Vitesse Energy Inc

NYSE:VTS

Earnings Call Analysis

Vitesse Energy Maintains Strong Production and Lowers CapEx Outlook

In the third quarter, Vitesse Energy reported production of approximately 13,000 BOE per day while maintaining an impressive 68% oil cut. They reduced their 2024 CapEx guidance by 18%, now projected between $110 million and $120 million, without altering production estimates. For 2025, the company anticipates a production increase of 7% to between 13,750 and 14,500 BOE daily, with CapEx remaining steady. A secure return on capital strategy continues with dividends of $0.525 declared for December. Furthermore, 54% of 2024 oil production is hedged above $78 per barrel, showcasing their proactive financial management.

Production Insights and Future Expectations

In the third quarter, Vitesse Energy reported an average production of approximately 13,000 barrels of oil equivalent per day (BOE/day) with an oil cut of 68%. Despite this being at the lower end of the previous guidance, the company is optimistic about future production increases as more wells are brought online. Currently, there are 20.2 net wells in the development pipeline, with 11.3 wells actively being drilled. Significant production growth is anticipated as these wells begin flowing late in 2024 and into early 2025.

Financial Performance Highlights

For Q3, the company achieved an adjusted EBITDA of $37.6 million and a GAAP net income of $17.4 million. Operating cash flow adjusted net of working capital changes was $35.1 million, which comfortably covered the company’s dividend and capital expenditure (CapEx). Vitesse's cash CapEx for the quarter was $17.2 million, and total CapEx for the first nine months was $87 million. Encouragingly, this figure is expected to be below the previous guidance range of $130 million-$150 million now projected to be $110 million-$120 million.

Capital Allocation and Efficiency

Vitesse Energy has a strong commitment to its return of capital strategy, maintaining a dividend of $0.525 per share paid in September and another declared for December. This careful management of capital is crucial, especially in fluctuating oil price environments. The company reduced its CapEx guidance by 18% for 2024 without adjusting its production estimates, signaling improved capital efficiency. For 2025, production is expected to grow by 7% while reducing CapEx by 2% at the midpoint, demonstrating a proactive approach to capital management.

Hedging Strategy and Market Positioning

The company has proactively hedged a significant portion of its oil production—54% for 2024 at an average price above $78 per barrel and 43% for 2025 at above $73 per barrel. This hedging strategy indicates Vitesse’s intention to mitigate risk from volatile oil prices, ensuring stability in revenue streams. The recent lower oil prices have also opened up new acquisition opportunities, allowing Vitesse to potentially increase its asset base selectively.

Debt Management and Financial Health

As of the end of Q3, Vitesse had achieved a debt level of $105 million, reflecting a low leverage ratio of 0.68 times annualized adjusted EBITDA. This robust financial position is underscored by a recent amendment to its credit facility, which extended the maturity date and adjusted commitments to $235 million while successfully reducing its effective interest rate by 25 basis points. This places Vitesse in a healthy position to continue funding its growth initiatives without excessive leverage.

Strategic Outlook and Opportunities

Looking ahead, Vitesse has expressed optimism around its operational efficiency and production growth. The preliminary outlook for 2025 projects annual production to be between 13,750 to 14,500 BOE/day, reflecting a 7% increase from the revised 2024 guidance. The company’s continued focus on organic acreage development, supported by new drilling opportunities, positions it strongly to capitalize on favorable market conditions as they arise.

Earnings Call Transcript 2024-Q3

[Operator]

Greetings. Welcome to the Vitesse Energy Third 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, and thank you for joining today. We will be discussing our financial and operating results for the third 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. On today's call, Bob will provide opening remarks on the quarter. Then Brian will give you an operations update and 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 and 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, and good morning, everyone. Thanks for participating in today's call. Vitesse's return of capital strategy continued in the third quarter. We paid a dividend of $0.525 per share in September and recently declared another $0.525 dividend to be paid in December. We have a strict return hurdle for our capital allocation in all price environments. We don't have a budget for our CapEx. We can flex our CapEx to meet those strict return hurdles. This resulting capital efficiency buttresses our return of capital model. It allows us to flourish in high price environments and to be resilient when prices decline.

This responsive strategy protects the dividend while positioning us in a downturn to take advantage of opportunities. Improving capital efficiency is exemplified in our revised 2024 guidance and our preliminary 2025 outlook. In our revised '24 guidance, we reduced CapEx by 18% while keeping our production guidance within the prior range. In 2025, we expect 7% production growth on 2% less CapEx at the midpoint. When oil prices are high, as they were over the summer, we tend to win less deals. But when oil prices decrease to where they are now or opportunities increase. We will continue to be opportunistic and again, we are not held to a fixed capital budget.

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

[Brian Cree, executive]

Good morning, everyone, and thanks, Bob. In the third quarter, our production averaged 13,009 barrels of oil equivalent per day, bringing our year-to-date production to 13,023 barrels of oil equivalent per day over the first 9 months. While this was at the low end of prior guidance, our CapEx through September was on pace to be well below that guidance. Production will increase significantly as our pipeline of drilling and completing wells is converted to cash flowing assets over the coming months.

As of September 30, we had 20.2 net wells in our development pipeline, including 11.3 wells that were being drilled and completed at that time. Many of these wells will begin producing late in the fourth quarter and early 2025. The overall pipeline is higher than ever as a result of the increased level of near-term development acquisitions closed earlier this year, and an acceleration of drilling on our organic acreage.

We expect the acceleration of development on our organic acreage to continue into 2025, which is our highest return investment opportunity. We continue to add oil hedges through the end of 2025. At the midpoint of our revised guidance, we have 54% of our remaining 2024 oil production hedged at above $78 per barrel and 43% of our 2025 production hedge at above $73 per barrel at the midpoint of our preliminary outlook. Thanks for your time.

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

[James Henderson, executive]

Good morning, everyone. Happy election day, and thanks for joining. I want to highlight a few financial results from the third quarter. You can refer to our earnings release and 10-Q, which we filed yesterday for any additional details. As Brian mentioned, our production for the quarter was approximately 13,000 BOE per day with a 68% oil cut. This kept our 9-month production within prior guidance.

Lease operating expense came in at $11.6 million for the quarter, which is $9.71 per BOE, a slight decrease from the second quarter on a gross and per unit basis. For the quarter, adjusted EBITDA was $37.6 million and adjusted net income was $7.6 million while GAAP net income was $17.4 million. Cash CapEx and acquisition costs totaled $17.2 million for the quarter and $87 million for the first 9 months of the year and are now projected to be below our prior guidance on an annualized basis. So we are dropping our prior guidance from $130 million to $150 million to $110 million to $120 million while leaving our production guidance within the prior range.

Operating cash flow net of working capital changes was $35.1 million in the quarter, which covered our dividend and CapEx, providing excess discretionary cash flow to pay down our debt by $10 million within the quarter. Debt at the end of the quarter was $105 million resulting in a leverage ratio of 0.68x on an annualized adjusted EBITDA basis. On October 22, we amended our credit facility and among other things, the amendment extended the maturity date. The borrowing base was reaffirmed at $245 million, and the elected commitments were decreased from $245 million to $235 million. We also reduced our effective interest rate by 25 basis points.

As always, we truly appreciate the support of our great bank group. Finally, we are providing preliminary 2025 outlook with annual production ranging from 13,750 to 14,500 BOE per day which is a 7% increase at the midpoint from our revised 2024 guidance and total CapEx for the year of $105 million to $120 million.

With that, let me turn the call over to the operator, and we'll take questions.

[Operator]

[Operator Instructions] And our first question comes from Jeff Grampp with Alliance Global Partners.

[Jeffrey Grampp, analyst]

I want to start first on the CapEx front. Obviously, it came in very low for the quarter and you guys obviously had a couple of different times that you reduced CapEx for the full year. But activity levels seem really robust, rig counts high on your acreage. I think wells in progress and in the pipeline has kind of been at record levels for the last couple of quarters. So curious to dig into that dynamic a bit more, if you could.

[Brian Cree, executive]

Yes, Jeff, this is Brian. I'll take a first crack at that and let anyone else add to it. Really, CapEx for the third quarter was a little lower than everyone expected, primarily just because some of those wells that were affiliated with the acquisitions we made in the second quarter, were going to be completed and brought on more in the fourth quarter as opposed to some of those in the third quarter. So it's really just a situation where the timing of those wells coming online got pushed to the fourth quarter and the first quarter of 2025.

[Jeffrey Grampp, analyst]

Okay. Got it. That's helpful. And I think on the last call, you guys talked about seeing a pretty material increase in the organic CapEx as you guys kind of call it, but maybe it sounds a little early, at least last quarter, to have any kind of conviction about the durability of that. Given that we have the outlook now for '25, I assume you guys have a little bit better line of sight one way or the other on that. So just, I guess, hoping to dig into what you guys are seeing on the organic front and kind of what's embedded in that preliminary outlook for next year?

[Brian Cree, executive]

Yes, we do have more visibility at this point in time. The AFEs that we've received so far during the course of 2024 are getting close to double what we saw in 2023. So a lot more drilling is occurring on our organic acreage, which allows us to allocate more of our capital to that higher rate of return opportunity.

[Jeffrey Grampp, analyst]

Great. And maybe if I can shift to the other side of the coin for my last one, if I could sneak 1 more on the acquisition front. What are you guys kind of seeing there, Bob, I think in the prepared remarks, you said that these kind of relatively lower oil prices kind of help you guys from a deal flow perspective. Any commentary there? And maybe if it makes sense to break it up in terms of kind of the near-term development funnel versus larger deals, if that's worth discussing separately, I'm happy to take it that way as well.

[Robert Gerrity, executive]

So we don't root for lower oil prices, but we are very busy when the price of oil is in the 60s or the 70s. And so the near-term opportunities are a lot more attractive right now. But as Brian said, those near-term opportunities have to compete with an incredible rate of return that we're getting for our organic. So we'll be very selective in buying those near-term drilling things. In terms of the large deals, we have a wonderful picture of Ted Williams on our war room, we're at right now. And we're always looking for the fat pitch. I can tell you that we're going to be very selective when we do that, but we like oil where it's at. We like our opportunity set, Jeff.

[Operator]

[Operator Instructions] Our next question comes from Noel Parks with Tuohy Brothers.

[Noel Parks, analyst]

Just -- I apologize if you touched on this already, but was there any effect that you saw from the wildfires this month or actually, I should say last month in October, in North Dakota?

[James Henderson, executive]

Noel, this is Jimmy. No, we are aware of what was going on out there, but it really didn't show up in our production volumes, and we're not really expecting it to impact us too much. We -- as you noted, we did lower our production a little bit within the range of previous guidance but that was largely due to the timing that Brian kind of walked through on wells coming on that we had acquired earlier in the year.

[Noel Parks, analyst]

Great. And I just wondered, any trends you're noticing as far as costs embedded in the AFEs you're seeing?

[Brian Cree, executive]

No, this is Brian. The AFEs between the second and the third quarter remain pretty consistent for our purposes, we would expect to see actual drilling costs come down. A lot of times, it takes the operators several months to start changing the AFEs. But with the lower oil prices, our expectation is that fuel costs will see those start to come down.

[Operator]

And there appears to be no additional questions at this time. So I'll hand the floor back to Bob Gerrity for closing remarks.

[Robert Gerrity, executive]

Thank you, and thanks, everybody, for dialing in. If you have any further questions, you can always get a hold of Ben. Thank you, and we'll see you next quarter. Bye-bye.

[Operator]

Thank you. This concludes today's call. All parties may disconnect.