Civitas Resources, Inc. (CIVI) Earnings Call Transcript & Summary

Okay. Good afternoon. This is Michael Johnson with JPMorgan. Very pleased today to be able to introduce Eric Greager, who's the CEO -- President and CEO of Bonanza Creek. He's going to walk us through some slides, and then we will move to Q&A. Eric, thank you for joining us today. Please proceed.

Thank you, Michael. Thank you, everyone, for joining us this afternoon. I'm on the May investor presentation. I'm going to advance 1 slide to our forward-looking statements. I just want to point out there that those are in the slides, and you can read them if you're so inclined. I'm going to move fairly quickly through our slide deck because I want to maintain as much time as possible for Q&A. I'm on Slide 3 of our deck, and I just want to point out here that Bonanza Creek maintains very low leverage in this deck. You'll point out -- you'll notice that we've got 2/10 of return, net debt to LTM EBITDA at the end of Q1. And we've got substantial liquidity. You'll note here in the deck, $300 million liquidity as of the end of Q1. We've maintained pretty decent growth over the last couple of years. In 2019, production growth of 48% and that was on the back of a CapEx year in 2019 of $222 million. In 2020, we have made a couple of revisions downward. 2020 production, maintaining approximately flat on a 2019 CapEx of $65 million. So we're anticipating full year 2019 average production of 23.5 MBOE a day. I'm going to advance 1 slide, and I want to advance to Slide 4 here. This is a 4 pack. In the upper left, you see our Wattenberg production and CapEx. You'll notice that both CapEx and net debt have been trending down, CapEx for several quarters and net debt for a couple of quarters. You'll also note that for 4 quarters, we've had essentially flat production, in the range of 24.3 to 24.8 MBOE a day and generally in the range of 55% to 58% oil cut. We've guided publicly our flat production profile over the balance of 2020, ending the year essentially flat relative to 2019. To the right, you'll notice our pre-hedged adjusted EBITDA and margin. And what we like to point out here is that despite the fact that realized pricing has fallen pretty consistently since the third quarter of '18, you see the EBITDA margin consistently in the mid-60s and only recently falling down into the 50s as a result of the lower price environment. You'll also note in the lower left of Slide 4, you can see our Wattenberg LOE and recurring cash G&A, you see that consistent downward trajectory. This is really consistent across all of our cash cost structure, and I'll speak to that in a slide or 2 later. But you'll notice this decline from 4Q '17 to 1Q of 2020, basically half of what existed just a few years ago. Pretty consistent downward pressure on costs and consistent pressure upward on production. But more importantly, it's consistent improvement on capital efficiency. I'm going to move now to Slide 5. What I want to point out here, it's a simple column chart. You'll notice these are -- this is courtesy of sell-side research Stifel research on May 4. You'll notice that BCEI is listed third from the left here with a cash cost structure just under $10 of BOE. And that's, again, very close to leading in the E&P space. Very unusual for a small-cap E&P. But you'll notice, even in third position, we're 9 percentage points above the nearest EBITDA margin or pre hedged cash margin. And we're very proud of this. I think this is a reflection of the consistent and deliberate action on cash costs and efforts, both LOE and operating across the board. I'm going to move on to Slide 6 now. I just want to point out here, and I'll move relatively quickly through this. We've seen a pretty consistent mix toward more balance in terms of our shareholder mix starting in mid '17 toward the end of 2019, a much more consistent EBITDA -- or sorry, much more consistent data, one; and much more consistent shareholder mix between index value and growth. And you'll also notice in the panel right below, we've got -- we show here our relative valuation. Essentially, you've got on the y-axis, our leverage ratio, net debt to LTM EBITDA. And essentially, it's an EBITDA per share on the y-axis, essentially showing that Bonanza Creek on an LTM EBITDA basis, net debt basis, punches way above its weight. I'm going to move on now to Slide 7. I just want to point out on Slide 7, Bonanza Creek is highlighted here in yellow on this base map to the right. And this really is just meant to highlight our acreage position relative to the municipalities, which are highlighted in the crosshatch. You can see that we're miles from the nearest municipality which is due west. That's really the big block due west of our legacy position. We continue to experience good relationships with the COGCC and the CDPHE in terms of permits and remain consistently engaged with the communities, but essentially see no difficulty in terms of community relations. So operatorship in a rural environment is much easier than much of Colorado, particularly in the more urban settings. I'm going to go ahead and flip slides now to Slide 8. And I just want to show very quickly here, zoomed in just a little bit, you see across our acreage position, almost no exposure to households, except in the northern block. And each of those circles is a radius of 2,000 feet. So you see that with extended-reach laterals, even our northern block, where we have slightly more exposure to housing, we still got full access to all of our development, all of our PUDs and very little risk on development. I'm going to move on to Slide 9 here, and I just want to point out Rocky Mountain infrastructure. I think most of you who are familiar with the Bonanza Creek story would be familiar with Rocky Mountain infrastructure. It's a wholly owned gathering system, 140 miles of gas gathering capacity. We've since also added another 35 miles of total oil gathering, which we've put online in the last 9 months, and that has made a fairly significant impact in our basis differentials, which has certainly helped in the last few months through these more difficult price environments. We can come back if there are any questions on Rocky Mountain infrastructure. I'm happy to double back on this slide, but I just want to move on here. I'm going to move on to Slide 10 and just point out one of the major benefits of Rocky Mountain infrastructure is both a low and consistent gathering system pressure. When you express low pressure consistently at the wellhead, you're able to bring oil and gas production on consistently. And that maps all the way through the performance of the wells, through not only low gathering system pressure, but higher performance and lower costs. So I'm going to flip on here into Slide 11. And I just want to point out here that over the last couple of years, as Bonanza Creek has instituted extreme limited entry, stimulation designs, higher and higher intensity designs and emphasized higher fracture complexity and concentrating that complexity near the wellbore, we've been able to drive not only better well performance and higher EURs on a per 1,000-foot normalized basis, but we've actually been able to do so with more wells in the same section of rock. So what you'll notice here and it's really meant to just isolate other variables and show that with the proper stimulation design and enhanced recovery flowback, together with better optimization of the surface facilities, you can drive similar or even better well performance and drive more wells into the same section of rock. You'll see this in the curve, and I'm happy to follow up if there are questions on this, but I'll move on to Slide 12. Slide 12 is meant to point out in our northern block, where we've done some delineation work, and in our eastern acreage, where you'll notice in the curves on the left, the Pronghorn B-28 pad, this is a pad of 5 wells that we drilled in early 2019. And then we brought these wells on production using our enhanced recovery flowback techniques. These are long laterals. You notice that these wells grow and consistently continue increasing production, peaking at about 240 days and then we hold that flat for a period. This is pretty unusual for an oil and gas player for a pad to grow this long and extend this long. And we think this really illustrates just the quality of the acreage, particularly to our east in our eastern block. But also if you look to the north, we've got both a star and a circle. And the circle indicates our Whitetail well, the Whitetail/F-4, which you'll notice is trending along its type curve. Again, it's a long lateral. But between our wells in the Pronghorn and our Whitetail well, combined with several of our offset operators labeled in wells A through D, you'll notice that the northern anchorage is quite a lot better than many folks might have expected it to be, and it's something we certainly plan to continue once prices recover and become kind of full development price environment, continue developing and delineating in the northern block. Happy to spend more time on that. I'm going to skip Slide 13, which is our type curve slide and come back to that if there are questions. I want to jump to Slide 14, where I'll spend a few minutes. On the left panel, you'll notice this is courtesy of SunTrust. This is a 2019 through 2021 estimated return on capital employed, and you'll notice on the left, BCEI ranks very high there with a 10% ROCE. The panel on the right is a panel of all the peers in DJ Basin, including our peers north of the border in the Wyoming DJ. You'll notice some very quality names, some very high-quality names here. This is meant to highlight that in the last 12 months, 12-month cumulative oil production, normalized on a per 1,000-foot basis, Bonanza Creek is the highest among the peer group, and the peers are listed down below. I'm going to move on now to Slide 15, and I just want to point out this material is presented in a slightly different way. But again, the data is courtesy of RSEG in 2019. This is a bubble plot, and you'll notice Bonanza Creek, far to the right, which is average horizontal interwell spacing in a family combined with Noble and HighPoint, what you'll notice on the y-axis, the oil EUR measured in thousands of barrels per 1,000 feet, we're second really only to Noble and color-coded we've actually got a higher cut, and that's despite the fact that we've had far fewer at bats, far fewer opportunities to get there, which I think illustrates a number of things. One, it illustrates how quickly Bonanza Creek has been able to put our technical and operating practices into action and really demonstrate consistent quality results, effectively measuring up with the best in the basin. But also, we haven't risked overcapitalizing by decreasing that interwell spacing to the point of overcapitalization. We've been disciplined about maintaining the interwell spacing in order to maintain high performance. I'm going to move on to another slide. This is Slide 16, where we highlight our 2020 guidance, and I won't spend a lot of time on that, but I just want to point out this essentially, in a tabular form, illustrates what we've spoken about a couple of times in terms of our production and oil cut on the back of a CapEx of nominally $65 million this year, maintaining 2020 flat guidance at nominally equivalent to 2019 or at the midpoint of guidance, 23.5 MBOE a day. With that, I'm going to go ahead and close out with an opportunity inviting Michael back and any questions that you guys may have.

Great. Thank you very much, Eric. I sort of compiled these questions and organized them a little bit as they came in. The first couple of questions have to do with cost structure. And the first thing I'd ask is kind of a related question, which is your production for the last 4 quarters has been remarkably steady. And also, you appear to have really low maintenance CapEx. If you look at your maintenance CapEx, your production has run along rock steady. Can you just give us some background? That's a little bit unusual, what's the secret behind that?

It is a little bit unusual, Michael. And we think it points to a number of things. It's really a confluence of factors. So number one, it's the combination of improving stimulation designs, improving flowback strategy and artificial-lift strategies. You combine bigger and more intense stimulation designs, which generate much greater a route [ K ], much greater fracture surface area and much greater fracture conductivity. So that kind of speaks to the stimulation design itself. And we spend a great deal of time and energy ensuring that we're geosteering -- actively geosteering to the very best seams in the rock. And so using a combination of petrophysical, geophysical and other near wellbore attributes, we're able to really focus on the very best part of the Niobrara, ensuring we both land in the right place and then we stimulate the rock in the most effective way with the high-intensity stimulation designs. Then you couple that with an effective artificial-lift strategy, which is a low-cost connected to RMI plunder assisted gas lift, very low cost, very effective in this kind of solution gas drive environment. You combine that with the stronger for longer enhanced recovery flowback strategy, which we illustrate on the slides, peaking the Pronghorn pad in 240 days. And rather than really kind of opening up wells very quickly and getting a real show me pop out of them with a high 60-day or 90-day IP, rather, we focus on really restricting the gas and ensuring that the gas doesn't escape from the gas drive reservoir without sweeping as much oil as possible. That tends to front-load the oil curve, which tends to improve our oil [ kilns ], tends to improve our discounted cash flow as it related to oil weight and also gives us the stronger-for-longer profile, when you stack pads back to back, where you can really take your time and manage that enhanced recovery flowback strategy, then you combine that with nominally 100,000 barrels of oil storage within RMI, then we can really smooth out. I mean think of it like an accumulator volume. You can really smooth out the volatility on a quarter-by-quarter basis by taking your time and engineering, if you will, the steady, consistent, predictable, cost-effective operations rather than kind of rushing through a quarter to put up 1 quarter of good numbers at the expense of another. We're looking at a much longer arc of time in order to create the credibility in a much longer plateau of longer and continuously improving capital efficiency. So let me stop there and see if that answers the question.

It did, yes. Thank you, Eric. So just continuing with some of the financial questions. Two questions I'll give you in a row. One is your G&A is down over 50% in the last roughly 2 years on a dollar per BOE basis. How much further can that go? And just give us some color on that. And then secondly, the cost reductions that you've enjoyed, can you give us a sense of how much of that is operational versus service cost reductions?

Yes. On the cash costs, relative to whether we're talking about RMI cash costs or LOE cash costs or G&A per BOE, all of the unit cash costs and the cash cost stack, those are almost all real savings based on operational efficiencies, better productivity, better human productivity, high grading what we work on. Organizations like Bonanza Creek and other organizations, particularly bigger ones, often find themselves working on things that aren't as valuable as we think they are, and we end up assigning our people and even big teams to things that don't add a great deal of value. What we've done each time we found ourselves in a position where we think there's an opportunity to reduce our G&A, we reengineer our business processes and our workflows. And we'll sit down with each of the department heads and I have both Brant and Scott here with me now, but we'll sit down with our leadership team, and we'll reimagine exactly what we need to do and only what we need to do, trying to eliminate the things that don't add value, whether they're small worksheets or small reports and things like that. And then it's not a pleasant exercise, but when you eliminate that kind of workload and you reimagine and reengineer workflows and technical processes, you often eliminate entire segments of the workflow and that sometimes means roles get eliminated, and that translates directly to savings. I mean humans are very expensive. And no one relishes reducing G&A, but it's a very effective way to maintain an efficient cost structure. And we're proud of the cost structure. And in terms of how much more we have, we've doubled -- since April of 2018, we've doubled our production and we've cut our workforce by 35%. And so that's pretty dramatic productivity improvement on a per person basis. The team is pretty well hooked up, particularly considering the disruption of the COVID-19 with a lot of folks working from home still. So I think we're about where we need to be today. We haven't experienced any fumbles, and we haven't experienced disruptions that we haven't been able to manage. So with that, I'm fairly pleased that at the body count we have today, around 106 full-time employees, and again that's down dramatically from April of '18, and doubling the production and the denominator of that. I think the opportunities we have in the future are going to be more scale-oriented. What we'd really like to focus on is taking more assets under management. I think growing the denominator and managing our unit costs by scaling up the denominator rather than squeezing on the numerator is probably going to yield more effective results as we go forward. And it's one of the reasons we've worked so hard to put our balance sheet in the position it's in today is for an opportunity like this, where a relatively small company like ours can really punch above our weight in terms of relative strength.

Thank you, Eric. Since you brought it up, there was a question around M&A, like basin consolidation, just really give us your color on how you see that progressing? Is it asset base? Is it corporate base? And where are you playing that?

Yes. I think it's going to be a combination of both asset accumulation and MOEs, corporate level, merger of equals. Mike, I think that consolidation in the DJ has been a long time coming. SRC, PDC certainly did create a nice model for us before coming into the COVID-19 situation here. It was, if not the only one, one of very few that actually got perceived in the investment community as the right way of doing it, and we think it's a good way of moving forward. I think Bonanza Creek right now with a clean balance sheet and with a pretty lean organization, I think we've put ourselves in a position where we can participate meaningfully in the consolidation in the DJ. And I don't think it has to be confined to the eastern flank. We certainly demonstrated we can help bring value out of reservoir along the eastern flank that's more oil-weighted. But I do also believe that, further to our West, we could play a meaningful role in participating in consolidation. There may be both assets available and also opportunities to emerge at a corporate level. But I think what's key for us is we've been very disciplined for the last more than 2 years, 2.5 years, disciplined about our evaluations and disciplined about how we view the proper valuation. And I think it's incredibly important today for us to remain very disciplined about that. You can't pay too much, particularly in an environment like Colorado, where urban risk can provide a meaningful constraint to development. So I think it's really important for us to understand both urban risk and also the value of any upside. We're valued for PDP. And I think from that perspective, we would look at implying a PDP valuation on anybody we'd be participating with. So provided that still creates value for shareholders and there's a lot of upside in consolidation, particularly considering some multiple expansion as you create scale and efficiency and wrench some G&A savings, I still think there's a great deal of value to be created through the consolidation. You just can't pay too much. I think that's the key thing for us.

That's good. Thank you. Just switching gears a little bit to talk about inventory. So you delivered great results, stock has doubled off the lows. Talk about inventory remaining in your core legacy asset and then maybe a little bit touch on French Lake and also your northern acreage as you talked about earlier.

Yes. Yes. So we like to think about inventory. Because our acreage as a function of the way the DSUs are set up and the way it was developed early on, legacy sort of lends itself more to SRLS, MRLs and some XRLs to the east. French Lake really lends itself more to XRL development, so long lateral development, 2-mile development. The northern block also really lends itself to XRL development. But because there's a variety of lateral lengths, we like to stabilize the conversation around SRL equivalents. So when we talk about inventory, Bonanza Creek has about 1,000 wells of economic inventory remaining. And when we say that, we mean gross. So our net working interest is about 70% in those 1,000 wells. And those are SRL equivalents. So to the south, in French Lake, it would be nominally 1/3 of those total gross SRLs expressed in XRLs. So you think somewhere between 160 gross, 170 gross XRLs in French Lake. We would participate as a 50% working interest partner in French Lake. In the legacy, we've got about another 1/3 of our total inventory, call it 325 or 350 wells that are SRL equivalents. I'd say about 1/3 of those are in central, and about 1/3 of those are in east and about 1/3 of those are in west and then bordering into central as well. So that's pretty evenly divided. And then to the northern block, it lends itself to a long lateral. So again, you think kind of 160-ish gross XRLs. And we tend to have a little bit below 50% working interest up there, but we operate all of the acreage. So if you think about our legacy interest being something north of 70%, French Lake being about 50% and the northern block being a little below 50%, you kind of get to that 70% overall working interest. But it's about 1,000 wells gross SRL equivalent.

Got it. Thank you. You have one of the lowest debts, as you've talked about, in the DJ. There's some reasons behind that, obviously. I think you said that you expect your debt to be paid off by the end of '20 with current free cash flow. Talk to us about what you do with -- what are your priorities with free cash flow after you have $0 debt?

Yes. Thanks, Michael. Our plan at this point is to continue to pay down the revolver. In Q4, we'll be debt-free, and we'll be probably experiencing exiting 2020 with, let's say, $25 million net cash on the balance sheet. And we really believe that's -- all of 2020 is built to position us for maximum advantage to capitalize on the A&D, M&A environment that we think presents itself over the next couple of quarters and possibly even longer. But really what we want to do is we want to continue to demonstrate the strength of our existing assets and continue to demonstrate a track record of predictable performance, both cost performance, oil performance, asset performance, well performance. And when it's time to wrench out savings, you'll watch us continue to wrench savings out of the apparatus. When it's time to grow, you'll see us pivot to growth quickly. And when it's time to maintain, we'll quickly pivot to maintenance. What we want to demonstrate is this combination, that sort of confluence between sophistication and agility. We wanted to demonstrate we've got -- although we're a small-cap E&P, we want to demonstrate we've got the sophistication of the biggest and most well-capitalized E&P companies when it comes to demonstrating the quality of the assets and really bringing the best value out of the rock and the reservoir and the surface assets like RMI. We also want to demonstrate we've got agility. Agility is sometimes, big companies no matter how well organized, they can't muster because they're so big. And we want to demonstrate that we live in the space and the confluence between those 2 rings, the intersection of agility and sophistication. And what we think that does, if we can continue to demonstrate this predictable quarter-over-quarter improving capital efficiency, low cash cost structure and predictable hedge performance and production performance, we want to demonstrate that we're a team and we're a company that you can trust to operate more assets efficiently, cost efficiently and predictably. And everything we're doing with regard to our balance sheet, with regard to cash flow on the balance sheet or cash on the balance sheet and free cash flow is meant to demonstrate that reliability as an operating team.

Eric, listen, thank you for that. Thank you for your presentation. Thank you for your time and congrats on your success in keeping this going. So that wraps up our session. Thank you, everybody, for joining. Much appreciate it. Thank you.

Michael, thank you. Thank you, everyone.