Release Date: August 02, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Civitas Resources Inc (CIVI, Financial) reported production ahead of plan, with Permian assets producing more than 185,000 Boe per day.
- Well costs in the Permian Basin are below expectations, contributing to reduced operating costs and enhanced cash margins.
- The company completed noncore asset sales at an accretive valuation, improving its financial position.
- Cash operating expenses were 2.5% lower than the first quarter, and drilling and completions teams delivered efficiency improvements resulting in less CapEx than planned.
- Civitas Resources Inc (CIVI) returned nearly $275 million to shareholders in the quarter, including $150 million in dividends and $125 million in share buybacks.
Negative Points
- The company experienced some temporary third-party facility downtime in the DJ Basin, impacting production.
- Extreme summer weather in Colorado deferred some third-quarter DJ Basin growth into the fourth quarter.
- Despite strong performance, the market valuation of Civitas Resources Inc (CIVI) does not reflect the quality of its assets and execution, according to the CEO.
- The company is still working through the integration of its Permian Basin assets, which may present ongoing challenges.
- Civitas Resources Inc (CIVI) faces continued pressure to balance capital allocation between debt reduction and shareholder returns.
Q & A Highlights
Highlights of Civitas Resources Inc (CIVI) Q2 2024 Earnings Call
Q: When deciding the amount of free cash flow to allocate to buybacks versus the variable, what would be the main criteria? Are you looking at recent share price dislocation, NAV, or maybe the low multiple that you highlight in your deck?
A: (M. Christopher Doyle, CEO) We view our capital return framework much like any other capital allocation decision. The move to add flexibility is tied to the disconnect with how we are valued. We look at underlying NAV, how we trade versus peers, and the asset market. The valuation today does not reflect the quality of our assets and team execution. We are excited to allocate to this business and believe it will be reflected in our value.
Q: Could you speak to the potential growth in both plays and factors impacting this for the remainder of the year?
A: (M. Christopher Doyle, CEO) We see oil production growth in both the Permian and DJ basins. Despite noncore asset sales, we reaffirmed our oil guide. We have a front-half loaded capital program, and recent extreme weather in Colorado will defer some third-quarter DJ Basin growth into the fourth. The Watkins wells are performing exceptionally well, and we expect strong second-half growth.
Q: What kind of improvement do you think modifying the spacing and zone targeting in the Permian can make in the performance of the wells?
A: (M. Christopher Doyle, CEO) The uplift is not insignificant. We have built in conservative but attainable results. The team has fully hit our expectations, and we expect a step-up in performance. The rock changes, but we are excited about what our team can achieve with full control.
Q: Can you give us a sense of how you think about incremental activity in the Permian along with opportunities to swap and trade to expand your inventory?
A: (M. Christopher Doyle, CEO) We have opportunities to trade within the Midland and Delaware basins. The asset market has changed significantly since our entry, and we will always look for ways to enhance our business. We have a high bar for acquisitions, and any deal must compete against buying back our own shares, which trade at a compelling valuation.
Q: Is it safe to say that the Board wants to be very aggressive on the share repurchase program in the near term?
A: (M. Christopher Doyle, CEO) The Board and management will focus on whatever generates the highest shareholder return and strengthens our business. We may more heavily allocate to buybacks in the near term while also addressing our delevering targets and maintaining a strong balance sheet.
Q: Can you talk about what's embedded in your production guidance regarding the fourth mile of the 4-mile laterals?
A: (M. Christopher Doyle, CEO) We are risking the fourth mile conservatively. The initial productivity is encouraging, and we are focused on upsizing infrastructure to unleash these wells. The type curves are compelling, and any outperformance could be a game-changer.
Q: How are you thinking about capital allocation across the two plays relative to this year's capital allocation and within the Permian, specifically Delaware versus Midland?
A: (M. Christopher Doyle, CEO) The challenge is real-time improvements in both basins. We have regulatory clarity in the DJ, which impacts capital allocation. We are more levered to Midland but have some of our best returns in Delaware. We will run the business to maximize free cash flow, keep production broadly flat, and generate as much free cash as possible for shareholders and the balance sheet.
Q: How are you thinking about the extension you want to be hedged in 2025?
A: (Marianella Foschi, CFO) We have a hedging program to underpin our balance sheet delevering initiatives. We target 30% to 40% of expected next 12 months on the hedging side. We recently rolled in Q3 2025 at attractive prices. We have a structural hedge with our low-cost structure and do not expect to add hedges beyond a 12-month period.
Q: Any early thoughts on how you are thinking about picking back activity to ensure the 2025 program is optimal?
A: (M. Christopher Doyle, CEO) 2024 is an anomaly with front-half loaded capital. We may redeploy capital savings to strengthen the exit and 2025 setup. We will look for opportunities to reallocate capital to drive long-term shareholder value.
Q: How are you thinking about simul-frac operations in the Permian, especially in the Midland?
A: (Hodge Walker, COO) We are optimizing equipment and designs and building a strong track record of continuous improvement. We are putting plans in place to move towards simul-frac in the Midland Basin towards the end of this year. The savings from simul-frac are not embedded in the current cost targets and will be incremental.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
