Fitch Ratings has upgraded
Fitch has also upgraded the Reserve Based Loan (RBL) credit facility to 'BBB-'/'RR1' from 'BB+'/'RR1' and its senior unsecured notes to 'BB'/'RR4' from 'BB-'/'RR4'. Fitch has removed Civitas' ratings from Rating Watch Positive and assigned a Positive Outlook.
The upgrade reflects the closing of the previously announced
The Positive Rating Outlook could be resolved before the 12 to 18 month timeframe if Civitas makes material progress in reducing post-close RBL borrowings and demonstrates a successful track record as an operator in the
Key Rating Drivers
Scale and Diversification Enhancing Acquisitions: Fitch believes the announced acquisitions of Hibernia and Tap Rock are transformational to Civitas' operating profile. The transactions diversify Civitas' asset profile and add material scale through approximately 68,000 net acres in the
Gross Debt Increases; Leverage Remains Low: Although the transaction is leveraging in the near term through the addition of approximately
FCF Prioritized Over Drill Bit Growth: Civitas aims to keep organic production flat to benefit FCF generation. Hibernia and Tap Rock are currently operating with three and four rigs, respectively, and Civitas plans to drop both locations to two rigs moving forward in order to prioritize FCF generation. Fitch expects 50% of the company's FCF, gross of working capital changes, will be distributed to shareholders through a variable dividend on top of a quarterly fixed dividend of
Under Fitch's base case, Civitas is forecast to generate over
Near Two Years of Permits in Hand: Citivas has 100% of the 2023 development plan permitted and over 80% of 2024 permits progressing or in hand with a goal of getting permits 12-18 months in advance. Civitas' permitting status consists of approximately 600 wells in various stages of progress on top of 132 locations that were approved in 2022.
Civitas balances its two-rig program in the
PDP-Focused Hedging Policy: Civitas' hedging strategy is expected to change post-close as the company plans to hedge a substantial portion of target oil volumes through 2024 in order to maintain leverage and liquidity throughout a
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 2Q23 standalone production of 173mboepd. This compares to
Civitas' 2Q23 standalone Fitch-calculated unhedged cash netback of
Civitas has historically had the lowest leverage in the peer group (0.2x at YE22) due to the low amount of gross debt; however, pro forma the acquisitions and note issuances, Civitas' mid-cycle EBITDA leverage of 1.1x is more comparable to the peer group.
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer Include
WTI (USD/bbl) of
Base interest rates applicable to the company's outstanding variable rate debt obligations reflects current SOFR forward curve;
No organic production growth in
Announced transaction close in 3Q23 under proposed terms;
Midstream operations in line with historical results;
Capex in line with management expectations;
Base portion of dividend does not increase through forecast, variable divided remains at 50% of post-base dividend FCF;
FCF applied to reduction of the RBL.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Strong FCF generation that is directed toward paying back RBL borrowings;
Successful track record as a new operator in the
Continued increases in scale and/or diversification that helps mitigate overall regulatory and community opposition event risks;
Midcycle EBITDA leverage maintained at or below 1.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Change in financial policy leading to trend of gross debt increases and lower liquidity;
A regulatory change that affects permitting, unit economics, or visibility on future operations;
Sustained negative post-dividend FCF stressing liquidity or underinvestment in asset base;
Midcycle EBITDA Leverage sustained over 2.0x.
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
Sufficient Liquidity: At the closing of the Hibernia and Tap Rock acquisitions, Civitas has secured
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
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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