Civitas Resources, Inc. Price & Performance (CIVI)

Provided our 2025 outlook and issued supplemental slides for your review. In addition, our 10 ks was filed yesterday and all of these items are available on our website. This morning, I'm joined by our CEO, Chris Doyle and our CFO, Marion LFO, and other members of management. After our prepared remarks, which will come from Chris and Marianella, we will conduct a question and answer session. As always, limit your time to one question and one follow-up, so we can work through the list efficiently. We will make certain forward looking statements today, which are subject to risks and uncertainties that could cause actual results to differ materially from projections. Please make sure and read our full disclosures regarding these statements in our most recent SEC filings. We may also refer to certain non GAAP financial metrics. Reconciliation to the appropriate GAAP measure can be found in yesterday's earnings release and our SEC filings. With that, I'll turn the call to Chris. I want to start with a quick recap of 2024 before focusing most of my time on 2025 and the actions we're taking to strengthen the company. By continuing to enhance our operating performance and portfolio, reducing our costs and prioritizing the balance sheet, we're creating more durable business and better positioning Civitas to generate sustainable free cash flow for years to come.

Quickly on 2024, it was a transformational year for the company. Underpinned by our high quality assets and strong operational execution.

We full year production was above plan. And we beat original guidance for capital and operating costs. Over the past year plus, we built scale positions in the Midland and Delaware basins, materially strengthening and diversifying our company. We brought in a proven leadership team, with deep Permian roots I'm very pleased with what the team has accomplished in just one year highlighted by the following. Midland Basin well costs are down 15%, Daily drilling footage is up nearly 20% daily completion throughput is up 50% In addition, we derisked perspective horizons and added high value inventory across our acreage position. And all of this has been accomplished while delivering excellent safety that's Further, we strengthened both our Midland and Delaware positions through ground game initiatives including more than 50 trades, swaps, and new leasing. And importantly, we did so with little to no cash. Yesterday, we announced a bolt on transaction in the Midland Basin adding 19,008 in 130 locations. With this announcement and to offset the purchase price, set a $300,000,000 asset sales target for 2025. Which is likely to come for the DJ Basin. Effectively, this is expected to accelerate value from the DJ in support of extending our runway the Permian.

Between the ground game and bolt on, we've added nearly two years of future development in our Permian business unit. And extended lateral lengths and working interest across our portfolio by 5%. This was done at very attractive valuations well below recent market transactions. Today, our Permian inventory stands at 1,200 development locations. While establishing a successful track record in the Permian, we didn't lose focus. As the DJ Basin also had a strong year of performance. In 2024, we turned in line the industry's first four mile laterals in Colorado. These were record representing the state's highest one hundred and eighty day cumulative well producers. Armed with basin leading operational capabilities team added high return development locations through a combination of ground game transactions in our core areas [indiscernible] through continual development optimization. Overall, free cash flow for the year was about $1,300,000,000 We returned more than 70% of that to our shareholders through $5 a share of dividends, and a repurchase of more than 7% of our outstanding shares. All in, we had a very successful year in 2024. Civitas is a deeper, more durable business today. Now let's turn to 2025 and the steps we're taking to strengthen our business.

Our plan focuses on delivering the following strategic priorities: First, run the business to maximize free cash flow. Built upon a leading cost structure and enhanced by sustainable capital efficiencies. Second, deploy that free cash flow to protect and strengthen the balance sheet. As Marinelo will discuss further, we're prioritizing debt reduction in 2025.

Third, return cash to shareholders.

Predominantly come from a strong base dividend this year and finally, lead in ESG and build a long term sustainable business. As we execute on our targets to further reduce our emissions. In 2025, we're level loading our capital investments compared to 2024, where the front loaded program led to low till counts at the end of the year. While level loading impacts near term production, this is more than offset by the long term benefits in operating and capital efficiencies. Keeping activity levels flat in 2025 will deliver full year oil production of 150,000 to 150,000 barrels of oil per day after level loading. And we'll invest $1,800,000,000 to $1,900,000,000 split relatively evenly between the Permian And DJ Basin. This is approximately 5% lower than last year. Reflecting the well cost savings our teams have delivered. Notably, our reinvestment rate in 2025 is consistent being $5 lower year over year. As expected, our first quarter production will be low point for 2025. 80% of the sequential drop is related to natural declines in the DJ Basin following peak production in the fourth quarter. This was driven by a low till count exiting 2024 and the first quarter twenty twenty five.

As well as severe winter weather and unplanned third party processing downtime. We expect to grow mainly through the middle part of the year as new tills come online. Specific to the 2025 plan, I want to mention a few other items of note. Within our Permian program, we're increasing our allocation of capital to the Delaware Basin, Today, we have four rigs running in the Permian, two of which are in the Delaware. And a third coming shortly. Nearly all of our completions in the Permian Basin will be simul frac leveraging the advancements our team delivered last year. Improving fluid throughput by 50% versus the start of the year. And in the DJ Basin, we have two rigs running today and continue to push the limits with longer labors. We're moving more of our production facilities to tankless operations and our teams are operating the most lowest emission rigs and completion crews in the basin. Our 2025 plan delivers approximately $1,100,000,000 of free cash flow. At $70 WTI. A free cash flow yield of over 20%. Maintaining a culture of performance and cost leadership is critical to building a durable sustainable enterprise. To further enhance our business, we're streamlining our organizational structure, with a 10% reduction in workforce throughout various levels of the company.

These are tough decisions. We're committed to staying low cost, driving efficiencies and enhancing margins across all areas of the business. Now I'll turn it over to Marinel to discuss the steps we're taking to accelerate our balance sheet goals. Thanks, Chris.

The long term winners in this business will be the companies with a strong balance sheet a cost structure at the low end of the cost curve. Yesterday, we took meaningful steps to prioritize and protect these two items. Including rolling out a new free cash flow location strategy. Our strategy is underpinned by our 2025 net debt target of $4,500,000,000 which represents an $800,000,000 reduction to year end 2024 pro form a for the bolt on This debt reduction will further benefit our cost structure. Decreasing associated interest expense by approximately $60,000,000 on an annualized basis or a 5% increase to a run rate free cash flow. This reallocation of excess cash will allow us to reach 1x leverage in late twenty twenty six. Our long term leverage target is unchanged at 0.75x EBITDA at mid cycle prices. While accelerating leverage reduction, we remain committed to our base dividend of $2 per share annually.

As compared to our prior framework, any additional return of capital to shareholders will be opportunistic and consistent with our near and long term balance sheet goals. I'd be remiss not to touch on our philosophy and risk management. Which further protects free cash flow.

We continue to execute on our systematic oil hedge strategy. We are approximately 40% hedged on net oil volume for 2025. As a reminder, oil accounts for approximately 80% of our unhedged revenue. Our tactical gas hedging strategy was extremely successful in 2024, especially in the back half of the year as Permian gas price volatility increased. Our Permian volumes are currently 50% hedged for 2025 and 2026. And we will continue opportunistically adding to our gas book. Ultimately, commodity business best hedge is a low cost structure and a fortress balance sheet. While our hedging philosophy has served us well, maintaining our top quartile cost structure, and derisking our balance sheet are more material value drivers And with that, I will turn it back over to Chris for concluding remarks. [indiscernible] Over the next three years at the 2025 investment in production level, CIBITAS will generate approximately $3,300,000,000 in cumulative free cash flow at $70 oil.

That represents two thirds of our current market cap. It will allow us to meet our leverage reduction goals while also returning significant capital to our shareholders. Tivitas's strength rests on our proven operating teams. And their track record of performance of the lowest breakeven oil basins in The U. S. Our 2025 plan will advance our strategy of building a long term durable business for our shareholders. Operator, we're now ready to take questions.

Our first question comes from the line of Gabe Dawood from Tivity or TD Cohen. Sir, please go ahead.

Thanks. Good morning, everyone. I was hoping Chris, we can maybe start with the decision to shift your capital allocation strategy.

I thought maybe you could, for lack of a better phrase, walk into them and pay down debt and still buy back a decent amount of stock. So maybe just a bit more color there and you mentioned opportunistic with buybacks. What does that mean? What would you need to see to step in? Sure. Thanks for the question, Gabe. As we thought about setting this business up for 2025, we had a couple of options and a number of options. And as we thought about the backdrop the macro that's in front of us, the volatility that we've seen over the past couple of months, we know that this is the plan that's best to build a long term sustainable business for Civitas. As you mentioned, we have a business that generates significant free cash flow, dollars 1,100,000,000.0 in 2025. Given the volatility that we see, we think the best use of that cash flow after our base dividend is really to direct it to our balance sheet. We'll have a little bit of opportunity to accelerate that. We mentioned $300,000,000 divestment target to offset the acquisition that that we announced yesterday. We're looking at other ways to potentially accelerate that delevering path and give us some more flexibility and optionality.

But this is about setting the company up for long term [indiscernible] Got it. Thanks, Chris. That's helpful. And then as a follow-up, obviously, starting 1Q, slowly and expected to ramp from here maybe a bit more color and granularity on the ramp from here and the production trajectory and how to that potential divestiture program impact volumes. I guess another way is what's the amount of production you anticipate selling with this $300,000,000 target? Thanks, guys.

Sure. First with first quarter oil, largely as it reflecting low levels of Civitas we mentioned in the the back half of twenty twenty four and certainly in the 2025, a lot of that drop as we mentioned is in the DJ We've restarted the engine We have a pretty active 1Q plan of 50 to 60 Civitas. Followed by another active quarter in the second quarter and you'll see as we lay out on Slide 12, growth from the first half to the second half. With that activity. In terms of the divestment, the $300,000,000 divestment, that's TBD. We're looking at all types of assets, some assets that don't have associated midstream assets, some water infrastructure assets in the Permian, for not significant, but looking at first and foremost assets, it could be more valuable in others' hands. Certainly, if we see the right value we would look to potentially accelerate some value from operating assets and producing assets. But that's certainly TBD at this point. Understood. Thanks, Chris.

Yes.

Thank you. Our next question comes from the line of Zack Parram from JPMorgan. Please go ahead.

Thanks for taking my question. First, with the bolt on deal that you did in the Midland, can you just talk about where those acquired locations fit into your development plan? Are those assets you'll be getting to work on later this year? Or are they more longer dated location maybe just talk about how that fits into the portfolio? Sure. As we dug into that opportunity, certainly we see value adjacent to our operations. We did not underwrite Styx and across that entire acreage position We see that activity really starting up later this year and But but more so in 2026. [indiscernible] the Wolfcamp A, Wolfcamp B, Wolfcamp D, primary development will yield good returns that will compete for Civitas, but that likely doesn't set up until late this year and into next. Thanks, Chris.

Then my follow-up is just maybe following up on Gabe's question on capital allocation. I know the focus is now on debt reduction But how do you think about further M and A versus potentially shifting back to a higher level of cash return It sounds like you're going to you talked about reaching a one turn leverage target in late twenty twenty six. So it sounds like you're going to continue paying down debt versus returning cash. Just kind of maybe how do you think about things over the longer term? M and A versus cash return versus debt reduction.

Hey, Zach, thanks for the question. So look, first and foremost, our top priority our net debt target 2025 net debt target of $4,500,000,000 To get there, we talked about how the majority of our free cash flow after the base seven, the year is going to be allocated to debt reduction. So anything we do in excess of that will be opportunistic. It will not be formulaic. And obviously, we have a very near term eye to that one time leverage Over and above that, you've seen us balance our Our allocation between buybacks and an acquisitions very well. Every acquisition we've done has been a very attractive price, certainly in $1 per stake relative to some of the recent transactions announced there. And at the same time, we've also had a very successful buyback approach. We bought 7% of our last year. That's going to underpin an 8% operating cash flow increase 2025 or 2024 So certainly, we've been very successful on both fronts and we'll continue being opportunistic about how we balance between those two benefit of long term value.

Great. Thanks for taking my questions.

Thank you.

Thank you. Our next question comes from the line of Josh Silverstein from UBS. Sir, Yes, thanks. Good morning, guys. Maybe just on the same point as you hit your $800,000,000 net net debt reduction target for this year, you shift back to that 50% -plus return of free cash flow to shareholders? Is that something that you get to or if gas prices are a bit higher or oil prices are bit higher, you just accelerate deleveraging a bit more?

It's more of the latter. Will certainly look to accelerate our balance sheet goals further Josh. And like I said earlier, we'll be opportunistic of anything in excess of that, but our top priority again, is hitting that 4.5 with an idle one time fleet next year.

Got it. Thanks. And then maybe just on the inventory as you've been talking about inventory in the Wolfcamp D, particularly in the Midland side, Where does that stand now? And is that in the 1,200 location count?

Yes. Thanks, Josh. It is in the 1,200 location count. We had about 10% of our program last year really delineating the Wolfcamp D north, Southeast, West excited about the results that we've seen, just as excited with the capital performance of the team delivered, where you're seeing about 10% higher capital for 15% more productive wells. And so What we're seeing is that the deal will compete for Civitas.

We're stepping up our D development this year probably about 20 Permian program. And so excited to see with additional swings of the plate if we can tighten those capital costs even further and continue to repeat the strong well performance. But Dee is certainly in there. I wouldn't say it's our our primary target like the Wolfcamp A, Wolfcamp B on the Midland side.

And Wolfcamp A third Bone on Delaware, but it's certainly very exciting for us and happy to allocate some capital towards it. 2025.

Our next question comes from the line of Neil Dingmann from Tuisys Securities. Sir, please go ahead.

Thanks for the time. Good morning. Chris, my first question maybe for you or Sam. Just a little bit like you just talked about on the Midland side, My question is more on the Delaware side.

It seems like you're just now sort of getting after that Based on what you're seeing now after repurmitting and doing some things there, are the opportunities there I guess I'd say is the opportunity set as good now as ever you've seen when you were initially looking at it or maybe How you see that side and what type of activity we can expect maybe the latter part of this year and going to next year in the Dell? Sure. Thanks for the question, Neil. As As we thought about allocating capital between Midland and Delaware, we really wanted to to shift to the higher return Delaware inventory, but we saw real opportunity to further optimize development. Previous operator was was willing to drill shorter laterals. We had a team that got in there and said, hey, we could take a one mile well and turn it into a two and greatly increase capital efficiency and increased the returns of that program. It was going to take some time like not only for the ground game to work itself through the system, but but also then to re permit Now that's behind us. The team has done a great job building up that position and optimizing the opportunity over there.

And so we're allocating more capital to the Delaware, which fantastic to see.

As a year, last year, we had about 20% of our TILs come out of the Delaware. This year, about 40% of our activity is going be pointed there.

So we're leaning in there and as you know, you know, Lee County is where the two rigs are currently. We're really excited about the opportunities there. And look forward to getting those wells online. But kudos to the team to take the time to do the right things go through the steps to further enhance the returns and and we're ready to deploy capital over there. So excited what we're seeing.

Got it. And then just lastly, just a little minor third party issue. I'm just wondering when it comes to sort of midstream infrastructure, all that, do you all feel pretty good now where you sit on very nicely you haven't had really virtually any issues Seems like over the DJ side recently, I'm just wondering now when you look at both sides, you feel pretty good about infrastructure going forward?

Yes. Unfortunately, thousand barrels of of impact to the DJ. So we certainly hit it, but the team did a really good job of finding multiple outlets and and minimizing the impact of the third party processor issue and we worked around it, but we were down for about four, six weeks. And so we feel good with where we are. As you know, in the Permian, the Permian is much of a water and gas business with oil a secondary product there. And so teams out front ahead of all our kills and getting our water place and good about our ability to execute and deliver our 25 plan. Great details. Thanks, Chris. Thanks, Neil.

Our next question comes from the line of Scott Hennel from RBC Capital Markets. Sir, please go ahead.

Yes. Thank you all. My first question is just on effectively the reset of the outlook in 2025 and beyond. Could you talk through the process of making the decisions you all did, obviously, making some hard decisions here, but like what were some of the other options? And obviously, your path here you're taking is one option. Did you look at others like larger M and A divestitures as was discussed out in some market reports. Can you just talk about like some of the options you looked at and and thought process into the 2025 plus plan. Thanks for the question, Scott. So first, as we thought about setting 2025 up, we had a of different paths just with the business as is. As we've talked about in the past, the level of activity in 2024 was not a maintenance level to support 160,000 barrels of oil a day. In addition to that, it was very front loaded, which really stopped the engine. Towards the end of the year. And so one option that we had was to increase activity maintain 160,000 barrels of oil a day. As we looked at the and consider the volatility in the macro that we're seeing currently.

Didn't think it was the right thing to double down invest a couple of hundred and more million dollars due to maintain 160,000 barrels of oil a day we believe the best thing for the business long term was to reset to the 50 to 155.

Peel out capital and hit that level of 1.8 to 1.9. In terms of [indiscernible] larger M and A [indiscernible] any rumors out there certainly. But I will say that this is a team that is focused on long term creating a long term sustainable business.

That generates significant value for our shareholders If there are opportunities to accelerate some of that value and that's any asset, not just DJ or just Permian. If there's an opportunity to accelerate value for our shareholders, we will certainly take it very seriously.

I will say as evidenced by the $300,000,000 divestment target, we are out there looking ways to identify assets that could be more valuable in others hands and use that to offset what we've thought was really attractive bolt on in the Midland Basin. And really a rotation to extend the runway into the Permian. And so I think more to come on that front, Scott, but a lot of work and a lot of diligence to go into laying out this plan as the best path for this company long term.

Yes.

And maybe to play a little bit off some of those those latter comments there. I mean, obviously, potentially, divestitures seem like they're going to be targeting some more more so in the DJ and you've obviously bolted on to the Permian. So So as you look at your inventory runway of 1,200 Permian locations, I mean, a couple of questions here. One, how do you comfortable you feel with your And do you see yourselves becoming more of a Permian company over time? Yes. I'd like to say we're a returns company and whether we get those returns from the DJ or the Permian that's what we'll go after. We see the opportunity in the Permian really to scale our business. We saw the opportunity to scale our business and diversify it In terms of the 1,200 locations, we're sitting about eight or nine years of of stay flat inventory. We've talked about wanting to extend that. Again, given the macro where it is, I feel very comfortable [indiscernible] refocus and send excess free cash to our balance sheet. Without the need to really participate in what have been extremely competitive asset transactions. There in the Permian. In the DJ, it was interesting not just through ground game, but relooking at a brand new or continually improving capital operating structure and what the team has been able to do to expand tiers out more than replacing image I think was a great achievement for the team.

But we're sitting there with eight plus years of state ride inventory as well.

Now as we get further down the dispatch curve, as the capital efficiency of those last couple of years the same as the next five? No, probably not. But we do have a team that is demonstrating the ability to drive additional efficiencies to take returns whether it's extending laterals, or optimizing completion designs to take lower returns and improve those with time. And so we feel very comfortable that this is a plan that that is sustainable that will deliver sustainable free cash flow and allow us to achieve all of our balance sheet goals and at the same time return significant capital to our shareholders.

Our next question comes from the line of Leo Mariani from ROTH Capital. Sir, please go ahead.

Yes, I wanted to follow-up a little bit about some of your comments around M and A. Clearly, you talked a little about divestitures, but just curious, you mentioned very competitive Permian markets, but in kind of a perfect world, is there a pretty healthy appetite for the company to try to add inventory in the Permian through M and A?

Yes, I would say our number one goal for 2025 is hitting that net debt target at the end of the year, the 4.5.

As we're doing with the bolt on in Midland, rotating out predominantly DJ developed assets to fund that. We'll see if there are similar opportunities to do that. But our number one focus given the inventory duration that we currently have and given macro that we see is really taking that excess cash to the balance sheet first and foremost. We'll continue to look for ways to accelerate our delevering, and to accelerate our returns to our shareholders. But our number one focus [indiscernible] that $4,500,000,000 net debt target? And then just jumping over to the LOE side, LOE obviously went up here in 4Q. Just trying to get a sense, was a lot of this driven by the Permian or did you all also see healthy increases in the DJ? Yes, you always see in the DJ and the Permian with wind really was led by a higher LOE than expected in the Permian. Winterization projects, a little more active work over plan and we'll see that continue into the first quarter before it moderates back. But we take this very seriously and this is our cost structure as we think about cash G and A and cash LOE that's a differentiator for any company in a commodity business.

It's why we made some of the hard decisions that we made recently. To reaffirm and reestablish and sustain that low cost stance.

And so Specific to your question on 4Q, it was really winter related.

And work over Civitas, but teams working through that and will get us back into top quartile cost structure. We're very comfortable with that.

Substantially all the increased quarter report was driven by Permian like Chris discussed. Rockies or DJ was actually flat. Quarter over quarter. I think as we see as we look out we have a cash or LOE target that's probably going to be somewhere in between Q3 and Q4 that we're like Chris discussed, quite a bit of one time items in the fourth quarter that will be recurring. But all in high 9s on a per BOE basis, which we believe is peer leading for our asset base. [indiscernible] Thank you. Our next question comes from the line of Jalen Abbott from Wolfe Research.

Hey, good morning and thank you very much for taking our questions. So with the focus here on free cash flow, maximizing that Could you speak a little bit about the trajectory of how you see future cash taxes over the next three year period of time? And when do you see yourself paying sort of the alternative tax What's your latest thoughts on cash tax?

Tax? Thanks, Sean. So this year, cash tax guidance $10,000,000 to $30,000,000 It's going to be fairly flat into 2026, maybe a little bit higher closer to the high end of this year. Range next year. As far as AMT, we don't hit AMT until around $80 a barrel. So there's nothing additional to model. Pursuant to AMT.

Appreciate it. And then Chris, I mean the focus right now is on deleveraging the balance sheet. You're looking at the commodity environment. But as you sort of sit down and think about your inventory, let's say the commodity environment improves, and you are what is your willingness to actually grow at that period of time having lowered your oil guide at this period of time. You only have so many years production What would you do? Would you add a rig? How do you think about growth if there were if there was a change in the commodity and price environment? Yes, let's let thanks for the question, John.

The macro completely flips and it's very bullish towards the end of this year or into next. We will be responsive to that macro environment. We like this plan as we roll it forward. The ability to generate sustainable free cash and take that to the balance sheet. If we saw solidifying of the commodity price instead of backwardating into the 60s some more solid foundation. You could see us potentially lean in a little bit on activity but only if we're well advanced of our balance sheet [indiscernible] continually look at ways to further optimize the way we allocate capital And as things shift like that, we will be responsive and not overreact, but certainly responsive to the macro and And given the success that both the DJ and the Permian teams have had over the past year, really replacing a extending inventory, we have the option to lean in a little bit. All eyes right now are focused on that $4,500,000,000 year end Appreciate it. Thank you very much for taking our questions. Thanks, John.

Our last question comes from the line of Noah Parks from Tuohy Brothers. Sir, please go ahead.

Hi, good morning.

You did touch a bit earlier on the potential for increased oil volatility. And I think you mentioned that in a way being conservative with activity and CapEx is sort of the first line of defense against that. But do you have a general view on oil volatility over the next few years? I mean, [indiscernible] total Black Swan events aside.

You sort of anticipate increasing volatility or volatility maybe sort of settling down over the next few years?

Yes. I think, first, I would say what we've seen is pretty significant volatility, right? $80 a month ago now it's backwardated into the 60s. We'll see if that continues, right? And we're not going to sit here and prognosticate which way that will go. But I will say, the first line of defense before even activity levels and taking a more conservative approach to capital allocation is is affirming and establishing a low cost structure. Again, it's something we spend a lot of time on And again, looking at some of the difficult decisions we've we've made really to solidify that peer leading cost structure, To us, that is the first defense against that volatility.

Great.

Thanks a lot. And just to clarify something on the the guidance, some of the sensitivity shown in the slides, Since the free cash flow has so much upward sensitivity, commodity price, I just wanted to double check The $1,100,000,000 I think it is a free cash flow estimate at $70 That would not count the $550,000,000 in delayed compensation.

Paying for venture since that was cost incurred last year, if I have that right. Is that right?

That's correct. That's just clean free cash flow. No The $475,000,000 deferred acquisition with Ventures, that was already paid and that was just paying down debt we had at the end of the year.

So it it doesn't impact the 1.1 free cash flow anyway.

Great.

Thanks a lot.

Thank you. That concludes our Q and A session. I will now turn the call back to Brad for closing remarks.

Really appreciate everyone for joining us today for the Q and A session. May and I are certainly around the next several days for additional follow-up. We look forward to seeing you on the conference circuit here over the next couple of weeks and we hope you have a great day.

That concludes our conference