This morning I received an updated report from KeyBanc in which they increased their price target for CIVI by $12 to $96 per share. That is a significant increase for a company of this size. When I look at new price targets from the Wall Street Gang, I am more concerned with the direction than I am their actual price target. KeyBanc is using much lower oil prices for future periods than I am, so they must be using expenditure forecast that are lower than what I'm using.
At the time of this post CIVI was trading at $80.84. My current valuation is $104.00.
KeyBanc's report below. < Note that "Size Matters" to them; something I've been stressing here lately and why I love the PR + ESTE merger.
Civitas Resources: Price target to $96 from $84. Our price target increase is
attributable to multiple factors. We now assume a slightly more aggressive target
EV/EBITDA multiple, given the Company is no longer a pure-play Colorado
operator. The diversification into the Permian Basin merits a higher multiple, in
our view. In addition, we also believe the scale factor merits a higher multiple.
Civitas increased its production base by over 70%, while maintaining its high
40s% oil skew. We continue to see an increasingly high correlation between size
and trading multiples, and we believe this phenomenon is warranted, given the
benefit that scale has on unit expenses, cost of capital, and relevance to long
only investors. With Civitas’s EV now over $12B, and with the Company
providing a clear line of sight on deleveraging through its disciplined variable
yield structure, we see further upside to CIVI shares. We also see value through
the dividend. We believe investors still don’t fully appreciate the variable
dividend, which equals 50% of TTM FCF. We forecast an NTM yield of 9.5%,
based on $7.59 of total dividends.
Tactically, we continue to see a strong setup for Civitas into YE23. We view
legacy guidance for Colorado as extremely conservative. Civitas’s 2022 and
2023 DJ Basin vintage wells have been strong, oily, and consistent, providing
management optionality on this asset. Stronger well results imply lower capex
and TILs needed to keep production flat, which could extend the current
inventory runway of six to seven years. Stronger well results also provide
optionality for 2023: lower capex to hit the production guide, or intact capex and
stronger volumes? Our gut instinct tells us the former is more likely than the
latter, but both would be positive. We hope to get an update on this topic with 3Q
earnings in November.
Our new $96 price target reflects a 4.0x 2024E EV/EBITDA multiple, which
remains at/below where many high-quality, mid-cap E&Ps under coverage trade
today, and trails the current group-average multiple of 4.1x. That $96 price target
also reflects a target 10.1% 2024E FCF yield (cash flow less capex, relative to
EV), which compares favorably to the 8.8% group average. < My valuation of CIVI is just 3.5 X annualized operating cash flow, which in my opinion is very conservative for a company of this size. Note that KeyBanc's focus is on Enterprise Value / EBITDA. I consider strength of the balance sheet and quality of running room in the multiple that I use. As I gain more confidence in my model, I do believe a multiple of 5X should be more appropriate.
Civitas Resources (CIVI) Price Target Update - Aug 23
Civitas Resources (CIVI) Price Target Update - Aug 23
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group