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Following Civitas Resources’ recent expansion into the Permian Basin, the Colorado E&P outperformed its expectations in drilling, but said it won’t entertain any more acquisitions unless it meets the company’s criteria.
“The hurdle for us to go after an acquisition is very high,” Civitas CEO Chris Doyle said on its third quarter earnings call on Nov. 8.
Doyle said a new acquisition must be able to generate free cash flow and extend the duration of the industry’s leading shareholder return framework.
“We’re not just looking at getting bigger. It’s ‘how do we improve shareholder returns?’” Doyle said. He said earlier in the call that his company returned nearly $1 billion to shareholders in 2023.
Like CEOs on other recent earnings calls, Doyle said the company would focus on the integration of recent acquisitions, which he said are ahead of schedule.
The two-year-old Civitas is a legacy D-J Basin E&P backed by energy private equity firm Kimmeridge Energy Management Co. It entered the Permian Basin in June by purchasing Tap Rock’s Delaware Basin assets and Hibernia Resources’ Midland Basin assets for a total of $4.7 billion. Civitas also announced the $2.1 billion acquisition of Midland’s Vencer Energy on Oct. 4, which Doyle said will close in January.
Neal Dingmann, an analyst with Truist Securities, complimented Doyle for a “nice job on the solid results” on the call, and wrote in a note that “the integration of the recently acquired Permian assets has gone swimmingly,” with operational handovers made at least a month earlier than expected. Dingmann wrote that Truist “would not be surprised if the company invested in larger scaled projects in the recently acquired basins, enhancing returns.”
On the call, Doyle said Civitas will seek to sell $300 million in non-core assets by mid 2024.
“Proceeds will help us reduce debt while also high grading our portfolio,” Doyle said.
Both Dingmann’s note and the earnings call noted a greater than expected performance in the “Watkins area,” a part of the D-J Basin just south of the Denver Airport.
“The Watkins area just continues to notably outperform. I think that’s even an understatement,” Dingmann said on the call.
Civitas went into the area with conservative expectations, starting with a two-mile well and then adding three milers, Doyle said.
“Early results have been really, really positive,” he said, adding that the some of the company’s recent deployment of $60 million in capital was directed at the “high-quality, high-return” pads in the Watkins area, which has “emerged as a core part of our portfolio.”
Civitas produced 168,000 boe/d in the D-J Basin in the third quarter—67,000 boe/d more than it produced in the Permian.
“We ran two rigs in the D-J, seven in the Permian during the quarter and, as planned, we’ve dropped in the Permian in October, and we’ll drop to four rigs by year end,” Doyle said.
Dingmann’s note said he expects Civitas to “deploy incremental capital in the area in 2024 to capture cash flow upside generated from increasingly operationally efficient and more productive wells.”
Civitas assumes an $80 cost of oil in its guidance and will give new guidance in February.
Civitas reported third quarter EVITDAX – earnings before interest, depreciation, amortization and exploration – at $708.9 million. The company reported $205 million in cash flow for the quarter.
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