Civitas Resources, Inc.

Good day and thank you for standing by. Welcome to Civitas Resources third quarter 2024 earnings conference call and webcast. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. And if you'd like to withdraw that question, again, press star one. Thank you. Please be advised that today's conference is being recorded. And I would now like to hand the call over to Brad Whitmarsh, Head of Investor Relations. Brad, please go ahead.

Thanks, Krista. Good morning, everyone, and thank you for joining us. Yesterday, we issued our third quarter earnings release, our 10Q, and we provided some supplemental materials for your review. These items are all available on our website. I'm joined this morning by our CEO, Chris Doyle. our CFO, Mary Nalifoski, and our COO, Hodge Walker. After our 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 will make certain forward-looking statements today, and those are subject to risk and uncertainties that could cause actual results to differ materially from those projections. Please make sure and read our full disclosures regarding these statements in our most recent SEC filings. In addition, we may also refer to certain non-GAAP financial metrics. Reconciliations to the appropriate GAAP measure are also in yesterday's SEC filings and our release. With that, I'll turn the call over to Chris. Thanks, Brad.

Good morning, everybody. Welcome to our third quarter call. This morning, there are three key things I want to focus on. First, I'll quickly summarize third quarter results and expectations for the fourth quarter. I'll share some highlights from the DJ in Permian, where we continue to enhance returns through solid operational execution and sustainable capital efficiencies. And lastly, I'll comment briefly on 2025, as it's important that you understand that our priorities have not changed. As with our usual practice, we'll provide our final 2025 plan in February. Over the past few months, we've continued to see significant volatility in commodity prices and the underlying macro environment. The actions we've taken as a company over the past couple of years strengthened Civitas, and positioned us to deliver long-term value to our shareholders at any point in the cycle. Our Permian acquisitions added depth and quality to our inventory, doubling the size of the company. With scaled positions now in the DJ and the Permian, we have a high-quality, diversified portfolio of opportunities in the lowest break-even basins in the U.S. Our team continues to improve and add to that position, delivering sustainable capital efficiency gains, improving up new zones for development, and capturing additional inventory that expands our runway of high return opportunities, all while returning significant amounts of capital to our shareholders. Let me start with our third quarter results and fourth quarter expectations. For the third quarter, we delivered solid financial results with adjusted EBITDA of $910 million, led by strong sales volumes, strong oil differentials, and strong cost control. Our board's recent action to further prioritize the balance sheet and share buybacks was very timely. During the quarter, we returned $227 million to our shareholders. Based on the trailing 12-month calculation, the third quarter variable return of capital totaled $104 million. Rather than paying a variable dividend, we elected to shift 100% of our third quarter variable return to buybacks, completing these share repurchases in October. We see tremendous value in our equity and will continue to prioritize share repurchases. The remaining 50% of our free cash flow went to reduced debt. On an equivalent basis, third quarter volumes were slightly above expectation. Revenues benefited from strong oil realizations and solid natural gas hedging gains. Oil volumes were a little light in the quarter due to unexpected downtime at third-party facilities in the DJ and water takeaway constraints in the Permian, but these temporary issues have now been resolved. Capital investments in the third quarter reflect facility spend pulled forward from the fourth quarter, as well as accelerated drilling and completion activity. And yesterday, as materials, we provided detailed fourth quarter guidance, where you can see the lower fourth quarter capital guide. We remain on track with all full-year deliverables, including volumes, capex, operating costs, and most importantly, free cash flow. On production, factoring in our investments from earlier this year, we're above the midpoint of our original oil guidance for the year. Pre-cash flow for the quarter should increase significantly as the oil volumes are expected 3% higher quarter over quarter, with the DJ basin growth more than offsetting expected declines in the Permian as we reduce activity into year end. We've had a strong start to the final quarter of the year with October oil production averaging 165,000 barrels per day. Let me now share a few more details from each business unit. In the Permian, our team has done an outstanding job establishing an operating track record focused on driving capital efficiencies and enhancing the value of our assets. On the productivity front, we've begun to deliver the expected improvement in well performance as a result of our development philosophy, which focuses on incremental well returns rather than an overall pad-level return. Our Permian well costs continue to trend lower, driven by reduced cycle times, drilling and completion design improvements, and lower oil field service costs. We're certainly not done. Here in the fourth quarter, we've initiated simulfracs across our permanent program with early results in the Midland Basin highlighting a more than 30% uplift in daily fluid throughput. Strong results from recent Wolf Camp D wells in the southern Midland are unlocking new resource for development as higher productivity is more than offsetting modestly higher well costs. Returns in the D are competitive with other core zones, such as the Wolf Camp A and B, and we've identified approximately 120 Wolf Camp D locations in the inventory with mid $40 oil break-evens. In addition, our ground game in the Permian is adding high-quality inventory by capturing more than 75 gross locations year-to-date. We've also executed a number of beneficial acreage trades and swaps to materially extend lateral links and increase working interest in near-term core developments. All of these ground game ads immediately compete for capital, and we're working even more opportunities to add to the portfolio. In the DJ Basin, our legacy asset continues to deliver outstanding results, and we've highlighted strong performance across the entirety of our acreage position, and our materials. The prolific Watkins area in the southern part of our acreage comprises approximately two-thirds of our well count in the DJ this year. In this area, we recently commenced production on 13 four-mile laterals, and the results are ahead of expectations, with no per-foot degradation observed as compared to our three-milers. Of note, the unrestricted deliverability of the Blue 4AH well set a Colorado record with 90-day cumulative production of 165,000 barrels of oil. These four-milers are another example of our team's ability to execute and drive returns through complex well geometries and extended reach laterals. This demonstrated capability is helping drive additional ground game opportunities to add high-quality inventory to our position. As a reminder, our Watkins oil is lower API crude than our typical DJ barrel, a significant contributor to our stronger realizations of late. Add to this the positive regulatory developments over the last couple quarters, including the ballot measure stand down and the Lowry cap approval at Watkins, and we're in a great position to continue to deliver in the DJ. Before we take your questions, let me briefly talk about 2025. As we've said in the past, our priorities have not changed and will be guided by our strategic pillars, generate significant free cash flow, enhance the balance sheet, return capital to shareholders, and lead in ESG. Production will be an outcome of the plan, not the driver, as we seek to balance each of these strategic imperatives. In 2025, we'd like to level load our capital investments through the year a bit better. Recall that we entered 2024 with very high levels of activity inherited from the three Permian acquisitions, and we've decreased activity every quarter this year. Establishing a more steady state operation and level loading activity will ultimately support sustainable capital efficiencies moving forward. Given the current volatility in the forward oil strip, we will remain flexible as we plan for 2025 and will respond quickly to commodity price changes. Again, focused on protecting free cash flow levels. Regardless of where things shake out, we are focused on returns. That's returns on our investments and returns of capital to our balance sheet and to our shareholders. In closing, 2024 has been an important year for Civitas. A year ago, we had a demonstrated track record in the DJ, and we were looking to build on that track record as we stood up a new team in the Permian. Our job is not done, but Civitas is well-positioned as we enter 2025. We have a scaled portfolio of high-quality, low-break-even assets and teams in the Rockies and the Permian that are focused on driving capital efficiency to enhance returns and deliver for our shareholders through the cycle. Thank you again for your interest in Civitas. Operator, we're now ready to take questions.