Resource Company with Steady Cash Flow Significantly Undervalued
Civitas Resources (NYSE: CIVI), a leading player in the oil and gas industry, is currently trading at a discount despite its impressive financial performance and growth initiatives.
In Q1'25, CIVI posted an adjusted free cash flow of $171M, and the company expects its Q2 oil volumes to jump 5%, with most of the growth coming from the Permian Basin. This growth is part of CIVI's broader strategy to focus on capital returns, cost cuts, and running an efficient operation.
The company's balance sheet is also improving, with a goal to get net debt down to $4.5B by year-end. CIVI's net debt currently stands at $5.1B as of Q1, a significant reduction from the $5B in net debt it reported earlier.
CIVI's assets are delivering well, despite being a newer company built through roll-ups in the DJ and Permian. The company has $5B in net debt, but the maturities are years out, providing a cushion for future operations.
To further optimise costs, CIVI has implemented a $100M cost optimization program, with $40M expected to hit this year. The company also tapped the debt markets in May with a $500M senior notes offering.
Despite lower commodity price forecasts, CIVI's business remains FCF positive even at $40 WTI. The company has 50% of its crude volumes hedged for the rest of 2025 at an average floor of $68/barrel, offering some protection against price volatility.
In addition to cost-cutting measures, CIVI plans to raise $300M through asset sales, not including core E&P assets. This move is intended to further strengthen the company's financial position.
Despite these positive developments, CIVI trades at a 58% discount to its tangible book value of $71 per share. The $2.00/share annual base dividend looks safe, even at $55 oil, offering an attractive yield for investors.
However, the undervaluation of CIVI is not just a matter of market sentiment. Lowered commodity price forecasts, production setbacks and operational challenges outside the core Permian Basin, and overall cautious investor sentiment amidst ongoing geopolitical and macroeconomic uncertainties contribute to the discounted stock price.
As the market shifts towards more sober, value-oriented investing, it's likely that energy stocks like Civitas, despite their strong fundamentals and low price-to-earnings ratios, will start to benefit. The mispricing of CIVI, while currently prevalent, is unlikely to last forever.
- Civitas Resources' impressive financial performance, growth strategies, and focus on efficiency in the oil and gas industry might attract investors in the health and finance sectors who seek energy investments, given the company's positive free cash flow and promising energy production forecasts.
- As the energy industry continues to evolve, with a growing emphasis on value-oriented investing, the undervalued stock price of Civitas Resources, despite its strong financial position, high-yield base dividend, and hedged crude volumes, could become increasingly attractive to investors in the finance industry, potentially leading to increased investments and a rise in the company's stock price.
