Vital Energy Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 7, 2024

There are 8 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to Vital Energy's, Inc. Third Quarter 2024 Earnings Conference Call. My name is Jericho, and I will be your operator for today. At this time, all participants are in listen only mode. We will be conducting question and answer session after the financial and operations report.

Operator

As a reminder, this conference is being recorded for replay purposes. It's now my pleasure to introduce Mr. Ron Heggett, 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, 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'll 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 yesterday afternoon. Press release and presentation can be accessed on our website at www.fidaleenergy.com. I'll now turn the call over to Jason Poggett, President and Chief Executive Officer.

Speaker 2

Good morning and thank you for joining us today. We are delighted to announce that Vital Energy has delivered exceptional results in the Q3 surpassing our expectations. Our recent strategic acquisitions particularly the transformative point acquisition have propelled us to new heights. We reached a new production record during the quarter and our cost reduction initiatives are significantly improving our cash flow. Before we take your questions today, I'll cover 4 key items.

Speaker 2

First, some quick highlights from the Q3. Importantly, recent results will increase our 4th quarter production outlook. Next, I'll provide additional information about our recent Point acquisition. This asset has exceeded expectations early on and provides us with a luxury of adding activity in a higher productivity area in 2025. Then I will discuss how our team is continuing to improve and extend our inventory.

Speaker 2

Lastly, I will share some early thoughts on our 2025 outlook. While we won't share full details until early next year, we expect to build on the strengths we've reinforced with our Q3 results. Now let's talk about the Q3. Our financial results surpassed expectations driven by higher than expected production, in line capital and a solid demonstration of our ability to lower operating cost over time on acquired assets. For the quarter, both standalone Vital Energy and the Point Energy assets delivered at the high end of production expectations combining to produce about 59,200 barrels of oil per day.

Speaker 2

Our oil production guidance for the quarter was 55,000 to 58,000 barrels of oil per day and did not include any volumes for Point. However, the team did a great job to close this transaction early giving us a boost for the quarter. If it weren't for some weather related flooding in Howard County, which caused approximately 6.50 barrels of oil per day to be shut in, our beat would have been almost 6% altogether. Help demonstrate why we are so excited about the Point transaction, we have a slide in today's deck with 2 charts showing Point production surpassing underwriting expectations for both base production and on a new ten well package. Additionally, these wells were completed with an optimized frac design on wider spacing than the previous operator paving the way for us to develop this asset at a significantly reduced cost compared to the prior operator.

Speaker 2

Lease operating expenses substantially improved during the quarter coming in at $8.78 per BOE below guidance of $8.95 per BOE, a 9% improvement over our 2nd quarter operating expense. These costs are inclusive of higher LOE related to the point assets. Excluding point, LOE would have been just over $8.70 per BOE. In the Q3, we delivered on our planned reduction in operating costs through several targeted initiatives aimed at improving efficiency and optimizing resource use. Key projects included optimizing our workover fleet and transitioning several rigs to 24 hour operations, which reduced downtime and improved cost efficiency.

Speaker 2

We also implemented changes to our H2S chemical processing and introduced chemical improvements across both the Midland and Delaware basins, reducing material costs and improving product quality. Throughout the quarter, we made strategic labor and staffing adjustments to better align with the long term based operational needs. We continue to use our cross base and scale to support a cost effective power strategy and have locked in a significant portion of our power cost through hedging to reduce volatility and derisk future cost pressure. These combined efforts have delivered substantial cost savings, enhancing our overall profitability and positioning us for sustained operational efficiency. Capital investments for standalone Vital Energy were $236,000,000 for the quarter within guidance of $215,000,000 to $240,000,000 The early close of point resulted in $6,000,000 of additional capital in the quarter, resulting in a total capital expenditure of $242,000,000 for the quarter.

Speaker 2

The momentum from production outperformance and cost savings will carry into the Q4. We have increased the midpoint of our oil production guidance by 1500 barrels of oil per day and 3,000 BOE per day of total production, while reiterating our previous capital guidance. Since April of 2023, we have completed six acquisitions and have fundamentally changed our Permian Basin footprint, growing our Delaware position to almost 90,000 acres. The Point acquisition materially enhanced the quality of our Delaware Basin assets and complements our overall Permian position. Our portfolio today has more optionality and flexibility to shift capital to our highest return projects than ever before.

Speaker 2

Team has done an incredible job of adding inventory organically over the last couple of years through innovating on well designs like horseshoe shaped wells, reducing our cost structure and testing new formations. Through these efforts, we have added over 300 locations representing just under 3.5 years of inventory. We have a large number of wells that sit just above our $50 breakeven cutoff. As little as a 5% improvement in the cost of these wells would shift 155 wells into the sub $50 breakeven range extending our runway of sub $50 breakeven wells to just over 6 years. 5 times the number of wells we had available to us in January of 2023.

Speaker 2

Our operations team has already reduced costs in the Delaware Basin from $1200 per foot to $10.40 per foot since we entered the basin. 2025 expectation is $9.25 per foot with longer laterals and faster drill times next year. We have delivered at a rapid rate of change and we see plenty of opportunities to continue this trend. In addition to adds via cost cutting measures, new formations like the Barnett could also lengthen our inventory runway. Crane County Barnett well reached a peak rate over 1,000 barrels of oil per day.

Speaker 2

These initial results are very encouraging. Our 2nd Crane County well is being completed right now with a smaller more efficient completion design. The relative performance of these 2 wells will help triangulate the optimal design for the future. The rapid increase in inventory length and quality that we have delivered on over the last few years allows us to take a pause on M and A and put more emphasis on operational excellence instead of asset transitions. Going forward, we will use nearly all of our free cash flow for debt reduction, which will provide the greatest positive impact for our shareholders.

Speaker 2

We anticipate that at current commodity prices, we should be able to generate more than $400,000,000 of adjusted free cash flow over the next 5 quarters or through the end of 2025. Our strong hedge position over this timeframe supports our cash flows and our forecast for lower debt and maintaining leverage. Looking forward, we expect to hold oil production flat with our original 4Q guidance range midpoint of 66,500 barrels of oil per day with a capital range of around $900,000,000 below consensus expectations of around $925,000,000 for 2025. And as efficiencies continue to improve, our intention is to maintain flat production with improving capital efficiency and we believe we can maintain this trend for the next 5 years. To conclude my comments for this morning, we beat expectations for the Q3.

Speaker 2

We are raising guidance for the Q4. Point is a great asset for us. Our operating efficiencies are progressing on all fronts resulting in lower expected capital spending for 2025. Well quality and operational efficiencies should allow us to maintain production for the next 5 years with flat to decreasing capital costs. Operator, we are now ready for questions.

Operator

And we will now begin the question and answer session. Our first question comes from Hill Dingmann from Tuohy Securities. Your line is now open.

Speaker 3

Good morning, guys. My first question is just on your cost reductions on Slide 6, where you showed the D and C per foot target $9.25 mix. I'm just wondering how much of this improvement is driven by the lateral length efficiency you mentioned? And maybe could you give details about other upside within that well cost that you're experiencing it sort of notable on that slide?

Speaker 4

Yes, Neal. I mean, we're really excited about all the progress we've made in the Delaware Basin. In both basins, really the team has not had a lot of swings at bat, but have been improving very quickly over time. But I'll turn it over to Katie to give you some more color on the future.

Speaker 5

Good morning, Neil. Like Jason said, we're really excited about that $925,000,000 a foot. It reflects a lot of great work across both the operations team and our land team and getting a position put together that allows us to drill extended laterals next year. Like Jason said, we've already reduced cost in the basin by about 20% since we entered a little over a year ago. And I think something that's really worth noting is that it's really less than 15 wells that we've had the opportunity to take from spud to turn line.

Speaker 5

And we've been able to deliver that dollar per foot reduction with a small program so far. So excited about the opportunity going forward. That $925,000,000 reflects both the operating efficiencies that we've already implemented and are executing on today plus an additional work that we have line of sight on being able to implement over the next few months. And then also the ability to drill extended laterals next year that's helping to drive that cost down even further. One of the areas that we're really pleased with progress is looking at drilling cycle times.

Speaker 5

When we first started and looked at underwriting back at the end of 2023, the expectations were 25 to 30 day wells from spud to rig release. And we're consistently delivering much lower than that today closer to 20 days a well and have even set a record at 16 days per well. And that trend is really consistent across all phases. So just great work by the execution team and still some opportunity in front of us.

Speaker 3

Great, great details, Katy. And then maybe just my follow-up, I think it's still so important on just your operations is looking at 25 regional operations. Can you remind me maybe broadly, how much ops will be in Dell versus Midland then within the Dell? Will most of that be the point? And I assume so.

Speaker 3

And if so, what type of potential LOE benefit or sort of trajectory could we get if you continued in that direction?

Speaker 5

The Delaware is a great opportunity for us, particularly with the Point asset that we're working to integrate today. You can see on Slide 5, early outperformance on the Point wells. So really excited about what that can do to our portfolio. We're going to take capital to that asset almost immediately. We're shifting activity there towards the end of this year and certainly really heavily investing next year.

Speaker 5

About 75% of our 2025 capital will be in the Delaware, 25% in the Midland. Of that 75% about half will be on the point asset and then half will be on other Delaware assets that we put together over the last year or so. I think the LOE question is a great one and an important one for us to address. We had a great quarter. Really pleased with the $878,000,000 that we were able to report in Q3.

Speaker 5

We executed on a lot of the projects that we've talked about delivering in 20 24 that helped to drive cost down across both basins. And a lot of those opportunities are absolutely applicable to point. We've left Q4 at $9.35 per BOE really just to reflect that we're in a period of asset integration and onboarding. That is not our expected long term run rate. A lot of the work that again we've done in 2024 in both Midland and Delaware we can take to point and we're starting to do that already.

Speaker 5

So I'd expect to exit this year around 9.35%. We'll be driving cost down across 2025 and expect by end of next year to be back into the high 8%. So just really pleased with the opportunity to be investing great asset. It does a lot for our portfolio.

Speaker 3

Great detail. I look forward to that, Elouise. Thanks, Kenny.

Operator

Our next question comes from Zach Barnum with JPMorgan. Your line is now open.

Speaker 6

Hey guys, thanks for taking my question. First, you commented on the Barnett wells a little bit earlier. Can you talk a little bit about the cost there and how those will compete with your wells in the Delaware Midland Basin?

Speaker 4

We're really excited about the Barnett, Zach. It's still also very early. I wouldn't take our cost that we for these wells to be what we plan on for the future. We did these about as inefficiently as you can. We drilled 4 wells spaced across our footprint both on our HBP and in the new acreage.

Speaker 4

And when you're drilling a well in a new formation and completing it as one well instead of a zipper frac like those costs aren't as relative. And it's still early as I mentioned we pumped a very large frac with a lot of sand on it. On the first one my message to the team was like we're going to see exactly how much these wells can deliver and it can deliver 1,000 barrels a day or more. The next phase for us is test a smaller frac on it which should be much cheaper and see does that does the performance come down or not. We're kind of doing the same thing that we saw in point where they pump big fracs then you step it down to smaller fracs.

Speaker 4

So I think it's too it's just still too early. These wells are new. They haven't hit we don't have a good estimate on final decline rates. They're very different production profile than we see from other assets. These wells kind of get slowly better every day versus our Wolfcamp A wells.

Speaker 4

They start off at high peaks and decline. So it's just it's real it's early, but we're really excited about it. For me when I think about what we've done in Crane, this is the first time that we've gone out there and had an idea for a new concept in a zone that's been tested, but not tested where we were on acreage and have a really good initial production test on it. We started this 2 years ago and then we're doing it in parallel with all of our acquisitions and that's setting up the future that we have today where we don't need M and A to add wells and we can add it organically. So we'll give you some more color in the future, but it's still really early, but results are very positive so far.

Speaker 6

Thanks, Jason. And then my follow-up, I wanted to ask on the Cape Bear pad that you had in the slide deck. Can you give us a little detail on how that pad was developed? I knew you said it was drilled and completed by point, but with the vital design, was that at 4 wells per section? And is that kind of how you expect to develop those assets going forward?

Speaker 6

And maybe comment on which zones that pad developed as well? Thanks.

Speaker 5

Thanks Zach. This is a 10 well pad that was being developed during the transition. Point drilled these at a little bit tighter spacing than our long term plans. These are 5 wells per section. It's across the A and the B.

Speaker 5

We did pump our completion design on all the wells. This is reflective of what our go forward completion looks like. But we expect to up space and plan to up space on the remainder of the development going forward.

Speaker 6

Thanks a lot.

Operator

Our next question comes from Noah Hulness with Bank of America. Your line is now open.

Speaker 7

Good morning, Paul. I just wanted to start off here on hedges. Just given that the strip for oil in the second half of twenty twenty five and twenty twenty six is below $70 How should we think about you all adding hedges kind of as we move through this year and into next year?

Speaker 4

We've been very consistent with our hedges. We again, we tend to be 75% hedged out into the future. What we've done I think the team has done a great job of lately here is just playing volatility. And when we see it, we will add hedges in that $75 range. We added them when we had this conflict in the Middle East, this flare up in the Middle East.

Speaker 4

So that's kind of where we are. As we get closer to the end of next year, we may add those. But for right now, we're 2 thirds hedged for 25. I think we're 88% hedged or so for the end of the rest of this year. So that's what we've been doing.

Speaker 4

We make 24,000,000 barrels per year, dollars 5 a barrel is over $100,000,000 impact to our free cash flow. So we want to give opportunity for oil prices to rise, but also protect cash flows as we get closer to year end and we're setting up the 20 6 budget.

Speaker 7

That makes sense. And then could you guys give any maybe additional color on what you all may be planning to try to lower D and C costs? And just noting the impact of a 5% reduction, how that adds to your inventory. Is there anything, any operational details you guys could give us on maybe what you're looking to implement?

Speaker 5

We've already implemented really good work on cycle time and that kind of sped the turn in line efficiency that's been accomplished. What is still left to do and the team is constantly questioning and I would say learning from repeat experiences in the Delaware, but what's still left to do is really working through every service cost making sure that we're either at or better than market and frankly working through with our partners that we're implementing best practices both in the Midland and the Delaware. You noted that the continued 5% improvement. When I think about the work that we've been able to deliver on in just a year on a pretty small subset of wells, I have a lot of confidence in our ability to continue to drive cost down past that 9.25 a foot. The 5% sensitivity that we show on inventory is really a question of when and not if and I think it's a really fair goal for us over the next couple of years.

Speaker 5

So excited to continue to be developing in the Delaware. We have a fair amount of capital allocation there next year. So there'll be a good opportunity for us to continue to drive costs down.

Operator

Sounds good guys. Thank you.

Speaker 5

Thank you.

Operator

There are no further questions. I'll hand the call over to Mr. Ron Hinckwood.

Speaker 4

Well, thank you all for joining us today. As we've discussed and you can hear, we are very excited about this quarter and what the future has in store for us. Now as we're slowed down the M and A for the future, you're going to see this operational excellence showing up every quarter, allowing us to again take our free cash flow and pay down our debt which is going to be a great return for our shareholders in the future. So we look forward to talking to you on the next call. Thank you.

Powered by Quartr
Earnings Conference Call
Vital Energy Q3 2024
00:00 / 00:00