Civitas Resources, Inc. (NYSE:CIVI) Q4 2023 Earnings Call Transcript

Civitas Resources, Inc. (NYSE:CIVI) Q4 2023 Earnings Call Transcript February 28, 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 morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Civitas Resources’ Fourth Quarter 2023 Earnings Conference Call. Today’s conference is being recorded. 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] At this time, I would like to turn the conference over to Brad Whitmarsh, Vice President of Investor Relations. Please go ahead.

Brad Whitmarsh: Thank you, Audra. Good morning, everyone and let me say that I’m thrilled to be a part of Civitas, a great team with great assets and a forward-thinking vision. I’m joined today by our CEO, Chris Doyle; CFO, Marianella Foschi; and COO, Hodge Walker. Today’s webcast and conference call coincides with our fourth quarter 2023 and 2024 outlook release. Our published supplemental slides and the 10-K all of which were published on our website yesterday. In addition, we’ve announced the large share repurchase transaction yesterday afternoon. So hopefully, you’ve had a chance to get through all of the materials that we have provided. During this call, we will make certain forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially from our projections.

Please read our full disclosures regarding forward-looking statements and other disclaimers in our earnings materials and most recent SEC filings. We may also refer to certain non-GAAP financial metrics. Reconciliations of these items can be found in our earnings release and our SEC filings as well. After prepared remarks, we look over to a question-and-answer session. As always, please limit your time to one question and one follow-up so we can work through the least efficiently. I’ll now turn the call over to Chris for opening comments.

Chris Doyle : Good morning, everyone, and thanks for joining us today. Let me also welcome Brad to the Civitas team. There are three primary things I want to cover today before we take your questions. First, a quick recap of the significant progress we’ve made over the last year. Civitas is a remarkably different and stronger company today. Next, I’ll share a few highlights from our fourth quarter and 2023 financial and operating results. Finally, we’ll discuss our 2024 outlook and how we’re extremely well positioned to create substantial shareholder value moving forward. Our ’24 plan has been optimized compared to our previous outlook as we reduced our capital expenditures by $150 million, while maintaining our expected full year production.

So let’s get started. A year ago, Civitas was a small cap single-basin company focused solely on the DJ. Production was approximately 170,000 barrels of oil equivalent per day. And while our DJ Basin assets were and continue to perform exceptionally well, we have limited flexibility in how we allocate our capital. Using our strategic pillars as our North Star, we’ve been working to enhance the Civitas investment thesis and portfolio for nearly two years now. Being on the forefront of this consolidation wave, we looked at a significant number of opportunities to diversify, scale and strength in our business. During 2023, our team successfully entered a second world-class base in the Permian through three separate large-scale transactions, all at compelling valuations.

The transactions added scale and diversified our operations across two of the lowest breakeven oil basins in the U.S. as we more than doubled our production, doubled our reserves and doubled our inventory of high-return development wells. We have all of the key ingredients to deliver long-term value for our shareholders. An exceptional team, high-quality assets, inventory depth, a strong balance sheet, significant free cash flow and a track record of returning that cash to owners through cycle. We’ve significantly transformed Civitas over the last year and our future has never been brighter. Shifting now to 2023 results, I’m very pleased with our performance last year as our full year results were in line with guidance. What our teams were able to accomplish operationally and financially amidst the ongoing transformation at Civitas is remarkable.

While our equity valuation is yet to catch up to our new asset base, we’re confident we’ll close this gap and deliver for our shareholders for years to come. Shareholder returns are one of our four strategic pillars and last year, we returned nearly $1 billion to our shareholders. 2/3 of this was in the form of dividends and 1/3 in the form of share buybacks. Now over the last two years, we’ve given back more than $1.5 billion to our owners and that represents nearly 25% of our market cap. Fourth quarter production was 279,000 barrels of oil equivalent per day. DJ basin volumes outperformed expectations once again with strong productivity in our Watkins area, which is in the southern part of our DJ acreage. Fourth quarter Permian production was impacted by facility upgrades to some of our higher oil cut production in the Delaware.

These upgrades were completed in November and we exited this year strong, with December 2023 Permian production averaging 120,000 BOE per day, 50% of which was oil. We took over operatorship of the Midland Basin assets late in the fourth quarter and our early performance is encouraging as we’re already seeing efficiencies through reduced drilling days and improved cycle times. Earlier this month, we took over complete control of the Delaware operations. I’m confident we’ll achieve similar operational improvements throughout the year. With our Permian leadership team now fully in place, we have the right people, work in the right assets and we’re primed to ready to deliver. Needless to say, I’m very excited about the opportunity ahead of us in the Permian.

Year-end 2023 proved reserves totaled nearly 700 million barrels of oil equivalent, up about 70% from last year. This was largely driven by the Tap Rock and Hibernia acquisitions. None of the reserve numbers include Vencer, which closed January 2, and will add significant reserves in 2024. Finishing up 2023, Civitas continued building a sustainable business, enhancing our environmental health and safety performance. Last year, we further reduced our total recordable incident rate and our score count and through a pneumatic device retrofit program, we reduced CO2 emissions in the DJ by 420,000 metric tons, another amazing accomplishment by the Civitas team. We’ll continue these efforts in the New Year and we’re bringing our expertise and bringing our approach to the Permian.

Shifting now to our 2024 outlook, our optimized plan focuses on three primary objectives; first, continuing our momentum in the DJ and successfully integrating our new Permian assets. Second, maximizing free cash flow through disciplined and returns-focused investments. And third, maintaining our industry-leading shareholder returns while also improving our balance sheet. As I mentioned earlier, we enhanced our ’24 plan by reducing CapEx 7% or $150 million while maintaining our production outlook. These planned improvements were achieved through optimized activity levels and reduced cycle times across the business along with productivity enhancements in the DJ. Our CapEx will be more weighted to the first half of the year, primarily as we’re coming off higher legacy activity levels in the Permian.

Production volumes are anticipated to increase modestly through the year. First quarter oil volumes reflect a new takeaway agreement in the Rockies where we have some line fill inventory to build. This agreement represents over $100 million in incremental value to Civitas over the next five years, and we’re excited about it. Net of the line fill, net of weather impacts, January production still came in at 325,000 BOE per day. About 60% of our 2024 CapEx will be allocated to the Permian, where we’re targeting 130 to 150 gross wells this year. Approximately 70% of our Permian lines will be in the Midland, with the remaining 30% in the Delaware. Because we’ve only recently taken over operatorship of the Permian assets, we’ve kept our drilling completion and facility cost was flat versus our acquisition assumptions.

As such, the opportunity to drive capital efficiencies in the Permian is significant and I expect we’ll have meaningful updates later this year as we establish our performance track record in the Permian. The remaining 40% of our anticipated CapEx will be allocated to the DJ, where our core Watkins development area continues to impress. Based on recent production performance in Watkins, we raised our expected recovery in our near-term development area by 10% versus prior estimates. The majority of our 2024 DJ basin activity will be in the Watkins area. In January, we filed our third comprehensive area plan in Watkins. We expect the previously submitted Lowry CAP to be approved in mid-2024 and the latest Arapa CAP to be approved late this year or early 2025.

Including the initial Box Elder CAP, these three caps represent nearly 80% of the remaining 300 or so locations in Watkins, and most of the non-CAP locations are covered by an existing OGDP, so we feel very confident in our plans and outlook in the DJ for the next several years. We’re maintaining our peer-leading shareholder return framework at $75 oil and $275 gas, we estimate free cash flow to be approximately $1.3 billion in 2024. Dividends, including base and variable are estimated at approximately $600 million this year or $6 per share, a nearly 10% yield based on our current stock price. In addition to our targeted divestment proceeds, the remaining $700 million in free cash flow will be prioritized for the balance sheet and opportunistic share buybacks like the one we announced yesterday, fully exiting NGP from our shareholder base.

We now have approximately $425 million remaining on our share repurchase authorization. Our current trading level equates to a free cash flow yield in excess of 20%. We believe this is a tremendous investment opportunity considering the quality of our asset base and our low cost structure. Our commitment to the strong balance sheet is unwavering. Our long-term target for leverage is unchanged at 3/4 of a turn. Our divestment program remains on track. During the fourth quarter of last year, we sold a non-operated acreage position in the DJ with essentially no production at a compelling valuation. It’s represented about 100 gross or 40 net non-operated locations. They’re low working interest assets, where we had no control over development timing and the area was not in the operator’s near-term development plan.

Completed divestments to date total about 1/3 of our $300 million target. We’re on track and confident that we’ll complete the remainder by the middle part of this year. Wrapping up, let me go back to where I started my comments today. Civitas is a significantly transformed company with all the key ingredients to deliver long-term shareholder value. We are differentiated from our peers through scale, asset durability, cash returns to shareholders and an employee base that consistently delivers. Before we move to Q&A, I want to give a quick shout out to our field teams who have managed through some incredibly challenging weather over the last couple of months. Companies often talk about employees being their greatest asset and our Civitas employees approving it.

Highlighted by our team recently limiting downtime in the DJ during an extreme weather event, where temperatures reached 30 below zero. I want to personally thank the men and women who work hard to deliver some of the lowest carbon barrels in North America. They do this every day, no matter what the weather looks like outside. Operator, we’re now happy to take questions.

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Q&A Session

Operator: [Operator Instructions] We’ll go to our first question from Neal Dingmann at Truist Securities.

Neal Dingmann : Nice quarter. My first question is on the ’24 Permian production guide. I think you talked about 170,000 BOE per day around 140 wells that now include — will include. So I’m just wondering, Chris, could you or the team give some color on the regional focus and maybe more importantly, what type of cycle times or operational efficiencies you believe are achievable now that you’ve got all the assets combined.

Chris Doyle : I’ll kick it off and then kick it over to Hodge. In terms of the 2024 guide, as we mentioned, we expect to see production growth throughout the year. In terms of the split for the year, we’re about 70-30 on TIL. 70% of the TILs will be from Midland, 30% from the Delaware. We like the production profile growing a little bit through the year, have started out the year very strong, coming off a really strong exit. In terms of capital efficiencies and how we’ve constructed this program, we’re early on. It’s early days, certainly. I love seeing the team already delivering 20%, 30% reduction in drilling days. We’re also accelerating TIL times. And I’m excited with this team that we’ve built will do. We’ve not reflected any additional significant efficiency gains in either side of the Permian. So, we think it’s the right way to set up 2024, and we think there’s room to enhance as we go through the year. Hodge, do you want to jump in on some of the specifics?

Hodge Walker : Yes. Thanks, Chris. Neil, as you know, we’re real early days with taking over operatorship. We just took over operatorship on the Hibernia assets here at the end of November. And on the Tap assets here just earlier this month. But — to the point that Chris mentioned, the team has already got some early quick wins. We’ve high-graded some rigs out in the Midland Basin, seeing some improvements on drilling times by 20%. We’re doing more modular builds versus stick builds, which help us accelerate facilities until timing. If you look at the broader efficiencies, it really is all about drilling completions and TIL timing. We are returns focused. Part of that return is really shortening that time from capital deployment to TIL. If we can consolidate some of that completion and bring revenue forward, we’re going to do that.

Neal Dingmann : And then Chris, maybe my second one for you, just on shareholder returns to capital allocation. You all continue to have among the best payouts, even notable that this obviously this great NGP buyback and the leading dividend yield. I’m just wondering, we all continue with the same sort of systematic sort of return plan and just with the 50% plus and what and how flexible you are on buybacks versus dividends going forward?

Chris Doyle : Sure. I’ll kick this off and then kick it over to Marianella. I think the first thing I’d say is we’ve built this track record of an all of the above approach. We look at what we’ve delivered through last year and even as we started 2024, a good mix between dividends and buybacks. And that really comes down to the strength of the assets and the teams that are managing those assets. I think it’s important to understand the company was formed with a very clear mandate and that was to return cash to our shareholders. We’ve done that. We’ve chosen to do that. We’ll continue to do that with a mix of the variable — the fix the variable and buybacks. Marianella, what would you add?

Marianella Foschi : Yes, absolutely. Neil, if you look at what we’ve done to date, we have an extremely strong track record of doing so and returning cash to shareholders really as good as anybody. We completed nearly $400 million in stock repurchases at a weighted average price of $61 unchanged. So, obviously very attractive levels. We also paid $670 million in dividends during the course of 2023. And we said in the prepared remarks, we’ve returned 25% of our market cap to shareholders just in the last two years alone. And I think it’s important to note that we did all of that while taking a meaningful step to diversify our asset base and afford ourselves just more capital allocation flexibility by entering into the Permian at very accretive multiples even if you look at it on a debt-adjusted basis.

So going forward, you could continue to expect us to do just that. Just expect us to continue this strong track record of returning cash to shareholders through cycles, and like Chris said, and this is all of the above philosophy. We believe this philosophy has really served us well to date. And I would say, I mean, look, if you look at our equity prices, they don’t really reflect the value of our high-quality asset base, which is why you saw us capitalize on that yesterday. If you look at our free cash flow during 2023 at $75 oil is $1.3 billion, which is over a 20% yield or said differently, we pay our entire market cap in under five years. And I will also note that we remain extremely committed to the balance sheet and achieving that 0.75x leverage target.

I mean, look, we don’t need to get there tomorrow, but for us, it’s more so about taking meaningful steps and making meaningful progress towards that every single day. That’s why you saw us come out with the asset sale program last year to accelerate that delevering target. And between our asset sale program and our free cash flow this year, we’ll have about $1 billion is to be allocated to balance sheet as well as the buyback program. I mean, look, it’s all a balance, right? I mean our focus is to create shareholder value if there’s the opportunity to do that. And so, it’s really just a question of balancing, making progress towards that leverage target and along with capitalizing on very cheap opportunities to buy our stock. And so I know I said a lot there, but I just wanted to give you a flavor as far as our decision matrix goes.

And for all those reasons, I mean, we think our equity right now represents a very compelling entry point and Civitas is well positioned as good as anybody to capitalize on that.

Operator: We’ll go next to Tim Rezvan at KeyBanc Capital Markets.