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On Monday, BMO Capital Markets adjusted its stance on Civitas Resources (NYSE:CIVI), downgrading the company’s stock rating from Outperform to Market Perform and reducing the price target to $42 from the previous $50. The revision follows a reassessment of the company’s financial projections in light of BMO’s updated commodity price forecast. According to InvestingPro data, the stock appears undervalued despite falling nearly 23% year-to-date, with 8 analysts recently revising their earnings expectations downward.
Phillip Jungwirth of BMO Capital expressed concerns regarding Civitas Resources’ need for higher oil prices to enhance its market valuation. The company maintains a significant free cash flow yield of 27% and trades at an attractive P/E ratio of 4.2x, though its current ratio of 0.45 indicates potential liquidity challenges. Despite the stock’s reasonable price based on free cash flow yield, the analyst noted that the balance sheet and inventory depth have negatively impacted the company’s valuation. Jungwirth pointed out that while the company is working towards de-leveraging and achieving sufficient scale, the process is expected to be gradual. InvestingPro subscribers can access detailed financial health metrics and 8 additional key insights about Civitas Resources.
The company’s shares experienced a decline after the fourth-quarter results were announced. The BMO analyst underscored that the trajectory for Civitas Resources to reduce its leverage and extend the duration of its free cash flow has become less certain, with the timeline for these objectives being extended due to softer crude prices.
Jungwirth’s commentary highlighted the challenges faced by Civitas Resources in the current economic environment. He indicated that while the company’s stock remains inexpensive based on its free cash flow yield, the valuation is currently being hampered by several factors, including its debt levels and the depth of its inventory.
In summary, BMO Capital’s revised outlook for Civitas Resources suggests a cautious approach, factoring in the broader market conditions and the company’s specific financial situation. The lowered price target to $42 reflects the firm’s recalibrated expectations for the energy company’s performance in the near future.
In other recent news, Civitas Resources reported its fourth-quarter 2024 earnings, missing analyst expectations with an earnings per share (EPS) of $1.78 compared to the forecasted $1.94. The company’s revenue also fell short, reaching $1.29 billion against an anticipated $1.3 billion. This earnings miss resulted in a decline in investor confidence, as reflected in the stock’s performance. Truist Securities adjusted its outlook on Civitas Resources by reducing the price target to $77 from $80, though it maintained a Buy rating, suggesting optimism about the company’s long-term valuation. JPMorgan, however, downgraded Civitas Resources from Overweight to Neutral and lowered the price target from $68 to $62, following the company’s strategic pivot towards mergers and acquisitions and debt reduction. KeyBanc has maintained a Sector Weight rating on the company, highlighting concerns about Civitas’ debt and cash returns. Despite these challenges, Civitas Resources has generated strong free cash flow and returned a significant portion to shareholders, while also announcing a 10% workforce reduction as part of operational streamlining.
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