CIVI - NYSE

Good morning. My name is Julianne, and I'll be your conference operator today. At this time, I would like to welcome everyone to Civitas Resources Second Quarter 2022 Earnings Conference Call. All participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the call over to John Wren. Please go ahead.

Thank you, operator. Good morning and welcome to Civitas' second quarter 2022 earnings conference call. I'm joined today by Chris Doyle, President, and CEO; Marianella Foschi, CFO; Matt Owens, COO, and Brian Cain, our 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 as well. I'll now turn the call over to Chris Doyle.

Thanks, John, and good morning everyone. I'm excited to talk about our results in the second quarter, but I want to start by highlighting what I see as the fundamental pillars of how we run our business. First, operating assets to maximize free cash flow. Second, maintain a fortress balance sheet. Third, commit to returning meaningful capital to shareholders, and fourth lead the way in terms of environmental, social, and governance. We believe this is a winning formula to create a durable or sustainable and certainly more investable business through any cycle. We have been and will continue to be strong believers in the value of consolidation but only as those opportunities enhance, extend, or optimize our business around those four pillars. Scale for scale sake is not what we're about. We want to be better, not just bigger. Staying disciplined to what matters most and falling back in those pillars is guiding principles is what will position Civitas for long-term success. That discipline means, we don't have a significant transaction to highlight for you today, but it also means we have a very clear picture of how the underlying assets are performing. So let's talk about the quarter. Operationally, we delivered 175,000 MBoe per day. That includes 80,000 barrels of oil per day. Total CapEx of roughly $240 million. The team is executing well, the assets performing ahead of expectations, we beat our internal oil targets, we beat our internal total production targets it came in under CapEx. That's in the face of continued inflationary pressure. I'd also like to note from the success our oil marketing group achieved during the quarter. They were very active in optimizing netbacks on our oil production which, thanks to 18 months of consolidation is not only a significantly more scale. We produced 110,000 barrels of oil per day gross, but is also geographically diverse. That allow the team to go out and find some very interesting in basin sales opportunities, some at a premium to WTI. Whether we continue to capture those opportunities is yet to be determined, the focus from this team is expanding margins. From drilling and completions to production and marketing the economies of scale to come from the active and accretive DJ consolidation of very apparent and the established Civitas as in the cost leader within our peer group. We're a company focused on generating free cash flow ahead of production growth, ahead of activity, cost leadership is an absolute imperative. On the financial side, I would direct you to our release for reconciliation. We generated GAAP net income of $468.8 million. Adjusted EBITDAX of $739.2 million and free cash flow of $436.6 million during the second quarter of 2022. The fortress balance sheet just got stronger. We redeemed $100 million in senior notes with cash on hand and as of the end of the quarter, the company was unlevered on a net debt basis, was $400 million of total debt outstanding, it gets roughly $440 million in cash. We also firmed as a company, our commitment to return meaningful capital to shareholders with the announcement of our $1.76 in a quarter per share total quarterly dividend. This is comprised of our base dividend of $0.4625 per share plus our variable dividend which was increased to $1.30 per share this quarter. This represents about a 30% quarter-over-quarter increase and one of the highest payout ratios in the industry. And our current share price implies roughly a 12% yield. As the business continues to create significant free cash flow we will evaluate the best use of cash where that's reinvesting in our business through the drill bit, launching share buybacks, extending the runway with additional acquisitions, or increasing dividends back to our shareholders. Relative merits of each of these options shift they shift continually, especially in the market is volatile is what we've seen over the past quarter. But this management team, our Board, and our largest shareholders are fully aligned and we're committed to getting it right. On the permitting and regulatory front, our 2022 plan is largely permitting at this point. Looking ahead into 2023, roughly 20% of our programs on a fully approved OGDP's of permits another 30% permits are submitted with the majority of those deemed complete and simply awaiting hearing dates and we'll continue to submit the remainder as we approach year-end and into the first quarter. In total, we have 575 wells working through what we call our permit pipelines. I'd also like to highlight the box elder cap. As expected this was deemed complete during the quarter and we had a hearing set for early November. Quick note on our updated 2022 guidance. We've increased our production guidance to account for our performance year-to-date and a small acquisition that we closed in early July. That adds about 1,000 MBoe per day to 2022. On CapEx, we have increased the midpoint of our '22 guidance slightly due mainly to cost inflation but importantly staying within the high end of the original guidance. Our operating cost guidance has been updated, our oil differential guidance was updated and decreased from $6 to between $4 and $5 per barrel. We also are now guiding $75 million to $125 million, of 2022 cash income taxes and that assumes oil average is $100 per barrel for the remainder of the year. As Colorado's largest pure-play E&P and first carbon-neutral E&P company on a Scope 1 and Scope 2 basis, Civitas is well positioned for future success within Colorado and the industry more broadly. We're a young company. We've come together over the past 18 months and there were certainly more work to be done. The price of the team's deals after integrating five companies is well-earned and that challenge can't be overstated. I am confident in saying we are in the early innings of optimizing this business. I look forward to sharing our continued progress and execution in the quarters to come. Thank you again for joining the call this morning. And I'll pass it back over to the operator for Q&A.

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

Good morning all. Fantastic quarter. My first question is really on capital allocation. I'm just wondering, given the - what appears to be substantial free cash flow going forward. Chris, I'm just wondering, could you discuss how share buybacks will play into the mix along with you know you certainly mentioned the dividends. They understand that as well in the mix, but also potentially even more hopefully more accretive deals like this latest non-op purchase?

Yes, Neal, thank you for the question and the comments. So I would, I would say that we are in a great position. We have a tremendous amount of optionality and flexibility. We're going to look opportunistically for opportunities as you said to do accretive deals like the one that we did but we will also consider whether that's a buyback, a special dividend, or other acquisitions all of those are in play. And as we've guided, most of the year there still a few in-basin opportunities within the DJ and that will continue to run to the ground. We've been running to the ground, but disciplined in our approach, and we'll be opportunistic. I think that we take most of those over the course of the next quarter or so. And as you said, we are generating significant free cash, and the Board is really focused and the team is focused on what the best use of that cash is going to be.

Great. And then second, just for Chris. But you are Matt maybe on permitting. I'm just wondering how long a runway do you all anticipate is prudent in order to continue to have the efficient D&C pace that you all are sort of laid out.

Yes, I'll start then I'll kick it to Matt. I'd like to add 12 to 18 months of permits in front of us always in the queue and that allows us to optimize our capital allocation. I would say we're early days with both the COGCC and the industry as more broadly if you think back Neal to Appalachia early days, it takes some time for operators to get their feet under them, it takes some time for the regulators to get their feet under them as well. I think we're getting there. But ultimately we'd like to have a year to 18 months of permits in hand. Matt?

Yes, I think that's a great number and that's permits in hand. So that's why when you look at that new Slide 5 that we have, we're showing a lot more than that. Almost 600 permits that we have in the queue because we want to have that 18 months runway that is approved. We've got a lot of projects that we're working on internally, Chris mentioned in his prepared remarks that we did get our first cap deemed complete earlier in the quarter and we hope to have our second one submitted by the end of this year.

Great. Thanks for the details, guys.

Our next question comes from Michael Scialla from Stifel. Please go ahead. Your line is open. Michael from Scialla your line is - Michael Scialla from Stifel, your line is open. Our next question comes from Leo Mariani from MKM Partners. Please go ahead. Your line is open.

Okay, thanks. Hi, I was hoping you could talk a little more about some of these kinds of pending M&A deals. I know that you guys have kind of had a few of these privates in your sites for quite a while now that kind of been sitting there in the slide deck. I guess there is still quite of ongoing negotiations here, are they kind of heavy, or is it just kind of getting difficult to transact here at the right price, just trying to get a sense of how you're thinking about M&A right now.

Sure. I would say we're in continuous dialog with multiple folks within the basin. Obviously, it's a rapidly consolidating base, and thanks to the efforts of this company and others it's not a difficult discussion to have quite honestly as long as we are disciplined. And we have been coming back to, how do we make this company better, not just bigger. And so what you saw in the second quarter is we were disciplined, we didn't get anything over the finish line other than small transaction that we highlighted in the comments. But that's the right approach. We are to a point now 18 months in where we are at scale position or larger operators on those active operators in the basin and we can be selective and will continue to be selective. We're not going to pull down acquisitions that simply make us bigger unless they do four things for us. Unless they allow us to create more cash flow get that back to shareholders, protect our balance sheet and lead the way in the ESG and it's as simple as that.

Okay. And I guess just. Is there any kind of high-level sort of time frame where you - if you're like at some point we had these things in our side has been an ongoing active dialogs where that just becomes exhausted where it's just clear maybe there is not going to be a deal at some point for one of these targets. And at that point, would you pivot to just a higher return of capital you obviously have no net debt at this point. Strong base dividend the variable was up a lot this quarter, but still a lot of excess free cash flow above that you did mention buyback in the prepared comments. Just trying to get a sense of some of these deals don't come to fruition. Should we be expecting may be a buyback to come into play here?

Sure. Thanks again, Leo. I would say time frame, there was. We're always going to be in the market within the DJ certainly looking at opportunities. We'll know I would say in the next quarter, certainly by the year-end will be sitting on significant free cash that we will deploy and what will determine working with the Board in the management team is best use those funds. But I think from a time perspective, Leo I'm thinking the next quarter, possibly to the end of the year.

Okay. And I just wanted to ask on the production here. Obviously very strong outperformance in the quarter. I know historically, the company has kind of talked about trying to keep volumes fairly steady. There was some benefit from the Bison deal but volumes were up a lot more than that. Can you just provide a little bit of color around that? Did you get a lot more wells on maybe they came on early in the quarter to see better well performance? What kind of drove the performance there? And do you expect the second quarter going to be the peak on production that we kind of start following the rest of the year when you look at the guidance kind of implies that?

Yes, great question. I would say, you look at first half were essentially flat to the second half the second quarter as higher than came in higher than what we expected. A lot of that's due to early but outperformance in the walk-ins area, longer plateaus and good execution by the team. We think production moderates as reflected in our guidance but comfortable with our update on that. Can you take that?

I think I'd add is, remember, we had a bunch of capital that we spent in the fourth quarter last year accelerating a bunch of docks. A lot of those wells were in our oilier areas like walk-ins like Chris mentioned and out in the legacy Bonanza Creek position. Those wells are the type that go on those oil plateaus on production for a couple of quarters and we just frankly saw outperformance due to our completion design and on those plateaus and it really manifested in the second quarter oil numbers.

Okay, that's good color. Thanks.

Our next question comes from Nicholas Pope from Seaport Research. Please go ahead, your line is open.

Good morning, everyone.

Morning, Nicholas.

I was hoping you guys could talk a little bit about the kind of shift mentioned in crude marketing. Kind of I guess longer-term plans there, the big jump in transport cost, but obviously, you saw it in the realizations. I guess what is the - what is the bigger picture, what's the long-term plan with how you guys are planning to kind of move all this oil and how those costs kind of play into those realized pricing?

Yes, great question. So our better realized prices mostly come from having opportunities to sell are crude and basin. We are the largest producer of low gravity crude in the DJ now after this consolidation effort, we've gone through. So pretty much we control the supply of sub-42 oil. We're able to sell that at a premium in basin when the markets are there. Because of the restructuring of several of the previous companies that have created Civitas we were able to remove legacy contracts and have the ability to sell that crude in basin. So as we continue developing, especially in our southern area we will have more volumes that we're able to sell in basin potentially at these better prices like we saw in the last two quarters. We also have a large volume commitment with NGL that rolls off in 2023. That was associated with the legacy Bonanza Creek position which would free up another 25,000 barrels a day of low gravity crude that we would then be able to access these in basin markets with. So as long as those in-basin market stay strong, we should be able to continue taking advantage of these prices.

Got it. I appreciate that. That's all I had. Thank you.

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

Hi, good morning.

Good morning.

Just had a couple of questions. I was wondering with all the free cash flow generated. Have you been doing any work in terms of looking at additional benches secondary targets on your plays now that much of the consolidation of the different companies is under your belt?

Yes, great question Noel. I would say that's exactly where you start, right? I mean, you start with the performance of your existing asset, how do you optimize base declines, and how do you optimize completions? But then you go up and down wellbores and look for other opportunities. I would say we're early days of thinking about that with exploration within the DJ. I think is an area that could - we could allocate some capital to, if we see a real opportunity and it would be in the easy tuck into our ops. Matt?

Yes, the only thing I'd add is, we're not really focused on new formations at this point in time, but there are alternate benches like you mentioned, and some of our areas that haven't been adequately tested. As we test those. I don't think it will add a new formation in total for us to develop, but it will allow us to develop on a little bit tighter Chevron pattern. If we are able to squeeze a few extra wells then because we see productivity in those new benches. So that's kind of what we're looking at right now.

Great. And just thinking about the continued well just the long process of integrating the five companies. And I just wonder if there is anything that it happened recently or on the horizon as far as different types of service contracts rolling off you're reconciling agreements with some of the component companies had to what the now combined company is having I think either on the sort of the cost side or in terms of operationally or even affecting G&A?

Yes I think when you look at G&A quarter-over-quarter, a significant decrease as we continue to peel off caution and rationalize systems and input integrated process and systems in place. Again, I would say we're very early in that process. The team has done a very good job. We are shifting some things around. We're bringing in some new folks and we'll continue to drive further integration of the business. But don't lose sight of five companies coming together and the complexity with which the team has really executed extremely well is really impressive from my viewpoint 3-months in. Marianella if you have anything to add on the G&A integration?

Yes. I would say in general, Noel, this is Marianella. We've been very impressed at the speed at which we've been able to extract midstream synergies and scenario that we didn't really underwrite or significantly quantify in the various acquisition due diligence. On the G&A side like Chris mentioned we are down 18% quarter-over-quarter. We're currently about $20 million for the second quarter and got a lot more than on a per unit basis. We're not done yet. I think that just the roll-off of the companies and the exit of services, we continue to shed off G&As as close as we can and different we are in the year we believe the guidance that we gave was a little more perfect, but we're definitely making meaningful strides on both those items.

Great, thanks a lot.

Thank you.

Our next question comes from Michael Scialla from Stifel. Please go ahead, Your line is open.

Hi, good morning everybody, and I apologize for joining the call late if any of these questions have been asked previously, I apologize for that. But I was wondering on Slide 14. Looking at your activity level for the year. It looks like in terms of wells drilled, completed, and brought online. A little bit lower than what you're guiding to previously in this quarter and is that any impact from the higher working interest that you have in some of these wells or just how does that reconcile with could you typically no change on the production forecast?

Yes, thanks, Michael. I would say a couple of things, one, the assets outperforming on a production basis and allowing us to generate significant free cash flow, which is our number one focus more so than activity. We did update those numbers were on that lower end of the previous guidance. Some of that's related to the working interest that we picked up that obviously pulled in $10 million of capital into our program. It is allowing us to be our production guidance with lower activity and we floated between 2 and 4 rigs. This year we're at three right now. So we would average around three for the year, we're still there. But really happy with how the assets performing and if we can deliver - out deliver on our promises with less activity that's a win for the team and a win for our shareholders. Anything, any other color you'd add there?

No. Besides the acquisition. The only other thing is, we've had some success with our internal leasing program and just setting up organically our working interest in a few pads. So I think that's how it played into it as well being able to hit our production numbers with slightly less activity.

Sounds good. And then wanted to ask on the inflation reduction that is - that becomes a while. What impact that might have on Civitas and particular with your methane emissions? There is a methane emission fee attached to the bill or any other aspects of the bill that would be positive or negative for the company?

I would say that, and this goes to the fourth pillar we talked on our prepared remarks is we will as a company, lead the way in environmental, social, and governance. That means for us becoming the first carbon-neutral company in Colorado. We think that's the right thing to do for our shareholders to ensure the longevity of this - of this business. We will be very aggressive in our reductions and overall emissions including methane simply because we are allocating capital out the door to be carbon-neutral. And so we'll - we can talk about potential impacts, but I'll tell you, we were going to lead the way in terms of ESG and Brian if you want to add any color?

Yes, and we have. So this is Brian. We have aggressive emissions reduction programs in place over the next three years. We're going to be spending about $6 million a year to retrofit pneumatic devices which at about year three should result in a 30% to 40% reduction in emissions and that in addition to some of the other sources that we've - that we've found and looking through the portfolio of 5 companies, we are targeting a 50% reduction by 2027. And so, as Chris said, we have an extremely aggressive program. We are not net zero by 2050 or in 30 years or something like that. We are, we are carbon-neutral today and we are making investments today to significantly reduce emissions, in the short term because to your point, we see that regulations and particularly regulations around air quality, they tend to get tougher and not easier, and so we are taking the proper steps to be ahead of that.

Very good. Thank you, guys.

Thanks, Mike.

Our next question comes from Bill Dezellem from Tieton Capital. Please go ahead. Your line is open.

Thank you, Chris. In your opening remarks, you had mention that you are in the early innings of integrating the five companies. Would you please give us some examples of really what you're referring to there, given that it appears is or you have integrated the five companies?

Sure. I would say we're early innings of optimizing the business. The companies are fully integrated, as evidenced by a great quarter - a great string of quarters quite honestly. But the business, I would, if we were looking around this table, and walk in the halls we know there is more that can be done to optimize our production base to optimize our performance in all aspects. I would highlight a couple of things that are continuing to get attention. I think, well not necessarily reflected in future guidance, could be some potential upside. To me, this is you take back 18 months ago and the individual constituents of this company, we are now a $5 plus billion company. What that means is the addition of a clear process, clear accountabilities, and clear systems integration I think can yield a lot of value that were not in place previously. I would say we're early innings there. We are now 170,000 barrel a day company, that is a massive base production much bigger than any of the constituent parts. And so really focusing in on-base production, not just drilling and completing wells, but base production. I think we are early innings and we've reorganized a bit to put more focus in on that. And I think more broadly we have everything plugged in together to your point, we're fully integrated but optimizing process, optimizing systems, getting the right folks in the right spots, and everyone aligned to one central mission. We're early days and we're going to get there, and I think that's what I wake up every morning really excited about is that, how the assets performing, how the teams performing in the wake of five companies coming together knowing that there is much more to come, I get really excited about.

And I recognize this sort of effort is never complete but when would you expect the bulk of this optimization process for the businesses that you have acquired to be far enough down the path that there is a noticeable difference to the - and to the outside world?

Sure. I would say, there should be a noticeable difference visible to the outside world based on the second quarter results. But I would also say, have this discussion a year from now, we're not going to be done. We may be closer to nil of biddings, but we will as a company continuously improve every aspect of our business. We will drive out as much cost as we can to maximize free cash flow and get that back to shareholders and protect our balance sheet. And so I would say, and the Company is doing a phenomenal job of this is, we will not accept where we are today. We will continuously drive improvement throughout our company, and throughout our business.

Great, thank you for the color, I appreciate it. Great quarter.

Thanks, Bill.

Thank you.

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

Yes. Just had a follow-up on, just wondering if you could give any guidance or if you did previously again apologize, but on where current taxes may be for the remainder of the year?

Sure, and I'll start off and kick it to Marianella. In previous quarters, we guided at $75 that we would not expect to pay cash income taxes. What we've put out there assuming $100 for the rest of the year is between $75 and $125 and we think it's a good idea to put that out there given where commodity prices have been and look to be for the remainder of the year. But let me kick it to Marianella.

Yes. Thanks, Michael for your question. I would say consistent with our prior messaging. If you look at where commodity prices top band cut around the first quarter in that $85 to $90 range. Our annual level for 2022 fully offset our taxable income. If you look at oil averaging about $108 for the second quarter and using our assumption of $100 of payroll the resulting cash impact is essentially all of them but a 25% effective rate of that incremental revenue. So that's why we guided to about a mid-point of $100 million based on that incremental oil price.

Got it. Thank you for that.

Yes. Thank you.

We have no further questions in queue. I'd like to turn the call back over to Chris Doyle, for closing remarks.

Sure. I'd like to thank everybody for being on the call today and your continued interest in Civitas. Have a great day and be safe. Thank you.