Vitesse Energy Inc

NYSE:VTS

Earnings Call Analysis

Vitesse Energy Q3 2023 Outlook

Vitesse Energy reviewed their Q3 2023 performance, highlighting their status as a return of capital company, maintaining a consistent dividend payout of $0.50 per share. Production levels held steady at just over 11,000 barrels of oil equivalent (BOE) per day, predominantly oil at 67%, aiming to increase to 12,300 to 13,000 BOE per day in Q4 due to recent acquisitions. For the forthcoming production, significant hedging strategies were executed, with about 40% of the anticipated 2024 oil output secured at $79 per barrel. They expect improved natural gas prices through winter and continuity in well cost management witnessed in prior quarters.

Vitesse Energy Maintains Steady Production and Commits to Investor Returns

Vitesse Energy has released its third quarter financial and operating results for 2023, marking a period of strategic acquisitions and sustained production output. The company upholds itself as a 'return of capital' organization, demonstrating this commitment by declaring a fourth quarter cash dividend of $0.50 per share.

Strategic Acquisitions to Boost Future Cash Flow

During the third quarter, Vitesse accelerated its growth by acquiring additional oil and gas interests. These investments of roughly $50 million, primarily focused on the latter half of the year, are predicted to bring significant gains in production and cash flow in the final stretch of 2023 and throughout 2024.

Hedging Strategy for Long-Term Stability

Vitesse has fortified its financial position through a strategic hedging approach, securing its oil production for the remainder of 2023, all of 2024, and the first half of 2025. This careful planning ensures a level of stability and predictability in its revenue streams against the backdrop of volatile market prices.

Consistent Production with Promising Increases

Production has remained steady, hovering just above 11,000 barrels of oil equivalent (BOE) per day. The company anticipates this to rise to between 12,300 and 13,000 BOE per day in the fourth quarter. These expectations align with their objective of further amplifying production in the following year, 2024.

Financial Highlights and Capital Expenditure Overview

Vitesse recorded an adjusted EBITDA of $34.7 million, in line with prior performance, while adjusted net income was reported at $11.1 million. Despite a reported GAAP net income loss of $1.5 million, the company remains focused on substantial capital expenditure and acquisition costs of about $34.1 million, fueling growth and operational expansion.

Q4 Outlook: Funding Growth and Maintaining Dividends

Looking forward to the fourth quarter, Vitesse expects to outspend as it finances further capital expenses and acquisition costs. Nonetheless, the company plans to manage these expenditures alongside the continuation of dividend payments, relying on operational cash flow and credit facilities to support these strategic initiatives.

Positive Returns from Near-Term Development

Vitesse's near-term development program focuses on investing in wells under active development, which has yielded promising returns. The completion of these wells began in the latter part of the third quarter, with more coming online in the fourth quarter, contributing to the company's growth trajectory.

Earnings Call Transcript 2023-Q3

[Operator]

Greetings, and welcome to the Vitesse Energy Third Quarter 2023 Earnings Call. [Operator Instructions] Please note, this conference is being recorded.

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

[Ben Messier, executive]

Good morning, and thank you for joining. Today, we will be discussing our financial and operating results for the third quarter of 2023, 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 here this morning with Vitesse's Chairman and CEO, Bob Gerrity, our President; Brian Cree, 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. Jimmy will review our third quarter financial results. After the conclusion of our prepared remarks, the executive team will be available to answer any 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, adjusted EBITDA, net debt, 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]

Good morning, everybody. Thanks so much for being on our call. With Brian Cree and I today is Jimmy Henderson, who joined us 2 months ago, and we are thrilled. He's had a wonderful successful career as a CFO in the oil business, which is rare. And Jimmy not only brings a deep skill set to the desk, he's a wonderful guy and just his -- fit in wonderfully. So he's really moved the needle in improving our capacity. So welcome, Jimmy.

The test is a return of capital company. Not the first time you've heard that from me, it won't be the last time you heard it from me. And payment of our fixed dividend is our top priority. We paid our third quarter cash dividend of $0.50 per share in September. And earlier this week, the Board declared our fourth quarter cash dividend of $0.50 to be paid in December.

We continue to look at a lot of near-term development drilling deals and larger asset acquisitions that continue to be supportive of our dividend. During the third quarter, we were able to complete several impactful acquisitions that meet our very high return hurdles.

As previously discussed, we buy whatever we can within our stringent economic parameters and we're not limited by a budget. We are only limited by opportunity and economics. We put hedges in place to protect these returns when the opportunities present themselves.

With that, I'm going to turn this over to Brian Cree, my longtime partner and Vice President -- and President of Vitesse. So Brian?

[Brian Cree, executive]

Thanks. Good morning, everyone. As Bob mentioned, we acquired additional oil and gas interest through our near-term drilling acquisition program during the third quarter that will result in approximately $50 million of additional CapEx, primarily in the second half of 2023. These acquisitions exceeded our internal hurdle rates and are expected to provide material increases to production and cash flow in both Q4 '23 and across 2024.

The wells associated with these acquisitions have either already started producing or are in the process of being turned on to production in the fourth quarter. So the time between CapEx spend and revenue receipt will be shorter than our typical acquisition. Additionally, we see -- we continue to see consistent pace of development on our existing assets. The organic conversion of our inventory of undeveloped locations remains core to our business model.

Since we like to provide insight into our pipeline of drilling and completion opportunities, as of September 30, 2023, we had 7.7 net wells that were either drilling or in the completing phase and another 10 net wells that have been permitted for development by our operators.

I want to touch a little bit on hedging. Over the last 2 months, we added to our oil hedges for the remainder of 2023 for all of 2024 and for the first half of 2025. We now have approximately 50% of our estimated fourth quarter 2023 oil production and close to 40% of our estimated full year 2024 oil production hedged at $79 per barrel.

Thanks for your time. Now I'll turn it over to our new CFO, Jimmy Henderson, to review our financial highlights. Welcome aboard, Jimmy. Great to have you here.

[James Henderson, executive]

Thanks, Brian, and thanks, Bob, for all the kind words. I'm certainly happy to be here. And good morning, everyone that's listening in today. It is great to be back and involved in this industry that I continue to feel is so important and provides a vital resource. It's been wonderful to reconnect with many of you in the investment, in the banking and research arenas as we continue to tell the exciting Vitesse story.

I especially want to thank the Vitesse team for making me feel welcome and helping me get up to speed since I joined. And lastly, congratulations to the Texas Rangers on the exciting win in the World Series last night.

Now on to a quick review of the financial results for the quarter and our financial status. I'll assume you all can refer to our earnings release and our 10-Q, which were filed last night for all the details on the quarterly and year-to-date results. So I won't bother repeating all the details that were included in those documents. But just to highlight a few items.

As both Bob and Brian described, we've continued our return of capital program through the dividend and strengthen our future cash flows with several acquisitions, which obviously supports the dividend. Both activities continue to be cornerstones of our strategy.

As for the results in the quarter, our production levels remain fairly consistent at just over 11,000 BOE per day with about 67% of that being oil. As we previously reported, we expect the fourth quarter of this year to increase to 12,300 to 13,000 BOE per day with further increases in production next year in 2024, primarily due to the recent acquisitions that we announced.

Likewise, adjusted EBITDA was flat sequentially at $34.7 million and adjusted net income was $11.1 million. GAAP net income was a loss of $1.5 million, and you can see the reconciliation of those numbers in the press release that we filed last night.

Cash CapEx and acquisition costs in the quarter were approximately $34.1 million. We funded this which put us at $56 million drawn as of September 30. We do expect further outspend in Q4 as we fund the remaining CapEx and acquisition costs as we disclosed a couple of weeks ago. We'll continue to fund these costs as well as our dividend through operating cash flow and on our credit facility.

With that, let me turn it over to the operator for any Q&A that we might have today. Thank you all.

[Operator]

[Operator Instructions] [Audio Gap] Partners, please proceed.

[Unknown Analyst]

Congratulations on the quarter, and congratulations to Mr. Henderson for his new position.

[James Henderson, executive]

Thanks, John. I appreciate it.

[Unknown Analyst]

You said you're -- as you put out in your press release, you said acquisition activity accelerated in the quarter. Do you want to provide some more details on those acquisitions? Were they all producing properties and were they all in the Bakken?

[Brian Cree, executive]

Thanks, John. This is Brian, and I'll handle that. Yes, as we've always said, the acquisition pipeline is something that we've developed over the last 10 years, but it can be lumpy. And we were just fortunate to see several different transactions come together kind of toward the middle and latter part of the third quarter. And they weren't really produced [Audio Gap] assets.

Although what I would tell you is that -- because our near-term development program is typically about buying AFEs or wells that are in the process of [Audio Gap], we're further along that drilling process. And so we were really happy with the rates of return, especially given that the wells started to come online kind of toward the latter part of the quarter and more of them will come on to the fourth quarter. So even though they were near-term development acquisitions, they were just coming online faster than our typical acquisition would indicate.

[Unknown Analyst]

And all of them in the Bakken?

[Brian Cree, executive]

Yes. All of those were in the Williston Basin.

[Operator]

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

[Donovan Schafer, analyst]

I want to start off by asking about natural gas price realizations. I know that natural gas is a very small part of the overall production for you guys. But just with how wide -- just how significant price swings have been over the last 12 months being thinking like 10x? What they were this last quarter? When you take all that into account, like it can still be somewhat material to the top line even as a small piece of the picture.

So I have to ask about realizations being $0.88 per Mcf in the quarter. I mean, I know you do it net of transportation expense. So that maybe makes it not like an apples-to-apples comparison, let's say, like a peer or someone else producing the basin, but I just want to understand kind of what drove that lower? What would it maybe be if you treat it, if there's a way to compare it to someone who doesn't report net of transportation expenses? Just trying to kind of wrap my mind around it and compare to what I see elsewhere.

[James Henderson, executive]

Yes. Thanks for the question, Donovan. Yes. So unfortunately, practices [Audio Gap] meaning that we have crude oil and natural gas only and not the NGLs and the natural gas includes the NGL component of that. And I think one of the biggest -- a couple of impacts in the third quarter that reduced our realized price and one is that NGL prices were very low as storage levels continue to be high coming out of the summer. That's certainly a seasonal thing, and we expect to improve as we go through the winter, assuming that it does continue to get cold on the East Coast, especially.

So that should improve certainly quarter-over-quarter here in the fourth quarter. The other component is, as you mentioned, gathering, transportation and downstream cost, we net that out of our price, not all producers do. Some show that as a separate G&T price. But the way that we are paid, that's really just a part of the net revenue we received at the well ahead. That's how it's handled here. So that I'd have to make that adjustment as others might show it as a different line item in the income statement.

The other way that affects our netback price is that a lot of those costs are fixed by the operator. So they have fixed fee versus like a percentage of proceeds type contract, which most people have gone to. And as prices of gas or NGLs goes down, obviously, that fixed fee becomes a higher percentage of the net price. And so it has more of an impact at lower prices than it does at higher prices. So hopefully, that's helpful. But we're happy to follow up with you if that doesn't get you where you need to be.

[Donovan Schafer, analyst]

Okay. That's very helpful. And then I want to ask about the hedge book additions just between the release yesterday and then the update release with the recent near-term development acquisitions. So it looks like -- I think the only -- if my notes are correct, the only change to the hedge positions between those 2 was really the addition of hedges in 2025.

It's not a huge quantity in terms of the -- maybe it's like 10% or something of the total volume at that point. But I'm guessing maybe it's sort of tied to the addition of these acquisitions. So you're sort of looking out and saying, okay, we underwrote things at a certain strip. First, am I kind of thinking about it conceptually the right way? Or was it just an opportunistic thing to pick up some smaller volume of hedges in '25? And then how does that '25 -- sorry, $75 slot price, how does that compare to what -- how the curve where strip prices were for that time period when you underwrote some of these?

[Brian Cree, executive]

Thanks, Donovan. This is Brian. I'll take a crack at that. You had several questions in there. So is it opportunistic? It's kind of a combination of both, right? I mean, we did see a nice run-up of oil prices starting in September and into early October, shortly after we had made those acquisitions.

And so it was a great opportunity for us to lock in prices associated with the expected production from those acquisitions at much higher prices than we had underwritten those acquisitions at. And that is part of the 2025 [Audio Gap] years out. And so it's just kind of part of our normal process of starting to lock in hedges. There's still a lot of backwardation in the market as you get out into 2025. So we took advantage of an uplift that we saw over a couple of days and got above $75 in 2025, so we pulled the trigger on that.

I just want to touch on your comment about '23 and '24. We actually did add quite a few hedges for '23 and '24 increase [Audio Gap] our expected production. Now we're hedged at closer to 40% of our expected production, and we increased that average price from $76, which is where we stood at the end of the second quarter, up to a little bit over -- close to $79. So again, it's a combination of both opportunistic. When we see those prices go up, we'll take advantage of it. And I think from our hedge book, you can see that we kind of like to be in that mid- to upper $70s before we lock in hedges and that's kind of historically how we've handled it. And my expectation is that's how we'll look at it on a go-forward basis.

[Donovan Schafer, analyst]

The state of the M&A market, what -- if you're assessing a lot of opportunities still, I guess, you can comment both on ground game or near-term drilling -- near-term development as well as something larger or package type deals. In both those kind of opportunity sets, have you seen directional changes or were you seeing more potential in one versus the other [Audio Gap] or the time or going forward? Just kind of in general trends and what kind of the state of affairs are there and opportunity versus not? Sometimes it's better to just set things out for a while?

[Robert Gerrity, executive]

Yes, Donovan, this is Bob. We are seeing [Audio Gap] because the price of oil has been fairly stable, but this is the most -- this is the biggest deal flow we've seen in years. Now that said, that doesn't always correlate to us closing those deals. But it's great. There's a real nice mortgage board of opportunities. About half the company is engaged in some form of reviewing and analyzing and closing deals. So we're very busy. But again, I can't promise that we're going to close those things [Audio Gap]...

[Donovan Schafer, analyst]

All right. Well, great. I'll follow up if I have any other questions.

[Operator]

Our next question comes from the line of Jeff Grampp with Alliance Global Partners.

[Jeffrey Grampp, analyst]

I was curious on the cost side of things, well cost specifically, just an update there in terms of what you guys are seeing? What -- how does a leading-edge AFE maybe compared to [Audio Gap]?

[Brian Cree, executive]

Sure. Thanks, Jeff. This is Brian. I'll take a crack at that and let Bob add anything that he wants to add. But we've talked about this on most of our calls. We didn't see as much cost inflation in the Bakken, as I think some of the other basins have seen over the last year, 1.5 years. But as we mentioned on our 2Q call, the difference between the first quarter and the second quarter, we were starting to see a nice -- small but nice trend back to lower AFEs.

I don't know that I would say that, that trend necessarily improved into the third quarter, but I think it's been consistent. I think we started to see the price of oil go back up. Your drilling and completion costs are going to have some correlation to the price of oil. But I think we're happy with the AFEs that we've been receiving in terms of where their costs are coming in. Our operators are doing a good job.

My sense is that sometimes it takes a while for us to get all the actual costs and it's one of the benefits of being a non-operated working interest owner is you don't see the cost as quickly as the operators do. But the trends that I think we're seeing is certainly the operators are doing a very good job of managing costs out there in the field. And I don't think we're seeing the inflation that we saw in 2022. I think that 2023 third quarter is kind of a continuation of the second quarter.

[Jeffrey Grampp, analyst]

Got it. Great. And for my follow-up, on the, I guess, tangentially related to your own M&A aspirations, Hess is obviously one of your larger operators, there's going to be a changing of the guard there soon. Do you guys have an opinion on that positive, negative nonevent as it relates to how it will impact the test? And prospectively, just curious how you guys are thinking about looking at opportunities underlying Hess acreage given that change.

[Robert Gerrity, executive]

Well, you must have been in our conference from the last week, Jeff, because it's been a big topic of conversation. We know Chevron for what they've done in the DJ, and we think that they're a very good operator. We are under Hess in a lot of wells, and we -- I can't predict if it's a good thing for us, Jeff, or a bad thing. But we do like Chevron, and we got our head on a swivel. Usually, when M&A like that happens, it's beneficial because the smaller assets do shuffle, but we haven't seen that yet. So we're looking out, we don't know yet.

[Jeffrey Grampp, analyst]

Yes. No, I know it's early. I thought I'd ask.

[Operator]

Ladies and gentlemen, there are no further questions at this time. I'd like to turn the call back to management for closing remarks.

[Robert Gerrity, executive]

Well, thanks, everybody, for your time. Ben does a terrific job in answering any questions that you have. And we really appreciate your interest and support. See you in a couple of months. Thank you. Bye-bye.

[Operator]

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