Civitas Resources, Inc.

Good morning, ladies and gentlemen. Thank you for standing by. My name is Erica, and I will be the conference operator today. At this time, I would like to welcome everyone to the Civitas Resources second quarter 2023 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 would like to ask a question during this time, simply press star followed followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. At this time, I'll be turning over everything to John Wren. Go ahead, John.

Thanks, operator, and good morning, everyone, and thanks for joining us this morning. I'm joined today by our CEO, Chris Doyle, CFO, Marian Ella Foskey, COO, Hodge Walker, and Brian Kane, our Chief Sustainability Officer. I hope you've reviewed our earnings release 10Q and slide deck, all of which are available on our website. We will make 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 in our 10Q and other SEC filings. We may also refer to certain non-GAAP financial metrics. Reconciliations to certain non-GAAP metrics can be found in yesterday's release and our SEC filings. After Chris's brief prepared remarks, we will all be available to take your questions. As always, please limit your time to one question and one follow-up as this allows us to get to more of your questions. I'll now turn the call over to Chris.

Thanks, John. Good morning, everyone. We've been extremely busy year to date and certainly this quarter in particular, capturing and now closing two transformative deals in the Permian while continuing to deliver on our DJ business. You can see that our second quarter financial and operating results are very strong. and top consensus estimates for both production and cash flow. In addition, we're managing our investment and activity levels with capital expenditures under expectations for the quarter and allowing us to reallocate some of our capital savings to value-adding projects in Colorado. Our teams are laser-focused on continuing to build upon our track record of delivering on our promises. Our results continue to prove that an EMP company with high-quality assets can return cash to shareholders through commodity cycles while also maintaining a strong balance sheet. Inclusive of our dividend payment next month, Civitas will return more than $800 million year-to-date to our shareholders, one of the highest dividend yields alongside an active stock repurchase program. When we announced our recent Permian acquisitions, we reiterated our unwavering commitment to a strong balance sheet. We're well underway with our plans to divest $300 million in non-core assets by mid-2024. The proceeds will allow us to quickly reduce debt while high grading our portfolio away from assets that simply are not part of our near-term development plan. Looking forward, we'll target three-quarters return of leverage at mid-cycle pricing. And again, maintaining a strong capital structure is key to building a sustainable business that can deliver top shareholder returns. Before taking your questions today, let me quickly discuss our recently closed Permian transactions and cover our second quarter highlights. Our new Permian assets are a perfect fit for Civitas and advance our strategic pillars. The new Civitas is scaled, it's diversified, it's a platform with duration in three of the best oil basins in North America. These deals create instant scale and provide an accretive entry into the Permian. As we've said before, scale really does matter in this industry, but we're not focused on getting bigger. We're focused on sustainably generating free cash and rewarding our shareholders through the commodity cycle. These deals check those boxes. A diverse asset base provides Civitas with flexibility in how we allocate capital, reduces risks, and enhances the certainty of delivering on our metrics. Civitas now has about a decade of high-quality, low break-even locations across three top oil basins in the U.S. Our proven business plan, matching high-quality assets with scale and a deep inventory, provide us with duration and confidence in our ability to deliver value for our shareholders. In today's deck, we provided production and activity updates for our new Permian assets. Production was in line with expectations, averaged about 107,000 BOE per day, of which 50% was oil during the second quarter. Currently, the assets are running around 100,000 BOE per day in the third quarter, which we'll look to maintain heading into the fourth and exit the year around 110,000 BOE per day. There are currently seven rigs running on our Permian assets. With closed, we can now optimize our activity levels and look for ways to best allocate investments across the DJ, Midland, and Delaware basins. We expect to run about six total rigs in the Permian and DJ throughout 2024. For full year 2023, we provided preliminary guidance when we announced the transactions. Today's materials include the 23 outlook for production, capital investments, total cash operating costs, production taxes, and oil price differentials. Bottom line, our outlook for Permian production costs are unchanged since the day of announcement. Our full-year capital investments, including five months of our new permanent assets, are expected to be about $1.3 billion at the midpoint. We're encouraged by some of the recent softening we've seen in certain services and consumables, including drilling, casing, mud, and sand. It's early, so we're maintaining our capital guidance for the combined company. As we said coming into this year, we will be opportunistic and disciplined in how we allocate capital. Any potential savings or efficiency gains on the back half of the year It can be allocated back to our development programs or to our balance sheet or back to our shareholders. Certainly too early to model deflation heading into 2024, but we like seeing the market beginning to correct. Since the announcement, we've been planning for integration. We have recent experience, obviously, successfully combining companies, and this integration in particular is going well, albeit very early innings. We're very impressed with the teams behind these assets, and we look forward to building upon their success. We have a six-month transition service agreement in place with both Hibernia and TAPROC to ensure a seamless transition. Concurrently, we're building out the team, looking to identify and retain top talent, align with the broader organization, and accelerate the transition wherever we can. Let me quickly summarize our second quarter results. Civitas delivered free cash flow of about $190 million in the second quarter, above consensus expectations and really driven by strong production, lowering expenses, and managing capital investments. On production, the team delivered higher than expected production of 173,000 BOE per day. So for the first half of 2023, we averaged about 166,000 BOE per day right at the midpoint or just over midpoint of our annual guidance. Our strong oil performance for the quarter was primarily driven by increased productivity we've seen from our recent 2023 tills, including the Watkins development area. We recently turned in line three pads with three-mile laterals that have significantly outperformed expectations to date. It's early, but based on that strong performance we've seen, we now expect to be around the high end of our DGA production guidance this year and continue to target an exit of 170,000 BOE per day or 280,000 BOE per day when combined with the Permian. On the expense side in the quarter, when we look at the foundation of our cost structure, LOE and cash G&A per BOE, We were down 10% quarter over quarter as we got out from under the first quarter winter and returned to normal production levels. Finally, we continue to manage our capital and clear expectations for CapEx are unchanged. Capital investments in the second quarter, about $230 million, were consistent with the first quarter as our activity levels remained relatively flat. When taken together, higher production, lower expenses, and capital inside expectations, you get higher free cash flow and higher returns to our shareholders. Finally, we were recently active under our $500 million share buyback authorization and repurchased about $20 million of stock at an average price of $64.55 per share during the quarter. In total, we've now repurchased $320 million in stock year-to-date and have $480 million remaining under the buyback authorization through year-end 2024. In closing, let me reiterate today's key takeaways. Our legacy DJ business is performing exceptionally well. Our teams continue to find innovative ways to address challenges and safely advance our business and deliver strong results. Second, our recent acquisitions have created stronger, better, and more balanced Civitas. We have options to invest capital across a portfolio of high return assets in the DJ and Permian. We're focused on safely integrating those assets and onboarding many of the great employees from Hibernia and Taprock once we get past our TSAs. Lastly, We know the importance of a premier balance sheet. We're advancing sizable non-core asset sales and have a strong outlook for free cash flow. When combined, we expect to return to our optimal leverage ratio of less than one time in 2024. Thank you for your interest in Civitas and Operator. We're now happy to take questions.