CIVI - NYSE

Thank you for standing by. My name is Cheryl and I will be your conference operator today. At this time. I would like to welcome everyone to the Civitas Resources First Quarter 2022, earnings call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. If you would like to ask a question during this time, [Operator Instructions] Thank you. John Wren, you may begin your conference.

Thank you, operator. Good morning and welcome to Civitas ' First Quarter 2022 Earnings Conference Call I'm joined today by Ben Dell, Chairman. Chris Doyle, President and CEO, Marianella Foschi, CFO. Matt Owens, COO, and Brian Cane, Chief Sustainability Officer. Yesterday we issued our earnings press release, filed our 10-Q and posted a new Investor Presentation, which is available on the Investor Relations section of our website. Please be aware that on today's call, we may make forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from projections. Please read our full disclosures regarding forward-looking statements in our 10-K and other SEC filings on today's call, we may also refer to certain non-GAAP financial metrics, reconciliations to certain non-GAAP metrics can be found in our earnings release and SEC filings. I'll now turn the call over to Ben Dell.

Thanks, John. And good morning, everyone. I'd like to start out the call today by introducing our new CEO, Chris Doyle. Chris has over 25 years of domestic and international experience in the E&P and midstream businesses, having set the foundation for his career by spending over two decades at Chevron, Anadarko. Chris has a strong track record of leading diversified teams and platforms across the E&P and midstream businesses is experience judgment, perspective in leadership qualities, will be instrumental as we continue to thoughtfully grow the Civitas plant, with a clear objective of becoming a national leader among our peers, while advancing the principles of the new E&P business model. Russet task board of directors and executive management team is thrilled to have Chris joined us. And we feel confident that Chris is exactly the right person with the right mix of experience and leadership skills to take Civitas to the next level as an organization. He's already made a tremendous start this week, and we look forward to all of you getting to meet with him and hearing directly from him in the coming weeks. Thank you for joining us, Chris. Moving on to the operating results. The first quarter of 2022 was another stellar quarter for the company execution-wise, with production of a 159 thousand barrels of oil equivalent per day, and 68 thousand barrels of oil today. And total CapEx of roughly $235 million. Civitas [Indiscernible] will be our budget on oil and total production, as well as on all operating and capital expenditures, including differentials. On the G&A front we had significant activity in 1Q related to the termination of legacy employees, our CEO transition, a move to our permanent headquarters, among other non-recurring expenses. We're working tirelessly to continue extracting synergies of excess overhead as quickly as possible. On the financial side, the company's balance sheet continues to be a core strength and strategic advantage that we're focused on maintaining. As of March 31st, CIVI's balance sheet consisted of $500 million of total debt and roughly a $150 million in cash. We have since paid off a $100 million, in outstanding notes with cash on hand and sit here today with only $400 million of debt on the balance sheet. And we expect to be unlevered on a net basis by mid-year. And now we also recently up-sized our credit facility borrowing base to $1.7 billion and increased our electric commitment on the facility to $1 billion, which provide us with significant amount of liquidity. We're excited to continue to follow through on our industry leading shareholder return policy. With the announcement of a $1.3625 per share total quarterly dividend to be payable on June 29th to shareholders on record on June 15th. This is composed of our $0.4625 per share base dividend, and our variable dividend of $0.9 per share this quarter. This represents one of the highest payout ratios in the industry. And that our current share price implies a top today yield of roughly 10%. On the permitting and regulatory from we have to more new OGDP locations with hearing date set in the near future. The we expect to be approved unanimously. Our 2022 plan is almost a 100% permitted at this point with the only remaining and permitted pad scheduled to be spot in 4Q and 2023 will largely be permitted once we receive approved on our cap, which we expect to occur in the third quarter. We believe the state of Colorado considers us to be the operator with the best understanding of permitting under the new rules and the best capacity to utilize best management practices to minimize surface impacts. And we're seeing that evidenced in a number of permits we've been getting approved lately. Our goal to become the clear ESG leader within our peer group is also very much aligned without states environment, so on community-focused coal jet. And we've provided details about our expanded ESG platform in Civitas ' assets inaugural corporate sustainability report, which was published earlier this week. We encourage everyone to take a look at the recall, which outlines the company's recent achievements and future goals around climate leadership, delivering value to our communities, and best-in-class corporate governance provisions. As Colorado's largest pure-play E&P and first carbon neutral E&P company on a Scope 1 and Scope 2 basis, we are very excited about the company's future. Civitas is leading the industry and executing on the new E&P business model. We have a simple business model focused on optimizing the. development of our high quality assets. A relentless focus on costs, expanding our cash margins, protecting our balance sheet, and returning excess cash flow generation to shareholders. This is also being done with an acute awareness of our environmental footprint, which we continue to minimize. I'd like to thank you all again for joining the call this morning and for your interest in Civitas. And with that, I'll turn the call back to the Operator for Q&A.

[Operator Instructions]. The first question is from Neal Dingmann of Truist Securities. Please go ahead. Your line is open.

Morning. All first one SEI Wealth Crystal, great quality higher there. Then my first question is really just on what you were just hitting on Colorado permitting. As you said, certainly seems like you have more than ample permits for this year. Could you remind us once you get the approval on those next two areas? Either for you or matter the gang, what will that take you towards lead? Will that basically set up for all the 23 just want to try to get that down for the model.

Sure. Neal I'll hand that over to Matt and give you a summary.

Yeah Neal. Great question. We are over 90% permitted for this year. Like Ben mentioned in his comments, we do have Q pads that are coming up and OGDP hearings that we plan to split in late fourth quarter, that should put us a 100% permitted through this year and those carrying into the first quarter of next year. Right now for our development plan in 2023, a bunch of that those locations come from the box elder cap that we have currently pending with the CEO GCC. So that will be the majority of the locations we do plan in 2023, just an update on that cap for everybody. We do anticipate getting completeness determination from the CEO GCC quarter, and that would lead to what we are hoping for a late third quarter final approval hearing and that should be. We anticipate the first cap approved under the new rules in the state.

Great details, thanks, Matt. And then, Ben's second question based on the top, reserve on shareholder returns. I have to make your share still traded a notable discount to various peers.. What's your thoughts on material buybacks in addition to the already material dividends you are talking out there?

I guess they'll be a little bit repetitive. I think if you look at our uses of cash, our focus is up a say, pay the base dividend, pay the variable dividend. And then at that point, we're looking in base and consolidation opportunities and then how they compare versus executing a buyback. I think if you look at those in base and consolidation opportunities, the vast majority of them are being down. And as we get towards back end of the year, we'll undertaken evaluation of what to do with our excess cash.

Very good. Nice set up. Thanks, guys.

Your next question is from Michael Scialla of Stifel. Please go ahead. Your line is open.

Good morning, everybody. And also like the offer my congratulations to Chris. I wanted to follow-up on Neal's question on the permitting side. Is there a backup plan? It sounds like the 2023 drilling depends on getting the Watkins Cap approved. Is there a backup plan in case something goes wrong there or are you confident enough that that's not going to be an issue? And also, I was wondering that was that Watkins plan reconfigured with some of the consolidation? I believe Crystal was the one to submit that initially or is that going through based on that original form?

Matt, you want to go first?

Yeah, I can -- I'll start some more stats on permitting in general. First of all, that cap, you're correct, it was submitted initially by Crestone, we amended that shortly after the merger announcement last year to include some of the extraction acreage that was right on the flanks so that already occurred a while ago and has been part of what we submitted and have resubmitted in late February. Other permits stats besides the cap which I think would help answer the backup plan that you had. The company is working right now on 12 other OGDP's internally. We have submitted 6 of those also to the state and that includes just over a 100 wells. 2 of those are in technical review with the final hearing next month. The other 4 are in completeness review. And those include another 75 wells. And then we have about another 6 that we're working internally for another a 100 wells. So over the next several months, we plan to have a couple 100 wells, about 220 wells submitted, and hopefully approvals rolling through on various OGDP's that we're working on that are in addition to the box elder cap is just currently our plan. is to drill the box, sell the cap mostly in 2023, but we should have ample inventory coming through these other OGDP's that we're working on. If there was some sort of delay. But I do want to say we have close communication with the Director often about the box elder cap and we're very confident that we've addressed all the outstanding questions with our last recent middle. And we do expect this to move through the process with final completeness determined hopefully this quarter.

That sounds good. Wanted to get an update on integration process with Bison or maybe even for all of the companies that have come together here over the past year, just to see where you are in that process.

Sure. I can give an update on that. This is Marianella. We're basically done with the Bison Integration. We really only brought three full-time employees as far as the -- I guess the longer-term integration that came with the merger, we're basically down to that 300 employee mark that we anticipated when we put together the margins in November first of last year. Everything pretty much is as expected, this is our first full quarter post merger implement-execution perspective and very clean quarter. I think there's certainly a little bit of work on the back-office still remaining there's -- we still have a couple of corporate and field offices trying to close those out, integrate those, but from an integration respective, think everything's going better than anticipated and faster than anticipated.

Sounds good. Thank you.

Yeah. Thank you for the question.

Your next question is from Noel Parks of Tuohy Brothers. Please go ahead. Your line is open.

Hi. Good morning.

[Indiscernible] Good morning.

A couple of things I want to check on. Wondering you could talk a little bit about where things stand in terms of land, now that you've combined all the companies. Just wondering if as far as rationalization half exchanges and so forth, that you'd like to do is that efforts substantially completed for the combined companies or is there still pretty significant ongoing tax of just cleaning up positions in leases and so forth?

Yeah, what I would say is that the base significant synergies on the land side of putting all these companies together, both in terms of ability to drill longer laterals, our ability to execute trades. I think we're going to continue to do that in the land side of the business is something we continue to evaluate day-by-day. Obviously with the other major players in the base and then everyone trying to optimize their positions along with trying to win bill an increase our working interest and our key path, so we never really stops from a A&D land side of the business and magnitude will be very effective in making a number to those trades to optimize what our business plan.

Great, thanks. And I was thinking about operations now with the combined companies. Of course, it's certainly a broader regional mix and product mix spend, I guess any one of the companies had the for the deals. I just wondered you could talk about sort of your flexibility to respond to what's going on in the commodity markets. We of course, there's massive rally in both oil and gas. But what sort of time frame would you need if you decided you wanted to shift activity? Some say in the event that oil and gas prices diverge in their trends from here.

Yeah, maybe I'll make some opening comments and then maybe Matt can follow-on. First and foremost, I think we set out a very clear plan of what we intend to do on a multi-year basis, and I don't see us materially deviating from that plan. Obviously, the commodity prices have moved around and relative pricing has moved around, but I don't think that's going to lead to a material shift in how we attack the business. I think when you look at the combination of the companies, the great thing we've seen over the last six months, Is that age company brought some really unique skill sets. Both on the drilling side, completions side, land sid,e M&A side. And we've been out of take the best from each of those different companies and hopefully build that it's what the Civitas culture as going forward.

Your next question is from Nicholas Pope of Seaport Research. Please go ahead. Your line is open.

Good morning, everyone.

Good morning.

I thought of you guys could talk a little bit about the bigger picture where midstream stands right now. And I'm also kind of what percentage of that 70 to 90 million of land midstream and other, how much of that do you all anticipate is going towards the midstream business? How -- I guess how do you expect to expand recognized midstream? Is that -- is that the path forward in terms of kind of pursuing a broader midstream strategy or is it going to be more third party?

Matt, you want to comment on that?

Yeah. Sure. For our midstream spend, it's a little over 50 million for this year. The remainder of that would be coming from land. The majority of the dollars are actually coming from expanding the Watkins. So the southern area oil infrastructure that we're building out to the terminal that we now operate known in Bennett. There will be some expansions to Rocky Mountain Midstream, but Rocky Mountain Midstream for the most part, has been built out. Only small connections are needed for any future pads and then some small upgrades. The CPS that Bonanza Creek has already built in the past. So the major construction projects for new construction anyways that we have going on are the oil lines down South in the Watkins that came with the Crestone acquisition.

Got it. And is --should we -- the way we should look at it going forward is Rocky Mountain. Is that going to be -- is that fixed or is that going to be something that has a independent or carved-out entity. Is that set in place now, going forward.

This is Mariani. When you look at Rocky Mountain and really not on the rocky mountain, but the broader midstream infrastructure with the oil asset that we have down the Southwest and the Gas gathering then have down lock-in. It's certainly not only material footprint at this point that so the time. Why would say a do look at the cash flow from the midstream business, about 85% ourselves get eliminated and consolidation. So when, when you look at Capital that happen, that's part of wire margins are where they are and, you know, keeping our margins and cost structure low with the very tenants to the company. So at this point, I think we don't see the need to potentially carve it out and indefinitely we're trying to get up. But in the future, it could be something strategic. It's just we're not looking at it that way in the near-term.

Got it. Just out of curiosity as you look at the Basin right now, I mean, I think part of the drive to carve out that midstream initially for bonanza was was kind of aligned pressures and access to capacity. Where do you think the Basin is right now and being able to move the crude and pipeline pressures that I think was always a frequent topic for all all the companies prior to the combination.

This is Matt, I think right now, the basins in pretty good shape as far as takeaway goes, there's a lot of infrastructure built before everything slowed down in 2020 for Civitas as a whole, we don't have a lot of exposure for new drills left to the DCP system. There are some pads here in there that will go into that system. But for the most part, our new production is going to be exploring through RMI, which has multiple offsets or updates to several different midstream providers. And then a lot of our other new turn-in-lines down south will be going to Western Gas or to Rocky Mountain midstream, which both have ample capacity available right now. So on the Gas side, we're not too worried about and then for oil, we have a very clear, very desirable mix of oil where we have access to a lot of the local markets as well as having to sell down in Coshing. So our lower gravity crude that make up a good portion of our portfolio. Now we do have a lot of interest for that in-basin.

Got it. That's all very helpful. I appreciate the time, everyone.

Your next question is from Bill Dezellem of Tieton Capital Golf Management. Please go ahead. Your line is open.

Thank you. Lease operating expense increased in the quarter. I think it was, what, 252 per barrel up from 222. I was a bit surprised given that volumes went up. What is it that brought the LOE per barrel -- per barrel up on higher volumes?

Hi, Bill. This is Marianella, I got a couple of things. One, the LOE in the fourth quarter is just a little bit, not apples-to-apples strike because keep in mind October west just Bonanza Creek. And so that's one reason. The second item I'd say Q1 does reflect March Bison production, which it was not a significant necessarily to the enterprise and because those are oilier barrels may do come in with higher per BOE LOE. But overall, I think we beat our LOE expectations. We were right at the low end, well the range that we provided for 2022.

Great. Thank you.

We have completed the allotted time for questions. I will now turn the call over to Ben Dell for closing remarks.

Thank you for joining us today. I'm excited about the next chapter in CIB Adapters future under Chris's leadership and we look forward meeting with you all in person. Thank you.