Release Date: May 03, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Civitas Resources Inc (CIVI, Financial) achieved significant operational efficiencies, including a 30% increase in average footage drilled per day in the Permian and a reduction in drilling and completion cycle times.
- The company successfully met its $300 million divestment target ahead of schedule, optimizing its asset portfolio and enhancing shareholder value.
- Civitas Resources Inc (CIVI) reported strong financial performance with a significant beat on consensus earnings and cash flow, driven by higher than planned sales volumes and lower cash operating costs.
- The company continued its robust shareholder return program, returning $215 million through dividends and share buybacks, and maintaining a strong commitment to returning capital to shareholders.
- Civitas Resources Inc (CIVI) has a strong balance sheet, having reduced its borrowings by $350 million in the first quarter, positioning it well for sustainable long-term business growth.
Negative Points
- Capital expenditures were $650 million, approximately 1/3 of the annual guidance, which is slightly higher than planned due to the acceleration of drilling and completion activities.
- The company faces ongoing challenges with regulatory uncertainties, although recent legislative compromises in Colorado are expected to provide some stability through 2028.
- While operational efficiencies are improving, the rapid changes and integration of new assets bring about complexities that require careful management to maintain consistent performance.
- The company's strategy of flat production growth, focusing on maximizing free cash flow rather than increasing output, may limit potential revenue growth compared to peers focusing on expanding production.
- Civitas Resources Inc (CIVI) is still in the process of fully integrating its acquisitions in the Permian, which could lead to operational hiccups if not managed effectively.
Q & A Highlights
Q: Congrats on the nice quarter. My first question is really on the notable upside you all already seen on the Permian. Specifically, what I'd like to add to Chris, is for your (inaudible), just on the well productivity in the play, it appears to be advancing very quickly. I'm just wondering. Are there a few items I know we've had a number of companies now with earnings this week talked about the well productivity and what's driving that? What's most impressive with yours is just a short amount of time. And so maybe you could talk about the type of drilling or completion ups -- what we're seeing there and maybe future D&C upside the remainder of the year?
A: (M. Christopher Doyle - Civitas Resources, Inc. - President, CEO & Director) Thanks for the question, Neal. It's very easy and what we've done is point to very notable capital efficiency gains, drill time, cycle times, turn-in-line cycle times. All of those are hitting on all cylinders. I think what's not necessarily out there quite yet is what this team is doing in terms of how we're developing this resource. And to your point, there's additional zones of interest uphole in the Delaware. We've talked about the Wolfcamp D in the Midland. The reason that we targeted entering the Permian is exactly what you pointed to. There is tremendous resource up and down the whole. We're testing those zones. Some of those zones, candidly, while there are upside, we did not underwrite value for these acquisitions. We're seeing how they perform. That will inform how we allocate capital going forward. I'll say we're very excited by early results that we're seeing in many of the secondary zones, and that will have impacts on how we allocate capital going forward.
Q: Great point. And then, Chris, since you've come in, you've done a tremendous job only doing what you're going to say, but just on the shareholder return. And I'm just wondering now, when we look at sort of Civi going forward, do you still think sort of the flat growth makes the most sense now that you've got these high-return Permian assets to go along with the DJ assets. Maybe just talk about what you think -- what strategy you believe is still best for shareholders going forward?
A: (M. Christopher Doyle - Civitas Resources, Inc. - President, CEO & Director) Yes. And I would point to the collective at Civitas really executing on this business model that was put in place, formation in November of 2021. We think it still makes the most sense long term, not to focus on production growth, but focus on cash flow, focus on maximizing free cash and returning that to shareholders. Now some years, that may mean a little bit of growth, whether you saw that early in 2022 when service costs weren't necessarily aligned with commodity prices. You saw the run-up in commodities. So what did we do? We accelerated and we grew production. The flip side was true as well. In 2023, where there was a mismatch, and we pulled activity back. Again, this is about how do you maximize shareholder value over the long term. And I would say right now, there's still a lot of flux in the system. And this is -- that's why it's a difficult question to answer for us right now as we stand up operations in the Permian. So much of that capital efficiency equation, so much of what this team can deliver and what these assets will deliver is still yet to be determined. I think what's truly exciting for our team is there are a lot of folks that wanted to see us execute. They wanted to understand, could we integrate three new businesses in the Permian and not stumble and -- look, again, it's one quarter. We're not spiking the football or anything like that. But we're super proud that this team has started out of the gate as strong as we have. I think what you'll see year-over-year is likely to be broadly flat production and how do we peel out as much capital as possible.
Q: I want to start first, I guess, the Colorado legislative news, obviously, a really big deal. Can you give any more insight on the timing when we -- is that like how it works being sort of passed through the legislature right now? And then while we're talking about time lines, can you give any more details on what you think for the Lowry CAP and then the third CAP in Colorado?
A: (Thomas Hodge Walker - Civitas Resources, Inc. - COO) Tim, this is Hodge. With regards to the legislation that you referenced, that legislation is moving through right now as we speak. The session ends here next week. So expectation is that we'll move through the process and get voted on here by the end of next week. As far as the application, as I think you might be aware, there's a sliding scale that's associated with pricing on oil and gas separately that sliding scale will go into effect in 2025. One of the benefits of this discussion, this compromise is really through the work of the governor, the legislature, ENGOs in the industry and the governor's announcement on Monday through companies were named and we were one of those companies through the work that we've been doing over the last few weeks. What we've agreed to through this compromise is that the governor and the legislature is stacking is to say that there will be no negative legislation. They'll come out against legislation and ballot initiatives that have a negative impact on this industry. And that's through the legislative session of 2027. So for all intents and purposes, that clears until the 2028 legislative session. On Lowry CAP, we're expecting Lowry CAP to be moving through this summer. And then next one is our Arapa CAP, and that will be probably at the end of this year, beginning of next year.
Q: Okay. That's great color. And then as my follow-up, I wanted to shift gears a little bit. I know you all have been out meeting with investors more this year. There's a growing debate out there about your differentiated dividend outlook. Obviously, repurchases have been in favor. And I know for you all, it's a little more complex issue because it is a sort of meaningful part of the comp structure that's been put in place. So Chris, I don't know if you could put your director hat on and address this or if Marianella, you have some views. But just kind of curious what you're hearing from investors on repurchases versus this differentiated dividend? And maybe how the Board is sort of thinking about this going forward now that you've -- you're digesting these acquisitions?
A: (M. Christopher Doyle - Civitas Resources, Inc. - President, CEO & Director) Yes. I'll kick this off and then maybe see if Marianella to smooth out the edges. This is an executive team that
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
