Civitas Resources Inc (CIVI) 2023 Q1 法說會逐字稿

Thank you for standing by. My name is Tamika, and I will 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) Thank you.

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 our brief prepared remarks, Chris and other members of the leadership team, we'll 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 hots 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 on 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 4 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. 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 leads to higher returns and that further strengthens our business model.

Third, we are generating exceptional financial results, which underpin one of the most attractive shareholder return frameworks in our industry. Civitas 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. A 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 productions recovered nicely with April production averaging approximately 165,000 BOE per day. Our low operating costs provide us with some of the highest margins in the industry. Our absolute LOE, cash G&A and GP&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 2 rig and 2 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 seller cap, which will receive expedited review after being approved with preliminary siding in the fourth quarter of last year. We currently have 8 total OGDP permits in 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 1 emissions 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 were just getting started, and I remain excited about what we'll 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, I'll start off here. You've always had a strict capital discipline mindset, I think, since you've gotten the seat. In fact, mentioning even on the fourth quarter release, where 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 your current thoughts on this disconnect and maybe for your future capital spend?

Sure. Thanks, Neal. Yes, we're proud as a team to come out a couple of months ago with that guidance. There was a time since then that oil floated up to 80%, and there was 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, we have further conviction that, that disconnect is very real.

We have seen the service market just a bit certainly on diesel tubulars and sand. But utilization is surprisingly high for our service market that was really underpinned by $100-plus oil and gas is 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 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.

No, it's great to hear. I'm glad you certainly were very early on that. And then my second question is just something we put out why the ad or an service taxes or nothing that occurred this quarter, nothing new. Just wondering, can you speak to maybe just any impact they might have on shareholder return and capital allocation this quarter?

Sure, I'll let Marianella take it.

Neal, thanks. Good to talk to you. Really, it's not going to have a material impact. I mean it's something that's known to your point, it hasn't changed. If you look at the -- our balance sheet, the long-term portion of that blowing taxes should give you an idea of what's coming due in April 2024. But like I said, I mean, we continue to be very -- we have a strong balance sheet, we -- 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.

This is Slate on for Tim today. Just 2 questions for you. So I saw 2 weeks ago, Governor Polis removed some onerous air quality provisions as a permitting condition and a bill that was sponsored by some environmentalist groups. 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 back of a strong relationship with the COGCC and the administration and a lot of work by technical teams as evidenced by our CAP approval last year with preliminary siding and the second cap going in. So we feel confident we're working on 2024, 2025 wells. But let me kick it to Brian to touch on some of the finer points.

Sure. Thanks for the question. So Government Polis 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 completions fleet among other steps that we'll be taking to reduce those on causing NOC for the benefit of all colorants. 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 a path to expedite and permitting for companies that meet certain criteria, part of which it was specifically announced includes carbon neutrality on a scope 1 and 2 basis. As the only company in Colorado that is 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 in our continued demonstrated capability to gain for mid-tier.

Okay. That's helpful context. And then just second, maybe on the repurchases. Your team 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 likely to see a press release about a tender or a 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 has came have changed. And we were able to pull down a large chunk from our largest shareholder back in January to discount to where we're trading. For the quarter, there was all 1 day where 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 in 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.

I know it's early to talk '24, but just conceptually, would 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.

Yes. We guided a couple -- or a couple of months ago that our fourth quarter to fourth quarter exit '22 to '23 was going to be relatively flat. And so we see exiting the year about 170,000 BOE per day and still on track to deliver that. As we mentioned on the prepared remarks, production in the mid-160s, you'll see that grow to the end of the year. As we think about 2024, we come back, I think I said on the previous call, one of the easiest companies to model because we come back to our 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 million to $170 million, you'd probably lay that down next year.

I think, Phillip, a lot also depends on this disconnect between service costs 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 will factor into the calculus as well. You see that rebalance. You can 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 the M&A front, I assume you guys continue to look at opportunities within the DJ Basin. But at this point, how much appetite is there to look sort of outside of the basin?

Yes. A couple of people have noticed we had 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's faced with some volatility on the commodity price side of things. It's companies with our type of balance sheet and the quality of asset that's generating significant free cash that can really optimize and look for ways to further build on to our DJ position.

Now I will 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 we're 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 base that are looking more attractive versus other areas?

The calculus there is 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 maintain a premier balance sheet means we can't go in and outcompete 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's 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 provide a little bit more color about the $30-plus million deal that you did here in the quarter, did that come with any production? Is 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 a little bit more color around potential availability of things in basin? Obviously, you consolidated a lot over the years. But what's kind of the current landscape of what's kind of available in the DJ? 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 a very highly accretive transaction for us. And again, kudos to the team for identifying the opportunity, bringing on board at a very reasonable and accretive valuation. But it is panning glove with our existing operations.

And then your question on additional M&A of size, I think I like the approach 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. It's 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 well. I think it's interesting with where commodity prices are currently that, 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 record 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 the 2024, you kind of talked about broadly flat production. I think that's basically been the strategy for a handful of years now. You're kind of at 2 rigs and 2 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. And we're -- as we mentioned, we're at 2 rigs and 2 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 4 rigs, dropped back to 3 rigs, brought in a third frac spread. So we will move up and down as we see the best path to optimize our capital allocation. It was going on last year, and a lot of that activity was really during a time where industry wasn't facing the amount of inflation that ultimately hit us on 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'd 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 could subsequently mean bring in 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, we'll 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 William Dezellem with Tieton Capital.

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.

And then secondarily, where 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 question, Bill. I think this is another check in on your part, and 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 of a string of quarters of delivering on our promises. And I say that because that is becoming a very real part of our culture to the company. This is a company that, to your point, brought together 4 or 5 other companies and not only executed, but in most quarters, many quarters outperformed expectations. You don't do that without a very strong culture of 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 investment community and our peers within this basin and outside. But I also know that there's more to come. And so this is a baseball game, I think when you asked the question earlier, it 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.

And then a final question, if I may, discuss if you would, the role that you see Hodge playing 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 peer within the basin, his time spent with Chevron and coming off a long career with Noble -- and at Noble, he was in charge of all the onshore assets for that company before the acquisition by Chevron. Hodge is a high integrity, continuous improvement, D&A, collaboration. He is a perfect mesh, a 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'll be a big part of continuing to build this culture. He's been on the job for all of, I think this is week 3-ish and is already making a good impact on our culture and excited to see where we go from here.

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.

This concludes today's call. Thank you for joining. You may now disconnect your lines.