Civitas Resources C-Suite Chat: Rising to the Challenge(s)

Presented by:

Where super-sized independents such as Occidental Petroleum Corp. and European super majors like TotalEnergies are orchestrating some carbon-neutral production in its nascent stages, Civitas Resources Inc. is a carbon-neutral producer by its first design.

The firm employs Scope 1 emissions offsets and Scope 2 green e-certified renewable energy credits to make the firm Colorado’s first carbon-neutral energy producer.

A triple merger among Denver-Julesburg (D-J) Basin producers Bonanza Creek Energy, Extraction Oil & Gas and Crestone Peak yielded Civitas two years ago. But the public company that emerged on the New York Stock Exchange on Nov. 2, 202—and now the largest oil and natural gas pure play in Colorado—is not the story of just any ordinary roll-up.

And its CFO is no ordinary corporate suit.

Marianella Foschi, 35, is young and savvy, a woman of color with dual degrees in finance and economics and a coming-of-age story that started in Colombia. In many ways, she is the future of the U.S. industry. By the time she graduated from high school at 18, Foschi knew she wanted to pursue an education in the U.S., where she found “fascinating” opportunities for someone willing to work hard.

Within the first 10 years of graduating from The University of Texas at Austin, Foschi held key finance roles at two public companies, managed debt and equity investing at The Blackstone Group —the world’s largest alternative investment firm with more than $880 billion in assets under management (AUM)—and worked on oil and gas deals at Credit Suisse, where current AUM value is upward of $1.5 trillion.

As Civitas neared its one-year anniversary as a public company, Foschi discussed with Oil and Gas Investor editor-in-chief Deon Daugherty the chances and the challenges ahead for the company, the industry and the next generation of oil and gas executives.

Deon Daugherty: Civitas is a young company, and it’s the sum of several parts. How did it all begin?

Marianella Foschi: The legacy company I came from—Extraction Oil and Gas—went through restructuring in 2020, not unlike others in the industry. We had come off the prior business model of growth, outspending cash flows when the pandemic and oil [prices] going to zero all hit us at the wrong time.

It was honestly—I mean, I hate saying this—but it was an incredible learning experience for me. It was not something that you would want to do and it’s not something that is a shining star on your resume. But for me, it was perfect because I wasn’t C-suite at the time. I was two levels down as director of finance.

We emerged from bankruptcy with new leadership that was much more aligned with what E&P companies need to be and what they need to do. Specifically, this was Kimmeridge; they owned 40% of Extraction at the time.

“We are continuing to look at acquisitions in Colorado—that’s part of our linear daily bread.”—Marianella Foschi, Civitas Resources

We were very vocal just in advance of emerging from bankruptcy that we were going to be as aggressive as we could. It’s something that we believed the industry needed to do. And it took a lot of time and work.

The reason the industry got to be where it was at the time was a lack of compensation alignment with shareholders, and so [Kimmeridge] wanted to make sure there was alignment between management teams and equity holders.

Within ESG is a lot of the compensation [issue]. People always think about ESG being about emissions, but the “G” is just as important for us—making sure we have a diverse workforce and that our board is aligned with us and with the Street. There’s a bunch of pieces within that, and they can be forgotten.

DD: Where does consolidation fit into the ongoing strategy?

MF: If you think about the 2016, 2018 period, every company and their mother was getting an equity check from their private equity firm. 

[Civitas’ management] view was that it is just too inefficient. We need a handful of players in every basin. We are serious about consolidation and balance sheet strength. 

I wanted to make sure we never got into another situation like we did in 2020 and ensure we were making a balance sheet that can survive through the cycle. We’re in a very cyclical industry and statistically, it’s just a matter of time: How many years do you think you have the next cycle? 

Just in the [D-J] basin, there was us and three others. To be honest, we didn’t need those companies. They overlapped, they were very similar and they could have been one [consolidated firm]. We put those companies together. 

Even before we emerged from bankruptcy, we were already having those discussions. We had a very clear vision that we would—obviously, price dependent and market conditions dependent—we would grow the footprint of the business in the basin. The whole goal was to see what we could do within the basin that’s accretive to our equity.

And we have big plans. We are continuing to look at acquisitions in Colorado—that’s part of our linear daily bread. We’re always looking at one to three opportunities, and I think that at the scale we have now, we’re already looking at [targets] outside Colorado as well, with the understanding that it’s going to be a steeper climb.

But I think we do exhibit a lot of the things that the industry needs to do. And I think to some extent, you’ve seen other companies adopt some of these pieces. I don’t think there’s a company that’s adopted all of them, like we have. It was easier for us to do it to some extent; we had a fresh start with a bankruptcy. 

DD: How did you find your way into the U.S. oil and gas industry after growing up in Colombia?

MF: You probably notice English is not my first language, it’s Spanish. I lived in Colombia until I was 18, and after I graduated high school, I wanted a better education than Colombia could afford me.

My plan at the time was just to get my degree here and then move back. And, of course, I didn’t do that. The infrastructure of this country and the opportunities available just completely fascinated me. It’s just so different. I don’t even know what word to use.

This industry is full of challenges. I had only a year to work here under a student visa. I thought, “let me just get the most intense job I can ever get because I could only be here a year.” That was investment banking. 

DD: What has been the biggest challenge for you at Civitas?

MF: The biggest challenge is the constant change. And I’ll give you one specifically about our company, but we’re figuring out strategically where we want to be and how we want to position ourselves amidst this sea of change and volatility in the industry. That is pretty challenging. 

You have to be nimble, and you need a board that’s nimble and supportive. We want to preserve the ability to move quickly. 

The other challenge I would say is operating in Colorado. This has never been easy, and it’s something that we feel like we do very well. A big part of our strategy that has paid off is the ability to work closely with the communities we operate [in]. We’re headquartered in Denver, and all of the fields where we’re developing [are] all over the Denver area. All of our field folks go home every day. We’re more competitive on the hiring front because of that reason.

But nonetheless, operating in Colorado continues to be something that takes more time. More staffing is needed to permit our wells, more staffing for planning things like air emissions monitoring and other incremental environmental initiatives that we have.

The continued integration of the companies is challenging. It’s been difficult, to say the least. But we’re coming up on a year of closing, and we’ve done it very successfully.

The first quarters have been very successful across the board on most metrics. And so I think that concern has very much gone away. But in this industry, there has been a lack of interest from investors. I kind of see that changing, but to be fair, there was a big rally in energy stocks in Q2 [second quarter]. And then it came down again. You just never know what you’re going to get every day.

The way we’re trying to combat that challenge is by making it very clear that it’s not a mutually exclusive thing. We’re spending meaningful dollars—tens of millions of dollars—on reducing our emissions operationally. We’re actually building a pipeline right now toward the south of the basin because we don’t want to use trucks. By not trucking, we’re also not paying for the trucking fee, but we’re also building the pipeline.

I think we’re just trying to make sure investors understand that, “Hey, you don’t need to sell us if you have an institutional mandate just because we’re oil and gas. At least give us a shot by understanding what we’re doing. We think you’re going to be really impressed.”

DD: It seems that it is going to take more time for the investor community to come back to oil and gas, if that’s possible.

MF: I think there’s going to be a very clear differentiator of the dos and don’ts [for companies making changes]. And I think that’s kind of once the SEC [U.S. Securities and Exchange Commission] finalizes their emissions reporting standard. That’s when it’s all going to come to light, who’s actually doing something and who’s not. 

DD: When you tally up the pluses and minuses of operating in Colorado, what does Civitas consider when adding some diversity to the portfolio with assets in other basins?

MF: At this point, we’re in more of a screening stage. We’re trying to figure out what makes us a better company. Does this option make us better in ESG? Does this improve our balance sheet? Does this create value? 

At this point, we’re keeping an open mind. We don’t have any specific biases. We’re at more of an inflection point where we’ve just closed these mergers and acquisitions that we have successfully integrated. 

DD: At the end of the second quarter, Civitas reported $436 million in free cash flow. How much do you expect to generate by the end of this year, and how will Civitas use it? 

MF: We don’t look at the strip too much. We’ll look at kind of lower pricing cases, but I would say roughly around $75 a barrel would probably create a billion-plus [dollars] in free cash flow. 

We’re committed to returning about 60% of that free cash flow back to investors. Then that leaves the other 40%, and we would want to preserve some flexibility.

We’re still evaluating whether the 40% would be used for consolidation because we’ve had a great experience with it. And we’re big believers in it.

That said, if we’re not seeing an accretive acquisition opportunity, we’ll look at other metrics, but it may be that we just won’t do it. And at that point, we would look at either a buyback, if we think the stock is at a price that makes sense, or a dividend. But those three, on the relative merits, is what we’re going to do with the balance of the cash. 

DD: What is the professional dynamic—the level of challenge—today for a woman of color to earn a spot in an oil and gas C-suite?

MF: I probably have two tiers of challenges, to be honest. Being a woman in a primarily male-dominated industry is one but then also being from Colombia. They’re not, by definition, insurmountable challenges given where I am, but there is more that can be done [to equalize opportunities].

It’s great that we’re nursing awareness, but there’s a fine line beyond which we don’t want to go. For example, I’ve seen companies that will only interview females for certain roles. That’s just not fair to anybody.