Civitas Resources - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered stronger operations but mixed headline metrics: revenue of $1.057B and diluted EPS of $1.34; adjusted EPS of $0.99 and adjusted EBITDAX of $749MM; cash operating costs fell >10% q/q to $10.19/BOE, and oil volumes rose 6% q/q to 149 MBbl/d.
• Civitas reinstated a capital return program: 50% of FCF (post base dividend) to buybacks and 50% to debt, lifted buyback authorization to $750MM, and launched a $250MM ASR; declared a $0.50 dividend (Sept 25, 2025).
• Asset sales: signed agreements to divest non-core DJ Basin assets for $435MM (>4x 2026 EBITDAX), proceeds to debt reduction; net debt targeted at ~$4.5B by year-end 2025.
• Guidance raised/introduced for Q3 2025: sales volumes 327–338 MBoe/d, oil 154–160 MBbl/d, capex $460–$500MM, cash OpEx $9.80–$10.30/BOE; Permian to maintain high levels in Q4 while DJ declines due to divestments.
• Management transition: Board named Wouter van Kempen Interim CEO, emphasizing execution, cost leadership, and capital returns; CEO change and buyback restart are likely stock catalysts.

What Went Well and What Went Wrong

What Went Well

• Oil volumes increased 6% q/q to 149 MBbl/d, driven by new Permian wells; simul-frac efficiencies and longer laterals enhanced productivity and lowered costs.
• Unit cash operating costs dropped to $10.19/BOE (>10% q/q reduction), with Permian LOE/BOE down >15% due to lower maintenance/workovers and water disposal/power.
• Hedging gains of $69MM and added >9MM bbl of oil hedges through Q3’26; ~60% of 2H’25 production protected at a $67 WTI floor, de-risking cash flow.
• Quote: “We’ve improved field-level execution, captured sustainable cost savings… and accelerated value through non-core divestments… we are reinstating an aggressive capital return program” — Interim CEO Wouter van Kempen.

What Went Wrong

• Revenue and adjusted EPS missed consensus*, despite operational outperformance: revenue $1.057B vs ~$1.100B*, adjusted EPS $0.99 vs ~$1.08*.
• Natural gas realizations were pressured by weak Waha pricing; NGL realizations averaged ~30% of WTI, constraining commodity mix realizations.
• Operating cash flow stepped down to $298MM (from $719MM in Q1), reflecting working capital seasonality (Colorado ad valorem payments) and lower price/realization backdrop.

Transcript

Speaker 3

Today, and thank you for standing by. Welcome to the Civitas Resources second quarter 2025 earnings conference call and webcast. My name is Morgan, and I will be your operator for today's call. Please be advised that today's conference call is being recorded. I will now turn the call over to Brad Whitmarsh, Head of Investor Relations. Brad, please go ahead.

Speaker 2

Thanks, Morgan. Good morning, everyone, and thank you for joining us. Yesterday, we announced our second quarter 2025 results, as well as an enhanced capital return program. We provided some supplemental materials, and we filed our 10-Q. In addition, we announced the appointment of Wouter van Kempen, formerly our Board Chair, as our Interim CEO. Hopefully, you've had a chance to look through all of our materials, which are all on the website. This morning, our prepared remarks will come from Wouter, as well as Marianella Foschi, our CFO, and Clay Carroll, our President and COO. As always, please limit your time to one question and one follow-up, and we can get through this list efficiently. We will make certain forward-looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially from projections.

Please read our full disclosures regarding these statements in our most recent SEC filings. Also, we may refer to certain non-GAAP financial metrics. Reconciliations to the appropriate GAAP measure can be found in yesterday's earnings release and our SEC filings. With that, I'll turn the call over to Wouter.

Speaker 1

Thanks, Brad, and good morning, everyone. Thanks for joining us. As we continue to build a world-class energy company, we must stay nimble and adaptable and build a culture of performance, strong execution, and growth leadership. Civitas Resources has accomplished a lot since our formation in 2021, but there's more work to be done. As such, the Board made the difficult decision to part ways with Chris Doyle. We thank Chris for his contributions to our company and all that he has done to bring Civitas Resources to where we are today. I want to be clear that this is not a strategic shift for Civitas Resources. This was a Board decision that we needed new leadership to deepen our focus on execution and performance, on discipline, and on growth leadership, and push the company forward. I will act as Interim CEO until a permanent replacement can be found.

Howard Willard, who has served on our Board since 2021, has been appointed Chair by the Board during this period. We enter 2025 with four clear priorities as we work to build a stronger and more durable Civitas Resources in the face of significant macro volatility. Number one, run the business to maximize free cash flow and build upon a leading cost structure enhanced by sustainable capital efficiencies. Number two, deploy that free cash flow to protect and strengthen the balance sheet. We laid out a goal of achieving $4.5 billion in net debt towards the end of the year. Number three, return cash to shareholders, which was targeted to primarily come through a strong base dividend, with the potential for higher shareholder returns tied to hitting our debt reduction target.

Number four, lead in ESG and build a long-term sustainable business as we execute on our goal to further reduce our emissions profile. As we look back on the first half of the year, Civitas Resources has taken decisive action to enhance our operational execution, sustainably lower our cost, and improve our financial position in order to maximize value for shareholders. With a number of our goals already achieved and confidence in meeting our debt reduction targets for the year, we are very pleased that we can now reinstate an aggressive capital returns plan with a buyback authorization that is well over 25% of our market cap today. Let me now hand it over to Marianella to go through this in more detail and cover this year's accomplishments.

Speaker 0

Thanks, Wouter. As you mentioned, we've taken decisive actions to strengthen the company and our forward plans, including, first, as we came into 2025, we optimized our investment levels, focusing on higher free cash flow and returns. Second, we reduced price risk and protected our cash flow with increased hedges. Taking advantage of multiple commodity price opportunities over the last couple of months, we are now approximately 60% hedged on oil for the remainder of this year, which is about twice our normal levels. Next, we proactively issued $750 million in new senior notes with a focus to enhance our liquidity and extend debt maturities. Today, we have around $2 billion in financial liquidity, and by the end of the year, we anticipate no borrowings outstanding on our credit facility. Fourth, we're on track with our previously announced $100 million cost optimization and efficiency initiative to enhance margins and returns.

Oil costs are lower in each basin, oil differentials are improved, and we're driving cash operating costs meaningfully lower. Clay will provide more color on this effort here shortly. Lastly, we significantly exceeded our full-year target for non-core asset sales, with executed agreements to divest $435 million in non-core DJ Basin assets at a strong valuation. Achieving a four-times multiple on 2026 cash flow establishes another strong marker for our DJ Basin assets and allows us to further high-grade our position in the basin. The divestments constitute the northernmost part of our asset base, an area with minimal near-term development plans, and it accelerates significant cash flow with proceeds targeted for debt reduction. Production from the divested assets is estimated to be around 10,000 barrels equivalent per day for next year, half of which is oil, and the transactions are expected to close around the end of the third quarter.

Each of these achievements is significant standalone. Combined, we have accelerated our plans for the year, putting our $4.5 billion year-end target squarely in sight. With confidence in our plan, we intend to take advantage of the compelling value our equity provides today. Going forward and including full-year 2025, we plan to allocate 50% of our free cash flow after the base dividend to share buybacks on an annual basis and the remainder to debt reduction. For the current year, that comes to about $375 million in repurchases, inclusive of the $70 million repurchase year to date. In strong support, our Board increased our share repurchase authorization to $750 million, which represents about 28% of our current market cap. We intend to rapidly take advantage with a $250 million accelerated share repurchase program, which is expected to be completed within the third quarter.

Before handing it over to Clay, I will quickly summarize our strong second quarter results, which were ahead of plan, demonstrating the strength of our assets and the capabilities of our team. Oil volume grew 6% quarter over quarter. Cash operating expenses on a unit basis were more than 10% lower, and capital investments went on the low end of the plan, driven by lower oil costs and meaningful gains in D&C cycle times we have shown today. These outcomes, along with strong oil realizations and hedging gains, led to nearly $750 million in adjusted EBITDA and over $120 million in adjusted free cash flow for the quarter. With an expected significant increase in our volumes, along with capital and operating costs running lower, we expect a meaningful ramp in both EBITDA and free cash flow in the second half of the year.

We are pleased with the recent tax act and the support it establishes for our industry. This new act will ensure we have minimal cash taxes for the foreseeable future, with over $200 million in savings over the next five years. Finally, we published our annual sustainability report last week, which can be found on our website. I hope you'll take time to read through the report, which includes a review of our performance and provides an update on our sustainability initiative. With that, I will turn it over to Clay.

Speaker 2

Thanks, Marianella, and good morning, everyone. Since joining Civitas Resources about three months ago, I've gained a better understanding of our assets, and I've been impressed with both the asset quality and the technical and operating performance of our teams. We were able to hit the ground running and deliver solid results in the second quarter, and I'm looking forward to building on this momentum and continuing to improve the results of the company moving forward. Let me start with some second quarter operational highlights from the Permian. Starting in the Delaware, we've been getting ready for our first significant operated activity after using most of last year to optimize the acreage footprint for longer laterals and higher working interest. In the second quarter, 50% of our wells drilled and 30% of our completions that occurred in the Permian were in the Delaware.

Right out of the gate, the team is delivering impressive efficiencies as year-to-date drilled footage per day is around 20% higher than planned, and our completions are averaging over 170,000 barrels of water per crew per day, reflecting strong performance from simultrack operations. We recently commenced production on our first operated Delaware pad in New Mexico, and while it's very early, initial production rates from these two-mile wells are strong, averaging over 1,200 barrels of oil per day. Third quarter turn-in lines should include around 20 Delaware Basin wells, which are a key driver of significant Permian production growth in the second half of the year. In the Midland, the teams have continued to deliver strong efficiencies as well, highlighted by an average daily footage drilled per well of more than 1,850 feet in the second quarter.

Our teams overcame water takeaway challenges, and we commenced production on a number of new pads across our asset. These included our first co-development in the northern part of the asset, targeting the Middle Sprayberry through Wolf Camp A, and we also delivered continued Wolf Camp D success with wells in Glascock and Reagan counties. Marianella mentioned our oil growth as a company in the second quarter. Essentially, all of it came from the Midland Basin. Moving over to the DJ, it's a similarly impressive story with efficiency gains on both the drilling and completion fronts. Drill times on all lateral links are better than planned, and of particular note, the team is delivering four-mile laterals spud to spud in about six days, which is really great execution.

On the completion front, our teams are leveraging real-time AI software to optimize frac parameters, which are contributing to 5% faster cycle times year to date. Our core Watkins area continues to deliver. In our materials, we highlighted the eight-well Invicta pad, which is a great success story, benefiting from our land optimization initiatives as well as our technical advantages in developing resource through long laterals and sometimes unique wellbore geometries. Utilizing one of our existing surface locations, the Invicta pad includes some of the longest wells ever drilled in Colorado, averaging 4.3 miles, and our completions covered the last three miles of the lateral. Production in early days is quite strong, averaging over 1,100 barrels of oil per day per well.

Drilling and completion efficiencies realized in each basin are a major contributing factor to our reduced well costs, which are 7% lower in the Delaware, 5% lower in the Midland, and 3% lower in the DJ compared to the beginning of the year. Along with other capital initiatives, production and midstream optimization, and corporate cost reductions, we are on track with our $100 million cost optimization initiative, and about 80% of this amount is captured to date. As a reminder, $40 million of the savings are impacting 2025. These are great wins for Civitas Resources, and the teams are continuing to identify additional savings. As it relates to the remainder of the year, we've updated our full-year volume guidance in our materials to account for the impact of our asset divestitures.

With a high turn-in line count in the middle part of the year, second half production is expected to grow approximately 7%. Third quarter production is expected to be higher than the fourth, mainly due to the timing of our asset divestitures, and we are off to a strong start in July with production in line with our third quarter guidance. On cash operating costs, our teams are driving in the right direction, with our second half expected to average less than $10 per BOE. On capital expenditures, we are on track to achieve our full-year outlook. Third quarter CapEx is anticipated to be higher than the fourth quarter as our efficiency gains are pulling activities forward. All in, we have strong momentum and are set up for an impressive second half of the year. Now I'll turn the call back over to Wouter for some closing comments.

Speaker 1

Thanks, Clay. Before going to questions, let me recap where we are today. First, we're executing on the base business and have a high level of confidence in our go-forward plans. Our team is delivering every day, optimizing our resource base, and driving cost out of the system. I'm extremely grateful for the hard and safe work of our talented people. Next, we have rapidly accelerated our debt reduction plan with value-driven divestitures and significant gains on our cost optimization and efficiency initiative. This has brought forward cash flows. We now have a clear line of sight to achieving the $4.5 billion net debt goal around the end of the year. Finally, we know the importance of strong and sustainable capital returns to our shareholders.

Our 50/50 capital allocation will deliver peer leading return of capital to our shareholders, and the accelerated share repurchase program will take advantage of the compelling value opportunity we see in our equity today. Thank you for your continued interest in our company. Morgan, we're now ready to take questions.

Speaker 3

At this time, we will conduct the Q&A session. In order to ask a question, please press star and the number one on your telephone keypad. Once again, to ask a question at this time, please press star and the number one on your telephone keypad. Your first question comes from Zach Parham with JPMorgan. Your line is open.

Yes, thanks for taking my questions. First, I just wanted to ask on the strategy shift and the comfort you have making that shift right now. If we look at the financials today, your net debt's a little bit higher than it was two quarters ago when you initially made the shift. When you initially made the shift, the oil strips are a little bit lower when you made the initial change. I know you've done the asset sale, but what else gives you comfort that the balance sheet is now bite-sized for the company and that you now have the ability to go back and aggressively buy back stock?

Speaker 0

Hey, Zach, thanks for the question. As you know, we've always had a commitment to return capital to shareholders. It's one of our core pillars. We definitely sit in a more advantaged position today because of the recent steps we've taken, including the incremental hedges, the cost optimization program, and the divestments, along with the debt turnout. If you look at our business, the goal we started the year with, which was the $4.5 billion net debt target around the end of the year, all of that has been solidified, inclusive of the 60% hedge that we have for the balance of the year. If you look at it on a go-forward basis, that's going to only get better as we continue paying down debt. I just wanted you to hear from us that we're not done here. The $4.5 billion was the goal for this year.

As we continue generating free cash flow, we're going to continue deploying that to further debt repayment. You know, being in the commodity industry that we are, we continue to see a strong balance sheet as essential to continue to execute on our strategy. We believe now, given all those actions this year, that's going to continue to further, and we'll do so at a more measured pace, given where the equity lies today.

Thanks, Marianella. My follow-up is on 2026 and how you're thinking about the 2026 plans post the strategy shift and the asset sale. Your prior messaging had been that you'd hold volumes on oil relatively flat at flat-ish CapEx. Is that still the message at this point, just at a lower level of CapEx and production following the asset sales? If so, any details on what that might look like would be helpful.

Speaker 2

Zach, it's early. As we're planning on 2026, obviously, commodity prices will have a big impact. As you mentioned, we had talked about holding production flat in the $150 million to $155 million range at a maintenance capital level with the asset divestitures. That'll take us down to about a $145 million to $150 million oil range for 2026. A lot of optimization is occurring right now as we're looking at the remainder of 2025 and how that will impact 2026. I think the general message around a maintenance capital program in those production levels is where we're at.

Thanks for the call.

Speaker 3

Your next question comes from Philip Chungworth with BMO Capital Markets. Your line is open.

Thanks. Good morning. A lot to cover, but I did have a question for Clay. Now that you've been in the seat for a couple of months, I was just hoping you could share your initial impressions of the Civitas Resources operations, where things are going well, any low-hanging fruit, and in what areas could there be some more medium-term improvement down the road that'll take time?

Speaker 2

Certainly. I think it starts with we've got really good assets, and the operational execution around those assets has continued to improve. I think 2Q was another example of that, where we saw the well cost reductions. The teams are constantly looking for efficiency gains and how we're increasing pumping time and getting more barrels away on the completions every day. That's reducing, making our cycle times faster, reducing costs on wells, getting wells online earlier. I think that has all been very positive, and I expect that to continue to improve moving forward. On the facility front, we're continuing to make progress in terms of utilizing the facilities that were in place with the past acquisitions, making appropriate adjustments to those so that we can optimize our production.

As we go forward with facility designs, particularly in the Permian, we look for ways to continue to be more efficient and lower the cost there. I'm really excited about what was accomplished in the second quarter and looking forward to the go-forward on the operational front.

Great. Nice to see the asset sale target exceeded. I believe you guys had initially looked at a range of options. I was just hoping you could talk about how you settled on this specific package. Could you revisit any additional divestitures down the road?

Speaker 0

Hey, Philip. Look, we were patient. As you know, we kicked off this process a bit ago, and the patience was rewarded. We talked about during the last call how we were open-minded and trying to figure out what the most secretive assets we could sell were, and those are, as you know, highly dependent on oil prices. I would say, in general, these were assets that were further down the development plan for us. There's really minimal to no near-term impact for the next couple of years, and we were very, very pleased to have checked that box in a very big way for this year. I would say on anything that comes from here, you know we'll obviously always entertain opportunistic offers.

We were really pleased with the assets that we have in our portfolio and are not proactively looking to sell anything additional, but as always, we will entertain opportunistic interest for any pieces of our asset base.

Great. Thanks.

Speaker 3

Your next question comes from Scott Hanold with RBC Capital Markets. Your line is open.

Yeah, thanks. If I can start with the CEO change, more specifically, what are you all looking for in the next CEO? What kind of attributes are you looking for in an individual? You know there's just a lot going on right now. Do you generally have a time frame at which you hope to have that wrapped up?

Speaker 1

Yeah. Scott, this is Wouter. Nice to meet you. Why don't I take this one? You know, obviously, you can talk in great detail around what is it that we're exactly looking for, what are the time frames. At the same time, there is an indication in the filings that we've done around how long I expect to be here. We hope to be doing this in the next six months or so. What are we looking for? I think you're looking for a person who can set strategy, a person that can allocate capital in the right way, that can build a great culture, that can continue to push the company forward. I want to make sure that what I said earlier, you know, very appreciative of what Chris has done to get the company to where we are today.

We think there is a shift needed on what we're going to do here forward. That's not a strategic shift. It is really focused on how do we execute better, how do we get better performance, how do we get more cost leadership, and in the end, how do we get the share price up? Every day we look at at 4:00 P.M., we get a report card, and we don't like where the report card is today, and there's a lot of opportunity there.

I guess more of my point is, do you guys have the strategy in place that you want? Do you want to find a CEO that's going to fit that strategy, or is Civitas Resources an open slate where, look, we're looking for the best CEO, and if you've got a different path for us, you know we're going to take that? Which option are you looking for? Are you looking for somebody to come in and make changes or somebody more that's going to fit the culture and the strategy you have kind of laid out at this point?

Every CEO that will come in will make changes. There's no doubt about that. That's all good. This is not about an A to Z strategy overhaul. This is not about, hey, let's bring someone in who is going to sit with the board and decide that what we have done to date needs to be done completely different. That is absolutely not where this is. This is not about making a massive strategy shift.

Okay. That's clear. Thanks for that. Let's go back to sort of Zach's question on the strategy shift with stock buybacks. Look, I'm going to pose the question to you. Why not push debt down further, right? I mean, what we've seen, you know I've been doing this almost 30 years, is that high debt in E&P companies, especially mid-cap E&Ps, is tough, especially given the uncertainty and volatility of commodity prices. I know you've locked in some stuff this year, but look, you got to look for the longer term. Why not just keep willing that debt down to like as low as you can get? The stock price will pick itself versus trying to force the stock price issue today. Why not take it? Wouldn't that be more of a debt reduction today? Wouldn't that be a longer-term benefit to you?

Speaker 0

Hey, Scott, this is Marianella. I'll start by saying that we did everything we set ourselves to do this year in terms of the goals on balance sheet, right? We trimmed out debt. We got the asset divestitures done. We increased hedges. As you think about just the continued debt repayment, having clarity on $4.5 billion was the first and foremost goal that we had, and we reiterated that many, many times over the last six months. Past that, we continue to believe that we need to maintain a strong capital structure, right? To your point, we're going to weather cycles, and we're going to weather low commodity prices again. I think the way we see our business is we're going to continue progressing those balance sheet goals. I think we still believe that we need to continue paying down debt. It's not just the absolute amount of debt.

There's so much more to it as well. There's the composition of the debt in your maturity stack. There's the cost structure. There's how hedged are you. We're certainly trying to not only continue paying down debt, but just de-risking all those other balance sheet components. As we move forward past the end of this year, where we expect to be around $4.5 billion, we still believe that companies of our size and industry that leverage below one times is ideal longer term. Like I said, past the year-end, we're going to balance the distribution of that between equity and debt with our strong free cash flows.

Okay. Thanks. I appreciate those comments, and I get your point on comfort in hitting your goals. I just would kind of suggest it's probably better to pay down debt even further, just get more aggressive there today. I'll leave it there. Thanks.

Thank you.

Speaker 3

Your next question comes from Lloyd Byrne with Jefferies. Your line is open.

Good morning.

Your line is open. You may have your line on mute, sir.

Sorry, I'm on mute. It's only taken me three years to get this right. Nice to meet you, Wouter and Clay. Welcome. Let me start with Marianella. How are you thinking about, or Wouter maybe, how are you thinking about the dividend at these levels? I mean, it seems high and maybe taking this opportunity to reduce that and buy back stock or pay down dividend. I'd like to go back to Clay afterwards and just talk about some of the opportunities he sees and the timing on reducing costs.

Speaker 0

Hey, Lloyd, thanks for the question. On the dividend, I mean, look, just consistent with what we said on prior calls, we've always been committed to that base dividend. We believe it's important that our investors can count on that return quarter over quarter and through the cycle. I will also note that with this accelerated repurchase program, we're buying 10% of our market cap. That will inherently save about $20 to $25 million in dividends on a go-forward basis. That's just with the repurchases we're doing the balance of this year. We remain committed and like our fixed dividend. I think at this time, there's really no changes that are on the table in that regard.

Lloyd, did you have a follow-up with Clay?

Yeah, Clay, just talk about timing where you see the most opportunity. I feel like the DJ, you've lagged a little bit some of the tiers. How quickly can you take asset costs down there? Like, give me some timeline on improvement.

Speaker 2

Sure. We talked about the cost initiative and continuing to lower costs, improve performance at this call three months ago. I think a lot of progress has been made where we've got 80% captured on the $100 million run rate in 2026 and feeling good about the $40 million in 2025 after a three-month period. We've got a longer list of items that are still in the works, but we don't consider them captured yet. It's across all categories. We've got things on the CapEx side around both drilling and completions, design changes. There's a component of service cost reduction in there, local sand, bringing more prop and providers into the mix, which is creating competition. On the LOE side, things around compression optimization, getting more power to our locations and reducing generator costs.

On the midstream and marketing front, what I'd say on the DJ is we're drilling the longest laterals in that basin. We've got some examples in the materials today. Our well costs that we're talking about are down around $650 a foot to where I think we're really competitive. The teams are continuing to look for more and more ways to keep bringing those costs down and getting creative to go add more inventory to the current asset with some of the things we can do around these drilling geometries like we showed on this Invicta pad.

Great. Thank you, guys.

Thank you, Lloyd.

Speaker 3

Once again, in order to ask a question during the Q&A period, please press star and the number one on your telephone keypad. Your next question comes from Leo Mariani with Roth Capital. Your line is open.

Yeah, hi. I wanted to see if we could get a little bit more detail on some of the recent well results. You guys obviously kind of highlighted the Wolfcamp D continues to look good. Can you provide a little bit more color around your Wolfcamp D results? Are you generally co-developing that in the Midland Basin as well?

Speaker 2

Sure. We like what we're seeing on the Wolfcamp D and continuing to look for ways to keep extending the limits around that bench. It seems like we're getting earlier oil cuts on the Wolfcamp D producers, which is also a good thing. We're continuing to look at all the benches across the play, like I talked about in my comments, and continuing to see encouraging results. We're customizing completion designs by the different benches as we continue to get more production histories there and doing some things on the G&G side to continue to gain technical information that will help us understand how we're most effectively treating the fracs on the completion side and getting the most out of these wells. The expectation would be that would continue moving forward, and we'll continue to provide updates there.

As I mentioned, we have a lot of completions in the Delaware in 3Q, and more information to come there as we move forward.

Okay. Just kind of sticking on the operational side, obviously, you're relatively new to the company. Could you maybe just talk a little bit, Clay, about how you kind of see the inventory and the different buckets? You know, DJ versus Delaware versus Midland, where do you kind of see longer and sort of stronger inventory at this point based on your kind of own assessment of the asset base?

Sure. We talk about the overall inventory being 2,000 locations, 1,200 in the Permian, 800 in the DJ. From an overall return standpoint, right now, the Permian is a little better returns, which is why the capital allocation is what it is. As we keep making improvements, as we keep lowering costs in both basins, we expect for that to, at a minimum, offset any productivity degradation over time, if not improve well performance with different approaches on the drilling and on the completion side. We're really excited about the Delaware, and it's really, really early results there, but more are going to come as we move forward. We have low breakevens in our program, but we need to continue to enhance the resource to reserves progression and keep lowering costs and improving performance.

As I mentioned on the previous answer, we're continuing to add more on the G&G space around getting as much technical information as we can around the acreage that we have, both in extending limits in both of these areas, but also looking at secondary objectives that are present shallower and deeper in both of these areas that can keep replacing the inventory and progressing it forward and elevating the quality as we move forward.

Okay, thank you.

Speaker 3

Your next question comes from John Abbott with Wolfe Research. Your line is open.

Hey, good morning, and thank you for taking our questions. My first question here is for you, Clay. I mean, we've spoken a lot about the opportunity in terms of costs and where you see that. When we were just sort of thinking about, you know, not the change in strategy, but what the firm is looking forward in terms of strategy, in terms of consistency, I guess my question is, when you sort of look at, you have assets in the Northern Delaware, you have assets in the Midland Basin, you have assets in the DJ. While you can execute on lowering costs, how do you think about the ability to sort of coordinate and provide a more level and consistent program that provides that sort of consistent performance that you guys may be sort of looking at?

What's the ability to coordinate these assets while at the same time reducing costs and hitting your targets?

Speaker 2

Sure. We need to continue to get more and more benefit from a multibasin set of assets and how that can optimize the performance at the total company level. Think about that from a capital allocation standpoint, from a timing of completions, how we can level load, how that helps from a supply chain standpoint when we're thinking about the broad services that we have across both basins. A lot of that is already happening, but I think there's room to keep improving in that space. From a consistency standpoint, I think we're very much aligned, and we have to be able to effectively forecast different parameters, production results as we move forward and understand that we're going to have things that surprise us along the way, but that we're set up to overcome those and deliver on performance month over month, quarter over quarter.

That's the ongoing push that's occurring right now.

Appreciate it. My next question is just more of a bookkeeping question on the $4.5 billion debt target by the end of this year. In terms of achieving that, how much of that is working capital and changes in working capital? How do we sort of think about those working capital changes? Do we sort of have to think about those working capital changes next year as well? That's kind of my follow-up question.

Speaker 0

Hey, John. Thanks for the question. On a working capital basis, as you know, during the second quarter, we had our usual payment of the Colorado ad valorem taxes in April. That caused us to tighten working capital by roughly about $150 million for the second quarter. We will get some of that naturally back in the second half. The way to think about it, both for the full year and then long-term on an annual basis, is we should be pretty flat at around low $800 million of free cash flow deficit. Again, naturally, we'll get some of that back in the second half for that specific draw. That should be natural and as expected and consistent with past years.

Appreciate it. Thank you very much for taking our questions.

Thank you.

Speaker 3

Your next question comes from Oliver Huang with TPH & Co. Your line is open.

Good morning all, and thanks for taking the questions. Maybe for Clay, just as we're thinking about activity levels for the year and how companies want to avoid the start and stop loss of efficiencies. You all demonstrated some incremental efficiencies with the faster cycle times and well cost reduction. Just trying to get a sense for how are you all thinking about the faster cycle times potentially pushing things towards the upper end of your budgeted range for both CapEx and TILs, given that's something that happened last year?

Speaker 2

Yeah, we're very much focused on balancing that. The faster cycle times are lowering costs, but it is pulling activities forward. As we keep looking to optimize the remainder of 2025 and 2026, we're looking at that. We're looking at where our capital levels are at, the cost savings initiative that we have in place, and balancing all of those things to try to have a more level-loaded approach as we move through the year and into next year.

Okay. Perfect. Just for a follow-up, maybe just on the debt side once more. I know 50% of the post-base free cash flow is going towards the balance sheet. You made a comment earlier on not being done with debt reduction. Is there a long-term target goal that you all have in mind for the next leg when thinking about it from a total absolute net debt perspective versus just wanting to move towards one-times?

Speaker 0

Yeah, absolutely, Oliver. Thanks for the question. If we look at our free cash flow at mid-cycle prices, we should be paying down debt at roughly a rate of $400 million on a given basis, just taking our 2025 capital program and production protocols as a proxy. Certainly, we will have internal goals for ourselves, right? We certainly want to balance the capital allocation the right way. Like I said earlier, it's not only about making progress towards that one-time, because it's also about just holistically de-risking the business by that maturity profile, hedges, cost structure. Certainly, we will continue to pay down debt in a very material way during the near term, along with de-risking the capital structure.

Sounds good. Thanks for the time.

Speaker 3

Your next question comes from Noel Parks with Twoey Brothers. Your line is open.

Hi, good morning. I just had a couple of things I wanted to run by you. In particular, I was thinking about, and it was mentioned in the slides, on Invicta and just that that was an example of progress with land optimization. I just wondered, could you talk about maybe where things stand in those sorts of initiatives? They, of course, tend to go on a little bit below the radar. You know, continuing with swaps and bolt-ons, exchanges, and so forth, is that a significant part of what you can accomplish efficiency-wise going forward, or is most of that already kind of baked in at this point?

Speaker 2

Sure. We're definitely continuing in the ground game, the trades, the swaps arena in both basins. We have examples regularly of how that keeps enhancing the working interest, enhancing the economics of the different wells in our program. The Invicta one is really an interesting one that you mentioned because the step-outs where we use an existing surface location and have to steer around existing wellbores to get to tier-one acreage that, had you not had that expertise, had you not done those trades, that would have been stranded tier-one acreage in the play and were able to go access it. The same thing's happening in the Permian, in both Delaware and in Midland. I think most operators all understand the win-win that can occur between two operators by swapping out of op, non-op interest, and better positioning their programs.

It's been an active part of our program, and it will continue to be one moving forward.

Terrific. You also talked a good bit today about cycle time reductions and the efficiency that's already brought and what you anticipate you can still accomplish there. I'm just wondering, in each of the basins at this point, are the sorts of incremental changes you're making more proprietary ideas or methods, or are they more along the lines of choosing from the many various things that your vendors maybe have experience with and just trying to select which of those are going to be the most effective? Just their perspective across customers versus your own proprietary knowledge at this point.

Yeah, I'd say it's a mix, and we welcome it all to keep improving efficiency and improving well performance and lowering costs. We've got service providers that we work with that have some proprietary products that enable us to improve cycle times. We mentioned some of that in our presentation materials. We have innovation that continues to come from our teams around how can we move quicker from one well to the next from a MOB standpoint and reduce cycle time there. We do things that our teams have come up with around cementing where the rig has already moved to the next location, and that's when we're coming and doing the final cement job on the production casing there to make the cycle times faster as we keep going to the next well and the next well.

I think that is a necessity as we move forward that we continue to innovate. Our teams work together to find ways to keep improving performance, not only on the cost and efficiency side, but on the well performance side. Doing that by customizing completion designs, using data analytics around what are the completion characteristic recipes that produce the best wells in different areas of the field, and that our service providers keep coming up with ideas that also benefit us. I think it will continue, and it'll be all of the above.

Great, thanks a lot.

Speaker 3

This concludes the Q&A session. I will now turn the call back over to Brad Whitmarsh for closing remarks.

Speaker 2

Yeah, thanks everyone for joining us early in the morning. Appreciate the opportunity to catch up on our great results and where we're headed as a company. Look forward to seeing you on the circuit here in a few weeks. If you've got a chance or have some follow-up questions, don't hesitate to reach out to me. Thank you.

Speaker 3

Ladies and gentlemen, that concludes today's call. Thank you for joining. Have a wonderful rest of your day.