Extraction Oil & Gas, Inc. (CIVI) Earnings Call Transcript & Summary

Good morning. My name is Annie, and I will be your conference facilitator today. I would like to welcome everyone to the Civitas Resources Investor Update Conference Call. [Operator Instructions] I would now like to turn the call over to John. Please go ahead.

Thanks, Annie. Good morning, everyone, and thank you for joining. On the call this morning, I'm joined by Eric Greager, President and Chief Executive Officer; Marianella Foschi, Chief Financial Officer; Matt Owens, Chief Operating Officer; and Brian Cain, Chief Sustainability Officer. This morning, we issued a press release and posted a new investor presentation, both of which can be found on the Investor Relations section of our website. We may refer to some of the slides presentation during our remarks this morning. Please be aware that our remarks will include forward-looking statements that are subject to many risks and uncertainties that could cause actual results to differ materially from these statements. You should read our full disclosures regarding forward-looking statements contained in our 10-Q, 10-K and other SEC filings. Also during this call, we will refer to certain non-GAAP financial measures because we believe they are good metrics to use in evaluating performance. Reconciliations of these measures to the most directly comparable GAAP measures are contained in our investor presentation and SEC filings. Now I'll turn the call over to Eric Greager, President and CEO. Eric?

Thanks, John. Good morning, everyone, and thank you for joining us. I'll keep my remarks brief and get to Q&A. On Monday, we closed the 3-way merger and formally rebranded as Civitas Resources. On Tuesday, we began trading as CIVI. This morning, we announced Q4 guidance, the declaration of our increased Q4 base dividend and a new variable dividend component equal to 50% of the excess free cash flow after the base dividend. This fixed and variable cash return model will make CIVI on the highest dividend yielding E&P stocks in the business. As of 9/30, our year-to-date production is 159 MBoe per day, consisting of 40% oil and 60% -- 65% total liquids on $390 million of total CapEx. For the full year, we expect to deliver a similar mix of oil, NGLs and residue gas equal to 157 MBoe per day on a midpoint of $628 million in total CapEx. You'll notice on Slide 6 of the updated IR deck that our 2021 reinvestment rate of 46.5% is a little below our target of 50%, and this helps explain the full year production also being a little below our target. Given the strength of our balance sheet and efficient cost structure, combined with our inventory of highly economic locations and basin expertise, we're confident in the durability of our business and strategy. We are committed to being responsible stewards of our resources, land, air, water, capital and people. I'm proud of the leading role we play in reducing the impact of E&P operations, lowering our carbon footprint and ensuring carbon neutrality. With that, I'll turn it back to Annie for Q&A.

[Operator Instructions] We have our first question from the line of Neal Dingmann from Truist Securities.

Team, congrats on getting all this done. I thought it was great, obviously, announcement on this variable, hoping the market starts to appreciate a bit more. And so maybe my question is on that a little bit. The thought on the variable. I'm just wondering when you and the Board thought about that versus obviously, other shareholder return considerations, such as maybe a larger quarterly or buyback. I'm just wondering what went into that thought. Obviously, you all can support. You have a great consistent free cash flow return. So I'm just wondering kind of what went in the thoughts?

This is Greager. I'm going to make a comment, and I'm going to pitch it over to Marianella to follow up. The current $1.85 a share annual base dividend is pretty strong already. I think it's peer leading. And for that reason, we thought having satisfied a pretty strong base dividend, that creating a variable distribution on top of that made a lot of sense. Of course, we're open minded to continuing to entertain other ideas around excess free cash flow return to shareholders. So I'm going to pick it over to Marianella to kind of fill in the blanks here.

Yes, Neal, this is Marianella. Thank you for the question. I mean I would say at this point, obviously having just closed the transaction, there's -- this is a big topic of discussion with the Board leading us to closing and obviously, since closing. I would say at this point, we haven't -- we're not releasing the exact form that, that distribution is coming out of. So like Eric said, we're going to be open-minded as to how that cash flows back. I think at this point, the only thing we're releasing at this time is obviously, peer-leading base yields. And we also expect to be very competitive on the all-in yield once you include that additional shareholder return in whatever form it comes in. Details are not being released right out, but obviously, that's spending a lot of time on that with the Board and internally, and we expect to have the details on in Q4.

Sure. No, I love that optionality. And then just lastly just on one of the earlier slides, I think Slide 3 now that obviously shows the massive footprint you have now. Can you give us an idea -- I know you don't have full plans out, but just thoughts on where you'll attack, will most of that be in well or both. Can you give us an idea of kind of what plans are next year?

Yes, it will be distributed across the various assets. I'm going to pitch it over to Matt Owens and he'll help me out fill in the blanks here.

Neal, yes, currently, we're running 3 rigs, 3 fleets. Two of them are in our western area, 2 of those rigs. One is in the southern area. As we move into 2022, it will probably be focused again in the southern area and the western area as we continue moving through the DUCs that we have in the eastern area from the legacy Bonanza and HighPoint positions.

[Operator Instructions] We have another question from the line of Michael Scialla from Stifel.

I guess on the ESG front, I just wanted to see if you could talk about some of the steps you're taking to get to Scope 1 and Scope 2 negative?

Sure. Yes. Mike, so this is Greager. I'm going to pitch it over to Brian Cain. You know already Brian, but he heads up our sustainability and ESG operation, among other things. Brian, over to you.

Thanks, Yes, Mike, glad to talk a little bit about that. So I think one of the most important things to understand about the way that we look at emissions reduction and specifically reducing Scope 1 and 2 is that operational emissions and driving down operational emissions is, by all means, our first priority above all else because that's the way that you truly reduce emissions and have the best effect on reducing the effects of climate change and kind of doing your part around your operations. So extraction, in particular, really brought -- brings a significant competency to Civitas and doing that, Crestone also had some great programs around air. But using things like grid electrification, P&A, legacy wells and of course, pneumatic retrofits and many, many other technologies, including designing closed-loop facilities and tankless facilities and on and on. That's really our first priority. And then displacing those residual emissions, offsetting them, right, using only certified credits that are purchased through the 4 largest and most legitimate offset registries, which we consider to the Gold Standard, Verra, ACR and CAR as a best practice. And that would be Scope 1. And now on Scope 2 side, -- and obviously, we do want to move as much as we can from Scope 1 to Scope 2 generally because that also means that we're reducing impacts in the community. So for example, if we're running a rig on electricity, not only are we moving that from Scope 1 to Scope 2, but we're also using a technology that is nearly silent in the community, that we're reducing those truck trips for fuel, and we're eliminating source emissions in that community. So in terms of offsetting Scope 2, we use Green-e certified RECs that so far, we sourced exclusively from the [Rocky] sub-grid region again as a best practice.

Great. Thanks for that detail, Brian. I guess in terms of the 3 rigs in -- I think you have 3 crews now. Is that kind of a steady state for the DUC inventory? Or do you continue to draw down that DUC inventory? And is that I guess -- yes, I just want to see what kind of the activity level looks like and how the DUC inventory progresses over the next 12 months?

Sure. This is Matt. We'll have kind of a steady DUC inventory from this point, just with that -- the normal amount that follows the drilling rig. We had 4 frac fleets running up until just last week. So that fourth fleet was there helping us draw down DUC inventory that we had. But right now, it will be pretty steady, around 50-plus DUCs just following the drilling rigs. And for the activity level in 2022, we'll probably be right around that 3 rigs and 3 frac fleets, maybe slightly less, but probably right around there for the majority of the year.

Great. And then just last one on kind of the permit process, I want to see what the next steps are for the jet fuel and Lone Tree OGDPs. What needs to be done there to get those 2 approval? And how would you handicap the potential for either one of those?

So for those OGDPs, they could be up for hearing this quarter in December. So those are the 2 that are furthest along for us in terms of the OGDPs. We are working 7 in total. We've got 4 others that have been submitted, and we're hoping to get those deemed complete by year-end. And then the last 2 also submitted before year-end. So in total, that would be over 100 wells on those OGDPs. And then besides that, we also have the Box Elder Comprehensive Activity Plan that was submitted back in July. We have received comments back from the state on that, and we're in the middle of addressing those with them. We still anticipate that we'll be able to get that deemed complete before year-end. And assuming we're able to hit that target, we would have a first quarter hearing for that Comprehensive Activity Plan, which, again, would be up to 161 future wellbores with about a 2-mile average length.

[Operator Instructions] We have another question from the line of Phillips Johnston from Capital One.

I know it's early on '22. But as we kind of think about CapEx for next year directionally, should we think about sort of the fourth quarter guidance that you gave for this year and sort of annualize that? Or would you expect next year's budget to sort of be higher or lower than that sort of annualized run rate?

Phillips, this is Marianella. I would say, you have kind of a lot of key components in our recent release as far as the modeling, right? One, we've released the long-term production growth target as being flat to full year 2021. There's in Slide 7, we released our EBITDA margins as a hedge for 2022 at different price levels. That's kind of the second data point. And then the third data point is we have the 50% approximately for investment target out there. So those are kind of 3 components that should pretty easily allow you to calculate production EBITDA and CapEx and as a result, free cash flow.

[Operator Instructions] Presenters, we have another question from the line of Patrick Conner.

Just a quick question, just a clarification. I apologize if you maybe have dealt with this earlier, but given the come out rule in terms of the leverage level that's already pretty low going into this. The way I'm reading the return to shareholders is 50% of free cash flow after the base dividend. What -- I guess, the concept of the 50% of free cash flow, where does that other money go to?

Sure. I can address that. This is Marianella. Look, I -- definitely 50% of remaining free cash flow, roughly 25% of the EBITDA, if you think that, that way, right, for reinvestment it's only 50%. Look, we -- a couple of things I would say about that. One, we have a -- in the short term, we have a $100 million notes. They don't mature until 2026, but they go to par call protection in April. So we likely take those out at that time. The balance, I would say, is just to leave us flexibility and optionality, frankly, on whatever might come in on the field off of larger strategic opportunities, right? We're on a constant, at any given time, looking at swap to core or acreage looking at buying or working with some partners out. And at the same time, as we look at -- with these transactions, we'll continue to look at it as advantage returns warrant. So I would just say it leaves us flexibility for all of the above.

Okay. So in essence, that doesn't rule out a potential that if the Board takes a look and sees all the other options out there that, that might also potentially be returned to shareholders and not a foregone conclusion that, that's definitively going elsewhere?

That's correct. It just leaves us flexibility to do other things as returns warrant.

We have a follow-up question from the line of Michael Scialla from Stifel.

I guess to follow up on what Marianella just mentioned there in terms of potential to add to the footprint in Wattenberg. I guess, are you thinking -- are you ready for highlighted in the past, some other private companies that have adjacent acreage? I guess, what would be the potential timing on that? Do you think you need to integrate the companies here that you just merged and acquired for some period? Or are you ready to get back after it with getting serious about potentially consolidating the basin further?

Well, Mike, we certainly believe that executing on the current strategy of Civitas, the merged 4 companies, is something that we've got to focus our attention on. The integration is ahead of schedule. We've been very intentional about the work. And I couldn't be more pleased with the progress we've made. Having said that, there's more work to do, and we'll continue to focus on execution. I think that's something that you've always come to expect from the companies. However, we haven't stopped our analysis all along the way. We've continued right through the integration and the tendency of these mergers continue to look at value-accretive consolidation opportunities. So both are on the table, and we'll continue to evaluate opportunities for that -- the balance of the excess free cash flow to obviously take advantage of the returns maximizing opportunity there, and we'll consider consolidation opportunities when they're value accretive to the company. Otherwise, we're going to focus on executing. We've got more than enough high-quality inventory to execute the plan, and we'll deliver on that.

Good. And just 1 more for me. As you look into '22, what are you anticipating in terms of inflation? What have you seen so far? And I know it's hard to find more efficiencies in Wattenberg these days. But I'm wondering have you guys used simul-fracs at all? And could that be part of the '22 plan and beyond?

This is Matt. For inflation, we have seen costs definitely go up from what they were at the end of last year, obviously, just with the rising commodity prices. For us, or I guess, Civitas as a whole, it's been right around 10% from what our costs were in the beginning of the year up until now. We are a much larger company than any of us were stand-alone. So we're going through a very comprehensive RFP process right now. Given the fact that we'll have the ability to keep multiple frac crews busy year around, multiple drilling rigs active, which none of us were able to do on a stand-alone basis, we're hoping that, that really helps lower our costs through the efficiencies of keeping that work going 24/7. As far as the simul-fracs go, that is something we are definitely exploring. It hasn't been done yet by us in this basin, but we're looking at it, particularly in our eastern area and in our southern area because those are a little bit shallower and much easier to frac in terms of pressures. So we're looking at the options of doing that out there. It's probably not something we're going to mess around with on the western side of the basin as you get closer to the front range. But it is definitely an option that we're looking at for those other 2 areas that I mentioned.

There are no further questions from the line. I would like to turn back the call to Mr. Eric Greager, President and CEO. Sir?

Thanks, Annie. Thank you, again, for joining our call this morning. We'll continue to earn the trust of our shareholders, employees and the communities in which we operate through engagement, value-conscious operatorship and cash return to shareholders. We appreciate your continued interest in Civitas Resources. Have a good day. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Thank you for participating. You have a good day.