Morgan Stanley Adjusts Rating on Civitas Resources Following Stock Appreciation

Investment Bank Downgrades Civitas Resources to Equal-weight

Morgan Stanley has downgraded Civitas Resources Inc. (CIVI) from "Overweight" to "Equal-weight," maintaining a price target of $40.00. The adjustment, announced on September 26, 2025, follows a substantial rally in Civitas shares, which have gained nearly 20% since the start of the third quarter, outperforming its oil exploration and production peers by approximately 14%. The investment bank indicated that the recent stock appreciation has largely priced in near-term positive catalysts.

Driving Factors Behind Civitas's Recent Performance

The significant rally in Civitas shares was primarily fueled by shareholder-friendly initiatives unveiled with the company's second-quarter 2025 results. These measures included a $250 million accelerated share repurchase (ASR) program and the resumption of buybacks, committing 50% of annual free cash flow after base dividends to these efforts. The company also reported strong second-quarter earnings, with an EPS of $1.34 against a forecast of $1.11, marking a 20.72% surprise. Despite a slight revenue shortfall, Civitas generated $749 million in adjusted EBITDAX and $123 million in adjusted free cash flow, with oil production growing 6% to 149 MBbl/d.

Analytical Rationale for the Downgrade

Morgan Stanley's revised rating reflects a re-evaluation of Civitas's valuation metrics relative to its peers. The bank anticipates that the impact of the ASR program has largely concluded, projecting a substantial decrease in buybacks from $250 million in the third quarter to approximately $50 million in the fourth quarter.

A key concern highlighted by Morgan Stanley is Civitas's projected leverage. The firm forecasts Civitas's net debt to EBITDAX ratio to reach 1.5 times by the end of 2025, considerably higher than the 0.8 times average for its broader oil exploration and production coverage. While Civitas exhibits a higher free cash flow to equity yield of 20% in 2026 (compared to a 10% median for peers at $60 per barrel WTI), its free cash flow to enterprise value (FCF/EV) yield of approximately 7% in 2026 is expected to align more closely with the industry median, primarily due to its elevated leverage.

Broader Context and Financial Implications

Despite the downgrade, Civitas Resources has demonstrated robust financial performance and profitability. According to InvestingPro data, the stock appears significantly undervalued, trading at 4.2 times earnings and 2.4 times EV/EBITDA, accompanied by a "GREAT" overall financial health score. The company boasts a 28% free cash flow yield.

Civitas has made debt reduction a strategic priority, targeting a net debt level of approximately $4.5 billion by year-end 2025. The company plans to allocate 50% of its free cash flow after base dividends towards debt reduction. Net debt, as of June 30, 2025, stood at $5,381 million, up from $4,949 million at the end of December 2024. Asset optimization efforts include $435 million in non-core DJ Basin asset sales, with proceeds earmarked for debt reduction.

The company has also implemented cost optimization initiatives, projecting $40 million in savings in 2025 and a $100 million run-rate in 2026. Furthermore, Civitas has hedged nearly 50% of its 2025 oil production at an average price of $68/barrel WTI and 40% of gas at $3.74/MMBtu to mitigate commodity price volatility. Liquidity remains strong, with $1.5 billion in cash and undrawn credit facilities and a $2.5 billion revolving credit facility at the end of Q1 2025.

Analyst Sentiment and Future Outlook

The consensus among analysts for Civitas Resources generally ranges from "Hold" to "Moderate Buy," reflecting a balanced perspective following the recent stock performance and re-evaluation. While some sources indicate a "Buy" or "Outperform" rating, Morgan Stanley's downgrade contributes to a more cautious near-term outlook.

Looking ahead, investors will closely monitor Civitas's progress on debt reduction, particularly its target of $4.5 billion by year-end 2025. The actual trajectory of share buybacks, following the anticipated reduction in Q4, will also be a key factor. The company's third-quarter oil output is expected to increase by 5% sequentially to about 157,000 barrels per day, primarily from the DJ Basin, which is 1% below consensus estimates but consistent with company guidance. The ongoing balance between aggressive capital returns and deleveraging will shape investor confidence in the coming quarters.