Morgan Stanley downgraded Civitas Resources Inc to Equal-weight from Overweight, saying the U.S. oil and gas producer’s strong share price run has already priced in most near-term catalysts.
Civitas shares have risen nearly 20% since the start of the third quarter, outperforming oil exploration and production peers by about 14%.
The rally was driven by shareholder-friendly measures announced with second-quarter results, including a $250 million accelerated share repurchase program and the resumption of buybacks at 50% of annual free cash flow after dividends.
With most of the ASR impact already reflected, buybacks are expected to decline to around $50 million in the fourth quarter from $250 million in the third.
The brokerage said Civitas’ valuation looks in line with peers when factoring in free cash flow relative to enterprise value, given the company’s higher leverage.
It forecasts net debt to earnings before interest, taxes, depreciation and amortization (EBITDA) of 1.5 times by end-2025, compared with a 0.8 times average for its broader coverage.
Morgan Stanley maintained its price target on Civitas but said it sees “a more attractive risk-reward” in other energy stocks.
The brokerage expects the company’s third-quarter oil output to rise 5% sequentially to about 157,000 barrels per day, mainly from the DJ Basin. That would be 1% below consensus estimates but in line with company guidance.
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