CIVI - NYSE

Good morning. My name is Chris and I will be your conference operator today. At this time, I’d like to welcome everyone to the Civitas Resources Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] I’ll now hand it over to John Wren, Director of Investor Relations. You may begin.

Thanks, operator and good morning everyone. We appreciate you joining our conference call. Today, I am joined by Civitas’ CEO, Chris Doyle; CFO, Marianella Foschi; COO, Matt Owens; and Brian Cain, our Chief Sustainability Officer. By now, I hope you have had a chance to review our earnings release, 10-K and slide deck, all of which are available on our website. On today’s call, we may make forward-looking statements, which 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. 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. After our brief prepared remarks, Chris and other members of the leadership team will be happy to take your questions. However, please limit your time to one question and one follow-up. And now I will turn the call over to Chris.

Thanks, John. Good morning, everyone. We have a lot of good news to share today, both in terms of our strong finish to 2022 as well as our plans for 2023. We’ll get to your questions shortly, but first, I want to highlight three points, which are critical to understanding where we sit today and the tremendous opportunity that lies before us. Let’s start with 2022. As we often discuss, our business model is based on the principle that a company in our space should prioritize free cash flow, sustainably return that cash to shareholders, maintain a premier balance sheet and lead on ESG. In 2022, we delivered across each of these strategic pillars. We met our original capital guidance for the year despite significant service cost inflation. We exceeded the top end of our production guidance and generated a record $1.2 billion in free cash flow, which is about 25% of our enterprise value. We demonstrated our commitment to returning cash to shareholders through our base and variable dividends totaling about $530 million last year or $6.29 per share. In addition, we bought back $300 million in stock last month. We maintained our pristine balance sheet and exited the year with nearly $770 million in cash, against $400 million in total debt and an undrawn facility. Lastly, we continued our focus on best-in-class ESG performance, initiating an equipment retrofit program to reduce emissions by more than a third by the end of this year and standing up the Civitas Community Foundation, a scholarship fund for high school graduates living in our operating areas and nearby communities. We talk a lot about our commitment to ESG, but it’s not just Civitas. We are among a truly exceptional group of North American oil and gas operators who are meeting global demand while producing among the cleanest energy molecules in the world every single day. Turning our attention to 2023, our approach this year remains consistent. We are committed to capital discipline. We’re focused on generating free cash flow, and we’ll return that cash to our shareholders. We’ve seen a meaningful pullback in commodity prices lately, and service costs have yet to adjust. Utilization remains high as many operators are choosing to sacrifice margins and capital efficiency to keep programs going. Although the DJ Basin has some of the lowest breakevens in North America, I can assure you, Civitas will not make that mistake. We started taking action late in the third quarter of ‘22 when we dropped a rig and temporarily added a third completion crew to work down our DUC inventory and improve overall program efficiency. Although we have the permits in hand today to pad that third rig back, we’re instead of electing to maintain 2 rigs and 2 completion crews to maximize capital efficiency and overall program returns. So for 2023, year-over-year capital investments will be down. Cash returns to shareholders are projected higher and production will be broadly flat. So let me explain how we get this done. Our capital investments will be $850 million or about 15% lower than last year, and our reinvestment rate will be below 50%. In the updated slide deck, we show cumulative production for our wells, vintaged by year. The company delivered a step change in performance in 2021, and you can see our 2022 program delivered that same performance. We don’t expect to see degradation in 2023’s program, and we continue to be excited with the results we are delivering in our Watkins-Lowry area. This year’s turn-in-lines will be similar to 2022, and production will be relatively flat year-over-year and exit-to-exit. Like others, record cold weather in the Rockies will impact first quarter sales. We’ve had 6 weeks so far already this year with below 0 wind chills, including this week. This weather has impacted our fuel operations, and we expect volumes will be in the 155,000 to 160,000 BOE per day range in the first quarter versus our full year guide of 160,000 to 170,000 BOE per day. At current strip prices, we expect to generate roughly $1 billion in free cash this year, the majority of which will be returned to shareholders. Due to our unique and resilient return framework with payouts based on the last 12 months of free cash flow, we actually expect total dividends to increase year-over-year to more than $600 million. Our commitment to return cash to shareholders is unwavering. And yesterday, we were excited to announce a new $1 billion buyback authorization. This is in addition to the $300 million we repurchased in January. We believe Civitas has the most compelling cash return framework in the industry. Finally, I continue to be impressed with the talented Civitas team and our collective accomplishments. We strengthened our business on numerous fronts over the past year. We secured more new pad permits than any other operator in the DJ. We received approval on the state’s first CAP with preliminary citing. We were disciplined in our approach to M&A, selectively executing on a couple of accretive transactions. And we found innovative ways to drive capital efficiency to help counter industry-wide inflation. I’d like to give a special shout out to our field team. This team has executed operationally quarter after quarter. They have delivered these results safely despite record cold temperatures, and so I thank them, and our shareholders thank them. Before I close, I would be remiss if I didn’t mention the significant contributions to our company’s foundation provided by both Ben Dell and Brian Stech. Back in 2021, these two former Chairmen recognized a shared vision of driving consolidation within the DJ Basin. I want to thank them for their service that proved to be so critical during our first chapter as Civitas. So I am excited to start a new chapter in our company’s history and welcome Wouter van Kempen and Deborah Byers to our Board. The Civitas team is just getting started and we look forward to delivering differentiated results for our shareholders in the years ahead. Operator, we are now happy to take questions.

Thank you. [Operator Instructions] The first question is from Neal Dingmann with Truist Securities. Your line is open.

An outstanding quarter, Chris. I am glad the investors are recognizing that this morning. My first question is, I guess, looking at free cash flow or I guess, I’d call it cash investment, specifically, you all recently announced a material stock buyback. And I am just wondering, was this just you all simply looking at how you – I guess, you assume the PV of your company value versus what you are seeing current deals or what were the other drivers or decisions part of that process?

Yes, thanks for the question, Neal. Yes, I think you hit on it. As you know, we have been very active looking at in-basin M&A. What we did last month pulling down $300 million of our stock really is an indication that the most attractive things we saw in front of us was buying back our own equity. As we roll our business model, which is very, very simple, forward through ‘23 and into 2024, the $1 billion authorization is really a product of looking at the excess cash flow that this company and this business is going to generate. So looking at ‘22 dividends of a little over $500 million going to $600 million this year and $1 billion of free cash this year, roll that forward into 2024, in addition to the cash balance that we currently have and we think, hey, this could be a really good opportunity and a really compelling investment to buyback additional shares.

Yes, I am glad to hear that. And then second question is on your operating plan that you just touched upon, specifically. I appreciate and agree with your plan to selectivity, especially if these OFS costs remain relatively high while oil and gas declines. So I am just wondering what would it take for you to ramp this plan back up or maybe asked another way, maybe just talk a little bit more than you already have about how you are thinking about just returning shareholder return versus growth?

Sure. And let me start just by reiterating, we are not focused on growth, right. We are focused on keeping production as flat as we can and minimizing capital to do so to maximize free cash. What we saw – if you think back in 2022 prior to 20% plus of inflation in ‘22, we actually were more aggressive. We drilled, we picked up, went to 4 rigs for a short period, built up a DUC inventory, and we have worked that down through the year. When we look at where we are today, it’s actually the opposite. Commodity prices, oil is down, call it, 20%ish. Gas is less than half of what it was just a short while ago and yet we are still seeing pressure given where utilization sits. So I think, with this environment with the disconnect between service costs and commodity prices, I think the right thing to do is to sit back a little bit. Now what would it take to lean back in? Those two things need to align better. And so that’s either commodity prices up or service costs start to soften a bit. And I think as you see operators pullback on activity, especially in some of the gassier names, we will see that. How long will that take? We will see, but we will be very disciplined in our approach to how we allocate capital. And that’s not just M&A, it’s not just buybacks, it’s organic investments as well.

Great. Thanks for the color.

Thanks, Neal.

The next question is from Tim Rezvan with KeyBanc. Your line is open.

Hi, good morning, everybody. I’d like to dig into the Slide 8 of your deck a bit. You’re highlighting lack of degradation. And I was just curious, kind of, were these consistent results a result of specific areas you’re drilling? Was it changes in the D&C design? And how repeatable do you think these results are over the next few years?

Thanks for the question, Tim. So we’ve pulled in the full year programs for everything 2020 and before, looked at just what was drilled in ‘21, looked at just what was drilled in ‘22. I would say the character of the – of each year’s program is starting to shift a bit into walk-ins area and the Lowry area. And what we’ve seen is consistent results. And not just what we show here, but there was a recently published report about 1.5 weeks ago showing consistency in the walk-ins area from a step change in 2020 to ‘21 and then again in ‘22, lay over on ‘21. When we look at our 2023 plan, it’s a lay down on 2022. So we’re seeing a very consistent, very repeatable result. And I would say that a lot of that is being driven by up spacing and optimizing returns, focused on the right things, not necessarily how many sticks we can drill a year, but how do we maximize those returns for the company and maximize free cash flow.

Okay, okay. That’s helpful. And then if I could pivot back to the repurchase discussion. I know there is some folks who have argued that having an open-ended repurchase that’s not being actively utilized is not helpful. So do you believe that – is it your intent, in a steady-state world, to kind of fully utilize this $1 billion over the next 2 years? And do you have a preference over open-market repurchases versus sort of negotiated repurchases like you did with CPPIB?

Sure. And I’ll kick this off and then maybe kick it to Nella to add some color. Yes, our intent with the authorization is to purchase $1 billion by the end of next year. Now how we do that, I think, everything is on the table. And I would tell you one thing that this team has shown time and time again, and the company has shown time and time again, is we’re going to be disciplined. And we’re going to attack whatever it is, if it’s a buyback, to maximize returns for our company. What we saw in January, again, was an opportunity to pull down a pretty significant chunk from one of our larger shareholders not impact the overall flow to the equity and do so at a really compelling price. And so what that looks like over the next couple of years is yet to be determined, but everything is on the table.

Tim, and I would add, I mean, to Chris’ point, any and all options are open. I mean the way we think about it is just really the incremental dollar, like where the return on that incremental dollar is. I mean open-market repurchases are just more spread out. You can’t do them as chunky. If you look at something negotiated, as we announced in January, that one is more chunky. You saw us over the last year evaluate. We did a couple of relatively small deals, one in January, one in July. At those points, we determined that those asset acquisitions were better than our stock. In January, we determined that our stock was very compelling. So it’s just a continuous evaluation of the relative merits of our stock and additional asset acquisitions. But we always, over time, we do those valuations. We look at the value proposition in our stock, and it’s just – it’s a continuous evaluation. So it’s hard to say pace or anything format, right? I mean, it just depends on – it’s going to be the situation on what the best return is at the time.

And we will be very opportunistic.

Okay. I look forward to seeing what happens. Thank you.

Great. Thanks.

The next question is from Phillips Johnston with Capital One. Your line is open.

Thank you. Just to ask about the setup for ‘24. Obviously, it’s early to be talking about next year. And obviously, there is no guidance out there or anything like that, but it is pretty notable that you guys are going to be bringing about 40 more wells online this year than the number of wells that you’re drilling with the two-rig program. I agree with the rationale, but services costs do remain high. I’m wondering if we’re at risk of robbing [indiscernible] and essentially pulling some free cash flow from ‘24 forward by year since you would presumably need to ramp up drilling activity to sort of keep the same tail pace?

Yes. Thanks for the question, Phillips. Let me – I’ll step back for a second and just make the point that no company should be building up DUCs. No company should have hundreds of DUCs. In my opinion, that’s inefficient use of capital. What we saw last year was we entered the year with about 40 DUCs. We exited with about 60. And so we’re working that down in ‘23 because it’s the best use of capital. As I look from ‘23 into ‘24, while there is no guidance there, the guidance is the business model. The business model is we’re going to keep production broadly flat. And so that’s 160,000, 170,000, that’s fine. Now how we get there, to your point, depends very highly on service costs. Now in my opinion, why would service costs remain high? I think because commodity prices will deem the utilization to remain high. And so in that case, we would lean into that. So I think the simplicity of our business model, focusing on all the right things, trying to be as efficient every year as possible, is not going to waiver this year or next year or over the foreseeable future. So Matt, I don’t know if there is anything you would add in terms of how we think about capital allocation or not.

No, nothing for me, but I would echo that we’re not drawing down a significant number of DUCs. Like Chris said, we did enter the year with about 40 and – or the previous year. And then going into ‘23, we have about 60. So it wasn’t like we built up a massive number, and that’s what we’re focusing on going forward. But we should always be kind of normalized right around that 40 ish number, depending on just the ebb and flow of the rig schedule.

Okay, sounds good. That’s good color. Maybe just to follow-up on Neal’s question on the M&A front, you guys haven’t been shy about your efforts to acquire some of the larger privates in the basin. So can you maybe just give us an update there? And should we assume that the more aggressive return of capital plans means that M&A is less of a priority going forward?

Yes. I wouldn’t say that, Phillips. I appreciate the question. I think it’s an indication that, all along, anything that we do in terms of M&A has to compete against our underlying business. We’ve been very, very active, as we said, on the M&A side. And the most compelling that we’ve seen currently is our own equity. And that’s a tribute to the strength of the business model and the opportunities – versus the opportunities that are out there. I would say we will remain active and look for ways, big or small, to continue to optimize our underlying business model, which is how do you generate the most cash that you can, get it back to shareholders without putting your balance sheet at risk and lead on ESG. So we will remain active. It’s really just a commitment to investors to say, look, this is – we’re not committed one way or the other. Everything has to compete on a level playing field.

Great. Thanks, guys.

Thank you.

The next question is from Noel Parks with Tuohy Brothers. Your line is open.

Hi, good morning.

Good morning.

Just a couple for me. In the release, you talked about setting a record for the – your [indiscernible] 2.5-mile lateral. I was just curious if you could talk about that. I assume that record will still not be the – will not be the average or typical in the near-term. But I was just sort of curious of the elements of that improvement. And I think it was described as being your highest-performing rig. And I was just wondering how much of that was maybe sort of crew dependent as well as just process consistency?

Yes. Thank you for the question. I’ll kick this off and then kick it over to Matt. It’s Matt’s team that is delivering that type of continuous improvement. I think what I would highlight for us is not just the record. The thing that jumps off the slide for me is a 30% plus improvement over ‘17, a 16% improvement over 2019, a team that is geared to continuously improve and drive cost, time, cycle times out of the system is that’s how you win in a commodity business. I would say the other thing is that this highlights the underlying capital efficiency of a DJ asset. Industry, and it’s not just us, has gotten this down to a fine art, and we continue to look for ways and find ways to get cost and time out of the system. Your last point is a good one. There are – it’s beyond just the rig, it’s the crew in the field, it’s the team helping those crews. And what we’ve seen is while we highlight the highest-performing rig, we’re very happy with the performance of all our rigs. And the last thing I would point out, too, is to have that type of performance for an entire year with no lost time incidences is what we can be most proud of. So Matt, anything to add from you?

Yes. I would just add, this was the only rig that we ran for the full year last year. Our second rig that we were running all of last year, the second two quarters, anyways, we picked up halfway through the year. And it’s not far behind what this rig was in terms of pace. Now, our average 2.5-mile well is at 2.2 days spud-to-TD, but the averages have been coming down. And you can see that in that bullet point Chris referenced earlier and the improvement over the prior year. So, our goal is to continue bringing down that average closer and closer to what our records are. But again, if you were to rewind 2 years and asked if we thought we would be drilling a 2.5-mile well, almost 21,000 feet, spud-to-TD in 2.2 days, I would have thought that would have been a little bit out of reach. But we keep finding new ways to innovate and get things done a little bit quicker and a little bit quicker each year.

Great. And I just wanted to ask about reserves. And I wonder if you could talk a bit about maybe whether you saw a positive-type curve revisions, I am assuming that with the 5-year rule, not all of those would necessarily be immediately visible in the proved numbers. And if you have any sense of what kind of improvement you might be able to see going forward?

Yes. Good question. This is Matt again. I am assuming you are referring to the roughly 25 million barrels equivalent of revisions that is showing up in the 10-K. But if you are looking at that, about half of that is due to price and the other half, roughly, is due to well performance. So, we have seen positive well performance compared to what type curves were generated off of a few years ago. And a lot of that has to do with what Chris alluded to earlier and our repeatable well results year-over-year due to different completion designs that we think are attributing to our outperformance, but also up spacing. So, we have generally up-spaced across the board, and we are seeing positive results and consistent results from that over the last 1.5 years.

Great. Thanks a lot.

Thank you.

Thanks.

Your next question is from Nicholas Pope with Seaport Research. Your line is open.

Good morning everyone.

Good morning.

I was hoping you could expand a little bit on these big wells that you are drilling because I see that the guidance for ‘23, you are talking about the average lateral lengths are going to be 2.5 miles. Is – I guess, how has that progressed over the last year in terms of – maybe the last 2 years, as you kind of look at the size of the wells you are drilling and kind of how sustainable that is to kind of keep with those bigger, longer wells?

Yes. No, thank you for highlighting that. That’s a big move year-over-year drilling 2-milers on average versus 2.5-miles now. We are testing longer laterals. We are very excited about what the team has been able to do in terms of cycle times and being able to extend laterals, and it really is just another ingredient to drive additional capital efficiency into the program. That – looking into 2024, that generally longer lateral mix of wells is, again, how we will most efficiently keep production broadly flat. Matt, I don’t know if you want to add anything, any other details?

Yes. I would add, our acreage position is different now, too, especially in Watkins, where it’s nearly 80,000 acre contiguous block, where we can drill these longer laterals. So, down in that area, you will see us drilling a lot more 3-mile wells. We drilled quite a few 3-mile wells last year, completed them, brought them online, and we have the ability to even do 4-mile wells now going forward. We anticipate efficiencies to get better with these longer laterals. But the one thing you got to remember that’s different about the DJ Basin compared to other basins is we can drill the wells so fast. So, the vertical section doesn’t save us millions of dollars, like it does in other basins. It only saved us about $1 million to not have to drill that vertical section. So, it’s not quite as efficient as some other basins, where drilling costs are a lot more expensive, but it is – we still think going to be more efficiencies going forward that we can continue to capitalize on.

Got it. That’s great. And to kind of switch gear a little bit here. Kind of curious if you could update thoughts on the permitting process. And I know there is a small piece of ‘23 that’s still kind of outstanding to kind of lock up permitting. Where do you – can you give a little update on where things are and kind of where the expectation is on kind of updates on kind of finalizing everything with ‘23?

Sure. I appreciate the question. I will kick this off and then kick it over to Brian Cain. So, as you highlight, we are about 85% of the way through for the 2023 program. I would just on the backs of the hard work of the team, highlight how much different a place we are this year than we were a year ago. And that’s again, lots of hard work and collaboration with multiple groups. At the tail end of last year, you saw our first – actually the first CAP get approved with preliminary citing. One of our peer companies in basin followed us. We are seeing the process work and certainly at a much different pace than what we saw this time last year. And so we are focused with that CAP. And you also saw us submit our second CAP. We are talking about ‘24, 2025 activity. And so the team is getting out in front of the rigs, which is exactly what we want to see, and continue to work very well with the COGCC. So, let me kick it to Cain, and he will give you some additional details.

Thanks Chris. And as you said, 85% of our 2023 plan is permitted. We have enough permits right now to run three rigs if we wanted to, obviously, choosing not to. Those two pads essentially left in the 2023 plan are currently pending. Those are November, December pads, and we believe that they are worth the wait because of the value that we assigned to those. So, we feel good about our 2023 plan. And I would just point out that we ended 2022, as you see, with nine new pad permits, which is more than any other operator in the basin by nearly 2x. So, we are creating a demonstrated track record of success in navigating this regulatory environment with, we think exceptional results. I would also note that by the end of the first quarter, by the end of this quarter, we will have as many OGDP permits, that’s new pad permits, pending as we received in the entirety of last year. And so those new pad permits that will be pending would be going towards the 2024 drilling program. Longer term, we would like to have a bank of about 12 months to 18 months of permits in hand to provide that maximum flexibility and value acceleration, where desired in our development plans. And so this year, we are laser-focused on working toward that goal, and we will be augmenting that through the pads associated with our approved Box Elder CAP. And then our next CAP, Lowry CAP, which is a very exciting development, about 170 wells nameplate, one service owner and no dissenting owners within 2,000 feet. So, we remain laser-focused on building that bank this year for coming years.

Got it. That’s very detailed, very helpful. I appreciate that. And I would also like to add, I like the slide on the greenhouse gas emissions reduction. That target you guys have for ‘23, I mean it’s a nice big number. I like to see that. So, that’s all I have. Thanks.

Yes. No, I appreciate the question. I appreciate the comment. And certainly, that’s a massive commitment for the company. And we think it’s the right thing to do, and excited to see what the team can do throughout the year.

[Operator Instructions] The next question is from Bill Dezellem with Tieton Capital. Your line is open.

Thank you and congratulations on a good quarter and year. How are you thinking about moving outside of Colorado over the course of the next couple of years?

Sure. So, I think I would take us back to our four pillars, really, of how we are going to run this business. And we have an asset that generates significant free cash. We have returned significant cash to shareholders. We are protecting our balance sheet, and we are leading the way in ESG. And so I would say that because that grounds us to opportunities as we look outside of the DJ, perhaps. It has to be assets that allows us to extend or optimize that business model. And so you are talking about asset quality, you are talking about entry into that asset is important as well. And so again, as we look at options to deploy capital, will we consider adding assets in base, ensure out-of-basin, perhaps. But we have a fundamentally really strong business going here right now. It’s going to take quite a bit to have us consider those opportunities. But we have proven ourselves as having a very disciplined approach to M&A, and we will continue down that path. Marianella, I don’t know if you want to add anything to that?

I think that’s right. I think with this latest buyback announcement we are – you saw us over the last 12 months execute on opportunities to compete with that. I think with this latest buyback announcement, we are making a very clear signal that everything that we do has to compete with our stock. And so that’s what you saw us do in January. And that’s what you will see us do pursuing to execution of this new newly announced $1 billion program.

Thank you both.

Thank you.

Thank you.

There are no further questions at this time. I will turn it over to Chris Doyle for any closing remarks.

Sure. Thank you. I appreciate everyone’s continued interest in Civitas. I am looking out, looking at the temperature, we are below zero again. So, I really appreciate the hard work of all of the Civitas employees, and especially the field operations group that is making this a super compelling investment and super compelling business. Thank you so much for the time this morning and look forward to speaking soon. Be safe.