CIVI - NYSE

Thank you for standing by. My name is Kamika and I'll be your conference operator today. At this time, I would like to welcome everyone to the Civitas Resources First Quarter 2023 Earnings Conference Call. [Operator Instructions] I will now hand today's call over to John Wren, Director and Head of Finance, Planning and Investor Relations. Please go ahead, sir.

Thanks, operator. Good morning, everyone and thanks for joining our call today. Today, I'm joined by our CEO, Chris Doyle; CFO, Marianella Foschi, our new COO, Hodge Walker; and Brian Cain, our Chief Sustainability Officer. By now I hope you've had a chance to review our earnings release 10-Q 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-Q 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 a brief prepared remarks, Chris and other members of the leadership team will be happy to take your specific questions. Please limit your time to one question and one follow-up, as this allows us to get to more of your questions today. I'll now turn the call over to Chris.

Thanks, John. Good morning, everyone. Before I jump into my comments on the quarter, let me welcome Hodge Walker, our new Chief Operating Officer. Hodge, is a great addition to an already-strong team bringing more than 25 years of experience to the table and we're excited to have Hodge jump-in and help position the company to be one of the strongest and most reliable DJ operators. Now as you can see from our latest quarterly results, we're off to a strong start to the year. The team is focused and firing on all cylinders as we continue to build on our track record of delivering on our promises quarter-after-quarter. Let me provide some high-level comments upfront on key topics relevant to our performance today. First, we continue to adhere to our four pillars. We prioritize free-cash flow, maintain a strong balance sheet, return significant cash to shareholders and lead on ESG. We use these pillars to guide all key decisions, including capital allocation and we believe this is the right framework to create and deliver value over the long-term. Second, we've created an operational environment focused on continuous improvement. We have tremendous certainty on our ability to execute and deliver on our business plan, and the efficiency gains that our teams are delivering help offset inflation and ensure we maintain our strong margins and free cash flow. We highlight a couple of examples in our new slide deck, including a 17% improvement in spud-to-spud cycle times already this year, our completions team delivered 7% higher throughput in the first quarter and that's in the midst of very difficult winter weather. Faster cycle times, obviously improved capital efficiency, which lead to higher returns and that further strengthens our business model. Third, we're generating exceptional financial results, which underpin one of the most attractive shareholder return frameworks in our industry. CIVI offers one of the highest dividend yields at approximately 12%, while also having one of the largest buyback programs in our industry, as a percentage of market cap, right at 18%. During the first quarter, we generated about $186 million in free cash flow after having started the year with $768 million of cash on the balance sheet. Civitas returned almost $500 million to owners during the quarter through base and variable dividends and the repurchase of $300 million in-stock. We have the full $1 billion remaining on our buyback authorization and we'll continue to be disciplined and opportunistic in our approach to executing this buyback program. For the second quarter, the Board has approved a variable dividend of $1.62 per share, in addition to our $0.50 fixed dividend. The total dividend of $2.12 per share will be paid on June 29 to shareholders of record on June 15. We're executing this shareholder return program while maintaining one of the strongest balance sheets in the industry. At quarter-end, we had about $560 million in cash against $400 million in total debt and an undrawn credit facility. Now let me talk about the first-quarter operations. Like others, record cold weather in late 2022 and early 2023 impacted our field-level operations. Despite these headwinds, our production of 159,000 barrels of oil equivalent per day came in at the high end of our guidance range of 155,000 to 160,000 barrels of oil equivalent per day. Those weather impacts are behind us and our production has recovered nicely with April production averaging approximately 165,000 BOE per day. Our low operating cost provide us with some of the highest margins in the industry, our absolute LOE, Cash G&A, and GT&P expense decreased 7% quarter-over-quarter despite slightly higher costs on the operational side, due to the cold weather in the quarter. By design, our 2023 capital program and activity levels are front-end loaded and as anticipated, our capital investments in the first quarter came in at about $237 million. While we continue to closely monitor service costs, we're maintaining our two-rig and two-frac crew operational plan at this time. Our 2023 development plan is now 100% permitted and we expect to make significant progress, permitting the 2024 plan over the next few months. Notably, with the OGDPs inside the box elder cap, which will receive expedited review after being approved with preliminary siting in the fourth quarter of last year. We currently have 8 total OGDP permits and process with the COGCC that will make-up a significant part of our 2024 program. Notably, our Lowry CAP development continues advancing on schedule with the state and those wells are planned for 2025 and beyond. Finally, we continue to progress our comprehensive pneumatic retrofit project, which will effectively reduce our total scope one emission by approximately 40% by the end-of-the-year. That project remains on-time and on-budget. Bottom-line, we're well on-track to deliver our full-year targets of 160,000 to 170,000 barrels of oil equivalent per day and $800 million to $910 million in total capital investments. Furthermore, with over $4 per share already paid or approved in variable and fixed dividends, we're also on-track to exceed our promise of increased dividend payouts in 2023 compared to 2022. I want to say thank you to all of our employees and especially our field team. This team has executed operationally quarter-after-quarter and they delivered exceptional results safely, despite record winter temperatures. While I'm pleased at where we sit today and how we started the year, I know we're just getting started and I remain excited about what we will be able to accomplish together. We look-forward to continuing to demonstrate the strength of this company in the quarters and years ahead. Operator, we're now happy to take questions.

[Operator Instructions] Your first question is from the line of Neal Dingmann with Truist Securities.

Chris. Starting out here. You've always had a strict capital discipline mindset. I think since you've gotten to see it in fact mentioned that even on the fourth-quarter release, well you'd be moderating the capital spend then for the year, for this year, given the disconnect between commodity prices and service costs. I'm just wondering, what's your current thoughts on this disconnect and maybe for your future capital spend?

Thanks, Neal. Yes, we're proud as a team to come out a couple of months ago that guidance, there was a time since then that oil floated up to 80 and there were some discussion around no more price concessions and we still saw at that point a real disconnect between the service market and commodity prices. Now with the weakness that we've seen in oil, where we have further conviction to that disconnect is very real. We have seen the service market adjust a bit, certainly on diesel, tubulars and sand. But utilization is surprisingly high -- full of our service market that was really underpinned by $100 plus oil and gas, it's twice where it is today. We'll continue to be very disciplined in our approach to capital allocation and that's every form of capital allocation and proud that we've made the moves that we did last quarter. And we'll continue to be flexible and make the right call for long-term shareholder value.

Now it's great to hear and glad you certainly very early on that. And then my second question, just so wouldn't put out while the ad valorem service taxes, nothing that occurred this quarter, nothing new. I'm just wondering, can you speak to maybe just any impact that might have on shareholder return and capital allocation this quarter?

Sure, I'll let --

Hi Neal. Thanks. Good to talk to you. Really, it's not going to have a material impact. I mean, it's something that known to your point it hasn't changed. If you look at the -- at our balance sheet, the long-term portion of that valorem taxes should give you an idea of what's coming due on April 2024. So like I said, I mean, if we continue to be very -- we have a strong balance sheet, that's nothing has changed, we've been planning for it. So it's really, we don't see that interacting with the shareholder return proposition.

Your next question is from the line of Tim Rezvan with KeyBanc.

Good morning, everyone. This is Clade on for Tim today. Just two questions for you. So I thought two weeks ago, Governor Paul has removed some owner's air quality provisions as a permitting condition and a bill that was sponsored by some environmentalists scripts. Can you talk about any discussions you've had with the state about potential changes to the permitting process and how much confidence you have that the steady-state permitting conditions in-place today will remain?

Sure. I'll kick this off and then kick it over to Brian. A few calls back, I mentioned that the goal for this team is to get 12 to 18 months ahead of each of our rigs. We made a tremendous amount of progress and that's on the backs of a strong relationship with the COGCC and then the administration and a lot of work by our technical teams, as evidenced by our CAP approval last year with preliminary siding in the second CAP going-in. So we feel confident, we're working on 2024, 2025 wells. But I'll let me kick it to Brian and touch on some of the finer points.

Sure. Hi, thanks for the question. So government policy put out a letter in late March requiring new Nox targets for industry. We feel these targets are very reachable, we already have some line-of-sight to how we plan to achieve these reductions from our operations, as Chris said earlier, we're always focused on leading on ESG and as part of that we're frankly kind of ahead of the game on this topic. Because we've already gained experience with piloting dual-fuel e-frac completion fleets among other steps, they will be taking to reduce ozone-causing Nox for the benefit of I'll call it revenues. So I think the real news and you mentioned how it affects permitting as part of his letter, the Governor announced that COGCC will be standing up a program to incentivize and reward operators, who are leading environmental protection for our state. It's to be called the environmental best practices operator program and we're told, it includes the path to expedite the permitting for companies that meet certain criteria, part of which it was specifically announced, includes carbon neutrality on a Scope 1 and 2 phases. As the only company in Colorado that carbon-neutral on Scope 1 and 2 basis, we're obviously very excited about this program. We're excited to participate and we think it could lead to very good things for us and our continued demonstrated capability to gain permit share.

Okay, that's helpful context. And then just second maybe on the repurchases. It seems very committed to repurchases. But your thought process on the form of repurchases seems to be evolving. Is there a chance you could be repurchasing shares in the open market anytime soon? Or are we more or likely to see a press release about a tender or negotiated repurchase?

Yes. What our track-record has demonstrated is that we will be disciplined and opportunistic and I would say our philosophy has not changed, but some of the market dynamics have changed and we were able to pull down a large chunk from our largest shareholder back in January at a discount to where we're trading. For the quarter that was all one day or we traded below where we struck that and we're still trading at a premium to where we brought that down. Again that was an example of very opportunistic buying. I would tell you that over the course of this year and by the end of next year, while we complete the $1 billion authorization. I'm very confident saying, we're likely to look at every option whether that's open-market tender or these block trades that we've done in the past.

Your next question is from the line of Phillips Johnston, Capital One Securities.

Hi, guys. Thank you. I know it's early to talk '24, but just conceptually with the goal be to keep production relatively flat to the full-year '23 average or would it be sort of more flat relative to the fourth-quarter exit-rate, which presumably will be a little bit higher than the full-year average?

We guided couple of core or a couple of months ago that our fourth-quarter to fourth-quarter exit '22 to '23 was going to be relatively flattened. And so we see exiting the year about 170,000 BOE per day and we're still on-track to deliver that. As we mentioned on the prepared remarks, production in the mid-one cities, you will see that grow to the end-of-the-year. As we think about 2024, we come back I think I've said on a previous call, one of the easiest companies to model, because we come back to our group proven business plan, which is really focused on how do we generate the most free-cash as possible while maintaining production broadly flat, get that back to shareholders and maintain premier balance sheet. That's going to be the story for 2024 and so when we guided this year 160 to 170, probably lay that down next year. I think those are a lot also depends on this disconnect between service costs in and the commodity price. When we think about what our maintenance capital level is that should be changing right with commodity prices moving down from where they've been in the past. I think that how will factor into the calculus as well. You see that rebalance, you could see us deploy more capital. If you see this imbalance continue, we'll continue to be very disciplined in how we're allocating capital.

Okay, sounds good. And then just on M&A front. I assume you guys continuing to look at opportunities within the DJ Basin. But at this point, how much appetite is there do you look sort of outside of the basin?

Yes, a couple of people knows well, a small acquisition in-basin this past quarter, a little over $30 million. So the team has done a very good job of continuing to look for opportunities, whether it's trades or working interest acquisitions or bolt-on acquisitions to further enhance and optimize our DJ position. We'll continue to look at every opportunity within the basin. Interestingly, as you think about an industry that is faced with some volatility on the commodity price side of things, it's companies with our type of balance sheet and the quality of assets that is generating significant free-cash that can really optimize and look for ways to further build-on to our DJ position. Now we'll say, we have looked and we'll continue to look for opportunities outside of the basin and it's a very-high bar to do that, right? We've got to look for the asset quality and scale that allows us to further enhance and extend our business model, focus on generating free-cash and our ability to get that back to shareholders. It's got to compete with the buyback, it has to compete with other opportunities, whether that's organically deploying capital or looking inside the basin. Our track record over the past 18 months since formation has been that we've been very disciplined, but also opportunistic when the time is right to pick-up high-quality assets that are accretive that help optimize and extend our business model.

Okay. Are there any particular areas outside of the basin that look more attractive versus -- like versus other areas?

The calculus there is, it can be a little bit different, right? Because it does come back down to asset quality and returns. But at the same time, our commitment to maintaining a premier balance sheet means we can go in and out-compete, and will not overpay for assets. So we'll protect that balance sheet, but look for those assets that will compete within our portfolio for capital. If they don't compete, there is no reason to go after them.

Your next question is from the line of Leo Mariani with Roth MKM.

I just wanted to follow-up a little bit on the M&A topic here. Can you talk little bit more color about the $30 plus million deal that you did here in the quarter. That come with any projection or was it more of kind of an acreage type deal. And then just additionally, you talked about continuing to look at all deals in-basin. Can you give us little bit more color around potential availability of things in-basin, obviously you'd consolidated a lot over the years. But what's kind of the current landscape of what's kind of available in the DJ or are there things that are maybe chunkier or is it more kind of small working interest acreage type deals?

Sure, thanks, Leo, for the question. I'll start with the small acquisition that was made, the largest part of that was an acquisition of an opportunity with some development running room about call it, 14 gross wells, 11 net wells, fits right into our development. It's very highly accretive transaction for us. And again, kudos to the team for identifying the opportunity bringing on-board a very reasonable and accretive valuation. But it's pan and glow with our existing operations. And then your question on additional M&A of size. I think, I like the approach to the team is taking which is, let's go look at the lowest risk integration acquisitions that we can bring on-board and that's working interest in these types of smaller tuck-in acquisitions. But I do believe and I think, I've said in the past, we looked at just about everything in-basin and know the basin obviously very, very well. I think it's interesting with where commodity prices are currently that could position Civitas to take advantage of those opportunities coming back to us. No idea, if that will happen, we'll be ready. But I will say that, as our track records demonstrates, we're going to be very disciplined and only do it, if it extends and improves our business model.

Okay. I appreciate that and then obviously, it's early on 2024 you kind of talked about broadly flat production. I think that's basically been the strategy for a handful of years now. Guess, you've-two kind of mid-two rigs and two crews. I mean, would you see the need for maybe bringing that third rig back next year to kind of stay broadly flat? How do you see activity potentially needed to kind of keep that sort of mode of operating continuing?

Sure, as we mentioned, we're at two rigs and two frac spreads and we'll dial that up and back to optimize our capital deployment obviously and we've done that in the past. You saw us last year actually grow, there was a short period of time we went up to four rigs, dropped back to three rigs and brought in a third frac spreads. So we will move up and down, as we see the best path to optimize our capital allocation. It was going on last year, a lot of that activity was really during that time where industry wasn't facing the amount of inflation and ultimately get us in the back-half of the year. With that inflation and then the subsequent weakness in commodity prices, you saw us reverse that out. And I sort of walk-through that history, because as you march from where we are today, May 4, 2023 and think about what 2024 looks like, we've got to have a view on where commodity prices sit and where service costs are. I will say, if those balance more appropriately, then you could see us lean-in and allocate more capital to the drill bit and that could mean, bringing in a third rig, which puts up subsequently made bringing it a third frac crew. If that's the case, you're going to see us on the high-end of guidance. If we continue a moderated pace, will be broadly flat and happy to be very -- I think disciplined in the way we're allocating capital and I think we have built that track or continue to build a track record of delivering on our promises and allocating capital in a very thoughtful way.

Your next question is from the line of Bill Dezellem with Tieton Capital.

Thank you. Would you please discuss the $4.4 million of advisory service costs and really specifically asking, if that is tied to acquisitions that you have been evaluating?

Bill, thanks for your question. I would say on the $4.4 million, it's primarily like we said on the press release. It's primarily related to severance and some cost savings advisory that we did in the first quarter, primarily related to G&A and LOE cost-saving initiatives.

Thank you. And then secondarily, would you say that Civitas is at today culturally relative to where you ultimately want to be, just given the multiple acquisitions that have created the company?

Yes, thanks for the questions. I think this is another check-in on your part. I think it's a fair one sitting here, almost to the date year anniversary and what I've seen from this company is tremendous growth and most importantly, yet another quarter -- the string of quarters that delivering on our promises. And I say that, because that is becoming a very real part of our culture as a company. This is a company that to your point, brought together four or five other companies and not only executed but in most quarters, many quarters, outperformed expectations. You don't do that without a very strong culture or performance and that's what we're building here. I'm very pleased with the integration efforts as evidenced by those results. I am excited about the culture that we're building, the excitement around the halls, as it's being recognized by the investment community and our peers within this basin and outside. But I also know that there is more to come. And so this is a baseball game. I think you asked the question earlier was probably second or third inning, maybe we're fourth or fifth, we're not quite to the stretch. This is a great company and we're getting stronger and a big part of that is continuing to enhance and build on this culture of performance. So thank you for that question.

Thank you. And then final question if I may? Discuss if you would -- the role that you see Hodge plan going-forward, now that you've formally created a COO role?

Sure and Hodge is here in the room with us, but I'll kick us off. I got to know Hodge last year as a pear within the basin. His time spent with Chevron and coming off a long career with Novo, and at Novo he was in charge of all the onshore assets for the company, before the acquisition by Chevron. Hodge is a high integrity, continuous improvement DNA collaboration. He is a perfect match, perfect fit with this team. I'm excited for what Hodge will bring to the table. And excited to have him as part of that team and I truly think that he will be a big part of continuing to build this culture. He's been on the job for all of this is week three-ish and he is already making a good impact on our culture and excited to see where we go from here.

Great, thank you all.

Thank you, Bill.

Thank you.

Thank you. I will now hand today's call over to Chris Doyle for any closing remarks.

Thank you everybody for your interest in Civitas and we look-forward to sharing our continued progress and delivery on upcoming calls. Have a great rest of your day and please be safe.