Vitesse Energy Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 1, 2023

There are 9 speakers on the call.

Operator

Greetings. Welcome to the Vitesse Energy Second 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.

Operator

I will now I'll turn the conference over to Ben Messier, Director of Investor Relations. 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 Q2 of 2023, which we released yesterday after market close. You can access our earnings release and presentation on our Investor Relations website and our Form 10 Q was filed with the SEC yesterday. I'm joined here this morning with Vitess' Chairman and CEO, Bob Garrity our President, Brian Cree and CFO, Dave Macosko. Our agenda for today's call is as follows.

Speaker 1

Bob will provide opening remarks on the quarter. After Bob, Brian will give you an update on operations and then Dave will review our Q2 2023 financial results. After the conclusion of our prepared remarks, the executive team will be available to answer 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 Litigation Reform Act.

Speaker 1

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 Those risks include, among others, matters that we have described in our earnings release and periodic filings. 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, including adjusted net income, adjusted EBITDA and free cash flow. Reconciliations of these measures to the closest GAAP measures can be found in the earnings release that we issued yesterday. Now, I will turn the call over to our Chairman and CEO, Bob Gary?

Speaker 2

Thanks, Ben, and welcome everyone to our 2nd quarter Q call. It's going to sound an awful lot like our Q1 Q call, which is what we intend to do. We are a dividend first Turn of capital company. To that, we paid a $0.50 dividend and we are has approved a second $0.50 Dividend. So as a dividend first company, a lot of our ability To pay that dividend, protect our dividend depends on our deal flow.

Speaker 2

And our deal flow in the second quarter was Excellent. We have very high economic hurdles and we were able to source a lot of capital Deals in that second quarter and we are very thankful about that. Remember, There is about a year plus or minus lag between CapEx and production. So, 1st and foremost, we are underwriters and our underwriting depends on the quality of our So I want to give a special shout out to our data scientists who have created and maintain our database which we call VLuminess. Amanda Bailey and Adam Woodson have done a Great job in creating that database, which is democratized over our entire organization.

Speaker 2

And what that means is that Land, accounting, engineering, finance and even management accesses our data continuously. We want to know exactly what's happening out in the field. We're in over 6,000 wells and we call those wells the kids in the class. So our ability to accurately underwrite our capital expenditures depends on that data. So I just want to thank you for jumping on the call.

Speaker 2

I am now going to turn the call over to our President, Brian Cree.

Speaker 3

Thanks, Bob, and good morning, everyone. I'll be providing a very brief update on our operations. I'm going to start off with our development pipeline. As of June 30, 2023, we had 8.5 net wells that were drilling, completing or that had been completing but not yet producing and another 11 net wells that had been permitted for development by our operators. Capital spending through the first half of twenty twenty three is on pace to beat the upper end of our yearly CapEx guidance as we spent $43,300,000 on development CapEx and acquisitions.

Speaker 3

As Bob mentioned, we are encouraged by the amount of well proposals and near term drilling acquisitions that have met or exceeded our hurdle rates so far this year. While average AFE costs increased less than 10% last year and during the Q1 of 2023, The average AFE cost decreased in Q2 2023, so that's a good trend for us. With the rig count remaining modest in the Williston, we just have not That's it. I'm going to turn this over to our CFO, Dave Macosko, to

Speaker 4

Thanks, Brian. Good morning to everyone on the call. I'll give a quick summary of our financial performance for the Q2 of 2023. Overall, our Q2 was much more typical of what we expect the company to look like going forward, Since our results weren't burdened with the one time spin related charges that we saw to income tax expense, stock comp expense and G and A expense And we took them in Q1. Our net income for the 2nd quarter was $9,600,000 and adjusted net income was $11,400,000 Our adjusted EBITDA was $34,800,000 which is down from $40,100,000 in Q1 as a result of lower commodity prices, primarily related to natural gas and NGLs.

Speaker 4

We generated 2nd quarter cash flow from operations of 39,000,000 and free cash flow of $16,100,000 We define free cash flow as cash flow from operations adjusted for working capital changes, less cash spent on drilling and completion CapEx. This free cash flow was used to pay our quarterly dividend, Reduce the balance drawn on our revolving credit facility by $4,000,000 and make $3,100,000 of attractive near term drilling acquisitions. We ended the quarter with $41,000,000 outstanding on our credit facility, while elected commitments remained at 170,000,000 with a borrowing base of $245,000,000 Our 2nd quarter production was up 16% From the Q2 of 2022 totaling 11,359 barrels of oil equivalent per day with oil representing 67% of our production and 94% of total revenue. Our year to date production was 11,441 BOE per day, against 67% oil. Total revenue, including the effects of our realized hedges, was $53,200,000 for the quarter.

Speaker 4

Lease operating expense in the Q2 increased a modest 3% compared to the Q1 of 2023 on a per BOE basis, which reflects quarterly variability related to workover activity. General and administrative expense for the Q2 of 2023 totaled $4,500,000 or $4.32 per BOE, a decrease of 59% on a per unit basis compared to the Q1 of 2023. This decrease was primarily due to lower one time related to the test spin off from Jefferies Financial Group, as I mentioned earlier. On the hedging front, We layered in additional oil swaps through Q1 2024 to take advantage of the increase in oil prices that occurred in April. With respect to our guidance, we are reaffirming our previously issued 2023 annual guidance.

Speaker 4

With that, I'll turn the call over to the operator for Q and A.

Operator

Thank Our first question is from Chris Baker with Evercore ISI. Please proceed.

Speaker 5

Hey, good morning. My first question is for Bob. Just on the ops update provided with the release, a good uptick in net Tivity wells to 8.5 in the second quarter and I think some good added detail just on the 3.5 net AFEs. I was hoping you may be able to help us just tie these figures back To this year's CapEx guide and then perhaps, Bob, as you kind of referenced earlier, any read throughs for how we should think about 20

Speaker 2

Yes. Chris, great questions. You can't imagine how much time our finance team sits in this room and models. So, your takeaway that we've had good activity in the second quarter is correct. We've seen a lot of deals that it clearly hit our hurdle or above.

Speaker 2

So, we don't know at this point, Chris, if that's going to continue in the Q3. Early indications are good. But again, we're non ops and we don't hit a budget. We We hit an economic hurdle. So we can't really give you a it's fair to ask about a read through about 2024, But we can't really give you any more biz on that, Chris.

Speaker 5

No, fair enough. I guess, The other question I had was just, obviously, given the diversified operator exposure, I think you kind of Mentioned this earlier around service cost deflation, but I was just curious what you guys are seeing in terms of, leading edge deflation on Through services just beyond I think what most have talked about is pretty visible consumable components coming down like steel etcetera.

Speaker 2

Chris, we didn't see a bump that much last year. We are seeing a decrease in costs Throughout the whole complex, steel spreads And the drilling costs. So, I can't really say it's a large trend. It's trending positively. I think over the course of time, we're strong believers in that capital will become more efficient and we'll get Similar production results with less money.

Speaker 2

So I think it's trending in that direction. I think part of that Is technology with fracs, part of that is just more efficiency. The structure of the Bakken is pretty well built out. So, no huge Deflation trend, but I think things are going in the right direction.

Speaker 5

That's great. And if I could just sneak one more in. Can you just maybe Talk about any of your sort of latest thoughts around larger scale acquisition front. It sounds like the smaller scale stuff is trending in a positive direction, which is great. Just in terms of the larger scale stuff, if there's any update, that would be great.

Speaker 5

Thanks.

Speaker 2

Yes, it's fair, Chris. We bid on A number of larger transactions, dollars 100,000,000 to $300,000,000 in the second quarter, we were not close. So, we look at everything. Take a look at our balance sheet and you can see the capacity that we have to make a Good size accretive acquisition. So we're looking.

Speaker 2

We'd love to do it. We haven't won one yet, Chris, but we're trying.

Operator

Our next question is from Lloyd Byrne with Jefferies. Please

Speaker 6

proceed. Hey, good morning, everyone. Just a couple of questions. I guess on the back of Chris's question, can you speak to capital efficiency you're seeing in the Bakken And just not deflation, but maybe our cost per foot basis, whether that's improving with technology? And then I'll ask a quick second question.

Speaker 2

Yes, you bet, Lloyd. Great question. Thanks. It's good to talk to you as well. So we have seen more 3 mile laterals and more refracs.

Speaker 2

We think that that is what the field is going to be in the future. It's up ticked a little bit more in the 2nd quarter then trend, but Brian Cree, I'm going to ask to elaborate on this.

Speaker 3

Yes. Good morning, Lloyd. So as Bob mentioned, yes, we've seen that increase in both 3 mile laterals and refracs Between what we saw in the Q1 and what we saw in the Q2 and that trend has continued from what we started See at the latter part of 2022. So again, that capital efficiency is what we think is going to drive Future results and we've been doing this since 2014 and the advancement of technology, especially in the fracs and now in the refracs It's something that has really changed our asset over time and we expect technology to continue to improve and that that and capital efficiency will continue to improve.

Speaker 2

Yes. Just to restate that, refracs were strong believers in the extraordinary economics around them. The 3 mile laterals are Pretty new and we don't have enough information to say that that's going to move the needle very much. So thanks for your question, Lloyd. Follow-up?

Speaker 6

Great. Yes. Maybe someone could just comment on kind of your Deferred taxes and how you see that progressing going forward? I know a lot of it was tied to the spin, but just kind of where you are there?

Speaker 2

I'm going to ask Dave Mancosco to answer that for you Lloyd.

Speaker 4

Okay. Good morning Lloyd. Yes, so we took the big charge in the Q1 From the change in corporate structure and so going forward, we obviously flush that big charge through income tax But going forward, we're looking at a tax rate somewhere in the 17% to 20% of our current net income as we go forward.

Speaker 6

Okay, perfect. Thank you, guys, and good job.

Speaker 2

Thanks, Lloyd.

Operator

Our next question is from Donovan Shafer with Northland Capital Markets. Please proceed.

Speaker 7

Hey, guys. Hey, hold on.

Speaker 2

Donovan, I need to interrupt you.

Speaker 7

Sure.

Speaker 2

Congratulations. Donovan is the father of young Sebastian, who I understand. His nickname is Sabe. So it's not Sabe. Sabe.

Speaker 2

Sabe. Okay. Well, congratulations Donovan and thanks for waking up for the call. So go for it.

Speaker 7

Yes. Yes. Thank you. Yes, I'm going to have to go do bottle service shortly after cleaning and proceeding. Thank you.

Speaker 7

Thank you very much. Yes, so congratulations on the quarter. I want to start with kind of, I guess, like a compound question where so the first one is, you're trending to To be above the high end of guidance on CapEx and in a lot of context like say you are building a factory or something, Being above guidance on CapEx is often seen negatively, but it sounds like in this case you're saying, well, This isn't being driven by inflation. And so it's actually a reflection of opportunities for us where we're seeing more things to pull the trigger on. So it's You're actually talking about this as a positive thing.

Speaker 7

I would just want to kind of feel like make sure I'm understanding that right. Is that a fair

Speaker 2

This is Bob. I'll start with it and I'll take it let Brian have. Look, Vitesse is a factory. We have built this machine to convert undeveloped Acreage and drilling opportunities into cash. At the end of the day, we return that cash to our equity owners Of whom management is a large chunk of.

Speaker 2

We get paid by that dividend. So the factory is a perfect Example, so the widgets that we buy have to be very economic. So when you see our CapEx going up, It's because we're seeing things that really makes the factory So your conclusion that if our CapEx Increases is a good thing is the right conclusion. It's exactly the way we see it. We don't want to just Buy stuff and ramp stuff through there.

Speaker 2

We could buy a lot more than we are doing. But when you see CapEx pop For us, that's a good thing. We are at the upper end of our range. But again, We're not changing the guidance,

Speaker 7

but deal flow is good. So then this is kind of the related part of that is, I think Chris, the first person asking questions, Ask the question about like 2024 growth. And I understand as a non op, you can like Kind of put the CapEx out there and sometimes I think of it as kind of laying the chips on the table. But you don't have necessarily control over the exact timing of when things will land there. So I appreciate that there is a challenge saying coming up with a number 1st day 2024 growth.

Speaker 7

But given that you are spending at this kind of a higher CapEx level, so like you're seeing the opportunities, And let's just sort of assume things hold steady. I mean, none of us has a crystal ball, but let's say Oil stays in kind of $80 ish plus or minus $5 or so. In that kind of a context or an environment with this kind of CapEx spending, when do you feel it would be like appropriate for us To kind of like bug you on growth or say, because you guys are you're newly public And then you've got the Q1 and the Q2. So I realize it's pretty myopic and shortsighted and I know These results can be lumpy. So it's not really fair to say, well, should we grow next quarter and should we grow the next quarter and should but there is a point where you have to say, well, It's been this many quarters.

Speaker 7

When should we bug you about it and say, see why aren't we seeing something? It's

Speaker 2

very fair. And I'm going to ask Brian Cree to elaborate on this. But But look, everything we do when we wake up in the morning is to protect that dividend. So, CapEx is very important if it's economic. So, Brian, you want to elaborate on that?

Speaker 3

Yes. Let me just So, Jonathan, I think your first conclusion was that CapEx is good. Bob handled that and I think that is absolutely the way that we look at it. But you also stated that CapEx is lumpy and the timing of production is lumpy. And so to really try to get to your question of when you can start bugging us, I would say, look, at the end of the Q3, if we have another good CapEx quarter, then we'll start looking at what that's going to mean toward 2024.

Speaker 3

So Let us get through another quarter. Let's see how CapEx looks and kind of what the trend looks like for the Q4 and then we'll likely comment on production for 2024.

Speaker 7

Okay. That's really helpful. That's actually very, very helpful. Okay. And then the last my last question back to this idea of kind of everything you guys is around protecting the dividend.

Speaker 7

And I know, the initial kind of going And the spin out from Jefferies, it was really given it being kind of a new story It was really nice to have, I think you had 50% of oil production hedged through 2024. I might not have the exact number there, but broadly speaking, the hedge position was pretty healthy through the end of 2024. And so you kind of look at the numbers and pretty much say, you know what, regardless of what commodity prices do, we can feel pretty darn Confident the dividend is protected through the end of 'twenty four. What is the do you have sort of decided on sort of a Philosophical approach going forward looking to 20 5, 20 26, will you do you plan to just kind of continue Hedging at about 50%, if the opportunities present themselves. So if you are able to Where prices are, if you can lock in a hedge out in 2024 or sorry, 2025, 26 that helps Secure that dividend, do you plan to take advantage of all that hedging?

Speaker 7

Or just how are you thinking about hedging when we get past 2024.

Speaker 3

So, Donovan, this is Brian and great question. Clearly, hedging is important to us to protect the dividend. We're a dividend paying company, capital return company. So we look for that hedging to help support that. At these prices, first, let me just talk about where we stand right now.

Speaker 3

We're not quite 50% hedged all the way 2024, we have more hedging in place in 2023 than in 2024. A lot of that has to do with the backwardation in the market, But we constantly look at our hedging. And as we get closer to 20252026, we absolutely expect To continue putting hedges in place at prices that we find attractive. And you'll see that in our 10 Q, we talk about the exact amount of hedges and where the prices are. We're hedged at around $78 for the rest of 2023 and above $76 in 20.24.

Speaker 3

So you can kind of see where we like to lock in prices and I would say that

Speaker 7

Okay. That makes sense. Okay. Thank you very much guys. Very helpful.

Speaker 7

I'll follow-up Offline with any other questions.

Speaker 2

Great. Congratulations again. We're really happy for you, Donna.

Speaker 7

Thank you.

Operator

Our next question is from Michael Swartz with Jefferies. Please proceed.

Speaker 2

Hi, Michael. Hey, guys.

Speaker 8

Congrats on the quarter. I had one question on the 3 mile laterals I want to So of the 97 gross AFEs you've got, how many have 3 mile laterals? And what operators are And then what is your average lateral length for your production in the Bakken? And when do you really expect To see the impact of these 3 milers across the board and adopted more broadly in the basin.

Speaker 3

So Michael, this is Brian. I'll give you some quick numbers on that. During the Q2, the number of 3 mile AFEs that we got in were more than double The first quarter, again, these things are lumpy. We're not sure that that will continue, but it seems like that is the trend that we are seeing from operators, Kraken, Cord, even Continental, Several of these operators are moving to try to do as many 3 mile laterals as they can at this point in time. And so, we've seen that increase, like I said, more than double from what we saw in the Q1.

Speaker 3

But it's still we still see more 2 mile laterals than we see 3 mile lateral.

Speaker 8

Got you. That's very helpful. Thank you.

Speaker 3

Thanks, Michael.

Operator

We have reached the end of our question and answer session. I would like to

Speaker 2

I want to thank everybody for being on the call. We look forward to Talking again in 3 months. If you have any questions, please contact Ben. So thanks everybody.

Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

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Earnings Conference Call
Vitesse Energy Q2 2023
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