Q2 2023 Vital Energy Inc Earnings Call
Okay.
Good day, ladies and gentlemen, and welcome to vital Energy, Inc. Second quarter 2020 earnings Conference call. My name is Justin and I'll be your operator for today.
This time all participants are in listen only mode. We will be conducting a question and answer session. After the financial and operations report.
A reminder, this conference is being recorded for replay purposes.
It is now my pleasure to introduce Mr. Raul Jacob.
This president Investor Relations you May proceed Sir.
Thank you and good morning.
Joining me today are adjacent target.
Didn't and Chief Executive Officer, Brian Lemmerman, Senior Vice President and Chief Financial Officer, J D Hill, Vice President operations as well as additional members of our management team.
During today's call, we'll 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.
Our actual 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 detailing our financial and operating results for second quarter 2023.
The press release and presentation can be accessed on our website at www dot vital energy Dot com.
Now I'll turn the call over to Jason Pigott, President and Chief Executive Officer.
Thanks, Ron and good morning, everyone. Thank you for joining us today.
Financial and operating results in the first half of the year have been outstanding.
We've strengthened our business through accretive acquisitions that extend our oil weighted inventory and enhanced oil production.
As a result production was again above the high end of guidance with oil.
Any record capital investments were below the low end of guidance.
We closed on two accretive oil weighted acquisitions are well positioned for the second half of 2023 and expect to maintain our momentum into 2024.
So we think about our 2024 program.
We remain focused on our core strategies, maintaining capital discipline generating free cash flow, reducing debt and leverage.
We're getting accretive acquisitions.
Sustainability and integrating digital solutions.
For 2024, we are targeting relatively flat production compared to 2023 inclusive of volumes acquired this quarter.
Importantly, we believe we can accomplish this at similar investment levels to full year 2023, and grow free cash flow versus full year 2023, enabling continued debt reduction.
Our expected 2020 for budget benefits from planned development in our recently acquired acreage in Upton County in Delaware Basin, reinforcing our strategy of acquiring and quickly developing high return oil weighted acreage across the Permian basin.
Over 90% of our production comes from properties, we acquired over the last four years.
Proud of what the organization has accomplished thus far in 2023 and are focused on continuing to execute our strategy and build additional shareholder value I will now turn the call over to Katy for additional details on our strong operational performance.
Thank you Jason.
I'd like to start this morning by recognizing the great work, our operations and supply chain teams are doing to optimize well productivity drive capital efficiencies lower cost and integrate new acquisitions.
These teams have been instrumental in continuing our outperformance throughout the.
For the year.
In the second quarter, we delivered higher than expected production volumes, driven primarily by outperformance on the base and accelerated oil production from new wells.
During the quarter, we released mechanical downtime and Frac impact on base production.
Additionally process improvement and the adoption of digital solutions have improved uptime performance on both our compression and artificial lift.
As Jason mentioned, we set a company record in the second quarter for oil production. Following the close of our Driftwood and Forge acquisition. We have subsequently hit a new oil production record early in the third quarter, we anticipate the average for the quarter will be the highest average oil production rate in our history.
We have hit the ground running on those new assets are you completing or well package in Upton County, and then to a package in the Delaware.
Our updated production guidance the midpoint of fourth quarter oil production is lower than the third quarter midpoint. This is a reflection of our planned development schedule and how we are optimizing and minimize future parent child impacts.
Currently drilling a 20 well package in western Glasscock, where completions operations are expected to start at the beginning of the fourth quarter and complete in early March of 2024.
As a result, the three months period, where very few wells will be brought online which is reflected in our fourth quarter production range production is expected to remain relatively flat in the first quarter of 2024 before increasing in the second and third quarters as we fully bring on the 20th Wildland package.
And the second quarter capital expenditures were below expectations as we maintain our efficiency gains including in the newly acquired leasehold.
We are also benefiting from moderating inflationary pressures for our services, especially in the CTV market.
We're seeing prices come down for both high spec drilling rigs and completion services.
I can bring both of our Midland drilling rates to highlight how are we further improved cost efficiency and reduce operating emissions during the drilling phase.
'twenty 'twenty four outlook is underpinned by our operational success and we have fire operating platforms of our recently acquired leased all we plan to continue optimizing well productivity and improve operational efficiencies. Our team has done a fantastic job mitigating cost pressures in 2023, and we are optimistic we can find additional savings in 2024.
Our current outlook does not factor in additional cost reductions beyond what we've achieved today.
So now I'll turn the call over to Brian to provide a financial update.
Thank you Patty.
Operational performance and efficient integration of the recently acquired Driftwood and forge assets.
Our strong outlook for the remainder of 2023 and full year 2024.
We're again, increasing production guidance for full year 2023 further.
Further incorporating improvements in our base production and excellent performance from new development.
Also lowered capital expectations for the year decrease in the midpoint of the range from $700 million to $680 million and bringing the high end of the range down by $30 million.
A result of moderating inflationary expectations for the second half of the year and exceptional performance from our operational teams.
As Jason mentioned.
Our initial outlook for 2024 envisions fairly similar activity levels on a net basis maintained full year 2023 production levels, even after increasing production associated with those acquisitions.
Resulting free cash flow over the next 18 months is expected to be around $265 million supported by relatively robust hedge book, we will continue to look for opportunities to strengthen our hedge book to lock in free cash flow that will be directed to paying down the RVO.
In the second quarter. The company recorded income of $222 million related to the reduction of the valuation allowance against our gross deferred tax asset.
So the company is currently structured.
Current commodity prices, we expect our $1 2 billion NOL will offset income for another two to three years, resulting in us being a federal taxpayer around 2026 at the earliest.
I will now turn the call back to Jason for closing comments.
Thank you, Brian and closing this was another strong quarter for us I can't say enough about how our teams have worked together to transform the company integrate our acquisitions control costs and deliver a strong first half of the year.
We went out and open up the call for questions.
Thank you at.
At this time I'd like to remind everyone that in order to ask a question.
It is star then the number one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Derrick Whitfield from Stifel.
Your line is open.
Thanks, and good morning, Jason and team and congrats on another solid quarter.
Thanks Derek.
Good morning from my for my first question I wanted to focus on your second half 'twenty three guidance in 2024 outlook in light of your lighter til schedule in Q3, and Q4 and the larger package package of wells, you're referencing in Q1 of 2024, how should we think about the shape of your production profile through the first half of 2024.
Okay.
Yeah. It's a good question Oh I'm on slide nine of our deck out there we do have the til schedule and where we're coming off a again 20 retails.
Our operated areas. Additionally.
Additionally, prior to us taking over for because they were running three rigs and we were running we're running just one rig. So are those two things will cost productions are kind of dip into the fourth quarter I believe as Katie mentioned on the call we're going to hit a record for the third quarter, but the lack of deals coming in fourth quarter and early first quarter of 'twenty four.
What kind of drive this dip in production.
Additionally, we have a large 20 well package that we're completing our drilling and completing in western Glasscock, which is much larger than we typically do typically arent packages or more like 12 wells at a time. So that is also going to defer again production coming online of the ramp into 2024, So we should see.
A dip for fourth Q fairly flat or <unk> 24, and then production will start rising as these wells are all coming online.
Great and for my follow up I wanted to confirm your base optimization work is not factored into your guidance and also ask Kate if she could offer her thoughts on how long it would take to integrate the optimization process into the driftwood and forged acquisitions.
Sure Hi, good morning, Derek.
Most of our base optimization work on the Midland Basin has been included in our go forward forecast.
We are probably three to six months from having the hardware platform deployed on the Delaware I thought upon which we'll be able to leverage all the AI work that we've done so I would expect to start to pull that in 2020 or for new acquisition, but we're pretty excited to be able to deploy that platform in that area.
And one last if I could with respect to forge could you share your broad thoughts on areas of upside relative to your initial assessment now that you have the asset in house.
Yeah. So the beginning has gone really well, we're about a month into the transition and it's been great getting to work with that team and then you I thought I think some of the opportunities that we've identified already are primarily related to our scale and purchasing power for both new capital activity and operating expense will be able.
To drive down cost. We also as I mentioned have really a strong AI platform that we're excited to deploy over the next probably six to 18 months I think we will see improvement on both base production optimization and then our overall cost structure in the area.
Yes, we mentioned in the release I think again, we're going to accelerate bringing the frac crew and so I think when you have one crew working for a longer period of time to get more consistency, there, which will also provide some opportunities to get our completion costs down.
That's great. Thanks for your time and responses.
Sure.
Thank you. Your next question comes from the line of Zack <unk> from J P. Morgan.
Your line is open.
Good morning, Thanks for taking my questions.
I guess first just on your your outlook or your.
Activity levels in 2020 for most of your activity in 'twenty threes in Howard County.
Can you give us some some color on how your activity will be split in 'twenty. Four I know you mentioned the 20 well package in Western Glasscock Thats planned for the first half of the year.
But can you just give us some detail on how those 70% to 75 turn in lines will be spread across your asset base next year.
Yes. This is cal called Iron.
I'll take that so in 'twenty four.
I guess at the end of 'twenty, three we revisit Howard County.
I have two sections that were going to develop there before returning to western Glasscock.
And we kind of bounce back and forth between Howard County in Western Glasscock, and the first half of the year and then towards the back half of the year is when we go in and essentially start developing our driftwood assets down in the southern Midland Basin.
So kind of looking at our schedule here I'd say, we got probably.
Quarter of development will be in Howard County.
Quarter of it would be in our South Midland Basin, and then the remainder would be in western Glasscock.
We're also got in parallel the rig running full time in the del Mar one rig is dedicated to the Delaware Basin right now right.
Got it so is that roughly a dozen turned in lines next year in the Delaware.
Yes, one rig running full full time in the Delaware is anywhere between 12 and 14 wells a year.
Got it thanks for that color.
Just a follow up on an operating cost.
LOE has been around $7 per Boe in the first half of the year and the guidance for <unk> at $7.
But it is expected to move closer to eight in <unk> just based on the second half guidance.
Can you give us some color on how you expect <unk> to trend in 'twenty four.
Maybe what's a good run rate we should be using.
About modeling that.
Yes, hi, good morning, Zach this is Katie.
You think about <unk> through the remainder of 'twenty, three and going into 'twenty. Four we expect total spend to stay relatively flat, but the dollar per BOE will moderate with production. We're heading again at Q3 production record for the company and with that we will see increased water volumes and you see a total spend go up a little bit and then as we go into Q4.
In Q1, the decline in total OEM flattening into 2024 will drive dollar per Boe.
We expect total year next year. It will look very similar to this year as you average it across the four quarters.
Thanks.
Okay.
Thank you Scott.
Thank you.
Your next question comes from the line of Greg <unk> from Bank of America.
Your line is open hey, good.
Morning, guys.
I think Gregg Brody.
So if people aren't sure.
Just can you talk a little bit about.
Sort of the M&A landscape, how youre thinking about that today, obviously you've completed.
Completed too.
Transactions I'm curious if you if you think you'll be active for the rest of this year or.
You'll be on the sidelines as you digest the most recent acquisitions.
Yeah, we really built this company and the team to scale as Katie mentioned they've already done.
But a large amount of work to get the assets integrated driftwood, it's pretty much fully integrated so I don't think having to take a break just because of the the teams that is really an issue for us it's really more the opportunities and when they come available where we've been successful. This year, we've pivoted to doing smaller deals that are more.
Digestible.
That 250 to 500 million dollar range.
Again when.
When they are available we look at them evaluate them our focus has been on.
And doing accretive acquisitions that build inventory for us and oily or parts of the basin, we move to the Delaware, because we see more opportunities potentially over there. So we will we'll continue to look at them I think our strategy shift again to do on these smaller acquisitions works for us are a little bit.
Less competitive. So then some of the larger opportunities where you get companies coming even from outside the basin to bid on these so this has been working for us for this year. So far the assets are virtually integrated again, we got things like telecommunications that we need to upgrade but that wouldn't prohibit us from doing something else but.
Again, we want to do things that are smart if you look at the company since 2019, and they've been we've been able to grow oil almost 55% and that's kind of on the heels of doing these acquisitions, where we bring bring wells that we acquire to the front of the rig schedule, they've got better returns and help us.
Grow our oil production overtime, so expect to continue to do deals kind of like we've done so far this year.
And your.
You, obviously have moved to the Delaware.
More recently.
Fair to say you're probably.
Focus in the Permian or are you still possibly thinking about going outside the Permian for opportunities.
Yeah, We've said, Texas oil, which again Permian Eagle Ford.
Primarily the things that we look at so.
And everything we're looking hard at would be in the Permian Basin, where we can we've got an existing footprint. We can expand from itself to kind of look at where our acquisitions have done we've gone from eastern Midland Basin to the North in Howard and then kind of along with southern perimeter through the Midland and then to the Delaware Basin. So just.
This is where we're comfortable operating but that's the that's the focus would be the Permian for now are there are not as many privates available they've been getting gobbled up so I guess at some point with many of the pivot but today its Permian oil is the primary focus.
And then just you highlighted the free cash flow generation you expect through next year.
Which obviously helps your liquidity picture, but I'm curious how you do think about your liquidity and sort of the refinancing.
I'm, just sort of your 'twenty fives, and just what's the right amount.
Of credits.
On your revolver.
All of us through what's your how you're thinking about that in the context of <unk>.
That's 25 maturity is 18 months away.
Sure.
A lot of different options to take care of the 2025, including refinancing and.
All of those we're looking at every day and looking for the best long term outcome of the company.
In the short term if we needed to we can put it on the revolver using our borrowing base.
Along with the free cash flow to pay them off, but we hope to do something better than that as far as a long term.
RBS balance, we've generally said that having 12 to 18 months of free cash flow on the revolver is a level at which we'd like.
Okay with that way, we have we have a location or a place to put.
Free cash flow without having to inhibition.
Inefficiently call bonds. So that's generally how we think about it so.
<unk> balances a little high right now.
Relative to where we would like to add that.
And just my last question, so the partnership with northern oil and gas with.
With this most recent acquisition can you just.
Mind us if there is.
If they have any outs on their drilling obligation with respect to.
But how do you plan to approach this.
Historically, they've typically had it out but I noticed a little bit different from that I'm just curious.
How committed is that capital.
To support what you wanted to.
Yes, so I am not sure, which one's transaction youre, referring to them in the past, but for our transaction. They are a straight ends up working interest partner. So they are no different than any other working interest partner we have in every other wells that we drill.
Got it and David.
Non consent or non consent wells, if they choose not to.
Yes.
Yes, as a as a working interest partner that they can incentivize et cetera.
How much of your and just.
When you think about that partnership did you identify.
Your inventory and sort of how long they would be.
What was.
A program that made sense.
Sense of since they would be there alongside you or is that are you.
I guess, how much planning have you done there yet.
Well, so I think I would expect these wells are.
They are at the front of our of our inventory schedule.
If for whatever reason they non consented, we would we would drill them 100%. So this is this is different than the transactions. They may have done with other people or not.
Family familiar with them. So I don't want to comment on these but on those but this doesn't this does not resemble our drilling commitment or a drilling fund or anything like that this is a straight up 100%.
Working is working interest partnership they bought into the asset and the exact same manner. We did the only difference is that we're the operator.
I think that's that's similar to what they have in the past so okay.
Thanks for the time.
Thank you.
Okay.
Thank you.
Last question comes from the line of Nicholas Pope.
Seaport research.
Your line is open.
Good morning, everyone.
Good morning Nate.
Okay I was hoping you could.
Compare across northern Midland Southern Midland Glasscock and in Delaware.
What are your expectations are for for well costs I don't know if thats on a per foot basis or total total drilling complete whatever whatever you're.
Comfortable with but it's.
Looking at the aggregate trying to understand like how that how that is going to look across those different areas right now.
Sure Good morning, and welcome.
Costs are generally trending with bottom hole pressure in that area, So youll see a little bit higher.
Cost as we move south in the Midland Basin, and as we move over into the Delaware, a little bit higher cost than our Howard County at development in 2023.
Is there not that big of a spread between.
Like the Delaware versus Midland in terms of where your where costs are at your expectations there.
Generally now so I think one of the opportunities that we have in the Delaware basin and compared to historical.
Spend in that area that will have a little bit better scale.
And to the previous operator, I think we expect to be able to deliver that as well that will that lower capital than that previous program that they were running in the area are continuing to apply both our previous Delaware experience that we have across the operations team and what we've learned in the Midland basin in that areas were working through the development plan.
But I think like again like Howard County, well would be.
76, $7700 per square foot versus $12 50, or so for Delaware, well right now, but again, it's Katie said lots of opportunity to improve we haven't drilled our.
Our first wells, yet we've completed them, but again I think there's good opportunity there.
Got it that's very helpful.
And looking at the outlook for 'twenty for the remainder of 2023, you gave a little clarity on on the LOE component of operating costs.
Yes.
Looking at just.
The transportation and marketing is that should we expect things to be fairly stable in that dollars 20.
How are you all thinking about that progressing through the this year and.
And then to 24.
Yes. This is Ben Cline, the transportation and marketing arrangements. We have in place are related that are reflected on that line item are related to crude transportation.
That's a fixed quantity of crude oil that we transport on gray oak pipeline.
So absolutely.
Absolute dollars should be relatively flat period over period.
Your unit cost is obviously going to fluctuate with total production.
Alright, Thats all I had thanks, everyone.
Thank you.
Thank you there are no further questions at this time, Mr. Hakan I will turn the call over back to you.
Well. Thank you for joining us. This morning, we appreciate your interest in vital energy and this concludes this morning's call.
Yeah.
This concludes today's conference call. Thank you for joining you may now disconnect.
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