Civitas cut at Morgan Stanley as most impacts of accelerated stock buybacks played out

Civitas Resources received a downgrade from Morgan Stanley, which lowered its rating from Overweight to Equal Weight and set a price target of $40, citing that while the company has a favorable free cash flow to equity ratio, its overall free cash flow to enterprise value yield aligns more closely with industry standards due to higher leverage.

Morgan Stanley's analyst projects Civitas' net debt to EBITDAX ratio will reach 1.5x by the end of 2025, significantly higher than the sector average of 0.8x, and expects a free cash flow to enterprise value yield of about 7% by 2026.

Despite a nearly 20% surge in share price since Q3 began, driven by significant share repurchase initiatives, McDermott anticipates a substantial decrease in buybacks for the fourth quarter, reducing the figure from $250 million to around $50 million.

Looking ahead, McDermott expects Civitas to report a strong Q3 with a 5% quarter-over-quarter increase in oil production, driven primarily by output from the DJ Basin, and estimates capital expenditures will fall within the guidance range provided by the company.

Recommendation Rating: Updated Insights on Civitas Resources

Civitas Resources (NYSE:CIVI) experienced a slight increase of 0.5% in Friday's trading session, despite a downgrade from Morgan Stanley, reducing its rating to Equal Weight from Overweight and setting a price target of $40. The firm noted that although Civitas boasts a favorable free cash flow (FCF) to equity ratio compared to its peers, its FCF to enterprise value (EV) yield aligns more closely with industry norms due to elevated leverage.

Morgan Stanley analyst Devin McDermott anticipates that Civitas' net debt to EBITDAX ratio will reach 1.5x by the end of 2025, in contrast to the bank's average figure of 0.8x for the oil exploration and production sector. He also projects a FCF to EV yield of approximately 7% in 2026, based on a West Texas Intermediate (WTI) price of $60 per barrel, which is in line with the peer median.

Since the beginning of the third quarter, Civitas (CIVI) shares have surged nearly 20%. This increase has been bolstered by proactive measures taken by the company, including a $250 million accelerated share repurchase plan and the reinstatement of buybacks at 50% of annual free cash flow following the base dividend, as detailed in their Q2 results. However, McDermott predicts that buybacks will decrease significantly, dropping from $250 million to around $50 million in the fourth quarter.

Looking ahead, McDermott forecasts that Civitas will deliver relatively strong Q3 results, expecting a quarter-over-quarter growth of 5% in oil production, reaching 157,000 barrels per day. This growth is mainly attributed to output from the DJ Basin, aligning closely with the company’s guidance range of 154,000 to 160,000 barrels per day. He also estimates capital expenditures for the quarter to be approximately $481 million, falling within the guidance of $460 million to $500 million.