We came across a bullish thesis on Civitas Resources, Inc. (NYSE:CIVI) on Value Investing Subreddit Page by mbacandidate1. In this article, we will summarize the bulls’ thesis on CIVI. Civitas Resources, Inc. (NYSE:CIVI)’s share was trading at $49.61 as of Jan 7th. CIVI’s trailing and forward P/E were 4.86 and 5.53 respectively according to Yahoo Finance.
Aerial view of an oil and natural gas drilling operation on a leasehold position.
Civitas Resources (NYSE:CIVI) is an oil and gas exploration and production company with assets in Colorado and Texas. It caught attention when top-performing hedge fund Donald Smith significantly increased its stake despite a recent stock decline. CIVI’s growth strategy, initiated under a new CEO, involves substantial debt accumulation (51% debt-to-capital ratio) to fuel geographical and asset expansion, driving revenue growth from ~$900M in 2021 to ~$5B in 2024. This expansion primarily includes both inorganic and organic asset acquisitions. For 2024, CIVI plans ~$2B in maintenance capex to sustain current production levels, as older wells decline.
In terms of valuation, CIVI trades at an EV/EBITDA multiple of 7.2x, compared to 10.5x for peers like ConocoPhillips (COP) and EOG Resources, making it appear undervalued initially. However, considering its debt load and size relative to its larger peers, this may not fully capture CIVI’s fair value. Its free cash flow (FCF) over the trailing twelve months (TTM) is $527M, but with $354M in interest payments, its interest-to-FCF ratio stands at 67.2%, a high figure. Despite this, CIVI remains cash-positive, with ~$175M available for shareholder value deployment, including dividends and buybacks.
To refine the valuation, CIVI’s debt load is incorporated, showing an EV/EBITDA – Capex – Cash Paid on Interest ratio of 9.7x, compared to COP at 11.1x and EOG at 10.7x. This suggests that CIVI is more fairly valued than initially thought, as it must maintain its high debt levels to sustain cash flows. An alternative measure of shareholder value return, calculated as EBITDA – Capex – Cash Paid on Interest over market cap, reveals a 20.6% yield for CIVI, far exceeding the 9.1% yield of COP and EOG.
This high yield points to significant upside potential, assuming CIVI can maintain its ~$5B revenue with a stable $2B capex, manage its hedge program effectively, and avoid operational issues. The key risks lie in crude oil price fluctuations and operational disruptions. If CIVI can keep its operations stable and benefit from a potential rise in oil prices, it stands to outperform the market significantly, offering an exceptional risk/reward opportunity for investors.
Civitas Resources, Inc. (NYSE:CIVI) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 48 hedge fund portfolios held CIVI at the end of the third quarter which was 52 in the previous quarter. While we acknowledge the risk and potential of CIVI as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CIVI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.