Civitas Resources, Inc.

Ladies and gentlemen, thank you for standing by. My name is Bhavesh and I'll be your conference operator today. At this time, I would like to welcome everyone to the Civitas Resources third quarter 2023 earnings conference call. At this time, 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 the star followed by the number one on your telephone keypad. If you'd like to withdraw your question, Please press the star followed by the one once again. Thank you. I will now hand the call over to John Wren, Director of Investor Relations. You may begin your conference.

Thanks, Operator, and good morning, everyone, and thanks for joining us. I'm joined today by our CEO, Chris Doyle, CFO, Mary Nalifoski, and COO, Hodge Walker. I hope you've reviewed our earnings release 10-Q 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 10-Q 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 in our SEC filings. After Chris's brief prepared remarks, we'll 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 this morning. Now I'll turn the call over to Chris.

Thanks, John. Good morning, everyone. The team once again delivered strong results this quarter, and our new Permian and Legacy DJ businesses are performing well against our expectations. Our results continue to prove that an E&P company with high-quality assets can return significant cash to shareholders while building scale through disciplined, accretive transactions. Our recently announced venture acquisition, which should close as expected in January, further strengthens our ability to generate free cash and return it to shareholders. This deal was part of several recent steps to transform our company, adding high-quality scale and further diversifying our portfolio. Simply put, we're a more competitive and more durable enterprise today. We recently celebrated our two-year anniversary, which gave us an opportunity to reflect on what we've accomplished as a company and what we've delivered for our shareholders. In 2022, we paid $6.29 per share in dividends. In 2023, that number will grow to $7.60, add an additional $320 million of buybacks that have already been completed, and we'll have returned nearly a billion dollars to shareholders in 2023 alone. That's 15% of our current market cap in one year. Our strong shareholder return program will continue to grow in 2024. At Strip, we expect the dividend will increase roughly 10%, furthering our track record of delivering one of the most reliable and significant dividends in our industry. We've accomplished all of this while maintaining an unwavering commitment to our strong balance sheet. Our plan to sell about $300 million in non-core assets is progressing well, and we're on track to meet our mid-2024 target. Proceeds will help us reduce debt while also high grading our portfolio. We continue to target three quarters of a turn of leverage longer term at mid-cycle prices and plan to be below one turn by the end of 2024, assuming $80 oil. We firmly believe that maintaining a strong capital structure is key to building a sustainable business that can deliver top shareholder returns. Let's talk about integration. Since this summer, our focus has been on integrating the new Permian assets into Civitas and standing up a new team. We built a proven Permian leadership team with decades of experience leading capital efficient development programs across the basin. In addition, I continue to be impressed by talented members of the TAPROC and Hibernia teams, many of whom are joining Civitas. Their dedication to maintaining safe, continuous, and efficient operations has allowed us to accelerate operational handover in the Midland Basin to the end of this month. That's over two months earlier than our original plan. Similarly, in the Delaware, we're on track to accelerate the operational handover by over a month. Bottom line, come January 1st, Taprock and Hibernia operations will be fully integrated into Civitas. Our team's now finalizing plans for the venture integration and optimizing our 2024 development program. As always, we will be guided by our proven business model, which focuses on maximizing free cash flow and improving cash-on-cash returns. Now, let me quickly summarize our third quarter results. Total company production was in line with expectations of the third quarter, averaging 235,000 BOE per day and 114,000 barrels of oil per day. And the DGA volumes were 168,000 BOE per day in the upper half of our original guidance range. We continue to push the limits of operational efficiency here in the DGA, recently drilling six four-mile laterals in an average spud to spud of nine days. It's a new company record. Importantly, the wells came in approximately 10% below pre-drill cost estimates. In the Permian, we produced 67,000 BOE per day for the quarter, which I note only reflects volumes after the transaction closed on August 2nd. Focusing in on August and September, Permian production averaged 101,000 BOE per day. We closed the quarter strong, averaging approximately 111,000 BOE per day and 56,000 barrels of oil per day. Importantly, we remain on track to exit this year within our original Permian five-month guidance range. Company-wide, we continue to target a year-end exit rate of about 280,000 BOE per day, and have raised the midpoint of our full-year production guidance. Capital investments in the third quarter were approximately $430 million, consistent with expectations. We ran two rigs in the DJ, seven in the Permian during the quarter. And as planned, we've dropped two rigs in the Permian in October, and we'll drop to four rigs by year-end before closing venture. And the DJ will maintain our two rig program and have reduced completion activity in the fourth quarter as planned. As we look toward the remainder of the year, we successfully increased our working interest in a few high return pads and elected to participate in additional non-op activity in the core of the DJ Basin. As a result of these investments, combined with improved drilling cycle times, We're electing to increase our capital investments by about $60 million, midpoint to midpoint, bringing the new midpoint to $1.34 billion. These are high return investments that set us up well heading into 2024. In closing, let me reiterate today's key takeaways. First, our legacy DJ and new Permian businesses are both performing well. Our integration is ahead of schedule, and we have the flexibility to invest capital across a portfolio of very high return assets in multiple basins. Second, Our recent acquisitions have created a stronger, more balanced Civitas with significant duration and a peer-leading shareholder return program. As I've said before, scale matters, but so does depth and quality of inventory and efficient execution. Scale, asset quality, and operational excellence are the key ingredients to sustaining and growing shareholder returns. Lastly, we know the importance of a premier balance sheet. We're advancing our non-core asset sales as planned. have a very strong outlook for free cash flow at current prices. We expect to return to our optimal leverage ratio of less than one turn by the end of 2024, assuming $80 oil. Thank you for your interest in Civitas, and operator, we're now happy to take questions.

Thank you. At this time, I would like to remind our teleconference participants, in order to ask a teleconference question, please press the star followed by the number one on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Our first question comes from the line of Neil Dingham from Truist Securities. Please go ahead with your question.

Morning, Chris and team, and nice job on the solid results. Chris, my first question is on the Permian. Could you remind me your assumed 2024 step up on the Permian DNC as part of that reiterated guide you mentioned in the release? And I'm just wondering, does this include any step up in project size? Yeah, thanks, Neil.

You look at our midpoint in 2024, $2.1 billion. That split between the Permian and the DJ is roughly 55-45 when you include Vinsor. So we'll be allocating slightly more than half of our capital to the Permian in 2024. Your second question is a really interesting one, and it's what the team is currently working on and just overall project size. As we looked at these transactions, all three of them, we had an underwriting case And then we have a case that indicates there's additional resource that could be allocated capital. And so one of the projects the team's working on is looking at overall project size and how do we most efficiently allocate capital to zones that have very strong returns but may not have been part of the underwriting case, whether they're shallower zones or zones such as the Wolf Camp D. So I would say that's still in progress. But we're very excited with how 2024 is setting up and excited to continue to execute.

Yeah, it looks like a great runway ahead. And then my second question, just on the DJ appears, the Watkins area just continues to notably outperform. I think that's even an understatement. I'm just wondering, based on the results you've seen now for a few quarters, have you changed future expectations here? And, you know, I was just wondering, is it the extended reach wells or what continues to drive this outperformance? Thank you.

Yeah, I think outperform is an understatement. You know, as conservatives as I am, I even see that. The Watkins area has emerged as a core part of our portfolio and a core part of the DJ Basin. I'd say that the outperformance is really attributed to a couple of things. One is as we stepped in and stepped into full development in this area, we were conservative in our expectations, rightfully so. The team has done a fantastic job of executing, continuing to deliver and outperform our investment case and our type curves in that area. And that's for, call it a two-mile well. When you add the extended reach wells, and we brought on a bunch of three-milers, I know the four-milers, I'll be interested to see how they perform. But the three-milers in this area, we were likewise very conservative on the degradation that we could see in that third mile. Last quarter, we noted the outperformance. Some of those pads have started to turn over. They continue to outperform our expectations, and they are performing currently in line with two-mile expectations. I'm not going to say that there is no degradation in the third mile. I don't think that's the case. I would say that early results have been really, really positive. And so, as we looked at, and this really leads into deciding to deploy $60 million of additional capital. Some of that is directed at these high quality, high return pads in the Watkins area. And so we're excited about what we're seeing there, excited about the team continuing to execute. And I would say that while we've reflected that outperformance, we are still being somewhat cautious and how we think about 2024, but the team will continue to dial that in as we see more and more performance, and we're excited to share that with you guys.

Thanks, Chris. Nice job. Thanks, Neil.

Thank you. Our next question comes from the line of Leo Mariani from Roth MKM. Please go ahead with your question.

Yeah, hi. Wanted to follow up a little bit on kind of your thoughts around M&A. I know you're kind of working on selling some assets, but obviously you've been an aggressive consolidator in the Permian after being an aggressive consolidator of the DJ, you know, in past years. So as you're sort of thinking about the strategy going forward, are you still kind of looking to go out there and kind of consolidate, you know, DJ or sort of Permian assets, you know, at this point in time?

Yeah, thanks, Leo. We have been fairly busy, I would say, looking for ways to scale, diversify, and extend our business model. The hurdle for us to go after an acquisition is very high. We always go back to the four pillars of our strategy, which is these assets have to be able to generate free cash flow That is a credit to asset quality. We have to be able to maintain a premier balance sheet. We're in the midst of, as you mentioned, the non-core asset sales to help preserve our balance sheet strength. And these assets have to extend the duration of the leading shareholder return framework in our industry. When we look back at the three acquisitions that we've made in the Permian, each of those progressed All of those all of those pillars and so I'd say the hurdle for us to be interested is pretty high We're not just looking at getting bigger. It's how do we improve? Shareholder returns and how do we extend the duration of shareholder returns? I would say even with Venser we mentioned this on the on the previous call we weren't necessarily aggressively looking to do the next transaction and But when we saw a transaction of that quality, that scale, that fits with our existing position in the Midland Basin and Permian more broadly, we did take the opportunity to pull that in. Will those opportunities continue to show themselves? We'll see. But I think we've shown, the management team has shown that we will be very disciplined and also opportunistic in how we think about extending this business model.

Okay, appreciate the response there. So I know you guys have spoken about potentially raising more capital for venture over time. Just wanted to get your kind of updated thoughts around that. And then also just curious how the venture deal affects your cash tax position in 2024.

Yeah, I'll kick us off and then kick it over to Marianella. So the way we structured the venture transaction was very deliberate to provide extreme flexibility in how we finance the transaction. Because it was coming so soon off the heels of Hibernia and Taprock, we wanted the flexibility of that deferred payment, and so we negotiated that deferred payment. Our plan is, as we look at our potential ways to finance the transaction, is we like having that flexibility, certainly with where equity is and the volatility in the market, we're not in a huge hurry to accelerate that payment for what is a 10% discount on that payment. But let me kick it to Marianelle to flesh that out and then talk about cash tax as well.

Sure, Leo. Thanks for your question. So we have inherent flexibility in our capital structure right now. Like Chris said, we structure the payment such that it's roughly a 10% cost to capital. We see tremendous value in our equity today. You know, we set that when we did the equity offering and, you know, the stock's about down about 10%. So we are sitting on a fully financed plan for venture and the deferred option even more so now is more attractive. In terms of the cash taxes, so look, when you think about us as a company potentially hitting And T into 2025, our cash tax is going to be pretty minimal until that point. A lot of it is what oil prices you assume. You know, it's 70 dollar oil. We're never expected to be. In an AMT position at 80 dollar oil. We are the soonest we could possibly be, which is 2025 or 2024 taxes to your point are going to be. Space was very lower than otherwise given the. The venture transaction closing and then so that they should be in kind of a. sub $100 million range for 2024. And then 2025, like I said, it depends on what oil prices you assume. If you assume 70 flat, we'll never hit that AMT position. If we do say at 80, we will. And the cash taxes at that point should be in the $300 million range.

Thank you for the detailed response.

Thank you. Thanks, Leo.

Thank you. As a final reminder, if you'd like to ask a question, please press the star followed by the one on your telephone keypad. Our next question comes from the line of Nicholas Pope from Seaport Research. Please go ahead with your question.

Good morning, everyone.

Morning.

I was hoping you could talk a little bit about the balance between the two sides of kind of this new Permian position you have as you look at Delaware versus Midland, comparing kind of the returns you're seeing on both sides and kind of what the expectation is of activity split between those two assets as you're kind of incorporating these three acquisitions?

Sure. Thanks for the question. So the way we rolled out initial signposts for 2024 was assuming a couple rigs in the Delaware and a couple rigs in the Midland Basin. Now you add Bencer, that would be four and two split between Midland and the Delaware assets. I think we'll be fairly close to that. RIG could move here or there, but we've got a scale position on both sides with opportunities to deploy capital at high returns, both sides of the Permian. So we're excited about that. I think getting back to Neil's initial question around project size is where it gets really interesting as we sit back and further optimize the 2024 plan. Because of project size, that could direct more capital one side or the other. But our initial look was just on overall size, have probably a third of it go to Delaware, two-thirds on the Midland. But that's TBD, and we're excited to be able to share our final guidance in February of next year.

Appreciate that. And as you look at the commodity mix between these two areas, are you all comfortable with where things stand in being able to get out the gas, get to process the NGL? Where do you think things stand, I guess, right now on being able to move all the product that you have in those two areas?

Yeah, I think we feel very confident with our plans on both sides of the Permian, certainly in the Delaware. Takeaway is always a consideration, so you're not going to plow half of your capital program on that side. You have to be mindful of getting product out and getting it to market, and so that will certainly have be a lever in how we look to deploy capital, but we feel confident with the contracts that we have in place and the access to market on both sides. But that's certainly, to your point, that's part of the calculus that will go into the 2024 capital plan. Got it. All right.

I appreciate the time. Thank you.

Thanks, Nicholas. There are no further questions at this time. Chris Doyle, I'll turn the call back over to you.

Thank you, Operator, and thank you for your continued interest in Civitas. We look forward to sharing our continued progress on upcoming calls. Have a great rest of your day, and please be safe. Thank you. This concludes today's conference call.

Thank you for participating. You may now disconnect.