Civitas Resources (CIVI) Valuation Update - May 6

[dan_s]

I have updated my forecast/valuation model for Civitas for their strong Q1 results and updated guidance for 2024. This is a relatively new company for me, so I'm gaining more confidence in my model each quarter. My valuation increases by $2 to $114/share. My valuation is based on a low multiple of just 3.5 X annualized operating CFPS. < My 2024 operating CFPS forecast of $33.97 compares to the TipRanks' consensus CFPS forecast of $34.51.

A higher multiple is justified because Civitas should generate over $1.3 billion of free cash flow this year and it has a lot of high-quality "Running Room" in both of its core areas in the Permian Basin and DJ Basin (Eastern Colorado). A lot of investors believe there is "political risk" in a blue state like Colorado, but the state gets a lot of revenues from oil & gas companies so IMO the risk is very low. The people that live east of Denver are very supportive of the oil & gas industry.

Civitas did take on a lot of debt to close the Vencer Energy Acquisition on January 2, 2024, so I expect them to hold their fixed + variable dividends at $1.50/quarter (~7.8% annual yield based on today's share price) and allocate more FCF to pay down debt and buyback shares, both of which increase share value.

TipRanks 5-6-2024: "In the last 3 months, 7 ranked analysts set 12-month price targets for CIVI. The average price target among the analysts is $100.00." 4 of the 7 analysts have updated their price targets since the Company's 5/2 conference call. They all rate it a BUY with price targets of $102, $103, $106, and $105 < by Neil Dingmann, a 5-Star analyst at Truist Financial.

CIVI is one of my Top Picks in our High Yield Income Portfolio.