Vitesse Energy Q2 2024 Earnings Call Transcript

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August 6, 2024

There are 9 speakers on the call.

Operator

Greetings, and welcome to the VITAS Energy Second Quarter 2024 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. I will now turn the conference over to Ben Messier, Director, Investor Relations and Business Development.

Operator

Thank you. You may begin.

Speaker 1

Good morning, everyone, and thank you for joining. Today, we will be discussing our financial and operating results for the Q2 of 2024, which we released yesterday after market close. You can access our earnings release and presentation in the Investor Relations section of our website. We filed our Form 10 Q with the SEC yesterday. I'm joined here this morning by Vitess' Chairman and CEO, Bob Garrity our President, Brian Cree and our CFO, Jimmy Henderson.

Speaker 1

Our agenda for today's call is as follows: Bob will provide opening remarks in the quarter. After Bob, Brian will give you an operations update. Then Jimmy will review our 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.

Speaker 1

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. 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 contemplated by these forward looking statements. Those risks include, among others, matters that we've described in our earnings release and periodic filings. 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, net debt, adjusted EBITDA, net debt to adjusted EBITDA ratio and free cash flow.

Speaker 1

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 Garrity.

Speaker 2

Thanks, Ben. Good morning, everyone. Thanks for jumping on the call. TESSA's return of capital strategy continued in the 2nd quarter. We paid an increased dividend of

Speaker 3

$0.52

Speaker 2

$5 dividend to be paid in September. As I've said before, in addition to our organic drilling, we are always looking at both near term development deals and larger asset acquisitions that will support the dividend. We are a dividend first company. Deal flow continues to be healthy and we direct capital to the highest rate of return projects. We only make acquisitions if they fit our rigorous underwriting criteria and then we hedge to protect the returns.

Speaker 2

We rely heavily on our database that we call Luminus, which is democratized over our entire organization to help direct our investment decisions. This strategy remains consistent

Speaker 4

despite the recent decline in oil prices. I'll now hand the call over to our President, Brian Cree to discuss our operations. Brian? Good morning, everyone. Thanks, Bob.

Speaker 4

In the second quarter, our production averaged 13,504 barrels of oil equivalent per day, an increase of 8% from the 1st quarter, bringing our year to date production up to 13,030 barrels of oil equivalent per day for the 1st 6 months of the year. As previously announced, during the Q2, we closed on additional near term development acquisitions in North Dakota that will result in over $40,000,000 of capital expenditures. The drilling and completion associated with these acquisitions will occur late this summer and fall and we expect significant increases to both production and cash flows during the second half of the fourth quarter of twenty twenty four and into 2025. As we said before, production will likely be lumpy over this period depending on when wells are turned online. As of June 30, we had 19.8 net wells in our development pipeline, including 11.1 net wells currently being drilled and completed.

Speaker 4

The overall pipeline has increased by 3.3 net wells or 20% from the end of the Q1. This increase is a result of both higher than normal acquisitions in the 2nd quarter and an acceleration of drilling on our organic acreage. Our 2nd quarter oil differential of $5.90 below WTI improved by 9% from the Q1 as the Trans Mountain pipeline expansion turned online on May 1. We have continued to add oil hedges through 2025. At the midpoint of our guidance, we have 57% of our remaining 2024 oil production hedged at above $78 per barrel and 20.25 hedges at above $74 per barrel.

Speaker 4

Thanks for your time. Now I'll turn the call over to our CFO, Jimmy Henderson for our financial highlights.

Speaker 5

Good morning, everyone, and thanks for joining the call. I want to highlight just a few financial results from the Q2. As always, you can refer to our earnings release and 10 Q, which were filed yesterday for any further details. As Brian mentioned, our production for the quarter was just over 13,500 BOE per day with the 70% oil cut. This was an increase from our 1st quarter production by roughly 950 BOE per day bringing our half year production within guidance to just over 13,000 BOE per day.

Speaker 5

Lease operating expense came in per BOE per day. Lease operating expense came in at $12,300,000 for the quarter or $9.99 per BOE, a slight decrease from the Q1 on a per unit basis. For the quarter, adjusted EBITDA was $43,100,000 and adjusted net income was $11,700,000 which produced an adjusted earnings per share of $0.39 per share as compared to $0.34 last quarter. GAAP net income was $10,900,000 and GAAP EPS was $0.31 Cash CapEx and acquisition costs totaled $37,600,000 for the quarter $69,800,000 the first half of the year, which is right at the midpoint of our current guidance on an annualized basis. Like our production, CapEx varies from quarter to quarter depending on activity levels and acquisition opportunities.

Speaker 5

Operating cash flow, net of working capital changes was $40,400,000 in the quarter, which covered our dividend and our maintenance CapEx, providing excess discretionary cash flow to fund some of the acquisitions spending in the quarter. The remainder of our CapEx was funded withdrawals on the credit facility. Debt at the end of the quarter was 100 and $15,000,000 and is currently down to $111,000,000 The quarter end number resulted in a leverage ratio of 0.67 times on an annualized adjusted EBITDA calculation. The elected commitments on our credit facility currently stand at $245,000,000 after their increase during our semi annual redetermination in May. Thanks as always to the banks in the group for their continued support.

Speaker 5

Lastly, given the level and timing of development activity that Brian described, we are reaffirming our previously revised 2024 guidance for both production and CapEx. With that, let me turn the call over to the operator for Q and A.

Operator

Thank you. We will now be conducting a question and answer Thank you. Our first question comes from the line of Jeff Grampp with Alliance Global Partners. Please proceed with your question.

Speaker 6

Good morning, everyone. Brian, you mentioned in the prepared remarks that activity levels at quarter end increased quite a bit sequentially. I know a lot of that was acquisition related from what you guys talked about last quarter, but you also noted an acceleration, I think was the term you used on your organic acreage. I'm curious to dive into that a bit more. Was that expected going into the year?

Speaker 6

Is that kind of a newer development that you guys are maybe not anticipating? Just any thoughts on what might be driving that?

Speaker 4

Yes. Thanks. Good morning, Jeff. I think I talked about it a little bit at the end of our Q1 call that we were seeing a higher level of AFEs. We weren't sure if that was going to continue, but it has continued during the Q2 and through the 1st 6 months of the year.

Speaker 4

We're on pace for a pretty significant increase year over year in our organic CapEx. So again, not sure that that will continue as we go into the second half of the year. But right now, we are definitely seeing even though the rig count hasn't really increased that much. I think you've seen our presentation at the end of the second quarter, we had 20 rigs running out of about 37 rigs. As you guys know, we're typically somewhere between 30% 50% of the rigs running in the basin.

Speaker 4

Today, there's just a little over 40 rigs running in the basin and we've got 18 of those drilling on our wells. So yes, it's great to see operators drilling on acreage that we have already in our inventory.

Speaker 6

Great. Appreciate those details. And for my follow-up, I'm curious, Vitesse is obviously not a new company, but you are newer a bit to public investors still. I'm curious for Bob or anyone to hear how the test has historically run when we're kind of on the lower end of oil price ranges. I mean, obviously not panic mode by any sense of the imagination, but what is the test typically done during weaker periods in the market from a capital allocation, balance sheet, operations perspective?

Speaker 6

Just any thoughts there would be great.

Speaker 2

Yes. Thanks, Jeff. This month, we celebrated our 13th year in existence. So even though we've only been public for a year and a half, my wife and I founded this company 13 years ago and we're joined right after that by Bryan Cree. So Jeff, we have seen negative oil prices.

Speaker 2

We have seen $120 oil price. And so we have seen it all. And I will tell you that Vitesse has a strategy for every oil price environment. We tend to do better acquisitions. By that, I mean more economic acquisitions in the $70 oil price range.

Speaker 2

And that's just It's just what we do. We run a process on everything.

Speaker 7

A process on everything. We're very disciplined about what

Speaker 2

we buy. It just said at $70 we seem to have less competition. So we'll be a little bit more acquisitive if it hurdles at $70 and our deal flow right now is terrific. I will also say that when the price flow went to 85, our organic picked up, but our near term drilling slowed down a little bit because we had more competition. So, Jeff, this is a very long duration asset.

Speaker 2

We've been in business for 13 years. We get up in the morning and we just run the process that we've been running and develop that whole period of time.

Operator

Thank you. Our next question comes from the line of Donovan Shafer with Northland Capital Markets. Please proceed with your question.

Speaker 7

Hey, guys. Just as a follow-up sort of for Jeff's question, if oil is in closer to the $70 range and that presents an opportunity for more economic acquisitions, How would you think about tapping capital for that? You're still fairly conservatively levered, but directionally you have been increasing debt. So is that something you think you have a good runway on that to kind of lever up further opportunities present themselves? Or would you look at it differently, approaches it in a different way?

Speaker 5

Yes, I'll take a stab at that. This is Jimmy. Yes, I think because we have run with the conservative balance sheet that we do have some room for the right opportunities and if they're accretive to the dividend and we can we see a line of sight to be bringing that debt back down, I think we can push it a little bit. As we've always stated, we're definitely staying under one times debt to EBITDA and we're well under that now and we'll continue to be there. But certainly, we have some dry powder for the right acquisition opportunities that can help move the company's really dividend coverage forward.

Speaker 7

Okay. That's helpful. And then for, I guess just also somewhat related to, I think, Jeff's first question or maybe it was the second one. But with people the focus kind of turning to oil prices or concerns of conceivably a recession or something like that, Can you give us any color on what kind of stress testing you do and with the hedges in place, like do you run it at $50 oil for how can you do $50 oil for 12 months, dollars 60 oil for 24 months? Just any color on that would be helpful as well.

Speaker 4

Yes, Donovan, this is Brian. I'll take the first crack at that and let Jimmy or Bob jump in. But obviously, yes, we always run stress tests. It's why we focus on the hedging and make sure that we have the hedges in place that we do to protect that dividend in case the price of oil does go down. We run it at $50 you run it at $60 we run some even disaster cases to look.

Speaker 4

Obviously, you have to also factor in that if prices go down, you're also going to see your capital expenditures also decline during that timeframe. So it's not just as easy as dropping in a lower oil price or gas price into a model and seeing that result, you have to take a lot of things into consideration. So for us, we take a look at that and we run it for different periods of time. I think as we've said before and Jimmy just mentioned, we keep our leverage low for really a couple of different reasons. One is to take advantage of those acquisitions that crop up.

Speaker 4

That was your real first question. And I think we did a really good job of that last fall. And we also did that in the at the beginning of the second quarter here. Hopefully, that opportunity will exist as we go through the remainder of 2024 if oil prices stay in this price range. The other side of that is just making sure that the dividend is covered and the lower debt allows us some flexibility there.

Speaker 4

Obviously, if prices are down for an extended period of time, we would have to look at our dividend. But I think prices going down $60 for a short period of time, we don't anticipate that that would have an impact on our dividend in the short term.

Speaker 5

The other thing that I might add is that because of significant part of our capital spending is in the acquisition arena, We have a lot of flexibility in our spending. So, unlike maybe an operator that is committed to a certain rig cadence and completion crews, we can adjust very quickly to the pricing environment and to kind of get into more of a harvest mode, if you will.

Speaker 7

Right. And somewhat related to that last point, Jimmy, I guess the question is, has there been a change in consent rate? I'm guessing maybe not yet. Are you still north of 95% consenting for the AFEs that come in? Or has that has there been any changes or adjustments there?

Speaker 5

There really hasn't been much change on that. It's typically, like you said, right at that 95% range and it's more driven by geographic or operator statistics than necessarily the price deck because we're helping right. But yes, the consent has been consent rate has been very consistent.

Speaker 7

Okay, great. Thank you. I'll take the rest of my questions offline.

Operator

Thank you. Our next question comes from the line of Jeff Robertson with Water Tower Research. Please proceed with your question.

Speaker 8

Thank you. Bob or Brian, based on your experience in the Williston Basin, do you have a feel for how the consolidation that's been taking place in the industry will affect the market for the near term development opportunities that have been your hallmark of growth in 2025? And is this key to success in that process just using your Lumina system to stay close to the operators who were having what you think is the most economic success in their development programs?

Speaker 4

So Jeff, this is Brian. I'll start and Bob can add to it. But yes, clearly, Luminess and all of our data plays a key role in that, as does just our history. Bob mentioned, we've been doing this for 13 years. So we've developed a lot of relationships among those operators.

Speaker 4

And that consolidation does generate opportunities at certain times. Not every consolidation generates that new opportunity. But from our standpoint, again, I think we've discussed this in the past, we're a big fan of the consolidation. We love to see operators get together because typically what happens when they put those two teams together is they're taking the best of both worlds and those enhanced and better economics flow down to us as a non operated working interest owner. So we're excited about that.

Speaker 4

Will some of these recent developments increase the opportunity for us to get near term? Yes, probably. And perhaps it even gives us a larger acquisition opportunity. We'll see if any of the non op assets that are out there come to market. It's something that we'll always take a look at.

Speaker 4

As we've always said, we're in the market all the time for both near term development and larger acquisitions as long as they can meet our hurdle rate.

Speaker 8

Thanks. And one question just on the philosophy at Vitesse. You all have focused on the Bakken because it's a long term asset with the chance that technology will improve. Are you seeing any operators explore different ideas, whether it's engineering or development or drilling wise that you think offer maybe near and intermediate term upside to the type of inventory that you have?

Speaker 2

Jeff, this is Bob. The trend towards 3 Mile Lateral is becoming a little bit more universal. And we were not initially enamored with that concept, but the recent results over the last 6 months have been really positive for the 3 Mile lateral. And I think that's what it encouraged a company like Devon to come in and be so aggressive in their acquisition. So technological increases are slow, grinding and very consistent.

Speaker 2

So each dollar spent in the Bakken right now is much more productive than even a year ago. So the Bakken is leveraged to technology and we don't see that change in any time in

Speaker 4

the future. And Jeff, I'd add that we continue to be excited about the refracs. The refrac results have continued to be very strong. We're on pace to see more refracs this year than we have in any other year. So it's still not it's not a huge part of our capital spend, but we're still continue to remain very optimistic that refracs will be a big part of the story over the next 5 years.

Speaker 8

Thank you.

Operator

Our next question comes from the line of Noel Parks with Tuohy Brothers.

Speaker 3

Hi, good morning.

Speaker 5

Hey, Nehal. Thank you.

Speaker 3

Just had a couple. I'm just wondering as far as what you're seeing either on the market or coming to the market these days for acquisition or bolt on opportunities. Is there any pattern to sort of the vintage of what you're seeing? I'm wondering if you're seeing interest or assets from the very earliest days of the play or maybe from that period, say, like 10 years ago when operators first started really going to the max with frac intensity and so forth with mixed results. Just wondering any pattern of what you're seeing come into market these days?

Speaker 4

Well, this is Brian. We don't spend a lot of time looking at PDP opportunities. So most of the things that we analyze that come to us on a near term basis are more development opportunities. So I'm not sure I'm really answering your question, but we did just we just recently closed on a very small PDP acquisition that had some flatter production. Somebody was just looking to exit the basin and most of the things we spend our time analyzing are more development opportunities at this point in time, unless it's a larger transaction.

Speaker 4

And at this point in time, there's not a lot of larger transactions in the Bakken that are being marketed.

Speaker 2

Yes, clearly, Noel, this is Bob. The Bakken is as a base is just under stimulated. It was the last to come to the Gen 2 fracs. So we really look forward to refracs being a dominant capital force in the future.

Speaker 3

Got it. And to a degree that there are assets out there that are ideal for refrac. Is there pretty specific awareness out there among sellers of what that opportunity would look like? Because on paper, it's just like, well, it's developed, it's developed acreage. So are people sort of keenly aware of what that upside might look like?

Speaker 3

Or is it something that like in the example you gave, the person just looking to exit, they just want a transaction, you're not going that deep on it?

Speaker 4

I mean, I guess I could tell you in this in the PDP acquisitions that we've done, we have never added any refrac value to our analysis. So I don't know if that means that people are not as aware of it. I think everyone's aware that there's been quite a few refracs done in the Bakken. Maybe they don't put a lot of value on it, but from our standpoint, it's something that we do pay attention to. Our database does allow us to analyze all the refracs that have been done in various areas and to kind have a good idea.

Speaker 4

But again, we don't see a lot of just PDP opportunities that present themselves. But when they do, we'll take into consideration that the refrac does have some upside, but we never put any value on it.

Speaker 2

This is Bob. Interestingly enough, a lot of the operators will do refrac operations as workovers. And so often we won't even get an AFE for refrac. And so it's very difficult to schedule refracs. And it's they're like Easter eggs, wonderful when you find them.

Speaker 2

So you just have to be very diligent. Our data really infers where refract activity is likely to take place, but it's very difficult to schedule out.

Speaker 3

Okay, thanks. Interesting.

Operator

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Bob for closing comments.

Speaker 2

Thanks everybody for joining in. Please reach out to Ben if you have any other questions and management will always answer whatever we can for you. Thank you very much and see you next quarter.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Vitesse Energy Q2 2024
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