Civitas Resources, Inc. (NYSE:CIVI) Q1 2024 Earnings Call Transcript

Civitas Resources, Inc. (NYSE:CIVI) Q1 2024 Earnings Call Transcript May 3, 2024

Civitas Resources, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to Civitas Resources’ First Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Brad Whitmarsh, Head of Investor Relations. Please go ahead.

Brad Whitmarsh: Thank you, Ali. Good morning, everyone, and thank you for joining us. Yesterday, we issued our first quarter earnings release, our dividend release, and a buyback announcement along with our 10-Q and we provided some supplemental materials. Hopefully you’ve had a chance to review those items, which should all be available on our website. I’m joined today by our CEO, Chris Doyle; CFO, Marianella Foschi; and COO, Hodge Walker. After our prepared remarks, we’ll conduct a question-and-answer session. As always, please limit your time to one question and one follow-up, so we can work through the list efficiently. We will make certain forward-looking statements today, which are subject to risks and uncertainties that could cause actual results to differ materially from our projections.

Please make sure and read our full disclosures regarding these forward-looking statements and our most recent SEC filings. We also may refer to certain non-GAAP financial metrics. Reconciliations of these items to GAAP measures can be found on the yesterday’s release and in our SEC filings. With that, I’ll turn the call over to Chris for opening comments.

Chris Doyle: Thanks, Brad. Good morning, everybody, and welcome to our first quarter call. 2023 was truly a transformational year for our company. Now in 2024, this is the first quarter that all of our new businesses are put together, and our results highlight just the beginning of Civitas’ bright future ahead. Today, we are benefiting from a scale to more diverse portfolio. Our teams are finding innovative ways to drive capital efficiency. Here are a couple of key takeaways. First, our Permian team and assets are performing very well. Through successful integration, we are already reducing drilling and completion cycle times and lowering cash operating costs. Now it’s only one quarter, but I’m super excited about the results this team is already delivering.

Next, our teams continue to optimize development of the DJ Basin, and we achieved our $300 million divestment target ahead of schedule. These divestments are accelerating value to Civitas, peeling away assets that simply don’t compete for capital. On an annual basis, the $300 million of assets would have generated approximately $70 million of EBITDA at $75 oil. Now connecting the dots here, these non-core assets traded at a material step-up in value from where our remaining core assets currently trade. Importantly, the quality of our portfolio, our strong operational execution and our confidence in achieving this year’s targets will allow us to maintain full-year volume guidance despite selling 5,000 BOE per day. This is essentially a 1.5% increase in our sales volume guidance for the year with no CapEx change.

Also during the quarter, we continued our strong shareholder return program, returning $215 million between our peer-leading dividend and share buybacks. Hopefully, you saw our press release yesterday announcing another share repurchase agreement where we are buying back more than 1 million shares from Vitol was now down to under 2% of our outstanding shares. Since the beginning of last year, we’ve repurchased $462 million of our stock at $63.30 per share. And our total return, including dividends is approaching $1.3 billion over that same time frame. That’s approximately 18% of our market cap returned to shareholders in a little over a year. In addition to our capital return, we paid down debt in the first quarter, reducing our revolver borrowings by $350 million.

Our first quarter operational and financial performance drove a significant beat on both consensus earnings and cash flow. Sales volumes for the quarter were higher than planned, averaging 336,000 barrels of oil equivalent per day and oil was 156,000 barrels per day or 47% of total volumes. This was driven by strong well productivity along with accelerated turn-in-line timing in both the DJ and Permian. Cash operating costs were in the lower half of our annual guidance at $9.19 per BOE. LOE was the primary driver here, totaling $4.31 per BOE. Capital expenditures were $650 million or approximately a third of our annual guidance. This is slightly higher than planned, but largely due to the acceleration of drilling and completion activities in the Permian as well as certain long lead items purchased for the DJ in the first quarter.

As a reminder, we’ll likely spend 60% to 65% of our full-year CapEx in the first half of the year. As we progress through the remainder of the year, our focus remains on maximizing free cash flow, enhancing the balance sheet and returning capital to our shareholders as we build a long-term and sustainable business. Now let me turn to some operational highlights. Starting with the Permian. We will be investing about 60% of this year’s capital in the Permian. We are continuing to show that assets are better in our hands. In today’s supplemental slides, we provide a number of helpful comparisons that highlight this exact point. On the drilling side, we’ve increased average footage drilled per day by nearly 30% from prior operators. And according to third-party data, we drilled more footage per day per rig than any other operator in the Permian during the first quarter of the year.

A particular note, we recently drilled a three-mile lateral in the Midland Basin and under 10 days spud to rig release. We’ve also had similar achievements on the completion side. Our teams have increased daily fluid throughput by 20%. Accordingly, cycle times are coming down as our D&C costs. So far, we’ve captured approximately 5% cost reduction on a per foot basis and there is much more to come. We are also finding ways to lower cash operating costs. In the first quarter LOE, we were more than $1 below expectations, driven by ongoing field-level synergies, primarily labor-related and the optimization of chemicals program, particularly in the Delaware. In March, we commenced production on a large number of new Delaware wells. Early production performance is in line with expectations.

Production from these wells along with additional TILs through the summer should drive oil growth in the Permian through the year. The first well is fully drilled and completed by Civitas are anticipated to commence production in the third quarter. We continue to find ways to optimize our portfolio through asset trades, acreage swaps and small farm EMS acquisitions. Our ground game has added valuable inventory, extended laterals and increased working interest in near-term development. As a result of this success, we’ve now lowered our 2024 expected Permian well count by about 10, while still completing the same lateral footage as our lateral lengths have increased by more than 10%. Now switching to the DJ. The highly prolific Watkins area comprises about 70% of our 2024 DJ investments.

We continue to be encouraged by performance. And you can see on our slides, how production continues to track well versus our recently uplifted type curve. During the first quarter, we completed 13 four-mile laterals in walk-ins. These are the longest wells ever drilled and completed in the basin. These wells allow us to access additional resource while reducing surface impact, and we are looking forward to production results in the second half of the year. We have 320 remaining development locations at Watkins, the majority of which are covered by comprehensive area plans. The Box Elder CAP is approved and represents much of our 2024 and 2025 planned activity, and we are working on the Lowry CAP approval, which we expect to happen later this summer.

Also during the first quarter, we drilled our first U-turn wells in the DJ. So another accomplishment in our strategy to maximize returns and resource development with longer laterals. Briefly on the Colorado regulatory front, I want to thank the governor and the legislature for their work to reach a compromise that will withdraw the competing ballot measures and in-process bills regarding oil and gas development. While the new compromised bills are not yet finalized, they are aligned with our emissions reduction commitments and they raise important funds for low carbon transportation options for all Colorado. Importantly, for producers, it provides certainty that the government will oppose any future ballot measure and any legislative attendant that would upend this certainty at least through the 2027 legislative session.

This is a win-win for all parties, including our shareholders as it removes risk of near-term regulatory changes in the state into 2028. Wrapping up, our first quarter performance reflects the benefits of a high-quality portfolio and the team’s ongoing ability to make the most out of our asset base. We are encouraged by the early efficiency gains and strong results we are seeing in the Permian and the DJ Basin continues to perform exceptionally well. Civitas has all of the key ingredients to deliver long-term shareholder value, high-quality assets, inventory depth, a strong balance sheet, significant free cash flow and a track record of returning cash to owners through cycle. Thank you for your interest in Civitas. Operator, we are now happy to take questions.

Operator: We are now opening the floor for question-and-answer session. [Operator Instructions] Our first question comes from Neal Dingmann from Truist Securities. Your line is now open.

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Q&A Session

Neal Dingmann: Good morning, Chris and team and congrats on the nice quarter. My first question, is really on the notable upside you all already seen on the Permian. And specifically, what I’d like to add to Chris, is for you [indiscernible] just on the well productivity in the play, it appears to be advancing very quickly. I’m just wondering, are there a few items I know we’ve had a number of companies now with earnings this week talked about the well productivity and what’s driving that? What’s most impressive with yours is just a short amount of time. And so maybe you could talk about the type of drilling or completion – what we’re seeing there and maybe future D&C upside the remainder of the year?

Chris Doyle: So thanks for the question, Neal. It’s very easy and what we’ve done is point to very notable capital efficiency gains, drill time, cycle times, turn-in-line cycle times. All of those are hitting on all cylinders. I think what’s not necessarily out there quite yet is what this team is doing in terms of how we’re developing this resource. And to your point, there’s additional zones of interest uphold in the Delaware. We’ve talked about the Wolfcamp D in the Midland. The reason that we targeted entering the Permian is exactly what you pointed to. There is tremendous resource up and down the whole. We’re testing those zones. Some of those zones, candidly, while there are upside, we did not underwrite value for these acquisitions.

We’re seeing how they perform. That will inform how we allocate capital going forward. I’ll say we’re very excited by early results that we’re seeing in many of the secondary zones, and that will have impacts on how we allocate capital going forward.

Neal Dingmann: Great point. And then, Chris, since you’ve come in, you’ve done a tremendous job only doing what you’re going to say, but just on the shareholder return. And I’m just wondering now, when we look at sort of Civi going forward, do you still think sort of the flat growth makes the most sense now that you’ve got these high-return Permian assets to go along with the DJ assets. Maybe just talk about what you think – what strategy you believe is still best for shareholders going forward?

Chris Doyle: Yes. And I would point to the collective at Civitas really executing on this business model that was put in place in formation in November of 2021. We think it still makes the most sense long-term, not to focus on production growth, but focus on cash flow, focus on maximizing free cash and returning that to shareholders. Now some years, that may mean a little bit of growth, whether you saw that early in 2022 when service costs weren’t necessarily aligned with commodity prices. You saw the run-up in commodities. So what did we do? We accelerated and we grew production. The flip side was true as well. In 2023, where there was a mismatch, and we pulled activity back. Again, this is about how do you maximize shareholder value over the long-term.

And I would say right now, there’s still a lot of flux in the system. And this is – that’s why it’s a difficult question to answer for us right now as we stand up operations in the Permian. So much of that capital efficiency equation, so much of what this team can deliver and what these assets will deliver is still yet to be determined. I think what’s truly exciting for our team is there are a lot of folks that wanted to see us execute. They wanted to understand, could we integrate three new businesses in the Permian and not stumble and – look, again, it’s one quarter. We’re not spiking the football or anything like that. But we’re super proud that this team has started out of the gate as strong as we have. I think what you’ll see year-over-year is likely to be broadly flat production and how do we peel out as much capital as possible.

Now I will say another hallmark of our Board and the hallmark of our executive leadership team is that we are always in the lab trying to figure out how to improve our business. And if that means, we grow a little bit. We’ll look at that as a potential option. My gut is it’s going to be broadly flat production, minimize capital.

Neal Dingmann: I think that makes the most sense. Thank you.

Chris Doyle: Thanks, Neal.

Operator: Net question comes from Tim Rezvan from KeyBanc Capital Markets. Your line is now open.

Timothy Rezvan: Good morning, folks and thank you for taking my questions. I want to start first, I guess, the Colorado legislative news, obviously, a really big deal. Can you give any more insight on the timing when we – is that like how it works being sort of passed through the legislature right now? And then while we’re talking about time lines, can you give any more details on what you think for the Lowry CAP and then the third CAP in Colorado? Thank you.

Hodge Walker: Hey, Tim. This is Hodge. With regards to the legislation that you referenced, that legislation is moving through right now as we speak. The session ends here next week. So expectation is that we’ll move through the process and get voted on here by the end of next week. As far as the application, as I think you might be aware, there’s a sliding scale that’s associated with pricing on oil and gas separately that sliding scale will go into effect in 2025. One of the benefits of this discussion, this compromise is really through the work of the governor, the legislature, ENGOs in the industry and the governor’s announcement on Monday through companies were named and we were one of those companies through the work that we’ve been doing over the last few weeks.

What we’ve agreed to through this compromise is that the governor and the legislature is stacking is to say that there will be no negative legislation. They’ll come out against legislation and ballot initiatives that have a negative impact on this industry. And that’s through the legislative session of 2027. So for all intents and purposes, that clears until the 2028 legislative session. On Lowry CAP, we’re expecting Lowry CAP to be moving through this summer. And then the next one is our Arapa CAP, and that will be probably at the end of this year, beginning of next year.

Chris Doyle: In Lowry CAP, we’ve got a schedule in June [indiscernible]. So we’re feeling good about that. I think the only thing I’d round out is the sliding scale at current price, about $0.50 a barrel of oil, about one and a half pennies for gas. If you apply that to our production stream over the entire Civitas production street is about $0.25 BOE and how we made more than that, it’s peeled more than that out of LOE in the first quarter. Now we’re not happy about paying additional taxes, but we are happy about building a coalition that shows the importance of this industry in the state, and removing regulatory uncertainty for the foreseeable future. And as Hodge mentioned, we work the Lowry through the process. We roll Arapa CAP through the process, we have a real line of sight to developing one of the great resources in the DJ over the next three, four years without that overhang.