Civitas Resources(CIVI) - 2022 Q4 - Annual Report

PART I Business Civitas Resources is an independent oil and natural gas exploration and production company focused on the DJ Basin, prioritizing free cash flow and ESG leadership - The company's primary objective is to maximize shareholder returns through generating free cash flow, maintaining a premier balance sheet, returning cash flow to shareholders, and demonstrating ESG leadership[16][156][126] - Civitas is Colorado's first carbon-neutral oil and gas operator on a Scope 1 and Scope 2 basis, employing practices like electric drilling rigs and 24/7 air monitoring, with a dedicated Board ESG Committee[5] 2022 Key Financial and Operational Highlights | Metric | Value | | :--- | :--- | | Net Income | ~$1.2 billion | | Cash Flow from Operating Activities | ~$2.5 billion | | Free Cash Flow | ~$1.2 billion | | Capital Reinvestment Rate | ~39% of operating cash flow | | Cash Returned to Shareholders | >$530 million | | Average Daily Sales Volume | 170.0 MBoe/d | | Gross Operated Wells Turned to Sales | 146 | - As of December 31, 2022, the company held approximately 525,900 net acres in the Rocky Mountain region, with 89% in the DJ Basin, operating 3,108 gross producing wells[92] Reserves Total proved reserves increased 5% to 416.0 MMBoe as of December 31, 2022, with 83% proved developed and a PV-10 value of $9.8 billion Estimated Proved Reserves as of December 31, 2022 | Reserve Category | Crude Oil (MBbls) | Natural Gas (MMcf) | NGL (MBbls) | Total (MBoe) | | :--- | :--- | :--- | :--- | :--- | | Developed | 117,768 | 750,793 | 102,004 | 344,904 | | Undeveloped | 34,834 | 116,707 | 16,830 | 71,115 | | Total Proved | 152,602 | 867,500 | 118,834 | 416,019 | Changes in Total Proved Reserves (MBoe) | Category | Net Reserves (MBoe) | | :--- | :--- | | Beginning of year (2022) | 397,690 | | Production | (62,063) | | Purchases of minerals in place | 27,269 | | Extensions, discoveries, and other additions | 27,904 | | Revisions to previous estimates | 25,447 | | End of year (2022) | 416,019 | - As of December 31, 2022, the company had 201 gross proved undeveloped (PUD) drilling locations, a decrease from 234 at year-end 2021, with an average lateral length of approximately 2.2 miles[137] - Reserve estimates were independently prepared by Ryder Scott and reviewed by the Company's Audit Committee and an in-house Senior Manager[141] Production, Revenues, and Price History In 2022, total production was 62,063 MBoe with average daily production of 170,035 Boe/d, and average crude oil sales price of $91.70 per barrel Production and Average Sales Price History | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Production (MBoe) | 62,063 | 20,445 | 9,239 | | Average Daily Production (Boe/d) | 170,035 | 56,015 | 25,242 | | Avg. Oil Sales Price (per Bbl, excl. derivatives) | $91.70 | $65.41 | $34.42 | | Avg. Gas Sales Price (per Mcf, excl. derivatives) | $6.15 | $3.84 | $1.45 | | Avg. NGL Sales Price (per Bbl, excl. derivatives) | $35.76 | $34.68 | $10.39 | | Avg. Production Costs (per Boe) | $3.25 | $3.41 | $4.00 | - In 2022, three customers accounted for a combined 72% of total revenue (Customer A: 50%, Customer B: 12%, Customer C: 10%)[144] Acreage and Drilling Activity As of December 31, 2022, the company held 525,900 net acres, primarily in the DJ Basin, and in 2022, drilled 176 gross wells and turned 146 to sales Acreage Summary as of December 31, 2022 | Basin | Developed Gross Acres | Developed Net Acres | Undeveloped Gross Acres | Undeveloped Net Acres | Total Gross Acres | Total Net Acres | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | DJ Basin | 526,600 | 396,900 | 172,200 | 73,100 | 698,800 | 470,000 | | Other Rocky Mountain | 107,800 | 42,600 | 19,900 | 13,300 | 127,700 | 55,900 | | Total | 634,400 | 439,500 | 192,100 | 86,400 | 826,500 | 525,900 | - In 2022, the company drilled 176 gross (152.0 net) wells, completed 142 gross (125.2 net) wells, and turned 146 gross (129.5 net) wells to sales[210][164] - Approximately 29,200 net acres, or 5.6% of total net acres, may expire within the next three years if production is not established or leases are not extended[209] Regulation of the Oil and Natural Gas Industry The company's operations are subject to extensive federal, state, and local regulations covering drilling, production, transportation, environmental protection, and safety, with evolving rules impacting costs and operations - Operations are substantially affected by federal, state, and local laws regulating permits, well spacing, production, surface use, water disposal, and well abandonment[216] - Interstate oil transportation is regulated by FERC under the Interstate Commerce Act, while intrastate transportation is regulated by state commissions[11] - Interstate natural gas transportation and sales are primarily regulated by FERC under the Natural Gas Act (NGA), including anti-market manipulation provisions[26][220] - The company is subject to numerous environmental regulations, including the Clean Air Act (CAA), Clean Water Act (CWA), and RCRA, which may require significant capital expenditures for compliance[225][226][939] - Colorado Senate Bill 19-181 significantly changed state regulation, shifting the COGCC's mission to prioritize public health and the environment and granting local governments greater control over facility siting[936][952] Human Capital As of December 31, 2022, Civitas had 353 full-time employees, prioritizing health, safety, and diversity, achieving a TRIR of 0.19 and 30% board diversity - The company had 353 full-time employees as of December 31, 2022, focused on attracting, retaining, and developing a highly qualified workforce[289] - Civitas prioritizes employee health and safety, achieving a Total Recordable Incident Rate (TRIR) of 0.19 in 2022, below its target of 0.25 and the industry average[291] - The company met its board diversity goal of at least 30% gender and racial diversity; as of year-end 2022, 22% of the workforce are women and 15% are minority group members[307] Risk Factors The company faces significant risks from commodity price volatility, operational uncertainties, evolving regulatory landscape in Colorado, and financial exposures from debt and derivatives - Declines in oil, natural gas, and NGL prices are a primary risk, adversely affecting business, financial condition, and capital expenditure obligations[277][326] - Operational risks include the high-risk nature of drilling, potential inaccuracies in reserve estimates, and challenges with horizontal drilling and completion techniques[280][296] - Regulatory initiatives, especially in Colorado, related to hydraulic fracturing, climate change, and increased local government oversight could result in increased costs, operating restrictions, or delays[281][282] - The concentration of operations in the DJ Basin in Colorado increases exposure to regional events, regulatory changes, and activist opposition[299][400] - Financial risks include restrictive covenants in debt agreements, potential losses from derivative activities, and credit risks associated with counterparties and customers[278][284] Properties Information regarding the company's properties, including details on acreage, reserves, and productive wells, is provided in Item 1, Business - The information required by Item 2 is contained in Item 1. Business and is incorporated by reference[511] Legal Proceedings The company is involved in various legal proceedings, with a previously disclosed litigation with Boulder County, Colorado, resolved on substantive issues, awaiting final dismissal - Previously disclosed litigation with Boulder County regarding oil and gas operations has been resolved on all substantive issues, with final dismissal pending[512] - In May 2022, Boulder County alleged new legal theories and requested lease termination, with no formal action initiated, but the company intends to vigorously defend its position[537] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under "CIVI", with a dividend policy including a base dividend increased to $0.50 per share in Q4 2022 - The company's common stock is listed on the New York Stock Exchange under the symbol "CIVI"[935] - The company initiated a quarterly base dividend in May 2021 and a quarterly variable dividend in March 2022, with the base dividend increased to $0.50 per share ($2.00 annually) starting in Q4 2022[515] - During Q4 2022, the company acquired 7,457 shares at an average price of $68.62 per share from employees to satisfy tax withholding obligations, not part of a public repurchase program[516][542] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, product revenues increased 309% to $3.8 billion, driven by volume and pricing, resulting in $1.25 billion net income and $1.8 billion liquidity - The discussion focuses on 2022 and 2021 results, with 2020 information available in the prior year's 10-K[519] 2022 vs 2021 Key Metrics | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Product Revenue | $3.8 billion | $926.0 million | | Crude Oil Equivalent Sales (MBoe) | 62,062.9 | 20,445.4 | | Avg. Sales Price per Boe (before derivatives) | $61.03 | $45.29 | | Net Cash from Operating Activities | $2.5 billion | $274.6 million | | G&A Expense per Boe | $2.31 | $3.19 | - As of December 31, 2022, liquidity was $1.8 billion, comprising $768.0 million in cash and $987.9 million available under the credit facility[562] - The 2023 capital budget is $725 million to $825 million for drilling and completion, plus $75 million to $85 million for land, midstream, and other activities including ESG[525] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is commodity price volatility; a 10% decline in SEC prices would decrease PV-10 value by $1.3 billion - The company's financial results are highly dependent on oil and natural gas prices, which are subject to wide fluctuations beyond its control[634] - A 10% change in SEC oil and gas prices would result in a 1% change in proved reserve volumes and a 13% (or $1.3 billion) change in the PV-10 value as of December 31, 2022[634] - The company uses derivative contracts to manage price risk; a hypothetical 10% upward shift in the forward curve would increase derivative loss by $20.7 million, while a 10% downward shift would decrease it by $20.4 million[611] - The company is exposed to counterparty credit risk from its 7 derivative counterparties (all members of its credit facility lender group) and from its customers[638][612] Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2022, 2021, and 2020, along with the independent auditor's report and detailed notes - The report includes audited consolidated financial statements for the three years ended December 31, 2022, presenting fairly the financial position and results of operations in conformity with U.S. GAAP[615] - Deloitte & Touche LLP identified the estimation of proved oil and gas reserves as a critical audit matter due to significant judgments and assumptions, particularly regarding the five-year conversion plan for proved undeveloped reserves[617][618] NOTE 2 - ACQUISITIONS AND DIVESTITURES In 2021, the company completed three major mergers, and in 2022, acquired Bison Oil & Gas II, LLC for $280.4 million, resulting in a $13.6 million bargain purchase gain - On April 1, 2021, Civitas acquired HighPoint Resources Corporation for a total merger consideration of $474.9 million[734][735] - On November 1, 2021, Civitas completed its merger with Extraction Oil & Gas, Inc. for a total merger consideration of $1.84 billion[706][739] - On November 1, 2021, Civitas completed its merger with Crestone Peak for a total merger consideration of $1.26 billion[1000][710] - On March 1, 2022, the company acquired Bison Oil & Gas II, LLC for approximately $280.4 million, resulting in a bargain purchase gain of $13.6 million[770] NOTE 5 - LONG-TERM DEBT As of December 31, 2022, long-term debt included $400.0 million in 5.0% Senior Notes due 2026, with a $1.85 billion revolving credit facility undrawn - The company has $400.0 million in aggregate principal of 5.0% Senior Notes due 2026, with a net carrying amount of $393.3 million as of December 31, 2022[975][752] - On May 1, 2022, the company redeemed all $100.0 million of its outstanding 7.5% Senior Notes[750] - The company's revolving credit facility has a borrowing base of $1.85 billion and an elected commitment of $1.0 billion, with a zero balance outstanding and $987.9 million available capacity as of December 31, 2022[781][782] NOTE 9 - DERIVATIVES The company uses commodity derivative contracts to mitigate price risk, recording a total derivative loss of $335.2 million in 2022, with $63.5 million in derivative liabilities Derivative Gain (Loss) Summary (in thousands) | Component | 2022 | 2021 | | :--- | :--- | :--- | | Derivative cash settlement loss | $(576,802) | $(275,914) | | Change in fair value gain | $241,642 | $215,404 | | Total derivative loss | $(335,160) | $(60,510) | - As of December 31, 2022, the company had oil and natural gas derivative contracts, primarily swaps and three-way collars, with positions extending through 2024[828][852] - Subsequent to year-end, the company entered into natural gas basis protection swaps on all outstanding NYMEX HH positions through Q3 2024 to mitigate pricing differentials between NYMEX HH and CIG[182][852] NOTE 15 - DISCLOSURES ABOUT OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) Capitalized costs for oil and gas properties totaled $1.49 billion in 2022, with the standardized measure of discounted future net cash flows from proved reserves at $7.93 billion Standardized Measure of Discounted Future Net Cash Flows (in thousands) | Component | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Future net cash flows | $12,526,994 | $6,773,594 | $1,023,287 | | 10% annual discount | $(4,599,504) | $(2,361,490) | $(586,233) | | Standardized measure | $7,927,490 | $4,412,104 | $437,054 | - Total costs incurred for property acquisition, exploration, and development were $1.49 billion in 2022, compared to $5.19 billion in 2021 (including major acquisitions)[896] - Positive revisions to proved reserves in 2022 totaled 25.4 MMBoe, driven by price-related revisions of 11.8 MMBoe and performance-related revisions of 13.6 MMBoe[870] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with an unqualified auditor opinion - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[266] - Management assessed the company's internal control over financial reporting as effective as of December 31, 2022, with the independent auditor issuing an unqualified opinion on its effectiveness[906][908] - No material changes in internal control over financial reporting occurred during Q4 2022[907] PART III Directors, Executive Officers, Corporate Governance, Compensation, and Security Ownership Information for Items 10-14 will be incorporated by reference from the company's definitive proxy statement, to be filed within 120 days of fiscal year-end - The information required by Items 10, 11, 12, 13, and 14 will be incorporated by reference from a future SEC filing within 120 days after December 31, 2022[274][288][923] PART IV Exhibits, Financial Statement Schedules This section lists all documents filed as part of the Annual Report on Form 10-K, including financial statements and various exhibits, with no financial statement schedules filed - This section includes the financial statements from Item 8 and a list of all exhibits filed with the report[887] - No financial statement schedules were filed with this report[926]