- United States
- Oil and Gas
A Look At The Intrinsic Value Of Civitas Resources, Inc. (NYSE:CIVI)
- Civitas Resources' estimated fair value is US$69.5 based on 2 Stage Free Cash Flow to Equity
- Current share price of US$64.4 suggests Civitas Resources is trading close to its fair value
- Analyst price target for CIVI is US$77.75 which is 12% above our fair value estimate
Today we will run through one way of estimating the intrinsic value of Civitas Resources, Inc. (NYSE:CIVI) by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
View our latest analysis for Civitas Resources
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
|Levered FCF ($, Millions)||US$917.5m||US$582.0m||US$514.0m||US$475.1m||US$452.7m||US$440.5m||US$434.7m||US$433.4m||US$435.0m||US$438.7m|
|Growth Rate Estimate Source||Analyst x2||Analyst x1||Est @ -11.68%||Est @ -7.58%||Est @ -4.71%||Est @ -2.70%||Est @ -1.30%||Est @ -0.32%||Est @ 0.37%||Est @ 0.86%|
|Present Value ($, Millions) Discounted @ 9.3%||US$839||US$487||US$393||US$333||US$290||US$258||US$233||US$212||US$195||US$180|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$3.4b
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 9.3%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$439m× (1 + 2.0%) ÷ (9.3%– 2.0%) = US$6.1b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$6.1b÷ ( 1 + 9.3%)10= US$2.5b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$5.9b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$64.4, the company appears about fair value at a 7.3% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Civitas Resources as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 9.3%, which is based on a levered beta of 1.222. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for Civitas Resources
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividends are covered by earnings and cash flows.
- Dividend is in the top 25% of dividend payers in the market.
- No major weaknesses identified for CIVI.
- Good value based on P/E ratio and estimated fair value.
- Annual earnings are forecast to decline for the next 4 years.
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Civitas Resources, there are three pertinent factors you should further research:
- Risks: Case in point, we've spotted 2 warning signs for Civitas Resources you should be aware of, and 1 of them can't be ignored.
- Future Earnings: How does CIVI's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.
Valuation is complex, but we're helping make it simple.
Find out whether Civitas Resources is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Civitas Resources, Inc., 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 Wattenberg Field of the Denver-Julesburg Basin of Colorado.
Outstanding track record, undervalued and pays a dividend.