Q1 2023 Vital Energy Inc Earnings Call

Good day, ladies and gentlemen, and welcome to Viper Energy incorporated first quarter 2023 earnings conference call.

My name is Abby and I will be your operator for today.

At this time all participants are in a listen only mode.

We will be conducting a question and answer session. After the financial and operations report.

As a reminder, this conference is being recorded for replay purposes.

And it is now my pleasure to introduce Mr. Ron Hagood, Vice President Investor Relations you May proceed Sir.

Yeah.

Thank you and good morning Jordan.

Joining me today are Jason Patton, President and Chief Executive Officer.

Brian Lemmerman Senior Vice President Chief Financial Officer, Jay.

J D Hill, Vice President operations as well as additional members of our management team.

During today's call, we will be making forward looking statements.

These statements, including those describing our beliefs goals expectations forecast and assumptions are intended to be covered by the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.

Sure results may differ from these forward looking statements for a variety of reasons many of which are beyond our control.

In addition, we will be making reference to non-GAAP financial measures.

Reconciliations to GAAP financial measures are included in the press release and presentation, we issued yesterday.

Jailing, our financial and operating results for first quarter 2023.

The press release and presentation can be accessed on our website at www dot vital energy Dot com.

We'll now turn the call over to Jason Pigott, President and Chief Executive Officer.

That's wrong.

Everyone and thank you for joining us today.

Energy had outstanding results for the first quarter.

Our wells in Howard County are delivering consistent production bracket impacts have been mitigated and we are seeing positive impacts from our multiyear implementation of cutting edge digital technologies that are improving both base production in our new wells today.

Today, 74% of our wells are operated by submersible pumps, we're using the combination of larger pumps and artificial intelligence to optimize our wells on an hourly basis and believe this differentiates us in the market cap.

Capital also came in at the low end of guidance driven by better than anticipated efficiencies from our <unk> fleet.

Short frac holiday due to freezing weather and a cessation of some of the inflationary pressures we experienced last year.

While our program was frontloaded with two Frac crews. This year, we nearly achieved cash flow neutrality for the quarter and expect to have positive free cash flow for the remainder of the year now that the additional completions crew is released.

We recently closed our driftwood acquisition, continuing our run of disciplined accretive acquisitions to build scale and add to our eight years of high quality inventory. We are active on the new acreage with our first four well package currently being completed in Upton County.

As we execute on our strategy, we are creating value by moving rigs to these new areas growing production and testing new zones that have increased our inventory.

The 9% of our production now comes from the areas we acquired over the last four years.

I'm also very proud to highlight our 2022 emissions results.

These results represent a tremendous achievement for the organization.

These efforts resulted in achieving our 2025 emissions reduction goals for both scope, one greenhouse gas emissions and methane emissions last year.

This achievement sets us up well to advance our more aggressive 2030 goal to reduce the combination of both scope one and two emissions to 10000 metric tons of Cotwo per Boe.

Vital energy has the right strategy to create long term value for our shareholders.

We are executing extremely well today exercising capital discipline to profitably develop our high quality inventory in a sustainable manner.

We are focused on generating free cash flow, reducing leverage building scale through accretive acquisitions and continuing to lower emissions.

I'll now pass the call over to Katie Hill for operational highlights.

Thank you Jason.

We executed very well in the first quarter total production was 8% higher than our guidance midpoint and oil production was about 12% above the mid point.

This was driven by several factors, including new wells, reaching peak production faster than anticipated lower downtime related to offset completion activity and better production uptime across base and new well.

These positive drivers are the result of initiatives aimed at increasing operational efficiency and the application of advanced digital solutions to our production operations.

Example, we have created a specialized teams that focus on optimizing artificial lift and compression operations, bringing key services in house and accelerating adoption of artificial intelligence.

We use AI to identify inefficiencies in artificial lift and compression operations, which allows us to proactively reduce associated downtime.

We are now able to remotely adjust artificial lift at that point in real time to optimize performance.

This culture of technological innovation has supported a 15% increase in gas lift <unk> and a 4% increase in submersible pump runtime directly impacting base production performance and efficiency.

Now there are a significant contributor to recent production results has been our program in Howard County to accelerate dewatering as new wells.

Equipment and working with our partners to upgrade their water system, we are able to achieve higher peak oil production rates. In addition, larger pumps and while impacted by offset completions can dewater more quickly returning base oil production to sales.

We have been able to reduce the operational impact from weather over the last two quarters through a proactive weatherization program.

Our operational standards during winter months, including proactive fluid management ahead of colder temperatures dramatically limited freeze offs and associated production downtime. In addition to outperforming production expectations. We continue to gain efficiencies in our completion operations in the first quarter, we converted our primary completion crew to an electric fleet.

We successfully implemented a new process, maintaining cycle time efficiencies and bringing online two new well packages ahead of schedule.

As a result of this performance we now plan to turn in line an additional four wells late this year, while remaining at the midpoint of our full year capital range.

Lease operating expenses on a Boe basis were lower than anticipated this quarter, while variable production expenses increased with higher water production and Risperdal <unk> LOE per BOE was diluted by maintaining fixed costs and an increase in production environment.

Believe these savings will hold average unit LOE at about $7 75 per Boe for the remainder of the year.

As Jason mentioned, we achieved our 2025 targets for greenhouse gas intensity and methane intensity in 2022.

These reductions are primarily driven by the application of continuous emissions monitoring technology, the retrofit facilities with non maintain pneumatics and enhanced detection program.

In 2023, we are expanding our continuous emissions monitoring to cover approximately 70% of our gross operated oil production and we maintain our commitment to regularly inspecting every operated site.

Additional pneumatic conversions in electrification of our field operations, including active drilling rigs in our electric Frac fleet will even further reduce emissions.

Similarly, we are making progress on reducing flaring associated with our operations.

In 2022, we reduce routine flaring, 42% from our 2019 baseline and expect to lower this further in 2023 as we work towards our target of eliminating routine flaring by 2025.

This team has delivered a great first quarter, continuing our operational track record and advancing the deployment of new technology across the field.

Now hand, the call over to Brian for a financial update.

Katy.

<unk> Energy's excellent financial results in the first quarter were driven by operational success, coupled with disciplined investments.

We're essentially free cash flow breakeven in the first quarter much better than anticipated at the beginning of the year due to the production gains Katie mentioned and lower than expected capital investments the.

The remainder of the year, we expect to be free cash flow positive.

Determining factors will be production, which has been strong to date capital, which we have a high degree of confidence in today and commodity price.

We will use the free cash flow generated by the business to reduce debt at current commodity prices and direct some towards return of cash to shareholders if commodity prices rise significantly.

<unk> expenses were in line to lower than forecasted other than G&A expenses, excluding <unk> and transaction expenses, which were $3 <unk> per Boe.

Higher than our guidance of $2 40 per Boe.

Alrighty drivers were one time expenses associated with a timing of accounting for the 2022 inflationary retention bonus paid out last year first quarter weighting of benefits and accruals related to both the 2022 and 2023 compensation plans.

We expect G&A, excluding <unk> transaction expenses to average around $2 50 per Boe for the balance of the year, which is in line with historical levels vital energy is off to a great start in 2023 executing well, both operationally and financially as we generate free cash flow through the end of the year.

Here, we will remain focused on reducing debt and maintaining strong liquidity.

Lastly, the strength of our capital structure was recognized by our Bank group during our spring Redetermination process, and our <unk> borrowing base and commitments were reaffirmed.

With that I will turn it over to the operator for questions.

Thank you.

I would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad if.

If you would like to withdraw your question Press Star one once again.

Ask that you please limit yourself to one question and one follow up question and we will pause for just a moment to compile the Q&A roster.

Yes.

We will take our first question from Derrick Whitfield with Stifel. Your line is open.

Thanks, Good morning, all and congrats on a solid quarter.

Okay.

Hi, there.

For my first question I wanted to focus on your base and new well performance.

With two very strong quarters in the books there appears to be.

Farm really in place on your operational performance.

Separating the two could you help frame the degree youre basis outperforming your expectations.

Separately, if your new well outperformance is driving higher EUR is there simply just the acceleration of the production response.

Thanks, Alex.

Yes.

First part of that.

Morning, Derik. This is Katie and I think when we think about our base production performance.

And by the application of technology that we've been working on over the last couple of years I think we're starting to realize those gains, particularly in areas where we.

Electric submersible pumps with our primary left pie.

We're seeing a lot of that in Howard County, with faster dewatering wells that have been hit by product, which is primarily based world, but also with some of the new wells, including otherwise that you mentioned as we think about new well performance.

I'll turn it back over to Jason, but we're in the middle of bromine.

A few of our wells online for the year. So we have about half of our new wells for 2023 are coming online in Q2.

I'll be excited to see the performance of those over the next few weeks.

Yeah, and I'd say again for the performance went back to.

Our core Howard County, So where we have a high confidence and the wells that are being brought online again, they are cleaning up faster because of technology and also mentioned we have 74% of our production is on ESP. That's why we highlight that when we get.

But the 4% more onetime although those are real volumes that kind of start to flow through the system, what's great about the technology at a more like an annuity right Theyre always there once we've reduced the downside is that we're excited about that.

Acknowledging we put in place it's been four years in the making.

To this point.

Underscore the buying that takes from the build on the cultural change required to get where we are today.

That's great Jason.

As my follow up I wanted to shift over to the capital side and the gains you're experiencing in capital efficiency, that's allowing you to raise the til count for the year without raising the midpoint of Capex.

How much of the improvement is self help versus market and would it be safe to assume the market contribution is only what you have clear line of sight to at the moment.

On our capital plan for the year I think we're benefiting a little bit on both we are deploying that electric Frac fleet in Q1 of this year starting in early January and have been able to maintain efficiency from end of 'twenty, two and are starting to see you actually improved cycle time, which is allowing us.

Paul and as additional wells are at the end of the year that acceleration of activity keeping us around the midpoint of guidance, but I will bring again well in addition to that all year plan.

We're also benefiting from a little bit more competitive market pricing on what was an expectation we have planned on a 4% end of 'twenty two into 'twenty three in place and then the market is experiencing a little bit below that but we're benefiting from both.

Yeah, that's it.

In the first quarter performance was really good.

Our spot crew is not as efficient as our fleet can be and so now that we're just on the equally again, we're picking up all of.

This day to day. So that's one of the thing at this point.

Still countable.

That's great. Thanks for your time and comments.

Great.

And I will now turn the call back to Ron Haywood for closing remarks.

Well. Thank you for joining us. This morning, we appreciate your interest in vital energy and this concludes today's call.

And ladies and gentlemen, this concludes today's conference call and we thank you for your participation you may now disconnect.

Okay.

Okay.

Yes.

Okay.

Yes.