Vital Energy Q1 2023 Earnings Report

Vital Energy EPS Results

• Actual EPS: $4.50
• Consensus EPS: $4.69
• Beat/Miss: Missed by -$0.19
• One Year Ago EPS: $5.17

Vital Energy Revenue Results

• Actual Revenue: $332.51 million
• Expected Revenue: $328.67 million
• Beat/Miss: Beat by +$3.84 million
• YoY Revenue Growth: -37.50%

Vital Energy Announcement Details

• Quarter: Q1 2023
• Date: 5/9/2023
• Time: After Market Closes
• Conference Call Date: Wednesday, May 10, 2023
• Conference Call Time: 8:30AM ET

Vital Energy (NYSE:VTLE), an independent energy company, engages in the acquisition, exploration, and development of oil and natural gas properties in the Permian Basin of West Texas, the United States. The company was formerly known as Laredo Petroleum, Inc. and changed its name to Vital Energy, Inc. in January 2023. Vital Energy, Inc. was founded in 2006 and is headquartered in Tulsa, Oklahoma.

Vital Energy Q1 2023 Earnings Call Transcript

[Operator]

Ladies and gentlemen, and welcome to Vital Energy Incorporated First Quarter 2023 Earnings Conference Call. My name is Abby, and I will be your operator for today. At this time, all participants are in a listen only mode. We will be conducting a question and answer session after the financial and operations report. As a reminder, this conference is being recorded for replay purposes.

[Operator]

And 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 Limmerman, 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, Forecast and assumptions are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. 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 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. Vinyl Energy had outstanding results for the Q1. Our wells in Howard County are delivering consistent production, frac hit impacts have been mitigated and we are seeing positive impacts Our multi year implementation of cutting edge digital technologies that are improving both base production and our new wells. Today, 74% of our wells are operated by submersible pumps.

[Speaker 2]

We're using the combination of larger pumps and artificial intelligence To optimize our wells on an hourly basis and believe this differentiates us in the market. Capital also came in at the low end of guidance driven by better than anticipated from our eFleet, a short frac holiday due to freezing weather and a cessation of some of the inflationary pressures we experienced last year. While our program was front loaded with 2 frac crews this year, we nearly achieved cash flow neutrality for the quarter and expect to have positive free cash flow The remainder of the year now that the additional completions crew is released. We recently closed our Driftwood acquisition continuing our run of disciplined accretive acquisitions To build scale and add to our 8 years of high quality inventory, we are active on the new acreage with our first four well package currently being completed in Upton County. As we have executed on our strategy, we have created value by moving rigs to these new areas, growing production and testing new zones that have increased our inventory.

[Speaker 2]

89% of our production now comes from the areas we acquired over the last 4 years. I'm also very proud to highlight our 20 These results represent a tremendous achievement for the organization. These efforts resulted in achieving our 2025 This achievement sets us up well to advance our more aggressive 2,030 goal to reduce the combination of both scope 1 and 2 emissions to 10,000 metric tons of CO2 per BOE. Vital Energy has the right strategy to create long term value for our shareholders. We are executing extremely well today, exercising capital discipline to profitably develop our high quality inventory in a sustainable manner.

[Speaker 2]

We are focused on generating free cash flow, reducing leverage, building scale through accretive acquisitions and continuing to lower our emissions. I'll now pass the call over to Katie Hill for operational highlights.

[Speaker 3]

Thank you, Jason. We executed very well in the Q1. Total production was 8% higher than our guidance midpoint and oil production was about 12% above midpoint. This was driven by several factors including new wells reaching peak production faster than anticipated, lower downtime related to offset completion activity And better production uptime across base and new wells. These positive drivers are the result of initiatives aimed at increasing operational efficiency And the application of advanced digital solutions to our production operations.

[Speaker 3]

For example, we have created specialized teams that focus on optimizing artificial lift artificial lift and compression operations, which allows us to proactively reduce associated downtime. We are now able to remotely adjust artificial lift set This culture of technological innovations has supported a 15% increase And gas lift run time and a 4% increase in Simmersville pump run time directly impacting base production performance and efficiency. Another significant contributor to recent production results has been our program in Howard County to accelerate dewatering of new wells. By upsizing equipment and working with our partners to upgrade the water system, we are able to achieve higher peak oil production rates. In addition, larger pumps and wells impacted by offset 2 quarters through a proactive winterization program.

[Speaker 3]

Our operational standards during winter months, including proactive fluid management ahead of colder temperatures, Dramatically limited freeze off and associated production downtime. In addition to outperforming production expectations, we continue to gain efficiencies in our completion operations. In the Q1, we converted our primary completion crew to an electric fleet. We successfully implemented the new process, Maintaining cycle time efficiencies and bringing online 2 new well packages ahead of schedule. As a result of this performance, We now plan to turn in line an additional 4 wells late this year while remaining at the midpoint of our full year capital range.

[Speaker 3]

Lease operating expenses on a BOE basis were lower than anticipated this quarter. While variable production expenses increased with higher water production and disposal, LOE per BOE was diluted by maintaining fixed costs in an increasing production environment. We believe these savings will hold average unit LOE At about $7.75 per BOE for the remainder of the year. As Jason mentioned, we achieved our 2025 targets for greenhouse gas intensity and methane intensity in These reductions were primarily driven by the application of continuous emission monitoring technology, the retrofit of facilities with non venting pneumatics Enhanced Detection Program. In 2023, we are expanding our continuous emissions monitoring to cover approximately 70% of our gross operated oil production, And we maintain our commitment to regularly inspecting every operated site.

[Speaker 3]

Additional pneumatic conversions and of our field operations, including active drilling rigs and our electric frac fleet will even further reduce emissions. Similarly, we are making progress on reducing flaring associated with our operations. In 2022, we reduced routine flaring 42% from our 2019 base Fine. And expect to lower this further in 2023 as we work towards our target of eliminating routine flaring by 2025. This team has delivered a great Q1, continuing our operational track record and advancing the deployment of new technology across the field.

[Speaker 3]

I'll now hand the call over to Brian for a financial update.

[Speaker 4]

Thank you, Katie. Vital Energy's excellent financial results in the first Quarter were driven by operational success coupled with disciplined investments. We were essentially free cash flow breakeven in the Q1, Much better than anticipated at the beginning of the year due to the production gains Katie mentioned and lower than expected capital investments. The remainder of the year, we expect to be free cash flow positive. Determining factors will be production, which has been strong to date Capital, which we have a high degree of confidence in today and commodity price.

[Speaker 4]

We will use the free cash flow generated by the business to reduce debt at current commodity prices And direct some towards return of cash to shareholders if commodity prices rise significantly. Most expenses were in line to lower than forecasted Other than G and A expenses, excluding LTIP and transaction expenses, which were $3.02 per BOE, Higher than our guidance of $2.40 per BOE. Summary drivers were one time expenses associated with the timing Accounting for the 2022 inflationary retention bonus paid out last year, 1st quarter weighting of benefits And accruals related to both the 20222023 compensation plans. We expect G and A excluding LTIP and transaction expenses to average around $2.50 per BOE For the balance of the year, which is in line with historical levels. Vital Energy is off to a great start in 2023, Executing well both operationally and financially.

[Speaker 4]

As we generate free cash flow through the end of the year, we will remain focused on reducing debt And maintaining strong liquidity. Lastly, the strength of our capital structure was recognized by our bank group during our spring redetermination Our RBL borrowing base and commitments were reaffirmed. With that, I will turn it over to the operator for questions. Thank

[Operator]

And we will pause for just a moment to compile the Q and A roster. We will take our first question from Derrick Whitfield with Stifel. Your line is open.

[Speaker 5]

Thanks. Good morning all and congrats on a solid quarter.

[Speaker 6]

Good morning, Derek.

[Speaker 5]

For my first question, I wanted to focus on your base and new well performance. With 2 very strong quarters in the book, There appears to be a firm re rate in place on your operational performance. Perhaps separating the 2, could you help Framed the degree your base is outperforming your expectations and separately if your new well outperformance Is driving higher EURs or simply just the acceleration of the production response?

[Speaker 6]

I'll let Katie kind of answer the first part of that.

[Speaker 3]

Good morning, Derek. This is Katie. I think when we think about our base production A lot of that's being driven by the application of technology that we've been working on over the last couple of years. I think we're starting to realize those Gain particularly in areas where we've used electric submersible pumps as our primary lift type. We're seeing a lot of that in Howard County.

[Speaker 3]

So with faster dewatering wells that have been hit by frac, which is primarily base wells, but also with some of the new wells, including The wedge that you mentioned, as we think about new well performance, I'll try to turn that back over to Jason, but we're in the middle of remaining Quite a few of our wells online for the year. So we have about half of our new wells for 2023 are coming online in Q2 And we'll be excited to see the performance of those over the next few weeks.

[Speaker 6]

Yes. And I'd say again for the performance we're back to So the core of Howard County, so we have a high confidence in the wells that are being brought online. Again, they are cleaning up faster due to technology. And I also mentioned we 74% of our production is on ESP. That's why we highlight that when we get Up to 4% more run time out of those, those are real volumes that kind of start to flow through the system.

[Speaker 6]

What's great about the technology is They're more like an annuity, right? They're always there once we've reduced the downtime. So we're excited about the technology we put in place. It's been 4 years in the making to get us to this point and I can't underscore the buy in it takes from the field and the cultural change required to get where we are today.

[Speaker 5]

It's great, Jason. And as my follow-up, I wanted to shift over to the capital side and the gains you're experiencing in capital efficiency that's Allowing you to raise the Till count for the year without raising the midpoint of CapEx. How much of the improvement is self help versus market? Would it be safe to assume the market contribution is only what you have clear line of sight to at the moment?

[Speaker 3]

So on our capital plan for the year, I think we're benefiting a little bit from both. We deployed the electric frac in Q1 of this year starting in early January and have been able to maintain efficiency from end of 2022 and are starting to actually improve cycle time, Which is allowing us to pull in additional wells towards the end of the year. That acceleration of activity is keeping us around The midpoint of guidance, but we'll bring again 4 wells in addition to the full year plan. We're also benefiting from a little bit More competitive market pricing than what was in expectation. We have planned on a 4% end of 22 into 2023 inflation and the market is experiencing a little bit below that, so we're benefiting from both.

[Speaker 6]

Yes. I'd say 2, again, the Q1 performance was really good. Our spot through is not as efficient as our eFleet can be. And so now that we're just on the e We're picking up almost a stage a day. So that's one of the things that's pulling the Till count forward.

[Operator]

And I will now turn the call back to Ron Haywood for closing remarks.

[Speaker 4]

Well, thank you

[Operator]

And ladies and gentlemen, this concludes today's conference call and we thank you for your participation. You may now disconnect.