Q4 2024 Civitas Resources Inc Earnings Call

Thanks, Chris. The long-term winners in this business will be the companies with a strong comprobación sheet and a cost structure at the low end of the cost curve.
Yesterday, we took meaningful steps to prioritize and protect these two items, including rolling out a free cash flow location strategy. Our strategy underpinned by our 2025 net debt target of $4.5 billion, which represents an $800 million reduction to year-end 2024 performance of the bolt on transaction. This debt reduction will further benefit our cost structure, decreasing associated interest expense by approximately $60 million on an annualized basis, or a 5% increase to a run rate free cash flow. This reallocation of excess cash will allow us to reach 1 times leverage in late 2026.
Our long-term leverage target is unchanged at 0.75 times EBITDA at mid-cycle prices. While accelerating leverage reductions, we remain committed to our colchoneta dividend of $2 per share annually. As compared to our prior framework, any additional return of renta to shareholders will be opportunistic and consistent with our near and long-term comprobación sheet goals.
I’d be remiss not to touch on our philosophy and risk management, which further protects free cash flow. We continue to execute our systematic oil hedge strategy, and we are approximately 40% hedge on net oil volume for 2025. As a reminder, oil accounts for approximately 80% of our unhedged revenue.
Our tactical gas hedging strategy was extremely successful in 2024, especially in the back half of the year as Permian gas price volatility increased. Our premium volumes are currently 50% hedge for 2025 and 2026, and we will continue opportunistically adding to our GAAP book.
Ultimately, a commodity business best hedge is a low-cost structure and a portrait comprobación sheet. While our hedging philosophy has served us well, maintaining our top quartile cost structure and de-risking your comprobación sheet are more material value drivers in the long term.
And with that, I will turn it back over to Chris for concluding remarks.

Over the next 3 years at the 2025 investment and production level, Civitas will generate approximately $3.3 billion in cumulative free cash flow of $70 oil. That represents two-thirds of our current market cap. It will allow us to meet our leverage reduction goals while also returning significant renta to our shareholders. Civitas’ strength rests on our proven operating teams and our track record of performance in the lowest breakeven oil basins in the US. Our 2025 plan will advance our strategy of building a long-term durable business for our shareholders.
Operator, we’re now ready to take questions.

Operator

(Operator Instructions)
Gabe Daoud, TD Cowen.

I was hoping we can maybe start with the decision to shift your renta allocation strategy. I thought maybe you could, for lack of a better phrase, walk into them and pay down debt and still buy back a decent amount of stock. So maybe just a bit more color there and you know, you mentioned opportunistic with buybacks, what does that mean? What would you need to see to step in?

As we thought about setting this business up for 2025, we had a couple of options, a number of options. And as we thought about the backdrop, the macro that’s in front of us, the volatility that we’ve seen over the past couple of months, we know that this is the plan that’s best to build a long-term sustainable business for Civitas.
As you mentioned, we have a business that generates significant free cash flow, $1.1 billion in 2025. Given the volatility that we see, we think the best use of that of that cash flow after our colchoneta dividend is really to direct it to our comprobación sheet. We’ll have a little bit of opportunity to accelerate that, we mentioned the $300 million divestment target to offset the acquisition that we announced yesterday. We’re looking at other ways to potentially accelerate that delivering path and give us some more flexibility and optionality, but this is about setting the company up for long-term success.

And then as a follow up, obviously starting 1Q slowly and expected to ramp from here, maybe it’s a bit more color and granularity on the ramp from here in the production trajectory. And how does that potential divestiture program impact volumes, I guess, another way is what’s the amount of production you anticipate selling with this $300 million target?

Sure, first with the with first quarter oil, largely as expected, reflecting low levels of activities as we mentioned in the back half of 2024 and certainly in ’25, a lot of that drop as we mentioned, is in the DJ. We’ve restarted the engine. We have a pretty active 1Q plan of 50 to 60 tills followed by another active quarter in the second quarter, and you’ll see as we lay out slide 12, growth from the first half to the second half with that activity.
In terms of the divestment, the $300 million dollar divestment, that’s TBD. We’re looking at all types of assets, some assets that don’t have associated production, midstream assets, some water infrastructure assets in the Permian are not significant but looking at first and foremost assets that could be more valuable in others’ hands. Certainly, if we see the right value, we would look to potentially accelerate some value from operating assets and producing assets, but that’s certainly TBD at this point.

Operator

Zach Parham, JP Morgan.

First, with the bolt on deal that you did in the Midland, can you just talk about where those acquired locations fit into your development plan or those assets you’ll be getting to work on later this year, or are they more longer dated locations? Maybe just talk about how that fits into the portfolio.

Sure, as we dug into that opportunity, certainly we see value adjacent to our operations. We did not underwrite sticks and across that entire acreage position. We see that activity really starting up later this year and, but more so in 2026. The Wolfcamp A, Wolfcamp B, Wolfcamp D, primary development will yield good returns that will compete for renta, but that likely doesn’t set up until late this year and into the next.

And then my follow up is just — maybe following up on Gabe’s question on renta allocation. I know the focus is now on debt reduction, but how do you think about further M&A contra potentially shifting back to a higher level of cash return? It sounds like you’re going to, you talked about reaching a one-term leverage target in late ’26, so it sounds like you’re going to continue paying down debt contra returning cash. Just kind of maybe, how do you think about things over the longer-term M&A contra cash return contra debt reduction?

So look, first and foremost, our top priority is our 2025 net debt target at $4.5 billion. To get there, we talked about how the majority of our free cash flow after the [Base 7] this year is going to be allocated to debt reduction. So anything we do in excess of that, will be opportunistic. It will not be formulaic, and obviously, we have our a very near-term eye to that one-time leverage.
Over and above that, you’ve seen us comprobación our allocation between buybacks and acquisitions very well. Every acquisition we’ve done has been a very attractive price. It’s certainly in $1 per stick relative to some of the recent transactions announced there. And at the same time, we’ve also had a very successful buyback approach, we bought 7% of our shares last year that’s going to underpin an 8% operating cash flow increase 2025 or 2024. So certainly, we’ve been very successful on both fronts and we’ll continue being opportunistic about how we comprobación between those two benefits of long-term value.

Operator

Josh Silverstein, UBS.

Josh Silverstein

Maybe just on the same point, as you hit your $800 million debt reduction target for this year, do you shift back to that 50% plus return of free cash flow to shareholders? Is that something that you get to, or if gas prices are a bit higher oil prices are a bit higher, you just accelerate the leveraging a bit more?

It’s more the latter. We will certainly look to accelerate our comprobación sheet goals further, Josh. And like I said earlier, we’ll be opportunistic of anything in essence of that, but our top priority again is hitting that $4.5 billion, with an eye to one-time late next year.

Josh Silverstein

And then maybe just on the inventory front, you’ve been talking about inventory in the Wolfcamp D, particularly in the Midland side, where does that stand now and is that in the 1,200-location count?

It is in the 1,200-location count. We had about 10% of our program last year, really delineating the Wolfcamp D North, South, East, West. Excited about the results that we’ve seen, just as excited with the renta performance that the team delivered where you’re seeing about 10% higher renta for 15% more productive wells. And so, what we’re seeing is the D will compete for renta.
We’re stepping up our D development this year, probably about 20% of our Permian program and so excited to see with additional swings of the plate if we can tighten those renta cost even further and continue to repeat the strong well performance. But D is certainly in there, I wouldn’t say it’s our primary target like the Wolfcamp A, Wolfcamp B on the Midland side, and Wolfcamp A [third bone] on Delaware, but it’s certainly very exciting for us and happy to allocate some renta towards it in 2025.

Operator

Neal Dingman, Truist Securities.

My first question may be for you is just a little bit like you just talked about on the Midland side. My question is more on the Delaware side. It seems like you’re just now sort of getting after that based on what you’re seeing now after re-permitting and doing some things there, are the opportunities there. I guess I’d say the opportunities that as good now as ever you’ve seen, when you were initially looking at it or maybe just talk about how you see that side and what type of activity we can expect maybe the latter part of this year and going to next year in the Delaware.

Neal, as we thought about allocating renta between Midland and Delaware, we really wanted to shift to the higher return Delaware inventory, but we saw a auténtico opportunity to further optimize development. The previous operator was willing to drill shorter laterals. We had a team that got in there and said, hey, we could take a 1 mile well and turn it into a 2 and greatly increase renta efficiency and increase the returns of that program.
It was going to take some time, right, not only for the ground game to work itself through the system, but also then to re-permit. Now, that’s behind us. The team’s done a great job building up that position and optimizing the opportunity over there. And so, we’re allocating more renta to the Delaware, which is fantastic to see.
As a year — last year, we had about 20% of our tools come out of the Delaware. This year, about 40% of our activity is going to be pointed there so we’re leaning in there and as the Lee County is where the two rigs are currently. We’re really excited about the opportunities there and look forward to getting those wells online. But kudos to the team to take the time to do the right things, go through the steps to further enhance the returns, and we’re ready to deploy renta over there. So, excited what we’re seeing.

And then just lastly, just a little minor third-party issue. I’m just wondering when it comes to sort of midstream infrastructure, all that, do you all feel pretty good now where you sit on that very nicely you haven’t had really virtually any issues. Seems like over the DJ side recently, I just want to know when you look at both sides, you feel pretty good about infrastructure going forward.

Yeah, we — unfortunately, we had the third-party issue in the first quarter alongside leather, probably a couple 1,000 barrels of impact to the DJ, so we certainly hit it, but the team did a really good job of finding multiple outlets and minimizing the impact of the third-party processor issue. And we worked around it, but we were down for about 4 or 6 weeks and so we feel good with where we are. As you know, in the Permian is much of a water and gas business with oil as a secondary product there, and so, teams out front ahead of all our tills and getting our water place and feel good about our ability to execute and deliver our ’25 plan.

Operator

(Operator Instructions)
Scott Hanold, RBC Renta Markets.

My first question is just on effectively the reset of the outlook in 2025 and beyond, can you talk through the process of making the decisions you all did, obviously, making some hard decisions here. But like, what were some of the other options, and obviously, your path here you’re taking is one option. Did you look at others like larger M&A, divestitures as was discussed out in some market reports? Can you just talk about like some of the options you looked at and the decision and thought process into the 2025 plus plan.

So first, as we thought about setting 2025 up, we had a couple of different paths just with the business as is. As we’ve talked about in the past, the level of activity in 2024 was not a maintenance level to support 160,000 barrels of oil a day. In addition to that, it was very front loaded, which really stopped the engine towards the end of the year.
And so, one option that we had was to increase activity and maintain 160,000 barrels of oil a day. As we looked at and considered the volatility in the macro that we’re seeing currently, we didn’t think it was the right thing to double down and invest a couple hundred more million dollars to maintain 160,000 barrels of oil a day. We believe the best thing for the business long term was to reset to the $150 to $155 peel out renta and hit that maintenance level of 1.8 to 1.9.
In terms of question around the larger M&A, we won’t comment specifically on any rumors out there, certainly, but I will say that this is a team that is focused on creating a long-term sustainable business that generates significant value for our shareholders. If there are opportunities to accelerate some of that value, and that’s any asset, not just DJ or just Permian, if there’s an opportunity to accelerate value for our shareholders, we will certainly take it very seriously.
I will say, as evidenced by the $300 million divestment target, we are out there looking for ways to identify assets that could be more valuable in others’ hands and use that to offset what we thought was a really attractive bolt on in the Midland Basin and really a rotation to extend the runway into the Permian. So I think more to come on that front, Scott, but a lot of work and a lot of diligence to go into laying out this plan is the best path for this company long term.

Yeah, and maybe to play a little bit off some of the latter comments there. I mean, obviously, potentially the investors seem like they’re going to be targeting some more so than the DJ and you’ve obviously bolted onto the Permian. So, as you look at your inventory runway of 1,200 Permian locations, I mean, is — a couple of questions here. One, how do you comfortable you feel with your inventory duration of what you would view as core wells, and do you see yourselves becoming more of a Permian company over time?

Yeah, I’d like to say we’re a returns company and whether we get those returns from the DJ or the Permian, that’s what we’ll go after. We see the opportunity in the Permian really to scale our business or saw the opportunity to scale our business and diversify it.
In terms of the 1,200 locations, we’re sitting about 8 or 9 years of stay flat inventory. We’ve talked about wanting to extend that again, given the macro where it is, I feel very comfortable with where we are. Our ability to really focus, refocus and send access free cash flow to our comprobación sheet without the need to really participate in what have been extremely competitive asset transactions there in the Permian.
And the DJ, it was interesting not just through ground game but relooking at a brand new or continually improving renta operating structure and what the team has been able to do to expand tiers out more than replacing inventory that we sold and that we drilled in the year, I think was a was a great achievement for the team. But we’re sitting there with 8+ years of state-wide inventory as well.
Now, as we get further down the dispatch curve, is the renta efficiency of those last couple of years the same as the next 5? No, probably not, but we do have a team that is demonstrating the ability to drive additional efficiencies to take returns, whether it’s extending laterals or optimizing completion designs to take lower returns and improve those with time. And so, we feel very comfortable that this is a plan that is sustainable, that will deliver sustainable free cash flow and allow us to achieve all of our comprobación sheet goals, and at the same time, return renta to shareholders.

Operator

Leo Mariani, Roth Renta.

Yeah, I wanted to follow up a little bit about some of your comments around M&A. Clearly, you talked a little about divestitures, but just curious, you mentioned very competitive Permian markets, but in kind of a perfect world, is there a pretty healthy appetite for the company to try to add inventory in the Permian through M&A?

Yeah, I would say our number one goal for 2025 is hitting that net debt target at the end of the year, the $4.5 billion. As we’re doing with the bolt on in the Midland, rotating out of predominantly DJ developed assets to fund that, we’ll see if there are similar opportunities to do that. But our number one focus, given the inventory duration that we currently have and given the macro that we see is really taking that excess cash to the comprobación sheet first and foremost. And we’ll continue to look for ways to accelerate our deleveraging and to accelerate our returns for our shareholders, but our number one focus this year is that $4.5 billion net debt target.

And then just jumping over to the LOE side, LOE obviously went up here in 4Q, just trying to get a sense with a lot of this driven by the Permian or did you also see healthy increases in the DJ?

Yeah, you always see in the DJ and the Permian with winter LOE jump up a little bit. The 4Q really was led by a higher LOE than expected in the Permian winterization projects, a little more active workover plan, and we’ll see that continue into the first quarter before it moderates back, but we take this very seriously, and this is our cost structure is we think about cash G&A and cash LOE, that’s a differentiator for any company in a commodity business. It’s why we made some of the hard decisions that we made recently to reaffirm and reestablish and sustain that low cost. And so, specific to your question on 4Q, it was really winter-related, and work over activity, but teams working through that and that will get us back into top quartile cost structure very comfortable.

Substantially, all of the increased quarter record was written by Permian like Chris discussed, Rocky or DJ was actually flat quarter over quarter. I think as we see — as we look out, we have a cash or a LOE target that’s probably going to be somewhere in between q3 and q4 that were like Chris has got finta a bit of one-time items in the fourth quarter that won’t be recurring, but all in, high nines on a per BOE basis which we believe is pure leading for our asset colchoneta.

Operator

John Abbott, Wolfe Research.

So with the focus here on free cash flow, maximizing that, could you speak a little bit about the trajectory of how you see future cash taxes over the next 3-year period of time, and when do you see yourself paying sort of the alternative impact? What’s your latest thoughts on cash?

So this year, cash tax guidance $10 million to $30 million. It’s going to be fairly flat into 2026, maybe a little bit higher, closer to the high end of this year’s range next year. As far as AMT, we don’t hit AMT until around $80 a barrel, so there’s nothing additional to model pursuant to AMT.

And then Chris, I mean, the focus right now is on deleveraging the comprobación sheet, you’re looking at the commodity environment. But as you sort of sit down and think about your inventory, let’s say the commodity environment improves and you are and what is your willingness to actually grow at that period of time, having lowered your oil guide at this period of time? You only have so many years of production. What would you do? Would you add a rig? How do you think about growth if there were — if there was a change in the commodity and price environment?

If the macro completely flips and it’s very bullish towards the end of this year or into next, we will be responsive to that macro environment. We like this plan as we roll it forward, the ability to generate sustainable free cash and take that to the comprobación sheet. If we saw solidifying of the commodity price, instead of backward dating into the 60s, some more solid foundation, you could see us potentially lean in a little bit on activity, but only if we’re well advanced of our comprobación sheet targets for the year and for longer term.
And so, this is a team that will continually look at ways to further optimize the way we allocate renta and, as things shift like that, we will be responsive and not overreact, but certainly responsive to the macro. And given the success that both the DJ and the Permian teams have had over the past year really replacing and extending inventory, we have the option to lean in a little bit. All eyes right now focused on on that $4.5 billion year-end target.

Operator

Noel Parks, Tuohy Brothers.

You did touch a bit earlier on the potential for increased oil volatility. And I think you mentioned that in a way, being conservative with activity and cap that is sort of the first line of defense against that, but do you have a normal view on oil volatility over the next few years? I mean, leaving total black swan events aside, do you sort of anticipate increasing volatility or volatility, maybe sort of settling down over the next few years?

Yeah, I think — first, I would say what we’ve seen is pretty significant volatility, right? Well, it was $80 a month ago, now it’s back into the $60s. We’ll see if that continues, right. And we’re not going to sit here and prognosticate which way that will go, but I will say the first line of defense before even activity levels and taking a more conservative approach to renta allocation is affirming and establishing a low-cost structure. Again, it’s something we spend a lot of time on, and again, looking at some of the difficult decisions we’ve made really to solidify that peer leading cost structure, to us, that is the first defense against that volatility.

And just to clarify something on the guidance, some of the sensitivity showing the slides, since the free cash flow has so much upward sensitivity with commodity price, I just want to double check the $1.1 billion I think it is a free cash flow, estimate of $70, that would not count the $550 million in delayed compensation for paying for Vencer since that was cost incurred last year if I have that right, is that right?

That’s correct. That’s just clean free cash flow. No, the $475 million deferred acquisition with Vencer, that was already paid and that was just paying out in debt we had at the end of the year, so it doesn’t impact the $1.1 billion free cash flow anyway.

Operator

Thank you. That concludes our Q&A session. I will now turn the call back to Brad for closing remarks.

Really appreciate everyone for joining us today for the Q&A session. Marianella and I are certainly around the next several days for additional follow up. We look forward to seeing you on the conference circuit here over the next couple of weeks, and we hope you have a great day.

Operator

That concludes our conference call. Thank you for joining today and you may now disconnect.