Civitas Resources, Inc.

Good day and thank you for standing by. Welcome to Civitas Resources second quarter 2024 earnings conference call and webcast. 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. At that time, you may press star one on your telephone keypad to ask a question. To withdraw your question, press star one again. Thank you. Please be advised that today's conference is being recorded. I would now like to hand the call over to Brad Whitmarsh, Head of Investor Relations. Please go ahead.

Thanks, Jessica. Good morning, everyone, and appreciate you joining us this morning. Yesterday, we issued our second quarter earnings release, our 10Q, and also provided some supplemental materials for your review. These items are all available on our website, and they may be helpful for this morning's call. I'm joined today by our CEO, Chris Doyle, CFO Marian Alifoski, and COO, Hodge Walker. After our brief prepared remarks, we will conduct a question and answer session. As always, please limit your time to one question and one follow-up so we can work through the list efficiently. We'll make certain forward-looking statements today which are subject to risk and uncertainties that could cause actual results to differ from projections. Please read our full disclosures regarding these statements in our most recent SEC filings. We also may refer to some certain non-GAAP financial metrics. Reconciliations to these can also be found in yesterday's release and SEC filings as well. With that, I'll turn the call over to Chris.

Hey, morning, everyone, and welcome to our second quarter call. Before I address our quarterly results and our improved outlook, I think it's important to reflect on how we fundamentally transformed our business over the past year. This starts with our entry into the Permian Basin, which increased and enhanced our portfolio scale and quality, provided important capital allocation flexibility, and created a more durable and sustainable business. Today, our Permian assets are fully integrated within Civitas and producing more than 185,000 BOE per day. Importantly, production's ahead of plan, oil's ahead of plan, well costs are below expectations, and reduced operating costs are enhancing cash margins, all while maintaining top quartile safety and environmental performance. In a short amount of time, our team's executing faster, and better than we'd planned and certainly well ahead of our underwriting assumptions. At the same time, we continue to deliver exceptional results in the D.J. Basin, recent highlights including completing our non-core asset sales and an accretive valuation, helping to secure a broad-based regulatory agreement that increases development clarity for years to come, and driving exceptional performance from our inventory-rich Watkins area. Simply put, there's no question that Civitas is stronger today. and we're better positioned than ever to drive differentiated returns for our shareholders. And moving to our second quarter results, starting with production, total volumes were above plan as the premium production was up about 12%, oil was up 5%. This is driven by strong oil performance and continued cycle time acceleration, more than offsetting the impact from non-poor asset sales and some temporary third-party facility downtime that occurred in the DJ. Cash operating expenses were 2.5% lower than the first quarter and less than $9 of BOE. Our teams remain laser-focused on driving down our cost structure across all basins. On the capital side, our drilling and completions teams have done a fantastic job delivering efficiency improvements to result in less capex than planned in the quarter. Well-cost reductions are outpacing our initial plan, highlighted by a 10% reduction year-to-date in the Midland Basin. Free cash flow is right in line with our expectation for the quarter as our operating capital cost efficiencies offset the impact of weak natural gas pricing in the Permian. For the quarter, we returned just under $275 million to our shareholders, about 150 of that in dividends, 125 million in share buybacks. A portion of our buybacks during the quarter was utilized to continue reducing concentrated ownership, and the remainder went to open market purchases. So lots of progress has been made over the past year, as evidenced by another strong quarter. I'd like to shift now, however, to three areas that have me really excited about what's to come. Operational execution is absolutely improving the business every single day. Second, our second half outlook reflects the strength of our asset base and our team's capabilities. And third, our enhanced capital return framework will provide additional flexibility to maximize shareholder value. Starting with operational execution and our supplemental materials, we highlight the impact of reduced costs on improving returns and driving down break-evens. A 10% well cost reduction in the Midland Basin drives well returns up 12% and reduces break evens by 7%. Across the Permian, these achievements are increasing the number of low break even locations by 20 to 30% and extending high quality inventory life. Savings are coming from all areas, whether it's optimizing, drilling, completion designs, high grading our service providers and utilizing more efficient equipment, standardizing facilities, for capturing the benefits of having skilled positions in multiple basins. This team is rapidly establishing a strong track record of execution and performance. Now, if we'd said a year ago that within six months of establishing Permian Operatorship that we would be where we are today, I'm not sure that many on this call would have believed it. It's still early days, we get it, but the combination of a culture of continuous improvement and the team focused on the value we can create together has me super excited for the years ahead. Now, leveraging that strong operational execution outlook for the remainder of 2024 continues to improve. Full year CapEx lowered by $50 million. Operating costs decreased by approximately $25 million. We've raised sales volumes expectations 3% from our original guidance, adjusting for asset sales. Looking forward, we expect total volumes in oil to grow quarter over quarter through the end of the year. Recent extreme summer weather in Colorado certainly would Record high temperatures will defer some of that third quarter DJ basin growth into the fourth, but a strong second half of the DJ will be driven by Watkins, where we recently drilled and completed our 13 four-mile wells, the longest laterals ever in Colorado. This is a testament to a talented team that continues to safely push the boundaries of what's possible. Importantly, while it's still early, we're encouraged by the initial productivity, which confirms production contribution across the full laterally. In the Permian, I'm particularly excited to see upcoming production from our first fully designed, drilled, and completed Civitas wells. Productivity to date trends in line with our expectations, but second half 2024 tills will target core zone development and slightly wider lateral spacing than previous operators. The strength of our business and continued execution, we anticipate second half free cash flows of over $900 million, which will be deployed to the balance sheet and to our shareholders. Finally, the true reflection of the strength of our business is our best-in-class shareholder return. Since the beginning of last year, we've returned nearly $1.5 billion to our shareholders via dividends and share repurchases. This represents more than 20% of our current market cap. We remain fully committed to returning 50% of our free cash flow to shareholders after the base dividend. Based on second quarter results, our board approved a $1.52 dividend to be paid in September. In addition, the Board enhanced our capital return program to add flexibility in the way we return the variable component to shareholders. Beginning with the third quarter, the variable return will now be provided through a combination of share repurchases and dividends. As part of this enhancement, the Board also approved a new $500 million share repurchase plan, which replaces the prior program. We will remain disciplined in executing our buyback strategy, but we traded a very compelling valuation when compared to our peers, and when compared to recent asset transactions. At Civitas, we believe that cyclical businesses should be run with low leverage, so we'll continue to execute on our hedging strategy to support the pace of our delivering efforts, and this capital return enhancement will prioritize our balance sheet with the remaining 50% of our free cash flow. Wrapping up, we've made tremendous progress in the first half of the year. Our entire team is excited to demonstrate what our transformed company is capable of delivering. Thank you for your interest in Civitas, operator. We're now happy to take questions.