Civitas Resources: Undervalued Growth and Shareholder Returns in Energy's Permian Play

Civitas Resources (NYSE: CIVI) trades near its 52-week low of $22.79, with a trailing P/E of just 3.41—well below its historical average and peers. This presents a compelling entry point for income and growth investors, as the company executes on its Permian Basin-led growth, cost optimization, and shareholder-friendly policies. Let's dissect why this energy producer could be a hidden gem in an otherwise volatile sector.

Permian Basin Dominance: The Engine of Growth

Civitas' Permian Basin operations are its crown jewel, accounting for 53% of sales volumes in Q1 2025. The company's drilling efficiency is improving dramatically:
- Delaware Basin drilling cycles are 10% faster than planned, while Midland Basin completions achieved 5% higher fluid-pumping rates in Q1.
- Four-mile laterals in the Watkins area—its longest wells ever—highlight Permian's scalability.

The Permian is driving oil volume growth of ~5% at the midpoint of Q2 guidance, with five rigs and two frac crews active. This contrasts sharply with the struggling DJ Basin, where weather and third-party logistics held back production. However, Permian's outperformance justifies a closer look at Civitas' broader strategy.

Cost Reductions and Free Cash Flow: The $900M Play

Civitas' $100M cost optimization plan—targeting capital efficiency, production, and corporate costs—is already bearing fruit:
- $40M of savings will flow into 2025 free cash flow (FCF), with the full $100M benefiting 2026.
- The company aims to hit $900M in 2025 FCF, a 34% jump from 2024's $670M. This is underpinned by lower break-even costs ($8.97/BOE in Q2 2024) and disciplined capital allocation.

While DJ Basin challenges persist, Permian's growth and cost cuts are insulating FCF. Even with modestly higher Q2 capex ($505–555M), Civitas remains on track to deleverage, targeting $4.5B net debt by year-end—a $800M reduction from 2024.

Aggressive Buybacks and Dividends: Rewarding Shareholders

Civitas has prioritized shareholder returns:
- In Q1 alone, it returned $121M via $50M in dividends (yielding ~9.6%) and $71M in buybacks (1.5M shares).
- A $500M buyback authorization (a 75% increase over prior programs) underscores its commitment, though buybacks may pause until debt targets are met.

Despite near-term risks, the dividend remains secure. Management has reaffirmed its $0.50/share quarterly dividend, even as peers cut payouts during market stress. This consistency positions Civitas as a high-yield alternative to lower-growth energy stocks.

Addressing DJ Basin Challenges: A Necessary Cost of Growth

The DJ Basin's struggles—9 delayed Turn-in-Line (TIL) projects, weather disruptions, and third-party logistics issues—accounted for 80% of Q1 volume declines. However, Civitas is mitigating this:
- $300M in DJ asset sales by year-end will refocus capital on the Permian.
- Local sand usage in completions rose to over 90%, reducing costs.

While DJ volatility persists, the Permian's scale and the asset-sale plan limit its drag on FCF. The DJ is now a non-core distraction, not a core threat.

Valuation: P/E of 3.41—Too Cheap to Ignore

Civitas trades at a P/E of 3.41, far below its 5-year average of 6.18 and peers like Chord Energy (CHRD, P/E 7.15) and Matador Resources (MTDR, P/E 6.78). This reflects market skepticism about its DJ Basin execution and energy sector headwinds.

But the discount is overdone:
- Deleveraging: Net debt is set to fall 15% by year-end.
- Hedging: ~50% of oil production is protected at $68/bbl WTI, shielding FCF from price dips.

At current prices, the stock offers a 30% free cash flow yield—a rare opportunity in energy.

Risks and Considerations

• Oil Price Sensitivity: A sustained dip below $60/bbl could strain leverage targets.
• Operational Execution: Permian's growth must offset DJ delays.
• Regulatory Risks: Colorado's stricter oil/gas rules could impact DJ valuation.

Investment Thesis: Buy the Dip

Civitas is a P/E anomaly in a sector where growth stocks trade at multiples 2–3x higher. Its Permian-led FCF machine, dividend resilience, and deleveraging focus justify a buy at $22.79.

Actionable Advice:
- Entry Point: Accumulate at current prices, with a $25–$30 target over 12 months.
- Stop-Loss: Below $20, signaling broader energy sector collapse.

The 52-week low and P/E of 3.41 are not just numbers—they're a buy signal for patient investors. Civitas' execution in the Permian and shareholder-first strategy make it a standout in a volatile market.

Final Note: Energy stocks are cyclical, but Civitas' cost discipline and Permian upside offer a margin of safety. This is a stock to own for the next leg of energy's recovery.