Civitas Resources - Earnings Call - Q4 2024

Executive Summary

• Q4 delivered solid operations: sales volumes 352 MBoe/d (+1% q/q) and oil 164 MBbl/d (+3% q/q); revenue was $1.29B and diluted EPS was $1.57. Higher-than-expected revenues offset elevated Permian cash operating costs tied to winterization and workovers.
• Full-year 2024 Adjusted FCF was $1.27B; Q4 Adjusted FCF was $519MM as capex tracked to plan ($278MM) and OCF was $858MM; Adj. EBITDAX was $895MM.
• 2025 outlook pivots to balance-sheet strength: capex cut ~5% to $1.8–$1.9B, oil guide 150–155 MBbl/d, ~$1.1B FCF at $70 WTI, YE net debt target < $4.5B, with more FCF after base dividend directed to debt reduction; a 10% workforce reduction lowers cost structure.
• Stock reaction catalysts: deleveraging priority (less variable buybacks), 1Q oil guide dip to 140–145 MBbl/d before mid‑year ramp, and a $300MM Midland bolt‑on partly offset by a $300MM divestiture program (likely DJ).

What Went Well and What Went Wrong

• What Went Well

  • Sequential volume growth in Q4 (352 MBoe/d; oil 164 MBbl/d) with DJ strength after Q3 TILs; revenue resilience despite commodity variability.
  • Structural efficiency gains: Midland two‑mile well costs cut from ~$850/ft to < $725/ft (>15% improvement); simulfrac boosted throughput >40%.
  • Capital discipline and returns: Q4 capex $278MM (in line), debt cut by $350MM, and $205MM returned to shareholders; 2024 returned >$920MM (base + buybacks).
  • Management quote: “Our high-quality assets and strong execution delivered in-line to better-than-expected sales volumes, capital expenditures, and operating costs.” — CEO Chris Doyle.

• What Went Wrong

  • Higher Q4 LOE in Permian from winterization and workovers; management expects moderation after Q1.
  • Q1 2025 oil volumes guided to trough (140–145 MBbl/d) due to low late‑2024/early‑2025 TILs, winter weather and third‑party processing downtime in DJ; growth resumes mid‑year.
  • Shift of free cash flow from buybacks to deleveraging reduces near‑term variable capital returns; management prioritizes YE 2025 net debt < $4.5B (targeting ~$800MM reduction vs YE 2024 pro forma).

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Civitas Resources Fourth Quarter 2024 Earnings Conference Call and webcast. My name is Jadeen, and I will be your operator for today's call. All lines have been placed on mute to prevent any background noise. After today's presentation, there will be an opportunity to ask questions. To ask questions, you may press star one on your touch-tone phone, and to withdraw your question, please press star one again. Please be advised that today's conference call is being recorded. I will now turn the call to Brad, Head of Investor Relations. Brad, please go ahead.

Brad Whitmarsh (VP of Investor Relations)

Thanks, Operator. Good morning, everyone, and thank you for joining us. Yesterday, we released our fourth quarter and full year 2024 results, provided our 2025 outlook, and issued supplemental slides for your review. In addition, our 10-K was filed yesterday, and all of these items are available on our website. This morning, I'm joined by our CEO, Chris Doyle, and our CFO, Marianella Foschi, and other members of management. After our prepared remarks, which will come from Chris and Marianella, 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, which are subject to risks and uncertainties that could cause actual results to differ materially from projections. Please make sure and read our full disclosures regarding these statements in our most recent SEC filings. We may also refer to certain non-GAAP financial metrics. Reconciliation to the appropriate GAAP measure can be found in yesterday's earnings release and our SEC filings. With that, I'll turn the call to Chris.

Chris Doyle (CEO)

Good morning, everybody. Thanks for joining today's call. I want to start with a quick recap of 2024 before focusing most of my time on 2025 and the actions we're taking to strengthen the company. By continuing to enhance our operating performance and portfolio, reducing our costs, and prioritizing the balance sheet, we're creating a more durable business and better-positioning Civitas to generate sustainable free cash flow for years to come. Quickly, on 2024, it was a transformational year for the company. Underpinned by our high-quality assets and strong operational execution, our full-year production was above plan, and we beat original guidance for capital and operating costs.

Over the past year plus, we built scaled positions in the Midland Basin and Delaware Basin, materially strengthening and diversifying our company. We brought in a proven leadership team with deep Permian roots. I'm very pleased with what the team has accomplished in just one year, highlighted by the following: Midland Basin well costs are down 15%, daily drilling footage is up nearly 20%, daily completion throughput is up 50%. In addition, we de-risked prospective horizons and added high-value inventory across our acreage position, and all of this has been accomplished while delivering excellent safety performance.

Further, we strengthened both our Midland and Delaware positions through ground game initiatives, including more than 50 trades, swaps, and new leasing, and importantly, we did so with little-to-no cash. Yesterday, we announced a bolt-on transaction in the Midland Basin, adding 19,000 acres in 130 locations. With this announcement and to offset the purchase price, we set a $300 million asset sales target for 2025, which is likely to come for the DJ Basin. Effectively, this is expected to accelerate value from the DJ in support of extending our runway in the Permian.

Between the ground game and bolt-on, we've added nearly two years of future development in our Permian business unit and extended lateral lengths and working interest across our portfolio by 5%. This was done at very attractive valuations, well below recent market transactions. Today, our Permian inventory stands at 1,200 development locations. While establishing a successful track record in the Permian, we didn't lose focus as the DJ Basin also had a strong year of performance. In 2024, we turned in-line the industry's first four-mile laterals in Colorado. These were record setters, representing the state's highest 180-day cumulative oil producers.

Armed with basin-leading operational capabilities, our team added high-return development locations through a combination of ground game transactions in our core areas, including Watkins, and through continual development optimization. Overall, free cash flow for the year was about $1.3 billion, and we returned more than 70% of that to our shareholders through $5 a share in dividends and a repurchase of more than 7% of our outstanding shares. All in, we had a very successful year in 2024, and Civitas is a deeper, more durable business today. Now let's turn to 2025 and the steps we're taking to strengthen our business.

Our plan focuses on delivering the following strategic priorities. First, run the business to maximize free cash flow, built upon a leading cost structure and enhanced by sustainable capital efficiencies. Second, deploy that free cash flow to protect and strengthen the balance sheet. As Marianella will discuss further, we're prioritizing debt reduction in 2025. Third, return cash to shareholders, which predominantly come from a strong base dividend this year. Finally, lead an ESG and build a long-term sustainable business as we execute on our target to further reduce our emissions.

In 2025, we're level loading our capital investments compared to 2024, where the front-loaded program led to low TIL counts at the end of the year. While level loading impacts near-term production, this is more than offset by the long-term benefits in operating and capital efficiencies. Keeping activity levels flat in 2025 will deliver full-year oil production of 150,000, to 150,000 barrels of oil per day after level loading. And we'll invest $1.8 billion-$1.9 billion split relatively evenly between the Permian and DJ basins. This is approximately 5% lower than last year, reflecting the well cost savings our teams have delivered.

Notably, our reinvestment rate in 2025 is consistent with 2024, despite WTI strip pricing being $5 lower year-over-year. As expected, our first quarter production will be the low point for 2025. 80% of the sequential drop is related to natural declines in the DJ Basin following peak production in the fourth quarter. This was driven by a low TIL count exiting 2024 and in the first quarter of 2025, as well as severe winter weather and unplanned third-party processing downtime. We expect to grow meaningfully through the middle part of the year as new TILs come online. Specific to the 2025 plan, I want to mention a few other items of note.

Within our Permian program, we're increasing our allocation of capital to the Delaware Basin. Today, we have four rigs running in the Permian, two of which are in the Delaware, and a third coming shortly. Nearly all of our completions in the Permian Basin will be simul-frac, leveraging the advancements our team delivered last year, improving fluid throughput by 50% versus the start of the year, and in the DJ Basin, we have two rigs running today, and we'll continue to push the limits with longer laterals. We're moving more of our production facilities to tankless operations, and our teams are operating the most efficient, lowest-emission rigs and completion crews in the basin.

Our 2025 plan delivers approximately $1.1 billion of free cash flow at $70 WTI, a free cash flow yield of over 20%. Maintaining a culture of performance and cost leadership is critical to building a durable, sustainable enterprise. To further enhance our business, we're streamlining our organizational structure with a 10% reduction in workforce throughout various levels of the company. These are tough decisions. We're committed to staying low-cost, driving efficiencies, and enhancing margins across all areas of the business. I'll turn it over to Marianella to discuss the steps we're taking to accelerate our balance sheet goals.

Marianella Foschi (CFO and Treasurer)

Thanks, Chris. The long-term winners in this business will be the companies with a strong balance sheet and a cost structure at the low end of the cost curve. Yesterday, we took meaningful steps to prioritize and protect these two items, including rolling out a new free cash flow location strategy. Our strategy is underpinned by a 2025 net debt target of $4.5 billion, which represents an $800 million reduction to year-end 2024 pro forma for the bolt-on transaction. This debt reduction will further benefit our cost structure, decreasing associated interest expense by approximately $60 million on an annualized basis, or a 5% increase to our run rate free cash flow.

This reallocation of excess cash will allow us to reach 1x leverage in late 2026. Our long-term leverage target is unchanged at 0.75x EBITDA at mid-cycle prices. While accelerating leverage reduction, we remain committed to our base dividend of $2 per share annually. As compared to our prior framework, any additional return of capital shareholders will be opportunistic and consistent with our near and long-term balance sheet goals. I'd be remiss not to touch on our philosophy on risk management, which further protects free cash flow. We continue to execute on our systematic oil hedge strategy, and we are approximately 40% hedged on net oil volume for 2025.

As a reminder, oil accounts for approximately 80% of our unhedged revenue. Our tactical gas hedging strategy was extremely successful in 2024, especially in the back half of the year as Permian gas price volatility increased. Our Permian volumes are currently 50% hedged for 2025 and 2026, and we will continue opportunistically adding to our gas book. Ultimately, a commodity business best hedged is a low-cost structure and a fortress balance sheet. While our hedging philosophy has served us well, maintaining our top quartile cost structure and de-risking our balance sheet are more material value drivers in the long term.

And with that, I will turn it back over to Chris for concluding remarks.

Chris Doyle (CEO)

Thanks, Marianella. Over the next three years, at the 2025 investment and production level, Civitas will generate approximately $3.3 billion in cumulative free cash flow at $70 oil. That represents two-thirds of our current market cap. It'll allow us to meet our leverage reduction goals while also returning significant capital to our shareholders. Civitas's strength rests on our proven operating teams and their track record of performance in the lowest break-even oil basins in the U.S. Our 2025 plan will advance our strategy of building a long-term, durable business for our shareholders. Operator, we're now ready to take questions.

Operator (participant)

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. I would like to remind everyone to limit themselves from one question, one follow-up only. Should you have a question, please press star one and your touch-tone phone, and you will hear a prompt that your hand has been raised. Should you wish to withdraw, please press star one again. If you're using a speakerphone, please leave the handset before pressing any keys. Our first question comes from the line of Gabe Daoud from TD Cowen. Sir, please go ahead.

Gabe Daoud (Managing Director of Energy Equity Research)

Thanks. Morning, everyone. I was hoping, Chris, we can maybe start with the decision to shift your capital allocation strategy. You know, I thought maybe you could, for lack of a better phrase, walk us through them and pay down debt and still buy back a decent amount of stock, so maybe just a bit more color there, and you mentioned opportunistic with buybacks. What does that mean? What would you need to see to step in?

Chris Doyle (CEO)

Sure. Thanks for the question, Gabe. As we thought about setting this business up for 2025, we had a couple of options. We had a number of options, and as we thought about the backdrop, the macro that's in front of us, the volatility that we've seen over the past couple of months, we know that this is the plan that's best to build a long-term sustainable business for Civitas. As you mentioned, we have a business that generates significant free cash flow, $1.1 billion in 2025. Given the volatility that we see, we think the best use of that cash flow after our base dividend is really to direct it to our balance sheet. We'll have a little bit of opportunity to accelerate that.

We mentioned the $300 million divestment target to offset the acquisition that we announced yesterday. We're looking at other ways to potentially accelerate that delivering path and give us some more flexibility and optionality. But this is about setting the company up for long-term success.

Gabe Daoud (Managing Director of Energy Equity Research)

Got it. Thanks, Chris. That's helpful. And then as a follow-up, obviously starting one Q slowly and expected to ramp from here, maybe a bit more color and granularity on the ramp from here in the production trajectory. And how does that potential divestiture program impact volumes? You know, I guess another way is what's the amount of production you anticipate selling with this $300 million target? Thanks, guys.

Chris Doyle (CEO)

Sure. First, with first quarter oil, you know, largely as expected, reflecting low levels of activity as we mentioned in the back half of 2024 and certainly in 2025. A lot of that drop, as we mentioned, is in the DJ. We've restarted the engine. We have a pretty active 1Q plan of 50-60 TILs, followed by another active quarter in the second quarter. And you'll see as we lay out in slide 12 growth from the first half to the second half with that activity. In terms of the divestment, the $300 million divestment, that's TBD. We're looking at all types of assets, some assets that don't have associated production, midstream assets, some water infrastructure assets in the Permian.

They're not significant, but looking at first and foremost assets that could be more valuable in others' hands. Certainly, if we see the right value, we would look to potentially accelerate some value from operating assets and producing assets, but that's certainly TBD at this point.

Gabe Daoud (Managing Director of Energy Equity Research)

Understood. Thanks, Chris.

Operator (participant)

Thank you. Our next question comes from the line of Zach Parham from JPMorgan. Please go ahead.

Zach Parham (Executive Director)

Hey, thanks for taking my question. First, with the bolt-on deal that you did in the Midland, can you just talk about where those acquired locations fit into your development plan? Are those assets you'll be getting to work on later this year, or are they more longer-dated locations? Maybe just talk about how that fits into the portfolio.

Chris Doyle (CEO)

Sure. As we dug into that opportunity, certainly we see value adjacent to our operations. We did not underwrite sticks across that entire acreage position. We see that activity really starting up later this year, but more so in 2026. The Wolfcamp A, Wolfcamp B, Wolfcamp D primary development will yield good returns that will compete for capital, but that likely doesn't set up until late this year and into next.

Zach Parham (Executive Director)

Thanks, Chris. Then my follow-up is just maybe following up on Gabe's question on capital allocation. I know the focus is now on debt reduction, but how do you think about further M&A versus potentially shifting back to a higher level of cash return? You know, it sounds like you're going to, you know, you talked about reaching a one-turn leverage target in late 2026, so it sounds like you're going to continue paying down debt versus returning cash. Just kind of maybe how do you think about things over the longer term, M&A versus cash return versus debt reduction?

Marianella Foschi (CFO and Treasurer)

Hey, Zach, thanks for the question, so look, first and foremost, our top priority is our net debt target, 2025 net debt target at $4.5 billion. You know, to get there, we talked about how the majority of our free cash flow after the base dividend this year is going to be allocated to debt reduction, so anything we do in excess of that will be opportunistic. It will not be formulaic, and obviously, you know, we have our very near-term idle, that 1x leverage. You know, over and above that, you've seen us balance our allocation between buybacks and acquisitions very well.

You know, every acquisition we've done has been at very attractive prices, certainly at a dollar per stick relative to some of the recent transactions announced there, and at the same time, we've also had a very successful buyback approach. You know, we bought 7% of our shares last year. That's going to underpin an 8% operating cash flow increase 2025 or 2024. So certainly, we've been very successful on both fronts and will continue being opportunistic about how we balance between those two to the benefit of long-term value.

Zach Parham (Executive Director)

Great. Thanks for taking my questions.

Marianella Foschi (CFO and Treasurer)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Josh Silverstein from UBS. Sir, please go ahead.

Josh Silverstein (Managing Director)

Yeah, thanks. Good morning, guys. Maybe just on the same point, you know, as you hit your $800 million net debt reduction target for this year, do you shift back to that 50% plus return of free cash flow to shareholders? Is that something that you get to, or if gas prices are a bit higher, oil prices are a bit higher, you just accelerate deleveraging a bit more? Thanks.

Marianella Foschi (CFO and Treasurer)

It's more of the latter. We will certainly look to accelerate our balance sheet goals further, Josh, and like I said earlier, we'll be opportunistic of anything in excess of that, but our top priority, again, is hitting that four and a half with an eye 1x late next year.

Josh Silverstein (Managing Director)

Got it. Thanks. And then maybe just on the inventory front, the past few hours you've been talking about inventory in the Wolfcamp D, particularly in the Midland side. Where does that stand now, and is that in the 1,200 location count?

Chris Doyle (CEO)

Yeah, thanks, Josh. It is in the 1200 location count. We had about 10% of our program last year, really delineating the Wolfcamp D, north, south, east, west. Excited about the results that we've seen. Just as excited with the capital performance that the team delivered, where you're seeing about 10% higher capital for 15% more productive wells. And so what we're seeing is the D will compete for capital. We're stepping up our D development this year, probably about 20% of our Permian program. And so excited to see with additional swings at the plate if we can tighten those capital costs even further and continue to repeat the strong well performance. But D is certainly in there.

I wouldn't say it's our primary target, like the Wolfcamp A, Wolfcamp B on the Midland side, and Wolfcamp A, Third Bone on Delaware. But it's certainly very exciting for us and happy to allocate some capital towards it in 2025.

Josh Silverstein (Managing Director)

Great. Thanks, guys.

Operator (participant)

Our next question comes from the line of Neal Dingmann from Truist Securities. Sir, please go ahead.

Neal Dingmann (Managing Director of Energy Research)

Hey, thanks for the time. Good morning, Chris. My first question may be for you. Just a little bit like you just talked about on the Midland side. My question is more on the Delaware side. Seems like you're just now sort of getting after that. Based on what you're seeing now after re-permitting and doing some things there, are the opportunities there? I guess I'd say, is the opportunity set as good now as ever you've seen, you know, when you were initially looking at it? Or maybe just talk about how you see that side and, you know, what type of activity we could expect maybe the latter part of this year and going into next year in the Del.

Chris Doyle (CEO)

Sure. Thanks for the question, Neal. You know, as we thought about allocating capital between Midland and Delaware, we really wanted to shift to the higher return Delaware inventory, but we saw real opportunity to further optimize development. Previous operator was willing to drill shorter laterals. We had a team that got in there and said, "Hey, we could take a one-mile well and turn it into a two-mile and greatly increase capital efficiency and increase the returns of that program." It was going to take some time, right? Not only for the ground game to work itself through the system, but also then to re-permit. Now that's behind us.

The team's done a great job building up that position and optimizing the opportunity over there, and so we're allocating more capital to the Delaware, which is fantastic to see. Last year, we had about 20% of our TILs come out of the Delaware. This year, about 40% of our activity is going to be pointed there. We're leaning in there. And as you know, you know, Lea County, it's where the two rigs are currently. We're really excited about the opportunities there and look forward to getting those wells online. Kudos to the team to take the time to do the right things, go through the steps to further enhance the returns, and we're ready to deploy capital over there.

Excited about what we're seeing.

Neal Dingmann (Managing Director of Energy Research)

Got it. Then just lastly, yeah, just a little minor third-party issue. I'm just wondering, when it comes to sort of midstream infrastructure, all that, do you all feel pretty good now where you sit on, you know, very nicely? You haven't had really virtually any issues. Seems like over in the DJ side recently. I'm just wondering now when you look at both sides, you feel pretty good about infrastructure going forward.

Chris Doyle (CEO)

Yeah, we, you know, unfortunately, had the third-party issue in the first quarter alongside weather, probably a couple thousand barrels of impact to the DJ. So we certainly hit it, but the team did a really good job of finding multiple outlets and minimizing the impact of the third-party processor issue. And we worked around it, but we were down for about four, six weeks. And so we feel good with where we are. As you know, in the Permian, the Permian is much a water and gas business with oil as a secondary product there. And so teams out front ahead of all our TILs and getting our water placed and feel good about our ability to execute and deliver our 2025 plan.

Neal Dingmann (Managing Director of Energy Research)

Great details. Thanks, Chris.

Chris Doyle (CEO)

Thanks, Neal.

Operator (participant)

Again, should you have a question, then press star followed by the number one. Our next question comes from the line of Scott Hanold from RBC Capital Markets. Sir, please go ahead.

Scott Hanold (Managing Director of Energy Research)

Yeah, thank you all. You know, my first question is just on, you know, effectively the reset of the outlook in 2025 and beyond. You know, could you talk through, you know, the process of making the decisions you all did? Obviously, you know, making some hard decisions here, but like what were some of the other options? And, you know, obviously, your path here you're taking is one option. Did you look at others like, you know, larger M&A, you know, divestitures as was, you know, discussed out in some market reports? Can you just talk about like some of the options you looked at and the decision and thought process into, you know, the 2025 plus plan?

Chris Doyle (CEO)

Yeah, thanks for the question, Scott. So first, as we thought about setting 2025 up, we had a couple of different paths just with the business as is. You know, as we've talked about in the past, the level of activity in 2024 was not at a maintenance level to support 160,000 barrels of oil a day. In addition to that, it was very front-loaded, which really stopped the engine towards the end of the year. And so one option that we had was to increase activity and maintain 160,000 barrels of oil a day.

As we looked at and considered the volatility in the macro that we're seeing currently, we didn't think it was the right thing to double down, invest, you know, a couple hundred more million dollars to maintain 160,000 barrels of oil a day. We believe the best thing for the business long-term was to reset to the $150 million-$155 million, peel out capital, and hit that maintenance level of $1.8 billion-$1.9 billion. In terms of question around the larger M&A deals, we won't comment specifically on any rumors out there, certainly. But I will say that this is a team that is focused on long-term creating a long-term sustainable business that generates significant value for our shareholders.

If there are opportunities to accelerate some of that value, and that's any asset, not just DJ or just Permian, if there's an opportunity to accelerate value for our shareholders, we will certainly take it very seriously. I will say, as evidenced by the $300 million divestment target, we are out there looking for ways to identify assets that could be more valuable in others' hands and use that to offset what we thought was a really attractive bolt-on in the Midland Basin and really a rotation to extend the runway into the Permian, and so I think more to come on that front, Scott, but a lot of work and a lot of diligence to go into laying out this plan is the best path for this company long-term.

Scott Hanold (Managing Director of Energy Research)

Yeah, and maybe to play a little bit off some of the latter comments there, I mean, you know, obviously, you know, potential divestitures seem like they're going to be targeting some, you know, more so in the DJ, and you've obviously bolted on to the Permian. So, you know, as you look at, you know, your inventory runway of 1,200 Permian locations, I mean, is, you know, a couple of questions here. One, you know, how comfortable do you feel with your inventory duration of what you would view as core wells? And do you see yourselves becoming more of a Permian company over time?

Chris Doyle (CEO)

Yeah, I'd like to say we're a returns company. And whether we get those returns from the DJ or the Permian, that's what we'll go after. We see the opportunity in the Permian really to scale our business or saw the opportunity to scale our business and diversify it. In terms of the 1,200 locations, you know, we're sitting about eight or nine years of stay-flat inventory. We've talked about wanting to extend that.

Again, given the macro where it is, I feel very comfortable with where we are and our ability to really focus, refocus, and send excess free cash to our balance sheet without the need to really participate in what have been extremely competitive asset transactions there in the Permian. In the DJ, you know, it was interesting, not just through ground game, but relooking at a brand new or continually improving capital operating structure and what the team has been able to do to expand tiers out, you know, more than replacing inventory that we sold and that we drilled in the year. I think was a great achievement for the team.

But we're sitting there with eight plus years of stay-flat inventory as well. Now, as we get further down the dispatch curve, is the capital efficiency of those last couple of years the same as the next five?No, probably not. But we do have a team that is demonstrating the ability to drive additional efficiencies to take returns, whether it's extending laterals or optimizing completion designs to take lower returns and improve those with time, and so we feel very comfortable that this is a plan that is sustainable, that will deliver sustainable free cash flow and allow us to achieve all of our balance sheet goals and at the same time return significant capital to our shareholders.

Operator (participant)

Our next question comes from the line of Leo Mariani from Roth Capital. Sir, please go ahead.

Leo Mariani (Managing Director and Senior Research Analyst)

Yeah, I wanted to follow up a little bit about some of your comments around, you know, M&A. Clearly, you talked a little about divestitures, but, you know, just curious, you mentioned very competitive, you know, Permian markets, but in kind of a perfect world, is there a pretty healthy appetite for the company to try to add inventory in the Permian through M&A?

Chris Doyle (CEO)

Yeah, I would say our number one goal for 2025 is hitting that net debt target at the end of the year, the four and a half. You know, as we're doing with the bolt-on in Midland, rotating out of predominantly DJ developed assets to fund that, we'll see if there are similar opportunities to do that. But our number one focus, given the inventory duration that we currently have and given the macro that we see, is really taking that excess cash to the balance sheet first and foremost. And we'll continue to look for ways to accelerate our delevering and to accelerate our returns to our shareholders. But our number one focus this year is that $4.5 billion net debt target.

Leo Mariani (Managing Director and Senior Research Analyst)

Okay, and then just jumping over to the LOE side. LOE obviously went up here in 4Q. Just trying to get a sense, was a lot of this driven by the Permian, or did you all also see healthy increases in the DJ?

Chris Doyle (CEO)

Yeah, you always see in the DJ and the Permian with winter LOE jump up a little bit. The 4Q really was led by a higher LOE than expected in the Permian. Winterization projects, a little more active workover plan, and we'll see that continue into the first quarter before it moderates back, but we take this very seriously, and this is, you know, our cost structure as we think about cash G&A and cash LOE. That's a differentiator for any company in a commodity business.

It's why we made some of the hard decisions that we made recently to reaffirm and reestablish and sustain that low-cost stance, and so specific to your question on 4Q, it was really winter-related and workover activity, but teams working through that and will get us back into top quartile cost structure. We're very comfortable with that.

Marianella Foschi (CFO and Treasurer)

I feel that substantially all the increased quarter-over-quarter was driven by Permian, like Chris discussed. Rockies or DJ was actually flat quarter-over-quarter. You know, I think as we see, as we look out, you know, we have a cash or an LOE target that's probably going to be somewhere in between Q3 and Q4 that we're, like Chris discussed, quite a bit of one-time items in the fourth quarter that won't be recurring. But, you know, all in high nines on a per BOE basis, which we believe is peer-leading for our asset base.

Leo Mariani (Managing Director and Senior Research Analyst)

Thanks.

Chris Doyle (CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of John Abbott from Wolfe Research.

John Abbott (VP of E&P Research)

Hey, good morning, and thank you very much for taking our questions. So with the focus here on free cash flow, maximizing that, could you speak a little bit about the trajectory of how you see future cash taxes over the next three-year period of time? And when do you see yourself paying sort of the alternative tax? What's your latest thoughts on cash taxes?

Marianella Foschi (CFO and Treasurer)

Thanks, John. So this year, cash tax guidance is $10 million-$30 million. It's going to be fairly flat into 2026, maybe a little bit higher, closer to the high end of this year's range next year. As far as AMT, we don't hit AMT until around $80 a barrel. So there's nothing additional to model pursuant to AMT.

John Abbott (VP of E&P Research)

Appreciate it, and then, Chris, I mean, the focus right now is on deleveraging the balance sheet. You know, you're looking at the commodity environment. You know, but as you sort of sit down and think about your inventory, let's say the commodity environment improves and you are in it, what is your willingness to actually grow at that period of time, having lowered your oil guide at this period of time? You only have so many years of production. What would you do? Would you add a rig? How do you think about growth if there were, if there was a change in the commodity and price environment?

Chris Doyle (CEO)

Yeah, thanks for the question, John. If the macro completely flips and it's very bullish towards the end of this year or into next, you know, we will be responsive to that macro environment. We like this plan as we roll it forward, the ability to generate sustainable free cash and take that to the balance sheet. If we saw, you know, a solidifying of the commodity price, you know, instead of backwardating into the 60s, some more solid foundation, you could see us potentially lean in a little bit on activity, but only if we're well advanced of our balance sheet targets for the year and for longer term.

And so this is a team that will continually look at ways to further optimize the way we allocate capital. And as things shift like that, we will be responsive and not overreact, but certainly responsive to the macro. You know, given the success that both the DJ and the Permian teams have had over the past year, really replacing and extending inventory, we have the option to lean in a little bit. All eyes right now focused on that $4.5 billion year-end target.

John Abbott (VP of E&P Research)

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

Chris Doyle (CEO)

Thanks, John.

Operator (participant)

Our last question comes from the line of Noel Parks from Tuohy Brothers. Sir, please go ahead.

Noel Parks (Managing Director of Energy Research)

Hi, good morning. You know, you did touch a bit earlier on the potential for increased oil volatility. And I think you mentioned that in a way, being conservative with activity and CapEx is sort of the first line of defense against that. But do you have a general view on oil volatility over the next few years? I mean, leaving total black swan events aside, do you sort of anticipate increasing volatility or volatility, you know, maybe sort of settling down over the next few years?

Chris Doyle (CEO)

Yeah, I think first I would say what we've seen is pretty significant volatility, right? Oil was $80 a month ago. Now it's backwardated into the $60s. We'll see if that continues, right? And we're not going to sit here and prognosticate which way that will go. But I will say the first line of defense before even activity levels and taking a more conservative approach to capital allocation is affirming and establishing a low-cost structure. Again, it's something we spend a lot of time on. And again, looking at some of the difficult decisions we've made really to solidify that peer-leading cost structure, to us, that is the first defense against that volatility.

Noel Parks (Managing Director of Energy Research)

Great. Thanks a lot. And just to clarify something on the guidance, some of the sensitivities shown in the slides. Since the free cash flow has so much upward sensitivity with commodity pricing, I just wanted to double-check. The $1.1 billion, I think it is a free cash flow estimate at $70, that would not count the $550 million in delayed compensation you're paying for Vencer since that was cost incurred last year, if I have that right. Is that right?

Marianella Foschi (CFO and Treasurer)

That's correct. That's just clean free cash flow. No, the $475 million deferred acquisition with Vencer, that was already paid. And that was just paid out that we had at the end of the year. So it doesn't impact the $1.1 billion free cash flow in any way.

Noel Parks (Managing Director of Energy Research)

Great. Thanks a lot.

Operator (participant)

Thank you. That concludes our Q&A session. I will now turn the call back to Brad for closing remarks.

Brad Whitmarsh (VP of Investor Relations)

Really appreciate everyone for joining us today for the Q&A session. May and I are certainly around the next several days for additional follow-up. We look forward to seeing you on the conference circuit here over the next couple of weeks, and we hope you have a great day.

Operator (participant)

That concludes our conference call. Thank you for joining today, and you may now disconnect.