CIVI

[allen46]

Dan, can you please comment on CIVI? They are reducing their dividend down to the fixed level of $2.00 and using the rest of cash flow to reduce debt. The market obviously does not like it - down 17% as I type this.

[Petroleum economist]

Allen,

The market dislike to the Civitas 2024 results is not sitting in the 2024 profits, costs, and production (these were fine), but is located in the proven reserves and future production prospects. Also, the balance sheet is weak with lower shareholder returns as a result.

Reserves
Civitas reported 2024 proven reserves of 798 M BoE. This is equivalent to only 6.4 years of 2025 production. This is well below the 9.5-10.0 years that oil and gas companies on average have in their books.

If companies have low reserves, then it becomes critical whether each year they are replacing production with new reserves. Here the picture for Civitas does not look good. Over the last six years (2019-2024) Civitas produced 292 M BoE, while they booked only 118 M BoE. Civitas is not replacing its production with hew reserves. 2024 was no different with 126 M BoE produced and only 70 M BoE booked.

With lower reserves every year, production will start to shrink. Lower production in 2025 (outlook 325-335 K BoE/d versus 345 K BoE/d in 2024) looks like the start of a long-term trend.

Balance sheet
The Civitas balance sheet has been weak since the Vencer acquisition. The equity ratio (44.4%) is too low and the debt/EBITDA ratio (>1.3) is too high. The balance sheet needs reinforcement.

With reduced 2025 shareholder returns ($ 2.00 dividend and no share buybacks) the Civitas balance sheet can be reinforced with most of the 2025 FCF. Once the balance sheet is restored, shareholder returns can be increases again in 2026.

The market reaction could be overdone. With a low 2025 PE (4.8) and decent returns in 2026, Civitas can become an attractive investment again.

After yesterday’s share price drop Civitas ranks 39th out of 84.

[ChuckGeb]

Good insights and analysis.

[dan_s]

Keep in mind that "Proved Reserves" are based on the SEC commodity price guidelines, which look backwards. So, all of the companies with a lot of natural gas and NGL reserves are impacted by the low gas prices required to be used. Use of the low gas prices causes wells to go "sub-economic" very early, which reduces proved reserves.

Civitas is wise to stick with the Base Dividend of $0.50/quarter, which was previously announced, and us free cash flow for debt reduction.