, I'd like to welcome Clay Carroll, our new President and Chief Operating Officer.

Chris Doyle: Yesterday was his first day on the job and Clay's here with us for this morning's call. Clay is a proven leader and he has deep operating experience, deploying best practices to safely reduce costs, improve cycle times, and lead teams to enhance productivity and margins.

Speaker Change: You know, establishing our original 2025 guidance, recognize the multiple supply and demand forces causing significant uncertainty in the global economy and therefore our industry.

Speaker Change: We plan for it and removed around $150 million of cat-backs as compared to 2024, focusing our attention on capital discipline and lower reinvestment rates rather than maintaining 2024's production level.

Speaker Change: We were made confident in our full-year outlook, but at the same time, we're positioned to reduce activity levels should current market conditions to curate further.

Speaker Change: These conditions not only include the oil price but also the corresponding service cost environment.

Speaker Change: Additionally, we're taking meaningful steps today to strengthen our business and improve our performance. First, we remain focused on running the business to deliver sustainable free cash flow.

Speaker Change: Yesterday we announced a comprehensive cost optimization and efficiency plan to generate an incremental hundred million dollars of annual free cash flow. As part of this effort, we're focusing on every opportunity is safely, lower costs, enhanced productivity, reduced cycle times in optimized production operations.

Speaker Change: In addition, we see substantial opportunity to improve our cash cost structure and our netbacks, including optimizing our commercial and mystery agreements. As an example of this, our teams recently executed a new oil gathering agreement for Transport out of the DJ Basin, which will help increase free cash flow by approximately $15 million each year.

Speaker Change: In total so far, we've identified over a hundred million dollars in incremental free cash law on a run rate basis with approximately 40 percent of this amount benefiting the second half of 2025. I look forward to sharing our progress on this initiative in months ahead.

Speaker Change: Second, we continue to prioritize protecting and strengthening the balance sheet which we believe is necessary to sustain shareholder returns over the long haul.

Speaker Change: This is why we set up our plans to start the year prioritizing our free cash flow after the dividend to the Delever which is even more important now with the current market.

Speaker Change: Consistent with that, we significantly expanded our hedge position, our now nearly 50% hedge on crude oil for the remainder of the year. Collectively our hedge position's there worth nearly two hundred million dollars.

Speaker Change: On year, our year-end 2025 net debt target of $4.5 billion is unchanged, and at current oil prices we'll achieve that goal with our remaining free cash flow and our plan to investment proceeds of $300 million.

Speaker Change: We were very encouraged with the interest we saw in our divestment process earlier this year, but the pullback and oil prices did not allow us to transact at a value we felt represented the quality of those assets.

Speaker Change: Given our diverse portfolio, we remain confident in achieving our investment target for the year, but let me be clear, we are not price takers We remain patient and solely focused on maximizing the value of our assets for our shareholders

Speaker Change: Voltons and acquisitions have been a key part of our story. We're extremely pleased with the scale and quality of the portfolio that we've built. Today however, we are seniorly focused on execution and optimization of our assets and we do not plan to be buyers in the asset market for the foreseeable future.

Speaker Change: Our third key priority for the year was returning cash to shareholders, a critical piece of the Civitas strategy.

Speaker Change: Our near-term focus on delivering this year's return was designed primarily to come from our robust and steady-based dividend.

Speaker Change: During the quarter, we did complete our existing 10B5 repurchase program, buying back nearly 2% of our shares outstanding.

Speaker Change: As we reach our $4.5 billion net debt target, we have the opportunity to shift more of our free cash flow to additional share buybacks going forward.

Speaker Change: Turning to first quarter results, production will slightly lower the expectations on lower capital and cash operating costs were higher than planned. On the production side, first quarter volume show the effect of low activity levels at the end of last year and to the start of 2025, particularly in the DJ.

Speaker Change: For the second quarter, we expect all to grow 5% led by growth in the Permian Basin.

Speaker Change: Momentum should continue into the third quarter, benefiting from a high tilt count in the middle part of the year.

Speaker Change: Capital performance in the first quarter was strong and our teams have delivered significant efficiencies to start the year.

Speaker Change: In the Permian, as we shift 40% of our activity to the Delaware, the team is drilling 10% faster than expected When the completion sprunt in the Midland Basin last quarter our teams delivered a 5% sequential increase in throughput utilizing somal-fract operations

Speaker Change: We did shift some capital from Q1 into Q2 in the DJ, which will flow through to second quarter production as reflected in our guide.

Speaker Change: As our volumes grow and we implement our cost optimization initiatives, cash costs and a per-BOE basis will decline through the remainder of the year, which gives us confidence to maintain our full-year guidance.

Speaker Change: In closing, as we navigate through a volatile market, I've great confidence in our team and what we can accomplish together, but there is important work to be done.

Speaker Change: We're taking meaningful steps today to further improve our cost structure and operations, enhancing returns, protecting our free cash flow and protecting our balance sheet. And importantly, we maintain the flexibility to respond to changing market conditions. All of this enhances the durability and strength of Civitas.

Operator and I are ready to take questions.

Speaker Change: Thank you. We will begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join Q. If you would like to withdraw your question, simply press star one again.

Speaker Change: If you're called upon to ask your question and are listening to our loudspeaker on your device please pick up your handset and ensure that your phone is not on mute when asking your question and we do request for today's session that you please limit to one question and one follow up.

Speaker Change: Your first question comes from the line of Gabe Daoud of Peter Cowan, your line is open.

Gabe Dowd: Thanks. Hey, morning everyone. Appreciate the time and prepared remarks. Chris was just hoping.

Gabe Dowd: to maybe get a bit more color on the rest of 2025, and I guess specifically...

Speaker Change: Your comfort level and executing on the production and free cash flow ramp the rest of this year, which is key in enabling you guys to hit your debt target, just maybe some more thoughts around that I think would be helpful.

Gabe Dowd: Sure. As we, thanks for the question, Gabe, as we came into the year, we tried to level out our program better than what we inherited the previous year, and we were split first half to second half capital, about 55 to 45 percent.

Gabe Dowd: That's giving us quite a few tools here in the second quarter will be the most tools throughout the year, followed by a strong third quarter and so that is building up that that second half production growth.

Gabe Dowd: In the first quarter, we were slightly below about a percent below our expectations, a lot of that due to weather.

Gabe Dowd: I mentioned some of the capital that moved into the second quarter, pushing some tills and the DJ, that's further enhancing third quarter growth.

Gabe Dowd: in the fourth quarter. I think the big thing here gave is we have very strong confidence in the program. Confidence in our ability to deliver our guidance.

but we're not blind to the continued volatility.

Gabe Dowd: and so we will continue to look at the macro and if we see the macro deteriorating further, we'll adjust activity and so that will impact the second half as well but as we sit here today, unless we see sustained mid to low 50s in an oil price, we feel very confident in executing the rest of the year.

Speaker Change: Okay, thanks for that, it's helpful, and my follow-up would…

Speaker Change: was going to be around what the program would maybe look like under that scenario that you mentioned

Gabe Dowd: Let's say, again, it's been pretty volatile, but let's say oil gets to 55 or below 55 for a sustained period. What would Civitas do in response? What would activity levels look like?

Speaker Change: Yeah, maybe rank like order of importance in that scenario, I'd imagine it's still paying down death, but again we'd just love to hear your thoughts on that if the macro deteriorates more.

Speaker Change: Sure. And as you can imagine, I'm sure every company out there has run a number of scenarios given just the

Speaker Change: up and down with the oil prices. So, as we think about, sustain oil...

Speaker Change: Below $55 or the first dollar that comes out, it's all going to be related to returns, the first dollar that will come out will likely be completion related and we'd look to build some ducks in the DJ.

Gabe Dowd: That would position us to maintain some productive capacity. Again, it's so volatile you could be back up over 60 and so we wouldn't want to shut down the entire program. Now, if that was sustained, certainly the next dollar out would be drilled dollars. We're not in the business to build up large duck inventory. But that's how we see the immediate terms game of...

Gabe Dowd: pulling capital out, and then certainly as we think through our Permian assets, the first half of this year, 40% of our activities.

Gabe Dowd: Directed to the Delaware. There's some of the best returns, most resilient returns in our portfolios. We're excited about that. But we'll we'll we would continue to look to pair down any any investments that just don't fly it, you know, low 50s.

Okay, great. Thanks for that. Thanks, everyone. Thanks again.

Speaker Change: Your next question comes from the line of Zach Parham with JP Morgan. Please go ahead.

Zach Parham: Hey, thanks for taking my question. First, just wanted to ask on OPEX, L-O-E was above expectations in the quarter due to some water issues in the Permian.

Speaker Change: The 2Q Guide was a bit higher than we'd expected, but you maintain the 4-year-old cross-guide. Can you just talk about the moving pieces there and how you expect L.O.E. to trend through the year?

in the Permian.

Speaker Change: Unable to hit their contractual obligations and the team had to supplement and add some redundant take-away capacity which allowed us to minimize any type of volume impact.

We have contractual protections that will allow us to...

Speaker Change: I recover some of those costs and that's our plan.

Speaker Change: but as, and it's related with the Holy Development, as we brought on.

Zach Parham: L.O.E. Drop in the second half of the year. At the same time as we're growing volumes, your per-BOE unit cost is going to come down as well. And I'd say Zach, the last piece of this is

Zach Parham: As we think through our cost optimization plan about half of that is directed to our cost structure and we'll start to see those savings kick in in the second half as well and so that gives us confidence that we'll be well within the current.

Crossguidance

Zach Parham: Thanks, Chris. That's all I wanted to ask on the 300 million asset sales target. In your prepared remarks, you said you remained confident and achieved in that target. But also that, you know, the upstream market was challenged and you weren't going to be price takers.

Speaker Change: Can you just tie those two comments together? What does that mean for asset sales? What are you looking to sell here that you still gives you confidence to achieve in that plan? Sure. Yeah, the macro just doesn't set up for upstream transactions very well.

Speaker Change: Concurrent with the previous process, we've also been running the ground non-producing assets, its surface acreage, its water infrastructure, other infrastructure investments that we could look to to monetize that are less.

Speaker Change: tied to the volatility on the upstream, and that gives us confidence to be able to pull some of that down.

Thanks Chris.

Thanks, Zach.

Speaker Change: Your next question comes from the line of Scott Hanold with RBC, please go ahead.

Yes, I think so.

Scott Hanold: Chris, can you talk through what your priorities are in this uncertain macro environment? What

Scott Hanold: You know, hitting that four and a half billion dollar debt target by the end of the year, so you'll need to do what you need to do to get there. And just give us a sense of, you know, how you think about how you prioritize, you know, various things you're looking at.

Scott Hanold: that absolute debt target by the end of the year. Having said that, we're not going to do...

Scott Hanold: We're not going to give up value on assets just to hit the four and a half and we're not going to be blind to

Further deterioration of the macro, and so...

Scott Hanold: What we have is a strong baller sheet supported by very strong recast flowing assets.

Okay, and what would you...

Scott Hanold: You know, consider like unnatural. I mean, you know, look is the fixed dividend, where is that right now sacred? Or, you know, if we were in sort of a $50 environment, would that be, you know, up for, you know, potential consideration to reduce?

Scott Hanold: Cashlow protected down to $40 WTI, including that dividend, and so that's not on the table right now.

Scott Hanold: and then in terms of unnatural, really just speaking to value and selling assets into a low strip, we don't have...

Scott Hanold: We don't have the need to do that. We've got very few near-term maturities and, again, a very strong cascading asset.

Understood, thank you.

Speaker Change: Again, if you would like to ask a question, press star 1 on your telephone keypad. The next question comes from the line of Oliver Wong with DPH, please go ahead.

Oliver Wang: Good morning, Chris and team, and thanks for taking the questions.

Speaker Change: Maybe to start off with a quick follow-up to Scott's question, just wondering what is the flex to alter the trajectory to hit the 4.5 billion net debt target by year end if oil prices are tracking closer to $55 to $55.

Speaker Change: Is that going to come from less capex spending the back half of the year or does that just get pushed out to the right in terms of timing?

Speaker Change: Hey Oliver, thanks for the question. So look, any of the ways to think about it is we'll hit our $4.5 billion target at $60 oil. That includes the proceeds from the acid

Speaker Change: We're continuously looking for ways to accelerate that and we have a lot of levers to do so, so on the...

Speaker Change: On the first side, we're aggressively working on cost reductions across the board as we discuss, and that will be a creative too, where we end up on year on net debt.

Speaker Change: As you know, we talked about the divestment. The volatility is not helpful to divest assets credibly. We feel very good completing the 300 target. By the end of the year, but like Chris said, we'll be valley driven and if we see values.

Speaker Change: That we like, we consider even going a little bit above that again if it's a creative and lastly, a lot we got the head just that we did at the time we did them for up to about 50% head.

Speaker Change: Look, as we progress through the year, we're keeping a very, very close pulse on a daily basis of what service costs bring. I think as we get closer to the price you reference, make your low 50s.

Speaker Change: We'll certainly adjust activity. As a reminder, we already built our plan in keeping in mind in a lower commodity price environment and we talked about that last quarter. I think most of this recent commodity price

Speaker Change: has allowed us to already absorb it in our pad economics in a way that those pads will need a return for our show. So, but like I said, we can continue tracking it closely and it's going to be service cost-dependent. But some of it, to your point, could come from CapEx adjustments. It's like my price is deteriorating further.

Okay.

Speaker Change: Thanks for that color. And for my second question, just wondering operationally in the Delaware it feels like it's been close to a year since you all have had material levels of activity there. So just hoping that you all might be able to provide some detail in terms of some of the key things that you all are focusing on there to optimize productivity as you all enter development of that asset in a more meaningful way on a city start to finish well.

and took the time.

Speaker Change: One mile wells, took the time with ground game to extend those laterals and really enhance returns. These are already top returns within our portfolio and we've taken that to a new level. The team is off executing as I mentioned in my remarks better than expected.

Speaker Change: Offset production and feel very confident about the returns for the capital that we're deploying there again. Some of our best returns in our portfolio.

Sounds good. Thanks for the time. Thanks, Oliver.

Speaker Change: Your next question comes from the line of Leo Mariani with Roth, please go ahead.

All right. I just wanted to...

Leo Mariani: Fault a little bit on the DJ. Looks like DJ volumes were down pretty significantly in the first quarter versus the prior quarter and I think you've articulated some of those reasons but in your slide back you're talking about kind of DJ volumes being flat again, you know in the second quarter which I guess maybe was a little bit

Leo Mariani: I think you provide a little bit more kind of color around that is not much in the way of second quarter kind of turn in line activity and how do you see DJ kind of trending in the second half.

Sure. Thanks, Leo.

Leo Mariani: As we guided first quarter, as we rolled out the plan.

We were looking at a pretty prolonged time period with-

Leo Mariani: with very few tills. And so you saw the full run of base decline. At the same time, we had some very productive wells in the Watkins area come off plateau. And so, coming off that plateau, the declines are higher as we reflected in our 1Q guide. You know, the 1% low to our expectations really.

Leo Mariani: was as expected but pretty aggressive. We also had some delays on Tills that pushed some capital into the second quarter and so that pushed some volumes out and therefore the second quarter is now now flat and you'll see now with the engine restarted some of that growth getting pushed to you at a third quarter.

We want to end as a reminder we had, we went through.

Speaker Change: Four or five months of no tilts in the DJ, we brought like Chris had a fair number of wells round up towards last year, and then the next batch, which was really nothing, it was three wells.

Speaker Change: Late Q1, so obviously pretty skinny there for almost two quarters and the DJ is are higher decline assets out of the two assets and so just from a timing perspective that's why you saw expected decline rates along with expected weather impacts for the last time of [inaudible]

Okay, this is helpful.

Speaker Change: You know, stripped down, you know, quite a bit. Activity hasn't exactly been robust as an industry and in the DJ, so I think anything on leading edge, kind of service cost changes.

Speaker Change: Yeah, thanks for the question, Leo, and this is critical, right, as we talk about oil in the mid to low 50s.

Speaker Change: You really need to know what the other end of that equation is, and that's the OFS market, and so the entire team is working with our suppliers. We have a lot of flexibility on our capital program, and so that...

Speaker Change: means that we can negotiate real time with the weakness, and as you said, with lower activity in both of the basins.

Speaker Change: We are seeing that weakness in the market, provide some opportunities to get costs out of the system and we'll continue to work with our partners to...

Speaker Change: to look for ways to pay. We'd like to continue to level load activity, but only if it makes sense for shareholders at the right returns. But we're encouraged by what we see in both basins.

Speaker Change: You know, the other uncertainty out there, obviously, is tariffs and we're in the...

Speaker Change: The 90-day whole period, but a lot of uncertainty on the back end of this, what that does to overall cost structure, and we're watching that very closely. But what we see here today, Leo, is that the opportunity to negotiate more attractive and more aggressive costs from our vendors is going to outweigh any type of pressure that we see on the tariff. So we're encouraged, but also given the volatility on both sides.

with oil price.

Speaker Change: This is a pretty dynamic situation that will manage very closely and make decisions real-time.

Okay, thank you.

Brad Whitmarsh: That concludes our Q&A session. I will now turn the conference back over to Brad for the closing remarks.

Brad Whitmarsh: Sure, thanks for Shell. Appreciate everybody joining us today. We look forward to seeing you on the conference circuit here in the coming weeks. Please be safe and happy Mother's Day to all the moms out there and those at Civitas.

Speaker Change: Thank you. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.