Civitas Resources Bolsters Its Permian Position With Low-Priced Acquisition (NYSE:CIVI) - Seeking Alpha

Civitas Resources Bolsters Its Permian Position With Low-Priced Acquisition (NYSE:CIVI) | Seeking Alpha

Civitas Resources Bolsters Its Permian Position With Low-Priced Acquisition
Civitas Resources, Inc. (CIVI) 8 Comments

Summary

- Civitas Resources, Inc. is acquiring Midland Basin player Vencer Energy for $2.1 billion, adding 44,000 net acres in the Midland Basin to its portfolio.
- Vencer has current production of 62.5 MBOEpd and 400 gross locations with top quartile well performance.
- Civitas plans to finance the acquisition through equity and debt offerings, aiming to achieve a debt/EBITDA target of 0.9x by the end of 2024.
- Pro forma for the deal, Civitas trades at 3x our 2024 Base Case EBITDA and still offers a high teen's implied dividend yield.

Funtay

The Assets:

Civitas Resources, Inc. (NYSE: CIVI) is acquiring Midland Basin private player Vencer Energy. The company has been in off-and-on talks with Vencer since at least summer (concurrent with its examination of Hibernia and Tap Rock ( covered by us here)), precluding a planned Vencer IPO this year. Vencer has 44,000 net acres in the Midland Basin, the majority of which are in Upton County, Texas, with smaller acreage pods in Glasscock, Midland, and Martin Counties. We've included a map at the bottom of the cheat sheet below.

Vencer has current production of 62.5 MBOEpd, about half oil, and have been running 3 rigs as they edged production up into the previously planned IPO. Civitas plans to ease back on the throttle, downshifting to 2 rigs next year to guide volumes into a stable plateau in the 50 to 60 MBOEpd ranges with an oil cut in the mid 40%'s.

The acreage comes with 400 gross largely Spraberry and Wolfcamp locations with a roughly 80% average working interest. As shown in the graph that follows, Vencer well performance has been top quartile.
Civitas Resources

The most recently available reserve report shows year-end 2022 1P reserves of 514 MMBOE (41% oil). This would be higher now given activity levels this year.

The Price Tag: $2.11 billion

They estimate the price tag is 2.8x their forecast of 2024 Vencer EBITDA using an $80 oil and $3.50 gas price deck. We're OK with deals priced under 3x that meet their other investment criteria. The price deck is actually in line with our own for 2024, although we're at $4 on gas (as noted in the model comments below, we have adjusted $3.50 for this name to allow us to speak apples to apples).

Paying The Tab: Equity, More Equity, and Debt

Vencer gets CIVI shares and cash:
Civitas will issue 7.3 mm shares to Vencer (about $560 mm with an average price of $76.70) Pay Vencer cash of $1.0 B due at deal close (January 2024). And pay Vencer $0.55 in January 2025 as a deferred cash payment. For purposes of valuation, we treat this as debt.

Civitas plans to finance the cash portion of the acquisition via debt and equity offerings, but has not yet announced any offerings nor suggested what the ultimate split will be. Civitas previously announced plans to sell $300 mm in non-core DJ Basin holdings, but at this time we are not counting on these sales in our total enterprise value math. So, let's make some assumptions.

We are assuming they raise a portion of the proceeds with a 10 mm share secondary offering and that they conduct the offering soon (our model assumes a deal price of $70 but it could be a little lower). Again, this is purely our assumption. We'd like to see them do this sooner rather than later, as having a pending equity offering of unknown size and timing will anchor the shares and we'd just as soon add to our position on a deal dip and think others probably are similarly oriented. Other Z4 financing assumptions on our part are highlighted in yellow in the cheat sheet below. This mix of equity and debt should get CIVI to their stated 0.9x end of 2024 debt/EBITDA target.

Impact: Effective close date of Jan 1, 2024.

Prior to the Vencer acquisition, CIVI production was guided to a range of 270 to 290 MBOEpd for 2024. About 100 MBOEpd was to come from their Permian acquisitions (Delaware and Midland Basins) that closed in August. This was to be a slight drop from the announcement level volumes for those plays.

Civitas is now looking for 170 MBOEpd from the Permian with new total company production guidance of 325 to 345 MBOEpd, making them at least 50% Permian (first time the DJ won't be the dominant basin) while maintaining the same liquids mix at 71 to 74% of volumes with the oil only cut holding at 48%. At present, they expect to run an 8 rig program in 2024: 3 Midland Basin, 3 Delaware Basin, 2 DJ Basin.

They see 2024 FCF increasing to a pro forma $1.8 B with accretion flowing to the variable dividend. They also have a $480 mm buyback in place, though our view is this will go largely unused at $80 oil in 2024.

The balance sheet impact should be minimal from a metrics standpoint, with net debt/ EBITDA projected to be 1.1x at closing and 0.9x by YE2024 on an $80 deck. We get to the same multiple in our updated pro forma model.

Lastly, the acquisition gives them 1,200 locations in the Permian vs. 1,000 locations in the DJ, or over a decade of drilling in both. This gives them greater capex optionality and should work to alleviate any investor concerns about their runway.

Z4 Modeling Comments:

For now, we are going with the middle of the volume guidance range (335 MBOEpd) until plans for next year are more formalized. This team has a history of besting guidance but with the move into the Permian we'd rather not count on that for 2024. We have taken our best stab at operating costs given their call comments yesterday and have attempted to remain conservative including by widening our natural gas differential. Lastly, we have adjusted our Base Case of $80 oil and $4.00 natural gas to align with their price deck of $80 and $3.50 as a check on our math and again to take a more conservative approach.

Nutshell: At the end of the remodel, our upside price targets come down modestly due to our assumption of their needed equity deal size and our inclusion of the $550 mm deferred cash payment as debt in our TEV calculation. Please see the Upside Target portion at the top of the cheat sheet below but the changes are modest and subject to revision once they announce their offerings. We'd like them to pop a deal soon on the equity side and not wait around for a better price point given that we all know some form of deal is coming, and selling begets selling ahead of such deals and you either raise less or raise the same but with more shares a month or two from now.

Most importantly, we don't see a game plan change here. We see them as maintaining modest, manageable leverage levels while remaining extremely focused on return of capital. Civitas remains inexpensive on our new 2024 Base Case, with all of the debt incorporated, trading at an EBITDA multiple of 3x and just $10 per simple combined 2022 1P BOE while offering a whoppingly high dividend yield of 14%. Thanks for reading and have a good day.
www.zmansenergybrain.com Z4 Energy Research

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of CIVI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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