Q1 2025 Vital Energy Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the vital energy incorporated first quarter 2025 earnings Conference call. My name is France, and I'll be your operator for today.
At this time all participants are in 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.
Speaker Change: It is now my pleasure to introduce Mr. Ron Hagood, Vice President Investor Relations you May now proceed Sir.
Speaker Change: Thank you and good morning, joining me today are adjacent market, President and Chief Executive Officer, Brian Lieberman Executive Vice President and Chief Financial Officer, Katie Hill, Senior Vice President Chief operating officer, as well as additional members of our management team.
Speaker Change: 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 under 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.
Speaker Change: 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 afternoon.
Speaker Change: The press release and presentation can be accessed at our website at www dot vital energy Dot com.
Speaker Change: I will now turn the call over to Jason Pigott, President and Chief Executive Officer.
Speaker Change: Good morning, and thank you for joining us.
Speaker Change: I don't energy delivered solid first quarter results driven by our ongoing optimization efforts that are making us a more resilient enterprise, while creating value for our shareholders.
Speaker Change: Today's call, we will discuss our first quarter financial and operating performance, including significant progress to reduce costs and enhance efficiencies.
Speaker Change: Our 2025 outlook and how our strong start to the year provides confidence in our full year assumptions and how our advantaged portfolio provides us with options and flexibility to effectively navigate today's challenges.
Speaker Change: Turning to the first quarter.
Speaker Change: Our key financial results exceeded street expectations.
Speaker Change: Cited that we were able to reduce net debt by $135 million or debt reduction was supported by higher than expected adjusted free cash flow, which beat Street consensus. We also benefited from our hedge position, adding more than $20 million to revenues and a noncore asset sale generated on <unk>.
Speaker Change: Parental $25 million.
Speaker Change: Our capital investments and production were in line and our costs are clearly moving in the right direction. The accelerated capital spending reflected our continued improvement in drilling efficiencies that pulled incremental activity into the first quarter.
Speaker Change: First quarter volumes were driven by 'twenty three turn in line wells all in the Delaware with 21 in the southern Delaware.
Speaker Change: We saw good well performance and our schedule optimization allowed for early production from several development packages.
Speaker Change: At the end of 2024, we shifted our focus from acquisitions to optimizing our asset base.
Speaker Change: Since that time, we have successfully reduced lease operating expense and general and administrative expenses by approximately 5%.
Speaker Change: In the fourth quarter of last year L O amounted to $121 million for the quarter. We now anticipate it will be around $115 million per quarter for the remainder of 2025 G&A expenses, excluding long term incentive plan were slightly over $23 million in Q4, and we project these call.
Speaker Change: Costs will be below $22 million per quarter for the duration of 2025.
Speaker Change: Our first quarter results provide confidence in our full year outlook today.
Speaker Change: Today, we reiterated the mid points of our full year capital and production guidance as well as lowering operating costs. Let me share a few reasons why we have high confidence in our 2025 outlook.
Speaker Change: First is the high returns we expect from the packages, we're completing in the second half of the year on.
Speaker Change: On slide five of our Investor deck, you can see how we are prioritizing our capital allocation to our lowest breakeven packages.
Speaker Change: Our significant ramp in production later this year, which is highlighted on slide six will be driven by a high turn in line count in the third quarter.
Speaker Change: These completions will be coming in from some of the highest return areas with low breakeven of about $45 per barrel <unk>.
Speaker Change: Due to the high quality of these wells and the robustness of our hedge portfolio. We foresee substantial returns from these packages. Consequently, we do not intend to delay the generation of valuable cash flow or debt repayment, we anticipate that production in the fourth quarter supported by our hedges will contribute significantly to our.
Speaker Change: <unk> free cash flow and facilitate debt repayment for the full year 2025.
Speaker Change: Second we are encouraged by our recent cost reductions and sustainable efficiencies, let me share a few examples.
Speaker Change: Thus far we have seen little impact from tariff related price increases, which have been more than offset by the price concessions, we have successfully secured and the softening services environment.
Speaker Change: Our drilling and completions teams continue to set records for speed and efficiency in the first quarter, we set cycle time records for both two mile and three mile Wells.
Speaker Change: Continuous improvement demonstrated by our operations team has allowed us to improve our Delaware basin year over year capital efficiency by 30% and.
Speaker Change: In 2025 more than 50% of our completions will be similar for <unk> in the first quarter. We successfully implemented this technique exceeding our expectations for completed feet per day and delivering every package in the first quarter ahead of schedule.
Speaker Change: Our operating teams are effectively using leading edge technology to drill shaped wells like J hook and horse shoes to maximize the value of our acreage and access high quality resources.
Speaker Change: On slide 10 of our Investor deck, we provided an update on two of these developments we have now drilled and completed our first two J hook wells proving the concept and the potential to lower the breakeven for 135 wells by $5 per barrel.
Speaker Change: Third our hedges provide confidence in our cash flow and debt reduction targets for the remainder of the year, 90% of our oil is hedged at $70 61 per barrel wty, ensuring returns and reducing risk.
Speaker Change: This should allow us to generate about $265 million and adjusted free cash flow and reduce net debt by $300 million <unk>.
Speaker Change: Including non core assets sold to date.
Speaker Change: Lastly, our asset quality and provides us with attractive options for the allocation of our capital slide nine in today's deck shows a 300% increase and complete a bold lateral foot with a sub $50 <unk> breakeven as.
Speaker Change: As we test new well shapes, we reduced well count through the combination of laterals, but not our develop a reservoir footage.
Speaker Change: Not only are we improving the quality and durability of our inventory we are reducing the breakeven of every but we drill.
Speaker Change: Before moving to questions. Let me quickly provide some thoughts on today's macro challenges.
Speaker Change: We are not immune to today's market challenges and we have the flexibility to meaningfully adjust activities should conditions warrant.
Speaker Change: We have no rig or completion contracts that extend beyond early 2026 and are committed to delivering positive adjusted free cash flow in 2026.
Speaker Change: Further we are conducting a full review of our cost structure and we are confident in our ability to continue to reduce costs and enhance margins. Our focus today is clear maximize cash flow and debt repayment.
Speaker Change: These are key ingredients to building long term value for our shareholders.
Speaker Change: Operator, we are now ready for questions.
Speaker Change: Thank you we will now begin the question and answer session.
Speaker Change: If you would like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue. If you would like to withdraw your question simply press Star one again.
Speaker Change: We are called upon to ask your question and our listening via loud speaker on your device. Please pickup your handset and ensure that your phone is not on mute.
Speaker Change: Asking your question.
Doug: Just a reminder, we ask that you please limit yourself to one question and one follow up only after Doug.
Doug: You can just simply join the queue again, thank you.
Speaker Change: And your first question comes from the line of Derik.
Derrick Whitfield: Derrick Whitfield.
Derrick Whitfield: From Texas Capital. Please go ahead.
Derrick Whitfield: Good morning, all and congrats on a strong <unk>.
Speaker Change: Thanks, Eric Eric Good morning.
Speaker Change: With my.
Speaker Change: First question I really wanted to focus on on maintenance capital as you guys see going forward with really the benefit of your latest D&C efficiencies optimize well design and base optimization work.
Speaker Change: Where would your maintenance capital B once some of your higher priced service contracts roll off over the balance of this year and next year.
Speaker Change: Yes, Thanks, Eric.
Speaker Change: Our plan for right now is to be flattened production year over year.
Speaker Change: And our goal for next year is to remain free cash flow positive.
Speaker Change: And as you've mentioned all of our major service contracts expire in March of 2026, and provide us the flexibility to adapt activity levels as needed.
Speaker Change: If you think about service costs. The recent rights that report suggested service costs could come down, 10% and a sustained $60.
Speaker Change: And if you look our current budget as a marker that's nearly $90 million in savings you could see on the cost front.
Speaker Change: This would reduce our breakeven from.
Speaker Change: Where it is today at about $57 per barrel down to $53 per barrel and that doesn't include other things like continued LOE reductions, our G&A reductions that start to push that down closer to $50 a barrel. So we're working a lot of things.
Speaker Change: I'm ahead of us, but I think that's kind of where we sit today.
Speaker Change: That's great and then maybe as my follow up just leaning in on the cost initiatives Kate.
Speaker Change: Katie can you perhaps speak to some of the elderly self help initiatives, you've accomplished and just comment on areas, where you see further opportunity.
You bet I love getting to talk about that I'm, just really excited about the work and the progress that the team is making.
Speaker Change: Jason mentioned in Q4 of last year, we were at $121 million run rate and we expect to be in the 110 to $1 15, a quarter for all of this year, we had a great Q1 $103 million.
Speaker Change: Big driver of that is continued outperformance on point, we've been really successful at lowering our operating cost there. We got it fully integrated late last year, we gave ourselves about a floor at our window to get the invoicing process fully onboard Ed and as a result, what we saw in Q1 was actually at $6 million adjustment from prior period.
Speaker Change: Our continued outperformance in Q4, so what that means is that when I flew with closer to a $110 million run rate for the quarter are reasonably go from one home of 114 or $1 15 is really driven by increased water volumes throughout the rest of this year, but from a fixed cost and Workover standpoint, we expect to maintain the performance that we've been able to deliver care of it.
Speaker Change: Last couple of quarters, So a big driver again on point, our reduced failure rates for some of the artificial lift specifically ESP, reducing our cost for all workovers in both Delaware and the Midland and then really great work from both basins on reducing our fixed operating cost again, we expect that the sustained for the rest of 2005.
Speaker Change: Great update.
And your next question comes from Zach Parham from J P. Morgan. Please go ahead.
Zach Parham: Hey, Thanks for taking my question first just wanted to ask on your hedging strategy you added around 20000 barrels a day of hedges for the back half of the year in the upper Fifty's, but didn't add any hedges for 2026, just curious about how you're thinking about building out the hedge book for next year and future years.
Zach Parham: Yes, as you mentioned, we did raise our hedge hedges for this rest of this year a lot of that was driven by higher volumes coming into the fourth quarter. It being our highest production volume for the year and almost got it could we could actually see a company record for production as we get to the fourth quarter of this year.
Zach Parham: Added those hedges to lock in our free cash flow generation for the year and assure our debt debt reduction and general we tend to be 75% hedged about a year in advance.
Zach Parham: This up to 90, 90% plus first quarter, we're at that Mark, but as time progresses, we'll continue to watch the environment and layer on hedges as we see fit to again lock in free cash flow generation and our debt reduction goals.
Speaker Change: Thanks, Jason and then my follow up just wanted to ask on the trajectory of volumes in Capex going forward you laid that out for the remainder of the year in the slide deck, but oil will peak in <unk> and Capex will be at the lowest level of the year can you just talk about the trajectory of production going into 2000.
Zach Parham: 26, just given that drop off in spending later this year would you expect a pretty decent decline into <unk> and then you kind of stabilize just curious.
Speaker Change: What that trajectory looks like.
Zach Parham: You bet.
Speaker Change: 2020.
Speaker Change: Graham right now, we estimate to be flat year over year for both volume and capital Jason mentioned in some of his comments that we have most of our contracts rolling off either in Q4 of 25, our Q1 of 'twenty six we're seeing really good movement from a market standpoint compared to our current average.
Speaker Change: So we're looking forward to being able to capture some of those savings that will ultimately drive the capital program next year. So as we think about that volume and quarter over quarter cadence.
Speaker Change: We first will need to resolve what the activity level looks like in the first half, but I would think our full year volumes as being flat compared to 25.
Speaker Change: Thank you.
And your next question comes from Noah <unk> from Bank of America. Please go ahead.
Noah: Good morning, everyone for my first question.
Speaker Change: You guys mentioned that.
Speaker Change: There may be potential for future pricing weakness, but I was also wondering do you guys see any opportunity to potentially high grade your current rigs or crews just as some of these service companies may be looking to keep some of some of these crews running.
Speaker Change: We do see some guys dropping them in the back half of the year in early 'twenty six.
Speaker Change: We stagger all of our contracts, which allows us to have a pretty good pulse on the market. Our most recent rag with about 20% below the fleet average for us. So certainly an opportunity for us to continue to capture some of those cost efficiencies and softening or at a high grade from a performance standpoint, as we look at 'twenty.
Speaker Change: Five and 26.
Speaker Change: The rig contracts continue to cycle through we don't have any of that extend past. The end of Q1 next year. So a lot of opportunity within that fleet and then similarly on the completion side. Our primary contract is extended into the beginning of 'twenty.
Speaker Change: We'll offer some opportunity after Q1 to capture the current market rate.
Speaker Change: Yes, I do think I do think there is opportunity both on performance and some of the technical capabilities technology capabilities and then also on cost.
Brian: Got you and then Brian This one is probably for you.
Speaker Change: Guys had a noncash impairment this quarter.
Speaker Change: As we kind of move through the year and if oil prices kind of stay where strip isn't.
Speaker Change: As implying the price would be.
Speaker Change: Could you talk about how if we may see more of these noncash impairments and then.
Speaker Change: So how like how much what the quantity of it looks like and then also if this will have any impact on the inventory numbers as well.
Speaker Change: Yes.
Speaker Change: If youll notice in the 10-Q, we talk about that going out one quarter or so that number is and then I'll, let you referred to it yet but definitively if we have it.
Speaker Change: Oil price stays where it is today, we will have noncash right now is just the way the.
Speaker Change: Our our pool is written down over time so.
Speaker Change: Next quarter, it's in the tune of a couple of hundred million dollars. We would expect to see that we don't really project out a lot further than that but if you take the SEC pricing.
Speaker Change: You can do the math and see that.
Speaker Change: Something like that until we stabilize with price.
Speaker Change: Again. This is just the write down of the of the free cash flow. It doesn't have to do anything with the underlying.
Speaker Change: The reserves aren't going there just.
Speaker Change: Just a calculation.
Speaker Change: Okay. Thank you.
Speaker Change: And your next question comes from John <unk> from Wolfe Research. Please go ahead.
John: Hey, good morning, and thank you for taking our questions I wanted to go back to Derek's question about breakeven.
Speaker Change: And you mentioned $53 per barrel next year.
John: Is that a wellhead breakeven.
John: If it is how do you think about your corporate breakeven and the movement in your corporate breakeven as you head into next year.
John: Yes, the number I quoted was actually our corporate breakeven Saar well break evens are below that are on average again, we're continuing to high grade the portfolio, but we're at $57 today and again if you have.
John: If costs or service costs that can be to continue to come down in that 10% range that would push it down to $53 and then again great work that Kt is doing on LOE you can push it down further and then potential G&A reductions and things like that push it down even further so we could be knocking on $50 by the end of next year for through next year.
John: Appreciate it and then just one very quick one for me.
John: A small asset sale here during the quarter whats the opportunity for additional asset sales this year.
John: Yes, we're continuing to look at our portfolio. This opportunity was one where we didn't have any inventory on the asset the offset operator had wells that they could extend or put inventory value on there the gassy or asset 200, roughly 200 barrels of oil per day in 2500 Boe per day.
John: A significant drop in our production as a company and we've actually absorb that and maintained our current guidance so for us opportunity to bring cash in the door accelerate our debt reduction goals and no impact on our full years projection. So it's something that we're excited about maybe even more difficult to do those kind of things in this price environment because of these asset.
John: Again are just taken away from your free cash flow, but this buyer was willing to pay us for inventory that we didn't even have on the books. So it was a good fit for us and we're continuing to look at the portfolio all the time.
John: I appreciate it thank you for taking our questions.
Speaker Change: And your next question comes from John <unk> from Keybanc capital markets. Please go ahead.
Speaker Change: Hi, Good morning, Thank you for taking our questions.
Speaker Change: We saw lahar realizations coming in nearly 40% of Henry hub in the quarter, which is the strongest and.
Speaker Change: In the past few quarters, but still on.
Speaker Change: On a relative basis.
Speaker Change: We recognize the warehouse swaps you have in place.
Speaker Change: To mitigate the impact of the takeaway constraints dynamics in the basin and net basis.
Speaker Change: Titan with some regional peers reducing activity.
Speaker Change: I know it could.
Speaker Change: <unk> too early to tell but is this reduction in activity and what you're seeing or hearing on the field, maybe among the smaller private operators.
Speaker Change: And are there some takeaway our in basin demand solutions that <unk> been looking at or planning.
Ben: Yes. This is Ben clients. So yeah. That's a great question, we definitely are seeing.
Speaker Change: Movement in the bases.
We here.
Speaker Change: It is activity driven and but we're not necessarily seeing anything different from a takeaway standpoint, nothing nothing from a new standpoint.
Speaker Change: Our headline standpoint, we look at all of our options when it comes to taking firm and selling out of basin.
Speaker Change: Versus going ahead, and selling in basin, and simply putting on basis swaps or hedging the wall outright. So yes. So our expectation is for when activity levels softened for her wallet has strengthened and allows for us to take advantage of that higher price as we said.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Okay, Yes.
Speaker Change: To follow up on that.
Speaker Change: Activity.
Speaker Change: Reductions.
Speaker Change: For you guys, how would a potential decision to trim activity levels look like with you, which prioritize building ducks and deferring tills would you drop a rig.
Speaker Change: I just want to get a sense of of your capital priorities.
Speaker Change: Potential lower lower price environment.
Speaker Change: Yeah again, I mentioned, our goal is to be free cash flow positive next year, a lot of variable, but a lot of variables right now that are kind of difficult to calculate as far as whether we build ducks or.
Speaker Change: Not complete wells.
Speaker Change: Again, we've got good line of sight on ways that we can reduce our corporate breakeven.
Speaker Change: Most to $50 with continued efficiencies service cost reductions. So I'd say, it's too early to do those games scenarios right now, but it's something that we have flexibility to adapt because both drilling services contracts and completion contracts expire in March. So we've got all the flexibility we need to.
Speaker Change: To adapt as needed.
Speaker Change: Okay.
Speaker Change: Okay understood. Thank you for the update.
Speaker Change: There are no further questions at this time.
Ron Hagood: I'd now like to turn the call back over to Mr. Ron.
Speaker Change: Please go ahead.
Speaker Change: We appreciate your interest and thank you for joining US. This morning. This concludes today's call.
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