Vital Energy, Inc. (NYSE:VTLE) Q1 2024 Earnings Call Transcript

Vital Energy, Inc. (NYSE:VTLE) Q1 2024 Earnings Call Transcript May 9, 2024

Vital Energy, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, ladies and gentlemen, and welcome to Vital Energy’s First Quarter 2024 Earnings Conference Call. My name is John and I will be your conference operator for today. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. As a reminder, this conference is being recorded for replay purposes. It is now my pleasure to introduce to you Mr. Ron Hagood, Vice President of Investor Relations for the company. Please go ahead.

Ron Hagood: Thank you, and good morning. Joining me today are Jason Pigott, President and Chief Executive Officer; Bryan Lemmerman, Executive Vice President and Chief Financial Officer; Katie Hill, Senior Vice President and Chief Operating Officer; as well as additional members of our management team. During today’s call, we will be making forward-looking statements. These statements, including those describing our beliefs, goals, expectations, forecasts and assumptions are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results may differ from these forward-looking statements for a variety of reasons, many of which are beyond our control. In addition, we’ll be making reference to non-GAAP financial measures.

Reconciliations to GAAP financial measures are included in the press release and presentation we issued yesterday afternoon. The press release and presentation can be accessed on our website at www.vitalenergy.com. I’ll now turn the call over to Jason Pigott, President and Chief Executive Officer.

Jason Pigott: Good morning and thank you for joining us today. First quarter results were solid as we achieved record production, exceeded adjusted free cash flow expectations, and delivered outstanding operational execution across our leasehold, again demonstrating our ability to create additional value on acquired acreage. We’ve integrated our 2023 acquisitions and we are working to optimize operations to lower capital, reduce operational costs and enhance productivity. We have already recognized significant gains on our properties versus what we underwrote, and we will continue to focus on creating additional value. As a company, we are highly focused on development that will both extend our inventory and reduce our breakevens.

I’d like to highlight three examples of ways that we are accomplishing this. To start, we recently completed a 20 well package of 15,000 foot wells in Western Glasscock on leases that we acquired in 2019 and 2021. Notably, seven of the 20 wells target the Wolfcamp C and D horizons, to which we did not assign value at the time of the acquisitions. The Wolfcamp C wells are our first modern test of this horizon in the area and are currently not included in our publicly stated inventory. The initial results are very encouraging with just a couple weeks of flowback. The entire package was brought online ahead of schedule and is a significant contributor to our production outperformance for the quarter. Next, from our Southern Delaware position, we’re observing strong production results from the assets we acquired.

Highlighted in our investor deck, the Teller wells are from the Forge acquisition and the Niedermeyer wells are from Tall City. The Teller wells Vital Energy’s first horseshoe shaped wells are designed to optimize productivity and reduce breakeven cost on smaller leases. These wells, paired with our high intensity completion techniques, are outperforming offsetting industry wells. Third, the success of the Teller wells gave us confidence to expand the use of this innovative design in the Midland Basin. In Upton County, we drilled three horseshoe wells averaging 13,900 feet of lateral length instead of six short lateral wells. This markedly improved our capital and operational efficiencies. More significantly, we expect to apply this concept to 84 short lateral wells that are in our public inventory, saving as much as $140 million in capital and reducing the average breakeven of these combined wells by $20 per barrel.

As a company, we’re pursuing multiple paths to reduce breakevens and extend inventory. We are improving productivity by extending lateral lengths, pumping high intensity completions, testing and proving up new horizons, implementing a wide array of new technologies, acquiring new assets, improving base operations and so much more. We’ve increased our average well productivity by 35% since 2019, and nearly 95% of our oil production comes from assets we acquired in the past five years. We have been consistent in our strategy to create value by building depth and quality of inventory, while also improving our financial structure and generating free cash flow. I’ll now turn the call over to Katie for an operational update.

Katie Hill: Thank you, Jason. First quarter production exceeded expectations, driven primarily by the outperformance of our twenty-well package in Western Glasscock and a three-well package in the Delaware Basin. Western Glasscock package was a full-DSU development consisting of 20 15,000-foot laterals targeting four horizons. This is the largest package Vital has ever developed and our team did an incredible job in safely executing ahead of schedule. In this package, completions operations spanned three months, utilized two crews and achieved a 10% efficiency improvement over our previous development in the area. On average, these wells began producing oil 19 days ahead of schedule. As of mid-April, all wells are producing with gross oil production from the package currently beating peak expectations by 15%.

We are particularly encouraged by the performance of the two Wolfcamp C wells drilled as productivity appraisal test. The early results are promising. Since our current public inventory does not include Wolfcamp C, positive outcomes here could significantly extend our inventory life and enhance its quality, leveraging organic appraisal within our existing footprint. The first quarter marked our first complete quarter managing the three assets we acquired last November. These assets are now fully integrated both operationally and administratively. When acquiring properties, we unlock value by decreasing well cost and enhancing productivity compared to prior operators. Since our initial acquisition in Southern Delaware in mid-year 2023, we’ve reduced the well cost from $12 million to $10.5 million for a 10,000-foot lateral by improving well design, enhancing operational efficiencies and leveraging lower service costs due to increased scale.

Moreover, the productivity of the two Delaware packages we’ve completed is approximately 45% higher than comparable industry wells adjacent to our acreage due to our optimized development, spacing and completion design. Of the two completed Delaware packages, one was acquired with the forge assets in mid-2023. They had drilled a two-well package of horseshoe wells in the Teller Unit that we subsequently completed and brought online. Between capital efficiency, completion design and development strategy, we are lowering breakevens on our Southern Delaware inventory by $5 to $10 a barrel. We have successfully transferred the horseshoe well design to our Midland position and have drilled three long lateral horseshoe wells in Upton County. This converted what would have been six 6,500 foot laterals into three extended laterals averaging close to 14,000 feet of lateral length per well.

We are currently completing these wells and the economics are extremely compelling. Development is less capitally intensive and more efficient, reducing expected break evens on the package to $45 per barrel. Preliminary impact to our total inventory converts 84 stated locations to 42 extended laterals, reducing break evens by an average of $20 a barrel. In addition to the inventory enhancement and capital efficiency work completed since close, our integration of the producing assets is also beating plan. In Q1 we exceeded production expectations averaging 124,700 BOE per day and 58,500 barrels of oil per day. We delivered 20 new wells ahead of schedule and anticipate bringing online roughly 60% of our planned 2024 wells by mid-year. Thanks to this accelerated schedule, we expect higher production rates in the first half of the year while maintaining our full year oil guidance of 55,000 to 59,000 barrels of oil per day.

We’ve already identified several opportunities to improve operating cost on our new Delaware position. In the first quarter, we spotted inefficiencies in the chemical usage program carried over from the preceding operators, along with outsized water production driven by improper well design and targeting. These two impacts caused higher operating costs in a limited area of our leasehold. We are temporarily shutting in the wells that are not meeting our profitability requirements, which will result in a reduction in both total and per unit LOE, starting in the second quarter. The shut in wells were forecasted to produce 400 net barrels of oil per day throughout the remainder of the year. This reduction in volume has been accounted for in our second quarter and reaffirmed annual production ranges.

Permanent solutions will be implemented that will further drive down LOE in the second half of the year, including expanding the chemical optimization program, using our consolidated operating footprint to centralize surface infrastructure and treating equipment, and further leveraging the shared water gathering system for new wells coming online. We are encouraged by the speed and effectiveness with which we’ve been able to integrate new assets and the first quarter results speak to the strength of our acquisition strategy. We are continuing to focus on opportunities to further improve both quality and quantity of available inventory, increase effectiveness of operating expenses and enhance free cash flow generation. I will now turn the call over to Bryan.

Bryan Lemmerman: Thank you, Katie. In the first quarter, we delivered solid financial results, generating cash flows from operating activities of $159 million and adjusted free cash flow of $43 million, driven by higher-than-expected production and lower capital investments. Lower capital in the first quarter was largely timing related and our full year guidance is unchanged at $750 million to $850 million. Continue to be focused on further strengthening our balance sheet, we made great progress on this front in the first quarter, executing two transactions in the bond market that extended maturities and redeemed higher rate debt to reduce interest expense. In March, we issued $800 million of senior unsecured notes at an interest rate of 7.875% compared to around 10% just six months prior.

Due to strong demand for the notes, we subsequently issued another $200 million at just under 7.7%. Utilize these proceeds of the issuance to fully redeem our 10.125% notes due 2028 and to redeem a portion of our 9.75% interest notes due 2030. These opportunistic moves will save us $11 million annually and we now have no term maturities until 2029. Additionally, as part of our regular semi-annual redetermination process for our RBL, our banks increased our elected commitment to $1.35 billion from $1.25 billion and we added an additional bank to the facility. We consistently use hedging to reduce commodity price volatility, ensure we can deliver strong returns with our drilling program and generate cash to reduce debt and reduce our leverage ratio.

Hedging is an integral part of delivering on this commitment. For the year, we are 97% hedged on our anticipated oil production at around $75 per barrel. This produces a very consistent cash flow profile, insulating us from risk associated with lower prices. Net debt to consolidated EBITDAX ratio is currently 1.13x. Our ratio rose slightly as a result of our new debt issuance and redemption of 2028 and 2030 notes, due to debt issuance cost and redeeming the notes at a premium to their par value. We have significantly improved our capital structure since mid-2023. Capital efficiency benefits from our successful integration of acquisitions are driving sustainable free cash flow generation. We’re focused on paying down debt, reducing interest expense, and targeting smart accretive acquisition that builds scale and strengthen our business.

Operator, please open the line for questions.

Operator: Thank you. We will now begin our question-and-answer session. [Operator Instructions] Thank you. The first question comes from the line of Neal Dingmann from Truist Securities. Please go ahead.

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