Q2 2023 Vitesse Energy Inc Earnings Call
Greetings and welcome to the tests Energy's second quarter 2023 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.
Now I'll turn the conference over to Ben Messier Director of Investor Relations. Thank you you may begin.
Good morning, and thank you for joining US today, we will be discussing our financial and operating results for the second quarter of 2023, which we released yesterday after market close.
You can access our earnings release and presentation on our Investor Relations website, and our Form 10-Q was filed with the SEC yesterday.
I'm joined here this morning, with the test as chairman and CEO , Bob guarantee our president, Brian <unk>, and CFO , David and Cosco.
Our agenda for today's call is as follows Bob will provide opening remarks on the quarter. After Bob Brian will give you an update on operations and then Dave will review, our Q2 2023 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.
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 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 <unk>.
Ben and welcome everyone to our second quarter.
To call.
It is going to sound an awful lot like our first quarter two calls which is what we intend to do we are a dividend first return of capital company.
To that we paid 50 said dividend and our board has approved a second 50 cent dividend.
So as the dividend first company.
A lot of our ability to pay that dividend protect our dividend depends on our deal flow and our deal flow in the second quarter was excellent.
We have very high economic hurdles and we were able to source a lot of capital.
Deals are in that second quarter, and we're very thankful about that remember.
There is about a year plus or minus lag between.
Capex and production.
So first and foremost we are underwriters.
And our underwriting depends on the quality of our data. So I wanted to give a special shout out to our data scientists who have created.
And maintain our database, which we call V luminous.
Amanda Bailey and Adam Woodson have done a great job in creating that database, which is democratize over our entire organization and what that means is that land accounting engineering finance and even management.
Access is our data continuously we want to know exactly what's happening out in the field.
We're in over 6000 wells and we called those wells the kids in the class so our ability to accurately.
Underwrite our capital expenditures depends on that data.
I just wanted to thank you for jumping on the call I'm now going to turn the call over to our President Brian Cree.
Thanks, Bob and good morning, everyone.
I'll be providing a very brief update on our operations I'm going to start off with our development pipeline.
As of June 32023, we had $8 five net wells that we're drilling completing or that had been completing but not yet producing and another 11 net wells that had been permitted for development by our operators.
Capital spending through the first half of 2023 is on pace to beat the upper end of our yearly Capex guidance as we spent $43 3 million on development Capex and acquisitions as Bob mentioned, we are encouraged by the amount of well proposals and near term drilling acquisitions that have.
Met or exceeded.
Our hurdle rates so far this year.
While average <unk> cost increased less than 10% last year and during the first quarter of 'twenty three.
The average AFB cost decreased in Q2 2023, so that's a good trend for us.
With the rig count remained modest in the Williston, we just have not experienced the same cost inflation as other basins and I know that's always a hot topic for people.
That's it I'm going to turn this over to our CFO , Dave <unk> to review our financial highlights for the quarter.
Thanks, Brian .
Morning to everyone on the call.
I'll give a quick summary of our financial performance for the second quarter of 2023 overall, our second quarter was much more typical of what we expect the company to look like going forward since our results Werent burdened with the one time spin related charges that we saw to income tax expense stock comp expense and G&A expenses.
Spence and but we took them in Q1, our net income for the second quarter was $9 6 million and adjusted net income was $11 4 million. Our adjusted EBITDA was $34 8 million, which is down from $40 1 million in Q1, as a result of lower commodity prices primarily related.
Natural gas and Ngls.
We generated second quarter cash flow from operations of 39 million and free cash flow of $16 1 million.
We define free cash flow as cash flow from operations adjusted for working capital changes less cash spent on drilling and completion capex.
This free cash flow was used to pay our quarterly dividend.
Reduce the balance drawn on our revolving credit facility by $4 million and make $3 1 million of attractive near term drilling acquisitions.
We ended the quarter with 41 million outstanding on our credit facility, while elected commitments remained at $170 million with a borrowing base of $245 million.
Our second quarter production was up 16% from the second quarter of 2022 totaling 11359 barrels of oil equivalent per day with oil representing 67% of our production and 94% of total revenue.
Our year to date production was 11441 Boe per day again, 67% oil.
Total revenue, including the effects of our realized hedges was $53 2 million for the quarter.
Lease operating expense in the second quarter increased a modest 3% compared to the first quarter of 2023 on a per Boe basis, which reflects quarterly variability related to workover activity.
General and administrative expense for the second quarter of 2023 totaled $4 5 million or $4 32 per Boe.
A decrease of 59% on a per unit basis compared to the first quarter of 2023.
This decrease was primarily due to lower one time costs related to the protests spinoff from Jefferies Financial group as I mentioned earlier.
On the hedging front, we layered in additional oil swaps through Q1 2024 to take advantage.
The increase in oil prices that occurred in April .
With respect to our guidance, we are reaffirming our previously issued 2023 annual guidance.
With that I'll turn the call over to the operator for Q&A.
Thank you.
I 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 he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star he is.
Our first question is from Chris <unk> with Evercore ISI. Please proceed.
Hey, good morning.
My first question is for Bob just on the ops update provided with the release.
Good uptick in our net activity wells day, and a half in the second quarter and I think some good out of detail just on a three and a half net fees I was hoping you might be able to help us just tie. These figures back to this year's Capex Guide and then you know, perhaps Bob as you kind of referenced earlier any read throughs for how we should think about.
2020 for production growth just given the lag.
You know an impact from that spend.
Yeah, Chris Great questions, you can't imagine how much time, our finance team sits in this room and models. So your takeaway that we've had good activity in the second quarter.
Is correct, we've seen we've seen a lot of deals at it.
Clearly a hit our hurdle or above so are we.
We don't know at this point, Chris if that's going to continue in the third quarter early indications are good but again.
We're not ops and we don't hit our budget, we hit an economic hurdle. So we can't really give you. It's fair to ask you about a read through about 2024, but we cant really give you any more bids on that Chris.
No fair enough I guess.
The other question I had was just you know obviously given the diversified operator exposure I think you've kind of.
Mentioned this earlier around service cost deflation, but I was just curious what you guys are seeing in terms of leading edge deflation on true services just beyond I think what most have talked about as you know pretty visible consumable components coming down like steel et cetera.
You know, Chris we didn't see a bump that much last year.
We are seeing a decrease in costs throughout the whole complex.
Steel spreads and the.
And the drilling costs, so I can't really say, it's a large trend it's trending positively I see.
Over the course of time, we're strong believers in that capital will become more efficient.
And we will get <unk>.
Production results with less money. So I think it's trending in that direction I think part of that is.
Is technology with with our Fracs part of that is just more efficiency the infrastructure of the Bakken pretty well built out so no huge.
Deflation trend, but I think things are going in the right direction.
Okay.
That's great and if I could just sneak one more and I'm curious maybe.
Talk about any you have your sort of latest thoughts around larger scale acquisition front. It sounds like the smaller scale stuff is is trending in a positive direction, which is great, but just I'm just in terms of the larger scale stuff if theres any update that'd be great. Thanks.
Yeah, That's fair, Chris we bid on a number of larger transactions.
You know $100 million to $300 million in the second quarter.
We were not close so we look at everything.
Take a look at our balance sheet and you can see at the capacity that we have to make a.
Good size accretive acquisition. So we're looking we'd love to do it we.
We haven't won yet Chris, but we're try it.
Thanks, Chris.
Our next question is from Lloyd burn with Jefferies. Please proceed.
Hey, good morning, everyone just.
Just a couple of questions I guess on the back of <unk>.
Chris's question keys to capital efficiency, you're seeing.
In the Bakken.
And just not deflation but.
Maybe our cost per foot basis, whether that's improving with technology and then I'm going to have quick second question, Yeah, you bet Lloyd.
Great question. Thanks, it's good to talk to you as well.
So we have seen more three mile laterals and more re fracs.
We think that that is what the field is going to be in the future its up ticked a little bit more in the second quarter than trend.
But Bryan Bryan Cree I'm going to ask to elaborate on this.
Yes, good morning, Lloyd So as Bob mentioned, Yeah, we've seen that increase in in both three mile laterals and re fracs between what we saw in the first quarter and what we saw in the second quarter and that trend has continued from.
What we started to see at the latter part of 2022 so.
Again that capital efficiency is what we think is going to drive our future results and and we've been doing this since 2014 and the advancement of technology, especially in the Fracs and now in the re Fracs is something that has really changed our our asset over time, and we expect technology to continue to improve.
Move in that that and capital efficiency will continue to improve yeah, just to restate that re fracs, we're strong believers in the extraordinary economics around them.
Three mile laterals are pretty new and we don't have enough information to say that that's going to move the needle very much. So thanks for your question.
Right Yeah.
Maybe someone could you just comment on.
Okay.
Deferred taxes and <unk>.
How you see that progressing going forward I know a lot of it was tied to the spin, but just kind of where you are there.
I'm going to ask David Costco to answer that for you look okay. Good morning, Lloyd Yes. So we took the big charge in the first quarter for the <unk>.
The change in corporate structure, and so going forward. We obviously you know flush that a big charged through income tax expense, but going forward. We're looking at a tax rate somewhere in the 17% to 20% of our current net income as we go forward.
Okay perfect.
Thank you guys.
And good job.
Thanks Lloyd.
Our next question is from Donovan Schafer with Northland Capital markets. Please proceed.
Hey, guys. So hold on Darden I need to interrupt you.
After.
Congratulations Donovan as.
As the father of young Sebastian with who I understand yes.
Nickname as Solvay is so it does the us Abby savvy staff, okay, well congratulation Donovan and thanks for waking up further calls so go for it yeah. Yeah. Thank you yeah I'm going to have to go Oh go do bottle service shortly.
Nothing in computing.
But thank you. Thank you very much yeah. So congratulations.
Congratulations on the quarter I want to start with kind of I guess like a compound question, where so the first one is yeah, you're trending you're trending to actually be above the high end of guidance on Capex and you know in a lot of context like say you were building a factory or something.
Being above guidance on Capex is often seen negatively but it sounds like in this case, you're saying well this isn't being driven by inflation and so it's actually a reflection of opportunities for us where we're seeing more things to pull the trigger on so it's you're actually talking about this as a positive thing.
I was just kind of like.
Make sure I'm understanding that right is that a fair characterization Brian .
This is Bob I'll start I'll start with it and I'll take that Brian had look the tests is a factory.
We have built this machine to convert undeveloped acreage.
And drilling opportunities into cash.
The end of the of the day, we return that cash to our equity owners.
Of whom management is a large chunk of we get paid by that dividend. So the factory is a perfect example, so the widgets that we buy.
I have to be very economic so when you see our capex going up it's because we're seeing things that really makes the factory home. So your conclusion that if our capex increases.
It's a good thing is the right conclusion is exactly the way we see it we don't want to just buy stuff and rammed stuff through there we could we could buy a lot more than we're doing but when you see capex pop for us. That's a good thing we are at the upper end of our of our range but.
Again.
We are not changing the guidance but.
Deal flow is good so.
So then this is kind of the related part of that is.
You know I think Chris the first person to ask them questions asked the question about like 2024, gross and I understand as a non op. Yeah, you can kind of put the the capex out there and it sometimes I think of it as kind of laying that chips on the table, but you don't have necessarily have control over.
Exact timing of when things will land there. So I appreciate that there's a challenge, saying you know coming up with a number for <unk> 'twenty 'twenty four growth.
But given that you are spending.
It's kind of a higher capex level, so like you're seeing the opportunities unless just sort of assume things hold steady I mean, none of us has a crystal ball, but let's say oil stays in a kind of E D.
S dollar, you know plus or minus a $5 or so.
And that kind of a context or an environment with this kind of capex spending you. When do you feel it would be like appropriate for us to kind of like bug you on growth or say you know cause because you guys are newly public.
And then you know you got the first quarter in the second quarter. So I realize it's pretty myopic and shortsighted and I know you guys are these results can be lumpy. So it's not really fair to say where should we grow next quarter and should we go to the next quarter or two but there is a point where you have to say Wow. It's been this many quarters. When you know when should we when should we bug you about it.
Why aren't we getting something very fair and I'm going to ask Bryan Cree to elaborate on this but look everything we do when we wake up in the morning is to protect that dividend. So capex is very important if it's economic.
Brian you want to elaborate on that and let me just so so Jonathan I think your first conclusion was that Capex is good bought handle that in and I think that is absolutely. The way that we look at it but you also stated that Capex is lumpy and the timing of production is lumpy and so to really try to get to your question of when you can start <unk>.
I would say look at the end of the third quarter. If we have another good capex quarter. Then we'll start looking at what that's going to mean towards 2024, so let us get through another quarter lets see how capex looks and and and kind of what the trend looks like for the fourth quarter and then we'll likely comment on production for 2024.
Okay. That's really helpful. That's actually very very helpful. Okay, and then the last called my last question back to this idea of kind of everything you guys do is around protecting the dividend and I know.
You know the initial kind of going public in the spin out from Jefferies. It was really.
Given it being kind of a new story for some investors and everything it was really nice to have I think you had 50% of oil production hedged.
Through 2024, I might not have the exact number there, but broadly speaking the hedge position was was a pretty healthy through the end of 'twenty 'twenty four and so you kind of look at the numbers and pretty much say you know what.
Regardless of what commodity prices do we can feel pretty darn confident that dividend is protected through the end of 'twenty four.
What is the do you have sort of decided on sort of a philosophical approach going forward looking into 'twenty five.
526, what do you do you plan to just kind of continue hedging at about 50% and if the if the opportunities present themselves. So if you are able to.
Where prices are if you can lock in a hedge out in 'twenty, four or sorry, 'twenty five 'twenty six that helps secure that dividend do you plan to take advantage of all that hedging or.
How are you thinking about hedging when we get past 2024.
So Jonathan this is Brian in and a great question clearly hedging is important to us to protect the dividend. It's a dividend paying company capital return company. So we look for we look for that hedging to help support that.
At these prices.
First let me just talk about where we stand right now we're not quite 50% hedged all the way through 2020 for AR, we have more hedging in place in 2023, then in 2020 for a lot of that has to do with the backwardation in the market.
But we constantly look at our hedging and as we get closer to 2025 and 2026, we absolutely expect to.
Continue putting hedges on play in place at prices that we find attractive and you'll see that you know and I in our 10-Q, we talk about the exact amount of hedges and where the prices are you know we're hedged at around $78 for the rest of 2023 and above $76 in 2024.
You can kind of see where we liked to lock in prices and I would say that that's a that trend is going to continue with those or we can get those prices are above we like to go ahead and and utilize our that instrument to help protect our dividend.
Okay that makes sense. Okay. Thank you very much guys very helpful. I'll take the I'll follow up offline with any other questions.
And congratulations again, we're really happy for you Donna.
Thank you.
Our next question is from Michael Swartz with Jefferies. Please proceed.
Hi, Michael.
Hey, guys. Congrats on the quarter I had one question on the three mile laterals I wanted to ask so up the 90 staffing Rosebay F E. You've got how many have three mile laterals and you know what operators are adopting this approach and then.
What is your average lateral length in your production in the Bakken and when do you really expect.
To see the impact.
Of these three Milers, you know across the board and adopted more more broadly in the basin.
So Michael this is Brian I'll I'll give you. Some some quick numbers on that are you know during the second quarter. The number of three mile. A F fees that we got in we're more than double the first the first quarter.
Again these things are lumpy, we're not sure that that will continue but it seems like that is a trend that we are seeing from operators.
Racking cord even continental.
Several of these several of these operators are moving to try and do as many three mile laterals as they can at this point in time and so we've seen that increase like I said more than double.
What we saw in the first quarter, but it's but it's still we still see more two mile laterals, then we see a three mile lateral.
Yeah.
Got you that's very helpful. Thank you.
Thanks, Michael.
We have reached the end of our question and answer session I would like to turn the conference back over to Bob for closing remarks.
I want to thank everybody for being on the call and we look forward to talking again in three months. If you have any questions. Please contact Beth so thanks everybody.
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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