Q3 2023 Vital Energy Inc Earnings Call

Good day, ladies and gentlemen, and welcome to vital Energy, Inc. Third quarter 2023 earnings Conference call. My name is necessary and that will be your operator for today.

This time, all participants are in listen only mode.

We'll be conducting a question and answer session after financial and operations report.

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

It is now my pleasure to introduce Mr. Ron Hey, good.

Nice precedent Investor Relations you May proceed sir.

Thank you and good morning.

Joining me today are adjacent packet President and Chief Executive Officer, Brian Zimmerman, Senior Vice President and Chief Financial Officer.

Katie Hill, Vice President operations.

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'll be making reference to non-GAAP financial measures.

Reconciliations to GAAP financial measures are included in the press release and presentation, we issued last night, describing our financial and operating results.

This 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 and thank you for joining us today.

Our results in the third quarter were outstanding were a continuation of our exceptional execution throughout the year, we are delivering on all aspects of our strategy.

In the third quarter, we announced three acquisitions, making a total of five for the year. These acquisitions increased scale are accretive to free cash flow and add high value inventory.

Generated 91 million of free cash flow and also achieved company record production levels.

We continue to demonstrate capital efficiency improvements coming in below guidance on capital investments and reducing our leverage ratio.

We have successfully integrated the driftwood enforce properties. We acquired earlier this year and are completing wells on those properties that are outperforming what the previous operators achieved.

<unk>, we are making progress upgrading operations to our standards and seeing opportunities for synergies future cost reductions in base production enhancement.

As we close out 2023, we have high confidence in our ability to execute on the plan for 2024 that we communicated in September.

We have a proven track record of integrating and creating value through acquisitions by applying our operational expertise and proprietary technologies to enhance based production.

Reduce risk and ensure cash flow, we have hedged around 90% of our 2020 for expected oil production free.

Free cash flow will be allocated to reduce absolute debt and decrease our leverage ratio to about 1.0 times by the end of 2024.

Today, We also released our 2023 sustainability report and our inaugural climate risk and resilience report updating the company's progress and performance on sustainability related matters.

This is the company's for sustainability report and the first is vital energy.

These reports you will see that we one achieved two of our four 2025 environmental targets three years ahead of schedule.

Second have reduced scope, one greenhouse gas emissions by 59% and methane emissions by 87% both from the 20th 19 baseline levels.

Third earned trust wells AAA low methane rating the first company to achieve this rating.

Final energy is now stronger than it's ever been.

Scale inventory depth free cash flow yield and balance sheet strength position us to build sustainable value in 2024 and beyond I will now turn the call over to Katy for additional details on our strong operational performance and our success integrating the driftwood and forge acquisitions.

Thank you Jason.

I'm excited to share details about our successful integration the driftwood important properties, including how we are driving down operating costs, improving capital efficiency and increasing production.

I will also address our increased fourth quarter and full year guidance.

Let's start I would like to compliment and congratulate the entire organization for the work they're doing to integrate these assets along with the two assets still in progress.

Everybody is energized and going above and beyond to make these acquisitions the platform.

We have a track record of rapidly onboarding and finding creative ways to capture synergies to enhance our return our driftwood enforce deals are no exception.

From a development perspective on forge, we have now executed on all phases of operation drilling new packages completing acquired dock and managing your turn in lines.

Development planning process has been successful and the operational results have been extremely encouraging all production from these wells are outperforming historical results from the previous operator by nearly 30% and we have already reduced well costs by 10% through excellent execution work from our drilling and completion teams.

It is a similar story on the driftwood asset we have completed the four docks that were acquired from the previous operator, we are seeing gains through the application of our Frac design and artificial lift which has resulted in oil production from these wells outperforming previous results by 7%.

We will soon relative first vital energy design wells and well work to identify a significant cost reductions and efficiencies.

We have on the Florida asset.

So the point necessary hardware to begin applying our production technology platform and we look to see optimization adult and that effort over the next six months.

Operationally, we are implementing our best practices and have already optimized routes relief operator, our team is now handling an average of 30 wells per operator versus 715 for the previous owners.

In addition to a faster deployment of the vital energy operating platform. There's also allows for a meaningful impact on lease operating expenses when scale to crop up.

Approximately 45% of base production on the fourth.

It's produced by E. S. P. We are currently building out data infrastructure in the field to be able to incorporate these well onto our digital platform and we see the potential for the same 4% increase in run time that we've experienced on our base production in the Midland Basin.

Turning to service cost, we have consistently outperformed our capital expenditure guidance. This year in part due to our supply chain group did a great weren't keeping up ahead of some of the big inflationary pressures observed blocks to everybody industry and we are seeing deflation in certain areas. This year, let's.

CTG, our tubular goods in particular, we tend to buy out about six to nine months to meet our tubular needs.

This kept us from hitting the extreme price peaks last year, but it also muted the positive deflationary impact this year.

Today, we are seeing an approximate 20% reduction in our current CTG costs when compared to last year's average.

Our stimulation services about three quarters of our cost for 2024 are locked and one place we saw some benefits within contracting of our second completion crew.

Where are we saw a 30% decrease in pricing and earlier this year.

These savings are significant and have been factored into our $750 million to $850 million budget range for 2024 on.

On the production front, we updated our Q4 total and oil production guidance to reflect strong recent performance across the apathy and earlier than estimated closing dates for all three acquisition.

Fourth quarter capital guidance is also lower than what we communicated in September again for adjustments related to timing and capital are being reflected in purchase price adjustment.

We also increased our full year production outlook to incorporate the outperformance in third quarter higher production expectations in the fourth quarter and the earlier closing date.

In closing our execution teams are continuing to deliver high performance. We are successfully integrating our new properties and optimizing our existing assets to increase production and lower costs.

I'll now turn the call over to Brian.

Thank you Katie.

Total energy has made substantial progress in 2023 significantly strengthening our overall capital structure generating sustainable free cash flow and furthering our ability to grow through future accretive transactions, we announced five transactions. This year totaling $1 7 billion three of which have closed with the.

Other two expected to close in early November.

Acquisitions growth scale and facilitate deleveraging as we remain disciplined in our spending to generate free cash flow to pay down debt.

We had a thoughtful approach to how we finance these transactions using a balanced split of debt and equity.

When combined with our recent public debt and equity issuances. This has resulted in a simple easy to understand balance sheet that provides us significant flexibility.

Upon closing of all transactions the discharge of the 2020 five notes and the conversion of Henry's preferred stock to common stock. We will have no debt maturities until 2027 more than 1 billion of liquidity and a simple capital structure of common stock.

Your credit facility and unsecured notes.

Yeah, we're laser focused on generating free cash flow to reduce absolute debt and interest expense, we have hedged about 90% of our expected 2024 oil production at prices, we feel are well above the long term average price of crude.

We're well positioned to reduce interest cost even after we pay down the <unk> balance since we have $700 million of unsecured notes that are currently callable.

We expect to generate approximately $425 million in free cash flow over the next 15 months and are targeting a leverage ratio of 1.0 times or less by year end 2020 for.

I will now turn the call back to Jason for some final comments.

In closing I want to thank all the vital energy team for their efforts to integrate and acquired five assets. This year.

And with our operational outperformance, we will enter 2024 and a position of strength. Thank you. Operator, you may now open the call for questions.

The floor is now open for your questions to ask a question at this time. Please press Star then the number one on your telephone keypad.

Pause for just a moment to compile the Q&A roster.

We have one question comes from the line of Devin Whitefield with stifle your line is open.

Thanks, and good morning, congrats on another solid quarter.

Good morning Derik.

Well My first question I wanted to focus on your 2024 outlook with the understanding that you're reiterating your previous output metrics could you shed light on activity expectations between basins and the shape of your production profile throughout the year.

Yeah perfect guidance for next year again, we really it's not really.

Changed at this point I think one of the things. The team is really working on is optimizing our development between the two basins and I think there's opportunity you're seeing the outperformance on the new assets that we highlighted.

So again, I think theres going to be opportunities there in the future, but we're working through it for US the key thing is getting these.

Transactions closed secondly closed maypole. This week, we should be closing on tall sitting in and Henry relatively soon so we're very excited about that and once we've got those closed we will continue to optimize the profile for next year I will turn it over to Kyle I can give you a little bit of guidance kind of on the shape of the curve again as a reminder, we do have this big package coming out in the west.

In Glasscock, but I'll turn it over to Ed.

Yes.

As you can see in our materials the investment opportunity in the Delaware side of the basin is very compelling.

As we as we integrate these assets and we optimize around that we're certainly kind of looking there and figuring out how we can deploy more capital to that area, but but as Jason said, we'll come out with kind of a full update on where we plan to be when they come out in February of 'twenty four.

Now that we have essentially.

Our diversified asset base would you invest across both the Delaware in the Permian and the business side of the basin.

Seeing a flatter oil profile than we have in the past.

As we've talked about we have this large play well compartment package at some of them coming online in <unk> of 'twenty, four and it's going to ultimately peak in <unk> of 'twenty. Four is ultimately we kind of view <unk> and <unk> is the peak in 'twenty four but ultimately a flatter profile than we've seen in past years.

That's one of the great. Thank you.

The benefits of scale as again, we had when you got two rigs running there is more volatility in the production profile at all when you have four rigs running at <unk>. So that's something that we're excited about as we achieve scale is less volatility in the production.

That's great and then with the benefit of an additional quarter of experience in the Delaware in your first completions.

Could I ask you to share your broad thoughts on areas of upside relative to your initial assessments.

And then more broadly or more specifically for the quarter I should say could you speak to some of the drivers of your initial well outperformance versus the legacy wells.

Sure. Good morning, Eric This is Katie.

We've got a really strong start over the last couple of months with the Florida asset in the Delaware, We've already achieved a 10% capital reduction.

The first few months thereabouts, so really excited to see our ability to continue to find capital efficiencies I think the fact that we have a more stable program, we're able to use that scale and gain some efficiency on the services side, we've been able to go to market. This quarter as we plan 2024 and already have a lot of the services for next year under contract.

Really excited to be able to apply that program in the Delaware I think we also see a lot of opportunity with the digital platform. We've seen success on the Midland Basin, and achieving about a 4% improvement in uptime on ESP is about a 15% improvement in uptime on compression and a lot of that technology upgrade application in the Delaware as well, that's probably a mirror.

24 expectation as we think about getting hardware deployed first and then building the software pieces on top of that but we're excited to get these assets closed here in the next couple of weeks and go from there.

Derek I think I also heard you asked a question about.

Slide eight essentially our successful integration of recent acquisitions looking at the profile of the production.

The wells that we've been involved with us taking over the assets versus the legacy the legacy results I think what you can see there is a combination of those wells that we've designed the completion of the completion.

We definitely if those with.

Hi, proppant intensity high fluid intensity with very tight cluster spacing. We ultimately believe that has a big impact on well results and we think that we're seeing that here.

The other thing is arent really are our operations team and our artificial lift strategy, we have an aggressive dropdown profile.

Strategy that we employ on these wells.

And it worked for us in 'twenty three in Howard County, and we're also seeing it work for US here on these new assets. We think that also contributes to this outperformance that we've seen on slide eight.

That's terrific. Thanks, Thanks for your time.

Thanks Bert.

There are no further questions at this time.

Mr. Hagan I'll turn the call back over to you.

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

This concludes today's conference call you may now disconnect.

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