Doubling In Size From Permian Acquisition Will Boost Future Operational Efficiency

Key Takeaways

• Acquiring Permian assets doubled Civitas's size, enhancing inventory and operational efficiency, which may boost revenue in low breakeven basins.
  
• Strategic focus on free cash flow and repurchases, along with innovations like simul-fracs, could enhance earnings through reduced costs and increased efficiency.
  
• Significant volatility in commodity prices and operational risks could negatively impact revenues, profitability, and shareholder sentiment for Civitas Resources.

Catalysts

An exploration and production company, focuses on the acquisition, development, and production of oil and natural gas in the Rocky Mountain region, primarily in the Field of the Denver-Julesburg Basin of Colorado.

• Civitas Resources has strengthened its portfolio by acquiring assets in the Permian, doubling the company's size and enhancing its inventory depth and quality. This expanded portfolio in low breakeven basins is likely to boost future revenue and operational efficiency.
  
• The company is focusing on sustainable capital efficiencies, proving up new zones for development, and capturing additional inventory that enhances their ability to deliver high-return opportunities. These efforts are expected to improve net margins by reducing costs and increasing well productivity.
  
• Strong operational execution in the DJ Basin, particularly with 4-mile laterals and record-setting well performance, suggests potential revenue growth from enhanced production capabilities and better oil realizations.
  
• Civitas’s strategic decision to prioritize free cash flow and share repurchases, while paying down debt, reflects a disciplined approach that can enhance earnings through reduced interest expenses and increased EPS from buybacks.
  
• The initiation of simul-fracs in the Permian and the unlocking of new resources in the Wolfcamp D with mid-$40 oil breakevens demonstrate operational innovations that could improve net margins and increase future earnings due to lower well costs and higher production efficiency.

Civitas Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Civitas Resources's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 19.6% today to 13.8% in 3 years time.
• Analysts expect earnings to reach $755.9 million (and earnings per share of $8.89) by about December 2027, down from $990.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.2 billion in earnings, and the most bearish expecting $627 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.9x on those 2027 earnings, up from 4.4x today. This future PE is about the same as the current PE for the US Oil and Gas industry at 10.9x.
• Analysts expect the number of shares outstanding to decline by 4.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.39%, as per the Simply Wall St company report.

Civitas Resources Future Earnings Per Share Growth

Risks

• Significant volatility in commodity prices could negatively impact Civitas Resources' revenues and profitability, especially if oil prices decrease further.
  
• Unexpected downtime at third-party facilities and water takeaway constraints, as experienced in the DJ and Permian, could result in reduced production volumes and revenue fluctuations.
  
• The shift from variable dividends to buybacks, while strategic, might not align with all investor preferences, potentially impacting shareholder sentiment and market valuation negatively.
  
• High reliance on oil revenue means that disruptions in oil production or unfavorable oil price changes could substantially affect free cash flow and net margins, especially given the relatively lower contribution of natural gas to total revenue.
  
• Regulatory and permitting challenges, particularly in the DJ Basin, could pose operational risks that might increase costs or delay projects, impacting net margins and cash flow.

Valuation

• The analysts have a consensus price target of $74.33 for Civitas Resources based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $84.0, and the most bearish reporting a price target of just $60.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.5 billion, earnings will come to $755.9 million, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 9.4%.
• Given the current share price of $44.99, the analyst's price target of $74.33 is 39.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.