Civitas Resources - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered disciplined execution in a volatile commodity tape: revenue $1.19B, diluted EPS $1.99, adjusted EBITDAX $786M, and adjusted free cash flow $171M, while management launched a $100M cost optimization plan aimed at structurally lowering costs and boosting free cash flow.
• Versus Wall Street consensus, results were broadly in line to modestly better: EPS beat by ~$0.09*, revenue was essentially in line*, and EBITDA was modestly above consensus*, aided by solid realizations and hedges; cash opex per BOE was temporarily elevated due to Permian water takeaway issues but expected to decline in 2H.
• FY25 outlook reiterated (capex $1.8–$1.9B; oil 150–155 Mbbl/d; YE net debt ≤$4.5B), with 2Q25 guidance calling for volume growth and slightly higher capex, supported by strong Permian TIL cadence.
• Portfolio moves and risk management: ~50% of remaining 2025 oil hedged ($68 WTI floors) and ~40% of gas hedged ($3.74 floors); hedge book valued at ~$290M at April-end (press release) while management referenced ~$200M “today” on the call (timing/methodology difference).
• Near-term stock catalysts: execution on $100M cost plan and 2H cost/LOE normalization, Permian-driven oil growth in Q2/Q3, progress on $300M divestment target, and deleveraging toward $4.5B net debt.

What Went Well and What Went Wrong

What Went Well

• “We announced a comprehensive cost optimization and efficiency plan to generate an incremental $100 million of annual free cash flow,” including commercial/midstream optimizations such as a new DJ oil gathering agreement adding ~$15M per year.
• Realizations were healthy: oil price $70.90/bbl, NGL at 34% of WTI, and strong Colorado Interstate Gas pricing for natural gas, supporting revenue resiliency despite lower volumes.
• Operational efficiency: Delaware drilling 10% faster than plan; Midland simulfrac throughput +5% q/q; DJ increased local sand utilization from ~50% to >90%—all contributing to sustainable cost savings.

What Went Wrong

• Cash opex/LOE above plan due to a third‑party’s failure to meet Permian water takeaway obligations and weather-related repairs; management expects cost recovery and LOE declines in 2H as water peaks subside.
• Sequential volume declines (311 Mboe/d vs 352 Mboe/d in Q4) driven by DJ low TILs late 2024/early 2025 and weather; ~80% of q/q oil volume decline occurred in the DJ.
• Hedge valuation disclosure inconsistency: press release cites ~$290M at April-end (including April settlements) while the call referenced “nearly $200M” currently—indicative of timing/mark-to-market differences (investors should anchor to formal release disclosure).

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Civitas Resources First Quarter 2025 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 speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. 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 (VP and Head of Investor Relations)

Thanks, Rochelle. Good morning, everyone, and thank you for joining us. Yesterday, we released our First Quarter 2025 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, and joining us for Q&A is our CFO, Marianella Foschi, 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 risk 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 (President and CEO)

Morning, everyone, and thanks for joining us. First, I'd like to welcome Clay Carrell, our new President and Chief Operating Officer. Yesterday was his first day on the job, and Clay's 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. You know, 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 million of CapEx as compared to 2024, focusing our attention on capital discipline and lower reinvestment rates rather than maintaining 2024's production level.

This is a challenging time, yet we remain well-positioned to navigate the current environment with a foundation of high-quality, low-break-even 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, we 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 million 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 net backs, 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 million each year. In total, so far, we've identified over $100 million in incremental free cash flow on a run-rate basis, with approximately 40% of this amount benefiting the second half of 2025. 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 million. Our year-end 2025 net debt target of $4.5 billion is unchanged, and at current oil prices, we'll achieve that goal with our remaining free cash flow and our planned investment proceeds of $300 million. 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'll remain patient and solely focus on maximizing the value of our assets for our shareholders. Bolt-ons and acquisitions have been a key part of our story, and 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. Our near-term focus on delivering this year's return was designed primarily to come from our robust and steady base dividend.

During the quarter, we did complete our existing 10b5 repurchase program, buying back nearly 2% of our shares outstanding. As we reach our $4.5 billion 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 showed the effect of low activity levels at the end of last year into the start of 2024, 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 simul frac operations. 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. 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 (participant)

Thank you. We will now begin the question-and-answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. We do request for today's session that you please limit to one question and one follow-up. Your first question comes from the line of Gabe Daoud of TD Cowen. Your line is open.

Gabe Daoud (Analyst)

Thanks. Hey, morning, everyone. 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 in 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 (President and CEO)

Sure. 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. We were split first half to second half capital about 55% to 45%. That is giving us quite a few tills here. In the second quarter, it will be the most tills throughout the year, followed by a strong third quarter. 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 tills in the DJ. That is further enhancing third quarter growth into 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 initial plan was set up for that volatility, and that certainly continued. We will continue to look at the macro, and if we see the macro deteriorating further, we'll adjust activity. That will impact the second half as well. 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)

Okay. Okay. Thanks for that. That's helpful. 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? Maybe rank order of importance in that scenario. I'd imagine it's still paying down debt, but again, would just love to hear your thoughts on that if the macro deteriorates more.

Chris Doyle (President and CEO)

Sure. 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. 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 ducks 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 we wouldn't want to shut down the entire program. If that was sustained, certainly the next dollar out would be drill dollars. We're not in the business to build up large duck inventory, but that's how we see the immediate terms, Gabe, of pulling capital out.

As we think through our Permian assets, the first half of this year, 40% of our activity is 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 would continue to look to pare down any investments that just don't fly at low $50s.

Gabe Daoud (Analyst)

Okay. Okay. Great. Thanks for that. Thanks, everyone.

Chris Doyle (President and CEO)

Thanks, Gabe.

Operator (participant)

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

Zach Parham (Executive Director and Equity Research Analyst)

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 (President and CEO)

Sure. 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. It is related with the Holly Development. As we've 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.

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

Zach Parham (Executive Director and Equity Research Analyst)

Thanks, Chris. My follow-up wanted to ask on the $300 million asset sale target. In your prepared remarks, you said you remained confident in achieving that target, but also that the upstream market was challenged and you were not 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 still gives you confidence in achieving that plan?

Chris Doyle (President and CEO)

Sure. Yeah. The macro just doesn't set up for upstream transactions very well. Concurrent with the previous process, we've also been running to ground non-producing assets. It's surface acreage. It's 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.

Zach Parham (Executive Director and Equity Research Analyst)

Thanks, Chris.

Chris Doyle (President and CEO)

Thanks, Zach.

Operator (participant)

Your next question comes from the line of Scott Henold with RBC. Please go ahead.

Scott Hanold (Analyst)

Yeah, 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 y'all, just so we know where the flex points have to come from? Is it hitting that $4.5 billion debt target by the end of the year? You will need to do what you need to do to get there. Just give us a sense of how you think about how you prioritize various things you're looking at.

Chris Doyle (President and CEO)

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 give up value on assets just to hit the $4.5 billion, and we're not going to be blind to further deterioration of the macro. What we have is a strong balance sheet supported by very strong free cash flowing assets with a very strong hedge book. I would say our top priority, again, is that debt target, but won't do anything unnatural to hit it.

Scott Hanold (Analyst)

Okay. And what would you consider unnatural? I mean, look, 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 (President and CEO)

Yeah. We do not have any plans to touch the fixed dividend. We have cash flow protected down to $40 WTI, including that dividend, and that is not on the table right now. In terms of unnatural, I am really just speaking to value and selling assets into a low strip. We do not have the need to do that. We have very few near-term maturities and, again, a very strong cash flowing asset.

Scott Hanold (Analyst)

Understood. Thank you.

Chris Doyle (President and CEO)

Thanks, Scott.

Operator (participant)

Again, if you would like to ask a question, press star one on your telephone keypad. The next question comes from the line of Oliver Huang with Piper Sandler. Please go ahead.

Oliver Huang (Analyst)

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 $4.5 billion net debt target by year-end if oil prices are tracking closer to $55? Is that going to come from less CapEx spent in the back half of the year, or does that just get pushed out to the right in terms of timing?

Marianella Foschi (CFO)

Hey, Oliver, thanks for the question. I think the way to think about it is we'll hit our $4.5 billion target at $60 oil. That includes the proceeds from the asset divestment. We're continuously looking for ways to accelerate that, and we have a lot of levers to do so. 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 divestment. The volatility is not helpful to divest assets accretively. We feel very good completing the $300 million target by the end of the year. Like Chris said, we'll be value-driven, and if we see values that we like, we consider even going a little bit above that again if it's accretive.

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 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 costs bring. I think as we get closer to the price you referenced, mid or low 50s, we'll certainly adjust activity. As a reminder, we already built our plan in keeping in mind in a lower commodity price environment, and we talked about that last quarter. I think most of this recent commodity price shift has allowed us to already absorb it in our PAT economics in a way that those PATs will meet our returns threshold.

Like I said, we continue tracking it closely, and it's going to be service cost dependent. Some of it, to your point, could come from CapEx adjustments if the commodity prices deteriorate further.

Oliver Huang (Analyst)

Okay. Thanks for that color. For my second question, just wondering operationally in the Delaware, it feels like it's been close to a year since you all have had material levels of activity there. Just hoping that you all might be able to provide some detail in terms of some of the 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 (President and CEO)

Yeah, sure. Thanks, Oliver. Yeah. As we laid out with the Taprock entry and some of the additional acres that we've 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 were already top returns within our portfolio, and we've taken that to a new level. 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 Huang (Analyst)

Sounds good. Thanks for the time.

Chris Doyle (President and CEO)

Thanks, Oliver.

Operator (participant)

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

Leo Mariani (Analyst)

Hi. I 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. In your slide deck, you're talking about kind of DJ volumes being flat again in the second quarter, which I guess maybe was a little bit surprising. Can you provide a little bit more kind of color around that? Is there not much in the way of second quarter kind of turn-in line activity, and how do you see DJ kind of trending in the second half?

Chris Doyle (President and CEO)

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 tills. 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. Coming off that plateau, those declines are higher as we reflected in our 1Q guide. The 1% low to our expectations was 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 tills that pushed some capital into the second quarter, and that pushed some volumes out, and therefore the second quarter is now flat. You will see now with the engine restarted, some of that growth getting pushed to third quarter.

Marianella Foschi (CFO)

As a reminder, we went through four to five months of no tills 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 Q1. Obviously, pretty skinny there for almost two quarters. The DJ is our higher decline asset out of the two assets. Just from a timing perspective, that's why you saw expected decline rates along with expected weather impacts for the outcome year.

Leo Mariani (Analyst)

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 oil field service cost side yet on the local basin level? Obviously, stripped down quite a bit. Activity hasn't exactly been robust as an industry and the DJ. Are you seeing anything on leading edge kind of service cost changes?

Chris Doyle (President and CEO)

Yeah. 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. The entire team is working with our suppliers. We have a lot of flexibility on our capital program, and 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, "Hey, we'd like to continue to level load activity, but only if it makes sense for our shareholders and at the right returns." We're encouraged by what we see in both basins.

The other uncertainty out there, obviously, is tariffs, and we're in the 90-day hold period, but a lot of uncertainty on the back end of this, what that does to overall cost structure. We're watching that very closely. 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. 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.

Zach Parham (Executive Director and Equity Research Analyst)

Okay. Thank you.

Operator (participant)

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

Brad Whitmarsh (VP and Head of Investor Relations)

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 (participant)

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