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Civitas Resources (NYSE:CIVI) recently repurchased approximately 6% of its outstanding common shares at a price of $61 per share. This will help boost its variable dividends per share (at a given level of free cash flow) due to the reduced share count.
Civitas has also made progress with development approvals, with its Box Elder Comprehensive Area Plan adding close to one year’s worth of wells. Civitas is now projected to generate a bit over $700 million in free cash flow in 2023, compared to nearly $1 billion in an October projection. Much of that decrease is due to weaker natural gas prices, as natural gas accounts for 31% of Civitas’s production. Despite the lower near-term cash flow expectations, I estimate that Civitas is worth around $69 per share in a long-term $70 WTI oil environment.
Share Repurchases
Civitas made a major share repurchase transaction in late January 2023, repurchasing 4.92 million shares from the Canada Pension Plan Investment Board for total consideration of approximately $300 million. This represents a repurchase price of $61 per share, which was lower than the roughly $65 share price at the time of the announcement, although lower than the mid-$50s share price that Civitas traded for through most of December 2022 and into early January 2023.
This leaves Civitas with around 80.2 million outstanding shares. Civitas notes that its dividend framework remains unchanged, so its lower share count would increase its variable dividend per share, all other things being equal.
The Canada Pension Plan Investment Board will remain Civitas’s largest shareholder after this deal, still owning 16.48 million shares, or approximately 21% of the outstanding common shares. This is down from approximately 25% ownership before the deal.
Development Approvals
Civitas announced in November that the Colorado Oil and Gas Conservation Commission approved its Box Elder Comprehensive Area Plan [CAP]. This shows Civitas’s ability to successfully navigate Colorado’s updated regulatory framework, which included a 2,000 foot setback, although wells that are less than 2,000 feet from residential buildings could be approved with informed consent from owners/tenants. Civitas had been working with the City of Aurora and other stakeholders to develop a plan that minimized the environmental impact of the development project.
The Box Elder CAP includes 151 new wells, which would be a bit under one year’s worth of inventory at Civitas’s current drilling pace. For the first three quarters of 2022, Civitas had drilled 139 gross wells.
Potential 2023 Outlook
While Civitas hasn’t provided guidance for 2023 yet, it has discussed that its general goal is to keep production broadly flat and prioritize maximizing free cash flow generation over production growth. Thus I am going to assume that Civitas’s 2023 production ends up around 2022 levels. This includes production of 168,000 BOEPD (69% liquids), including 75,000 barrels per day of oil production.
The current strip for 2023 is around mid-$70s WTI oil and $3 Henry Hub gas, and at those prices, Civitas would generate around $2.72 billion in revenues before hedges. Civitas has a modest amount of hedges for 2023, covering around 4% of its oil production and 16% of its natural gas production. These hedges have an estimated value of negative $17 million.
| Type | Units | $/Unit | $ Million |
| Oil (Barrels) | 27,375,000 |
$71.50 |
$1,957 |
| NGLs (Barrels) | 14,935,800 | $27.00 | $403 |
| Natural Gas [MCF] | 114,055,200 | $2.50 | $360 |
| Hedge Value | -$17 | ||
| Total Revenue | $2,703 |
This now results in a projection that Civitas can generate around $714 million in free cash flow before dividends in 2023.
| Expenses | $ Million |
| Lease Operating Expense | $168 |
| Gathering, Transportation, Processing and Midstream | $305 |
| Production Taxes | $231 |
| Cash G&A | $90 |
| Cash Interest | $20 |
| CapEx | $1,050 |
| Cash Taxes | $125 |
| Total Expenses | $1,989 |
Notes On Valuation
I now estimate Civitas’s value at approximately $69 per share in a long-term $70 WTI oil and $4.00 Henry Hub gas environment. Civitas’s estimated value has been increased a bit by its share repurchase, as it appears to have paid a good price (at least in a long-term $70 WTI oil environment) to repurchase the 4.92 million shares from the Canada Pension Plan Investment Board.
Compared to my previous projections though, Civitas is expected to generate less free cash flow in 2023, primarily due to weaker natural gas prices. Around 31% of Civitas’s production is natural gas and 84% of that production is unhedged for 2023, leaving its free cash flow susceptible to changes in commodity prices.
Conclusion
Civitas repurchased approximately 6% of its shares at a decent price, which results in less shares among which to split its variable dividend. It is now projected to generate a bit over $700 million in free cash flow in 2023 at current strip of mid-$70s WTI oil and $3 Henry Hub natural gas. I believe that Civitas is worth approximately $69 per share in a long-term $70 WTI oil environment. It has also made progress with getting its development plans approved, and it appears that reasonable amounts of oil and gas development will still be allowed in Colorado.
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