Vital Energy Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2024

There are 14 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to Vital Energy's First Quarter 2024 Earnings Conference Call. My name is John, and I will be your conference operator for today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. It is now my pleasure to introduce today to Mr.

Operator

Ron Hagood, Vice President of Investor Relations for the company. Please go ahead.

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. The press release and presentation can be accessed on our website

Speaker 2

atwww.vitalenergy.com.

Speaker 1

I'll now turn the call over to Jason Pigott, President and Chief Executive Officer.

Speaker 3

Good morning and thank you for joining us today. 1st quarter results were solid as we achieved record production, exceeded adjusted free cash flow expectations and delivered outstanding operational execution across our leasehold, again demonstrating our ability to create additional value on acquired acreage. We've integrated our 20 23 acquisitions and we are working to optimize operations to lower capital, reduce operational costs and enhance productivity. We have already recognized significant gains on our properties versus what we underwrote and we will continue to focus on creating additional value. As a company, we are highly focused on development that will both extend our inventory and reduce our breakevens.

Speaker 4

I'd like

Speaker 3

to highlight three examples of ways that we are accomplishing this. To start, we recently completed a 20 well package of 15,000 foot wells in Western Glasscock on leases that we acquired in 2019 2021. Notably, 7 of the 20 wells target the Wolfcamp C and D horizons to which we did not assign value at the time of the acquisitions. The Wolfcamp C wells are our 1st modern test of this horizon in the area and are currently not included in our publicly stated inventory. The initial results are very encouraging with just a couple of weeks of flowback.

Speaker 3

The entire package was brought online ahead of schedule and is a significant contributor to our production outperformance for the quarter. Next, from our Southern Delaware position, we're observing strong production results from the assets we acquired. Highlighted in our investor deck, the Teller wells are from the Forge acquisition and the Needham Meyer wells are from Tall City. The Teller wells, Vitals Energy's first horseshoe shaped wells, are designed to optimize productivity and reduce breakeven cost on smaller leases. These wells paired with our high intensity completion techniques outperforming offsetting industry wells.

Speaker 3

3rd, the success of the Tellawherls gave us confidence to expand the use of this innovative design in the Midland Basin. In Upton County, we drilled 3 horseshoe wells averaging 13,900 feet of lateral length instead of 6 short lateral wells. This markedly improved our capital and operational efficiencies. More significantly, we expect to apply this concept to 84 short lateral wells that are in our public inventory, saving as much as $140,000,000 in capital and reducing the average breakeven of these combined wells by $20 per barrel. As a company, we're pursuing multiple paths to reduce breakevens and extend inventory.

Speaker 3

We are improving productivity by extending lateral lengths, pumping high intensity completions, testing improving up new horizons, implementing a wide array of new technologies, acquiring new assets, improving base operations and so much more. We've increased our average well productivity by 35% since 19 and nearly 95% of our oil production comes from assets we acquired in the past 5 years. We've been consistent in our strategy to create value by building depth and quality of inventory, while also improving our financial structure and generating free cash flow. We'll now turn the call over to Katie for an operational update.

Speaker 5

Thank you, Jason. 1st quarter production exceeded expectations driven primarily by the outperformance of our 20 well package in Western Glasscock and a 3 well package in the Delaware Basin. Western Glasscock package was a full DSU development consisting of 2015,000 foot laterals targeting 4 Horizon. This is the largest package Vital has ever developed and our team did an incredible job safely executing ahead of schedule. This package completions operations spanned 3 months, utilized 2 crews and achieved a 10% efficiency improvement over our previous development in the area.

Speaker 5

These wells began producing oil 19 days ahead of schedule. As of mid April, all wells are producing with gross oil production from the package currently beating peak expectations by 15%. We are particularly encouraged by the performance of the 2 Wolfcamp C wells drilled as productivity appraisal test. The early results are promising. Since our current public inventory does not include Wolfcamp C, positive outcomes here could extend our inventory life and enhance its quality, leveraging organic appraisal within our existing footprint.

Speaker 5

The Q1 marked our 1st complete quarter managing the 3 assets we acquired last November. These assets are now fully integrated both operationally and administratively. When acquiring properties, we unlock value by decreasing well cost and enhancing productivity compared to prior operators. Since our initial acquisition in Southern Delaware in mid year 2023, we've reduced the well cost from 12,000,000 dollars to $10,500,000 for a 10,000 foot lateral by improving well design, enhancing operational efficiencies and leveraging lower service costs due to increased scale. Moreover, the productivity of the 2 Delaware packages we've completed is approximately 45% higher than comparable industry wells adjacent to our acreage due to our optimized development spacing and completion design.

Speaker 5

Of the 2 completed Delaware packages, one was acquired with the forge assets in mid-twenty 23. They had drilled a 2 well package of horseshoe wells in the teller unit that we subsequently completed and brought online. Between capital efficiency, completion design and development strategy, we are lowering breakevens on our Southern Delaware inventory by $5 to $10 a barrel. We have successfully transferred the horseshoe well design to our Midland position and have drilled 3 long lateral horseshoe wells in Upton County. This converted what would have been 6,600 foot laterals into 3 extended laterals averaging close to 14,000 feet of lateral length per well.

Speaker 5

We are currently completing these wells and the economics are extremely compelling. Development is less capital intensive and more efficient, reducing expected breakevens on the package of $45 per barrel. Preliminary impact to our total inventory converts 84 stated locations to 42 extended laterals reducing breakeven by an average of $20 a barrel. In addition to the inventory enhancement and capital efficiency work completed since close, our integration of the producing assets is also beating plan. In Q1, we exceeded production expectations averaging 124,700 BOE per day 58,500 barrels of oil per day.

Speaker 5

We delivered 20 new wells ahead of schedule and anticipate bringing online roughly 60% of our planned 2024 wells by mid year. Thanks to this accelerated schedule, we expect higher production rates in the first half of the year while maintaining our full year oil guidance of 55,000 to 59,000 barrels of oil per day. We've already identified several opportunities to improve operating cost on our new Delaware position. In the Q1, we spotted inefficiencies in the chemical usage program carried over from the preceding operators along with outsized water production driven by improper well design and targeting. These two impacts caused higher operating costs in a limited area of our leasehold.

Speaker 5

We are temporarily shutting in the wells that are not meeting our profitability requirements, which will result in a reduction in both total and per unit LOE starting in the second quarter. The shut in wells were forecasted to produce 400 net barrels of oil per day throughout the remainder of the year. This reduction in volume has been accounted for in our Q2 and reaffirmed annual production ranges. Permanent solutions will be implemented that will further drive down LOE in the second half of the year, including expanding the chemical optimization program, using our consolidated operating footprint to centralize surface infrastructure and treating equipment and further leveraging the shared water gathering system for new wells coming online. We're encouraged by the speed and effectiveness with which we've been able to integrate new assets and the Q1 results speak to the strength of our acquisition strategy.

Speaker 5

We are continuing to focus on opportunities to further improve both quality and quantity of available inventory, increase effectiveness of operating expenses and enhance free cash flow generation. I'll now turn the call over to Brian.

Speaker 6

Thank you, Katie. In the Q1, we delivered solid financial results, generating cash flows from operating activities of $159,000,000 and adjusted free cash flow of $43,000,000 driven by higher than expected production and lower capital investments. Lower capital in the Q1 was largely timing related and our full year guidance is unchanged at $750,000,000 to $850,000,000 We continue to be focused on further strengthening our balance sheet. We made great progress on this front in the Q1 executing 2 transactions in the bond market that extended maturities and redeemed higher rate debt to reduce interest expense. In March, we issued $800,000,000 of seniors unsecured notes at an interest rate of 7.875 percent compared to around 10% just 6 months prior.

Speaker 6

Due to strong demand for the notes, we subsequently issued another 200,000,000 dollars at just under 7.7 percent. Utilize these proceeds of the issuance to fully redeem our 10.125 percent notes due 2028 and to redeem a portion of our 9.75 percent interest notes due 2,030. These opportunistic moves will save us $11,000,000 annually and we now have no term maturities until 2029. Additionally, as part of our regular semiannual redetermination process for our RBL, our banks increased our elected commitment to $1,350,000,000 from $1,250,000,000 and we added an additional bank to the facility. Consistently use hedging to reduce commodity price volatility, ensure we can deliver strong returns with our drilling program and generate cash to reduce debt and reduce our leverage ratio.

Speaker 6

Hedging is an integral part of delivering on this commitment. For the year, we are 97% hedged on our anticipated oil production at around $75 per barrel. This produces a very consistent cash flow profile, insulating us from risk associated with lower prices. Net debt to consolidated EBITDAX ratio is currently 1.13 times. Our ratio rose slightly as a result of our new debt issuance and redemption of 2028 and 2,030 notes due to debt issuance cost and redeeming the notes at a premium to their par value.

Speaker 6

We have significantly improved our capital structure since mid-twenty 23. Capital efficiency benefits from our successful integration of acquisitions are driving sustainable free cash flow generation. We're focused on paying down debt, reducing interest expense and targeting smart accretive acquisition that builds scale and strengthen our

Operator

Thank you. We will now begin our question and answer session.

Speaker 7

Jason, my first question maybe for you, Katie, on Slide 7 on the latest presentation. Specifically, I like on that slide where you talk about the optimized development, you highlight the spacing, completion design, all these things that have seen improved results. I'm just wondering, could you talk about now what how has that changed? And what is now that you consider the most effective type of spacing and completion both in the Midland and Delaware versus, let's say, even last year?

Speaker 5

Good morning, Neil. This is Katie. There's a few pieces of this that we're pretty excited about. I think the first is that we've up space compared to some of the previous development plans. You can see in the productivity results that that's really well supported.

Speaker 5

The other piece of the Delaware story is that we've been able to drive down capital costs really effectively in the 1st 6 to 9 months of operating. So we reduced well costs for a 10,000 foot lateral by about 15% already and together between that and the up spacing and certainly having a really strong profitability impact on the Delaware inventory. We also are continuing to test some of the completion design in the area and I think that we'll be able see results of that across 2024 that will influence the 2025 plan as well, but promising results so far from the Delaware acreage.

Speaker 7

No, that's great to hear. And then by segment go ahead, Jason.

Speaker 3

I think you also had Midland in your question. I think for Midland, we're just part of what we're working through right now is just the co development. We've talked about these new zones both last quarter and quarter. As Katy mentioned in her commentary, we have the wine rack for the Western Glasscock development. There's a new zone in there.

Speaker 3

The C that is a new test for us that wasn't underwritten. So when we think about Midland, we're really working through how do we co develop these new zones that we're finding with the existing inventory that we have. And so that's something that we're going to continue to optimize into 2020 about those additional zones?

Speaker 7

Yes. I mean we've talked about the inventory about those additional zones?

Speaker 3

Yes. I mean we talked about some last quarter and then the C zones again they look really good, but they have just 2 weeks of production. It's the first test with this kind of new higher intensity design. So and they're very, very promising and those C zones are one of the contributors to our outperformance of that Western Glasscock package.

Speaker 7

Okay. And then just lastly on capital allocation, Jason for you or Brian, we show in our estimates that the free cash flow continues to ramp very nicely, especially second half this year. Will that almost entire focus continue to be debt repayment? Or could you talk about, I mean, are there acquisitions you're already seeing that you would

Speaker 6

Sure. Sure. This is Brian. I would say absent any acquisition opportunities, it will definitely go towards debt pay down. On the M and A front, it's been a slow first half of the year, but there are numerous packages coming from operators, consolidation operators, etcetera, in the back half of the year.

Speaker 6

So we've got our eyes looking at that stuff and we'll be focused on it. So that will be somewhat dependent upon what packages come out, how we see those fitting into our portfolio and whether or not they're accretive to our business. But we're definitely looking at those things. But in the absence of any of that, we'll be continuing to pay down debt.

Speaker 7

That's a take on the detail. We're trying to

Speaker 3

sorry, Neal. What we're trying to highlight with this quarter is the impact of the acquisitions we've done in the past and what they're doing for us now. We are Katie and team are getting more out of these wells via the new completion techniques. We're reducing capital cost. We're finding new zones.

Speaker 3

And so we still think that that is a great use of capital for us when we find the deal that works and fits in our portfolio and expect to see several things kind of come in the market the next few months.

Speaker 7

Look forward to that guys. Thank you.

Operator

Thanks. The next question comes from the line of Zach Parham from JPMorgan. Please go ahead.

Speaker 2

Thanks for taking my questions. First, could you talk a little bit more about the opportunity set on the Horseshoe wells? You talked about the breakeven on those wells being reduced at $20 per barrel. Going forward, how do you think about those wells slotting into your future inventory plans or future development plans? Do those get moved forward?

Speaker 2

Just trying to think

Speaker 3

about how

Speaker 2

we should think about you developing those going in the future?

Speaker 7

How's that? Thanks for the question. This is Kyle Kopiner. So I think ultimately we think about this, these U-turn wells as another tool in our toolbox that allows us to strategically unlock acreage that perhaps wasn't available to us before. In this case, you can see that development could have been 6,000 foot laterals, which ultimately is not the most capital efficient way to develop our ability to drill these as almost 14,000 foot laterals with this horseshoe shaped design really drives a ton of capital efficiency into the program.

Speaker 7

And as you mentioned, the breakeven is dropping by $20 a barrel is really incredible. The team is looking at where do we deploy this opportunity or this tool in our toolbox going forward. We already have wells towards the back end of this year and early next year that we're planning on drilling as Horseshoe laterals in the Delaware Basin. So it's something that we're going to put to work right away.

Speaker 3

I'd say too, we've got these wells that we have improved the economics on. We don't talk about wells that aren't in our inventory that this technology will now move or have the ability to move into our inventory in the future. So it's both a win for reducing cost or breakevens on wells in our inventory and then creating new inventory that we haven't counted before.

Speaker 2

Thanks. And then Jason, maybe following up on some of your earlier comments. You talked about early success of those Wolfcamp C wells and I know it's early on. But if the Wolfcamp C does prove to be successful on that glasscock pad, what's the potential impact to inventory? And maybe could you remind us how much inventory you've already booked in the Wolfcamp D and the spacing that you've assumed for that inventory versus what you drilled on this latest Glasscock pad?

Speaker 7

Zach, this is Kyle again. So to your answer on the Wolfcamp C, we think it could unlock up to 70 locations over there in our Western Glasscock acreage. So it's obviously a big add for us. Like Jason said, we're very encouraged by what we see so far, but we're only just a few weeks into our flowback period. On the Wolfcamp D, we did book our locations there at 5 wells per section, which is what we drilled this 20 well package at.

Speaker 7

The results so far again have been encouraging. It's early on. These wells both at Wolfcamp C and D had a lot of pressure during drill out and in fact free float of 5.5 casing to start for a number of weeks before we ultimately put them on ESP. So strong bottom hole pressure, strong results so far. We're encouraged with what we see.

Speaker 2

Thanks. Really appreciate the color.

Speaker 3

Thanks, Zach.

Operator

The next question comes from the line of Derrick Whitfield from Stifel. Please go ahead.

Speaker 8

Good morning all and congrats on a strong quarter and operational update.

Operator

Thanks, Derrick.

Speaker 8

Leaning in on the 20 well package in Western Glasgow, could you speak to the actions that led to the faster than expected oil cut and how you've accounted for the production response in your Q2 guide? It's clearly inflecting higher shown on Page 6, but expected to roll over as the chart indicates.

Speaker 5

Good morning, Derek. I think there's a couple of pieces here to hit on. So the first is, there's really strong execution by the team across all phases. This is the largest package that we've developed at Vital and really excited by the team's ability to deliver at our faster than planned cycle times. So we started drilling on this package mid year last year.

Speaker 5

We were completing really Q4 of last year. And across all the teams, the handover between disciplines was better than planned. We were able to get the wells online earlier. And then really to speak to Kyle's point earlier, really good performance on the C and D helped support cutting oil before planned. So there's a couple of pieces of both day 1 being sooner than planned and then and getting to oil cut sooner as well that supported the Q1 outperformance.

Speaker 5

In terms of how that influences the full year, we are not reforecasting yet this package until the wells start to turn over. It's really just too soon. There's enough with the C and D test that we want to get better data support before we start to build that in. I think that the key part is it has accelerated volume from later in the year and so we now expect the first half of the year to be a heavier weighting from a volume standpoint on our dailies.

Speaker 8

Terrific. And Katy, perhaps staying with you, just on the higher LOE expenses, could you elaborate on your near and medium term objectives that you would like to implement to lower drive the LOE lower?

Speaker 5

You bet. So LOE in Q1 I think is a reflection of the team getting these assets integrated and really quickly trying to understand where there's some operating cost efficiencies. The 2 that so far we're tackling and making progress on in Q2 is around chemical costs and around saltwater disposal costs in the Delaware. So there's a small subset of wells that have effectively flat water production with declining oil, so an increasing water cut over time. This seem to have turned over early in Q1 and so we've had some opportunity for us to shut in and make sure that we're only producing profitable wells.

Speaker 5

Those came from one of the assets that we bought late last year and were drilled across some lineaments in the area. I think we've got good subsurface control that that would not be our development plan, but is now from a producing well set something that we're managing on the LOE side. For chemicals, I think I'm really encouraged by the opportunity that we have in front of us this year. The way that these assets were previously operated, there really wasn't much consolidation or shared costs and infrastructure support from a treating standpoint. So the high H2F area in the Delaware, we're continuing to focus on how do we improve the efficiency of our chemical program, how do we reduce the costs associated with it and then how do we better leverage our scale with these assets that are right bolt on to each other to more effectively treat and get everything to sales.

Speaker 3

Terrific. Great update guys.

Speaker 5

Thanks, Eric. Thanks, Eric.

Operator

The next question comes from the line of Tim Rezvan from KeyBanc Capital Markets. Please go ahead.

Speaker 4

Good morning, folks, and thank you for taking my question.

Speaker 9

Good morning, Tim.

Speaker 4

I wanted to ask, I don't know if this is more for Katie or Jason, but can you provide an update on where you stand with base production optimization on the recently acquired assets? And I know it takes some time to get all the tech in place and work to optimize production. I know that's sort of a critical part of the value proposition. So just any color on that now that you have a full quarter under your belt?

Speaker 5

We're continuing to evolve our base optimization tools in the Midland. So I think there's been a great expansion of that into Southern Midland as we picked up the driftwood and some of the Henry acreage. That has really been focused on ESP wells and we're starting to transition that over to the Delaware. At this stage, I would frame it as we've completed a lot of the technical expertise and sort of support from the Midland team. They've expanded over into the Delaware.

Speaker 5

They're leading a lot of our Delaware operations. And so I think we're taking advantage of a lot of the knowledge and the technical ability from our group. We are not yet in a spot that we've fully deployed any of the hardware that would support some of the machine learning and AI tools that we've talked about before. That will really take most of 2024 to be able to effectively complete across the Delaware side. So I think there's quite a bit of opportunity still in leveraging our base optimization toolkit.

Speaker 4

Okay. That's great. That's great. And then just as a follow-up, some Midland Basin peers over the last couple of years have been reporting really strong game results. You've seen them in Martin County and farther north.

Speaker 4

Where is is that something that's on your radar as you look to kind of fully develop the rest of your Midland inventory? Just kind of curious what your thoughts are on that interval. Thank you.

Speaker 7

This is Kyle again. So the Dean has been a great interval for us up in our Howard County acreage as we developed up there. Essentially Dean sits between the Lower Spraberry and the Wolfcamp A. And so there were times where we would target the Dean explosively and other times where we would essentially hit the boundaries between the Dean and the Wolfcamp A or the Dean and Lower Spraberry. We know that Dean was a huge contributor to the outperformance we saw in the Tower County assets.

Speaker 7

So we took a full advantage of it where it was available to us. And then as you've seen in other parts of the basin on other acquisitions that we purchased, we are always looking for upside zones that we can test and appraise and add inventory to. We've demonstrated that in Howard County, in Western Glasscock and South Upton and on the Delaware. It's a part of our acquisition and value unlocking model.

Speaker 4

Okay. Thank you.

Operator

The next question comes from the line of Han Wen Chang from Wells Fargo. Please go ahead.

Speaker 9

Thanks for taking my questions. I want to follow-up on the development of the Horseshoe wells and the potential upside to inventory and lowering your breakevens. Are there any specific areas or producing zones in the Midland Basin or the Delaware Basin that could disproportionately benefit from it? Thank you.

Speaker 7

When we look at the opportunity set across the assets, we probably see a 2 thirds weighting to the Midland Basin side just in terms of our footprint and having a greater opportunity set because of the size of our footprint on the Midland side. But what we're really excited about is that we have now demonstrated that this opportunity can be done on the Delaware side and the Midland side, which really unlocks the opportunity for us across our portfolio.

Speaker 3

Yes, I don't think it's so much basin weighted as your acreage footprint weighted in this where is a zone set of wells trapped because you've got development on either side. But that could be again an opportunity for us as we're looking to do bolt ons and things like that as we're kind of testing this technology and testing longer laterals compared to a lot of our peers.

Speaker 9

Thank you. Could you provide some colors on your outlook for gas price differentials in the second half of twenty twenty four?

Speaker 10

Yes, from a gas price standpoint, we're definitely looking at a strengthening specifically in the basin. We are expecting some additional capacity with the Matterhorn Express Pipeline to come online later in the year in the Q3. That's going to add another 2.5 Bcf a day capacity to the basin. The last few months has been hampered with not only tight capacity, but on and off maintenance of the existing brownfield and greenfield projects that have already been put into place later earlier last year. And so getting through this period of time until the Matterhorn Express pipeline comes online is going to be tight, but we are expecting a rise as soon as the next quarter.

Speaker 9

Thanks guys.

Speaker 4

Thank you.

Operator

The next question comes from the line of Cholff Jay from Daniel Energy Partners. Please go ahead.

Speaker 11

Hi, guys. My question is really about sort of the cadence of CapEx this year. It looks like it changed a bit from your expectations last quarter. Obviously, you spent less than you thought Q1. And it looks like CapEx is going to crest in Q2.

Speaker 11

And I'm just wondering what that is? Are you pulling some things forward? Is it purely a function of the increased efficiencies you guys have seen?

Speaker 5

Good morning. I appreciate on slide 9, I think there's some good visual to help support this, but I appreciate your point about Q2. So a lot of the movement that we're seeing in the first half of the year is timing related, small movement between Q1 and Q2. But over the first half, we plan to stay flat. It's less reflective of capital reduction in Q1 and more just movement into Q2.

Speaker 5

And then as you'll notice in the second half the year, we have some opportunity to continue to moderate capital spend with a spot crew in the Q4. We'll use that to ensure that we're hitting our full year plan.

Speaker 11

Okay, great. And then around the horseshoe wells, I was just wondering, I guess my understanding is the real savings is sort of having the needs for vertical casing. Are there other savings associated with these wells

Speaker 3

that maybe I'm not aware of?

Speaker 7

Yes. I think you're thinking about it correctly. It's all the things associated with the wellhead, the pad, the vertical portion of the well, ESPs when the wells go on production effectively it's cutting those costs in half. And so your ability to spend more time drilling productive rock in the lateral and spending your dollars there as opposed to spending dollars to get to that point, that's where the real true savings comes from.

Speaker 11

Excellent. Hey, that's all for me. Thanks, guys.

Operator

The next question comes from the line of Paul Diamond from Citi. Please go ahead.

Speaker 8

Thank you. Good morning all. Thanks for taking my call. Just a quick one to stay on the horseshoe wells. Can you talk a bit about decline rates, performance relative to standard wells, kind of anything you're seeing that differentiates these versus a standard lateral?

Speaker 7

Yes. So if you look at Slide 7, one thing that we wanted to make sure and highlight here is that the teller wells are Horseshoe wells that are drilled in a very similar pattern to what we drilled the Allison wells on the Midland Basin side. You can see from the production versus time profile on the bottom right that those wells are performing very well relative to industry benchmarks in the area. So that's just one example of how these wells can perform. When we look at the opportunity set, when we think about our design, we have always taken a more conservative approach to spacing.

Speaker 7

As we come into these assets, we space a little bit wider than industry peers have in the past. And we think that is a big driver of our outperformance and our well results in the area. We've seen

Speaker 4

the same

Speaker 5

approach with these

Speaker 7

U turns and they are spaced in our wider spacing pattern. So ultimately, we do not anticipate seeing any kind of degradation or differential performance that's negative as a result of the Horseshoe. We think of them as being as efficient at draining the reservoir as a straight long lateral would be. The benefit really comes from the saved capital that you get by not drilling 6 wells and only drilling 3 effectively.

Speaker 8

Understood. And just a quick follow-up on kind of quarterly capital spending. There's some optionality in the Q4. Just how does that what drives that? Is that going to be I mean, versus what drives that versus how it's kind of set up into 'twenty five?

Speaker 8

I know it's a bit early to talk about that. But is that more of a function of what you want to see this year? Or is it more of a function of kind of how the market is going

Speaker 4

to connect?

Speaker 5

This is really an opportunity for us to continue to optimize development throughout the year. So we're really excited about the work so far in the Delaware, but where we will see capital efficiencies throughout 2024 that can help support maintaining that spot crew later in the year. We're really using that to help make sure that we stay where we want to be on total spend in 2024 and moderating that with getting into 2025 in a sustainable way.

Speaker 7

Understood. Thanks for the clarity.

Operator

Next question comes from the line of Greg Brody from Bank of America. Please go ahead.

Speaker 12

Hey, guys. Appreciate all the details on these horseshoe wells. Obviously, everyone's really interested in it. You gave a split of how much opportunity there is for to sort of leverage this technology based on Midland versus Delaware. Do you have a cumulative number how many wells that you could convert that are in inventory in inventory and out of inventory?

Speaker 7

Yes. So you can see on Slide 8 on the bottom bullet, we talk about within our previously public stated inventory, 84 of those wells have this opportunity. So effectively it becomes 42. It is a reduction in the count of inventory, but as Jason said in his comments, it's $140,000,000 of capital saved for effectively recovering the same resource as you would have with those 84 wells. The other thing to think about and we'll update this when we come up with our updated inventory counts is that there are now wells that because of increased capital efficiency will be pulled into our public inventory that previously weren't there making up for the effectively lost 42 laterals that we're talking about.

Speaker 7

So we view this as a positive all around. Improves breakevens by a dramatic amount and ultimately our inventory counts will stay flat or even go up as a result.

Speaker 12

Is that where the 2 thirds, 1 third Midland Delaware came from? That's how we should think about it, the total 84?

Speaker 7

Yes. So the 2 thirds, 1 third is really is talking about where the opportunity set is and it's and as Jason and I said earlier, it's really a function of how big is your footprint and how many opportunities are there based upon the way our acreage is laid out. And so the 84 to 42 is reflective of that kind of 2 thirds, 1 third split that we talked about.

Speaker 12

Got it. I guess the question is why not do this with some of your core inventory? Is there an opportunity to go along or what's the physical limit that you think that this that you have degradation in performance?

Speaker 7

So to date, we've drilled wells 15,000 and even just above. The industry is continuing to extend lateral lengths. It's obviously one of the largest drivers of capital efficiency that's available. We are certainly thinking about that open to that possibility. These wells that we drilled on the Allison package were near 15,000 feet themselves.

Speaker 7

So we will continue to push lateral lengths to the optimum limit, driving capital efficiency, improving capital efficiency and getting all that we can out of these wells.

Speaker 12

Do you think there's a time where we could actually see you drill, take your 10,000 foot laterals and try to do a U-turn there with 2 wells like that?

Speaker 7

The team is always thinking about creative opportunities to do something like that. There have been situations where we've been locked in by with a land position where we've considered those types of creative opportunities, but it's just something that we have to evaluate on a case by case basis.

Speaker 3

And that's Steve. I mean, you need to consider the risk too and that much capital being invested in any one well. But, I guess, this is our first shot at it. So I think there's going to be lots of opportunities in the future and the team again quickly took a technology from an acquired asset in Delaware Basin and immediately moved it to the new assets in the Midland Basin. So again it's great execution.

Speaker 3

They did this on their first try. So really proud of the team. But there's like we're trying to highlight today there's just lots of potential for us in the future as we take technology and take it from one acquisition acquired asset to another and just really kind of build this one vital energy culture that's embracing technology and trying to do take the best techniques from all the acquisitions and drive ultimately a corporate performance.

Speaker 12

So just as I look at the data set you have here, you have 2 wells from the tower unit and it looks like 240 days of data. You're saying for the Midland, you'll have similar performance. How much data do you have there in terms of time? And maybe just contextually, like how much other data is there is around the industry that you're that gives you the confidence that this is repeatable throughout wherever you drill?

Speaker 7

On the Midland side, we have successfully drilled and cemented those wells and we are in the middle of our completion operations and everything is going well, going according to plan. In terms of industry data, we're aware of 43 wells including these that have used this horseshoe shape and we have not seen any kind of production degradation associated with the shape with that type of well plan.

Speaker 12

Got it. I appreciate that. One last question for you. Usually you get asked about M and A. Obviously, Porsche Wells has been dominant today.

Speaker 12

What's there's what's your sense of what's out there and your the opportunity set just as you look at it today?

Speaker 3

I think there's still a pretty good pipeline of opportunities that we see. Some of them have data rooms out there. Some we expect to come. I think there's several, but as a result of these large corporate deals, we could see some assets hit the market from other public companies, which will be new and haven't been a lot of those here recently versus just privates that are selling. So see a good pipeline.

Speaker 3

For us, it's still something that we're very interested in. As you again, as we tried to highlight with these quarterly results, we've been really good at being able to drive out cost, find new zones, implement new technology on acquired assets. These Allison wells were things that we acquired from the Henry team. So we immediately took again a technique from one acquired company and took it to assets acquired from another one. So I think there's lots of opportunity there.

Speaker 3

What we've done a really great job, I think, of is just squeezing more out of these assets after we've acquired them. And so we still think that's an important part of our portfolio. But we're trying also to build inventory organically in case some of these acquisitions don't go in our favor or we're not successful this year. We're extending inventory through technology and finding new zones. And so we'll have a great year whether we do acquisitions or not, but it's still something that's important to us as a company.

Speaker 12

Thanks for all the time guys and appreciate all the color.

Speaker 3

Thank you.

Operator

The next question comes from the line of Brian Ville from Capital One Securities. Please go ahead.

Speaker 13

Good morning, everyone. Thanks for taking my question. Just one more on M and A while we're at it here. As you look at future possibilities, should we think about your current trading multiples, free cash flow yields as metrics that any future deals would have to be accretive on for you to transact or those guidelines or how do you think about that in terms of deals that you go after?

Speaker 6

Great question. Yes, I think with the transactions we accomplished last year, we got the balance sheet where we want it. And I think going forward, you'll see any transaction that we do will need to be accretive to shareholders on virtually every metric. I mean, sometimes that's hard to catch every single one of them, but that will be our focus is to make sure that the acquisitions this year are accretive to all metrics for shareholders and are protective of the balance sheet going forward. So we believe we can do that through all the tools we've used in the past for acquisitions and that is the focus.

Speaker 13

Perfect. Thank you very much. That's very helpful.

Speaker 3

Thank you.

Operator

As there are no further questions at the queue at this time, this concludes our Q and A session. I would like to turn the call over back to Ron Haygood for brief closing remarks.

Speaker 1

Thank you for joining us this morning. We appreciate your interest in Vital Energy. And this concludes today's call.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Vital Energy Q1 2024
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