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Investing.com - Morgan Stanley downgraded Civitas Resources (NYSE:CIVI) from Overweight to Equalweight on Friday, setting a price target of $40.00 following the stock’s nearly 20% rally since the start of the third quarter. According to InvestingPro data, the stock appears significantly undervalued, trading at just 4.2x earnings and 2.4x EV/EBITDA, with a "GREAT" overall financial health score.
The investment bank noted that Civitas has outperformed other oil exploration and production companies by approximately 14% during this period, supported by shareholder-friendly actions announced with second-quarter results, including $250 million in accelerated share repurchases (ASR) and resumption of buybacks at 50% of annual free cash flow after base dividends. InvestingPro analysis confirms management’s aggressive share buyback strategy, with the company maintaining strong profitability and a notable 28% free cash flow yield.
Morgan Stanley expects the impact of the ASR program has largely played out already and forecasts buybacks will decrease significantly from $250 million in the third quarter to approximately $50 million in the fourth quarter.
The downgrade reflects Civitas’s valuation now screening in-line with peers on 2026-27 free cash flow to enterprise value metrics, despite the company’s higher free cash flow to equity yield of 20% in 2026 compared to the 10% median for oil exploration and production companies at $60 per barrel WTI.
Morgan Stanley projects Civitas’s net debt to EBITDAX ratio will end 2025 at 1.5 times, higher than the 0.8 times average for its broader oil exploration and production coverage, and estimates a free cash flow to enterprise value yield of approximately 7% in 2026 at $60 WTI, roughly matching the peer median.
In other recent news, Civitas Resources reported its second-quarter 2025 earnings, exceeding expectations with an earnings per share (EPS) of $1.34, compared to the forecasted $1.11, resulting in a 20.72% surprise. However, the company experienced a slight revenue shortfall during the same period. Piper Sandler, following discussions with Civitas management about production forecasts, adjusted its price target for the company to $52.00, down from $54.00, while maintaining an Overweight rating. William Blair initiated coverage on Civitas Resources with a Market Perform rating, acknowledging recent changes such as a new CEO, increased stock repurchases, and cost optimization measures. Despite these efforts, William Blair expressed concerns about the company’s ability to generate significant free cash flow, predicting it to remain moderate until mid-2026. These developments provide investors with insights into Civitas Resources’ current financial and operational landscape.
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