Earnings call transcript: Civitas Resources beats Q1 2025 forecasts

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Published May 08, 2025 09:29AM ET

Earnings call transcript: Civitas Resources beats Q1 2025 forecasts

Civitas Resources Inc. reported stronger-than-expected earnings for the first quarter of 2025, with earnings per share (EPS) of $1.77, surpassing the forecast of $1.63. Revenue also exceeded expectations, reaching $1.19 billion compared to the anticipated $1.18 billion. Despite these positive results, the company's stock saw a slight decline of 1.04% in premarket trading. According to InvestingPro metrics.

Outlook & Guidance

Looking forward, Civitas Resources expects a 5% growth in oil production for Q2 2025. The company maintains its full-year cost guidance and is prioritizing debt reduction, with a target of $4.5 billion in net debt by year-end. Additionally, potential asset sales of $300 million are being considered to focus on non-producing assets.

Executive Commentary

CEO Chris Doyle emphasized the company's commitment to improving its cost structure and operations, stating, "We're taking meaningful steps today to further improve our cost structure and operations." Doyle also highlighted the priority of debt reduction: "Our top priority is debt and to hit that absolute debt target by the end of the year."

Risks and Challenges

Civitas Resources faces several challenges, including:

  • Volatile oil prices and global economic uncertainties.
  • Slightly lower-than-expected first-quarter production.
  • Potential impacts from oilfield service cost trends.
  • The need to maintain operational efficiency amidst market fluctuations.

Q&A

During the earnings call, analysts inquired about the company's ability to maintain productive capacity if oil prices remain low. Management expressed confidence in executing its 2025 guidance and highlighted strategies to protect cash flow and maintain dividend levels even if oil prices drop to $40 WTI.

Full transcript - Civitas Resources Inc (CIVI) Q1 2025:

Operator: Good day, and thank you for standing by. Welcome to the Civitas Resources First Quarter twenty twenty five Earnings Conference Call and Webcast. My name is Rochelle, and I will be your operator for today's call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Please be advised that today's conference call is being recorded. I will now turn the conference call over to Brad Whitmarsh, Head of Investor Relations. Brad, please go ahead.

Brad Whitmarsh, Head of Investor Relations, Civitas Resources: Thanks, Rochelle. Good morning, everyone, and thank you for joining us. Yesterday, we released our first quarter twenty twenty five results along with some supplemental materials and our 10 Q. Hopefully, you've had a chance to look through these materials, all of which are available currently on our website. This morning, our CEO, Chris Doyle, will make our prepared remarks.

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And joining us for Q and A is our CFO, Marianella Lefoski, and other members of management. We will conduct a question and answer session after our opening comments. And as always, please 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 and those are subject to risks and uncertainties that could cause actual results to differ materially from our projections. Make sure you read our full disclosures regarding these statements in our most recent SEC filings.

Also, we may refer to certain non GAAP financial metrics. We do provide reconciliations to the appropriate GAAP measures in yesterday's earnings release and 10 Q as well. With that, I'll turn the call over to Chris.

Chris Doyle, CEO, Civitas Resources: Good morning, everyone, and thanks for joining us. First, I'd like to welcome Clay Carroll, our new President and Chief Operating Officer. Yesterday was his first day on the job and Clay is here with us for this morning's call. Clay is a proven leader and he has deep operating experience deploying best practices to safely reduce costs, improve cycle times and lead teams to enhance productivity and margins. I'm confident that Clay will be a great addition to our team.

I know he's very excited to get started. Establishing our original 2025 guidance, we recognize the multiple supply and demand forces causing significant uncertainty in the global economy and therefore our industry. We planned for it and removed around $150,000,000 of CapEx as compared to 2024, focusing our attention on capital discipline and lower reinvestment rates rather than maintaining twenty twenty four's production level. This is a challenging time, yet we remain well positioned to navigate the current environment with the foundation of high quality low breakeven assets. In addition, we have robust financial liquidity, a strong hedge book and significant capital flexibility to adjust our plans as necessary.

We remain confident in our full year outlook, but at the same time, we're positioned to reduce activity levels should current market conditions deteriorate further. These conditions not only include the oil price, but also the corresponding service cost environment. Additionally, we're taking meaningful steps today to strengthen our business and improve our performance. First, remain focused on running the business to deliver sustainable free cash flow. Yesterday, we announced a comprehensive cost optimization and efficiency plan to generate an incremental $100,000,000 of annual free cash flow.

As part of this effort, we're focusing on every opportunity to safely lower costs, enhance productivity, reduce cycle times and optimize production operations. In addition, we see substantial opportunity to improve our cash cost structure and our netbacks including optimizing our commercial and midstream agreements. As an example of this, our teams recently executed a new oil gathering agreement for transport out of the DJ Basin, which will help increase free cash flow by approximately $15,000,000 each year. In total so far, we've identified over $100,000,000 in incremental free cash flow on a run rate basis with approximately 40% of this amount benefiting the second half of twenty twenty five. I look forward to sharing our progress on this initiative in the months ahead.

Second, we continue to prioritize protecting and strengthening the balance sheet which we believe is necessary to sustain shareholder returns over the long haul. This is why we set up our plans to start the year prioritizing our free cash flow after the dividend to delever, which is even more important now with the current market. Consistent with that, we significantly expanded our hedge position and are now nearly 50% hedged on crude oil for the remainder of the year. Collectively, our hedge positions today are worth nearly $200,000,000 On year our year end 2025 net debt target of $4,500,000,000 is unchanged. And at current oil prices, we'll achieve that goal with our remaining free cash flow and our planned divestment proceeds of $300,000,000 We were very encouraged with the interest we saw in our divestment process early this year, but the pullback in oil prices did not allow us to transact at a value we felt represented the quality of those assets.

Given our diverse portfolio, we remain confident in achieving our divestment target for the year, but let me be clear, we are not price takers. We remain patient and solely focused on maximizing the value of our assets for our shareholders. Bolt ons and acquisitions have been a key part of our story. We're extremely pleased with the scale and quality of the portfolio that we've built. Today, however, we are singularly focused on execution and optimization of our assets and we do not plan to be buyers in the asset market for the foreseeable future.

Our third key priority for the year was returning cash to shareholders, a critical piece of the Civitas strategy. The near term focus on delevering this year's return was designed primarily to come from our robust and steady based dividend. During the quarter, we did complete our existing 10b5 repurchase program, buying back nearly 2% of our shares outstanding. As we reach our $4,500,000,000 net debt target, we have the opportunity to shift more of our free cash flow to additional share buybacks going forward. Turning to first quarter results.

Production was slightly lower than expectations on lower capital and cash operating costs were higher than planned. On the production side, first quarter volumes show the effect of low activity levels at the end of last year and at the start of 2025, particularly in the DJ. For the second quarter, we expect oil to grow 5% led by growth in the Permian Basin. Momentum should continue into the third quarter benefiting from a high till count in the middle part of the year. Capital performance in the first quarter was strong and our teams have delivered significant efficiencies to start the year.

In the Permian, as we shift 40% of our activity to the Delaware, the team is drilling 10% faster than expected. On the completions front in the Midland Basin, last quarter our teams delivered a 5% sequential increase in throughput utilizing simulfrac operations. And in the DJ, we continue to accelerate completion cycle times while also leveraging a higher percentage of local sand. All of these efforts are delivering sustainable cost savings to the business. We did shift some capital from Q1 into Q2 in the DJ, which will flow through to second quarter production as reflected in our guide.

On the cash cost side, we had some operational challenges with contracted water takeaway in the Permian in the first quarter. The team did a good job of supplementing with other solutions to minimize volume impact, but this elevated our first quarter costs. We'll be pursuing cost recovery of these incremental dollars. As our volumes grow and we implement our cost optimization initiatives, cash costs on a per BOE basis will decline through the remainder of the year, which gives us confidence to maintain our full year guidance. In closing, as we navigate through a volatile market, I have great confidence in our team and what we can accomplish together, but there is important work to be done.

We're taking meaningful steps today to further improve our cost structure and operations, enhancing returns, protecting our free cash flow and protecting our balance sheet. And importantly, we maintain the flexibility to respond to changing market conditions. All of this enhances the durability and strength of Civitas. Operator, we're now ready to take questions.

Operator: Thank you. We will begin the question and answer Your first question comes from the line of Gabe Daoud of TD Cowen. Your line is open.

Gabe Daoud, Analyst, TD Cowen: Thanks. Hey, morning, everyone. I appreciate the time and prepared remarks. Chris, was just hoping to maybe get a bit more color on the rest of 2025 and I guess specifically your comfort level executing on the production and free cash flow ramp the rest of this year, which is key in enabling you guys to hit your debt target. Just maybe some more thoughts around that I think would be helpful.

Chris Doyle, CEO, Civitas Resources: Sure. As we thanks for the question Gabe. As we came into the year, we tried to level load our program better than what we inherited the previous year. And we were split first half to second half capital about 55% to 45%. That's giving us quite a few TILs here in the second quarter will be the most TILs throughout the year followed by a strong third quarter.

And so that is building up that second half production growth. In the first quarter, we were slightly below about 1% below our expectations, a lot of that due to weather. I mentioned some of the capital that moved into the second quarter pushing some TILs in the DJ. That's further enhancing third quarter growth in the fourth quarter. I think the big thing here Gabe is, we have very strong confidence in the program, confidence in our ability to deliver our guidance, but we're not blind to the continued volatility in the macro.

Our plan initial plan was set up for that volatility and that certainly continued. And so we will continue to look at the macro. And if we see the macro deteriorating further, we'll adjust activity. And so that will impact the second half as well. But as we sit here today, unless we see sustained mid to low 50s in an oil price, we feel very confident in executing the rest of the year.

Gabe Daoud, Analyst, TD Cowen: Okay. Okay. Thanks for that. That's helpful. And my follow-up was going to be around what the program would maybe look like under that scenario that you mentioned Chris, if oil were to let's say, again, it's been pretty volatile, but let's say oil gets to 55 or below 55 for a sustained period, what would Civitas do in response?

What would activity levels look like? And maybe rank like order of importance in that scenario, I'd imagine it's still paying down debt. But again, we'd just love to hear your thoughts on that if the macro deteriorates more.

Chris Doyle, CEO, Civitas Resources: Sure. And as you can imagine, I'm sure every company out there has run a number of scenarios given just the up and down with the oil prices. So as we think about sustained oil below $55 the first dollar that comes out, it's all going to be related to returns. The first dollar that will come out will likely be completion related. And we'd look to build some DUCs in the DJ.

That would position us to maintain some productive capacity. Again, it's so volatile you could be back up over $60 and so we wouldn't want to shut down the entire program. Now if that was sustained, certainly the next dollar out would be, drill dollars. We're not in the business to build up large DUC inventory, but that's how we see the immediate terms Gabe, of pulling capital out. And then certainly as we think through our Permian assets, the first half of this year 40% of our activities directed to the Delaware.

There are some of the best returns most resilient returns in our portfolio. So we're excited about that. But we'll we would continue to look to pair down any investments that just don't fly at low 50s.

Gabe Daoud, Analyst, TD Cowen: Okay. Great. Thanks for that. Thanks everyone.

Chris Doyle, CEO, Civitas Resources: Thanks, Ken.

Operator: Your next question comes from the line of Zach Parham with JPMorgan. Please go ahead.

Zach Parham, Analyst, JPMorgan: Hey, thanks for taking my question. First, just wanted to ask on OpEx. LOE was above expectations in the quarter due to some water issues in the Permian. The 2Q guide was a bit higher than we'd expected, but you maintained the full year cost guide. Can you just talk about the moving pieces there and how you expect LOE to trend through the year?

Chris Doyle, CEO, Civitas Resources: Sure. And it really relates mainly to a contractor that we have in the Permian unable to hit their contractual obligations. And the team had to supplement and add some redundant takeaway capacity, which allowed us to minimize any type of volume impact. We have contractual protections that will allow us to recover some of those costs and that's our plan. But as and it's related with the Holly development.

As we brought on the 30 well Holly development and some activity behind it, we'll see water volumes peak and start to diminish here later this quarter. And that will give us the flexibility to pull off some of that temporary rental equipment to supplement our contractor and see LOE drop in the second half of the year. At the same time as we're growing volumes your per BOE unit cost is going to come down as well. And I'd say, Zach the last piece of this is as we think through our cost optimization plan about half of that is directed to our cost structure. And we'll start to see those savings kick in, in the second half as well.

And so that gives us confidence that we'll be well within the current cost guidance.

Zach Parham, Analyst, JPMorgan: Thanks, Chris. My follow-up, I wanted to ask on the $300,000,000 asset sale target. In your prepared remarks, you said you remain confident in achieving that target, but also that the upstream market was challenged and you weren't going to be price takers. Can you just tie those two comments together? What does that mean for asset sales?

What are you looking to sell here that you that still gives you confidence in achieving that plan?

Chris Doyle, CEO, Civitas Resources: Sure. Yes. The macro just doesn't set up for upstream transactions very well. Concurrent with the previous process, we've also been running the ground non producing assets, surface acreage, its water infrastructure, Other infrastructure investments that we could look to monetize that are less tied to the volatility on the upstream and that gives us confidence to be able to pull some of that down. Thanks, Chris.

Thanks, Zach.

Operator: Your next question comes from the line of Scott Hanold with RBC. Please go ahead.

Scott Hanold, Analyst, RBC: Yes, thanks. Chris, can you talk through what your priorities are in this uncertain macro environment? What should we think about as sort of like the primary goal for you all just so we know where the flex points have to come from? Is it hitting that $4,500,000,000 debt target by the end of the year, so you'll need to do what you need to do to get there? And just give us a sense of what how you think about like how you prioritize various things you're looking at?

Chris Doyle, CEO, Civitas Resources: Sure. Our top priority is debt and to hit that absolute debt target by the end of the year. Having said that, we're not going to do we're not going to give up value on assets just to hit the 4.5 and we're not going to be blind to further deterioration of the macro. And so, what we have is a strong balance sheet supported by very strong free cash flowing assets, with a very strong hedge book. And so, I would say our top priority again is that debt target, but, won't do anything unnatural to hit it.

Scott Hanold, Analyst, RBC: Okay. And and what what would you, you know, like, unnatural? I mean, you know, look, the is is the fixed dividend where it's at right now sacred? Or, if we were in sort of a $50 environment, would that be up for potential consideration to reduce?

Chris Doyle, CEO, Civitas Resources: Yes. Don't have any plans to touch the fixed dividend. We have cash flow protected to down to $40 WTI, including that dividend. And so, that's not on the table right now. And then in terms of unnatural, I'm really just speaking to value and selling assets into a low strip.

We don't have the need to do that. We've got very few near term maturities and again a very strong cash flowing asset.

Scott Hanold, Analyst, RBC: Understood. Thank you.

Chris Doyle, CEO, Civitas Resources: Thanks, Scott.

Operator: The next question comes from the line of Oliver Wang with TPH. Please go ahead.

Oliver Wang, Analyst, TPH: Good morning, Chris and team, and thanks for taking the questions. Maybe to start off with a quick follow-up to Scott's question. Just wondering what is the flex to alter the trajectory to hit the $4,500,000,000 net debt target by year end if oil prices are tracking closer to $55? Is that gonna come from less CapEx spend in the back half of the year, or does that just get pushed out to the right in terms of timing?

Marianella Lefoski, CFO, Civitas Resources: Hey, Oliver. Thanks for the question. So so look, I think the way to think about it is we'll hit our 4 and a half billion targeted at $60 oil that includes the proceeds from the asset divestments. We're continuously looking for ways to accelerate that, and we have a lot of levers to do so. So on the on on the first side, we're aggressively working on cost reductions across the board as we've discussed, and that will be accretive to where we end up on year end net debt.

As you know, we talked about the divestments. Volatility is not helpful to divest assets accretively. We feel very good completing the 300 target by the end of the year. But like Chris said, we'll be value driven. And if we see values that we'd like, we consider even going a little bit above that again if it's if it's accretive.

And and lastly, a lot we got the hedges that we did at the time we did them. We're up to about 50% hedged. And considering opportunistically adding to us to our hedge position, obviously, commodity price dependent. Look, as we progress through the year, we're keeping a very, very close pulse on a daily basis of what service cost brings. I think as as we get closer to to the price you referenced, or low fifties, we'll certainly adjust activity.

We as a reminder, we already built our plan in in a keeping in mind in a lower commodity price environment, and we talked about that last quarter. So I think that this most of this recent commodity price shift has allowed us to already absorb it in our pad economics in a way that that those pads will meet our return threshold. So well, like I said, we can continue tracking it closely and it's gonna be service cost dependent. But some of it, to your point, could come from from CapEx adjustments if if the commodity prices deteriorated further.

Oliver Wang, Analyst, TPH: Okay. Thanks for that color. And for my second question, just wondering operationally in the Delaware, it feels like it's been close to a year since you all had material levels of activity there. So just hoping that you all might be able to provide some detail in terms of some of key things that you all are focusing on there to optimize productivity as you all enter development of that asset in a more meaningful way on a city start to finish well.

Chris Doyle, CEO, Civitas Resources: Yes, sure. Thanks Oliver. Yes, as we laid out, with the Taprock entry and some of the additional acreage that we picked up in there, we took the time, rather than drill less capital efficient one mile wells, took the time, with ground game to extend those laterals and really enhance returns. These are already top returns within our portfolio and we've taken that to a new level. Our team is off executing as I mentioned in my remarks better than expected.

We're targeting known zones with known offset production and feel very confident about the returns for the capital that we're deploying there. Again, some of our best returns in our portfolio.

Oliver Wang, Analyst, TPH: Sounds good. Thanks for the time.

Chris Doyle, CEO, Civitas Resources: Thanks, Oliver.

Operator: Your next question comes from the line of Leo Mariani with Roth. Please go ahead.

Leo Mariani, Analyst, Roth: Hi. Just wanted to follow-up a little bit on the DJ. Looks like DJ volumes were down pretty significantly in the first quarter versus the prior quarter. And I think you've articulated some of those reasons. But in your slide deck, you're talking about kind of DJ volumes being flat again, you know, in the second quarter, which I guess maybe was a little bit surprising.

Can you provide a little bit more, you know, kind of color around that? Is there not much in the way of of second quarter kind of trend line activity? And how do you see DJ kind of trending in the second half?

Chris Doyle, CEO, Civitas Resources: Sure. Thanks, Leo. As we guided first quarter, as we rolled out the plan, we were looking at a pretty prolonged time period with very few TILs. And so you saw the full brunt of base decline. At the same time, we had some very productive wells in the Watkins area come off plateau.

And so coming off that plateau those declines are higher as we reflected in our 1Q guide. The 1% low to our expectations really driven by a number of weather events in both basins. But that natural base decline then was as expected, but pretty aggressive. We also had some delays on TILs that pushed some capital into the second quarter. And so that pushed some volumes out and therefore the second quarter is now flat.

And you'll you'll see now with the, the engine restarted, some of that growth getting pushed to, to third quarter.

Marianella Lefoski, CFO, Civitas Resources: You know, as a reminder, we had we went through four or five months of no tilt in the DJ. We brought, like Chris said, a fair number of wells around October of last year, and then the next batch, which was really nothing. It was three wells, late q one. So, obviously, pretty skinny there for for almost two quarters. And well, the DJ is our higher decline assets out of the two assets.

And so just from a timing perspective, that's why you saw expected decline rates along with expected weather impacts for the last time of year.

Leo Mariani, Analyst, Roth: Okay. That's helpful. Moving over to the cost side, obviously, you guys have some initiatives to cut costs, which certainly seem encouraging. But have you all kind of seen anything on the oilfield service, you know, cost side yet, on the the local basin level? Obviously, stripped down quite a bit.

Activity hasn't exactly been robust as an industry in the DJ. So are you seeing anything on leading edge kind of service cost changes?

Chris Doyle, CEO, Civitas Resources: Yes. Thanks for the question, Leo. And this is critical, right? As we talk about oil in the mid to low 50s, you really need to know what the other end of that equation is, and that's the OFS market. And so, the entire team is working with our suppliers.

We have a lot of flexibility on our capital program. And so that means that we can negotiate real time with the weakness and as you said with lower activity in both of the basins. We are seeing that weakness in the market provide some opportunities to get costs out of the system and we'll continue to work with our partners to look for ways to pay. We'd like to continue to level load activity, but only if it makes sense for our shareholders and at the right returns. But we're encouraged by what we see in both basins.

The other uncertainty out there obviously is tariffs and we're in the ninety day whole period, but a lot of uncertainty on the back end of this what that does to overall cost structure and we're watching that very closely. But what we see here today Leo is that the opportunity to negotiate more attractive and more aggressive costs from our vendors is going to outweigh any type of pressure that we see on the tariffs. So we're encouraged, but also given the volatility on both sides with oil price This is a pretty dynamic situation that we'll manage very closely and make decisions real time.

Leo Mariani, Analyst, Roth: Okay. Thank you.

Operator: That concludes our Q and A session. I will now turn the conference back over to Brad for the closing remarks.

Brad Whitmarsh, Head of Investor Relations, Civitas Resources: Sure. Thanks, Rochelle. Appreciate everybody joining us today. We look forward to seeing you on the conference circuit here in the coming weeks. Please be safe, and happy Mother's Day to all the moms out there and those at Civitas.

Operator: Thank you. Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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