Civitas Resources - Q3 2024
November 8, 2024
Transcript
Operator (participant)
Good day, and thank you for standing by. Welcome to Civitas Resources' Third 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. If you would like to ask a question during that time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw that question, again, press star one. 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. Brad, please go ahead.
Brad Whitmarsh (Head of Investor Relations)
Thanks, Krista. Good morning, everyone, and thank you for joining us. Yesterday, we issued our third-quarter earnings release, our 10-Q, and we provided some supplemental materials for your review. These items are all available on our website. I'm joined this morning by our CEO, Chris Doyle, our CFO, Marianella Foschi, and our COO, Hodge Walker. After our 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 will make certain forward-looking statements today, and those are subject to risk and uncertainties that could cause actual results to differ materially from those projections. Please make sure and read our full disclosures regarding these statements in our most recent SEC filings. In addition, we may also refer to certain non-GAAP financial metrics.
Reconciliations to the appropriate GAAP measure are also in yesterday's SEC filings and our release. With that, I'll turn the call over to Chris.
Chris Doyle (CEO)
Thanks, Brad. Good morning, everybody. Welcome to our third quarter call. This morning, there are three key things I want to focus on. First, I'll quickly summarize third quarter results and expectations for the fourth quarter. Second, I'll share some highlights from the DJ and Permian, where we continue to enhance returns through solid operational execution and sustainable capital efficiencies. And lastly, I'll comment briefly on 2025, as it's important that you understand that our priorities have not changed. As with our usual practice, we'll provide our final 2025 plan in February. Over the past few months, we've continued to see significant volatility in commodity prices and the underlying macro environment. The actions we've taken as a company over the past couple of years strengthened Civitas and positioned us to deliver long-term value to our shareholders at any point in the cycle.
Our Permian acquisitions added depth and quality to our inventory, doubling the size of the company. We scaled positions now in the DJ and the Permian. We have a high-quality, diversified portfolio of opportunities in the lowest break-even basins in the U.S. Our team continues to improve and add to that position, delivering sustainable capital efficiency gains, proving up new zones for development, and capturing additional inventory that expands our runway of high-return opportunities, all while returning significant amounts of capital to our shareholders. Let me start with our third quarter results and fourth quarter expectations. For the third quarter, we delivered solid financial results with an adjusted EBITDA of $910 million, led by strong sales volumes, strong oil differentials, and strong cost control. Our board's recent action to further prioritize the balance sheet and share buybacks was very timely. During the quarter, we returned $227 million to our shareholders.
Based on the trailing 12-month calculation, the third quarter variable return of capital totaled $104 million. Rather than paying a variable dividend, we elected to shift 100% of our third-quarter variable return to buybacks, completing these share repurchases in October. We see tremendous value in our equity and will continue to prioritize share repurchases. The remaining 50% of our free cash flow went to reduced debt. On an equivalent basis, third-quarter volumes were slightly above expectation. Revenues benefited from strong oil realizations and solid natural gas hedging gains. Oil volumes were a little light in the quarter due to unexpected downtime at third-party facilities in the DJ and water takeaway constraints in the Permian, but these temporary issues have now been resolved. Capital investments in the third quarter reflect facility spend pulled forward from the fourth quarter, as well as accelerated drilling and completion activity.
In yesterday's materials, we provided detailed fourth-quarter guidance, where you can see the lower fourth-quarter capital guide. We remain on track with all full-year deliverables, including volumes, CapEx, operating costs, and most importantly, free cash flow. On production, factoring in our investments from earlier this year, we're above the midpoint of our original oil guidance for the year. Free cash flow for the quarter should increase significantly as oil volumes are expected 3% higher quarter-over-quarter, with DJ Basin growth more than offsetting expected declines in the Permian as we reduce activity into year-end. We've had a strong start to the final quarter of the year, with October oil production averaging 165,000 barrels per day. Let me now share a few more details from each business unit.
In the Permian, our team has done an outstanding job establishing an operating track record focused on driving capital efficiencies and enhancing the value of our assets. On the productivity front, we've begun to deliver the expected improvement in well performance as a result of our development philosophy, which focuses on incremental well returns rather than an overall pad-level return. Our Permian well costs continue to trend lower, driven by reduced cycle times, drilling and completion design improvements, and lower oil field service costs. And we're certainly not done. Here in the fourth quarter, we've initiated simul-fracs across our Permian program, with early results in the Midland Basin highlighting a more than 30% uplift in daily fluid throughput. Strong results from recent Wolfcamp D wells in the southern Midland are unlocking new resources for development as higher productivity is more than offsetting modestly higher well costs.
Returns in the D are competitive with other core zones, such as the Wolfcamp A and B, and we've identified approximately 120 Wolfcamp D locations in the inventory with mid-$40 oil break-evens. In addition, our ground game in the Permian is adding high-quality inventory by capturing more than 75 gross locations year-to-date. We've also executed a number of beneficial acreage trades and swaps to materially extend lateral links and increase working interest in near-term core developments. All of these ground game adds immediately compete for capital, and we're working even more opportunities to add to the portfolio. In the DJ Basin, our legacy asset continues to deliver outstanding results, and we've highlighted strong performance across the entirety of our acreage position in our materials. The prolific Watkins area in the southern part of our acreage comprises approximately 2/3 of our well count in the DJ this year.
In this area, we recently commenced production on 13 four-mile laterals, and the results are ahead of expectations, with no per-foot degradation observed as compared to our three-milers. Of note, the unrestricted deliverability of the Blue 4AH well set a Colorado record with 90-day cumulative production of 165,000 barrels of oil. These four-milers are another example of our team's ability to execute and drive returns through complex well geometries and extended reach laterals. This demonstrated capability is helping drive additional ground game opportunities to add high-quality inventory to our position. As a reminder, our Watkins oil is lower API crude than our typical DJ barrel, a significant contributor to our stronger realizations of late.
Add to this the positive regulatory developments over the last couple of quarters, including the ballot measure stand-down and the Lowry CAP approval in Watkins, and we're in a great position to continue to deliver in the DJ. Before we take your questions, let me briefly talk about 2025. As we've said in the past, our priorities have not changed, and we'll be guided by our strategic pillars: generate significant free cash flow, enhance the balance sheet, return capital to shareholders, and lead in ESG. Production will be an outcome of the plan, not the driver, as we seek to balance each of these strategic imperatives. In 2025, we'd like to level load our capital investments through the year a bit better. Recall that we entered 2024 with very high levels of activity inherited from the three Permian acquisitions, and we've decreased activity every quarter this year.
Establishing a more steady-state operation and level loading activity will ultimately support sustainable capital efficiencies moving forward. Given the current volatility in the forward oil strip, we will remain flexible as we plan for 2025 and will respond quickly to commodity price changes, again focused on protecting free cash flow levels. Regardless of where things shake out, we are focused on returns. That's returns on our investments and returns of capital to our balance sheet and to our shareholders. 2024 has been an important year for Civitas. A year ago, we had a demonstrated track record in the DJ, and we were looking to build on that track record as we stood up a new team in the Permian. Our job is not done, but Civitas is well-positioned as we enter 2025.
We have a scaled portfolio of high-quality, low-break-even assets and teams in the Rockies and the Permian that are focused on driving capital efficiency to enhance returns and deliver for our shareholders through the cycle. Thank you again for your interest in Civitas. Operator, we're now ready to take questions.
Operator (participant)
Thank you. We will now start the question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. And if you'd like to withdraw that question, again, press star one. And we ask that you limit yourself to one question and one follow-up. Your first question comes from the line of Neal Dingman with Truist Securities. Please go ahead.
Neal Dingmann (Managing Director - Energy Research)
Morning, Chris. Nice quarter. My first question is around your future activity. Specifically, I believe you talked to investors outright now. I believe most everybody's in agreement about little need to grow overall production. I'm just wondering, Chris, do you all still believe the best way going forward to create value will continue to be with a Permian versus DJ activity of maybe, or a rig count, I should say, three to one, given your potential continued advancements of Permian assets on one hand, but also understanding maybe the limited value that investors seem to be giving you for your DJ? I'm just curious about how you might shape this plan going forward.
Chris Doyle (CEO)
Yeah, thanks, Neal. Good question. As we step back and we think about how we've established this company and how we'll run this company, the basic model, as you know, is we're going to keep production broadly flat. We're going to peel out as much capital as we can, get costs as low as we can, and really focus in on maximizing free cash flow. A couple tweaks as we head into 2025. 2024 was a bit of an outlier with front-end loaded capital as we brought in the three acquisitions. We've tried to get that capital down throughout the year, really focusing again on free cash flow for the year. As we head into 2025, as I said in my prepared remarks, we'll level load activity, but really focus in on maintaining free cash flow.
Your question about three to one Permian to DJ, we're going to let returns drive us. And I think the benefit of having these positions in both the DJ and Permian gives us quite a bit of flexibility. To your point, there are a couple of other considerations. I think the compromise in the DJ is really having us focused in on, let's get all the permits we can ahead of the next three or four years and ensure that we have that flexibility to go between basins. We're ending the year right now with three rigs in the Permian, one in the DJ, but that's not a sustainable level of activity. We'll pick that up next year, again, level loaded as best we can and focus back in on free cash flow. We think ultimately that is the way to deliver long-term sustainable success and value for our shareholders.
I think when you add on the overall macro, we don't think it's appropriate for Civitas or others to really think about growing production into that macro until you have a better idea of what 2025 looks like and beyond.
Neal Dingmann (Managing Director - Energy Research)
Yeah, I completely agree with that second. And then my second question, Chris, and just for you, Marianella, on the shareholder return. Specifically, are there drivers you believe would make sense to cause you all to change your current 50% variable return component, such as if leverage gets notably below 1x or even your stock price even is further discounted even from where it is today, or you see a highly accretive asset available? That's sort of one thing on what would cause you to change that component. And then secondly, what do you all view as sort of an adequate dividend yield?
Marianella Foschi (CFO)
Yeah, Neal, thanks for the question. I mean, look, I'll say that since our inception, I mean, you've followed us for a long time. Our current framework has always been focused on striking that right balance among our strategic pillars. I think if you look at our formulation right now, that LTM framework allows us to do that very well, such that we're paying debt disproportionately quicker at higher prices, and then we're buying countercyclically at low prices. We continue accelerating our balance sheet goals with the great work the team is doing in terms of taking costs out of the system. You saw us complete some asset divestitures earlier this year among a lot of other initiatives. Like I've said in prior quarters, I mean, in certain times, we'll obviously look to prioritize the balance sheet further.
I mean, we have high-quality assets in a low-cost structure that yield a tremendous amount of free cash flow, and so I think at this point, we like what we see in terms of how both of those ends are getting advanced in terms of our strategic pillars. I'll also note that we're a highly aligned management team, right, in the way that we get compensated, so we'll always do what's right in the best interest of shareholders, and then on your second question, I mean, look, I'll say on the dividend yield, we're certainly our base dividend alone, as we see it, is about twice our peers at this point, and in terms of the total yield, we certainly want to be peer leading, but again, at the same time, making sure we're advancing our balance sheet goals at the pace that we want to.
Neal Dingmann (Managing Director - Energy Research)
Great details. Thank you both.
Chris Doyle (CEO)
Thank you.
Operator (participant)
Your next question comes from the line of Zach Parham with J.P. Morgan. Please go ahead.
Zach Parham (Executive Director - Oil and Gas E&P Equity Research)
Thanks. First, just wanted to ask a little bit more on the shareholder return program. Can you just give us some thoughts on buybacks versus variable dividends at this point? Is it fair to assume with the stock trading where it is, you'd continue to utilize 100% of the variable return for buybacks? And if so, would you expect the buyback pace to increase in 4Q just given higher trailing 12-month free cash flow?
Marianella Foschi (CFO)
Yeah. Look, we will be price disciplined with our stock. We always are, as we are with any asset acquisition, is how we think about it, but just to address your question very directly, we're pretty far from stock prices at which we do a variable dividend at this point, and then on your second question, yes, just from the nature of the LTM formulation of free cash flow going up this year, yes, we'll expect the variable return of capital to be higher, and that would be allocated disproportionately to buybacks at this point.
Zach Parham (Executive Director - Oil and Gas E&P Equity Research)
Thanks for that. And then just wanted to follow up. You mentioned a little bit more level-loaded program. Can you talk a little bit more about that? Would you still expect to hold volumes flat year-over-year with a more level-loaded program? And in a more level-loaded program, how would you expect CapEx to trend year-over-year?
Chris Doyle (CEO)
Yeah, I think as we headed into 2024 and we had a guide of 195 capital, we knew that that was not a sustainable level of capital. We were going to let that fall off through the year. The shape of 2024, very first-half weighted, you had wells really concentrated in the middle of the year. That ultimately does mean production's going to start to climb at the end of the year and into the first quarter before we pull back with wells sort of mid-quarter. Again, we'd like to have a more sustained, a more level-loaded level of activity in each of the basins just to drive additional capital efficiency.
I think as we step back and think, "All right, if 195 going into the year wasn't a sustainable maintenance level of capital, what this team has done throughout the year, peeling out capital efficiency, drilling, being much more efficient with our rigs and completions, you're starting to see the tweaks on the development come to fruition." And I think the program, as we look at it in 2025, is more efficient than we would have thought a year ago, which is a real positive. But it's likely we're much closer to that 195 as a maintenance level than we were certainly 12 months ago.
Zach Parham (Executive Director - Oil and Gas E&P Equity Research)
Got it. Thanks for that, color.
Operator (participant)
Your next question comes from the line of Scott Hanold with RBC Capital Markets. Please go ahead.
Scott Hanold (Managing Director - Energy Research)
Yeah, thank you. I guess for my first question, just looking at the ways you've optimized your activity and specifically the Midland Basin, I mean, you're nearing your D&C target. So two questions. One, how much further below that can you potentially push it? And can you talk about how the progress in the Midland compares to what you've seen in the Delaware so far?
Chris Doyle (CEO)
Sure. We've said in the past, and thank you for the question, Scott. We've said in the past that most of our swings at the plate have been really focused on the Midland. Not surprising. We're about 2/3 Midland, 1/3 Delaware. Part of that capital allocation this year, I think we were 75-25 split between Midland and Delaware, is really getting the Delaware position optimized, extending laterals, and setting us up in 2025 and future years to allocate more capital in that direction with extended laterals. But most of the swings at the plate we've had this year have been on the Midland side, and therefore we've been highlighting that. I would say the team has made significant progress. Coming into the year at $850 a foot, consistent with previous operators, getting to $740.
Some of that is a little bit on the service side of consumables, but the vast majority of that is just capital efficiency. Drilling, completing wells much faster, getting wells better on the back end as well. And so we're very close, to your point, to the target that we set out there earlier this year. I think what gets me excited is as we look towards 2025, it started this quarter implementing simul-frac throughout the Permian program. We see that as we've seen significant throughput increases. We see that as 150,000 a well type savings, and that boom automatically right there at your target cost. So we will continue to drive costs out of the system. It will not just be from service costs alone. It will be from continuous improvement, and I'd love to see what the team has done.
I think it's interesting as we look at that cost structure applied to a zone that we were really interested to see how it would do. We've highlighted the Wolfcamp D. All of a sudden, Wolfcamp D is 5%-10% higher on a per foot basis. So it's a little bit more expensive. But with what we've seen in terms of the subsurface results, all of a sudden, the Wolfcamp D went from a potential something interesting to look at to something that's going to compete for capital. And so it's teams that have and can establish a very strong cost structure and operating track record that are able to pull in some of those emerging zones. So really excited what the team's been up to and excited to see how we continue to drive costs out of the system.
Scott Hanold (Managing Director - Energy Research)
I appreciate that content, and my follow-up question is back on the 2025 outlook. You all have shown probably one of the more leading strategies of being disciplined with capital and production. Well, I guess production is, as you said, the outcome, but let's say, and I know there's a lot of volatility out there, but look, if oil ends up being in a, I don't know, call it a mid-$60 environment or even low $60, or maybe I'll say it this way. At what point would you feel comfortable letting oil production fall year-over-year? Is there some sort of price decision where you're just going to let it fade a little bit considering the macro?
Chris Doyle (CEO)
Yeah, I think I appreciate your comment, Scott. I think that's something our management team really prides ourselves in, and it gets to Marianella's comment about being really aligned with shareholders. Ultimately, what we're going to focus in on is free cash flow. So if you get oil in the low 60s, mid-60s, we take a look at, "Hey, let's focus in on free cash flow. Let production moderate a bit." That's what we'll do. We did that back in 2023, as you might recall, not necessarily because of the commodity price, but there was a big disconnect between the service markets that were underpinned by $100 oil, and you had the commodity floating down 25%, 30%. We moderated production just a little bit in that scenario. We're going to be very flexible. Now, I would say, let's say it goes the other way.
To your point, there's a lot of volatility, whether it's geopolitical or demand side, supply side, that if it goes the other way, I don't think you're going to see this company lean in and start growing this platform. You'd see us start to delever much faster and return capital to our shareholders.
Scott Hanold (Managing Director - Energy Research)
Good to hear. Thanks.
Chris Doyle (CEO)
Thanks, Scott.
Operator (participant)
Your next question comes from the line of Gabe Daoud with TD Cowen. Please go ahead.
Francis DiGiovanna (Equity Research Associate, Energy and Mobility Tech)
Hey, guys. This is Francis DiGiovanna for Gabe. Just given the production profile in 2024, how should we kind of think about 2025 declines and kind of the activity required next year to keep 2024 volumes flat?
Chris Doyle (CEO)
Yeah. So if you look at us as a company, our oil declines, call it high 30s% on an annual basis. The way that we've shaped capital, again, focused on free cash flow and getting to a more sustainable level loaded program, you're looking at D&C's a low quarter in Q4, and then you'll see us decline into that first quarter. We'll pick back up mid-quarter with the D&C's, and activity will pick up as well. And so our level load for 2025 is going to be a little bit more activity than what we see in the fourth quarter. But you are going to see us drop down a little bit before coming out of that into the back half of the first quarter and second quarter.
Francis DiGiovanna (Equity Research Associate, Energy and Mobility Tech)
Okay. Great. Thanks for that. And then how are you thinking about just M&A moving forward?
Chris Doyle (CEO)
Yeah. I think I would say as we made the moves when we did, where we did, it was extremely important that we came in with scale. We have that scale now. It was important that we really focus on asset quality and to augment and enhance what we had. We're still believers in adding inventory, adding duration. We believe scale is really important. I think I said on the last call, and it's even more true today. I think of all the companies out there where we believe the equity value just does not match the underlying asset quality and the operating team. Our hurdle to do something with our equity is very, very high. And so while we'll look at transactions and to an earlier question, if there's something that really gets our attention, we'll take a look at it for sure.
What you see in this team, too, is with where the asset markets are related to where our equity is currently trading, what we're focused on is little bolt-on ground games to replace drilled inventory and wait for that to moderate a little bit. And that allows us to generate more free cash and take that to the balance sheet and take it to our shareholders. And so as long as we're trading, it's so disconnected to what we see as an underlying value, disconnected to the asset markets, and disconnected to the equity markets, I think it's going to be really tough for us to lean in and get too excited on the M&A front.
Francis DiGiovanna (Equity Research Associate, Energy and Mobility Tech)
Great. Thanks, guys.
Chris Doyle (CEO)
Thanks, Gabe.
Operator (participant)
Your next question comes from the line of Leo Mariani with Roth. Please go ahead.
Leo Mariani (Managing Director, Senior Research Analyst)
Hey, guys. Wanted to kind of approach the maintenance question a little bit differently here. So just kind of wanted to get a sense of kind of what you think roughly maintenance activity is. Is that two DJ Basin rigs, four Permian rigs, just trying to get a little bit more color around that? And then obviously, you mentioned briefly that you're going to start drilling more wells kind of mid-first quarter. So you got some pretty low CapEx guidance in four Qs. Should we expect that literally some new activity shows up kind of right around January 1 for the company? Just trying to get a sense of how you're thinking about it.
Chris Doyle (CEO)
Yeah. Thanks, Leo. Yeah. First, on the low fourth quarter CapEx, that's really a byproduct of pulling forward some of that capital into the third quarter. A lot of that was facility related, a little bit on the D&C side. But that resulted in a low Q4 guide. We know that's not a sustainable level of activity. On the maintenance level, I think what's really interesting for us as we in the DJ really go extended reach. In the Permian, we're extending laterals. We're also really becoming much more efficient with the rigs that we have. That maintenance level of activity and rigs is moving around, and we're becoming much, much more efficient. I tell you that two rigs in the DJ, four in the Permian, we'll continue to look at scenarios where you lean in a little bit heavier on the DJ or a little bit lighter.
And in the Permian, with the inventory that we've got, being in that four, five, or six rig range, those are all the scenarios we're looking at in 2025. And again, we're going to be guided by free cash flow and would love to get to that level load for the year. But I'd say you're not far off on how you started to frame it.
Leo Mariani (Managing Director, Senior Research Analyst)
Okay. Appreciate that. And I just wanted to follow up a little bit on the Wolfcamp D. So look, I think that a lot of other operators in the Midland have kind of classified the D as maybe a little bit less important and having economics that weren't quite as good as the A and B out there. So maybe just provide a little bit more color as to why you guys think that it's more competitive in your portfolio. And it sounds like the returns could be similar or better if I'm kind of reading the information here, right, that you provided?
Chris Doyle (CEO)
Yeah. Leo, I'd tell you we would have been we were one of those operators saying the same thing. The way we thought about Wolfcamp D was, "Hey, this could be pretty interesting." It's not a zone that you've got to co-develop with the A's and the B's. And so we had it out there as a potential. What's changed in our view is 16 wells in is, "All right, capital's a little bit lower than what we thought. Team executed very well. And so you're seeing a little bit 5%-10% higher on capital." That was better than we were anticipating. And then the real eye-opener was as we were turning these on and having them really compete compared to the A and B.
And so we knew that in order for the D to compete for capital, that you'd have to make up for that additional CapEx. We just didn't think it was going to be there, and we were very surprised by it. And so look, we're not going all in on the D by any stretch. We had about 10% of our 2024 spend allocated to the D. It will compete for capital. It's probably going to be in that 20%-30% of the program going forward. And so again, I think if you go back to the call when we entered the Permian, one of the things we and all other operators in the Permian love is this is an oil province that continues to highlight these emerging zones. And the D is just the next one that's starting to compete for capital, and there are others out there.
Leo Mariani (Managing Director, Senior Research Analyst)
Okay. Thanks.
Operator (participant)
Your next question comes from the line of Tim Rezvan with KeyBank Capital Markets. Please go ahead.
Tim Rezvan (Managing Director, Oil and Gas Equity Research)
Good morning, folks, and thank you for taking my question. I don't know if this is more for Chris or Hodge, but looking at your operating areas, the most de-risked one where you have built a steady backlog of permits and where you're getting real value for your natural gas is in Colorado, with well results looking much stronger, and as you look after the Governor Polis' tenure ends in 2029, there's some uncertainty. I know you're focused on maximizing free cash flow, but from a pragmatic point of view, why not pull that value forward and allocate kind of more capital there, especially with the natural gas challenges in Waha?
Chris Doyle (CEO)
Yeah. Thank you for the question, Tim. And yeah, that's exactly the exercise and the debate that we're having internally. And I think the benefit of having good, strong returns in the DJ gives us the opportunity, if we wanted to lean in a little bit on allocating capital to Watkins or to our greater position in the DJ, we have that opportunity. The team's been focused since the compromise last year or this year, earlier this year, of really underpinning a more active program to give us the flexibility in order to allocate a little bit more there. To your point, we're ultimately going to be focused on what is the most efficient use of capital in 2025.
And if we can get close to that with more DJ activity than less, to your point, there are very clear markers on the value of our Permian position and less so on the DJ. And so one of those extra considerations would be, "Hey, if we can allocate a little bit more to the DJ and have as efficient a program or nearly efficient a program, that's something that we'd lean in on." And so I tell you, that work's ongoing right now, and we'll have the final plan here in February.
Marianella Foschi (CFO)
Tim, I'll follow up on your point on natural gas. Yes, we're certainly getting stronger gas realizations in the Rockies versus zero or negative in some cases in the Permian, but even then, gas is only in the Rockies. It's only 6%-7% of our total revenue anyway, so oil is always what's going to drive our economics.
Tim Rezvan (Managing Director, Oil and Gas Equity Research)
Okay. That makes sense, Marianella. And that's a good segue. My follow-up was intended for you. You've been active kind of protecting basis in West Texas. Looks like you have about 130 million a day swapped through 2026, and the outlook looks pretty bleak through that time. Is that a good amount? Are you still looking to get more protection? Just sort of curious what you can do or what you're trying to do on the margin there. Thank you.
Marianella Foschi (CFO)
Yeah, for sure. I mean, look, we're always trying to improve our realizations and certainly not a big fan of paying for transport to take our gas away. I think at this point, as we were looking out early this year into 2025 and 2026, we decided to take that opportunistic hedging or risk-off, if you will, in the spring. We essentially hedged half of the Permian gas balance of this year or second half of this year. And that's been insanely successful, right? I mean, the Q3 realizations alone were $29 million. So they improved our netback company-wide, gas company-wide, about $0.50-$0.60. So obviously, that's going to translate into increased realizations into Q4 as well. Not sure it will be that amount. We'll see where Waha ends the quarter and the year here. In 2025 and 2026, we looked at just the capacities that are coming online.
There's just not much in 2025. I mean, there's going to be quite a bit in 2026, and it seems like a lot of those are late 2026, call it in the 7 BCF a day range of additional capacity. I think us and probably others have been a little disappointed at the uplift we've seen so far from Matterhorn, really. It hasn't been much, maybe about $1.50 or so. And so just looking at all those pieces, we aggressively, to your point, Tim, we decided to add on those positions for 2025 and 2026. I think at this point, we're not particularly inclined to add a lot more. I mean, we certainly are keeping a close eye on the additional supply demand dynamics in the basin.
I would say that because they're a little bit longer term out and because of our flexible business plan to the extent that it gets, again, like I said earlier, gas is not a big driver, but to the extent that we can adjust activity to perhaps earlier areas or the DJ, for example, if we would like to do that, that's an option for us. So I think at this point, not particularly inclined to increase it much from 50, but to the extent that we get a good window or some good tailwinds in the market that we see a good opportunity to continue adding, we certainly would consider that.
Tim Rezvan (Managing Director, Oil and Gas Equity Research)
Okay. I appreciate all the color, folks. Thank you.
Operator (participant)
Your next question comes from the line of Oliver Huang with TPH. Please go ahead.
Oliver Huang (Director, E&P Research)
Good morning, all, and thanks for taking the questions. Just wanted to kind of focus on the further optimization of development in the Midland. Certainly good to see the 15% uplift you all have highlighted in your slides on your first round of iterations on this upspacing, higher intensity completions. But just trying to think through from here what the main levers that you all could potentially look at further tweaking on the horizon in the near term over, call it, the next six to 12 months from a productivity perspective?
Chris Doyle (CEO)
Yeah. Thanks, Oliver. To address your question, I point you to a couple of things. One, whether it's upspacing or spacing off existing wells, our team is really focused in, as I said in my remarks, on incremental returns. And just to put a fine point on that, let's say you've got a six well per section development. We're not looking at, "Hey, what are the return average for those six wells?" We're looking at, "What is the sixth well? What is that return on that sixth well?" And so what that ultimately does is it leads us to be a little bit more conservative, peel out a well or so, and really drive a better cash-on-cash return as a program. And so that work will continue. It's very bespoke to each DSU. Every one is a little bit different.
I think as we look forward, we're always leaning in on the subsurface to understand, "Are we targeting wells appropriately? Are we staying in zone as best as we can? Are there further optimizations on completions?" And that's really just the DNA of a company that is focused on continuous improvement and focused in on returns. I think when you couple that with an operating team that is looking to deliver the best well bores as quickly and safely as possible, what you see is a very quick for Civitas, a very quick decision into, I would say, not top quartile yet, but clear line of sight to get there. And then from here, you'll just continue to see whether it's simul-frac or other opportunities just to peel out time, cost, waste out of the system.
If we got the team focused in on the right things, you'll see that quarter-over-quarter, and so it's going to be a ton of small little things that will continue to deliver a better, more capital-efficient result.
Oliver Huang (Director, E&P Research)
Thanks. That's helpful color. And maybe just a quick follow-up. Is there another leg down that you all have line of sight to and kind of thinking about Q4 2025 service costs when you're just anything to kind of be aware of in terms of just the recontracting negotiations that are kind of going on? And when you're kind of referencing the $1.95 billion ballpark number for maintenance, how much year-over-year deflation does that kind of assume?
Chris Doyle (CEO)
Yeah. The 195 is where we started in 2024. From there to now, we've seen some deflation in consumables, tubulars, etc., obviously. I would say on the service side, the rig side, we've seen some deflation from where we were late 2023 to now, probably a little bit more on the rig side than we have on the frac side. We're also upgrading some of our frac fleets, whether it's going to e-fleets, a little more efficient operation there. But I would say consumables were the big driver from 2024 to now. As we look forward, the same volatility that we see is the volatility that service companies see, right? And they're trying to figure out where's the market going. I think we're not going to be, I don't know that you'll see us take a massive step down year-over-year.
We try not to take long commitments. We try to be as close to market as possible. There's going to be surely a noise for a quarter or two, but that allows us to be responsive to whatever the macro brings. And so I think it's early to think a year ahead where our service costs because we don't know how that macro and how the overall volatility sort of works out. But like I said, I think both sides of the coin are trying to figure that out.
Oliver Huang (Director, E&P Research)
Perfect. Thanks for the time.
Chris Doyle (CEO)
Thanks, Oliver.
Operator (participant)
Your next question comes from the line of John Abbott with Wolfe Research. Please go ahead.
John Abbott (E&P Research VP)
Hey, appreciate taking our questions here, and I also appreciate the color and thought about 2025 when we see commodity prices here lower. We had a bit of a discussion last night, but commodity prices are lower, and you sort of think about allocation in a lower price environment. There are benefits to maintaining operations in each of your areas because you do have economic positions there and you have built this momentum, so sort of thinking about that, how much activity do you see as necessary in the DJ or the Midland or the Delaware to maintain efficiencies if we sort of see lower commodity prices?
Chris Doyle (CEO)
Yeah. Thanks, John. Thanks for the question. You're exactly right. I think I'm excited about the operating momentum that we've continued in the DJ and that we've really established throughout the year in the Permian. We've been as far down as a rig in the DJ, and that allows us to maintain the crews, maintain that momentum, and then we'll scale up or back as needed. I think that's a pretty minimal level that would be gap down and commodity price type activity level, but that allows us to keep the momentum there on the DJ side. On the Permian side, we're sitting. It's how do we marry those rigs with frac crews because that's the other piece here. And the level of three rigs or so is probably not a bad maintenance level. It's why you've seen us kind of go down to that in the fourth quarter.
But to your point, we'd love to keep a base load to keep up the momentum and scale up when the market is signaling that we should. I think the last thing I would say, John, and this was so critical as we looked to how we wanted to expand this company and scale this company and diversify the company is we had to go in and get low break-even assets. And it's for times such as you describe, if commodity prices we can further that, "Hey, we can deploy capital, maintain a level load of operating momentum, and still generate significant returns and generate significant free cash flow for our shareholders." So all of that will go into how responsive, how flexible we want to be as we see how the macro sort of settles out over the coming months plus.
John Abbott (E&P Research VP)
Yep, and then the topic's already been brought up about the variable dividend, but just sort of want to approach it slightly a different way, so the focus here right now is on buybacks, just given where the shares are. When you sort of think about signaling to the market, I mean, there are plans out there where companies switch between variable and buybacks. Does it make sense ever to go back to a variable dividend as you're sort of making a statement about where your stock is at? Or do you just continue to, at this point in time, just given where your shares are, do you continue to focus on the buyback and just manage the fixed dividend, so does the variable dividend have a place going forward?
Chris Doyle (CEO)
Yeah. I think it's a good question, John. I would start with our commitment to returning capital to our shareholders is critical for us, and in the past, that had a variable component to it. As we look forward, I'm hopeful three months from now, six months from now, we are on this call, we're debating that very question. We're a long way away from having that debate, however, just given what we're seeing from our asset base and how the team is executing. All of that balanced also with protecting our balance sheet and keeping leverage in a manageable position, so I think you raise an interesting question. I would tell you that we are committed to getting capital back to our shareholders in any form.
The decision that the board made last quarter really set us up to protect the balance sheet, live up to that commitment, and really take advantage of what we believe is a highly undervalued equity.
John Abbott (E&P Research VP)
Thank you very much for taking our questions.
Chris Doyle (CEO)
Thanks, John.
Operator (participant)
Your next question comes from the line of Noel Parks with Tuohy Brothers. Please go ahead.
Noel Parks (Managing Director, Energy Research)
Hi. Good morning. I've been thinking about inventory and further technical advancements, how that can potentially open up more inventory on existing holdings. It seems like we're in a time where basins are seeing more divergence of what's going on operator by operator in a basin as opposed to those times when everybody's pushing higher sand content or spacing is all going one way. So as you think about looking at acquisitions out there, does seeing yourself going after the Wolfcamp D when other people have kind of backburnered it, does that divergence make you say pickier about acquisitions? Or in contrast, does it make you a little bit more adventurous in terms of how you might look at something that's interesting and maybe how you value the upside, the unbooked upside potential?
Chris Doyle (CEO)
Yeah. Thanks for the question, Noel. I think it makes us more informed as we look at acquisitions. And I think the position that we're in today that we weren't a year ago is we had to underwrite the transactions that we made based on previous operators' performance. And we looked at, "Hey, if we're able to get our feet under us, if we're able to build that operating momentum, if we're able to optimize completions and development, this is what could be." Now, interestingly, you've got an operating team that is delivering good capital efficiency that we have a view on how we're optimizing development, not just in the A and B, but with some of the emerging zones.
And you have a subsurface team coupled with the operating team that really understands the assets and what this team can deliver, with much more clarity today than a year ago. And so as we look at opportunities, whether it's small ground game or acquisitions, it's from a place of having that track record built up, which is a great place to be. We will be much more informed of what this team is able to deliver and therefore have a better view of how valuable those assets or those sticks could be in the hands of Civitas. It's exciting a year in to be where we are, but I would leave you with one thought, and that is we're going to be disciplined in everything that we do. We will ultimately be a top quartile operator.
That will give us advantages that the assets will be better in our hands. We're not where we need to be yet, but we're getting there, and in all things, we're very much aligned with shareholders and we'll do the right thing for long-term shareholder value.
Noel Parks (Managing Director, Energy Research)
Great. Thanks. And you mentioned Matterhorn and the uplift there so far. I have heard some operators express the opinion that when maintenance wraps up on some of the other pipelines and sort of what the ripple effects would look like, that there's still reason to believe that there could be some pretty significant improvement in basis appearing from what Matterhorn that just hasn't manifested yet. Are you sort of in that camp or do you see it a little differently?
Marianella Foschi (CFO)
Hey, no. I would say that, I mean, look, from what we're seeing, there's about a BCF and a half flowing through Matterhorn. That's a 2 1/2 BCF pipe. I would imagine, and I haven't seen the details close-up of the other pipe, but I would imagine it's all very recent, right? Matterhorn came out about a month ago. I would imagine flows elsewhere going down because there really just wasn't that much gas waiting for a home. So yeah, certainly some of the items you're bringing up on maintenance are correct. We certainly haven't seen them yet. So we're cautiously optimistic. Like we said earlier, we hedged away 50% well into late 2026, through the end of 2026. So we're cautiously optimistic, frankly, not seeing it just yet.
Noel Parks (Managing Director, Energy Research)
Great. Thanks a lot.
Chris Doyle (CEO)
Thanks, Noel.
Operator (participant)
That concludes our question and answer session. I will now turn the conference back over to Brad Whitmarsh for closing comments.
Brad Whitmarsh (Head of Investor Relations)
Yeah. Thanks, Krista, and everybody for joining us today. We'll be around this afternoon and into next week. So if you have any follow-up questions, certainly don't hesitate to reach out. We hope you have a great weekend and please be safe.
Operator (participant)
This concludes today's conference call. Thank you for your participation, and you may now disconnect.
