Civitas Resources Inc (CIVI) 2022 Q1 法說會逐字稿

Thank you for standing by. My name is Cheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Civitas Resources First Quarter 2022 Earnings Call. (Operator Instructions) Thank you. John Wren, you may begin your conference.

Thank you, operator. Good morning, and welcome to Civitas' First Quarter 2022 Earnings Conference Call. I'm joined today by Ben Dell, Chairman; Chris Doyle, President and CEO; Marianella Foschi, CFO; Matt Owens, COO; and Brian Cain, 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. I'll now turn the call over to Ben Dell.

Thanks, John, and good morning, everyone. I'd like to start out the call today by introducing our new CEO, Chris Doyle. Chris has over 25 years of domestic and international experience in the E&P and midstream businesses, having set the foundation for his career by spending over 2 decades at Chesapeake and Anadarko. Chris has a strong track record of leading diversified teams and platforms across the E&P and midstream businesses.

His experience, judgment, perspective and leadership qualities will be instrumental as we continue to thoughtfully grow the Civitas platform with a clear objective of becoming a national leader among our peers while advancing the principles of the new E&P business model. The Civitas Board of Directors and executive management team is thrilled to have Chris join us, and we feel confident that Chris is exactly the right person with the right mix of experience and leadership skills to take Civitas to the next level as an organization. He has already made a tremendous start this week, and we look forward to all of you getting to meet with him and hearing directly from him in the coming weeks. Thank you for joining us, Chris.

Moving onto the operating results, the first quarter of 2022 was another stellar quarter for the company execution-wise, with production of 159,000 barrels of oil equivalent per day and 68,000 barrels of oil per day and total CapEx of roughly $235 million. Civitas met or beat our budget on oil and total production as well as on all operating and capital expenditures, including differentials. On the G&A front, we had significant activity in 1Q related to the termination of legacy employees, our CEO transition and move to our permanent headquarters, among other nonrecurring expenses. We are working tirelessly to continue extracting synergies of excess overhead as quickly as possible.

On the financial side, the company's balance sheet continues to be a core strength and strategic advantage that we are focused on maintaining. As of March 31, Civitas' balance sheet consisted of $500 million of total debt and roughly $150 million in cash. We have since paid off $100 million in outstanding notes with cash on hand and sit here today with only $400 million of debt on the balance sheet, and we expect to be unlevered on a net basis by midyear. I'd note that we also recently upsized our credit facility borrowing base to $1.7 billion and increased our elected commitment on the facility to $1 billion, which provides us with a significant amount of liquidity.

We are excited to continue to follow through on our industry-leading shareholder return policy with the announcement of a $1.3625 per share total quarterly dividend to be payable on June 29 to shareholders on record on June 15. This is composed of our $0.4625 per share base dividend and our variable dividend of $0.90 per share this quarter. This represents one of the highest payout ratios in the industry and at our current share price implies a top-tier yield of roughly 10%.

On the permitting and regulatory front, we have 2 more new OGDP locations with hearing dates set in the near future that we expect to be approved unanimously. Our 2022 plan is almost 100% permitted at this point with the only remaining unpermitted pad scheduled to be spud in 4Q, and 2023 will largely be permitted once we receive approval on our cap, which we expect to occur in the third quarter. We believe the state of Colorado considers us to be the operator with the best understanding of permitting under the new rules and the best capacity to utilize best management practices to minimize surface impacts. And we're seeing that evidenced in the number of permits we've been getting approved lately.

Our goal to become the clear ESG leader within our peer group is also very much aligned with our state's environmental and community-focused culture, and we've provided details about our expanded ESG platform in Civitas' inaugural Corporate Sustainability Report, which was published earlier this week. We encourage everyone to take a look at the report, which outlines the company's recent achievements and future goals around climate leadership, delivering value to our communities, and best-in-class corporate governance provisions. As Colorado's largest pure-play E&P and first carbon-neutral E&P company on a Scope 1 and Scope 2 basis, we are very excited about the company's future.

Civitas is leading the industry and executing on the new E&P business model. We have a simple business model focused on optimizing the development of our high-quality assets, a relentless focus on costs, expanding our cash margins, protecting our balance sheet and returning excess cash flow generation to shareholders. This is also being done with an acute awareness of our environmental footprint, which we continue to minimize. I'd like to thank you all again for joining the call this morning and for your interest in Civitas. And with that, I'll turn the call back to the Operator for Q&A.

(Operator Instructions) The first question is from Neal Dingmann of Truist Securities.

I first want to say welcome to Chris Doyle. Great quality hire there. And my first question is really just on what you were just hitting on Colorado permitting. As you said, certainly seems like you have more than ample permits for this year. Could you remind us, once you get the approval on those next 2 areas, either for you or Matt or the gang, what will that take you towards? Will that basically set up for all of '23? I just want to try to get that down for the model.

Sure. Neal, I'll hand it over to Matt, and he can give you a summary.

Yes, Neal, great question. We're over 90% permitted for this year. Like Ben mentioned in his comments, we do have 2 pads that are coming up in OGDP hearings that we plan to spud in late fourth quarter. That should put us 100% permitted through this year and those carry into the first quarter of next year. Right now, for our development plan in 2023, a bunch of that, of those locations, come from the Box Elder CAP that we have currently pending with the COGCC. That will be the majority of the locations we do plan in 2023. Just an update on that CAP for everybody, we do anticipate getting completeness determination from the COGCC this quarter, and that would lead to what we are hoping for a late third quarter final approval hearing and that should be we anticipate the first CAP approved under the new rules in the state.

Great details. Thanks, Matt. And then second question, just on the top on shareholder returns, I estimate your shares still trade at a notable discount to various peers. What's your thoughts on material buybacks in addition to the already material dividends you all turn out there?

Sure. I guess I'll be a little bit repetitive. I mean I think if you look at our uses of cash, our focus is obviously pay the base dividend, pay the variable dividend. And then at that point, we're looking at in-basin consolidation opportunities and then how they compare versus executing a buyback. I think as you look at those in-basin consolidation opportunities, the vast majority of them have been done. And as we get towards the back end of the year, we'll undertake an evaluation of what to do with our excess cash.

Your next question is from Michael Scialla of Stifel.

I'd also like to offer my congratulations to Chris. I wanted to follow up on Neal's question on the permitting side. Is there a backup plan? It sounds like the '23 drilling depends on getting the Watkins CAP approved. I guess is there a backup plan in case something goes wrong there? Or are you confident enough that that's not going to be an issue? And also, I was wondering, was that Watkins plan reconfigured with some of the consolidation you did? I believe Crestone was the one to submit that initially. Or is that going through based on that original form?

Matt, do you want to go on that?

This is Matt. Yes. I can -- I'll just throw out some more stats on permitting in general. First of all, that CAP, you're correct, it was submitted initially by Crestone. We amended that shortly after the merger announcement last year to include some of the extraction acreage that was right on the flank, so that already occurred a while ago and has been part of what we submitted and have resubmitted in late February. Other permit stats besides the CAP, which I think would help answer the backup plan that you had, the company is working right now on 12 other OGDPs internally.

We have submitted 6 of those also to the state, and that includes just over 100 wells. 2 of those are in technical review with a final hearing next month. The other 4 are in completeness review and those include another 75 wells. And then we have about another 6 that we're working internally for another 100 wells. Over the next several months, we plan to have a couple of hundred wells, about 220 wells submitted and hopefully approvals rolling through on various OGDPs that we're working on that are in addition to the Box Elder CAP.

It's just currently, our plan is to drill the Box Elder CAP mostly in 2023, but we should have ample inventory coming through with these other OGDPs that we're working on if there was some sort of delay. But I do want to say we have close communication with the director often about the Box Elder CAP, and we're very confident that we've addressed all of the outstanding questions with our last resubmittal and we do expect this to move through the process with final completeness determined hopefully this quarter.

Sounds good. I wanted to get an update on the integration process with Bison or maybe even for all of the companies that have come together here over the past year, just to see where you are in that process?

Sure. I can give an update on that. This is Marianella. We're basically done with the Bison integration. We really only brought 3 full-time employees. As far as the I guess it's the longer-term integration that came with the mergers, we're basically down to that 300-employee mark that we anticipated when we put together the mergers in November of course of last year. Everything pretty much is as expected. This is our first full quarter post-merger, and from an execution perspective, a very clean quarter. I think there's certainly a little bit of work on the back office still remaining. There's -- we still have a couple of corporate and field offices, trying to close those out, integrate those. But from an integration perspective, I think everything is going better than anticipated and faster than anticipated.

Your next question is from Noel Parks of Tuohy Brothers.

A couple of things I wanted to check on. I wonder if you could talk a little bit about where things stand in terms of land now that you've combined all the companies. Just wondering if as far as rationalization path, exchanges and so forth that you'd like to do, is that effort substantially completed for the combined companies? Or is there still pretty significant ongoing task of just cleaning up positions and leases and so forth?

Yes. What I would say is there's been significant synergies on the land side of putting all these companies together, both in terms of our ability to drill longer laterals, our ability to execute trades. I think we're going to continue to do that. The land side of the business is something we continue to evaluate day by day. Obviously, with the other major players in the basin and everyone trying to optimize their positions, along with trying to infill and increase our working interest in our key pads. It never really stops from an A&D land side of the business, and Matt and the team have been very effective in making a number of those trades to optimize our business plan.

Great. Thanks. And I was thinking about operations now with the combined companies. Of course, it's certainly a broader regional mix and product mix than I guess any one of the companies had before the deals. I just wonder if you could talk about sort of your flexibility to respond to what's going on in the commodity market. We of course have this massive rally in both oil and gas. But what sort of time frame would you need if you decided you wanted to shift activity from say in the event that oil and gas prices diverge in their trends from here?

Yes. Maybe I'll make some opening comments and then maybe Matt can follow on. I mean first and foremost, I think we set out a very clear plan of what we intend to do on a multiyear basis, and I don't see us materially deviating from that plan. Obviously, the commodity prices have moved around and relative pricing has moved around, but I don't think that's going to lead to a material shift in how we attack the business. I think when you look at the combination of the companies, the great thing we've seen over the last 6 months is that each company brought some really unique skill sets, both on the drilling side, completion side, land side, M&A side. And we've been able to take the best from each of those different companies and hopefully build that into what the Civitas culture is going forward.

Your next question is from Nicholas Pope of Seaport Research.

I was hoping you guys could talk a little bit about the bigger picture where midstream stands right now. And also, kind of what percentage of that $70 million to $90 million of land, midstream and other, how much of that do you all anticipate is going towards the midstream business? How -- I guess how do you all expect to expand Rocky Mountain Midstream? Is that the path forward in terms of kind of pursuing a broader midstream strategy? Or is it going to be more third party?

Matt, you want to comment on that?

Yes, sure. For our midstream spend, it's a little over $50 million for this year. The remainder of that would be coming from land. The majority of the dollars are actually coming from expanding the Watkins, so the southern area oil infrastructure that we're building out to the terminal that we now operate in Bennett. There will be some expansions to Rocky Mountain Midstream, but Rocky Mountain Midstream for the most part has been built out. Only small connections are needed for any future pads and then some small upgrades to the CPS that Bonanza Creek has already built in the past. The major construction projects for new construction anyways that we have going on, are the oil lines down south in the Watkins area that came with the Crestone acquisition.

Got it. And is -- should we -- the way we should look at it going forward, is Rocky Mountain -- is that going to kind of be -- is that fixed? Or is that going to be something that as like an independent or kind of carved-out entity, is kind of set in place now going forward?

Nick, I can address that. This is Marianella. When you look at Rocky Mountain, it's really not only Rocky Mountain, but the broader midstream infrastructure with the oil assets that we have down in the Southwest and the gas gathering that we have down in Watkins. It's definitely not a material footprint at this point of Civitas. I would say, if you look at the cash flows from the midstream business, about 85% or so get eliminated in consolidation. When you look at the capital that has been spent, that's part of why our margins are where they are. And keeping our margins and cost structure low is a very important tenet to the company. At this point, I think we don't see the need to potentially carve it out. I think that's what you were trying to get at. But in the future, it could be something strategic, just we're not looking at it that way in the near term.

Got it. And just out of curiosity, as you look at the basin right now, I think part of the drive to carve out that midstream initially for Bonanza was kind of line pressures and access to capacity. Where do you think the basin is right now in being able to move the crude and pipeline pressures that I think was always a frequent topic for all the companies prior to the combination?

This is Matt. I think right now the basin is in pretty good shape as far as takeaway goes. There was a lot of infrastructure built before everything kind of slowed down in 2020. For Civitas as a whole, we don't have a lot of exposure for new drills left to the DCP system. There are some pads here and there that will go into that system. But for the most part, our new production is going to be flowing through RMI, which has multiple offset or offtakes to several different midstream providers. And then a lot of our other new turn-in lines down south will be going to Western Gas or to Rocky Mountain Midstream, which both have ample capacity available right now. On the gas side, we're not too worried about it. Then for oil, we have a very desirable mix of oil where we have access to a lot of the local markets as well as having to sell down in Cushing. Our lower gravity crude that makes up a good portion of our portfolio, now we do have a lot of interest for that in-basin.

Got it. That's all very helpful. I appreciate the time, everyone.

Your next question is from Bill Dezellem of Tieton Capital Management.

Lease operating expense increased in the quarter. I think it was what $2.52 a barrel, up from $2.22. I was a bit surprised given that volumes went up. What is it that brought the LOE per barrel up on higher volumes?

Hi, Bill, this is Marianella. A couple of things. One, the LOE in the fourth quarter is just a little bit not apples-to-apples, right? Keep in mind, October was just Bonanza Creek. And so that's one reason. The second item I would say is Q1 does reflect March Bison production, which it was not as significant necessarily to the enterprise. And because those are oilier barrels, they do come in with higher per Boe LOE. But overall, I think we beat our LOE expectations. We were right at the low end of the range that we provided for 2022.

We have completed the allotted time for questions. I will now turn the call over to Ben Dell for closing remarks.

Well, thank you for joining us today. I'm excited about the next chapter in Civitas' future under Chris's leadership, and we look forward to meeting with you all in person. Thank you.

This concludes today's conference call. Thank you for your participation. You may now disconnect.