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.

Thank you. And just a reminder, if you would like to ask a question, press star one on your telephone keypad. To withdraw your question, press star one again. And your first question comes from the line of Kevin McCurdy with Pickering Energy Partners. Kevin, your line is open.

Hey, good morning, team. I wanted to start off by asking about the execution of the newly increased buyback. When deciding the amount of free cash flow to allocate the buybacks versus the variable, what will be the main criteria? Are you looking at recent share price dislocation, NAV, or maybe the low multiple that you highlight in your deck?

Yeah, sure. Thanks for the question, Kevin. As we've said in the past, we view our capital return framework much like any other capital and this is something we discuss regularly with our board. The move to add that flexibility is really tied to exactly what you talked about, and that is a continued disconnect with how we are valued. Look at underlying NAV, look at NAV at various commodity prices, look at how we trade versus peers, and look at the asset market. This is not the asset market that we entered the Permian in. A year after our entry, the asset market is up a full one and a half plus turns, and in some cases, that's for lower quality assets. So the valuation as we see it today does not reflect the quality of these assets and does not reflect the quality of the team and how they are executing. And ultimately, I don't think it reflects the tailwinds that we've seen in terms of regulatory and the DJ. So you've got a business here that's executing on really high-quality assets, trading at a 20% free cash flow yield. That's a super compelling opportunity as we see it. That's driving the change, and we're excited to dig in and allocate money to this business. We're super excited, super proud of what we've built. Hasn't been reflected yet, but it will be. And appreciate the question. And the other thing to highlight on the shareholder return framework is we can protect our equity, but at the same time not lose sight of our delivering targets and maintaining a strong balance sheet. So we're super excited for the adjustment. We think it fully enhances framework and know that this team is fully aligned with shareholders as we go through that calculus.

Great. Thank you for that answer. I think that's what the market wants to hear. Shifting maybe to well costs, when I look at slide 10 in your investor deck, what do you need to do to cut the extra 5% out of well costs in the Midlands? And just to clarify, does the new CapEx run rate factor in the $765 per foot in the Midland Basin, or is it using the $725?

Yeah, good question, Kevin. So, our current forecast for second-half capital assumes our current cost structure of the $765 in Midland. You know, as we look back, again, We took over for established operators in the basin. There are a lot of questions around, can we continue that level of performance? And we knew fundamentally that we would improve upon it, but we'd like to stack some skins on the wall. And I think that's what this team's done for a couple of quarters, just as we've done in the DJ. What has got us to where we are today really is a mix of benefits of scale, driving down service costs. That's probably about 30% of that delta. design changes to how we complete wells, how we drill wells, that's probably 20%. The other half is really just continued optimization and efficiency gains. So what will take us from 765 to 725 is just continued relentless digging in and driving additional efficiency gains. We're not building any additional deflation or any weakness in the service market. This is about the team stepping back, looking for ways to claw back every dollar and every inch. And look, again, very early, two quarters in, but this is a team that has made a living of doing exactly this in the DJ, and we're doing it there in the Permian as well. Appreciate the answer. I might hop back in the queue. Thanks, Kevin.

And your next question comes from the line of Neil Bingman with Truist Securities. Neil, your line is open.

Thanks for the time. Thank you all for the time and nice remarks, Chris. My first question is really just on your anticipated oil production growth. Specifically, it seems that given your non-core sales and oil production reiteration, you're suggesting that production should continue to trend higher. I'm just wondering, could you speak to the potential growth in both plays and maybe factors impacting this for the remainder of the year?

Sure, thanks. Thanks, Neil. I appreciate the question. I appreciate you highlighting the divestments as well. That was, as we announced last quarter, a massive transaction for us, traded at a full turn above. These are non-core assets in the DJ, trading at a full turn above our entire enterprise. So we hit that bid. It did impact our second quarter results, right? 5,000 BOEs a day. two to three thousand barrels of oil a day. So take that, put that back into the mix and you saw quarter over quarter strong oil growth as a company. So I would say as we look at, I would point to the Permian first, you know, second quarter over first quarter we saw oil up. We see both basins into the third quarter growing as evidenced by our reaffirmation of our oil guide. um even taking out the the divestment so we'll see a step up in both uh both basins you know we have uh a a front half loaded capital program about two-thirds of our tills are coming on in the second third quarter and that's going to really support and drive uh oil growth to the back half of the year um you know a couple of things that we'll talk about in the dj or some some headwinds we saw them in the second quarter with some third third-party facility downtime. We're past that. That was temporary. June is the, I think June went down as the second hottest June in the history of Colorado. I don't know where July is going to come out, but it's going to be up there. And so certainly that's impacting some of our operations out there, but that's temporary. You know, the other thing that's going to drive growth into the second half that we're really excited about is the continued outperformance of the Watkins Wells. Whether it's the four milers, Every well that we're drilling down there is really performing exceptionally well against expectations. So both teams are hitting on expectations. We see some real good tailwinds as we head into the second quarter. And, again, evidenced by a reaffirmation of our oil guide. So we are very confident and pleased with how we've set up for the second half.

Great answer, Chris. And then, secondly, I just wanted a question on the OFS cost. You all seem to be indicating maybe a little bit of pressure there, unlike some others that are seeing things flat. I'm just wondering, Chris, is that maybe I want to make sure I understand that right. Are you saying that, you know, some of the costs are lower or maybe you were just seeing reductions based on the efficiencies?

Yeah, so when we entered the year in the Permian, we were running nine rigs. So we rationalized the rig fleet. We rationalized the track fleet. What that allowed us to do was upgrade crew, upgrade iron. That drove efficiency. It also allowed us to capture some of the weakness that we've seen beyond just consumables, but some of the OFS weakness that we've seen. When you look at a top-tier rig a year ago, it was probably – turning fairly close to 40, and it's now in the mid to high 20s. And so there's certainly been some weakness in that market. I would caution, however, you know, I've seen companies that will only focus, in fact, some of the prior operators focus on the day rate and lose sight of how a higher tier rig and much more efficient higher tier crew what they can deliver. And so we are seeing a little bit of softness, and that's good, but we're not planning on that. This is a team that's going to continue to drive efficiencies and claw for every inch. If OFS continues to weaken a little bit, you'll see us peel some more capital out or redeploy that capital.

Thanks, Chris.

Thanks, Neil.

And your next question comes from the line of Scott Hanold with RBC. Scott, your line is open.

Thanks. Good morning, all. My first question is on the Permian Basin, those first designed and drilled Civitas wells, you talked a little bit about obviously modifying the spacing and zone targeting to get better performance. So two questions on that. Number one is what kind of improvement do you think this can make in the performance of the wells? Are we talking like a you know, just give us some scale, like a 5%, 10% or like, what is the size that you're expecting? And just out of curiosity, is that uplift, you know, factored into, you know, your budget and your outlook?

Yeah, great question. Yeah, as I said, you pointed to super excited to get the city design wells online. Yeah, as an example, there was a previous operator that we think we feel like over-drilled one of the pads They're performing as expected, but we know that it wasn't the best cash on cash return development design. And so we take a little bit of a different approach. I think a lot of operators do too, or you look at that incremental well and what that does to overall returns. And so we're super, super focused on cash on cash returns. I would tell you that the uplift there is not insignificant. We've built in what we believe are conservative but attainable results going forward and this is a team again that's even with prior operators have have fully hit our expectations. But you'll see a bit of a step up. Now, ROC changes east, west, north, south. We get all that, and WellMix will change. But we're super excited about what this team can do when we have fully our hands on the wheel.

Understood. Thanks for that. And switching to the asset market, obviously, you guys have been very involved over the last few years. Can you give us a sense of what you're, you know, there's a lot of transactions that continue to go through the Permian. And, you know, give us a sense of how you think about incremental activity in the Permian, along with, you know, how much opportunity you have in your existing assets to swap and trade to expand your inventory.

Sure. And, you know, we pointed, I think, last quarter to really really great trade that was made in the Midland Basin that allowed us to extend laterals, drive for higher returns, really push costs down on a per-foot basis. There are more opportunities like that that the team continues to deliver. What's interesting is with scaled positions on both sides, we've got operator overlap on both sides where we could trade out of Midland into Delaware or Delaware into Midland. seeing those opportunities as well. We'll let value really guide us. In terms of the asset market, again, take us back to where we entered a year ago with the first two transactions and then followed closely by the third transaction. Any of those assets come to market today and you're talking about a much different entry point. So timing is absolutely critical. Now, in terms of are there opportunities we would pursue potentially in the asset market to think about going after, I think we always look for ways to enhance our business. You're going to hear every CEO out there talk about how high the bar is. I will tell you, I would say we probably have the highest bar out there with where we trade and the disconnect. with the quality of what we've got versus what's on the market. Some of the things that we've seen trade, we've looked at. We'll continue to look at deals. But anything that we do has to compete against turning around and buying a business that's trading at three times where the market's one and a half times higher than that. So we have built a strong business. We're ahead of schedule in terms of how that business is executing and super proud and excited about the future ahead for us.

Scott, and also underpin, like Chris was saying earlier, when we look at our buyback proposition, it's obviously an incredibly compelling opportunity. We kind of focus more on intrinsic value. When you look at our business, we have a free cash flow generating machine that over a five-year period equates to our entire market cap, and that's just really hard to not say impossible to find in the market right now, really public or private.

Appreciate those comments.

Thank you.

Our next question comes from the line of Phillips Johnston with Capital One.

Phillips, your line is open.

Hey, thanks for the time. Just to follow up on Kevin's question on the return of capital, is it safe to say that the board wants to be very aggressive on the share purchase program? in the near term. And maybe just a corollary to that, with the prior framework, you've been repurchasing stock in addition to the 50% variable formula. So I guess the total cash return effectively has been greater than the 50%. So I'm wondering if you'll be limiting the total return to the 50% formula with the other 50% earmarked for reduction of debt, or would you

view that as more sort of a minimum 50 promise with the potential to exceed that amount when you see opportunities in the market yeah i'll kick this off here i think the board and management will be super focused on whatever generates the highest shareholder return and strengthens our business now today today specifically and today more generally does that mean we might more heavily allocate that return to buybacks. I think that's probably a fair assessment. I would say on the question of, hey, before we were really limited to the other 50% of the cash flow post the base dividend and post the variable dividend component to buying back our shares, what that didn't allow us to do, and I think the company's done a really good job of of opportunistically working down some of that concentrated ownership at the top. But what it didn't allow us to do was address and accelerate our delivering plan. And so that's why I think this is a really strong enhancement to the overall program where we can protect and lean in on a buyback and at the same time not stretch our leverage and really progress towards our leverage target.

Okay, thanks for that. And then just on the four-mile laterals, sounds like so far so good. Can you maybe talk about what's embedded in your production guidance regarding that fourth mile? Are you giving it some sort of a haircut? And so what are the specifics there?

You know, I'll take us back to the approach we had last year with the three-milers. And that was we were very confident in the first two miles. the third mile we had risked. You saw that play out quarter over quarter towards the end of the year where those wells actually performed in line with the two milers. And so super excited with how those three milers executed. Now it's replaying itself on the four milers. Very strong performance above tight curve expectations, but we are... We are risking that fourth mile still, being conservative as we are. And so that's going to show up, could show up towards the end of the year. I would tell you the high curves that we have on these four milers are quite compelling in terms of returns. And so any type of outperformance, now all of a sudden you've got potential game changers. We're focused on let's watch these things produce. We're focused on upsizing infrastructure in the area. to unleash these wells. And we're super excited, not just from an operational execution perspective, but seeing contribution throughout the lateral. I think the team's just done a phenomenal job of efficiently executing and bringing these things online. And then the results are just, the proof will be in the pudding, but the results are really, really exciting. And so, you know, in terms of going forward, you know, that's some tailwinds. If it plays back, remember the fourth mile on these wells going to some of the best rock. I think interesting, we talked about the ground game in the Permian quite a bit. You know, there's a ground game in the Rockies as well. You've got a team here that I think is a differentiated weapon within the DJ in terms of what we can execute, long-reach laterals, uh and uh and effectively delivering uh oil from four miles away is is fantastic so super excited what the team's done and really excited to see these wells continue to to perform sounds good chris thank you our next question comes from the line of gabe dowd with td cowan gabe your line is not open

Thanks morning, everyone. Thanks for taking my questions. Chris, maybe any thoughts you could share right now on 2025 and just capital allocation across the two plays relative to this year's capital allocation and also capital allocation within the Permian, specifically Delaware versus Midland.

Sure. You know, this is coming into this year. The calculus was was pretty difficult because we didn't know how the team would execute. I think as we look ahead, and certainly it's too early to guide where we're going to be in 2025, but as you look ahead, the challenge that this team's going to have is this is real-time improvements, enhancements throughout the Permian and in the DJ. The game is changing in both basins, and so there are a lot of moving pieces that will drive relative capital allocation between the DJ and the Permian. Keep in mind, we'll also have, again, the tailwinds on the regulatory side with compromise that gives us you know, into 2028, good clarity in developing the asset, and that's going to impact how we think about capital allocation. There's a lot moving. And then in the Permian specifically, as you think about Delaware versus Midland, certainly we're more levered to Midland, both in terms of scale and production and inventory, some of our best returns on the Delaware side. Now, we have, I think we mentioned in the past, a previous operator was looking to develop some one-milers and good returns, don't get me wrong, good returns, but the team is taking the time to say, look, how do we extend these into two-mile developments and drive some additional efficiencies? And so we're working that through the system, really excited to start allocating to the Delaware. Just given the scale and everything, we're going to be more weighted to the Midland. We're super excited about that as well. While it's early for 2025, I'll just take us back to how are we going to run this business? We're going to run this business to maximize free cash flow, keep production broadly flat, and generate as much free cash, get it back to shareholders, get it back to our balance sheet as we can. I think that business model is really interesting because it does a really important thing. It creates capital scarcity, and when you have capital scarcity with two super competitive teams, you start finding ways to improve that capital allocation mix. And so that's what we're seeing from the DJ. It's what we're seeing from the Permian. These men and women are finding more and more ways to improve returns. And so it's going to be a lot of fun as we set up for 2025, but there is a lot of noise in the system.

Understood. Understood. Thanks, Chris. Obviously, a bit too early still for 2025, but that's helpful. And then just as a follow-up, just going back to well design and spacing in the Permian relative to the prior operator or operators, can you maybe just remind us, broad strokes, what are spacing or well protection assumptions in Midland right now? And is that a little bit of a wider spacing relative to the prior operator? Is that embedded in your inventory number?

Yeah, thanks for the question. This is Hodge. As Chris mentioned, you know, earlier this year we've had some pads come on from prior operators that we feel they probably drilled it at a higher density than we would. As we move into our designs, we're taking that into consideration. Every additional well that is contemplated within a section has to be competitive from a returns basis. We look at this on a well-by-well incremental returns basis. And within the Midland Basin, within our sections, that's like four to five wells per section. But bench to bench, those things vary. We don't have a cookie cutter across the whole thing. We make sure that we understand as rock changes north to south, east to west, and what benches we're operating in, we're going to make sure that we're as efficient with that incremental capital on every well board.

Understood. That's very helpful. Thanks, guys.

And your next question comes from the line of Tim Redson with KeyBank. Tim, your line is open.

Good morning, folks. Thank you for taking my question. I want to start on the balance sheet. From your presentation, it looks like you have about $475 million left on the deferred venture payment. And, you know, using big numbers, maybe a billion and a half of free cash flow, half of that for the balance sheets. So where I'm getting at is we see leverage kind of hanging on north of one times here, you know, for several quarters looking forward. So as you, you know, adjusted your cash return framework, and Chris, I was wondering if you could speak from the board's perspective. Why is there a need to return 50% and how does kind of debt pay down factor into value creation? I'm just curious how they're thinking about that.

Yeah, let Mary Nola take this one.

Tim, good morning. I mean, look, we remain extremely committed to our balance sheet, right? And we have one of the more conservative leveraged targets out there, 0.7 times, 0.75 times. You know, as you know, we took that to finance the permanent transactions, and that was an incredibly deliberate decision we took to de-risk our corporate outlook, and it was the right one. You know, we're no question a stronger enterprise today. You know, like I've said in prior quarters, for us, it's It's more about taking meaningful steps and taking meaningful progress towards delivering, delivering every single day. You know, this is why we've seen us come out and take steps like complete our asset sales program earlier this year to accelerate that delivering process. And then further to your point, this update we just announced to the shareholder return policy will also continue supporting and underpinning our balance sheet initiative. We carefully balance those capital allocation decisions between paying down debt and returning that cash to shareholders. When we look out and we see our plan, we're comfortable with the pace of de-levering or de-levering efforts. And frankly, we can't ignore the tremendous opportunity that our stock presents to us right now. I mean, even levels well north of where we're currently trading. So we're really balancing all those components in our four pillars in a way that delivers maximum value to our shareholders.

Okay, yeah, that makes sense with where the stock price is today. So I appreciate that. And then as my follow-up, Chris, we share your views on some of the sort of surprising valuations we've seen for some of the M&A deals. So is it, you know, as you think of kind of future opportunities, is it just this idea that, I'm just curious, you know, what sort of is thriving that? Is there some sort of new scarcity value for these, you know, 500 million plus packages. I was trying to get any insight because oil has been obviously, you know, pretty stable here for a year. Kind of curious what's driving that.

Yeah, to your point, you've seen oil has been fairly stable. You see a little bit of weakness going into 2025. So what's driving those valuations? Not sure if it's scarcity. Don't know exactly how others are bidding on these assets. I can tell you how we underwrite them. And that's conservatively. It's how we underwrote the entry with Taprock, Hibernia, and Venser. Again, timing is everything. And again, it's just look at our DJ package as well. These were non-core assets trading at a full turn above where our whole company is trading. It's a bit of a head-scratcher why that's not reflected better in our value. And that's this team's job. uh, to, to close that gap. I think, um, scarcity could have something to do with it and, um, we'll, we'll remain disciplined and, uh, we're generally a conservative, uh, buyer. I think that's the way you win longterm and, and, you know, that means we may miss out on some things and that's okay. I will say, you know, how our underwriting has been in the past is also changing, right? As you have a team where you've got confidence, hey, we can deliver mid-700s on capex. We see line of sight going to the low 700s in the Midland Basin. That changes our ability to underwrite. But at the end of the day, Everything that we do, you're going to come back to say, okay, why don't you just go buy this one asset here? It's got a couple thousand wells and inventory of high-quality stuff, and it's trading at three times. And that's called Civitas. And so, again, this change in the shareholder framework is going to be helpful. And I think drive home that point even further that, hey, we've got a great opportunity within the walls of Civitas and teams on both sides of the company really executing at a very high clip.

Okay. Thanks for the comments.

Your next question comes from the line of Leo Mariani with Roth Capital.

Leo, your line is open.

Yeah, I wanted to follow up a little bit on some of this downtime that you guys had in the DJ. I was hoping you could kind of, you know, quantify that for the second quarter. Was this kind of a couple thousand BOE per day? And it sounds like you have some expectations that's going to be present as well in 3Q. So I don't know if you guys have a rough estimate of what that might look like in 3Q as well.

Yeah, Leo, this is Hodge. As Chris mentioned, we've had some extreme temperatures here in Colorado. We've seen some impacts in June and we saw impacts in July. And I think today we're probably going to be 100 degrees, 98 degrees today. So we're definitely seeing some impacts on production. I think it's in that ballpark that you're referring to. It's transitory. This isn't lost production. This is production that kind of gets shifted out in time. And really what you'll see is a little shift from what we had talked about earlier on production from third quarter into fourth quarter. This is something that we'll work through. It's not loss production.

Okay. And then obviously you've done a great job, you know, reducing well cost most prominently on the Midland side. And clearly you've got targets to reduce those costs a little bit further. You know, I guess assuming that you guys are able to get to those, you know, new well cost reduction targets, which I guess is a handful of more percent depending on the basin, Where do you see that kind of putting, you know, maintenance CapEx for the company? I know that you still have a goal of being broadly flat, it sounds like, over the next few years.

Yeah, thanks for the question. You know, as we entered 2024 with nine rigs in the Permian, we knew we were going to be really front half loaded on CapEx. And so we've got a couple of things that are really important. making 2024 a little bit noisier than we would like. We came off the high capital spend, but two-thirds of our capital or 64% of our capital hit in the first half. Now that is setting up the back half growth with second and third quarter tills representing about two-thirds. And the DJ as an example in the first half, I think we tilled just under 50 wells, 45 wells, and the second half will till over 70. So we're excited about how the second half has set up. But when we entered, we knew 195 as a company was not a maintenance level. You know, we were taking over private assets. These guys were really ramping activity. We needed to moderate that. We would moderate that. And so 195, not as a maintenance capital level going forward. I think what's changing and what's really interesting is where is that maintenance level because with capital costs coming down as significantly as they are. One thing I would point you, we've got a 10% target out there, our 10% realized, 15% target on the Midland, a little bit less on the Delaware. That's really about, we've had a ton of swings at the plate on the Midland. We're super excited about what the team's delivered. On the Delaware, we've had fewer swings at the plate. And so as we dig in on the Delaware side, I think you'll see some additional cost savings that we could work through the system. So there's a lot of noise in the overall capital allocation system that we'll work through as we head into 2025. But again, we'll figure out what that maintenance level capex is. I think importantly in 2025, you'll see us try and baseload activity a little bit cleaner throughout the quarter now that we're fully in control of the assets, and we'll see where we end up. But it's going to be targeting broadly flat production year over year.

Okay, that's helpful color. I mean, it sounds like certainly the punchline is going to be below 195, and I guess we'll see where it comes out. And I guess just lastly for me on taxes, you guys did take down your cash tax estimate a little bit here in 2024. Wanted to get maybe a high-level sense of what you guys are seeing as we roll into 25. Are you still able to defer the preponderance of taxes here?

Deal this, Mary Nell. We did take down the guidance about 12% at the midpoint on cash taxes. That was primarily related to somewhat a slightly conservative assumption on cash taxes for the year as we completed an acquisition in the first quarter. The actual cash tax moved down a little bit, but perhaps not as materially significant. And then as you look into next year, obviously having lost a little bit of the tax shield with not having an acquisition next year, right, is expected to trend up year over year.

Okay. And is that going to trend up a lot or do you still think there's still a decent amount of shields?

It's probably going to trend out a meaningful amount. You're probably looking at somewhere in the $75 million range or so, $75 to $100 at a $75 oil.

Okay, thank you.

And your next question comes from the line of John Abbott with Wolf Research. John, your line is open.

Hey, thank you very much for taking our questions. Chris, I just want to go back to this discussion about production being broadly flat year over year, and I just want to make sure that I understand. So oil production is expected to increase gradually from 3Q into 4Q. It sounds like you want a more level-loaded program next year. I understand the idea is to maximize free cash flow, but I'm trying to understand the potential cadence in 2025. So it's flat year over year. Why not hold the 4Q production rate flat? And why is that not a possibility? Or how do you sort of think about that?

Yeah, I think, thanks for the question, John. You know, the broadly flat, that's the overall guideline. But we're going to look at multiple iterations, whether that's keeping exit flat or year-over-year flat. Or I would point us back to 2023. When we entered the year, we saw a big disconnect between service costs and the commodity, and we said, hey, we're going to let production moderate a little bit, and the team ended up outperforming and keeping production flat again. So I would say broadly flat's the starting point, but we're going to gut check the model and the capital allocation to see if it makes sense to – keep the exit flat or go a different direction. But we'll have a lot of work to do this fall as we get ready for 2025 and excited to ultimately have a little bit of a more steady state program going forward. We'll look at all paths to allocate capital to drive long-term shareholder value.

Appreciate it. And the second question is on hedging. So it sounds like you want to add more hedges and As you sort of look at the oil macro out there, how are you thinking about the extent that you want to be hedged in 2025? John, this is Mary Ann.

Thanks for the question. You know, we have a hedging program that underpins our balance sheet delivering initiatives, right? And with that, we want to de-risk the pace at which we're delivering on a go-forward basis. You know, right now, our hedging program Basically, as long as we're above our leveraged target of 0.75 times, you will continue to see us roll through a 30% to 40% of expected next two months on the hedging side. We just recently rolled in Q3 of 2025 at very attractive prices about a couple months ago when all of us are at least prompt months within the low 80s. You know, look, I'll say we have a structural hedge somewhat in our business, right, with the low-cost structure that we have that we continue driving down lower. And when you combine that with a curve that's backwardated along with the meaningful progress that we expect to make on leverage, we don't expect to have to really want to or need to add hedges beyond a 12-month period at this point. I think all those components leave us extremely comfortable with our basically levering on our free cash flows over that time frame. So between now and then, you'll continue to see us roll in the quarter as it rolls out. And that's what we will continue to target on a go forward basis.

Appreciate it. Thank you for taking our questions.

Thank you.

And just as a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad to get your question into the queue. Our next question comes from the line of Oliver Huang with TPH. Oliver, your line is now open.

Good morning, all, and thanks for taking the questions. For my first question, I know this stuff is always lumpy, and it's still pretty early to be thinking about 2025, but as we approach the back half the year, any sort of early thoughts in terms of how you all are thinking about picking back up activity to ensure the 2025 program is coming along at optimal levels? Just kind of thinking about how this year's program was front and weighted on a capital side and how you all have been talking about wanting to level load it a little bit more going forward.

Sure. Thanks for the question. You know, yeah, 2024 is a little bit of an anomaly. I think what's interesting and as we head into the second half, what's not baked in is Are there additional gains on the capital side where we could step back, redeploy that capital rather than as we did this quarter, reduce overall capex by $50 million, redeploy that capital to strengthen, may not hit production in 24, but to strengthen the exit, strengthen as we head into 2025. I think that's the beauty of what this team is delivering is we can lean in just as we've done with the DJ. This is a highly functioning team that now we've got confidence we can lean in as we head into 2025. So capital savings could come back to additional free cash flow to take to the balance sheet, or it could be redeployed. And we'll look for the opportunities to redeploy that capital and do whatever is best in long-term shareholder value. But all eyes for us are let's look at 2025 and strengthen what we can. And if the opportunity is there to reallocate some of that capital, we'll take it.

Okay, that makes sense. And for my second question, I know you all haven't talked about this too much, but just wanted to kind of hit on maybe if you could provide some color on how you all are thinking about simulfrac operations in the Permian, especially in the Midland. Is this an opportunity set or something that could get implemented in the coming quarters in a more fulsome way to kind of drive more savings?

Yeah, Oliver, this is Hodge. Thanks for the question. You know, going back and looking at where we were building this team out and what this team has done, what I think you've seen through the capital efficiencies, the operating efficiencies, is this team really leaning in on the way operations were being done, optimizing the equipment, optimizing the designs, and really building a strong track record of delivery and continuous improvement. To your point and to your question, Now, what are the incremental things that we can bring to the table for continuous improvement on the completion side? And we are in the process of putting plans in place to move towards SimulFrac towards the end of this year, in the middle of- Okay, perfect.

And would any sort of savings from SimulFrac be embedded into the target that you all have outlined today already, or would that kind of be in that plus category?

The savings to date at that 765 number, they're not in there. That will be incremental savings on a go-forward basis.

Okay. Thanks for the color.

All right. And your final question comes from the line of Noel Parks with Tuohy Brothers. Noel, your line is open.

Hi. Good morning. You know, one thing I was wondering is with the series of acquisitions in the Permian, has your use of service vendors remained largely consistent versus the ones you inherited there? And I was sort of wondering because from what I'm hearing as people head toward looking at 2025 contracting for services, I feel like I'm hearing more negotiations happening earlier but maybe going slower. So I just sort of wondered where you stood with your roster of providers.

Sure. You know, it's changed, I'd say, quite significantly from the beginning of the year. When you go from nine rigs to start to four or five rigs today, when you really hone in on who are your service partners that you want to align yourself on the drilling side and completion side, you know, that's very different from the previous operators. And we're super excited to have the partners that we have in those basins. I would say what's interesting, and again, this is what will show up at the negotiating table, is guys, here's a team that's executing exceptionally well. We peeled off seven days per well in the Midland as an example between drilling and completion efficiencies. That means they can be much more efficient. That means their margins are improving, and we can lean into that and really be successful together. I think the other thing, we've seen this in the past, right, is companies have entered basins You know, enter subscale. We had some discussions of, hey, do you just dip your toe in and then start building scale around that? No, you don't. You go in big. You establish scales as quickly as you can. That's what we did in the Midland. It's what we did in the Delaware. And so now you step back and say, here's a company that's got scale positions in three basins, and we can lean and work together with our service providers in the DJ, Midland, and Delaware to say, look, here's a high-functioning team. How do we win together? And, you know, we weren't in that position at the beginning of the year, right, because we weren't ready to underpin and underwrite what we felt like was going to be a high-functioning technical team, and it's proved out that way after the first two quarters.

Great. Thanks. That's really interesting. And just to circle back to something that got asked about earlier, in terms of how you change your – development approach being a little bit more, I guess, judicious about infill drilling and so forth. So is development pattern your biggest philosophical difference technically with the prior operators? And just in broad strokes, is that more engineering or more better understanding of the rock driving that?

Yeah. You know, as we look at it, it's a little bit of both, right? It's res for engineering, but it's tied to our understanding of the subsurface. It's tied to how we believe wells will interact with one another. That is a big philosophical change. There are companies out there that, gosh, we've got an inventory number, and we've got to expand inventory, so let's drill eight wells a section. And, guys, look at the seventh well. Look at the eighth well. Those are money losers. Peel off a couple of wells, increase your cash on cash return. That's a better solution for our shareholders. Don't focus in on inventory, focus on return. So that's a big change. I think the other big change is, look, lean into new ventures. Lean into the land team. Take one mile wells, push them to two. And the DJ, look to swap into pads where you've got four mile wells versus three that other operators in the basin can't do as we've done. Use that operating team to your advantage, and don't focus in on, hey, we've got to drill these wells right now. Take one mile and make it a two. That's another big change. And then the final change is, again, hey, look at me. I've got a low day rate. That's great. The iron's not great. The crew's not great. So let's upgrade. Let's spend a little bit more on a day rate, get better iron, get better crews, and, whoa, you've got 20%. 50% efficiency gains overnight. It's amazing how that works. And so I think really digging in on all facets of the business, peel yourself back a little bit and figure out what drives long-term shareholder value and then go attack. That's what we've done in the DJ. It's what we're doing in the Permian. And so I think it's a little bit of all of the above and all, but I appreciate the question.

Great. Thanks a lot.

Thank you.

Thank you. This does conclude our Q&A session. At this time, I will hand the call back over to Mr. Whitmarsh for closing remarks.

Thank you, Jessica, and appreciate everybody for joining us and for your interest in Civitas. We'll be on the road quite a bit here in the third quarter, so we look forward to seeing you at conferences and at roadshows. Please don't hesitate to reach out if you have any additional follow-up, and have a great day, and please stay safe.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.