Civitas Resources, Inc.

Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to Civitas Resources' third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question, you'll need to press star 1 on your telephone. To withdraw your question, you'll need to press star 1 again. In the interest of time, we ask that analysts please limit themselves to one question and one follow-up. Thank you. If you require operator assistance at any time, please press star zero. I would now like to introduce Mr. John Renn. Please go ahead. Your line is open.

Thank you, operator, and good morning, everyone. Thanks for joining our third quarter conference call. Today I'm joined by our CEO, Chris Doyle, our CFO, Mary Nalifoski, our COO, Matt Owens, and Brian Kane, our Chief Sustainability Officer. By now, I hope you've had a chance to review our earnings release, our 10Q, and our investor slide deck, all of which are available on our website. On today's call, we may make forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from projections. Please read our full disclosures regarding forward-looking statements in our 10K and other SEC filings. We may also refer to certain non-GAAP Financial metrics, reconciliations to certain non-GAAP metrics can be found in our earnings release and our SEC filings as well. After our brief prepared remarks, Chris and other members of the leadership team will be happy to take your specific questions. Please limit your time to one question and one follow-up today. This will allow us to address more of your questions. I'll now turn the call over to Chris.

Thanks, John. Good morning, everyone, and thank you for joining us. We have a lot of good news to share with you today and look forward to taking your questions shortly. Our team here at Civitas has done a fantastic job at delivering on our promises while navigating a pretty challenging macro environment this year and positioning us for success in 2023. But before highlighting our third quarter results, I want to reiterate the key strategic pillars of our business model which shape capital allocation and are designed to generate free cash flow and deliver strong returns. These pillars are fundamental to creating long-term value for investors. The first pillar is to generate free cash flow. We firmly manage our assets to maximize free cash, and this starts with asset quality and scale, which optimize our cost structure and position us to be a low-cost operator. We're blessed in the DJ to have both high-quality rock and scale, thanks to active consolidation over the past 18-plus months. Our reinvestment ratio today is among the lowest in the industry. In fact, we expect that this year's capital investments will be less than 40% of our unhedged EBITDA. and we've generated nearly a billion dollars in free cash flow through the end of the third quarter. That's approximately 17% of our market cap during that nine-month period. Third quarter free cash flow alone was about $350 million. In short, we're living well within our means and generating significant cash, which we can in turn give back to our shareholders. We view this as a sustainable model. The second pillar is ensuring we maintain a premier balance sheet. Obviously, with $400 million of total debt outstanding, against nearly $700 million of cash, Civitas has one of the strongest balance sheets in our space today. It's important to be a through-cycle company, and for us that means a long-term net leverage target of under half a turn. The third pillar is committing to return cash to shareholders. Earlier this year, we published a dividend framework to do exactly that. This quarter, following another period of strong performance and execution, the board elected to increase our fixed dividend by 8% to $0.50 per share. and pay a variable dividend of $1.45 per share. The total $1.95 per share represents a 10% increase over last quarter's dividend. By year end, we'll have returned more than $530 million to investors through base and variable dividends, including about $165 million to be paid in December. We have one of the industry's highest payout ratios, and the stock offers an 11% yield at today's price. Our final pillar is ESG leadership. From the boardroom to our headquarters to the field, We believe our approach to ESG is unique and the right thing to do. It guides our business decisions and is fundamental to our success within the Colorado regulatory environment. We're proud to be Colorado's first carbon neutral E&P company on scope one, scope two basis, and committed to attaining our goal of 50% reduction in total scope one emissions by 2027 and reducing methane emissions below the newly implemented IRA tax threshold before 2024. Lastly, we understand the importance of best-in-class corporate governance and and are pleased to announce yesterday several shareholder-friendly corporate governance measures, including majority voting for uncontested director elections, shareholder ability to call special meetings, proxy access, and shareholder action by written consent. Now let me move on to our strong third quarter results. I directed you to our release for updated 2022 guidance, but let me share a few highlights from the quarter. Total production was more than 176,000 BOE per day, That includes over 78,000 barrels of oil per day, both well ahead of expectations. Our production base has proven to be resilient thanks to minimal downtime in the field and strong well performance from our recent turning lines. Despite industry-wide inflation, third quarter capital investments came in below expectations at $237 million. That includes $16 million on land and midstream. For the year, we reduced total CapEx guidance to be between $970 million to just over a billion. Our team continues to partner with Colorado regulators to ensure that we have ample permits in hand to support our development program. We had three OGDPs approved during the quarter, and we had a fourth OGDP approved last week. That's a total of seven this year. We have the Box Elder cap hearing tomorrow, and we just submitted our next cap, the Lowry cap, which has a nameplate of 174 wells. As we think about next year, over half of our plan is approved as permits or OGDPs, Another 20% to 30% have been submitted or complete and will be heard in the fourth quarter, and the remainder will be submitted by year-end, early 2023. While we don't plan to issue 23 guidance until early in the year, be assured that this team, this board, and this company will be focused on four things, driving strong free cash flow, maintaining our premier balance sheet, returning significant cash to shareholders, and leading ESG. It strikes me here on November 1st, on the anniversary of our formative transaction, how much this team has accomplished in the past 12 months. From closing accretive transactions that built scale and established us as a low-cost operator to executing on the 2022 program that prioritizes free cash flow, allowing us to protect our premier balance sheet and return significant cash to our shareholders, the first 12 months of the new Civitas have been exceptional. And I look forward to sharing the team's accomplishments in the future. Thank you again for joining us this morning. Operator, we're now ready for Q&A.