Civitas Resources, Inc.CIVINYSE
LOADING
|||
Operator: Good day, and thank you for standing by. Welcome to the Civitas Resources Second Quarter 2025 Earnings Conference Call and Webcast. My name is Morgan, and I will be your operator for today's call. Please be advised that today's conference call is being recorded. I will now turn the call over to Brad Whitmarsh, Head of Investor Relations. Brad, please go ahead.
Brad Whitmarsh: Thanks, Morgan. Good morning, everyone, and thank you for joining us. Yesterday, we announced our second quarter 2025 results as well as an enhanced capital return program. We provided some supplemental materials and we filed our 10-Q. In addition, we announced the appointment of Wouter van Kempen, formerly our Board Chair as our interim CEO. Hopefully, you've had a chance to look through all of our materials, which are all on the website. This morning, our prepared remarks will come from Wouter as well as Marianella Foschi, our CFO; and Clay Carrell, our President and COO. As always, please limit your time to 1 question and 1 follow-up, and we can get to the list efficiently. We will make certain forward- looking statements, which are subject to risks and uncertainties that could cause actual results to differ materially from projections. Please read our full disclosures regarding these statements in our most recent SEC filings. Also, we may refer to certain non-GAAP financial metrics. Reconciliations to the appropriate GAAP measure can be found in yesterday's earnings release and our SEC filings. With that, I'll turn the call over to Wouter.
Wouter T. van Kempen: Thanks, Brad, and good morning, everyone. Thanks for joining us. As we continue to build a world-class energy company, we must stay nimble and adaptable and build a culture of performance, strong execution and cost leadership. Civitas has accomplished a lot since our formation in 2021, but there's more work to be done. And as such, the Board made a difficult position to part ways with Chris Doyle. We thank Chris for his contributions to our company and all that he has done to bring Civitas to where we are today. I want to be clear that this is not a strategic shift for Civitas. This was a board position that we needed new leadership to deepen our focus on execution and performance on discipline and on cost leadership and push the company forward. I will act as interim CEO until a permanent replacement can be found and Howard Willard, who has served on our Board since 2021 has been appointed chair by the Board during this period. We entered 2025 with 4 clear priorities as we work to build a stronger and more durable Civitas in the face of significant macro volatility. Number one, run the business to maximize free cash flow and build upon a leading cost structure, enhanced by sustainable capital efficiencies. Number two, deploy that free cash flow to protect and strengthen the balance sheet and we laid out a goal of achieving $4.5 billion in net debt towards the end of the year. Number three, return cash to shareholders, which was targeted to primarily come through a strong base dividend with the potential for higher shareholder returns tied to hitting our debt reduction target. And number four lead in ESG and build a long-term sustainable business as we execute on our goal to further reduce our emissions profile. As we look back on the first half of the year, Civitas has taken decisive action to enhance our operational execution, sustainably lower our cost and improve our financial position in order to maximize value for shareholders. With a number of our goals already achieved and confidence in meeting our debt reduction targets for the year, we are very pleased that we can now reinstate an aggressive capital returns plan with a buyback authorization that is well over 25% of our market cap today. Let me now hand it over to Marianella to go through this in more detail and cover this year's accomplishments.
Marianella Foschi: Thanks, Wouter. As you mentioned, we've taken decisive actions to strengthen the company and our forward plans including, first, as we came into 2025, we optimized our investment levels, focusing on higher free cash flow and returns. Second, we reduced price risk and protected our cash flow with increased hedges. Taking advantage of multiple commodity price opportunities over the last couple of months, we are now approximately 60% hedged on oil for the remainder of this year, which is about twice our normal levels. Next, we proactively issued $750 million in new senior notes with a focus to enhance our liquidity and extend debt maturities. Today, we have around $2 billion in financial liquidity. And by the end of the year, we anticipate no borrowings outstanding on our credit facility. Fourth, we're on track with our previously announced $100 million cost optimization and efficiency initiatives to enhance margins and returns. Well costs are lower in each basin, oil differentials are improved, and we're driving cash operating costs meaningfully lower. Clay will provide more color on this effort shortly. And lastly, we significantly exceeded our full year target for noncore asset sales with executed agreements to divest $435 million in noncore DJ Basin assets at a strong valuation. Achieving a 4x multiple on 2026 cash flow, establishes another strong marker for our DJ assets and allows us to further high grade our position in the basin. The investments constitute the northernmost part of our asset base, an area with minimal near-term development plans and it accelerated significant cash flow with proceeds targeted for debt reduction. Production from the divested assets is estimated to be around 10,000 barrels equivalent per day for next year. Half of which is oil, and the transactions are expected to close around the end of the third quarter. Each of these achievements is significant stand-alone. And combined, we have accelerated our plans for the year. Putting our $4.5 billion year-end target squarely in sight. With confidence in our plan, we intend to take advantage of the compelling value our equity provides today. Going forward and including full year 2025, we plan to allocate 50% of our free cash flow after the base dividend to share buybacks on an annual basis and the remainder to debt reduction. For the current year, that comes to about $375 million in repurchases, inclusive of the $70 million repurchased year-to- date. In strong support, our Board increased our share repurchase authorization to $750 million, which represents about 28% of our current market cap. We intend to rapidly take advantage with a $250 million accelerated share repurchase program, which is expected to be completed within the third quarter. Before handing it over to Clay, I will quickly summarize our strong second quarter results, which were ahead of plan, demonstrating the strength of our assets and the capabilities of our team. Oil volumes grew 6% quarter-over- quarter. Cash operating expenses on a unit basis were more than 10% lower and capital investments when they're on the low end of plan driven by lower well costs and meaningful gains in D&C cycle times we have shown today. These outcomes, along with strong oil realizations and hedging gains, led to nearly $750 million in adjusted EBITDA and over $120 million in adjusted free cash flow for the quarter. With an expected significant increase in our volumes, along with capital and operating costs running lower, we expect a meaningful ramp in both EBITDA and free cash flow in the second half of the year. We are pleased with the recent Tax Act and the support it establishes for our industry. This new act will ensure we have minimal cash taxes for the foreseeable future with over $200 million in savings over the next 5 years. Finally, we published our annual sustainability report last week, which can be found on our website. I hope you'll take time to read through the report, which includes a review of our performance and provides an update on our sustainability initiatives. With that, I will turn it over to Clay.
Clayton A. Carrell: Thanks, Marianella, and good morning, everyone. Since joining Civitas about 3 months ago, I have gained a better understanding of our assets, and I've been impressed with both the asset quality and the technical and operating performance of our teams. We were able to hit the ground running and deliver solid results in the second quarter, and I'm looking forward to building on this momentum and continuing to improve the results of the company moving forward. Let me start with some second quarter operational highlights from the Permian. Starting in the Delaware, we've been getting ready for our first significant operated activity after using most of last year to optimize the acreage footprint for longer laterals and higher working interest. In the second quarter, 50% of our wells drilled and 30% of our completions that occurred in the Permian were in the Delaware. Right out of the gate, the team is delivering impressive efficiencies as year-to-date drilled footage per day is around 20% higher than planned, and our completions are averaging over 170,000 barrels of water per crew per day, reflecting strong performance from simulfrac operations. We recently commenced production on our first operated Delaware pad in New Mexico and while it's very early, initial production rates from these 2-mile wells are strong, averaging over 1,200 barrels of oil per day. Third quarter turn-in lines should include around 20 Delaware Basin wells which are a key driver of significant Permian production growth in the second half of the year. In the Midland, the teams have continued to deliver strong efficiencies as well highlighted by an average daily footage drilled per well of more than 1,850 feet in the second quarter. Our teams overcame water takeaway challenges and we commenced production on a number of new pads across our assets. These included our first co-development in the northern part of the asset targeting the Middle Spraberry through Wolfcamp A and we also delivered continued Wolfcamp D success with wells in Glasscock and Reagan Counties. Marianella mentioned our oil growth as a company in the second quarter, essentially all of it came from the Midland Basin. Moving over to the DJ. It's a similarly impressive story with efficiency gains on both the drilling and completion fronts. Drill times on all lateral lengths are better than planned and of particular note, the team is delivering 4-mile laterals spud to spud in about 6 days, which is really great execution. On the completion front, our teams are leveraging real-time AI software to optimize frac parameters, which are contributing to 5% faster cycle times year-to-date. Our core Watkins area continues to deliver. In our materials, we highlighted the 8-well Invicta pad, which is a great success story benefiting from our land optimization initiatives as well as our technical advantages in developing resource through long laterals and sometimes unique wellbore geometries. Utilizing one of our existing surface locations, the Invicta pad includes some of the longest wells ever drilled in Colorado, averaging 4.3 miles and our completions covered the last 3 miles of the lateral. Production in early days is quite strong, averaging over 1,100 barrels of oil per day per well. Drilling and completion efficiencies realized in each basin are a major contributing factor to our reduced well costs, which are 7% lower in the Delaware, 5% lower in the Midland and 3% lower in the DJ compared to the beginning of the year. Along with other capital initiatives, production and midstream optimization and corporate cost reductions, we are on track with our $100 million cost optimization initiative and about 80% of this amount is captured to date. As a reminder, $40 million of the savings are impacting 2025. These are great wins for Civitas, and the teams are continuing to identify additional savings. As it relates to the remainder of the year, we've updated our full year volume guidance in our materials to account for the impact of our asset divestitures. With a high turn-in-line count in the middle part of the year, second half production is expected to grow approximately 7%. Third quarter production is expected to be higher than the fourth, mainly due to the timing of our asset divestments, and we are off to a strong start in July, with production in line with our third quarter guidance. On cash operating costs, our teams are driving in the right direction with our second half expected to average less than $10 per BOE. And on capital expenditures, we are on track to achieve our full year outlook. Third quarter CapEx is anticipated to be higher than the fourth quarter as our efficiency gains are pulling activities forward. All in, we have strong momentum and are set up for an impressive second half of the year. Now I'll turn the call back over to Wouter for some closing comments.
Wouter T. van Kempen: Thanks, Clay. And before going to questions, let me recap where we are today. First, we're executing on the base business and have a high level of confidence in our go-forward plan. Our team is delivering every day, optimizing our resource base and driving cost out of the system. And I'm extremely grateful for the hard and safe work of our talented people. Next, we have rapidly accelerated our debt reduction plan with value-driven divestments and significant gains on our cost optimization and efficiency initiative. This has brought forward cash flows. And we now have a clear line of sight to achieving our $4.5 billion net debt goal around the end of the year. And finally, we know the importance of strong and sustainable capital returns to our shareholders. Our 50-50 capital allocation will deliver peer-leading return of capital to our shareholders and the accelerated share purchase -- repurchase program will take advantage of the compelling value opportunity we see in our equity today. So thank you for your continued interest in our company. And Morgan, we're now ready to take questions.
Operator: [Operator Instructions] Your first question comes from Zach Parham with JPMorgan.
Benjamin Zachary Parham: First, I just wanted to ask on the strategy shift and the comfort you have making that shift right now. I mean, if we look at the financials today, your net debt is a little bit higher than it was 2 quarters ago when you initially made the strip -- when you initially made the shift, the oil strip is a little bit lower when you made the initial change. I know you've done the asset sale but what else gives you comfort with -- that the balance sheet is now rightsized for the company and that you now have the ability to go back and aggressively buy back stock?
Marianella Foschi: Thanks for the question. So as you know, we've always had a commitment to return capital to shareholders. It's one of our core pillars. We definitely sit in a more advantaged position today because of the recent steps we've taken, including the incremental hedges, the cost optimization program and the divestments along with the debt term out. If you look at our business, the goal we started with the year, which was a $4.5 billion net debt target around the end of the year, all of that has been solidified, inclusive of the 60% hedge that we have for the balance of the year. And if you look at it on a go-forward basis, that's going to only get better as we continue paying down debt. I just wanted you to hear from us that we're not done here. The $4.5 billion was the goal for this year. As we continue generating free cash flow, we're going to continue deploying that to further debt repayment. Being in the commodity industry that we are, we continue to see a strong balance sheet is essential to continue to execute on our strategy. And we believe now, given all those actions this year, that's going to continue to further and we'll do so at a more measured pace given where the equity lies today.
Benjamin Zachary Parham: My follow-up on 2026 and how you're thinking about the 2026 plans post the strategy shift and the asset sale, your prior messaging had been that you hold volumes on oil relatively flat at flattish CapEx. Is that still the message at this point, just at a lower level of CapEx and production following the asset sales. And if so, any details on what that might look like would be helpful.
Clayton A. Carrell: So Zach, it's early as we're planning on 2026. Obviously, commodity prices will have a big impact. But as you mentioned, we had talked about holding production flat in the 150 to the 155 range. Out of maintenance capital level with the asset divestments that will take us down to about a 145 to 150 oil range for 2026. So a lot of optimization is occurring right now as we're looking at the remainder of 2025 and how that will impact 2026. But I think the general message around a maintenance capital program in those production levels is where we're at.
Operator: Your next question comes from Phillip Jungwirth with BMO Capital Markets.
Phillip J. Jungwirth: A lot to cover, but I did have a question for Clay. Now that you've been in the seat for a couple of months, I was just hoping you could share your initial impressions of the Civitas operations. where things are going well, any low-hanging fruit? And what areas could there be some more medium-term improvement down the road that will take time.
Clayton A. Carrell: Certainly. So I think it starts with -- we've got really good assets and the operational execution around those assets has continued to improve. I think 2Q was another example of that, where we saw the well cost reductions. The teams are constantly looking for efficiency gains and how we're increasing pumping time and getting more barrels away on the completions every day, and that's reducing making our cycle times faster, reducing costs on wells, getting wells online earlier. So I think that has all been very positive, and I expect that to continue to improve moving forward. I think on the facility front, we're continuing to make progress in terms of utilizing the facilities that were in place with the past acquisitions, making appropriate adjustments to those so that we can optimize our production. And then as we go forward with facility designs in -- particularly in the Permian look for ways to continue to be more efficient and lower the cost there. So I'm really excited about what was accomplished in the second quarter and looking forward to the go forward on the operational front.
Phillip J. Jungwirth: Great. And then nice to see the asset sale target exceeded. I believe you guys had initially looked at a range of options. So I was just hoping you could talk about how you settled on this specific package and could you revisit any additional divestitures down the road?
Marianella Foschi: Phillip, look, we were patient. As you know, we kicked off this process a bit ago and the patience was rewarded. We've talked about a lot during the last call how we were open-minded and trying to figure out what the most accretive assets we could sell were, and those are, as you know, highly dependent on oil prices. I would say, in general, these were assets that were further down the development plan for us. So there's really minimal to no near-term impact for the next couple of years, and we are very, very pleased to have checked that box in a very big way for this year. I would say on anything that comes from here, we'll obviously always entertain opportunistic offers. We were really pleased with the assets that we have in our portfolio and not proactively looking to sell anything additional, but as always, we will entertain opportunistic interest for any piece of our asset base.
Operator: Your next question comes from Scott Hanold with RBC Capital Markets.
Scott Michael Hanold: If I could start with the CEO change and more specifically, what are you all looking for in the next CEO? Like what kind of attributes are you looking for in an individual? And there's just a lot going on right now? Do you generally have a time frame at which you hope to have that wrapped up?
Wouter T. van Kempen: Yes. Scott, it's Wouter. Nice to meet you. And why don't I take this one. And obviously, can't talk in great detail around what is it that we're exactly looking for, what are the time frames. At the same time, there is an indication in the filings that we've done around how long I expect to be here. So we hope to be doing this in the next 6 months or so. What are we looking for? I think you're looking for a person who can set strategy, a person that can allocate capital in the right way that can build a great culture. That can continue to push the company forward. And I want to make sure that what I said earlier, very appreciative of what Chris has done to get the company to where we are today. But we think there is a shift needed on what we're going to do here forward. And again, that's not a strategic shift. It is really focused on how do we execute better, how do we get better performance, how do we get more cost leadership. And in the end, how do we get the share price up. Every day, we look at 4 p.m., we get a report card and we don't like where the report card is today, and there's a lot of opportunity there.
Scott Michael Hanold: Yes. And I guess more of my point is like do you guys have the strategy in place that you want. And so you're finding -- want to find a CEO that's going to fit that strategy? Or is Civitas an open slate where, look, we're looking for the best CEO. And if you've got a different path for us, we're going to take that? Like which option are you looking for? Are you looking for somebody to come in and make changes or somebody more that's going to fit the culture of the strategy you have kind of laid out at this point?
Wouter T. van Kempen: Every CEO that will come in will make changes. There's no doubt about that. And that's all good. But this is not about an A to Z strategy overhaul. So this is not about hey, let's bring someone in who is going to sit with the Board and decide that what we have done to date needs to be done completely different. That is absolutely not where this is. This is not about making a massive strategy shift.
Scott Michael Hanold: Okay. That's clear. And then let's go back to sort of Zach's question on the strategy shift with stock buybacks. And look, I'm going to pull the question to you, why not push debt down further, right? I mean, what we've seen -- I've been doing this almost 30 years is that high debt in E&P companies, especially SMID-cap E&P is tough, especially given the uncertainty and volatility of commodity prices. I know you've locked in some stuff this year. But look, you got to look for the longer term and why not just keep willing that debt down to like as low as you can get. And the stock price will fix itself versus trying to force the stock price issued today. Why not take it? Wouldn't that be more of a debt reduction today? Because wouldn't that be a longer-term benefit to you?
Marianella Foschi: Scott, this is Marianella. I'll start by saying that we did everything we set ourselves to do this year in terms of the goals on balance sheet, right? So we termed out debt. We got the asset divestments done, we increased hedges. As you think about just the continued debt repayment, having clarity on 4.5 was the first and foremost goal that we had, and we reiterated that many, many times over the last 6 months. Past that, we continue to believe that we need to maintain a strong capital structure, right, to your point, just we're going to weather cycles, and we're going to weather low commodity prices again. No, I think the way we see our business is we're going to continue progressing those balance sheet goals. I think we still believe that we need to continue paying down debt. And it's not just the absolute amount of debt, there's so much more to it as well. There's a composition of the data in your maturity stack, there's a cost structure, there's how hedged are you. And so we're certainly trying to not only continue paying down debt, but just derisking all those other balance sheet components as we move forward past the end of this year, we expect to be around 4.5, we still believe that companies of our size and industries that leverage below 1x is ideal longer term. And like I said, past the year-end, we're going to balance the distribution of that between equity and debt with our strong free cash flow.
Scott Michael Hanold: Okay. I mean I appreciate those comments, and I get your point on comfort and hitting your goals. I just would kind of suggest it's probably better to pay down debt even further just get more aggressive there today. But I'll leave it there.
Operator: Your next question comes from Lloyd Byrne with Jefferies.
Francis Lloyd Byrne: It's only taken me 3 years to get this right. Nice to meet Wouter and Clay. Welcome. Let me start -- I guess, let me start with Marianella, how are you thinking about or what may be -- how are you thinking about the dividends at these levels? I mean, it seems high and maybe taking this opportunity to reduce that and buy back stock or pay down dividend? And then I'd like to go back to Clay afterwards and just talk about some of the opportunities he sees and the timing on reducing costs.
Marianella Foschi: Lloyd, thanks for the question. On the dividend, I mean look, just consistent with what we've said on prior calls, we always been committed to that base dividend. We believe it's important that our investors can count on that return quarter-over-quarter and through the cycle. I'll also note that with this accelerated repurchase program, we're buying 10% of our market cap, that will interimly save about $20 million to $25 million in dividends on a go-forward basis. And that's just what the repurchases we're doing the balance of this year. So we remain committed and like our fixed dividend. And I think at this time, there's really no changes around the table in that regard.
Operator: Lloyd, did you have a follow-up for Clay?
Francis Lloyd Byrne: Yes, Clay, just talk about timing where you see the most opportunity? I feel like the DJ, you've lagged a little bit some of the peers. How quickly can you take asset cost down there like give me some time line on improvement?
Clayton A. Carrell: Sure. So we talked about the cost initiative and continuing to lower cost, improve performance, at this call 3 months ago. And so I think a lot of progress has been made, where we've got 80% captured on the $100 million run rate in 2026 and feeling good about the $40 million in 2025 after a 3-month period. And we've got a longer list of items that are still in -- that are in the works, but that we don't consider them captured yet. And it's across all categories. I mean, we've got things on the CapEx side around both drilling and completions, design changes, there's a component of service cost reduction in there, local sands, bringing more proppant providers into the mix, which is creating competition. On the LOE side, things around compression optimization, getting more power to our locations and reducing generator costs. And then on the midstream and marketing front, what I'd say on the DJ is we're drilling the longest laterals in that basin. We've got some examples in the materials today. Our well costs that we're talking about are down around $650 a foot to where I think we're really competitive and the teams are continuing to look for more and more ways to keep bringing those costs down and getting creative to go add more inventory to the current asset with some of the things we can do around these drilling geometries like we showed on this Invicta pad.
Operator: [Operator Instructions] Your question comes from Leo Mariani with ROTH Capital.
Leo Paul Mariani: Yes. I wanted to see if we get a little bit more detail on some of the recent well results. You guys obviously kind of highlighted the Wolfcamp D continues to look good. Can you provide a little bit more color around your Wolfcamp D results? And are you generally codeveloping that in the Midland Basin as well?
Clayton A. Carrell: Sure. We like what we're seeing on the Wolfcamp B and continuing to look for ways to keep extending the limits around that bench. It seems like we're getting earlier oil cuts on the Wolfcamp D producers, which is also a good thing. We're continuing to look at all the benches across the play. Like I talked about in my comments and continuing to see encouraging results. We're customizing completion designs by the different benches as we continue to get more production histories there and doing some things on the G&G side to continue to gain technical information that will help us understand how we're most effectively treating the fracs on the completion side and getting the most out of these wells. So the expectation would be that would continue moving forward. And we'll continue to provide updates there. As I mentioned, we have a lot of completions in the Delaware in 3Q. And so more information to come there as we move forward.
Leo Paul Mariani: Okay. And then just kind of sticking on the operational side. Obviously, you're relatively new to the company. Could you maybe just talk a little bit Clay about how you kind of see the inventory in the different buckets, DJ versus Delaware versus Midland, where do you kind of see longer and sort of stronger inventory at this point based on your kind of own assessment of the asset base?
Clayton A. Carrell: Sure. So we talk about the overall inventory being 2,000 locations, 1,200 in the Permian, 800 in the DJ. From an overall return standpoint, right now, the Permian is a little better returns, which is why the capital allocation is what it is. As we keep making improvements, as we keep lowering costs in both basins, we expect for that to, at a minimum, offset any productivity degradation over time, if not improved well performance with different approaches on the drilling and on the completion side. We're really excited about the Delaware and the -- it's really, really early results there, but more are going to come as we move forward. We have low breakevens in our program, but we need to continue to enhance the resource to reserve progression and keep lowering costs and improving performance. And as I mentioned on the previous answer, we're continuing to add more on the G&G space around getting as much technical information as we can around the acreage that we have, both in extending limits in both of these areas, but also looking at secondary objectives that are present, shallower and deeper in both of these areas that can keep replacing the inventory and progressing it forward and elevating the quality as we move forward.
Operator: Your next question comes from John Abbott with Wolfe Research.
John Holliday Abbott: My first question here is for you, Clay. I mean we've spoken a lot about the opportunity in terms of costs and where you see that. And then when we were just sort of thinking about not the change in strategy, but what the firm is looking forward in terms of strategy, in terms of consistency. I guess my question is when you sort of look at -- you have assets in the Northern Del, you have assets in the Midland Basin, you have assets in the DJ. While you can execute on lowering costs, how do you think about the ability to sort of coordinate and provide a more level and consistent program that benefits it provides a sort of consistent performance that you guys may be sort of looking at, what's the ability to coordinate these assets, while at the same time, reducing costs and hitting your targets?
Clayton A. Carrell: Sure. So definitely, we need to continue to get more and more benefit from a multi-basin set of assets and how that can optimize the performance at the total company level and think about that from a capital allocation standpoint, from a timing of completions, how we can level load, how that helps from a supply chain standpoint when we're thinking about the broad services that we have across both basins. A lot of that is already happening, but I think there's room to keep improving in that space. And from a consistency standpoint, I think we're very much aligned, and we have to be able to effectively forecast different parameters, production results as we move forward and understand that we're going to have things that surprise us along the way, but that we're set up to overcome those and deliver on performance month-over-month, quarter-over-quarter. And that's the ongoing push that's occurring right now.
John Holliday Abbott: Appreciate it. And my next question is just more of a bookkeeping question on the $4.5 billion debt target by next -- by the end of this year. I guess in terms of achieving that, how much of that is working capital and the changes in working capital? And how do we sort of think about the working capital changes? And do we sort of have to think about those working capital changes next year as well? That's kind of my -- that's my follow-up question.
Marianella Foschi: John, thanks for the question. On a working capital basis, as you know, during the second quarter, we had our usual payment at the Colorado ad valorem taxes in April. That cost us tighten working capital by roughly about $150 million for the second quarter. We will get some of that naturally back in the second half. But the way to think about it, both for the full year and then long term on an annual basis, like we should be pretty flat at around low $800 million of free cash flow deficit. So again, naturally, we'll get some of that back in the second half for that specific draw. But that should be natural and as expected and consistent with the past years.
Operator: Your next question comes from [ Oliver Wang with TPH ]
Unidentified Analyst: Maybe for Clay, just as we're thinking about activity levels for the year and how companies want to avoid the start and stop loss of efficiencies. You all demonstrated some incremental efficiencies with the faster cycle times and well cost reductions. So just trying to get a sense for how are you all thinking about the faster cycle times potentially pushing things towards the upper end of your budgeted range for both CapEx and TILs, given that's something that happened last year?
Clayton A. Carrell: Yes. We're very much focused on balancing that. The faster cycle times are lowering costs, but it is pulling activities forward. And so as we keep looking to optimize the remainder of 2025 and 2026, we're looking at that. We're looking at where our capital levels are at. We're looking at the cost savings initiative that we have in place and balancing all of those things to try to have a more level-loaded approach as we move through the year and into next year.
Unidentified Analyst: Okay. Perfect. And just for a follow-up, maybe just on the debt side, once more. I know 50% of the postpaid free cash flow is going towards the balance sheet. And you made a comment earlier on not being done with debt reduction. Is there a long-term target goal that you'll have in mind for the next leg when thinking about it from a total absolute net debt perspective versus just wanting to move towards 1x.
Marianella Foschi: Yes, absolutely, Al. Thanks for the question. So if we look at our free cash flow at mid-cycle prices, we should be paying down debt at roughly a rate of $400 million on a given basis, taking our '25 capital program and production profiles as a proxy. Certainly, we will have internal goals for ourselves, right? We certainly want to balance the capital allocation the right way. And like I said earlier, it's not only about making progress towards that 1x because it's also about just holistically derisking the business by debt maturity profile, hedges, cost structure so certainly continue to pay down debt in a very material way during the near term, along with derisking of the capital structure.
Operator: Your next question comes from Noel Parks with Tuohy Brothers.
Noel Augustus Parks: Just on a couple of things I wanted to run by you. In particular, I was thinking about -- and it was mentioned in the slides on Invicta and just that, that was an example of progress with land optimization. And I just wondered, could you talk about maybe where things stand in those sorts of initiatives, of course, tend to go on a little bit below the radar and continuing with swaps and bolt-ons, exchanges and so forth. Is it a significant part of what you can accomplish efficiency-wise going forward? Or is most of that already kind of baked in at this point?
Clayton A. Carrell: Sure. We're definitely continuing in the ground game, the trades, the swaps arena in both basins. And we have examples regularly of how that keeps enhancing the working interest, enhancing the economics of the different wells in our program, the Invicta one is really an interesting one that you mentioned because the step-outs where we use an existing service location and have to steer around existing wellbores to get to Tier 1 acreage that had you not had that expertise, had you not done those trades, that would have been stranded Tier 1 acreage in the play and we're able to go access it. And so the same thing is happening in the Permian in both Delaware and in Midland. I think most operators all understand the win- win that can occur between 2 operators by swapping out of op, non-op interest and better positioning their programs. So it's been an active part of our program, and it will continue to be one moving forward.
Noel Augustus Parks: Terrific. And you have also talked a good bit today about cycle time reductions and the efficiency that's already brought and what you anticipate you can still accomplish there. So I'm just wondering, in each of the basins at this point, are the sorts of incremental changes you're making more proprietary ideas or methods or are they more along the lines of sort of choosing from the many various things that your vendors maybe have experience with and just trying to track which of those are going to be the most effective. So just their perspective across customers versus sort of your own proprietary knowledge at this point?
Clayton A. Carrell: I'd say it's a mix, and we welcome it all to keep improving efficiency and improving well performance and lowering costs. We've got service providers that we work with that have some proprietary products that enable us to improve cycle times. We mentioned some of that in our presentation materials. We have innovation that continues to come from our teams around how can we move quicker from 1 well to the next from a mode standpoint and reduce cycle time there. We do things that our teams have come up with around cementing, where the rig has already moved to the next location and that's then we're coming and doing the final cement job on the production casing there to make the cycle times faster as we keep going to the next well and the next well. So I think that is a necessity as we move forward that we continue to innovate. Our teams work together to find ways to keep improving performance. And not only on the cost and efficiency side but on the well performance side and doing that by customizing completion designs, using data analytics around what are the completion characteristic recipes that produce the best wells in different areas of the field and that our service providers keep coming up with ideas that also benefit us. So I think it will continue, and it will be all of the above.
Operator: This concludes the Q&A session. I will now turn the call back over to Brad Whitmarsh for closing remarks.
Brad Whitmarsh: Yes. Thanks, everyone, for joining us early in the morning. Appreciate the opportunity to catch up on our great results and where we're headed as a company. I look forward to seeing you on the circuit here in a few weeks. And if you've got a chance or have some follow-up questions, don't hesitate to reach out to me. Thank you.
Operator: Ladies and gentlemen, that concludes today's call. Thank you for joining. Have a wonderful rest of your day.