Vital Energy Q3 2023 Earnings Call Transcript

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November 3, 2023

There are 7 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to Vital Energies Inc. 3rd Quarter 2023 Earnings Conference Call. My name is Desiree, and I will be your operator for today. At this time, all participants are in listen only mode. We will be conducting a question and answer session after financial and operations report.

Operator

As a reminder, this Conference is being recorded for replay purposes. It is now my pleasure to introduce Mr. Ron Hagood, Vice President, Investor Relations. You may proceed, sir.

Speaker 1

Thank you and good morning. Joining me today are Jason Pigott, President and Chief Executive Officer Brian Lumberman, Senior Vice President and Chief Financial Officer Katie Hill, Vice President, Operations 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.

Speaker 1

In addition, we will be making reference to non GAAP financial measures. Reconciliations to GAAP financial measures are included in the press release and presentation we issued last night describing our financial and operating results. 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.

Speaker 2

Thanks, Ron. Good morning, everyone, and thank you for joining us today. Our results in the Q3 were outstanding and were a continuation of our exceptional execution throughout the year. We are delivering on all aspects of our strategy. In the Q3, we announced 3 acquisitions making a total of 5 for the year.

Speaker 2

These acquisitions increase scale, are accretive to free cash and add high value inventory. We generated $91,000,000 of free cash flow and also achieved company record production levels. We continue to demonstrate capital efficiency improvements coming in below guidance on capital investments and reducing our leverage ratio. We have successfully integrated the Driftwood and Forge properties we acquired earlier this year and are completing wells on those properties that are outperforming What the previous operators achieved. Additionally, we are making progress upgrading operations to our standards and seeing opportunities for synergies, Future cost reductions and base production enhancement.

Speaker 2

As we close out 2023, we have high confidence in our ability on the plan for 2024 that we communicated in September. We have a proven track record of integrating and creating value through acquisitions by applying our operational oil production. Free cash flow will be allocated to reduce absolute debt and decrease our leverage ratio to about 1.0 times by the end of 2024. Today, we also released our 2023 sustainability report and our inaugural climate, risk and resilience report, updating the company's progress and performance on sustainability related matters. This is the company's 4th sustainability report and the first is Vital Energy.

Speaker 2

In these reports, you will see that we, 1, achieved 2 of our 4 2025 environmental targets 3 years ahead of schedule 2nd, have reduced Scope 1 greenhouse gas emissions by 59% and methane emissions by 87% both from the 2019 baseline levels. 3rd, earn Trustwell's AAA low methane rating, the 1st company to achieve this rating. Vital Energy is now stronger than it's ever been. Our scale, inventory depth, free cash flow yield and balance sheet strength position us to build sustainable value in 2024 and beyond. I will now turn the call over to Katie for additional details on our strong operational performance Our success integrating the Driftwood and Forge acquisitions.

Speaker 3

Thank you, Jason. Today, I'm excited to share details about our Successful integration of the Driftwood and Forge properties, including how we are driving down operating costs, improving capital efficiency and increasing production. I will also address our increased 4th quarter and full year guidance. To start, I'd like to compliment and congratulate The entire organization for the work they are doing to integrate these assets, along with the 2 assets still in progress. Everybody is energized and going above and beyond to make these acquisitions successful.

Speaker 3

We have a track record of rapidly onboarding and finding creative ways to capture synergies to enhance our return. Our Driftwood and Forage deals are no exception. From a development perspective on Forge, we have now executed on all phases of operations, drilling new packages, completing acquired ducts And managing new turn in lines. Development planning process has been successful and the operational results have been extremely encouraging. Oil production from these wells is outperforming historical results from the previous operator by nearly 30%, and we have already reduced well cost by 10% through excellent execution work from our drilling and completion team.

Speaker 3

It is a similar story on the Driftwood asset. We have completed the 4 DUCs that were acquired from the previous We are seeing gains through the application of our frac design and first artificial lift, which has resulted in oil production from these wells outperforming previous results 7%. We will soon drill the 1st Vital Energy design wells and we'll work to identify significant cost reductions and efficiencies just like we have on the Forage asset. We also deployed necessary hardware to begin applying our production technology platform And we look to see optimization results from that effort over the next 6 months. Operationally, we are implementing our best practices And I've already optimized routes for lease operators.

Speaker 3

Our team is now handling an average of 30 wells per operator versus 7 to 15 for the previous owners. In addition to a faster deployment of the Vital Energy operating platform, this also allows for a meaningful impact on lease operating expenses when scaled across assets. Approximately 45% of base production on the forge assets is produced by ESP. We are currently building out data infrastructure in the field To be able to incorporate these wells onto our digital platform and we see the potential for the same 4% increase in run time that we've experienced on our base production in the Midland Basin. Turning to service costs, we have consistently outperformed our capital expenditure guidance this year in part due to our supply chain group.

Speaker 3

They did great work keeping us ahead of some of the big inflationary pressures observed last year by the industry and we are seeing deflation in certain areas this year. OCTG or tubular goods in particular, we tend to buy out about 6 to 9 months to meet our tubular needs. This kept us from hitting the extreme price peaks last year, but it also muted the positive deflationary impact this year. Today, we are seeing an approximate 20% reduction in our current OCTG cost when compared to last year's average. For Simulation Services, about 3 quarters of our cost for 2024 are locked in.

Speaker 3

One place we saw some benefits was in contracting of our second completions where we saw a 30% decrease in pricing since earlier this year. These savings are significant and have been factored into our $750,000,000 to $850,000,000 budget range for 2024. On the production front, we updated our Q4 total And oil production guidance to reflect strong recent performance across the asset base and earlier than estimated closing dates for all three acquisitions. 4th quarter capital guidance is also lower than what we communicated in September, again for adjustments related to timing and capital being reflected in purchase price adjustments. We also increased our full year production outlook to incorporate the outperformance in 3rd quarter, Higher production expectations in the Q4 and the earlier closing dates.

Speaker 3

In closing, our execution teams are continuing to deliver high performance. I'll now turn the call over to Brian.

Speaker 4

Thank you, Katie. Kennel Energy has made substantial progress in 2023, Significantly strengthening our overall capital structure, generating sustainable free cash flow and furthering our ability to grow through future accretive transactions. We announced 5 transactions this year totaling $1,700,000,000 3 of which have closed with the other 2 expected to close in early November. These acquisitions grow scale and facilitate deleveraging as we remain disciplined in our spending to generate free cash flow to pay down debt. We had a thoughtful approach to how we finance these transactions using a balanced split of debt and equity.

Speaker 4

When combined with our recent public debt and equity issuances, this has resulted in a simple, easy to understand balance sheet that provides us Upon closing of all transactions, the discharge of the 2025 notes and the conversion of Henry's preferred stock to common stock, We will have no debt maturities until 2027, more than $1,000,000,000 of liquidity and a simple capital structure of common stock, Secured credit facility and unsecured notes. We are laser focused on generating free cash flow to reduce absolute debt and interest expense. We have hedged about 90% of our expected 2024 oil production at prices we feel are well above the long term average price of crude. We are well positioned to reduce interest costs even after we pay down the RBL balance since we have $700,000,000 of unsecured notes that are currently callable. We expect to generate approximately $425,000,000 in free cash flow over the next 15 months and are targeting a leverage ratio of 1.0x or less by year end 2024.

Speaker 4

I will now turn the call back to Jason for some final comments.

Speaker 2

In closing, I want to thank all the Vital Energy team for their efforts to integrate and acquire 5 assets this year. Combined with our operational outperformance,

Operator

We have one question comes from the line of Derrick Whitefield with Stifel. Your line is open.

Speaker 5

Thanks and good morning all. Congrats on another solid quarter.

Speaker 2

Good morning, Derek.

Speaker 5

For my first question, I want to focus on your 2024 outlook with the understanding that you're reiterating your previous output metrics. Could you set light on activity expectations between basins in the shape of your production profile throughout the year?

Speaker 2

Yes. For the guidance for next year, again, we've really it's not really Changed at this point. I think one of the things the team is really working on is optimizing development between the two basins and I think there's You've seen the outperformance on the new assets that we highlighted. So again, I think there's going to be opportunities there in the future, but we're working through it. For us, the Key thing is getting these transactions closed.

Speaker 2

Again, we closed Maple this week. We should be closing on Tall City and Henry relatively soon. So we're very And once we've got those closed, we'll continue to optimize the profile for next year. I'll turn it over to Kyle. He can give you a little bit of guidance kind of on The shape of the curve, again, as a reminder, we do have this big package coming on Western Glasscock, but I'll turn it over to him for that.

Speaker 6

Yes. So as you can see in our materials, the investment opportunity in the Delaware side of the basin is very compelling. And so as we integrate these assets and we optimize around that, we are certainly kind of looking there and figuring out how we can deploy more capital to that area. But As Jason said, we'll come out with kind of a full update on where we plan to be when we come out in February of 2024. Now that we have essentially diversified asset base we're going to invest across both the Delaware and the Permian and the Midland side of the basin.

Speaker 6

We're seeing a flatter oil profile than we have in the past. As we've talked about, we have this large 20 well coke Hoffman package that's coming online In 1Q of 'twenty four, it's going to ultimately peak in 2Q of 'twenty four. And so ultimately, we kind of view 2Q and 3Q as the peak in 'twenty four, But ultimately a flatter profile than we've seen in past years.

Speaker 5

That's one

Speaker 2

of the benefits of scale is again we had when you got 2 rigs running there's more volatility in the production We have 4 rigs running to 5 rigs. And that's something that we're excited about as we achieve scale as less volatility in the production profile.

Speaker 5

That's great. And then with the benefit of an additional quarter of experience in the Delaware in your first completions, Could I ask you to share your broad thoughts on areas of upside relative to your initial assessments? And then more broadly or more specifically for the quarter, I should say, could you speak to some of the drivers of your initial well outperformance versus the legacy wells?

Speaker 3

Good morning, Derek. This is Katie. We've had a really strong start over the last couple of months with the forge asset in the Delaware. We've already achieved a 10% reduction with the 1st few months under our belt. So really excited to see our ability to continue to find capital efficiencies.

Speaker 3

I think The fact that we have a more stable program, we're able to use that scale and gain some efficiency on the services side. We've been able to go to market this quarter as we planned 2024 and already have a lot of the services for next year under contract. So really excited to be able to apply that program in the Delaware. I think we also see a lot of opportunity with the digital platform. We've seen success on the Midland Basin in achieving about a 4% improvement in uptime on ESPs, about a 15% improvement in uptime on compression and a lot of that technology will upgrade application in the Delaware as well.

Speaker 3

That's probably a mid-twenty four as we think about getting hardware deployed first and then building sort of the software pieces on top of that, but we're excited to get these assets closed Here in the next couple of weeks and go from there.

Speaker 6

Derek, I think I also heard you ask a question about slide 8, essentially our successful Integration of recent acquisitions looking at the profiles of production of the wells that we've kind of been involved with since taking over the assets versus the legacy I think what you can see there is a combination of for those wells that we've designed to completion and pumped to completion, We've definitely hit those with high proppant intensity, high fluid intensity with very tight cluster spacing. We We believe that that has a big impact on well results and we think that we're seeing that here. The other thing is our really our operations team and our artificial With strategy, we have an aggressive drawdown profile and strategies that we employ on these wells. We've seen it work for us in 2023 in Howard County and we're also seeing it work for us here on these new assets. We think that also contributes to this outperformance that we're seeing on Slide 8.

Operator

There are no further questions at this time. Mr. Hagood, I turn the call back over to you.

Speaker 1

Well, thank you for joining us this morning. We appreciate your interest in Vital Energy and this concludes our call.

Operator

This concludes today's conference call. You may now disconnect.

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Vital Energy Q3 2023
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