Civitas Resources, Inc.: A Leading Independent E&P Company in the DJ and Permian Basins

Published on November 04, 2024 | Ticker: CIVI

Business Overview and History

Civitas Resources, Inc. (NYSE: CIVI) is an independent exploration and production company focused on the acquisition, development, and production of crude oil and liquids-rich natural gas from its premier assets in the DJ Basin in Colorado and the Permian Basin in Texas and New Mexico. The company has undergone a significant transformation over the past year, expanding its footprint into the prolific Permian Basin while maintaining a strong position in the DJ Basin.

Civitas Resources, Inc. was founded in 2017 through the merger of several independent oil and gas exploration and production companies operating in Colorado's Denver-Julesburg (DJ) Basin. The company was initially focused on acquiring, developing, and producing crude oil and natural gas from its premier assets in the DJ Basin. In 2021, Civitas made several strategic acquisitions to expand its footprint, entering the Permian Basin in Texas and New Mexico. This included the acquisitions of Hibernia Energy III, LLC, Tap Rock AcquisitionCo, LLC, and Tap Rock Resources II, LLC, which significantly increased Civitas' scale and production.

During its early years, Civitas faced challenges as it integrated the various legacy companies and their assets. The company had to work to standardize operations, cut costs, and optimize efficiency across the combined portfolio, which required significant changes to its organizational structure and processes. However, Civitas successfully navigated these integration challenges and established itself as a leading independent exploration and production company focused on the DJ Basin and Permian Basin.

Over time, Civitas has grown production, reduced costs, and improved operational efficiency through a combination of organic development and strategic acquisitions. The company is now considered a premier operator in both the DJ Basin and Permian Basin, with a reputation for safe, responsible, and efficient operations.

Financial and Operational Highlights

Civitas has delivered impressive financial and operational results in recent years. In 2023, the company reported total revenue of $3.48 billion, up from $3.79 billion in 2022, and net income of $784.29 million, compared to $1.25 billion in the prior year. The company's strong financial performance has been driven by its ability to consistently grow production, optimize costs, and effectively manage commodity price volatility through its disciplined hedging program.

In the first half of 2024, Civitas reported total sales volumes of 61.73 MBoe/d, a 105% increase compared to the same period in 2023. This growth was primarily attributable to the company's recent acquisitions in the Permian Basin, which have seamlessly integrated into Civitas' operations. The company has also made significant strides in improving operational efficiency, with a 10% reduction in well costs in the Midland Basin year-to-date.

Financials

Civitas' financial position remains strong, with a net debt to EBITDA ratio of 1.6x as of June 30, 2024. The company has ample liquidity, with $1.40 billion available under its $4.0 billion credit facility as of the end of the second quarter. Civitas' disciplined approach to capital allocation and its focus on maintaining a healthy balance sheet have been key to its success.

For the fiscal year 2023, Civitas reported revenue of $3.48 billion, net income of $784.29 million, operating cash flow of $2.24 billion, and free cash flow of $729.62 million. In the most recent quarter (Q2 2024), the company reported revenue of $1.31 billion, net income of $215.99 million, operating cash flow of $359.57 million, and free cash flow of -$173.54 million. Revenue remained flat compared to the prior quarter, while net income, operating cash flow, and free cash flow declined. This was primarily due to weaker natural gas pricing in the Permian Basin, partially offset by operational efficiencies that reduced cash operating expenses by 2.5% compared to the prior quarter.

Civitas operates two main business segments: Crude Oil, Natural Gas, and NGL Sales, which is the company's core business, and Other Income. During the three months ended June 30, 2024, crude oil sales accounted for $1.13 billion, or 86% of total product revenue. Natural gas sales were $9.39 million, and NGL sales were $167.43 million, resulting in total product revenue of $1.31 billion for the quarter. For the six months ended June 30, 2024, crude oil sales totaled $2.21 billion, natural gas sales were $96.38 million, and NGL sales were $332.60 million, resulting in total product revenue of $2.64 billion.

The company's average sales prices before derivatives for the three months ended June 30, 2024, were $80.27 per barrel of crude oil, $0.17 per Mcf of natural gas, and $20.94 per barrel of NGLs. These average prices increased on a quarter-over-quarter basis by 6% for crude oil, decreased by 89% for natural gas, and decreased by 8% for NGLs.

Liquidity

Civitas maintains a robust liquidity position, which provides financial flexibility and supports its growth initiatives. The company's strong cash flow generation, combined with its disciplined capital allocation strategy, ensures that it can fund its operations and pursue strategic opportunities while maintaining a healthy balance sheet.

As of June 30, 2024, Civitas reported the following key liquidity metrics:

Debt/Equity ratio: 0.77
Cash: $91.88 million
Available credit line: $1.35 billion under the $3.40 billion borrowing base (next scheduled borrowing base redetermination in November 2024)
Current ratio: 0.41
Quick ratio: 0.41

Outlook and Growth Initiatives

Looking ahead, Civitas is well-positioned to continue delivering strong operational and financial performance. The company has raised its full-year 2024 production guidance by 3% and lowered its capital expenditure outlook by $50 million, reflecting its ability to drive efficiencies across its asset base.

In the DJ Basin, Civitas is leveraging its technical expertise to push the boundaries of what's possible, recently completing its longest-ever lateral wells at 4 miles. Initial productivity from these wells has been encouraging, and the company is working to optimize infrastructure to fully capitalize on the increased production.

In the Permian Basin, Civitas is focused on driving further cost reductions and operational improvements. The company has set a target of reducing well costs in the Midland Basin by an additional 5% to $725 per foot, which would translate to a 12% improvement in well returns and a 7% reduction in breakeven prices. Civitas' ability to rapidly integrate and optimize its Permian assets has been a key differentiator.

Based on recent guidance provided by the company:

Civitas exceeded their production guidance for the second quarter of 2024, with total volumes above plan and oil production up 5% compared to the first quarter.
The company has lowered their full-year 2024 CapEx guidance by $50 million and decreased their operating cost guidance by approximately $25 million.
Civitas expects total volumes and oil production to grow quarter-over-quarter through the end of 2024.
The company anticipates second half 2024 free cash flow of over $900 million.
Civitas' Board approved a $1.52 per share dividend to be paid in September 2024.
The Board also enhanced their capital return program to provide flexibility in returning the variable component through a combination of share repurchases and dividends. A new $500 million share repurchase plan was approved.

Risks and Challenges

While Civitas has demonstrated its ability to successfully navigate various industry challenges, the company, like its peers, remains exposed to the inherent volatility of commodity prices. Sustained weakness in crude oil and natural gas prices could have a material impact on the company's financial performance and growth initiatives.

Additionally, Civitas operates in regions that are subject to complex regulatory environments, and any significant changes or delays in the permitting process could hinder the company's development activities. The company's recent non-core asset divestiture in the DJ Basin, which was executed at an attractive valuation, highlights its ability to proactively manage its portfolio and mitigate regulatory risks.

Conclusion

Civitas Resources has emerged as a leading player in the oil and gas industry, thanks to its diversified asset base, operational excellence, and disciplined capital allocation strategy. The company's successful integration of its Permian Basin acquisitions, coupled with its continued optimization efforts in the DJ Basin, position it for sustained growth and value creation. While the industry faces inherent challenges, Civitas' proven track record and strategic initiatives provide confidence in the company's ability to navigate the evolving landscape and deliver strong returns for its shareholders.

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