Fitch Ratings has affirmed
The Rating Outlook has been revised to Positive from Stable.
The Positive Outlook reflects Civitas' improved post dividend FCF profile, the scale of its operations, the expectation Civitas will remain one of the lowest levered exploration and production (E&P) companies supported by a relatively low amount of debt in its capital structure, as well as Fitch's improved comfort that Civitas will be able to navigate
Key Rating Drivers
Low Debt and Low Leverage: Fitch forecasts Civitas to have midcycle total debt with equity credit-to-operating EBITDA leverage of approximately 0.2x during its forecast. This is exceptionally low, particularly for a non-investment-grade rating and translates to a debt to flowing barrel of below
DJ Basin Consolidator: Since forming with the staged consolidation through 2021 of
Fitch expects Civitas to continue to act as a consolidator in the
Near Two Years of Permits in Hand: At 2Q22 Citivas had nearly all of its 2022 development plan permitted and approximately 20% of 2023 fully approved. Civitas' permitting status consists approximately 575 wells in various stages of process on top of 270 locations that were approved prior to 2022, the latter of which at Civitas current drilling pace would provide almost two years to maintain production.
Civitas balances its three-rig program with drilling rig allocations between its Southern position (e.g.
FCF Prioritized Over Drill Bit Growth: Civitas aims to keep organic production flat to benefit FCF generation. 50% of its FCF, gross of working capital changes, is distributed to shareholders through a variable dividend on top of a quarterly fixed dividend that currently costs
Under Fitch's base case, Civitas is forecast to generate post fixed and variable dividend distribution FCF of approximately
Hedging: At 2Q22 Civitas had approximately 27% and 2% of its respective expected 2022 and 2023 oil production hedged, as well as approximately 48% and 15% of its respective expected 2022 and 2023 natural gas production hedged. Civitas hedging percentages, although reduced from the levels at its 2021 formation, provide support to cash flow visibility to support its annual total capex requirements at maintenance levels of approximately
Colorado Regulatory Risk: Fitch continues to assess regulatory risk within
Fitch anticipates knowledge gained from permit applications and continued collaboration with the COGCC and communities will help the permitting process become more efficient over time. Civitas' ESG investments to achieve a Scope 1 and Scope 2 carbon neutral position through a combination of operational improvements and emission offset credits also support its ability to continue to permit development plans.
Derivation Summary
Civitas is the largest producer within Fitch's 'BB-' rating category with 2Q22 production of 175mboepd. This compares to
Compared to the aforementioned peers, Civitas' unit economics compare relatively well. With a 2Q22 unhedged cash netback
In addition to currently being the largest E&P in terms of production scale within Fitch's North American E&P portfolio at the 'BB-' category, Civitas, has the lowest absolute debt level at
Key Assumptions
WTI of
No organic production growth, assumed cash funded DJ basin bolt-on acquisition in 2023 and 2024
Midstream operations in line with historical results;
Total capex of approximately
Base dividend portion of dividend increases during the forecast period;
Assume no unmet firm capacity commitments after 2022;
No share repurchases during the forecast period.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Further developing a permitting track record within the state regulatory regime without unreasonable delays;
Proven economic access to debt capital markets that moderates potential future liquidity and refinance risks;
Increased scale in areas within the
Midcycle total debt with equity credit maintained at or below 1.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Midcycle total debt with equity credit/operating EBITDA sustained over 2.0x;
A regulatory change that affects unit economics or visibility on future operations;
Sustained negative post-dividend FCF stressing liquidity or underinvestment in asset base.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Simple Capital Structure: Civitas has a simple capital structure with no short-term refinancing risk. At 2Q22 its liquidity position consisted of a reserve-based loan credit facility with a
Civitas' only debts are its revolving facility maturing in 2025 and its
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
(C) 2022 Electronic News Publishing, source