Civitas Resources (CIVI) Update - Feb 10

[dan_s]

CIVI closed at $48.06 on February 7. < This Company increased production by ~62.5% year over year in 2024. Based on my forecast it will generate over $3.2 billion of operating cash flow in 2025 with close to $1.2 billion of free cash flow.

I moved CIVI into the Sweet 16 for 2025 because I believe the stock was grossly oversold when they announced in early November that they were going to lower their quarterly dividend and use more free cash flow for stock buybacks. The BOD made a smart move because CIVI was and continues to trade at a significant discount to book value per share.

Since January 6th, seven analysts have submitted updated price targets to TipRanks. All seven of them rate CIVI a "BUY" with price targets that range from $70 to $83 (average of $75.42).

My recently updated valuation is $84.00 based on just 2.5 X annualized operating cash flow per share.

[Petroleum economist]

Civitas has many good things going for it.
Its balance sheet, recovering from the Vencer acquisition, is in a reasonable state. Thanks to the strong FCF by late 2025 the balance sheet should be in a good state. Civitas is very profitable and will have in 2025 a PE of only 6.1. Civitas will pay in 2025 a $ 2.00 dividend and also will buy back shares. This will result in 2025 in excellent shareholder returns of > 10%.
The weakest point of Civitas are its proven reserves. Civitas is short of proven reserves.

Proven reserves
Late 2023 Civitas had 698 M BoE of proven reserves. The reserves replacement ratio (RRR) over the five years has been very low at 0.29. Civitas over the last five years did not replace the volumes it produced,

in January 2024 Civitas completed the acquisition of Vencer. Proven reserves of Vencer were not announced. An educated guess learns that if Vencer proven reserves are equivalent to nine to ten years of its production (62.5 K BoE/d), then Vencer proven reserves are in the 200-230 M BoE range.

Life of proven reserves
The life of Civitas reserves is limited. Civitas has not yet announced a 2025 production outlook. If I assume that the 2025 production rate will be 350 K BoE/d, then the reserves of Civitas and Vencer combined are equivalent to (698+215)*10^3/(350*365) = 7.2 years of production. Proven reserves are low.

Well locations and drilling rates
The low reserves are reinforced by well numbers and drilling rates taken from the May 2024 corporate presentation:
• In the Midland DJ basis Civitas has 780 development locations and is drilling these up at a rate of 90-110 wells/year. This means there is in the DJ basin 780/100 = 7.8 years of drilling inventory.
• In the Permian basin Civitas has 1,120 development locations and is drilling these up at a rate of 120-140 wells/year. This means in the Permian basin there is 1,120*130 = 8.6 years of drilling inventory.

Conclusion
If nothing changes, then Civitas in a few years will run out of reserves and drilling locations. Civitas needs to add new proven reserves and drilling locations.

The reserves numbers and the RRR in the upcoming 2024 results deserves as much attention as the profit and loss account and the balance sheet.

[dan_s]

I agree that 1P reserves are a bit low, but keep in mind that SEC rules make reported proved reserves much lower than they actually are. Proved + Probable reserves are more likely to be what they actually have.

My $84/share valuation of CIVI is just 2.5 X annualized operating cash flow per share, which a very conservative valuation multiple.

I just don't see anything that justifies CIVI trading below book value, which as of 9-30-2024 was $67.89 per share.

The Wall Street Gang has never given the DJ Basin companies the value they deserve. Colorado is a Blue State, so it is perceived to have "political risk", but the state has always been good to the oil & gas industry because it needs the tax revenues they generate.