Civitas Resources, Inc.

Good morning, my name is Chris and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Civitas Research fourth quarter, excuse me, Civitas Resources fourth quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. I'll now hand it over to John Wren, Director of Investor Relations. You may begin.

Thanks, Operator, and good morning, everyone. We appreciate you joining our conference call. Today I'm joined by Civitas CEO Chris Doyle, CFO Marianne Lofoski, COO Matt Owens, and Brian Kane, our Chief Sustainability Officer. By now, I hope you've had a chance to review our earnings release, 10-K, and slide deck, all of which are available on our website, On today's call, we may make forward-looking statements which 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 10-K 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 SEC filings as well. After our brief prepared remarks, Chris and other members of the leadership team will be happy to take your questions. However, please limit your time to one question and one follow-up, and now I'll turn the call over to Chris.

Thanks, John. Good morning, everyone. We have a lot of good news to share today, both in terms of our strong finish to 2022, as well as our plans for 2023. We'll get to your questions shortly, but first I want to highlight three points which are critical to understanding where we sit today and the tremendous opportunity that lies before us. Let's start with 2022. As we often discuss, our business model is based on the principle of that a company in our space should prioritize free cash flow, sustainably return that cash to shareholders, maintain a premier balance sheet, and lead on ESG. In 2022, we delivered across each of these strategic pillars. We met our original capital guidance for the year despite significant service cost inflation. We exceeded the top end of our production guidance and generated a record $1.2 billion in free cash flow, which is about 25% of our enterprise value. We demonstrated our commitment to returning cash to shareholders through our base and variable dividends, totaling about $530 million last year, or $6.29 per share. In addition, we bought back $300 million in stock last month. We maintained our pristine balance sheet and exited the year with nearly $770 million in cash, against $400 million in total debt and an undrawn facility. Lastly, we continued our focus on best-in-class ESG performance, initiating an equipment retrofit program to reduce emissions by more than a third by the end of this year, and standing up the Civitas Community Foundation, a scholarship fund for high school graduates living in our operating areas and nearby communities. We talk a lot about our commitment to ESG, but it's not just Civitas. We're among a truly exceptional group of North American oil and gas operators who are meeting global demand while producing among the cleanest energy molecules in the world every single day. Turning our attention to 2023, Our approach this year remains consistent. We're committed to capital discipline. We're focused on generating free cash flow, and we'll return that cash to our shareholders. We've seen a meaningful pullback in commodity prices lately, and service costs have yet to adjust. Utilization remains high, as many operators are choosing to sacrifice margins and capital efficiency to keep programs going. Although the DJ Basin has some of the lowest break-evens in North America, I can assure you Civitas will not make that mistake. We started taking action late in the third quarter of 22 when we dropped a rig and temporarily added a third completion crew to work down our duck inventory and improve overall program efficiency. Although we have the permits in hand today to add that third rig back, we're instead electing to maintain two rigs and two completion crews to maximize capital efficiency and overall program returns. So for 2023, year over year, capital investments will be down, cash returns to shareholders are projected higher, and production will be broadly flat. So let me explain how we get this done. Our capital investments will be $850 million, so we're about 15% lower than last year, and our reinvestment rate will be below 50%. In the updated slide deck, we show cumulative production for our wells, vintage by year. The company delivered a step change in performance in 2021, and you can see our 2022 program delivered that same performance. We don't expect to see degradation in 2023's program, and we continue to be excited with the results we're delivering in our Watkins and Lowry area. This year's turning lines will be similar to 2022, and production will be relatively flat year over year and exit to exit. Like others, record cold weather in the Rockies will impact first quarter sales. We've had six weeks so far already this year with below zero wind chills, including this week. This weather has impacted our field operations, and we expect volumes will be in the 155,000 to 160,000 BOE per day range in the first quarter versus our full-year guide of 160,000 to 170,000 BOE per day. At current strip prices, we expect to generate roughly $1 billion in free cash this year, the majority of which will be returned to shareholders. Due to our unique and resilient return framework with payouts based on the last 12 months of free cash flow, We actually expect total dividends to increase year over year to more than $600 million. Our commitment to return cash to shareholders is unwavering, and yesterday we were excited to announce a new billion-dollar buyback authorization. This is in addition to the $300 million we repurchased in January. We believe Civitas has the most compelling cash return framework in industry. Finally, I continue to be impressed with the talented Civitas team and our collective accomplishments. We strengthened our business on numerous fronts over the past year. We secured more new pad permits than any other operator in the DJ. We received approval on the state's first cap with preliminary siting. We were disciplined in our approach to M&A, selectively executing on a couple of accretive transactions. And we found innovative ways to drive capital efficiency that helped counter industry-wide inflation. I'd like to give a special shout out to our field team. This team's executed operationally quarter after quarter. They've delivered these results safely despite record cold temperatures, and so I thank them, and our shareholders thank them. Before I close, I would be remiss if I didn't mention the significant contributions to our company's foundation provided by both Ben Dell and Brian Steck. Back in 2021, these two former chairmen recognized a shared vision of driving consolidation within the DJ Basin. I want to thank them for their service that proved to be so critical during our first chapter of Civitas. So I'm excited to start a new chapter in our company's history and welcome Bowder Van Kampen and Deborah Byers to our board. The Civitas team is just getting started and we look forward to delivering differentiated results for our shareholders in the years ahead.