Civitas Resources Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 28, 2024

There are 11 speakers on the call.

Operator

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Civitas Resources 4th Quarter 2023 Earnings Conference Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise.

Operator

After the speakers' remarks, there will be a question and answer session. At this time, I would like to turn the conference over to Brad Whitmarsh, Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, Audra. Good morning, everyone, and let me say that I'm thrilled to be a part of Civitas, a great team with great assets and a forward thinking vision. Joined today by our CEO, Chris Doyle CFO, Marianella Foske and COO, Hodge Walker. Today's webcast and conference call coincides with our Q4 2023 2024 outlook release, our published supplemental slides and the 10 ks, all of which were published on our website yesterday. In addition, we've announced a large share repurchase transaction yesterday afternoon.

Speaker 1

So hopefully, you've had a chance to get through all of the materials that we have provided. During this call, we will make certain forward looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially from our projections. Please read our full disclosures regarding forward looking statements and other disclaimers in our earnings materials and most recent SEC filings. We may also refer to certain non GAAP financial metrics. Reconciliations of these items can be found in our earnings release and our SEC filings as well.

Speaker 1

After prepared remarks, we look forward to 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. I'll now turn the call over to Chris for opening comments.

Speaker 2

Good morning, everyone, and thanks for joining us today. Let me also welcome Brad to the Civitas team. There are 3 primary things I want to cover today before we take your questions. First, a quick recap of the significant progress we've made over the last year. Civitas is a remarkably different and stronger company today.

Speaker 2

Next, I'll share a few highlights from our Q4 2023 financial and operating results. Finally, we'll discuss our 2024 outlook and how we're extremely well positioned to create substantial shareholder value moving forward. Our 2024 plan has been optimized compared to our previous outlook as we reduced our capital expenditures by $150,000,000 while maintaining our expected full year production. So let's get started. A year ago, Civitas was a small cap single basin company focused solely on the DJ.

Speaker 2

Production was approximately 170,000 barrels of oil equivalent per day. And while our DJ Basin assets were and continue to perform exceptionally well, we have limited flexibility in how we allocate our capital. Using our strategic pillars as our North Star, we've been working to enhance the Civitas investment thesis and portfolio for nearly 2 years now. Being on the forefront of this consolidation wave, we looked at a significant number of opportunities to diversify, scale and strengthen our business. During 2023, our team successfully entered a 2nd world class base in the Permian through 3 separate large scale transactions, all at compelling valuations.

Speaker 2

The transactions added scale and diversified our operations across 2 of the lowest breakeven oil basins in the U. S. As we more than doubled our production, doubled our reserves and doubled our inventory of high return development wells. We have all of the key ingredients to deliver long term value for our shareholders, an exceptional team, high quality assets, inventory depth, a strong balance sheet, significant free cash flow and a track record of returning that cash to owners through cycle. We've significantly transformed Civitas over the last year and our future has never been brighter.

Speaker 2

Shifting now to 2023 results, I'm very pleased with our performance last year as our full year results were in line with guidance. Where our teams were able to accomplish operationally and financially amidst the ongoing transformation at Civitas is remarkable. While our equity valuation is yet to catch up to our new asset base, we're confident we'll close this gap and deliver for our shareholders for years to come. Shareholder returns are one of our 4 strategic pillars and last year we returned nearly $1,000,000,000 to our shareholders. 2 thirds of this was in the form of dividends and a third in the form of share buybacks.

Speaker 2

Now over the last 2 years, we've given back more than 1 point $5,000,000,000 to our owners and that represents nearly 25 percent of our market cap. 4th quarter production was 279,000 barrels of oil equivalent per day. DJ Basin volumes outperformed expectations once again with strong productivity in our walk ins area, which is in the southern part of our DJ acreage. 4th quarter Permian production was impacted by facility upgrades to some of our higher oil cut production in the Delaware. These upgrades were completed in November and we exited this year strong with December 2023 Permian production averaging 120,000 BOE per day, 50% of which was oil.

Speaker 2

We took over operatorship of the Midland Basin assets late in Q4 and our early performance is encouraging as we're already seeing efficiencies through reduced drilling days and improved cycle times. Earlier this month, we took our over complete control of the Delaware operations I'm confident we'll achieve similar operational improvements throughout the year. With our Permian leadership team now fully in place, we have the right people, working the right assets and we're primed and ready to deliver. Needless to say, I'm very excited about the opportunity ahead of us in the Permian. Year end 2023 proved reserves totaled nearly 700,000,000 barrels of oil equivalent, up about 70% from last year.

Speaker 2

This was largely driven by the Taprock and Hibernia acquisitions. None of the reserve numbers include Venser, which closed January 2nd and will add significant reserves in 2024. Finishing up 2023, Civitas continued building a sustainable business enhancing our environmental health and safety performance. Last year, we further reduced our total recordable incident rate and our spill count. And through a pneumatic device retrofit program, we reduced CO2 emissions in the DJ by 420,000 metric tons, another amazing accomplishment by the Civitas team.

Speaker 2

We'll continue these efforts in the New Year and we're bringing our expertise and bringing our approach to the Permian. Shifting now to our 2024 outlook, our optimized plan focuses on 3 primary objectives. First, continuing our momentum in the DJ and successfully integrating our new Permian assets. 2nd, maximizing free cash flow through disciplined and returns focused investments. And 3rd, maintaining our industry leading shareholder returns while also improving our balance sheet.

Speaker 2

As I mentioned earlier, we enhanced our 2024 plan by reducing CapEx 7% or $150,000,000 while maintaining our production outlook. These planned improvements were achieved through optimized activity levels and reduced cycle times across the business along with productivity enhancements in the DJ. Our CapEx will be more weighted to the first half of the year primarily as we're coming off higher legacy activity levels in the Permian. Production volumes are anticipated to increase modestly through the year. 1st quarter oil volumes will reflect a new takeaway agreement in the Rockies where we have some line fill inventory to build.

Speaker 2

This agreement represents over $100,000,000 in incremental value to Civitas over the next 5 years. We're excited about it. Net of the line fill, net of weather impacts, January production still came in at 325,000 BOE per day. About 60% of our 2024 CapEx will be allocated to the Permian where we're targeting 130 to 150 gross wells this year. Approximately 70% of our Permian turn in lines will be in the Midland with the remaining 30% in the Delaware.

Speaker 2

Because we've only recently taken over operatorship of the Permian assets, we've kept our drilling completion and facility cost per foot flat versus our acquisition assumptions. As such, the opportunity to drive capital efficiencies in the Permian is significant and I expect we'll have meaningful updates later this year as we establish our performance track record in the Permian. The remaining 40% of our anticipated CapEx will be allocated to the DJ where our core Watkins development area continues to impress. Based on recent production performance in Watkins, we raised our expected recovery in our near term development area by 10% versus prior estimates. The majority of our 2020 4 DJ Basin activity will be in the Watkins area.

Speaker 2

In January, we filed our 3rd comprehensive area plan in Watkins. We expect the previously submitted Lowery cap to be approved in mid-twenty 24 and the latest Arapa cap to be approved late this year or early 2025. Including the initial Box Elder cap, these 3 caps represent nearly 80% of the remaining 300 or so locations in Watkins and most of the non cap locations are covered by an existing OGDP. So we feel very confident in our plans and outlook in the DJ for the next several years. We're maintaining our peer leading shareholder return framework.

Speaker 2

At $75 oil and $2.75 gas, we estimate free cash flow to be approximately $1,300,000,000 in 2024. Dividends including base and variable are estimated at approximately $600,000,000 this year or $6 per share, nearly 10% yield based on our current stock price. In addition to our targeted divestment proceeds, remaining $700,000,000 in free cash flow will be prioritized for the balance sheet and opportunistic share buybacks like the one we announced yesterday, fully exiting NGP from our shareholder base. We now have approximately $425,000,000 remaining on our share repurchase authorization. Our current trading level equates to a free cash flow yield in excess of 20%.

Speaker 2

We believe this is a tremendous investment opportunity considering the quality of our asset base and our low cost structure. Our commitment to the strong balance sheet is unwavering. Our long term target for leverage is unchanged at 3 quarters of a turn. Our divestment program remains on track. During the Q4 of last year, we sold a non operated acreage position in the DJ with essentially no production at a compelling valuation.

Speaker 2

It's represented about 100 gross or 40 net non operated locations. They're low working interest assets where we had no control over development timing and the area was not in the operator's near term development plan. Completed divestments to date total about a third of our $300,000,000 target. We're on track and confident that we'll complete the remainder by the middle part of this year. Wrapping up, let me go back to where I started my comments today.

Speaker 2

Civitas is a significantly transformed company with all the key ingredients to deliver long term shareholder value. We're differentiated from our peers through scale, asset durability, cash returns to shareholders and an employee base that consistently delivers. Before we move to Q and A, I want to give a quick shout to our field teams who have managed through some incredibly challenging weather over the last couple of months. Companies often talk about employees being their greatest asset and our Civitas employees approving it. Highlighted by our team recently limiting downtime in the DJ during an extreme weather event where temperatures reached 30 below 0.

Speaker 2

I want to personally thank the men and women who work hard to deliver some of the lowest carbon barrels in North America. They do this every day no matter what the weather looks like outside. Operator, we're now happy to take questions.

Operator

Thank you. We'll go to our first question from Neal Dingmann at Truist Securities.

Speaker 3

Good morning, guys. Next quarter, my first question is on the 24 Permian production guide. I think you talked about 170,000 BOE per day around 140 wells that now include will include events. I'm just wondering, Chris, could you as a team give some color on the regional focus and maybe more importantly, what type of cycle times or operational efficiencies you believe are achievable now that you've got all the assets combined?

Speaker 2

Sure. Thanks for the question, Neil. I'll kick it off and then kick it over to Hodge. In terms of the 2024 guide, as we mentioned, we expect to see production growth throughout the year. In terms of a split for the year, we're about seventy-thirty on till 70% of the till will be from Midland, 30% from the Delaware.

Speaker 2

We like the production profile growing a little bit through the year, have started out the year very strong coming off a really strong exit. In terms of capital efficiencies and how we've constructed this program, we're early on, it's early days certainly. Love seeing the team already delivering 20%, 30% reduction in drilling days. We're also accelerating till times and I'm excited what this team that we've built will do. We've not reflected any additional significant efficiency gains in either side of the Permian.

Speaker 2

So we think it's the right way to set up 2024 and we think there's room to enhance as we go through the year. Hodge, why don't you jump in some of the specifics?

Speaker 4

Yes. Thanks, Chris. Neal, as you know, we're real early days with taking over operatorship. We just took over operatorship on the Hibernia assets here at the end of November and on the TAP assets here just earlier this month. But to the point that Chris mentioned, the teams already got some early quick wins.

Speaker 4

We've high graded some rigs out in the Midland Basin, seen some improvements on drilling times by 20%. We're doing more modular builds versus stick builds, which help us accelerate facilities until timing. If you look at the broader efficiencies, it really is all about drilling, completions and till timing. We are returns focused. Part of that returns is really shortening that time from capital deployment to till.

Speaker 4

If we can consolidate some of that completion and bring revenue forward, we're going to do that.

Speaker 3

That's great upside guys. And then Chris, maybe my second one for you and Ella, just on shareholder return and capital allocation, you all continue to have among the best payouts, even notable that this obviously this great MGP buyback and the leading dividend yield. I'm just wondering, we all continue with the same sort of systematic total return plan and just with the 50% plus and when and how flexible you are on buybacks versus DIVs going forward? Thank you.

Speaker 2

Sure. I'll kick us off and then kick it over to Maranella. I think the first thing I'd say is we've built this track record of an all of the above approach. If you look at what we've delivered through last year and even as we started 2024, a good mix between dividends and buybacks. And that really comes down to the strength of the assets and the teams that are managing those assets.

Speaker 2

I think it's important to understand the company was formed with very clear mandate and that was to return cash to our shareholders. We've done that. We've chosen to do that. We'll continue to do that with a mix of the variable, the fixed variable and buyback. Mary Nolan, what would you add?

Operator

Yes, absolutely. Neal, if you look at

Speaker 5

what we've done today, we have an extremely strong track record of doing so in returning cash to shareholders really as good as anybody. We completed nearly $400,000,000 in stock repurchases at a weighted average price of $61,000,000 and change, so obviously very attractive levels. We also paid $670,000,000 in dividends during the course of 2023. And like we said in the prepared remarks, we've returned 25% of our market cap to shareholders just in the last 2 years alone. And I think it's important to note that we did all of that while taking a meaningful step to diversify our asset base and afford ourselves just more capital allocation flexibility by entering into the Permian at very accretive multiples even if you look at it on a debt adjusted basis.

Speaker 5

So going forward, you could continue to expect us to do just that, just expect us to continue the strong track record of returning cash to shareholders through cycles. And like Chris said, in this all of the above philosophy, we believe this philosophy has really served us well To date and I would say, I mean, look, if you look at our equity prices, they don't really reflect the value

Speaker 2

of

Speaker 5

our high quality asset base, which is why you saw us capitalize on that yesterday. If you look at our free cash flow during 2023 at $75 oil is $1,300,000,000 which is over a 20% yield or said differently we pay our entire market cap in under 5 years. And I will also note that we remain extremely committed to the balance sheet and achieving that 0.75 times leverage target. I mean, look, we don't need to get there tomorrow, but for us it's more so about taking meaningful steps and making meaningful progress towards that every single day. That's why you saw us come out with the asset sale program last year to accelerate that delevering target.

Speaker 5

And then between our asset sale program and our free cash flow this year, we'll have about $1,000,000,000 to be allocated to balance sheet as well as the buyback program. I mean, look, it's all a balance, right? I mean, our focus is to create shareholder value if there's the opportunity to do that. So it's really just a question of balancing, making progress towards that leverage target and along with capitalizing on very cheap opportunities to buy our stock. And so I know I said a lot there, but just wanted to give you a flavor as far as our decision matrix goes.

Speaker 5

And for all those reasons, I mean, we think our equity right now represents a very compelling entry point and Civitas is well positioned as good as anybody to capitalize on that.

Speaker 3

That's very helpful. I would agree. Thank you all.

Operator

We'll go next to Tim Rezvan at KeyBanc Capital Markets.

Speaker 6

Good morning, folks. I wanted to dig into the Permian a little more given your position. It just got bigger at the start of the year with Venser. Do you plan any similar sort of facilities work as you integrate the new assets? And I'm just trying to think how we should think about items like LOE going forward.

Speaker 6

Do you see some short term increases to get longer term decreases? Or any big picture comments you have on sort of what you plan to do in the field this year following what you did in the Q4 would be helpful. Thanks.

Speaker 2

Sure. The Q4 facility upgrades that we saw was really about short term pain for long term gain and enhancing flow assurance in the Delaware. We've done similar facility upgrades and tweaks already this quarter with minimal downtime. And so we think that's a one off. I think importantly as we think about Vincer and the integration efforts that have kicked off, Much different than with Taprock and Hibernia, we have the platform in place.

Speaker 2

We have the leadership team in place along with all the support staff that will drive a successful integration. These are assets that the team is very familiar with, the basin that they've worked for a long time. I think we've shown as we've exited the year and moved into this quarter, assets are better in our hands. And I'm excited to see what the team can deliver. I'm most excited to be able to accelerate the integration with Vint Cer and see what the assets can deliver.

Speaker 2

We don't see any similar sort of one off facility upgrades like we experienced in October November. But this is also a team that's going to look for every single way to optimize the business. Hodge, anything you would add? Just adding a

Speaker 4

bit of color to Chris' commentary. The work that was done there during 3rd or during the October November timeframe was really all about debottlenecking, optimizing flow assurance and minimizing downtime. And that work really was associated with some specific facilities and that's behind us. And that's proven by the way that we exited the year at 120,000 barrels a day for the month of December and the strong entrance into this year. The team is always looking for opportunities to optimize things, but at the same time, we will look for efficiencies everywhere we can.

Speaker 6

Okay.

Speaker 2

In terms of cost structure, sorry, just getting to the second part of your question, we exited the year with all in cash costs around $9.50 or so, just over $9.50 That's right at the middle of our guide for 2024. There are likely some synergies that have not been baked into that number with Vincer volumes coming over, but we feel very confident how we exit the year and as we lay out very low and competitive cost structure in 2024.

Speaker 6

Okay. Appreciate the color. And then as my follow-up, I wanted to ask, out here in Colorado, there was a proposal that came out recently, SB 24-159, where some of the Democrats in the state are proposing a phase out of drilling towards the end of the decade. I know it's early stages, but can you talk about what you or you collectively as the industry are sort of doing in response to this proposal?

Speaker 2

Sure. I'll kick us off and then kick it over to Hodge. Similar push was about heard about a year ago. The governor came out very strongly in opposition of that measure. They tried to go through a valid initiative, didn't get the signatures, didn't get the financial support.

Speaker 2

Here it comes again this quarter. We don't think it's going anywhere. We're actively engaged at all levels within Colorado. And Hodge, any additional color on where that sits today?

Speaker 4

Yes. Kind of building off of that to your point on where the industry is, we with the industry continue to work with the trades and work with the legislature. I think one of the things to note here is there doesn't appear to be a whole lot of support sitting in the legislature right now. As Chris mentioned last year, the governor came out against this bill. Earlier this week, he came out with his greenhouse gas roadmap.

Speaker 4

And in that roadmap he mentions that a production phase out at the scale large enough to make any meaningful impact would really drive up costs of living for many Coloradans, which really can't afford that kind of an increase to living costs. So I think that gives you a sense of his indication of where he stands, which is similar to where it was last year. Okay.

Speaker 6

I appreciate those comments. Thank you.

Speaker 2

Thanks, Ed.

Operator

We'll move next to Leo Mariner at ROTH MKM.

Speaker 7

Hi, guys. Wanted to just follow-up a little bit on the Permian here. Certainly feels like there could be a lot of low hanging fruit from an operational perspective. I know you haven't really baked in any efficiencies in the 2024 program, but

Speaker 6

I was hoping maybe if

Speaker 7

we kind of looked out around a year or so from now, I mean, just trying to get a sense of what type of improvements could materialize and we could could we see something like up to a 10% reduction in like D and C cost per foot? And are we also likely to see just improved EURs out there as well to kind of get the double whammy. It's just it feels like there's kind of some low hanging fruit here and I'm assuming you guys maybe have some internal targets about what you might do over say the next year?

Speaker 2

Yes. Thanks Leo. I'll kick us off here. Appreciate the question. I think first thing I would say is look how Civitas has managed and developed the DJ and those lessons don't necessarily stop at the border as we go south into the Permian.

Speaker 2

This is a team and a leadership team that is focused on returns. It is focused on continuous improvement and we are super competitive. Take that mindset into the Permian. We built this built out the team and they have they are very like minded. What we were focused on in our 2024 guide is we've got to deliver this.

Speaker 2

There are many companies that have tried to do what we are doing and not been able to deliver. And so we did take rightfully so a conservative view into 2024. We know that the Permian is a different animal. We've got the team to execute. I think where you're guiding potential cost savings per foot, I think that's very achievable.

Speaker 2

We've got a team that doesn't want to be just part of the pack. They want to be at the head of the pack. And if that's the case, then a 10% reduction in cost per foot, getting drilling days down into single digits, that's all going to be part of it. We're just not going to come out with a plan that pre bakes success because we know the pitfalls that could arise from that. So I think you're thinking about it correctly.

Speaker 2

We're excited to get another quarter under our belt and continue to build that track record, a track record that we built in the DJ, we want to replicate in the Permian.

Speaker 7

Okay. That would certainly be an impressive if you guys are very successful there. And then just maybe jumping over to the thought process around buybacks. I think obviously very successful buyback that you just announced taking NGP out. I know it's kind of always hard to know, but I know you guys clearly have some other type of PEInsider shareholders in the stock.

Speaker 7

Is there a pretty strong appetite within Civitas to continue to maybe clean up some of these legacy shareholders that really came to the company through some of the M and A that you all did over time? And how do you kind of think about that in terms of balancing debt reduction as I know you've got the goal to get to 0.75 times, but sounds like you guys are going to be a little bit patient there. So maybe there's more firepower for more buybacks at the right time here in 2024?

Speaker 5

Yes, absolutely. Leo, this is Marinel. I mean, look, we will continue being opportunistic. Like I said earlier, we hold that 0.75 times target, very true to ourselves. It's one of our 4 pillars.

Speaker 5

Our North Star, however, is creating shareholder value. I mean, we have done open market repurchases. We also have a track record of negotiating direct purchases. It's a good way of getting a lot and getting at a discount. So we I will note that we do have a decent amount remaining under authorization 425,000,000 dollars and we'll continue to do so.

Speaker 5

We'll continue executing at attractive prices, again, 61 and changes our weighted average share repurchase price and then obviously a meaningful discount where we are, which is still a discounted level relative to our peers and relative to the quality of our asset base. So we will continue doing both. We will continue doing open market repurchases as well as buying in block and then just depends on where the best opportunities lie.

Speaker 6

Thank you.

Speaker 2

We'll

Operator

take our next question from Oliver Wang at TPH and Co and

Speaker 8

Company. Good morning, all and thanks for taking my questions.

Speaker 2

Good morning, Oliver.

Speaker 8

I think just wanted to jump over to the DJ as we kind of think about the uplifted EURs out of the Watkins area year over year that you all have kind of seen in your 2023 results. Just wanted to get a sense of what drives the confidence that the outperformance will continue? And was there something that was kind of done differently between the 2022 2023 programs that drove that uplift?

Speaker 2

Sure. I'll kick this off and see if Hodge wants to add anything. Yes, 2023 was different than 20 22, 22 was different than 20 21, 2024 is going to be different than 2023. We are continually working on how do we enhance returns. Some of the big moves from 2022 to 2023 were around extended laterals.

Speaker 2

We had going into that risked the additional mile and what we saw was the degradation in that 3rd mile just didn't show up or didn't certainly didn't show up to the level that we had risked. That was a big driver. We were always tweaking completion design, development, spacing and how we flow back wells, how we bring wells on and the team has done a phenomenal job getting stronger every single quarter. So we've rolled some of those enhancements and improvements into the 2024 plan, but it is a stark performance improvement year over year. I'm super proud of what the team was able to deliver.

Speaker 2

This is some of the this is great rock. This is great rock. These returns will compete for capital within the Permian and that's why you're seeing us allocate so much capital into the Watkins. You couple that with 3 caps that will cover the vast majority of it. This is an area that's prime to deliver for Civitas for a number of years to come.

Speaker 4

Yes, Leo, I'd just add to a couple of points that Chris mentioned. I mean, if you look at our activity set in the DJ during 2024, 70% of our activity is going to be down in the Watkins area. We've got the Box Elder cap that's been approved. We've got a hearing coming up here mid year on the Lowery cap and that's really a 2025 plus development program. We've recently filed our ARAPA cap, which is more of a program that is a long term development.

Speaker 4

We expect that cap to be approved towards the end of this year, beginning of next year.

Speaker 8

Awesome. That's helpful color. And just for a follow-up question, I was hoping that you could provide us a reminder with how cash taxes might look for that 2025 plus timeframe, if there's some sort of rule of thumb.

Speaker 5

Sure. Absolutely. Obviously for this year, we guided to $0 to $50 that's a $75 oil. A lot of that has been a lot of that is related to the Fenster transaction closing this year and giving us a slightly favorable tax treatment for this year. For 2025 and beyond, I would say, once we get out of 2024 with the stable tax reform of the acquisition, as long as or along with bonus appreciations have been down over time, you'll probably see something higher probably in the range of $150,000,000 a year and that's at $75 oil.

Speaker 5

And I will say as a reminder on the AMT front, we at $75 oil flat, we're not expected to hit that, really in the foreseeable future. But going forward, I would say $150,000,000 $1.75 cash tax per year is probably a pretty good ballpark.

Speaker 8

Thanks. Appreciate the time.

Operator

We'll go next to Phillips Johnston at Capital One.

Speaker 9

Hey, guys. Thank you. Just thinking directionally about Q1 volumes in the Permian. Obviously, you guys don't give guidance, but presumably the summer exit rate of 120 day, that was pretty flush. I guess if we ignore the effects of the Venser deal, would you expect your Q1 Permian volumes to be directionally down versus that exit rate or you think you can sort of maintain that level?

Speaker 2

So if you look at our full year guide of right at about 170,000 Boe per day. We anticipate a little bit of downtime obviously for weather in the Q1. What we saw Permian specifically however was above our expectations for the quarter. We think as we go Q1 through to the end of the year, we'll see some increase fairly modest and that's based on the assets outperforming coming off that strong exit into January and now February.

Speaker 9

Okay, sounds good. And then wondering if you can share the next 12 month PDP decline rate that Ryder Scott assumed in your year end 'twenty three reserve report? And would you expect that decline rate to move materially lower between now and the end of this year?

Operator

Yes, absolutely.

Speaker 5

So for year end, it's probably low to mid-30s on a BOE basis, we'll call it 33%, 34% going forward. And it's going to depend on shape and cadence of activity, right? Like if we have a lot of completions and bring online later in the year versus earlier in the year. But other than that cadence throughout the year, I don't expect a material change in that decline on a go forward basis for a level loaded normalized activity plan.

Speaker 9

Okay. That's helpful. Thank you so much.

Operator

We'll move next to Kevin McCurdy at Pickering Energy Partners.

Speaker 10

Hey, good morning and congratulations on the well received capital number. In regards to that $150,000,000 reduction compared to your prior number, can you help us break down that number a little bit more on the savings from well cost reduction, faster cycle times and lower well cost and sorry, lower well count? And how much of that savings is coming from the DJ versus the Permian compared to the prior plan?

Speaker 2

Sure. I'll kick us off here. 3 primary drivers to the $150,000,000 The first is the early wins in terms of cycle times that we've seen across our business. That's making for a much more efficient capital program in 2024. The second is the enhanced well productivity that we saw in the DJ.

Speaker 2

That's making for a much more capital efficient program in 2024. And the combination of those 2 has allowed us to tweak and to pull out a little bit of activity and yet deliver the same amount of production for less capital. The split between those 3 is probably fairly even, I'd say. I think there's likely more upside on the cycle time enhancements. We've not baked in anything into the Delaware or into the Vincer assets.

Speaker 2

Now let us get our hands squarely on the wheel with those assets and we'll see how we progress through the year. And I think the other thing that Hodge touched on is, we'll look for ways to accelerate TILs. And it will cause a little bit of lumpiness, why you see us 60% of our capital in the first half of the year, because we think we can bring wells on a lot faster and that's going to be a better return for our shareholders, but it will create a little bit of lumpiness. I'd say of the 150, the split between the Permian and the DJ is likely heavier weighted to the DJ just because it's a known commodity. And I'd like to be here next quarter or a couple of quarters from now saying, hey, we're uncovering additional ways to optimize the Permian.

Speaker 2

We just haven't rolled that into the 2024 plan yet.

Speaker 10

Great. Thanks for the details on that. And turning to the DJ, you've laid out your plan for most of your DJ capital we spent on the Southern acreage this year. That looks like your highest return area. Do you expect that area to continue to receive the majority of the DJ Capital in the coming years?

Speaker 10

And can you talk about how permitting fits into that decision?

Speaker 2

Sure. And the short answer is yes. Those are some of our best returns in the DJ. I think it's also setting up because of the permitting situation, the Box Elder cap approved, the Lowery cap set to get approved this year, the Arappa cap maybe late this year early next that you then have really strong confidence in being able to allocate capital in that area. I would say that we're going to be as we allocate capital between the DJ and the Permian, this stuff is going to compete.

Speaker 2

And I would I'd say we're 70% this year, probably 75% next year of our capital going into the Watkins area. And so we're excited about it. It is a fantastic area and we've got line of sight, clear line of sight on the permitting with the caps working through the system. And so yes, you'll see us really pull capital into this area over the next few years.

Speaker 4

Yes, I'd add, if you take a look at what the remaining inventory in that Watkins area looks like, it's over 300 wells and about 80% of those are going to be covered by the caps that Chris is referencing.

Speaker 10

Great. Thank you for the detail.

Operator

And that does conclude our question and answer session. I would like to turn the conference back over to Brad Whitmarsh for closing remarks.

Speaker 1

Yes. Thanks, Audra, and certainly appreciate all the interest in Civitas today. We look forward to connecting with many of you in the following weeks as we're going hit the road for road shows and conferences upcoming. I hope you have a great rest of your day. Please be safe.

Speaker 1

Thanks again for joining us.

Operator

And that does conclude today's conference call. Again, thank you for your participation. You may now disconnect.

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Key Takeaways

  • Civitas completed a major portfolio transformation in 2023 by acquiring three Permian assets at attractive valuations, effectively more than doubling its production (~170,000 to 279,000 BOE/d), reserves (up ~70% to 700 MMBOE) and high-return drilling inventory.
  • Fourth‐quarter production of 279,000 BOE/d beat expectations in the DJ Basin, and after facility upgrades in the Delaware, Permian output rebounded to 120,000 BOE/d (50% oil) by December.
  • The 2024 plan reduces capital spending by $150 million (7%) while holding full‐year production flat, allocating ~60% of CapEx to the Permian (130–150 gross wells) and achieving optimized cycle times and productivity gains.
  • At $75 oil and $2.75 gas, Civitas expects ~$1.3 billion of free cash flow in 2024, funding ~$600 million of dividends (≈10% yield) and ~$700 million for debt reduction and opportunistic share repurchases (with $425 million still authorized).
  • The company continued to enhance its environmental and safety performance, cutting its total recordable incident rate, spills and reducing CO₂ emissions in the DJ Basin by 420,000 metric tons through pneumatic device retrofits.
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Earnings Conference Call
Civitas Resources Q4 2023
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