From the Perm Basin to the top: How strategic acquisitions and high dividends are redefining the mining sector
Gaining access to the richest oil areas in the US, reducing the cost of production while maximising returns for shareholders - these are the goals the oil giant has not only set, but achieved. With bold acquisitions in the Permian Basin and a focus on environmental sustainability, it has become a leader that does not lose sight of the financial rewards for its investors. How does it balance mining and innovation, and what does this mean for the future?
Expanding production capacity and strategic investments in the Permian Basin have enabled the company to achieve record dividends that are now delivering exceptional returns for its investors.
Company introduction
Civitas Resources $CIVI+1.1% is a major U.S. oil and gas exploration and production company. The company is headquartered in Denver, the capital of the state of Colorado, and its primary area of operations is the United States, specifically oil and gas rich regions such as the Permian Basin, DJ Basin and other key plays.
Civitas Resources was formed as a result of several mergers and acquisitions, which included the consolidation of smaller mining companies, allowing it to rapidly expand its assets and strengthen its market position. Since its inception, the company has focused on sustainable growth and the efficient use of modern technology to achieve maximum production while minimizing environmental impact.
The main products and services provided by Civitas Resources include oil and gas production and sales. The company focuses on improving drilling and production technologies, which includes innovations in hydraulic fracturing and other methods that increase the recovery of oil and gas from their reservoirs. Civitas is also dedicated to cost optimization, which allows it to maintain competitive pricing and increase profitability.
One of the company's key strategies is to return capital to its shareholders through dividends and share buybacks. This policy includes paying out at least 50% of free cash flow as a variable component of dividendswhich provides attractive returns for investors. The Company has recently modified its capital return program to include greater flexibility in deciding between share repurchases and dividend payments.
In 2023, Civitas Resources significantly strengthened its market position by acquiring assets in the Permian Basin, one of the richest areas for oil production in the US. This acquisition brought the company not only increased production capacity, but also additional opportunities to optimize costs and improve operational efficiency.
Civitas Resources' history is an example of dynamic growth and adaptation to changing market conditions in the mining industry. The company continues to expand, improve technology and deliver strong returns for its shareholders, making it one of the key players in the U.S. oil and gas production industry.
Interesting acquisition
1. Civitas Resources, Inc. announced the closing of the acquisition of certain oil and gas assets in the Midland Basin, part of the broader Permian Basin in Texas, from Vencer Energy, LLC, an investment of Vitol.
Under the terms of the agreement, Civitas issued 7,181,527 shares of common stock and $1 billion in cash to Vencer. A deferred cash payment of $550 million is due to Vencer on January 3, 2025. Civitas currently plans to use available cash and/or borrowings on its credit facility to pay the deferred cash payment.
The agreement, which was announced in October 2023, adds more than 40,000 new acres in the Midland Basin in the Permian Basin, production of approximately 62,000 barrels of oil equivalent per day (MMboed), 50% of which is oil, and approximately 400 development locations in the Spraberry and Wolfcamp formations. This acquisition increases Civitas' estimated production in the Permian Basin to approximately 170 thousand barrels of oil equivalent per day.
2. Civitas Resources announced the signing of two definitive agreements to acquire oil producing assets in the Midland and Delaware basins in West Texas and New Mexico for total consideration of approximately USD 4.7 billion, subject to customary purchase price adjustments. These transactions fundamentally transform Civitas into a stronger, more balanced and sustainable business with an extensive inventory of high-return drilling opportunities in the heart of the Permian and DJ Basins.
Unconventional shareholder rewards
On August 1, the Company reported second quarter results and declared a quarterly dividend of $1.52 per share, payable on September 26.
This amount included a base dividend of 50 cents per share and a variable dividend of $1.02 per share.
Civi's return of capital policy involves paying out at least 50% of its free cash flow (after payment of the basic dividend) as a variable component. Interestingly, the company has now modified its capital return program to increase flexibility in the way it rewards shareholders with variable returns. Effective in the third quarter of 2024, CIVI's variable component will include a combination of buybacks and dividends, with the allocation to be determined by management and the Board of Directors. CIVI also announced a new share repurchase plan of up to $500 million.
Following the second-quarter results, Mizuho analyst William Janela reiterated a "buy" recommendation on CIVI stock with a target price of $98, calling the company a top pick. The analyst said Civitas delivered another quarter of solid execution on the Permian Basin assets acquired in 2023.
Commenting on the revised capital return program, Janela said this gives the company "the flexibility to focus more on buybacks, which should resonate with investors and prepare the company positively for a significant increase in free cash flow in the second half of 2024."
The analyst pointed out that Civitas has reduced its capital expenditure budget for the year by around 3% due to reduced drilling costs as the company integrates its Permian Basin acquisitions. Additional drilling cost savings in the DJ Basin also helped the company lower its 2024 capital expenditure estimate.
How was the company's most recent quarter?
Civitas Resources delivered significant financial and operational results in the second quarter of 2024. The company reported net income of $216 million and operating cash flow of $359.6 million. Adjusted EBITDA was $918.1 million, reflecting strong financial performance. Total sales volumes came in at 343 thousand barrels of oil equivalent per day (MBoe/d), up slightly from the previous quarter.
One of the key factors contributing to the success was a reduction in drilling costs, which resulted in a $50 million reduction in capital expenditures for the full year. The Company also increased its 2024 sales volume guidance by 1.5%, reflecting strong production capacity and operational efficiencies.
The Permian Basin saw sales volumes increase nearly 12% compared to the first quarterdue to strong production from new wells in the Delaware and Midland regions. In addition, the Company was able to reduce drilling costs in the Midland Basin by 10%, resulting in a significant improvement in return on investment.
Civitas Resources also continues to return capital to its shareholders. In the second quarter, the company paid out a total of $274 million to shareholders through dividends of $1.50 per share and share repurchases of $125 million. The company also strengthened its share repurchase program, increasing the authorization to $500 million.
Civitas Resources Dividend Analysis
Civitas Resources Inc has maintained a consistent dividend payment history since 2021. Dividends are paid quarterly, providing stable income for shareholders. The company's current dividend yield for the past 12 months is 9.98%, while the expected yield for the next 12 months is 8.63%. This difference indicates an expectation of a slight decline in dividend payments in the coming year.
Dividend Sustainability: Payout Ratio and Profitability
To assess the sustainability of dividends, it is important to focus on the ratio payout ratio (dividend payout ratio). This ratio shows how much of a company's profits are distributed to its shareholders as dividends. A lower ratio means that the company is retaining a greater proportion of profits, which may provide funds for future growth or to cope with unexpected fluctuations. Civitas Resources Inc has a Payout Ratio of 0.66, indicating a balanced approach to dividend payouts.
The company also has a high profitability rating, which is rated 8 out of 10 by GuruFocus. Civitas Resources Inc has posted net income in six of the last ten years, indicating its stability and ability to generate profits.
Growth Metrics.
For a dividend to be sustainable, it is essential for a company to exhibit strong growth metrics. Civitas Resources Inc has achieved high revenue growth, averaging approximately 56.50% per annum, outperforming 93.47% of global competitors. Earnings per share (EPS) growth over the past three years has averaged 27.30% per year, which also indicates the company's strong ability to grow its earnings, which is key to sustaining dividends over the long term. The company has also posted a five-year EBITDA growth of 21.20%, again outperforming its competitors by approximately 70.73%.
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