Civitas Resources - Q2 2024

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to Civitas Resources' Second Quarter 2024 earnings conference call and webcast. 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. At that time, you may press star one on your telephone keypad to ask a question. To withdraw your question, press star one again. Thank you. Please be advised that today's conference is being recorded. I would now like to hand the call over to Brad Whitmarsh, Head of Investor Relations. Please go ahead.

Brad Whitmarsh (VP of Investor Relations)

Thanks, Jessica. Good morning, everyone, and appreciate you joining us this morning. Yesterday, we issued our Second Quarter earnings release, our 10-Q, and also provided some supplemental materials for your review. These items are all available on our website, and they may be helpful for this morning's call. I'm joined today by our CEO, Chris Doyle, CFO, Marianella Foschi, and COO, Hodge Walker. After our brief prepared remarks, we will conduct a question and answer session. As always, please limit your time to one question and one follow-up so we can work through the list efficiently. We'll make certain forward-looking statements today, which are subject to risks and uncertainties that could cause actual results to differ from projections. Please read our full disclosures regarding these statements in our most recent SEC filings. We also may refer to some certain non-GAAP financial metrics.

Reconciliations to these can also be found in yesterday's release and SEC filings as well. With that, I'll turn the call over to Chris.

Chris Doyle (CEO)

Good morning, everyone, and welcome to our Second Quarter call. Before I address our quarterly results and our improved outlook, I think it's important to reflect on how we fundamentally transformed our business over the past year. This starts with our entry into the Permian Basin, which increased and enhanced our portfolio scale and quality, provided important capital allocation flexibility, and created a more durable and sustainable business. Today, our Permian assets are fully integrated within Civitas and producing more than 185,000 BOE/D. Importantly, production's ahead of plan, oil is ahead of plan, well costs are below expectations, and reduced operating costs are enhancing cash margins, all while maintaining top quartile safety and environmental performance. In a short amount of time, our team's executing faster and better than we'd planned and certainly well ahead of our underwriting assumptions.

At the same time, we continue to deliver exceptional results in the DJ Basin. Recent highlights, including completing our non-core asset sales in an accretive valuation, helping to secure a broad-based regulatory agreement that increases development clarity for years to come, and driving exceptional performance from our inventory-rich Watkins area. Simply put, there's no question that Civitas is stronger today, and we're better positioned than ever to drive differentiated returns for our shareholders. Now, moving to our second quarter results, starting with production, total volumes were above plan as the premium production was up about 12%, oil was up 5%. This is driven by strong well performance and continued cycle time acceleration, more than offsetting the impact from non-core asset sales and some temporary third-party facility downtime that occurred in the DJ.

Cash operating expenses were 2.5% lower than the first quarter, less than $9/BOE. Our teams remain laser-focused on driving down our cost structure across all basins. On the capital side, our drilling and completions teams have done a fantastic job delivering efficiency improvements to result in less CapEx than planned in the quarter. Well cost reductions are outpacing our initial plan, highlighted by a 10% reduction year-to-date in the Midland Basin. Free cash flow is right in line with our expectation for the quarter, as our operating and capital cost efficiencies offset the impact of weak natural gas pricing in the Permian. For the quarter, we returned just under $275 million to our shareholders, about $150 million of that in dividends, $125 million in share buybacks.

A portion of our buybacks during the quarter was utilized to continue reducing concentrated ownership, and the remainder went to open market purchases. Lots of progress has been made over the past year, as evidenced by another strong quarter. I'd like to shift now, however, to three areas that have me really excited about what's to come. First, operational execution is absolutely improving the business every single day. Second, our second half outlook reflects the strength of our asset base and our team's capabilities. And third, our enhanced capital return framework will provide additional flexibility to maximize shareholder value. Starting with operational execution and our supplemental materials, we highlight the impact of reduced costs on improving returns and driving down breakevens. A 10% well cost reduction in the Midland Basin drives well returns up 12% and reduces breakevens by 7%.

Across the Permian, these achievements are increasing the number of low breakeven locations by 20%-30% and extending high-quality inventory life. Savings are coming from all areas, whether it's optimizing drilling completion designs, high-grading our service providers, and utilizing more efficient equipment, standardizing facilities for capturing the benefits of having skilled positions in multiple basins. This team is rapidly establishing a strong track record of execution and performance. Now, if we'd said a year ago that within six months of establishing Permian operatorship, that we would be where we are today, I'm not sure that many on this call would have believed it. It's still early days, we get it, but the combination of a culture of continuous improvement and the team focused on the value we can create together, has me super excited for the years ahead.

Now, leveraging that strong operational execution, our outlook for the remainder of 2024 continues to improve. Full-year CapEx lowered by $50 million. Operating costs decreased by approximately $25 million. We've raised sales volumes expectations 3% from our original guidance, adjusting for asset sales. Looking forward, we expect total volumes in oil to grow quarter-over-quarter through the end of the year. Recent extreme summer weather in Colorado, certainly with record high temperatures, will defer some of that third quarter DJ Basin growth into the fourth. But a strong second half on the DJ will be driven by Watkins, where we recently drilled and completed our 13 4-mile wells, the longest laterals ever in Colorado. This is a testament to a talented team that continues to safely push the boundaries of what's possible.

Importantly, while it's still early, we're encouraged by the initial productivity, which confirms production contribution across the full lateral. In the Permian, I'm particularly excited to see upcoming production from our first fully designed, drilled, and completed Civitas wells. Productivity to date trends in line with our expectations, with second half 2024 TILs will target the core zone development with slightly wider lateral spacing than previous operators. The strength of our business and continued execution, we anticipate second half free cash flows of over $900 million, which will be deployed to the balance sheet and to our shareholders. Finally, the true reflection of the strength of our business is our best-in-class shareholder return. Since the beginning of last year, we've returned nearly $1.5 billion to our shareholders via dividends and share repurchases.

This represents more than 20% of our current market cap. We remain fully committed to returning 50% of our free cash flow to shareholders after the base dividend. Based on second quarter results, our board approved a $1.52 dividend to be paid in September. In addition, the board enhanced our capital return program to add flexibility in the way we return the variable component to shareholders. Beginning with the third quarter, the variable return will now be provided through a combination of share repurchases and dividends. As part of this enhancement, the board also approved a new $500 million share repurchase plan, which replaces the prior program. We will remain disciplined executing our buyback strategy, but we trade at a very compelling valuation when compared to our peers and when compared to recent asset transactions.

At Civitas, we believe that cyclical businesses should be run with low leverage, so we'll continue to execute on our hedging strategy to support the pace of our delevering efforts, and this capital return enhancement will prioritize our balance sheet with the remaining 50% of our free cash flow. Wrapping up, we've made tremendous progress in the first half of the year. Our entire team's excited to demonstrate what our transformed company is capable of delevering. Thank you for your interest in Civitas Operating. We're now happy to take questions.

Operator (participant)

Thank you. Just a reminder, if you would like to ask a question, press star one on your telephone keypad. To withdraw your question, press star one again. Your first question comes from the line of Kevin MacCurdy with Pickering Energy Partners. Kevin, your line is open.

Kevin MacCurdy (Managing Director)

Hey, good morning, team. I wanted to start off by asking about the execution of the newly increased buyback. When deciding the amount of free cash flow to allocate to buybacks versus the variable, what will be the main criteria? Are you looking at recent share price dislocation, NAV, or maybe the low multiple that you highlight in your deck?

Chris Doyle (CEO)

Yeah, sure. Thanks for the question, Kevin. As we've said in the past, we view our capital return framework much like any other capital allocation decision, and this is something we discuss regularly with our board. I think the move to add that flexibility is really tied to exactly what you talked about, and that is a continued disconnect with how we are valued. Look at underlying NAV, look at NAV at various commodity prices, look at how we trade versus peers, and look at the asset market. This is not the asset market that we entered the Permian in. You know, a year after our entry, the asset market is up a full 1.5+ turns, and in some cases, that's for lower quality assets.

The valuation as we see it today does not reflect the quality of these assets and does not reflect the quality of the team and how they are executing. Ultimately, I don't think it reflects the tailwinds that we've seen in terms of regulatory and in the DJ. So, you've got a business here that's executing on really high-quality assets, trading at a 20% free cash flow yield, and that's a super compelling opportunity as we see it. That's driving the change, and we're excited to dig in and allocate to this business. We're super excited, super proud of what we've built. Hasn't been reflected yet, but it will be.

Appreciate the question and thank you. The other thing to highlight on the shareholder return framework is we can protect our equity, but at the same time, not lose sight of our delevering targets and maintaining a strong balance sheet. We're super excited for the adjustment, and we think it fully enhances the framework, and know that this team is fully aligned with shareholders as we go through that calculus.

Kevin MacCurdy (Managing Director)

Great. Thank you for that answer, and I think that's what the market wants to hear. Shifting maybe to well costs, when I look at slide 10 in your investor deck, what do you need to do to cut the extra 5% out of well costs in the Midland? Just to clarify, does the new CapEx run rate factor in the $765 per foot in the Midland Basin, or is it using the $725?

Chris Doyle (CEO)

Yeah, yeah. Good question, Kevin. Our current forecast for second half capital assumes our current cost structure at the $765 in Midland. As we've looked back, again, as we took over for established operators in the basin, there are a lot of questions around, can we continue that level of performance? We knew fundamentally that we would improve upon it, but we'd like to stack some skins on the wall, and I think that's what this team's done for a couple of quarters, just as we've done in the DJ. What has got us to where we are today really is a mix of benefits of scale, driving down service costs. That's probably about 30% of that delta.

Design changes to how we complete wells, how we drill wells, that's probably at 20%. The other half is really just continued optimization and efficiency gains. What will take us from $765-$725 is just continued relentless digging in and driving additional efficiency gains. We're not building in any additional deflation or any weakness in the service market. This is about the team stepping back, looking for ways to claw back every dollar and every inch. Look, again, very early, two quarters in, but this is a team that has made a living of doing exactly this in the DJ, and we're doing it there in the Permian as well.

Kevin MacCurdy (Managing Director)

Appreciate the answer. I might hop back in the queue.

Chris Doyle (CEO)

Thanks, Kevin.

Operator (participant)

Your next question comes from the line of Neal Dingmann with Truist Securities. Neal, your line is open.

Neal Dingmann (Energy Analyst)

Thanks for the time. Thank you all for the time and nice remarks, Chris. My first question is really just on your anticipated production, oil production growth. Specifically, it seems that given your non-core sales and oil production reiteration, you're suggesting that production should continue to trend higher. I'm just wondering, could you speak to the potential growth in both plays and maybe factors impacting this for the remainder of the year?

Chris Doyle (CEO)

Sure. Thanks. Thanks, Neal. I appreciate the question, and appreciate you highlighting the divestitures as well. That was a massive transaction for us, as we announced last quarter, traded at a full turn above. These are non-core assets in the DJ, trading at a full turn above our entire enterprise. We hit that bid. It did impact our second quarter results, right? 5,000 BOEs a day, 2,000 BOE-3,000 BOEs a day. So take that, put that back into the mix, and you saw quarter-over-quarter strong oil growth as a company. I would say as we look at, I would point to the Permian first. Second quarter over first quarter, we saw oil up.

We see both basins into the third quarter growing, as evidenced by our reaffirmation of our oil guide, even taking out the divestment. So we'll see a step-up in both basins. We have a front half loaded capital program. About 2/3 of our TILs are coming on in the second and third quarter, and that's gonna really support and drive oil growth to the back half of the year. A couple of things that we'll talk about in the DJ are some headwinds. We saw them in the second quarter with some third-party facility downtime. We're past that. That was temporary. I think June went down as the second highest, hottest June in the history of Colorado.

I don't know where July is gonna come out, but it's gonna be up there. Certainly, that's impacting some of our operations out there, but that's temporary. The other thing that's gonna drive growth into the second half that we're really excited about is the continued outperformance of the Watkins wells. Whether it's the four milers, every well that we're drilling down there is really performing exceptionally well against expectations. So both teams are hitting on expectations. We see some real good tailwinds as we head into the second quarter, and again, evidenced by a reaffirmation of our oil guide. So we are very confident and pleased with how we've set up for the second half.

Neal Dingmann (Energy Analyst)

Great answer, Chris. Then, secondly, just wanted to question on the OFS cost. You all seem to be indicating maybe a little bit of pressure there, unlike some others that are seeing things flatter. I'm just wondering, Chris, is that maybe I want to make sure I understand that right. Were you saying that, some of the costs were lower, or maybe you were just seeing reductions based on the efficiencies?

Chris Doyle (CEO)

Yeah. When we entered the year in the Permian, we were running nine rigs, so we rationalized the rig fleet, we rationalized the frack fleet. What that allowed us to do was upgrade crew, upgrade iron, and that drove efficiency. It also allowed us to capture some of the weakness that we've seen beyond just consumables, but some of the OFS weakness that we've seen. When you look at a top-tier rig a year ago, it was probably turning fairly close to 40, and it's now in the mid- to high 20s. There's certainly been some weakness in that market. I would caution, however, I've seen companies that will only focus, in fact, some of the private operators focus on the day rate and lose sight of what how a higher-tier rig and much more efficient, higher tier crew what they can deliver.

We are seeing a little bit of softness, and that's good, but we're not planning on that. This is a team that's gonna continue to drive efficiencies and claw for every inch. If OFS you know continues to weaken a little bit, you'll see us peel some more capital out or redeploy that capital.

Neal Dingmann (Energy Analyst)

Thanks, Chris.

Chris Doyle (CEO)

Thanks, Neal.

Operator (participant)

Your next question comes from the line of Scott Hanold with RBC. Scott, your line is open.

Scott Hanold (Managing Director)

Thanks. Good morning, all. My first question is on the Permian Basin, those, first designed and drilled Civitas wells. You talked a little bit about the, obviously modifying the spacing and zone targeting to get better performance. Two questions on that. Number one is, what kind of improvement do you think this can make in the performance of the wells? Are we talking like just give us some scale, like a 5%, 10%, or like what, what is the size that you're expecting? Just out of curiosity, is that uplift factored into your budget and your outlook?

Chris Doyle (CEO)

Yeah, great, great question. Yeah, that, as I said, you pointed to, super excited to get the Civitas design wells online. Yeah. There's an example, there was a previous operator that we think, we feel like over-drilled one of the pads. They're performing as expected, but we know that it wasn't the best cash-on-cash return development design. We take a little bit of a different approach. I think a lot of operators do, too, where you look at that incremental well and what that does to overall returns. We're, we're super focused on cash-on-cash returns. I would tell you that the uplift there is not insignificant.

We've built in what we believe are conservative but attainable results going forward. This is a team, again, that's even with prior operators have fully hit our expectations. You'll see a bit of a step up. Now, rock changes east, west, north, south, we get all that, and well mix will change. We're super excited about what this team can do when we have fully our hands on the wheel.

Scott Hanold (Managing Director)

Understood. Thanks for that. Switching to the asset market, obviously, you guys have been very involved over the last few years. Can you give us a sense of what your, there's a lot of transactions that continue to go through the Permian, and give us a sense of how you think about incremental activity in the Permian, along with how much opportunity you have in your existing assets to swap and trade to expand your inventory?

Chris Doyle (CEO)

Sure. We pointed, I think last quarter, to a really great trade that was made in the Midland Basin that allowed us to extend laterals, drive for higher returns, really push costs down on a per-foot basis. There are more opportunities like that that the team continues to deliver. What's interesting is with scale positions on both sides, we've got operator overlap on both sides, where we could trade out of Midland into Delaware or Delaware into Midland. We are seeing those opportunities and, as well, and we'll let value really guide us. In terms of the asset market, again, I'd take us back to where we entered a year ago with the first two transactions and then followed closely by the third transaction.

Any of those assets come to market today, and you're talking about a much different entry point. Timing is absolutely critical. Now, in terms of are there opportunities we would pursue potentially in the asset market to think about going after? I think we always look for ways to enhance our business. You're gonna hear every CEO out there talk about how high the bar is. I will tell you, I would say, we probably have the highest bar out there with where we trade, and the disconnect with the quality of what we've got versus what's there, what's on the market. Some of the things that we've seen trade, we've looked at. We'll continue to look at deals.

Anything that we do has to compete against turning around and buying a business that's trading, you know, at three times, where the market's one and a half times higher than that. So we have built a strong business. We're ahead of schedule in terms of how that business is executing, and super proud and excited about the future ahead for us.

Marianella Foschi (CFO)

Scott, and also underpin, like Chris was saying earlier, when we look at our buyback proposition, it's obviously an incredibly compelling opportunity. We kind of spoke with more intrinsic value. When you look at our business, we have a free cash flow-generating machine that, over a five-year period, equates to our entire market cap, and that's just really hard to not say impossible to find in the market right now, whether public or private.

Scott Hanold (Managing Director)

Appreciate those comments. Thank you.

Operator (participant)

Our next question comes from the line of Phillips Johnston with Capital One. Phillips, your line is open.

Phillips Johnston (Senior Equity Research Analyst)

Hey, thanks for the time. Just to follow up on Kevin's question on the return of capital, is it safe to say that the board wants to be very aggressive on the share repurchase program in the near term? Maybe just a corollary to that, with the prior framework, you've been repurchasing stock in addition to the 50% variable formula. So, the total cash return effectively is been greater than the 50%. So I'm wondering if you'll be limiting the total return to the 50% formula, with the other 50% earmarked for reduction of debt? Or would you view that as more sort of a minimum 50% promise, with the potential to exceed that amount when you see opportunities in the market?

Chris Doyle (CEO)

Yeah, I'll kick us off here. I think the board and management will be super focused on whatever generates the highest shareholder return and strengthens our business. Now, today specifically, and today more generally, does that mean we might more heavily allocate that return to buybacks? I think that's probably a fair assessment. I would say on the question of a before, we were really limited to the other 50% of the cash flow, post the base dividend, post the variable dividend component, to buying back our shares.

What that didn't allow us to do, and I think the company's done a really good job of opportunistically working down some of that concentrated ownership at the top, but what it didn't allow us to do was address and accelerate our delevering plan. That's why I think this is a really strong enhancement to the overall program where we can protect and lean in on a buyback, and at the same time, not stretch our leverage and really progress towards our leverage target.

Phillips Johnston (Senior Equity Research Analyst)

Okay, thanks for that. Then just on the four-mile laterals, sounds like so far, so good. Can you maybe talk about what's embedded in your production guidance regarding that fourth mile? Are you giving it some sort of a haircut? And if so, what are the specifics there?

Chris Doyle (CEO)

Yeah, I'll take us back to the approach we had last year with the three milers. And that was we were very confident in the first two miles. The third mile, we had risked. You saw that play out quarter-over-quarter towards the end of the year, where those wells actually performed in line with the two milers. Super excited with how those three milers executed. Now, it's replaying itself on the four milers. Very strong performance, above type curve expectations. We are risking that fourth mile still, being conservative as we are, and so that's gonna show up, could show up, towards the end of the year.

I would tell you the type curves that we have on these four milers are quite compelling in terms of returns, and so any type of outperformance, now all of a sudden, you've got potential game changers. Yeah, we're focused on let's watch these things produce. We're focused on upsizing infrastructure in the area to unleash these wells. And we're super excited, not just from an operational execution perspective, but seeing contribution throughout the lateral. The team's just done a phenomenal job of efficiently executing and bringing these things online. Then the results are just the proof will be in the pudding, but the results are really, really exciting.

In terms of going forward that's some tailwinds. If it plays back, remember the fourth mile on these wells going to some of the best rock. I think interesting, we talked about the ground game in the Permian quite a bit. There's a ground game in the Rockies as well, that you've got a team here that I think is a differentiated weapon within the DJ in terms of what we can execute. Long-reach laterals and effectively delivering oil from four miles away is fantastic. Super excited what the team's done and really excited to see these wells continue to perform.

Phillips Johnston (Senior Equity Research Analyst)

Sounds good, Chris. Thank you.

Operator (participant)

Our next question comes from the line of Gabe Daoud with TD Cowen. Gabe, your line is now open.

Gabe Daoud (Managing Director and Energy Equity Research Analyst)

Thanks. Morning, everyone. Thanks for taking my questions. Chris, maybe any thoughts you could share right now on 2025 and just capital allocation across the two plays relative to this year's capital allocation, and also capital allocation within the Permian, specifically Delaware versus Midland?

Chris Doyle (CEO)

Sure. You know, this is, coming into this year, the calculus was pretty difficult because we didn't know how the team would execute. As we look ahead, and certainly it's too early to guide where we're gonna be in 2025, but as you look ahead, the challenge that this team's going to have is, this is real-time improvements, enhancements throughout the Permian and in the DJ. The game is changing in both basins, and so there are a lot of moving pieces that will drive relative capital allocation between the DJ and the Permian. Keep in mind, we also have, again, the tailwinds on the regulatory side with compromise. That gives us, you know, into 2028, good clarity in developing the asset, and that's going to impact how we think about capital allocation.

There's a lot moving. In the Permian, specifically, as you think about Delaware versus Midland, certainly we're more levered to Midland, both in terms of scale and in production and inventory. Some of our best returns on the Delaware side. Now, we have, I think we mentioned in the past, a previous operator was looking to develop some 1-milers and good returns, don't get me wrong, good returns, but the team is taking the time to say, "Look, how do we extend these into 2-mile developments and drive some additional efficiencies?" We're working that through the system. Really excited to start allocating to the Delaware. Just given the scale and everything, we're going to be more weighted to the Midland, and we're super excited about that as well.

I think while it's early for 2025, I'll just take us back to how are we gonna run this business? We're gonna run this business to maximize free cash flow, keep production broadly flat, and generate as much free cash, get it back to shareholders, get it back to our balance sheet as we can. I think that business model is really interesting because it does a really important thing. It creates capital scarcity, and when you have capital scarcity with two super competitive teams, you start finding ways to improve that capital allocation mix. That's what we're seeing from the DJ. It's what we're seeing from the Permian. These men and women are finding more and more ways to improve returns.

It's gonna be a lot of fun as we set up for 2025, but there is a lot of noise in the system.

Gabe Daoud (Managing Director and Energy Equity Research Analyst)

Understood. Understood. Thanks, Chris. Obviously, a bit too early still for 25, but that's helpful. Then just as a follow-up, just going back to, well design and spacing in the Permian relative to the prior operator or operators, can you maybe just remind us, broad strokes, what are spacing, or well per section assumptions in, Midland right now? Is that, like, that little bit of a wider spacing relative to the prior operator, is that embedded in your inventory number?

Hodge Walker (COO)

Yeah, thanks for the question. This is Hodge. As Chris mentioned, earlier this year, we've had some pads come on from prior operators that we feel they probably drilled it at a higher density than we would. As we move into our designs, we're taking that into consideration. Every additional well that is contemplated within a section has to be competitive from a returns basis. We look at this on a well-by-well, incremental returns basis. Within the Midland Basin, within our sections, that's like 4 well-5 wells per section, but bench to bench, those things vary. We don't have a cookie cutter across the whole thing. We make sure that we understand as rock changes north to south, east to west, and what benches we're operating in. We're gonna make sure that we're as efficient with that incremental capital on every well bore.

Gabe Daoud (Managing Director and Energy Equity Research Analyst)

Understood. That's very helpful. Thanks, guys.

Chris Doyle (CEO)

Thank you.

Operator (participant)

Your next question comes from the line of Tim Rezvan with KeyBanc. Tim, your line is open.

Tim Rezvan (Managing Director and Equity Research Analyst)

Good morning, folks. Thank you for taking my question. I wanted to start on the balance sheet. From your presentation, it looks like you have about $475 million left on the deferred Vencer payment. Using, you know, big numbers, maybe $1.5 billion of free cash flow, $750 million for the balance sheet. What I'm getting at is we see leverage kinda hanging on north of 1x here for several quarters looking forward. So as you adjusted your cash return framework, and Chris, I was wondering if you could speak from the board's perspective, why is there a need to return 50%, and how does kinda debt pay down factor into value creation? I'm just curious how they're thinking about that.

Chris Doyle (CEO)

Yeah, I'll let Marianella take this one.

Marianella Foschi (CFO)

Tim, good morning. Look, we remain extremely committed to our balance sheet, right? We have one of the more conservative leverage targets out there, 0.7x- 0.75x. We took debt to finance the Permian transactions, and that was an incredibly deliberate decision we took to de-risk our corporate outlook, and it was the right one. We're no question, a stronger enterprise today. You know, like I've said in prior quarters, for us, it's more about taking meaningful steps and taking meaningful progress towards delivering the de-levering every single day. This is why you've seen us come out and take steps like complete our asset sales program earlier this year to accelerate that de-levering process.

Then further to your point, this update we just announced to the shareholder return policy will also continue supporting and underpinning our balance sheet initiatives. We carefully balance those capital location decisions between paying down debt and then returning that cash to shareholders. When we look out and we see our plan, you know, we're comfortable with the pace of delevering or de-levering efforts, and frankly, we can't ignore the tremendous opportunity that our stock presents to us right now. Even at levels well north of where we're currently trading. We're really balancing all those components in our four pillars in a way that delivers maximum value to our shareholders.

Tim Rezvan (Managing Director and Equity Research Analyst)

Okay. Yeah, that makes sense with the, where the stock price is today. I appreciate that. hen, as my follow-up, Chris, kinda we share your views on some of the sort of surprising valuations we've seen for some of the M&A deals. As you think of kind of future opportunities, is it just this idea that I'm just curious, do you know what sort of is driving that? Is there some sort of new scarcity value for these, you know, $500 million+ packages? I'm just trying to get any insight, 'cause oil has been obviously, you know, pretty stable here for a year. Kinda curious what's driving that?

Chris Doyle (CEO)

Yeah, to your point, you've seen oil has been fairly stable. You have to see a little bit of weakness going into 2025, so what's driving those valuations? Not sure if it's scarcity. Don't know exactly how others are bidding on these assets. I can tell you how we underwrite them, and that's conservatively. It's how we underwrote the entry with Tap Rock, Hibernia, and Vencer. Again, timing is everything. And again, it's just look at our DJ package as well. These were non-core assets trading at a full turn above where our whole company is trading. It's just, it's a bit of a head scratcher why that's not reflected better in our value, and that's this team's job to close that gap.

I think, scarcity could have something to do with it, and, we'll remain disciplined, and, we're generally a conservative buyer. I think that's the way you win long term, and that means we may miss out on some things, and that's okay. I will say, how our underwriting has been in the past is also changing, right? As you have a team where you've got confidence, hey, we can deliver mid-$700s on CapEx. We see line of sight going to the low $700s in the Midland Basin. That changes our ability to underwrite. But at the end of the day, everything that we do, you're gonna come back to say, "Okay, well, why don't you just go buy this one asset here?

It's got a couple thousand wells and inventory of high quality stuff, and it's trading at 3x." And that's called Civitas. Again, this change in the shareholder framework is gonna be helpful, and I think drive home that point even further. Hey, we've got a great opportunity within the walls of Civitas, and teams on both sides of the company really executing at a very high clip.

Tim Rezvan (Managing Director and Equity Research Analyst)

Okay, thanks for the comments.

Operator (participant)

Your next question comes from the line of Leo Mariani with Roth Capital. Leo, your line is open.

Leo Mariani (Managing Director and Senior Research Analyst)

Yeah, hi. I wanted to follow up a little bit on some of this downtime that you guys had in the DJ. I was hoping you could kind of, you know, quantify that for the second quarter. Was this kind of a couple thousand BOE per day? And it sounds like you have some expectations that's gonna be present as well in 3Q. So I don't know if you guys have a rough estimate of what that might look like in 3Q as well.

Hodge Walker (COO)

Yeah, Leo, this is Hodge. As Chris mentioned, we've had some extreme temperatures here in Colorado. We've seen some impacts in June, and we saw impacts in July. Today we're probably gonna be 100 degrees, 98 degrees today. We're definitely seeing some impacts on production. I think it's in that ballpark that you're referring to. It's transitory. This isn't lost production. This is production that kind of gets shifted out in time, and really what you'll see is a little shift from what we had talked about earlier on production from third quarter into fourth quarter. But this is something that we'll work through. It's not a lost production.

Leo Mariani (Managing Director and Senior Research Analyst)

Okay. And then obviously, you've done a great job, or reducing well costs, most prominently on the Midland side, and clearly, you've got targets to reduce those costs a little bit further. Assuming that you guys are able to get to those, you know, new well cost reduction targets, which I guess is a handful of more percent, depending on the basin, where do you see that kind of putting maintenance CapEx for the company? I know that you still have a goal of being broadly flat, it sounds like, over the next few years.

Chris Doyle (CEO)

Yeah. Thanks for the question. Yeah, as we entered 2024 with 9 rigs in the Permian, we knew we were going to be really front, front half loaded on CapEx. So we've got a couple of things that are really making 2024 a little bit noisier than we would like. We came off the high capital spend, but 2/3 of our capital, or 64% of our capital, hit in the first half. Now, that is setting up the back half growth with second and third quarter TILs representing about 2/3. In the DJ, as an example, in the first half, I think we TIL'd just under 50, well, 45 wells. In the second half, we'll TIL over 70. So, we're excited about how the second half has set up.

But when we entered, we knew 195 as a company was not a maintenance level. You know, we were taking over private assets. These guys were really ramping activity. We needed to moderate that. We would moderate that. And so 195, not as a maintenance capital level going forward. I think what's changing and what's really interesting is, where is that maintenance level? Because with capital costs coming down as significantly as they are. You know, as I, the one thing I would point to, we've got a 10% target out there, or a 10% realized, 15% target on the Midland, a little bit less on the Delaware. That's really about... We've had a ton of swings at the plate on the Midland. We're super excited about what the teams delivered.

On the Delaware, we've had fewer swings at the plate. And so as we dig in on the Delaware side, I think you'll see some additional cost savings that we can work through the system. So there's a lot of noise in the overall capital allocation system that we'll work through as we head into 2025. But again, we'll figure out what that maintenance level CapEx is. I think importantly, in 2025, you'll see us try and baseload activity a little bit cleaner throughout the quarter now that we're fully in control of the assets. And we'll see where we end up, but it's going to be targeting broadly flat production year-over-year.

Leo Mariani (Managing Director and Senior Research Analyst)

Okay. Yeah, that's helpful color. I mean, it sounds like certainly the punchline is it's gonna be below 195, and I guess we'll see, you know, where it comes out. I guess just lastly for me on taxes, you guys did take down your cash tax estimate a little bit here in 2024. Wanted to get maybe a high-level sense of what you guys are seeing as we roll into 2025. Are you still able to defer the preponderance of the tax this year?

Marianella Foschi (CFO)

Leo, this is Marianella. We did take down the guidance about 12% at the midpoint on cash taxes. That was primarily related to somewhat a slightly conservative assumption on cash taxes for the year as we completed an acquisition in the first quarter. The actual cash tax will move down a little bit, but perhaps not as materially. And then as we look into next year, you know, obviously, having lost a little bit of the tax shield with not having an acquisition next year, right? It is expected to trend down or trend up, sorry, year-over-year.

Leo Mariani (Managing Director and Senior Research Analyst)

Okay. Is that going to trend up a lot, or you still think there's still a decent amount of shield?

Marianella Foschi (CFO)

It's probably gonna trend up a meaningful amount. You're probably looking at somewhere in the $75 million dollar range or so, $75-$100 at, at $75 dollar oil.

Leo Mariani (Managing Director and Senior Research Analyst)

Okay. Thank you.

Operator (participant)

Your next question comes from the line of John Abbott with Wolfe Research. John, your line is open.

John Abbott (VP of Exploration and Production Research)

Hey, thank you very much for taking our questions. Chris, I just want to go back to this discussion about production being broadly flat year-over-year, and I just want to make sure that I understand. So oil production is expected to increase gradually from 3Q into 4Q. It sounds like you want a more level loaded program next year. I understand the idea is to maximize free cash flow. But I just, I'm trying to understand the cadence, potential cadence in 2025. So it's flat year-over-year. Why not hold the 4Q production rate flat, and why is that not a possibility? Or how do you sort of think about that?

Chris Doyle (CEO)

Yeah, I think, thanks for the question, John. It's broadly flat, that's the overall guideline, but we're gonna look at multiple, multiple iterations, whether that's keeping exit flat, or year-over-year flat, or I would point us back to 2023. When we entered the year, we saw a big disconnect between service costs and the commodity, and we said, "Hey, we're gonna let production moderate a little bit," and, and the team ended up outperforming and, and keeping production flat again. So I would say broadly flat's the starting point, but we're gonna gut check the model and the cap allocation to see if it makes sense to keep the exit flat, or go a different direction.

We'll have a lot of work to do this fall as we get ready for 2025, and excited to ultimately have a little bit of a more steady state program going forward. We'll look at all paths to allocate capital to drive long-term shareholder value.

John Abbott (VP of Exploration and Production Research)

Appreciate it. The second question is on hedging. It sounds like you wanna add more hedges, and as you sort of llook at the oil macro out there, how are you thinking about the extent that you wanna be hedged in 2025?

Marianella Foschi (CFO)

John, this is Marianella Foschi. Thanks for the question. Look, we have a hedging program that underpins our balance sheet delevering initiatives, right? With that, we wanna de-risk the pace at which we're delivering on a go-forward basis. Right now, our hedging program have basically, as long as we're above our leverage target of 0.75x, you will continue to see us roll through 30%-40% of expected next 12 months on the hedging side. We just recently rolled in Q3 of 2025 at very attractive prices about a couple of months ago, when oil was, or at least front month, within the low $80s.

I'll say, we have a structural hedge somewhat in our business, right, with the low cost structure that we have, that we continue driving down lower. When you combine that with a curve that's backwardated, along with the meaningful progress that we expect to make on leverage, we don't expect to have to really want to or need to add hedges beyond a 12-month period at this point. I think all those components leave us extremely comfortable with our pace of delevering and our free cash flows over that time frame. So between now and then, you'll continue to see us roll in the quarter as it rolls out, and you know, that's what we will continue targeting on a go-forward basis.

John Abbott (VP of Exploration and Production Research)

Appreciate it. Thank you for taking our questions.

Chris Doyle (CEO)

Yep. Thanks, John.

Marianella Foschi (CFO)

Thank you.

Operator (participant)

Just as a reminder, if you'd like to ask a question, please press star one on your telephone keypad to get your question into the queue. Our next question comes to the line of Oliver Huang with TPH. Oliver, your line is now open.

Oliver Huang (Director of Exploration and Production Research)

Good morning, all, and thanks for taking the questions. For my first question, I know this stuff is always lumpy, and it's still pretty early to be thinking about 2025, but as we approach the back half of the year, any sort of early thoughts in terms of how you all are thinking about picking back up activity to ensure the 2025 program is coming along at optimal levels? Just kind of thinking about how this year's program was front-end weighted on a capital side, and how you all have been talking about wanting to level load it a little bit more going forward.

Chris Doyle (CEO)

Sure. Thanks for the question. You know, yeah, 2024 is a little bit of an anomaly. I think what's interesting, and as we head into the second half, what's not baked in is, are there additional gains on the capital side where we could step back, redeploy that capital, rather than, as we did this quarter, reduce overall CapEx by $50 million, redeploy that capital to strengthen may not hit production in 2024, but to strengthen the exit, strengthen as we head into 2025. I think that's the beauty of what this team is delivering, is we can lean in, just as we've done with the DJ. This is a highly functioning team that now we've got confidence we can lean in as we head into 2025.

So capital savings could come back to additional free cash flow to take to the balance sheet, or it could be redeployed. And we'll look for the opportunities to redeploy that capital and do whatever is best in long-term shareholder value. But all eyes for us are let's look at 2025 and strengthen what we can, and if the opportunity is there to reallocate some of that capital, we'll take it.

Oliver Huang (Director of Exploration and Production Research)

Okay, that makes sense. For my second question, I know you all haven't talked about this too much, but just wanted to kind of hit on, maybe if you could provide some color on how you all are thinking about simul-frac operations in the Permian, especially in the Midland. Is this an opportunity set or something that could get implemented in the coming quarters in a more fulsome way to kind of drive more savings?

Hodge Walker (COO)

Yeah, Oliver, this is Hodge. Thanks for the question. Going back and looking at where we were with building this team out and what this team has done, what I think you've seen through the capital efficiencies, the operating efficiencies, is this team really leaning in on the way operations were being done. Optimizing the equipment, optimizing the designs, and really building a strong track record of delivering continuous improvement. To your point and to your question, now, what are the incremental things that we can bring to the table for continuous improvement on the completion side? We are in the process of putting plans in place to move towards simul-frac towards the end of this year, in the middle of December.

Oliver Huang (Director of Exploration and Production Research)

Okay, perfect. Then would any sort of savings from simul-frac be embedded within the target that you all have outlined today already, or would that kind of be in that plus category?

Hodge Walker (COO)

The savings to date at that 765 number, they're not in there. That will be incremental savings on a go-forward basis.

Oliver Huang (Director of Exploration and Production Research)

Okay. Thanks for the color.

Operator (participant)

All right, and your final question comes from the line of Noel Parks with Tuohy Brothers. Noel, your line is open.

Noel Parks (Managing Director of Energy Research)

Hi, good morning. One thing I was wondering is, with the series of acquisitions in the Permian, has your use of service vendors remained largely consistent, versus the ones you inherited there? I was sort of wondering because, from what I'm hearing as people head towards looking at 2025 contracting for services, I feel like I'm hearing more negotiations happening earlier, but maybe going slower. So just sort of wondered where you stood with your, your roster of providers?

Chris Doyle (CEO)

Sure. You know, it's changed, I'd say, quite significantly from the beginning of the year. When you go from 9 rigs to start to 4 or 5 rigs today, when you really hone in on who are your service partners that you want to align yourself on the drilling side and completion side, that's very different from the previous operators. We're super excited to have the partners that we have in those basins. I would say what's interesting, and again, this is what will show up at the negotiating table is, guys, here's a team that's executing exceptionally well. We've peeled off 7 days per well in the Midland, as an example, between drilling and completion efficiencies.

That means they can be much more efficient, that means their margins are improving, and we can lean into that, and really be successful together. The other thing, we've seen this in the past, right? Is, as companies have entered basins, you know, enter subscale. We had, some discussions of, "Hey, do you just dip your toe in and, then start building scale around that?" No, you don't. You go in big, you establish scales as quickly as you can. That's what we did in the Midland. It's what we did in the Delaware. You step back and say, "Here's a company that's got scale positions in three basins, and we can lean, and work together with our service providers in the DJ, Midland, and Delaware to say, 'Look, here's a high-functioning team.

How do we win, win together?" We weren't in that position at the beginning of the year, right? Because we weren't ready to underpin and underwrite what we felt like was going to be a high-functioning technical team, and it's proved out that way after the first two quarters.

Noel Parks (Managing Director of Energy Research)

Great, thanks. This is really interesting. Just to circle back to something that got asked about earlier, in terms of how you changed your development approach being a little bit more judicious about infill drilling and so forth. Is development patterning your biggest philosophical difference technically with the prior operators? Just in broad strokes, is that more engineering or more better understanding of the rock driving that?

Chris Doyle (CEO)

Yeah, as we look at it, it's a little bit of both, right? It's reservoir engineering, but it's tied to our understanding of the subsurface. It's tied to how we believe wells will interact with one another. That is a big philosophical change. There are companies out there that, gosh, we've got an inventory number, and we've got to expand inventory, so let's drill eight wells a section. Guys, look at the seventh well, look at the eighth well. Those are money losers. Peel off a couple of wells, increase your cash on cash return. That's a better solution for our shareholders. Don't focus in on inventory, focus on return. So that's a big change.

I think the other big change is, look, lean into new ventures, lean into the land team. Take 1-mile wells, push them to 2. In the DJ, look to swap into pads where you've got 4-mile wells versus 3, that other operators in the basin can't do as we've done. Use that operating team to your advantage, and don't focus in on, hey, we just, we gotta drill these wells right now. Take a 1-mile, make it a 2. That's another big change. Then the final change is, again, hey, look at me, I've got a low day rate. That's great. The iron's not great, the crew's not great, so let's upgrade.

Let's spend a little bit more on a day rate, get better iron, get better crews, and whoa, you got 20%, 50% efficiency gains overnight. It's amazing how that works. Really digging in on all facets of the business, peel yourself back a little bit and figure out what drives long-term shareholder value, and then go attack. That's what we've done in the DJ. It's what we're doing in the Permian. It's a little bit of all of the above, Noel, but I appreciate the question.

Noel Parks (Managing Director of Energy Research)

Great. Thanks a lot.

Chris Doyle (CEO)

Thank you.

Operator (participant)

Thank you. This does conclude our Q&A session. At this time, I will hand the call back over to Mr. Whitmarsh for closing remarks.

Brad Whitmarsh (VP of Investor Relations)

Yep. Thank you, Jessica, and appreciate everybody for joining us and for your interest in Civitas. We'll be on the road quite a bit here in the third quarter, so we look forward to seeing you at conferences and at road shows. Please don't hesitate to reach out if you have any additional follow-up, and have a great day, and please stay safe.

Operator (participant)

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