Vitesse Energy Inc

NYSE:VTS

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Greetings, and welcome to Vitesse Energy Second Quarter 2024 Earnings Call. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to Ben Messier, Director, Investor Relations and Business Development. Thank you. You may begin.

[Ben Messier, executive]

Good morning, everyone, and thank you for joining. Today, we will be discussing our financial and operating results for the second quarter 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 Vitesse's Chairman and CEO, Bob Gerrity; our President, Brian Cree; and our CFO, Jimmy Henderson. Our agenda for today's call is as follows. Bob will provide opening remarks on 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. 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 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, net debt, adjusted EBITDA, net debt to adjusted EBITDA ratio 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 Gerrity.

[Robert Gerrity, executive]

Thanks, Ben. Good morning, everyone. Thanks for jumping on the call. Vitesse's return of capital strategy continued in the second quarter. We paid an increased dividend of $0.525 a share in June and recently declared another $0.525 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.

We rely heavily on our database that we call Luminis, which is democratized over our entire organization to help direct our investment decisions. This strategy remains consistent despite the recent decline in oil prices.

I'll now hand the call over to our President, Brian Cree, to discuss our operations. Brian?

[Brian Cree, executive]

Good morning, everyone. Thanks, Bob. In the second quarter, our production averaged 13,504 barrels of oil equivalent per day, an increase of 8% from the first quarter, bringing our year-to-date production up to 13,030 barrels of oil equivalent per day for the first 6 months of the year.

As previously announced, during the second quarter, we closed on additional near-term development acquisitions in North Dakota that will result in over $40 million 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 2024 and into 2025. As we've said before, production will likely be bumpy -- 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. The overall pipeline has increased by 3.3 net wells or 20% from the end of the first quarter. This increase is a result of both higher-than-normal acquisitions in the second quarter and an acceleration of drilling on our organic acreage.

Our second quarter oil differential of $5.90 below WTI improved by 9% from the first quarter 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 2025 hedges at above $74 per barrel.

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

[James Henderson, executive]

Good morning, everyone, and thanks for joining the call. I want to highlight just a few financial results from the second quarter. 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 a 70% oil cut. This was an increase from our first quarter production by roughly 950 Boe per day, bringing our half year production within guidance to just over 13,000 Boe per day.

Lease operating expense came in at $12.3 million for the quarter or $9.99 per Boe, a slight decrease from the first quarter on a per unit basis. For the quarter, adjusted EBITDA was $43.1 million and adjusted net income was $11.7 million, which produced an adjusted earnings per share of $0.39 per share as compared to $0.34 last quarter. GAAP net income was $10.9 million and GAAP EPS was $0.31.

Cash CapEx and acquisition costs totaled $37.6 million for the quarter and $69.8 million for 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.

Operating cash flow net of working capital changes was $40.4 million 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 $115 million and is currently down to $111 million. The quarter-end number resulted in a leverage ratio of 0.67x on an annualized adjusted EBITDA calculation. The elected commitments on our credit facility currently stand at $245 million after their increase during our semiannual redetermination in May. Thanks as always to the banks and the group for their continued support.

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&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Jeff Grampp with Alliance Global Partners.

[Jeffrey Grampp, analyst]

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

[Brian Cree, executive]

Yes. Thanks. Good morning, Jeff. I think I talked about it a little bit at the end of our first quarter 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 second quarter and through the first 6 months of the year. 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 see in 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% and 50% of the rigs running in the basin. 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.

[Jeffrey Grampp, analyst]

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 Vitesse 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 has Vitesse typically done during weaker periods in the market from a capital allocation, balance sheet operations perspective? Just any thoughts there would be great.

[Robert Gerrity, executive]

Yes. Thanks, Jeff. This month, we celebrated our 13th year in existence. So even though we've only been public for 1.5 years, my wife and I founded this company 13 years ago, and we're joined right after that by Brian Cree. So Jeff, we have seen negative oil prices. We have seen a $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. And by that, I mean more economic acquisitions in the $70 oil price range. And that's just -- it's just what we do. We run a process on everything. We're very disciplined about what we buy. It just that 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 for oil 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. 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 it that whole period of time.

[Operator]

Our next question comes from the line of Donovan Schafer with Northland Capital Markets.

[Donovan Schafer, analyst]

Just as a follow-up sort of from 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 if opportunities present themselves? Or would you look at it differently, approach this in a different way?

[James Henderson, executive]

Yes, I'll take a stab at that. This is Jimmy. Yes, I think because we have run with a 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 bringing that debt back down, I think we can push it a little bit. And as we've always stated, we're definitely staying under 1x 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.

[Donovan Schafer, analyst]

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 a $50 oil for 12 months, $60 oil for 24 months? Just any color on that would be helpful as well.

[Brian Cree, executive]

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. We run it at $60. We run some even disaster cases to look.

Obviously, you have to also factor in that if prices go down, you're also going to see your capital expenditure -- capital expenditures also decline during that time frame. 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. 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. Obviously, if prices are down for an extended period of time, we would have to look at our dividend. But I think if price is going down to $60 for a short period of time, we don't anticipate that, that would have an impact on our dividend in the short term.

[James Henderson, executive]

The other thing that I might add is that because a 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 kind of get into more of a harvest mode, if you will.

[Donovan Schafer, analyst]

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 kind of north of 95% consenting for the AFEs that come in? Or has that -- has there been any changes or adjustments there?

[James Henderson, executive]

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 -- that we underwrite. But yes, the consent has been -- consent rate has been very consistent.

[Donovan Schafer, analyst]

Okay. Great. I'll take the rest of my questions offline.

[Operator]

Our next question comes from the line of Jeff Robertson with Water Tower Research.

[Jeffrey Robertson, analyst]

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 Luminis system to stay close to the operators who are having the -- what you think is the most economic success in their development programs?

[Brian Cree, executive]

So Jeff, this is Brian. I'll start and Bob can add to it. But yes, clearly, Luminis and all of our data plays a key role in that as is it just our history. Bob mentioned, we've been doing this for 13 years. So we've developed a lot of relationships among those operators. 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 2 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. 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. 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.

[Jeffrey Robertson, analyst]

And one question just on the philosophy at Vitesse. You all have focused on the Bakken because it's a long-term asset with a 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?

[Robert Gerrity, executive]

Jeff, this is Bob. The trend toward 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. 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 changing any time in the future, so.

[Brian Cree, executive]

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 continuing to remain very optimistic that refracs will be a big part of the story over the next 5 years.

[Operator]

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

[Noel Parks, analyst]

I had a couple. [ I was 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 just 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. So I was wondering, any pattern of what you're seeing coming to market these days.

[Brian Cree, executive]

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 it was relatively very small. But -- so we do see those from time to time.

But most of the things we spend our time analyzing are more development opportunities at this point in time, unless it's a larger transaction. And at this point in time, there's not a lot of larger transactions in the Bakken that are being marketed.

[Robert Gerrity, executive]

Yes. Clearly, no. This is Bob. The Bakken is, as a basis, just understimulated. It was the last to come to the Gen 2 frac. So we really look forward to refracs being a dominant capital force in the future.

[Noel Parks, analyst]

Got it. And to a degree that there are assets out there that are ideal for refract, is there pretty specific awareness out there among sellers of what that opportunity would look like? Because on paper, it's just that -- well, it's developed, it's developed acreage. So are people sort of keenly aware of what that upside might look like? Or is it something that -- like in the example you gave, the person just looking to exit, they just want transaction, they're not going that deep on it?

[Brian Cree, executive]

I mean I guess I could tell you 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 is 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 and in various areas and to kind of have a good idea. 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.

[Robert Gerrity, executive]

Yes. 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 a refrac. And so it's very difficult to schedule refracs. And it's -- they're like Easter eggs. They're wonderful when you find them. So you just have to be very diligent. Our data really infers where refrac activity is likely to take place, but it's very difficult to schedule out.

[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.

[Robert Gerrity, executive]

Well, 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.