Executive Summary / Key Takeaways

• Strategic Recalibration: Civitas Resources has pivoted from an M&A-driven growth strategy to a sharp focus on operational excellence, cost leadership, and disciplined capital allocation, prioritizing debt reduction and enhanced shareholder returns. This shift is designed to build a more durable business amidst commodity price volatility.
• Operational & Technological Edge: The company is achieving significant efficiencies across its Permian and DJ Basin assets through advanced drilling and completion techniques, including 4-mile laterals, simulfrac operations, and AI-optimized frac parameters. These innovations are driving down well costs and boosting productivity.
• Strengthened Financial Position: Civitas is on track to achieve its $4.5 billion net debt target by year-end 2025, supported by strategic asset divestitures and robust hedging. This commitment to a strong balance sheet underpins its long-term stability.
• Aggressive Shareholder Returns: With confidence in its financial trajectory, Civitas has reinstated a capital return program, allocating 50% of Adjusted Free Cash Flow (after the base dividend) to share buybacks annually. This includes a $250 million accelerated share repurchase program in Q3 2025.
• Compelling Valuation: Despite strong free cash flow generation and operational improvements, Civitas's equity is perceived by management and analysts as significantly undervalued, trading at attractive multiples relative to its intrinsic value.

A New Chapter for Civitas: Operational Mastery and Capital Discipline

Civitas Resources, Inc. (NYSE:CIVI) stands as a prominent independent exploration and production company, strategically focused on crude oil and associated liquids-rich natural gas assets within the prolific Permian Basin of Texas and New Mexico, and the established DJ Basin in Colorado. The company's journey has been marked by a transformative period of growth since its formation in 2021, expanding its footprint through significant Permian acquisitions that effectively doubled its size and diversified its portfolio. This expansion, however, has recently given way to a strategic recalibration, emphasizing operational excellence, cost leadership, and disciplined capital allocation.

The recent appointment of Wouter van Kempen as interim CEO, replacing Chris Doyle, underscores this renewed focus. Management has explicitly stated this change is not a strategic overhaul but rather a deepening of commitment to execution, performance, discipline, and cost leadership. This pivot is a prudent response to the inherent volatility of the crude oil and natural gas industry, which continues to be influenced by geopolitical events, inflationary pressures, and global supply-demand dynamics. Civitas aims to build a more resilient and sustainable enterprise, leveraging its high-quality, low break-even assets, robust financial liquidity, and a strong hedge book to weather market fluctuations.

Technological Edge: The Engine of Efficiency

Civitas's competitive advantage is deeply rooted in its innovative operational techniques and continuous pursuit of efficiency in drilling and completions. These technological advancements are not merely incremental improvements; they are foundational to the company's ability to drive down costs, enhance productivity, and expand its economic inventory.

In the Permian Basin, the company's teams are delivering impressive results. In the Delaware Basin, year-to-date drilled footage per day is approximately 20% higher than planned, showcasing significant drilling efficiencies. Completions are averaging over 170,000 barrels of water per crew per day, a testament to the effectiveness of simulfrac operations. These efforts have contributed to a 7% reduction in Delaware well costs compared to the beginning of the year. Initial production from the first operated Delaware pad in New Mexico, featuring 2-mile laterals, has been robust, averaging over 1,200 barrels of oil per day.

The Midland Basin operations are equally impressive, with average daily drilled footage per well exceeding 1,850 feet in Q2 2025. Well costs in the Midland have decreased by 5% since the start of the year. The adoption of simulfrac across the Permian program has yielded a more than 30% uplift in daily fluid throughput, directly translating to faster cycle times and lower costs. Furthermore, strong results from Wolfcamp D wells in the Southern Midland are unlocking new resources, with returns competitive with the established Wolfcamp A and B zones. Civitas has identified approximately 120 Wolfcamp D locations with mid-$40 oil breakevens, expanding its high-return inventory.

The DJ Basin also demonstrates significant operational prowess. Teams are achieving 4-mile laterals from spud to spud in approximately six days, a remarkable feat of execution. Real-time AI software is being leveraged to optimize frac parameters, contributing to a 5% faster cycle time year-to-date. Well costs in the DJ Basin are 3% lower, averaging around $650 per foot. The 8-well Invicta pad, featuring 4.3-mile laterals, has delivered strong initial production averaging over 1,100 barrels of oil per day per well, benefiting from land optimization and complex wellbore geometries.

These technological advancements and operational efficiencies are critical for investors. They directly contribute to Civitas's competitive moat by lowering its cost structure, enhancing capital efficiency, and extending the economic life of its assets. This translates into higher free cash flow generation, improved margins, and a stronger market position, ensuring long-term growth even in challenging commodity price environments.

Competitive Positioning: A Focused Player in a Dynamic Arena

Civitas operates in a highly competitive E&P landscape, contending with industry giants like Occidental Petroleum (OXY), Devon Energy (DVN), and ConocoPhillips (COP). While these larger players boast global scale and diversified portfolios, Civitas carves out its niche through regional expertise and a relentless focus on cost leadership in its core basins.

Civitas's strengths lie in its specialized operational execution and adaptability within the DJ and Permian Basins. Its basin-leading capabilities, exemplified by the industry's first 4-mile laterals in Colorado and record-setting 180-day cumulative oil producers, demonstrate a proficiency in complex well geometries. The company's cash operating cost target in the high-$9s per BOE is considered peer-leading, reflecting its disciplined approach to cost management. Furthermore, Civitas's "ground game" initiatives, involving trades, swaps, and new leasing, consistently enhance working interest and lateral lengths, adding high-quality inventory.

Comparing Civitas to its larger rivals reveals distinct competitive dynamics. Civitas's focused strategy allows for faster decision-making and adaptation to local geological conditions, potentially yielding greater efficiency in reserve development. For instance, its ability to optimize Delaware development by extending laterals from one-mile to two-mile wells significantly increased capital efficiency and returns. However, larger competitors like OXY and COP benefit from economies of scale, providing cost advantages in procurement, logistics, and broader market access. OXY's diversified asset base and COP's global operations offer greater resilience to regional downturns and geopolitical risks, areas where Civitas's more concentrated footprint presents a vulnerability.

Devon Energy, a significant player in U.S. shale, also emphasizes scalable operations and flexible capital allocation. While Devon has shown trends of superior profitability and efficiency metrics due to its diversified production base, Civitas's focused execution in its niche areas allows it to compete effectively on a per-well and per-foot cost basis. For example, Civitas's well costs in the DJ Basin are around $650 per foot, making it highly competitive.

Indirect competitors, such as companies in renewable energy and electric vehicle manufacturers, pose a long-term threat by potentially reducing demand for fossil fuels. Industry trends like electrification and grid investments could shift energy consumption patterns, impacting Civitas's market share if it cannot adapt or if the demand for natural gas as a transition fuel diminishes faster than anticipated. Civitas's reliance on third-party infrastructure for water takeaway, gas processing, and transportation also presents a vulnerability, as constraints can impact production and costs.

Financial Performance: Resilience Amidst Volatility

Civitas's recent financial performance reflects both the challenging commodity environment and the early successes of its strategic recalibration. For the three months ended June 30, 2025, the company reported total operating net revenues of $1,057 million and Adjusted EBITDAX of $749 million. Net income for the quarter stood at $124 million, or $1.34 per diluted share. Total sales volumes for Q2 2025 were 28,819 MBoe, averaging 317 MBoed. Adjusted Free Cash Flow for the quarter was $123 million, with capital expenditures totaling $506 million.

Comparing Q2 2025 to Q1 2025, product revenues decreased by 12%, primarily due to a 14% decrease in crude oil equivalent pricing, partially offset by a 3% increase in total sales volumes from the timing of wells turned-in-line. For the six months ended June 30, 2025, product revenues decreased 15% to $2.25 billion compared to $2.64 billion in the same period of 2024, driven by an 8% decrease in crude oil equivalent pricing and an 8% decrease in total sales volumes.

Operational expenses show a mixed picture, reflecting both challenges and efficiency gains. Lease operating expense (LOE) decreased 9% in Q2 2025 (12% per Boe) compared to Q1 2025, largely due to Permian Basin efficiencies in maintenance, saltwater disposal, and fuel usage. However, LOE increased 29% for the six months ended June 30, 2025 (40% per Boe), compared to H1 2024. This was primarily due to increased saltwater disposal costs in the Permian (including those from takeaway capacity constraints) and higher plugging and abandonment costs, environmental remediation, and electric power rates in the DJ Basin. General and administrative (G&A) expense decreased in Q2 2025 due to non-recurring severance charges and stock compensation related to a 10% workforce reduction in Q1 2025, a key component of the company's cost optimization initiative.

The company's liquidity remains robust, with $2.0 billion as of June 30, 2025, comprising $69 million in cash and $1.9 billion available on its Credit Facility. Civitas successfully issued $750 million in 9.62% Senior Notes due 2033, using the net proceeds of $743 million to repay a portion of its Credit Facility borrowings. The Credit Facility's aggregate elected commitments were increased to $2.5 billion, and the company remains in compliance with all financial covenants, including a maximum net leverage ratio of 3.00 to 1.00.

Strategic Initiatives & Outlook: A Clear Path Forward

Civitas has a clear roadmap for value creation, centered on aggressive cost optimization, strategic portfolio management, and a disciplined capital return program.

The company is well on its way to achieving its $100 million annual free cash flow cost optimization and efficiency target, with 80% already captured and $40 million impacting 2025. This initiative is driving lower well costs across all basins (7% in Delaware, 5% in Midland, 3% in DJ).

In a significant move to accelerate debt reduction, Civitas exceeded its noncore asset sales target, divesting $435 million in noncore DJ Basin assets. These assets, located in the northernmost part of its acreage with minimal near-term development plans, were sold at a strong 4x multiple on 2026 cash flow. The divested assets are estimated to represent approximately 10,000 Boe/day for 2026, with half being oil.

The company is steadfast in its commitment to strengthening the balance sheet, targeting $4.5 billion in net debt by year-end 2025, an $800 million reduction from year-end 2024 (pro forma for a bolt-on transaction). Management anticipates no borrowings outstanding on its Credit Facility by year-end 2025. This debt reduction is expected to decrease annual interest expense by approximately $60 million, boosting run-rate free cash flow by 5%. The long-term leverage target remains at 1x by late 2026, with a goal of 0.75x EBITDA at mid-cycle prices.

Following these achievements, Civitas reinstated an aggressive capital return program in August 2025. The Board approved allocating 50% of Adjusted Free Cash Flow (after the base dividend of $0.50 per share quarterly) to share buybacks annually, with the remainder directed to debt reduction. The share repurchase authorization was increased to $750 million, and the company plans a $250 million accelerated share repurchase program in Q3 2025 to capitalize on its undervalued equity.

For 2025, Civitas has updated its full-year volume guidance to account for the asset divestitures. Second-half production is expected to grow approximately 7%, with Q3 production anticipated to be higher than Q4 due to the timing of divestments. Cash operating costs for the second half are projected to average less than $10 per BOE. Capital expenditures are on track for the full-year outlook, with Q3 CapEx expected to be higher than Q4 as efficiency gains pull activities forward. Looking to 2026, oil production is projected to be in the 145-150 MBoed range, reflecting a maintenance capital program post-divestitures. The recent Tax Act is also expected to provide over $200 million in cash tax savings over the next five years, ensuring minimal cash taxes for the foreseeable future.

Risks & Challenges: Vigilance in a Dynamic Market

Despite a clear strategic path, Civitas faces inherent risks. Commodity price volatility remains a primary concern, with crude oil and natural gas prices subject to wide fluctuations from geopolitical events, economic conditions, and OPEC decisions. The Waha Hub has experienced periods of negative natural gas pricing, highlighting regional market imbalances. Inflationary pressures and potential tariffs could impact operating costs and demand.

Operational challenges, such as third-party infrastructure constraints for water takeaway, gas processing, and transportation, can lead to production interruptions and increased costs. The company is also exposed to counterparty credit risk on its derivative contracts and customer receivables. Legal and regulatory risks include a class action lawsuit filed in May 2025, alleging misleading statements related to 2025 production and financial condition, and recent Notices of Alleged Violation from the Colorado ECMC regarding falsified environmental reports. While management intends to vigorously defend against these claims and does not believe the environmental penalties will be material, these issues introduce uncertainty.

Conclusion

Civitas Resources is at a pivotal juncture, having strategically recalibrated its focus from aggressive expansion to disciplined operational excellence and capital stewardship. The company's commitment to maximizing free cash flow, strengthening its balance sheet, and returning capital to shareholders is a prudent response to the volatile energy landscape. Through innovative operational techniques, such as advanced drilling and completion methods, Civitas is driving down costs and enhancing productivity across its high-quality Permian and DJ Basin assets, solidifying its competitive position.

With a clear line of sight to achieving its $4.5 billion net debt target by year-end 2025 and an aggressive capital return program in place, Civitas is poised to unlock significant value for its shareholders. The company's robust financial health, coupled with its technological edge and a strategic emphasis on efficiency, positions it as a compelling investment for those seeking a resilient E&P player focused on long-term, sustainable returns.