Q4 2022 Vitesse Energy Inc Earnings Call
Speaker 2: Greetings. Welcome to VTES Energy's full year 2022 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 of Investor Relations. Thank you. You may begin.
Speaker 3: investor relations website in our Form 10-K will be filed with the SEC in the coming days.
Speaker 3: We have also posted a new investor presentation on the website.
Speaker 3: I'm joined here this morning with Vittess' Chairman and CEO Bob Garry, our President, Brian Cree and CFO Dave Micasco. Our agenda for today's call is as follows. Bob will provide opening remarks regarding Vittess and our return of capital strategy. After Bob, Brian will give you an overview of our asset and operations.
Speaker 3: and then Dave will review our 2022 financial results and 2023 guide. After the conclusion of our prepared remarks, the executive team will be available to answer.
Speaker 3: Before we begin, let's cover our safe harbor language. Please be advised that our remarks today and putting the answer to your questions may include forward looking statements within the meaning of the private security's litigation reform act.
Speaker 3: 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.
Speaker 3: We display 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-gape financial measures, including Adjusted EBITDA, and debt to Adjusted EBITDA in free cash flow. Reconciliation of these measures to the closest GAT measures can be found in the earnings release.
Speaker 4: on January 17th.
Speaker 4: The test is focused on returning capital to its stockholders through owning financial interest as a non-operator in oil and gas wells drilled by leading U.S. operators.
Speaker 4: As part of this return of capital strategy, we declared a quarterly cash dividend of 50 cents per share to be paid in the first quarter of 2023 and also approved a $60 million share repurchased program.
Speaker 4: We have a strong alignment with our shareholders as the Vitesse management team and board, combined with other members of Jefferies management.
Speaker 4: collectively own approximately 30% of the outstanding shares of the test.
Speaker 4: Our existing asset provides significant cash flow and includes a deep inventory of economic drilling locations.
Speaker 4: Our capital allocation strategy starts with the return of capital to our shareholders through paying our quarterly dividend.
Speaker 4: Next, our returns-based hierarchy.
Speaker 4: focuses on organic cat-backs and acquiring near-term development opportunities followed by other asset acquisitions.
Speaker 4: Finally, remaining cash flow will be allocated to share repurchases or debt repayment.
Speaker 4: We are grateful to Jeffries for their support from 2014 to today and we are excited to run the test as an independent public company and look forward to our future success.
Speaker 4: And now hand it over to our president Brian Cree to discuss our operations.
Speaker 5: Thanks Bob. Let me start by noting that the 2022 financial and operating results included in our earnings release only reflect the results of our predecessor, the test energy LLC. It did not include the effects of the acquisition of the test oil LLC made on January 13, 2023.
Speaker 5: concerned with our spin-off from Jeffries. However, the investor presentation included on our website provides pro-former financial and operating data as though VTES oil was acquired at the beginning of 2022.
Speaker 5: The combined assets include approximately 50,000 net acres, primarily in the Williston Basin, although we also own assets in the DJ and Powder River Basins.
Speaker 5: We have financial interest in over 6,400 producing wells operated by over 30 leading operators.
Speaker 5: In addition, we had 16 net wells that were drilling, completing, or had been permitted for development by our operators as of December 31, 2022.
Speaker 5: Historically, 25 to 40% of the rigs running in the Williston drill on Vittess' acreage, which is a testament to the quality of our acreage and its diversification across the basin. Today, 33% of the rigs are actively drilling on Vittess' acreage.
Speaker 5: During 2022, the test energy in the Tess oil combined had drilling and completion cat-backs of just over $60 million.
Speaker 5: We've been encouraged by our operator's discipline to control costs and drill productive wells. The potential for cost inflation has been a hot topic. We expect costs to increase slightly in 2023, which is incorporated within our stated annual CAPEX guidance.
Speaker 5: With the RIC count remaining modest in the Wilson, we have not experienced the same cost inflation as other more active basins.
Speaker 5: Thanks for your time and now I'll turn it over to our CFO to review our financial highlights for 2022.
Speaker 4: Thanks, Brian . I'll give a quick summary of VTESA's financial performance during 2022. I want to remind you once again that our year end results only include the operations of VTESA Energy LLC and will not include VTESA oil until Q1 of 2023.
Speaker 4: due to that acquisition occurring when the spin-off from Jeffries occurred on January 13th. Our net income for the year was $118.9 million. This was a substantial increase over 2021 and was primarily driven by higher oil and gas prices.
Speaker 4: Our 2022 production was up 4% over 2021, totaling 10,376 barrels of oil equivalent per day. Adjusted EBITDA was 168 million and increased to 62% from 2021, and we generated 100 million of free cash flow in 2022.
Speaker 4: Free cash flows defined as cash flow from operations, adding back working capital adjustments, less drilling and completion capbacks. The test has realized oil and natural gas prices in 2022 before the impact of hedging were approximately $94 per barrel and $8 per MCF.
Speaker 4: After taking into consideration the impact of hedging, a realized oil price dropped to $76 per barrel, and as a two-string reporter, our natural gas revenue includes revenues from NGLs, which is why we reported realized natural gas prices above Henry Huff. Production expense.
Speaker 4: including gathering and transportation, increased 6% compared to 2021 on a per-BOE basis.
Speaker 4: As we saw many operators allocate more capital to workovers on existing wells.
Speaker 4: Cast GNA included approximately 8 million of spin related costs for the year.
Speaker 4: Capital spending for 2022 was near maintenance levels as VTESA energy spent 56 million on drilling and completion costs.
Speaker 4: At the end of 2022, our net debt to Adjusted EBITDA ratio was 0.23 times as we had 48 million drawn on our revolver and 10 million of cash.
Speaker 4: On January 13, 2023, the spin-off date, we entered into a new revolving credit facility with a borrowing base of 265 million.
Speaker 4: On the hedging front, we have approximately 1.3 million barrels hedged in 2023 at a weighted average price of $78.14.
Speaker 4: and 660,000 barrels hedged in 2024 at a weighted average price of $75.97 per barrel.
Speaker 4: These hedges are intended to help protect the dividend while ensuring our stockholders return some exposure to increases in oil prices.
Speaker 4: We will continue to monitor oil prices and opportunistically add hedges at the appropriate time.
Speaker 4: Now, with respect to 2023 guidance, we are currently providing annual guidance for daily production, including the percentage of oil and CAP-X.
Speaker 4: Our expected production for 2023 range from 10,800 to 11,800 barrel of oil equivalent per day, with a 66 to 70 percent oil cut as a percentage of our production.
Speaker 4: Please note that our oil and natural gas production can vary from quarter to quarter based on weather, new wells coming online, and other operational matters that may arise.
Speaker 4: We expect our total cat-backs to be in the range of 60 to 80 million for 2023.
Speaker 4: With that, I'll turn the call over to the operator for Q&A.
Speaker 2: Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. And for a participant choosing speaker equipment, it may be necessary to pick up the handset before pressing the star keys.
Speaker 2: Our first question is from Stephen Richardson with Evercore ISI. Please proceed.
Speaker 6: Hi, good morning. I was wondering if you could talk, Bob and Brian , a little bit about the M&A environment and what you're seeing in the outlook. And then perhaps considering the fact this is your first call, if you could talk a little bit about how you evaluate M&A and how you plan to differentiate yourself relative to some of the other...
Speaker 6: public, non-op companies that investors may be familiar with.
Speaker 4: Thanks, Steven. So this is Bob. So far this year we've had about the same deal flow that we had last year which is very encouraging to us.
Speaker 4: our organic drilling has come in at about the same level as last year, which is our highest rate of return. So we're encouraged by that. On the larger M&A transactions, we look at everything.
Speaker 4: Again, we are not purchasers of flowing. We.
Speaker 4: are happy with the asset that we have both our undeveloped and our resource base.
Speaker 4: We now that we're public we have gotten a lot of deals that have walked into the door But I have to tell you to do a substantial deal. It's gonna have to be pretty special
Speaker 4: We're we're we will look at everything again. We've got about $200 million of fresh powder on our revolver that we Could use but we're not gonna just do a deal to grow
Speaker 6: Great, maybe as a follow-up, Bob, could you, I mean, one of the dimensions, do you own some minerals? And clearly the mineral market has been pretty hot and obviously a little bit more, quite a bit more expensive than non-op. So, you know, in myials…
Speaker 6: As it pertains to owning, you know, not bidding on just PDP packages and also packages that come that may have minerals, can you talk about, you know, partnership strategies or how you would approach those types of packages and perhaps how you've done in the past?
Speaker 4: Yeah, that's a terrific question. We don't cheek out minerals or royalties. We have a fair amount of them, but you're right. The market for minerals is pretty hot. And I will tell you that we're actually entertaining right now a package where we would sell some of our minerals.
Speaker 4: So, you know, we're, we always look to maximize our economics. So, we're not actively looking just for minerals and, you know, at certain points, we would actually sell some minerals.
Speaker 6: Great. Thanks very much. Best of luck. Thanks Steven.
Speaker 2: Our next question is from Donovan Chiefer with North Lane Capital Markets. Please proceed.
Speaker 7: Hey guys, thanks for taking the questions and congratulations on completing this set up. I'm also happy to see you.
Speaker 7: The board did approve that you dollar dividend, that you know, you'd be able to indicate it in your filings before that, but also, you know, nice to see the $60 million approved for buybacks. So, you know, Kudos on those funds.
Speaker 7: I want to, so the first question though, I think.
Speaker 7: I get the sense investors do want to get a better handle overall on sort of the sustainability of the dividend just because on the face of it, it looks like a very high attractive dividend. And you know when you guys came out it was like a 13% dividend.
Speaker 7: Stocks come up. So it's like 11% now. So, you know, it's bill looks pretty attractive But of course people look at 2022 they think okay, that's exceptional somehow And of course the the year view performance increase from 2021 To 2022 is driven a lot by oil price increases
Speaker 7: But, you know, with the hedges, it looks like, you know, effectively your oil price in 2022 is crazy to have Nathanael man raised in the past from the point of view.
Speaker 7: $76 barrel so you know maybe 2022 wasn't sort of as exceptional as it looks on the face of it And that that might be maybe it makes it a more representative year
Speaker 7: But I want it'd be great. I think if you guys could just talk through that a bit how you look at
Speaker 7: that dividend level going forward and the sort of sustainability of that in the context of like you know, 2020 2021, 2021, you know, 2022 when people kind of look at those numbers, how to square the, how to make sense of that.
Speaker 4: Absolutely. Thanks a lot for the question, Don. The first thing I'll do is refer to the return space capital allocation framework slide that we have on our presentation.
Speaker 4: We are a dividend paying company. The first capital allocation we make is to pay a dividend.
Speaker 4: So where other companies may pay the dividend after they figure out how to allocate the rest of their capital, we pay it first.
Speaker 4: I remember 30% of this company is owned by management and management of Jeffree's.
Speaker 4: So, we like those dividends and this company is constructed so that we don't need to make any other acquisitions.
Speaker 4: We're comfortable with the assets that we have. We're low-leathered. And I think that your statement that, well, last year we got net $76.
Speaker 4: oil price.
Speaker 4: This year so far with our hedges and where the price oil is, it's a very similar year. So we are very comfortable with our current dividend and we will look to any deal that we make to be supportive of that dividend.
Speaker 7: Okay, that's really awful. And then...
Speaker 7: Just curious, you know, you've got the shareholder return framework and putting being being a dividend paying company kind of at the forefront of that. On that topic, is there a sort of a payout ratio, you know, if that's kind of front and center and what you want to focus on, then when you are looking at the dividend.
Speaker 7: going forward. Is there sort of a payout ratio like on a normalized basis you're kind of targeting so you know, on trailing free cash flow, you know, it's a 66 percent I think of the 100 million trailing free cash flow. So you know fast forward several years.
Speaker 7: If that were to get out of whack where you're at a meaningfully higher free cash load, you know, north of the hundred million, then does it make sense for us or for investors that start thinking, okay, they'll move back in a direction of like a 66% day out, kind of just how do we think about that?
Speaker 4: Very fair question. Absolutely a fair question. We allocate capital pretty much every day. So our business plan anywhere between $60 and $100, it's pretty much the same thing. You got to remember with a $60 million dollars
Speaker 4: Maintenance capexs. We do have a substantial amount of capital that we can allocate to the dividend or share buybacks.
Speaker 4: So we do not have a specific number, but again to reiterate we love the dividend. It's the reason why we're a public company and we will look to adjust the dividend upwards if we continue to see these strong prices in the market.
Speaker 7: Okay, okay. And then this might be a bit of sort of a housekeeping question, but just for the Vitesse Oil LLC, how that smaller piece is getting folded in with I think an effective date of January 13th.
Speaker 7: It kind of just double checking here. My understanding is that is, you know, like an equity, it's worked out in terms of sort of an equity deal, just the way everything's structured. So it's not like just some incremental cash spend, some purchase price associated with it.
Speaker 7: that will come up in the first quarter, that it just becomes folded into the share counts.
Speaker 7: And then tied into this is the comments about management owning about 30%.
Speaker 7: That's also kind of on a...
Speaker 7: prolonged like a vesting that's based on a
Speaker 7: sort of I think a restricted stock unit or something comparable to that. So I want to make sure when we factor into the test oil ink equity impact plus the management, 30% management ownership. I've been calling that about 33 million shares.
Speaker 7: going forward in terms of share counts. Just want to see if I'm roughly in the right ballpark there.
Speaker 5: Yep, again Donovan, very good questions. I'm going to ask Brian Cree to answer that. Thanks Donovan. Yeah, you're right on track there. It's 33 million is kind of what we're thinking of as fully diluted shares outstanding. And then just to address your question on the test oil that is kind of part since that was done at the time of the spinoff.
Speaker 5: There will be no incremental shares issued for that. It's roughly the 28.2 million of common shares that are outstanding right now. That includes the VTESO oil acquisition.
Speaker 7: Okay, and then it's sort of the...
Speaker 7: You know, of course dilution can be like a dirty word, but for the sake of just how this is all structured and organized That's really about part of what gets
Speaker 7: Part of what gets you guys to that 30% ownership, including Jeffries and Jeffries management and other stuff like that That's what gets you to the 33 million shares
Speaker 5: That's exactly right. It's all those remaining restricted stock units of got it both our management team and the Jeffries management team.
Speaker 7: Okay, fantastic. And then, I always can ask a million questions, but I want to check because I'll set back in line with...
Speaker 7: So I want to check with the operator. Operator, are there other people waiting to ask questions in the queue?
Speaker 7: You can keep that. I want to talk about winter weather, so some other companies in the back end, some non-op operating as well. I talked about the winter, it was pretty brutal.
Speaker 7: December specifically definitely impacted production levels. You guys reported to full 2022 results without...
Speaker 7: breaking out as much for the fourth quarter, but just in general going forward and kind of modeling.
Speaker 7: Did 2022 seem like an exceptional year in that sense? And so even without investments that drive growth, would we expect 20 in a sort of quote unquote normal year? Does it make sense?
Speaker 7: to think of 2023 as getting an improvement from that, kind of just from having a tough.
Speaker 7: having a tough production environment in the fourth quarter of this year. Just any other color, kind of on the winter, and how to think about winter. North Dakota, you know, it's cold. I'm going to be right now. I'll take a crack at that one and anyone else can jump in here.
Speaker 5: Look, I mean, from our perspective, winter weather just happens. And it's happened even though we've been public since January of this year. We've been doing this since 2014 in the Williston. And every year is different, right? I mean, yeah, November and December this year were pretty cold and we saw impacts. But last year in April , there were two major winter storms that occurred.
Speaker 5: And none of us are meteorologists. We don't know what's going to happen. And we just try to take the best estimates that we can on a go forward basis. And again, put that into our guidance.
Speaker 7: Okay, okay, and on the theme of the guidance.
Speaker 7: Looking at the back end and kind of rigged counts and
Speaker 7: I know natural gas prices have come down a lot, so it's not as relevant for you guys being much more oil weighted, but in the gas space, and for instance, there's an expectation that rig activity is likely to maybe slow down in 2023. Which is all fresh, battery.
Speaker 7: I don't know that we're expecting that as much on the oil side, but I'm kind of just if you can clarify what the assumption is in the outlook, if you're expecting, you know, stable rig count in the back end and increasing rig count, slightly declining rig count.
Speaker 7: What kind of are those assumptions built into the guidance? Distram activity levels.
Speaker 5: So again, this is Brian , I'll take a first shot at that. Currently today, based off of the NDIC, there's 45 rigs running the base and as I mentioned earlier, 15 of those rigs are running on our asset. Our $60 to $80 million of CapEx projection assumes kind of that same range of rig count. TheI Rick Counsell.
Speaker 5: over the last four or five months has ranged anywhere from the low fouries to the upper forties. And that's kind of how we model it on a go forward basis. We don't expect the rig count to jump into the fifties or anything like that. But if it does, our organic catbacks, as Bob mentioned earlier, is the first place after our dividend that we want to allocate funds to. So.
Speaker 5: We would certainly welcome higher rig count. Love to see that organic capex be developed to producing assets. But we don't model that in our 60 to 80 million or in our annual guidance of production.
Speaker 8: Okay. Okay.
Speaker 7: Then, I actually have two questions around kind of maintenance cap-ex and how to think about that. For the outlook, you got the 60 to 80 million and we talked about some cost inflation. So I guess the first one there would be, are we still even accounting for cost inflation? Do you still see-
Speaker 7: I think you talked before of 60 million is being around a maintenance cap X level so you know you have to budget you have to allow for the possibility that it goes up to 80 because you're not controlling the pace of the rigs and all the activity but Are you still sort of looking at this from a standpoint?
Speaker 7: But, you know, on average overall your belief or view is that something going north of the 60 million would be more, you know, driving growth versus maintenance.
Speaker 7: But on average, overall, your belief or view is that something going north of the 60 million would be more driving growth versus maintenance. CapEx.
Speaker 5: We've tried to take into consideration the inflation that we've seen so far and again, as I mentioned, I don't think we see massive inflation occurring in 2023. So we feel like that $60 million that we've talked about as maintenance cap-backs still reflects...
Speaker 5: our expectations for 2023 and remember that that is a component of that as we've discussed before that is the organic cat-backs which you know ranges anywhere from 40 to 50 million dollars and then the other part of that is the near-term development opportunities that we've acquired.
Speaker 5: So really the range between 60-80 factors more into, we don't know what that rig counts going to be, we don't know exactly what our organic cat-x will be, and then our acquisition strategy. Typically, we think about trying to acquire, make acquisitions in the $10 million range is kind of how we model it, but last year we spent over $20 million. So that's why we kind of take that range down to them and it's just to give ourself flexibility.
Speaker 4: So we're actually getting more production than out of each dollar we spend. We think that trend will continue, and that's a very exciting trend. We're also seeing a greater amount of three-mile laterals. Again, from a capital efficiency standpoint, we're seeing a greater amount of three-mile
Speaker 4: Those are very beneficial to us. So our dream scenario is to spend the same amount of money every year and get more production.
Speaker 4: And that's generally what happened in 22, and we believe that that will continue in 23.
Speaker 7: Okay, and then on the same topic just for 2022 and the reported results. For the free cash flow calculation, you're including the organic drilling and completion top X which was 56 million.
close to what you talked about as a maintenance, gap X, well, I know that doesn't include the VTES oil LLC, so maybe you include that, maybe that bump that almost right on the money to $60 million or something. But you do exclude the $28.5 million.
for acquisitions.
So I'm just curious, is this reflecting that same kind of framework around generating returns to investors? So you include the 56 million because – and doing your free cash flow because conceptually that falls more into kind of a maintenance context bucket.
And then you're not including the 28.5 million, you're not subtracting that out to get your fruit cash book because that sort of icing on the cake or sort of this incremental opportunistic.
move to drive return to investors and drive gross and it's not as much of a maintenance capex type expenditure. Am I thinking about that the right way?
Yeah, hi, Donovan. This is Dave. When we think about that, the reason we didn't include that 28-5 in our free cash flows, we look at that as discretionary spending. And going forward, we have maintenance cap-X included, obviously, in some small level of Hao Da, of the authorized print filters, and for the public safe access, we have used this immediately to make sure that
reserves, it's great to see very large year-by-year increase in reserves. That does benefit from...
the increase in oil prices. I don't think reserves there's not as much kind of the hedging dynamic we talked about with the the dividend because they're looking on a go-forward basis and so they use you know the reserve engineers as auditors you know it's more a matter of just what have historical front month first of the month
Trailing told me I'm pricing has been and so forth, but it's really nice and curious and so If I look at the deck on your website your PV 10
shows pro forma for the Vitesse Oil LLC puts you north of 1.2 billion.
And then because historically you were a limited partnership while you were under Jefferies and so the pastor entity you didn't pay any taxes and so your standardized measure and your PV10 end up effectively being the same. But you know if we're trying to look at that on a go-forward basis knowing that you will be paying taxes.
and haircuts like a tash tach on the serves. So if I take that same 17 percent,
And sort of assume that that would apply the same way it applied about proportionally to the 2021 numbers That still puts you right at about one billion dollars on a standard as measure the reserves Maybe even just a little bit north of the one billion. I just want to check
broadly in a pretty broad sense. My logic there just is should the sort of tax rate, which was about 17 percent.
from the 2021 numbers, like in terms of the reserve impact, does it make sense that it views like a 17-ish percent?
you know, cash, tax, hair cut, or something you say in like the 20% ballpark, or is there, am I blindly missing some glaring thing there that I should know about?
Donna, I think you're in the right ballpark. I'd look at it more from a 15 to 20% haircut on that. And remember, if our cap ex goes up, that'll reduce that effective tax rate if we get more of the IDCs to take against our taxable income. But that 15 to 20% as a run rate is reasonable.
Okay, great. Well, this all kind of checks all the boxes for me. So I'm good to go on this end. I'll take any other questions offline. And congratulations on the quarter and the spin guys. Appreciate it. Thank you, Donovan.
We have reached the end of our question and answer session. I would like to turn the conference back over to Bob for closing comments.
I want to thank everybody for their interest in Vitef. And if you have any questions, please reach out to Ben. We'd love to answer them. And thank you very much. Bye bye.
Thank you, this will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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