Vitesse Energy Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 2, 2023

Key Takeaways

  • Return of capital: Vitesse prioritizes paying a fixed cash dividend, having paid $0.50 per share in Q3 and declaring $0.50 for Q4, with near-term drilling deals and acquisitions aimed at supporting this dividend.
  • Q3 acquisitions and CapEx: Completed several near-term development transactions totaling ~$50 million of CapEx, primarily in H2 2023, expected to drive material production and cash flow increases in Q4 2023 and 2024.
  • Production and financial results: Average production in Q3 was ~11,000 BOE/d (67% oil) with adjusted EBITDA of $34.7 million and adjusted net income of $11.1 million, while GAAP net income showed a loss of $1.5 million.
  • Balance sheet and funding: Q3 cash CapEx and acquisition costs of $34.1 million were funded via operating cash flow and credit facility borrowings, increasing debt by $15 million to $56 million at quarter-end.
  • Hedging strategy: As of Q3, 50% of estimated Q4 2023 oil production and ~40% of full-year 2024 production are hedged at $79/barrel, with additional 2025 hedges at ~$75/barrel.
AI Generated. May Contain Errors.
Earnings Conference Call
Vitesse Energy Q3 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Greetings, and welcome to the Vitesse Energy Third Quarter 2023 Earnings Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Ben Messier, Director of Investor Relations and Business Development.

Operator

Thank you. You may begin.

Speaker 1

Good morning and thank you for joining. Today, we will be discussing Our financial and operating results for the Q3 of 2023, which we released yesterday after market close. You can access Our earnings release and presentation in the Investor Relations section of our website, we filed our Form 10 Q with the SEC yesterday. I'm here this morning with Vitess' Chairman and CEO, Bob Garrity our President Brian Cree and our CFO, Jimmy Henderson. Our agenda for today's call is as Bob will provide opening remarks on the quarter.

Speaker 1

After Bob, Brian will give you an operations update. Jimmy will review our 3rd quarter financial After the conclusion of our prepared remarks, the executive team will be available to answer any questions. Before we begin, let's cover our Safe Harbor language. Please be advised that our remarks today, including the answers to your questions, may include forward looking statements within the meaning of the Private Securities These forward looking statements are subject to the risks and uncertainties, some of which are beyond our control, That could cause actual results to be materially different from the expectations contemplated by these forward looking statements. Those risks Include, among others, matters that we have described in our earnings release and periodic filings.

Speaker 1

We disclaim any obligation to update these forward looking statements, except as may be required by applicable securities laws. During our conference call, we may discuss certain non GAAP financial measures, Reconciliations of these measures to the closest GAAP measures Bob Garrity?

Speaker 2

Thanks, Ben. Good morning, everybody. Thanks so much for being on our call. With Brian Kree and I today is Jimmy Henderson, who joined us 2 months ago and we are thrilled. He's Had a wonderful successful career as a CFO in the oil business, which is rare.

Speaker 2

And Jimmy not only brings a Deep skill set to Vitesse. He's a wonderful guy and just has fit in wonderfully. So Yes. It's really moved the needle in improving our capacity. So welcome, Jimmy.

Speaker 2

The TESS Is a return of capital company, not the first time you've heard that from me, won't be the last time you heard it from me. And payment of our fixed dividend is our top priority. We paid our 3rd quarter cash dividend of $0.50 Per share in September and earlier this week, the Board declared our 4th quarter cash dividend of $0.50 to be paid in December. We continue to look at a lot of near Term development drilling deals and larger asset acquisitions that continue to be supportive of our dividend. During the Q3, we're able to complete several impactful acquisitions that meet our very high return hurdles.

Speaker 2

As previously discussed, we buy whatever we can within our stringent Economic parameters and we're not limited by a budget. We are only limited by opportunity and economics. We put hedges in place to protect these returns when the opportunities present themselves. With that, I'm going to turn this over to Brian Cree, My longtime partner

Speaker 3

and Vice President and President of FITES. So Brian? Thanks. Good morning, everyone. As Bob mentioned, we acquired additional oil and gas interest through our near term drilling acquisition program during the Q3 That will result in approximately $50,000,000 of additional CapEx, primarily in the second half of twenty twenty three.

Speaker 3

These acquisitions exceeded our internal hurdle rates and are expected to provide material increases to production and cash flow In both Q4 'twenty three and across 2024. The wells associated with these acquisitions have either already started producing or are in the process of being turned on to production in the Q4, so the time between CapEx spend and revenue receipt will be shorter than our typical acquisition. Additionally, we continue to see consistent pace of development on our existing asset. The organic conversion of our inventory of undeveloped locations remains core to our business model. Since we like to provide insight into our pipeline of drilling and completion opportunities, as of September 30, 2023, We had 7.7 net wells that were either drilling or in the completing phase and another 10 net wells that had been permitted for development I want to touch a little bit on hedging.

Speaker 3

Over the last 2 months, we added to our oil hedges for the remainder of 2023, For all of twenty twenty four and for the first half of twenty twenty five, we now have approximately 50% Of our estimated Q4 2023 oil production and close to 40% of our estimated full year 2024 oil production Hedged at $79 per barrel. Thanks for your time. Now I'll turn it over to our new CFO, Jimmy Henderson, Welcome aboard, Jimmy. Great to have you here.

Speaker 4

Thanks, Brian, and thanks, Bob, for all the kind words. Certainly happy to be here and good morning everyone that's listening in today. It is great to be back and involved in Industry that I continue to feel is so important and provides a vital resource. It's been wonderful to reconnect with And the investment in the banking and research arenas as we continue to tell the exciting Vitesse story. I especially want to thank the VITAS team for making me feel welcome and helping me get up to speed since I joined.

Speaker 4

And lastly, congratulations to the Texas Rangers on an exciting win in the World Series last night. Now onto a quick review of the financial results for the quarter and our financial status. I'll assume you all can refer to our earnings release and our 10 Q, which were filed last For all the details on the quarterly and year to date results, so I won't bother repeating all the details that were included in those documents, But just to highlight a few items. As both Bob and Brian described, we've continued our return of capital program Through the dividend and strengthen our future cash flows with several acquisitions, which obviously supports the dividend, Both activities continue to be cornerstones of our strategy. As for the results in the quarter, Our production levels remain fairly consistent at just over 11,000 BOE per day with about 67% of that being oil.

Speaker 4

As we have previously reported, we expect the Q4 of this year to increase to 12,000 300 to 13,000 BOE per day with further increases in production next year in 2024, primarily due to the recent acquisitions that we announced. Likewise, adjusted EBITDA was flat sequentially At $34,700,000 and adjusted net income was $11,100,000 GAAP net income was a loss of $1,500,000 And you can see the reconciliation of those numbers in the press release that we filed last night. Cash CapEx and acquisition costs in the quarter were approximately $34,100,000 We funded this investment with operating cash flows and withdrawals on the credit facility. This resulted in outstanding debt increasing by $15,000,000 in the quarter, which put us at $56,000,000 drawn as of September 30. We do expect further outspend in Q4 as we fund the remaining CapEx and acquisition costs as we disclosed a couple of weeks ago.

Speaker 4

We'll continue to fund these costs as well as our dividend through operating cash flow and on our credit facility. With that, let me turn it over to the operator for any Q and A that we might have today. Thank you all.

Operator

Thank you. One moment please while we poll for questions. And our first question comes from the line From John White with ROTH Capital Partners, please proceed.

Speaker 5

Good morning and congratulations on the quarter and Congratulations to Mr. Henderson for his new position.

Speaker 4

Thanks, John. Appreciate it.

Speaker 5

You said your as you put out in your press release, you said acquisition activity Accelerated in the quarter. Do you want to provide some more details On those acquisitions, were they all producing properties and were they all in the Bakken?

Speaker 3

Thanks, John. This is Brian and I'll handle that. Yes, as we've always said, the acquisition pipeline is something that we've developed over the last 10 years, But it can be lumpy. And we were just fortunate to see several different transactions come together kind of toward the middle and latter part of the third quarter. And they weren't really producing assets, although what I would tell you is that because our near Development program is typically about buying AFEs or wells that are in the process of drilling.

Speaker 3

And that's really what the majority of these were. But there was a little bit of uniqueness to them in that several of these wells that we acquired were further along that drilling process. And We were really happy with the rates of return, especially given that the wells started to come online kind of toward the latter part of Quarter and more of them will come on in the Q4. So even though they were near term development acquisitions, They were just coming online faster than our typical acquisition would indicate.

Speaker 5

Thank you. And all of them in the Bakken?

Speaker 3

Yes. All of those were in the Williston Basin.

Speaker 5

Okay. Thank you. I'll pass it back to the operator.

Operator

Thank you. Our next question comes from the line of Jonathan Shafer with Northland Capital Markets. Please proceed.

Speaker 6

Hey, guys. Thanks for taking the questions. I want to start off by asking about natural gas price realizations. I know that natural gas is a very small part of the overall production for you guys. But just with how wide just how significant price swings have been over the last 12 months being 10x what they were this last quarter.

Speaker 6

When you take all that into account, like it can still be somewhat material to the top line even as a small piece of the Pictures. So I have to ask about realizations being $0.88 per Mcf in the quarter. I mean, I know you do it net of transportation expense. So that maybe makes it not like an apples to apples comparison Let's say like a peer or someone else producing in the basin. But I just want to understand kind of what drove that lower What would it maybe be if you treated if there's a way to compare it to someone who Doesn't report it, net of transportation expenses.

Speaker 6

Just trying to kind of wrap my mind around it and compare to what I've heard what I see elsewhere.

Speaker 4

Yes. Thanks for the question, Donovan. Good morning. Yes, so unfortunately, Practices vary in how you handle transportation as well as 2 stream versus 3 stream reporting. For us, we report 2 streams.

Speaker 4

I think one of the biggest, well, a couple of impacts in the 3rd quarter That reduced our realized price and one is that NGL prices were very low as Storage levels continue to be high coming out of the summer. That's certainly a seasonal thing and we expect to improve As we go through the winter, assuming that it does continue to get cold on the East Coast especially. So that should improve, certainly quarter over quarter here in 4th quarter, the other component is as you mentioned gathering transportation and downstream cost. We net that out of our price, not all producers do, some show that as a separate G and T price, But the way that we are paid, that's really just a part of the net revenue we receive at the well ahead. So that's how it's handled here.

Speaker 4

So that I'd have to make that adjustment as others might show it as a different line item in the income statement. The other way that affects our netback price is that a lot of those costs are fixed By the operator, so they have fixed fee versus like a percentage of proceeds type contract, which most people have gone to. And as prices of gas Or NGLs goes down, obviously that fixed fee becomes a higher percentage of the net price and so it has more of an impact at So hopefully that's helpful, but we're happy to follow-up with you If that doesn't get you where you need to be.

Speaker 6

Okay. That is that's very helpful. And then I want to ask about the hedge book additions just Between the release yesterday and then the update release with the recent Near term development acquisitions. So, I think the only if I'm My notes are correct. The only change to the hedge positions between those two Was really the addition of hedges in 2025.

Speaker 6

And it's not a huge quantity in terms of the yes, maybe Like 10% or something of the total volume at that point, but I'm guessing maybe it's sort of tied to The addition of these acquisitions, so you're sort of looking out and saying, okay, we underwrote things at a certain strip And then what can we hedge that same strip what can we Hedge that as compared to how we underwrote it. So I guess first, am I kind of thinking about it conceptually the right way or was it just an opportunistic To pick up some smaller volume of hedges in 'twenty five. And then how does that $25 sorry, dollars 75 Yes, swap price, how does that compare to what how the curve where strip prices were for that time period when you underwrote some of these.

Speaker 3

Thanks, Donovan. This is Brian. I'll take a crack at that. You had several questions in there. So, is it opportunistic?

Speaker 3

It's kind of a combination of both, right? I mean, we did see a nice run up of oil prices starting in September and into early October, shortly after we had made those acquisitions. And so it was a great opportunity for us to lock in prices associated with the expected production from those acquisitions at much higher prices than we had underwritten those acquisitions at. And that is part of the 2025 Hedges, but also keep in mind that historically, our company has liked to be closer to having hedges in place for approximately 2 years out. And so, it's just kind of part of our normal process of starting to lock in hedges.

Speaker 3

There's still a lot of backwardation in the market as you get out into 25, so we took advantage of an uplift that we saw over a couple of days and got above $75 in 20 25, so we pulled the trigger on that. I just want to touch on your comment about 'twenty three and 'twenty four. We actually did add quite a few hedges for 'twenty three and 'twenty four increasing our average price. I think at the end of the second quarter, we had hedges in place for 2024 That accounted for maybe about 20% of our expected production. Now we're hedged at closer to 40% of our And we increased that average price from $76, which is where we stood at the end of the And quarter up to a little bit over close to $79 So again, it's a combination of both opportunistic.

Speaker 3

When we see those prices go up, we'll take advantage of it. And I think from our hedge book, you can see that we kind of like to be in that Mid to upper 70s before we lock in hedges and that's kind of historically how we've handled it and my expectation is that's how we'll look at it on a go forward basis.

Speaker 6

Okay. And then lastly, just curious if you can comment on kind of The state of the M and A market, what if you're Assessing a lot of opportunities still, I guess you can comment both on Ground game or near term drilling, near term development as well as something larger or package type deals In both those kind of opportunity sets, have you seen directional changes or where you're seeing more Potential in one versus the other at this time or going forward, just kind of in general trends and what kind of The state of affairs are there and opportunity versus not, sometimes it's better to just set things up for a while.

Speaker 2

Yes, Donovan. Thanks for the question. This is Bob. We are seeing A lot of deal flow, both in the near term and in the larger asset class. It's possibly because the price of oil has been fairly stable, but this is the most This is the biggest deal flow we've seen in years.

Speaker 2

Now that said, that doesn't always correlate to us closing those deals. But it's great. There's a real nice smorgasbord of opportunities. About half the company is engaged in some form of reviewing and analyzing and closing deals. So, We're very busy.

Speaker 2

But again, can't promise that we're going to close those things. But at the end of the day, we are underwriters. So we're having a lot of fun.

Speaker 6

Yes. I'd actually prefer that you promise that you don't close On any of the ones that are coming at it from an economic standpoint.

Speaker 2

Right on.

Speaker 6

Okay. All right. Well, great. Thanks, guys. I'll follow-up if you have any other questions.

Speaker 2

Thanks for your support, Donovan. Thank you.

Operator

Thank you. Our next question comes from the line of Jeff Grant with Alliance Global Partners. Please proceed.

Speaker 7

Good morning, all. Thanks for the time. I was curious on the cost side of things, well cost specifically, just an update there in terms of what you guys Seeing what how does a leading edge JF maybe compare to this time last year, maybe first half of this year? And then Relatedly, what kind of costs are you guys baking into that 'twenty four guide? Thanks.

Speaker 3

Sure. Thanks, Jeff. This is Brian. I'll take a crack at that and let Bob add anything that he wants to add. But we've talked about this on most Our calls, we didn't see as much cost inflation in the Bakken as I think some of the other basins have seen over the last year, year and a But as we mentioned on our 2Q call, the difference between the Q1 and the Q2, we were starting to see a nice Small but nice trend back to lower AFEs.

Speaker 3

I don't know that I would say that that trend necessarily improved into the Q3, but I think it's been consistent. I think we started to see the price of oil go back up. Your drilling and completion costs are going to have some correlation to the price of oil, but I think we're happy with the AFEs that we've been receiving in terms of Where their costs are coming in, our operators are doing a good job. My sense is that sometimes it takes a while for us to get all the actual costs in. It's one The benefits of being a non operated working interest owner is you don't see the cost as quickly as the operators do.

Speaker 3

But the Trends that I think we're seeing is certainly the operators are doing a very good job of managing costs out there in the field. And I don't think we're seeing the inflation that we saw in 2022. I think that 2023 Q3 is kind of a continuation of the 2nd quarter.

Speaker 7

Got it. Great. Thank you. And for my follow-up, on the I guess Tangentially related to your own M and A aspirations, Hess is obviously one of your larger operators. There's going to be a changing of the guard there soon.

Speaker 7

Do you guys have an opinion on that positive, negative, non event as it relates to how it will impact the tests? And prospectively, just curious how you guys are Looking at opportunities underlying Hess acreage given that change?

Speaker 2

You must have been in our conference room the last week, Jeff, because it's been a big topic of conversation. We No Chevron for what they've done in the DJ, and we think that they're a very good operator. We are under Hess in a lot of wells. And we I can't predict If it's a good thing for us, Jeff, or a bad thing. But we do like Chevron And we got our head on a swivel.

Speaker 2

Usually when M and A like that happens, It's beneficial because the smaller assets do shuffle, but we haven't seen that yet. So We're looking out. We don't know yet.

Speaker 7

Yes. No, I know it's early. I thought I'd ask. So thanks for the time, guys. Appreciate it.

Speaker 2

Thank you,

Operator

Jeff. Thank you. Ladies and gentlemen, there are no further questions at this time. I'd like to turn the call back to management for closing remarks.

Speaker 2

Well, thanks everybody for your time. Ben does a terrific job in

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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