Q2 2025 Vital Energy Inc Earnings Call

Speaker #1: Good day, ladies and gentlemen, and welcome to Vital Energy's second quarter 2025 earnings conference call. My name is Demi, and I will be your operator for today.

Speaker #1: At this time, all participants are in a listen-only mode. Be conducting a question and answer after the financial and operations report. As a reminder, this conference is being recorded for replay purposes.

Speaker #1: It is now my pleasure to introduce Mr. Ronald Hagood, Vice President Investor Relations. You may proceed, sir.

Speaker #2: Thank you and good ning. Joining me today are Jason Pigott, President and Chief Executive Officer; Brian Lemurman, 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 #2: During today's call, we'll be making forward-looking statements. These statements, including those describing our beliefs, goals, expectations, forecasts, and assumptions, are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Speaker #2: 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 yesterday afternoon.

Speaker #2: The press release and presentation can be accessed at our website at www.VitalEnergy.com. I'll now turn the call over to Jason Pigott, President and Chief Executive Officer.

Speaker #3: Good morning. And thanks for joining us. The second quarter results show solid execution on our optimization plan, delivering sustainable cost reductions that strengthen our outlook for adjusted free cash flow in the second half of this year and beyond.

Speaker #3: This morning, we'll cover three key areas: first, the progress we've made in reducing expenses in a sustainable way; second, recent operational achievements, including our successful JHook Wells and how they can enhance our inventory; and third, our outlook for the second half of the year where large high-quality well packages are expected to drive meaningful debt reduction.

Speaker #3: Let's start with a look the second quarter. We posted strong results delivering consolidated EBITDA acts of $338 million and adjusted free cash flow of $36 million.

Speaker #3: Total production and oil volumes came within our guidance range even after accounting for weather-related impacts and temporary curtailments. On average, these factors reduced daily production by $780 barrels of oil equivalent per day.

Speaker #3: With roughly 500 barrels of that being oil, capital for this quarter came in at $257 million. Above the high end of our guidance, that increase was driven by two factors: first, we accelerated $11 million of activity from the third quarter, this move helped us solidify the turn-in line timing for the 38 wells we'll bring in over the next two and a half months.

Speaker #3: Second, we saw $13 million in drilling cost overruns. The technical challenges behind those overruns have been resolved, and we're now seeing improved performance and cost consistency on newer wells.

Speaker #3: Overall, we made strong progress on capital savings initiatives this quarter. We executed three horseshoe wells using water-based fluids instead of oil-based mud, saving $5 per foot.

Speaker #3: We improved our completion stage architecture, reducing pumping cycle times by 9%, saving $13 per foot. We shaved a day off our ill-out cycle time in the Delaware Basin marking a 30% improvement in drill-out speed, saving $9 per foot.

Speaker #3: These changes generate savings in the quarter, improved operational efficiency, and will reduce our per well cost going forward. On the capital efficiency front, we continue to push the envelope in drilling and completions.

Speaker #3: This quarter, we drilled a nine longest wells in our company's history. Including our longest lateral ever at 16,555 feet. And set new company Delaware Basin records for the most feet drilled in a single day and the most feet completed in a ek.

Speaker #3: We also achieved a major milestone in our effort to extend lateral links through innovative well designs. In Midland County, we drilled six of our 12 horseshoe wells during the quarter.

Speaker #3: Since then, we've illed five more and expect to finish the 12th in coming days which we believe is the first time any company in our industry has drilled a stacked horseshoe development like this one.

Speaker #3: We also successfully completed our first two JHook wells turning three wells into two fully developing the resource and saving millions in drilling capital. Looking ahead, we estimate that around $130 of our 10,000-foot straight locations can be converted into 90 JHook locations at 15,000 feet each.

Speaker #3: This optimization lowers WTI break-evens by about $5 per barrel across the $1.3 million completable lateral feet tied to these locations. We have also continued to make great progress optimizing our cash cost.

Speaker #3: When we close the point acquisition late last year, our lease operating expense run rate was between $115 and $120 million per quarter. Through the renegotiation of service contracts, optimized chemical usage, more efficient power generation, and the consolidation of lease operator routes, we delivered an average of less than $111 million per quarter over the past three quarters.

Speaker #3: These sustainable savings will deliver an incremental $25 million in cash flow per year from our efforts. At the end of the second quarter, we took additional steps to streamline employee and corporate expenses.

Speaker #3: This aligns with our shift from an acquisition-focused strategy to one that's focused on optimizing the assets we already have. As part of that effort, we reduced our combined employee and contractor headcount by about 10%.

Speaker #3: While these decisions are never easy, they're ready making an impact, driving nearly a 20% reduction in total G&A expenses when compared to the average of the past three quarters.

Speaker #3: Net debt at the end of the second quarter rose by $8 million as we reduced our net working capital by $41 million in line with our expectations for the quarter.

Speaker #3: For the quarter, we recorded a non-cash pre-tax impairment on our oil and gas properties along with a valuation allowance against our federal net deferred tax asset.

Speaker #3: Details can be found in the press release. Neither the impairment nor the valuation allowance impact our ability to generate adjusted free cash flow, reduce debt, or continue utilize our NOLs.

Speaker #3: We are well-positioned to generate substantial adjusted free cash flow in the second half of 2025. We expect the turn-in line 38 wells all of which should be producing by October.

Speaker #3: We are maintaining capital discipline and remain on track to meet the midpoint of our capital investment guidance of $875 million. We've also closed an itional $6.5 million non-core asset sale to further support our debt reduction goals.

Speaker #3: Our capital discipline combined with increased production is expected to drive adjusted free cash flow in the back half of the year resulting in net debt reduction of approximately $25 million for the third quarter and around $185 million in total for the remainder of the year.

Speaker #3: Our debt reduction outlook is supported by a solid hedge position. We swapped roughly 95% of our expected second half oil production at an average price of $69 per barrel.

Speaker #3: We've hedged about 85% of our expected and 75% of our ethane and propane volumes. We remain firmly committed to our optimization strategy, focused on generating adjusted free cash flow and reducing debt to build long-term value for our shareholders.

Speaker #3: Operator, please open the line for questions.

Speaker #1: Good to ask a question. You will need to press the number one on your telephone keypad. And you would like to withdraw your question, press star one again.

Speaker #1: We will pause for just a moment to compile the Q&A. And our first question comes from the line of Derek Whitfield with Texas Capital.

Speaker #1: Your line is open.

Speaker #4: Good morning, all, and thanks for your time. Good morning, Derek. For my first question, I wanted to focus your trajectory into 2026 and how the capital efficiency you're attaining in second half projects into 2026.

Speaker #3: Sorry, Derek, could you repeat the last little bit there?

Speaker #4: Sure. So I wanted to focus on your trajectory production trajectory into 2026 and how the capital efficiency you're attaining in the second half projects into 2026.

Speaker #5: You bet. Good morning, Derek. This is Katie. Yeah, we're really cited about the cost reduction work that we've been able to achieve year to date.

Speaker #5: We have put into the slide deck this quarter the progress that we're ing between the first half and the second half of the year.

Speaker #5: You can see a lot of improvement in our capital efficiency in the second half, and that's really being driven by some of these larger packages that we're bringing online.

Speaker #5: We've successfully extended lateral links across really all the development in second half, and then really applied some great drilling best practices that came out of the second quarter.

Speaker #5: Some of the capital overspend that we saw on wells that we drilled in May really impacted how we're thinking casing design, how we're inking about our fluid agement system.

Speaker #5: It's helping support some of the standard operating procedures that we've put in place. And it's carried into the third quarter really successfully so far.

Speaker #5: Over the last six weeks, we've drilled some of our fastest wells, some of best cycle time wells, and certainly some of the lowest dollar per foot so far.

Speaker #5: So we're starting the second half strong. As we think going into '26, many of our long contracts are starting to expire. We have an opportunity to go to market with most of our large contracts and most of the drilling and completion side, which we believe to be good timing from an oil field services market standpoint.

Speaker #5: We also are continuing to focus on our dollar per foot efficiency. Like Jason said, we've really pivoted into cost optimization, and that continues to be our ocus.

Speaker #5: So you can see on the capital slide that we have now added our lowest dollar per foot well to help give context to where we're ed as we continue to drive cost down.

Speaker #4: Terrific. And Kate, maybe you lean it in just on the cost accomplishments on slide five. Could you offer some color on what's assumed in the upper and lower ends of your LOE projections and separately maybe speak to some of the other cost initiatives you currently are pursuing that aren't reflected in the guidance for the second half?

Speaker #5: You bet. If you look at the slide five recovering both LOE and G&A, what we're representing there is a shift in the second half on our G&A spend.

Speaker #5: We believe that to be sustainable. That's a fair run rate on the go-forward. For LOE, we've made really just a ton of progress since we first stepped into the Delaware.

Speaker #5: Following the point asset late last year, we've been successful at eliminating costs every quarter. That dollar per quarter run rate that we're showing in the second half of '25 reflects the progress that we've made on shifting away from rental generators and going to high line power; there's a lot of compression and chemical optimization that's included in there.

Speaker #5: And then we're really working through using our joint asset scale effectively in our bid process. And working through every line item of our LOE statement.

Speaker #5: So made good progress year to date. Those ranges reflect continuing the improvements that we've made today. As we think about getting into '26, an area of focus for us is really on work overspend.

Speaker #5: We're esting this year in building out our gas lift infrastructure, and it's supporting a large switchover campaign to get off of our high-cost ESP and transition to a more LOE-effective gas lift lift type.

Speaker #5: And so we'll able to see the benefit of that in workover as we get into '26. There's still some opportunity beyond what we're showing in the second half here for cost reduction.

Speaker #5: That's really driven by, again, improvement in failure rate, but then shifting to a more efficient lift type. So excited to continue to work on it as we get into next year.

Speaker #5: These ranges, though, in, just reflect the work that we've done so far in 2025.

Speaker #4: That's great. I'll turn it back to the operator.

Speaker #3: Thanks, Derek.

Speaker #1: Next question comes from the line of Noah Hagnet with Bank of America. Your line is open.

Speaker #6: Good morning, Vital Team. For my first question here, I was just wondering if you could maybe talk about the production cadence kind of heading into '26 in 1Q and 2Q of '26, just considering that as you pull activity forward and you're planning to turn in line your second half, what '25 wells by early October what does the beginning of '26 really look like from a production perspective?

Speaker #5: We're really excited about the second half. We have 38 wells left to bring online this year. So absolutely focused on getting those large packages online.

Speaker #5: We have three that contribute to 33 of the 38. So hyper-focused on the delivery of that. Some of the capital acceleration that we talked about in Q2, was really to de-risk the timing.

Speaker #5: But not necessarily to accelerate. So it was taking operations off critical path to ensure that we could deliver the plan in the second half.

Speaker #5: We're keeping our third quarter and fourth quarter volume flat to previous guide. Definitely progressing along the timing plan as we expected. Because of that flush production, you know we would expect to exit the year high in the fourth quarter, and it'll come down a little as we get into '26 just because of the timing of that turn-in line cadence.

Speaker #5: So not yet ready to talk about full year '26, but certainly excited about bringing on some really great wells in the second half this year.

Speaker #3: Gotcha. I appreciate that color. And then could you maybe talk about you guys have been able consistently sell off parts of your non-core acreage that's been a source of funds this year.

Speaker #3: And even given the volatile commodity price, how can you think the potential cadence of those potential non-core asset sales moving forward as something that we've seen kind of year to date?

Speaker #3: Something a pace that you guys could keep moving forward, or is this something that's more opportunistic and it'll just come depending on how the market?

Speaker #4: Yeah, I'd say we've been more opportunistic with these. We're always looking to optimize our portfolio. We're high grading our near-term development plans, and we're monetizing assets that are not in our near-term plans.

Speaker #4: We're being paid inventory on wells that we won't develop till further out in the future. So I'd say there's no no set goal. But there is a market out there where people are looking to continue to buy assets.

Speaker #4: For us, these are just helping to accelerate our debt reduction goals, create more value for our shareholders over time. But we want to, you ow, if we're getting good prices, we'll execute on those.

Speaker #4: And that's what you've seen over the last couple of arters.

Speaker #3: Makes sense. Thanks.

Speaker #4: Thanks.

Speaker #5: Thank ou.

Speaker #1: Next question comes from the line of John Mardini with KeyBank. Your line is open.

Speaker #7: Hi. Good morning, and thank you for taking my estions on. Your main well hedge for the back half of this year that are those hedges are well in the money, and it's it's helping fund the net debt reduction as well.

Speaker #7: But just looking out to 2026, how do you see net debt or leverage trending given a strip that's call it $8 or so below the 2025 hedges that you have in place?

Speaker #3: Well, for '25, like you said, we're pretty well hedged, and we've talked about our free cash flow and debt pay down. In '26, we would, you know, we haven't come out with a guidance, but we would expect to continue to pay down debt.

Speaker #3: So it should be heading down, not higher. Yeah.

Speaker #4: Our corporate break-even right now for '26 with the hedges we in place is below $55 a barrel. We tend to be hedged a year out in advance around 75%.

Speaker #4: So I wouldn't surprised if you saw us adding third quarter hedges for '26 which will continue to further reduce that corporate break-even to the low 50s.

Speaker #7: Okay. That's helpful. And just on the underdevelopment program in 2025, the first half is kind of heavily weighted towards these 2 to 6 well pads while the second half is heavier in these larger scale developments.

Speaker #7: Just curious about the opportunity set that you have to allocate capital towards more of these larger scale developments. Into 2026, I know it's bit early, but I think out of, you ow, details you have on there would be pful.

Speaker #5: So you're right. We had some of some smaller wells per pad early in the year. A large part of that was driven by the remaining development that we captured in Howard County.

Speaker #5: So we brought online kind of the last of the most competitive inventory that was up there that was part of why we had several 2, 3 well pads.

Speaker #5: As we get into the second half, you know, we have kind of 8 to 8 to 13 well pad development that's going on. So really excited about the capital efficiency opportunity that that's driving.

Speaker #5: And we're eing a lot of success with that development plan. so far as we're working through it. So we've been able to apply SAML frac because of these larger developments.

Speaker #5: We've been able to really capture some good drilling cycle time efficiency. It's certainly driving as we think about development planning for next year. And the inventory depth, as we move into early '26, supports continuing some of really efficient development strategies.

Speaker #5: So I would expect that to carry into the next year.

Speaker #7: Okay. I appreciate the details. I'll leave it there.

Speaker #5: Thank you.

Speaker #4: Thanks, John.

Speaker #1: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Speaker #8: shortly.

Speaker #1: Good day, ladies and gentlemen, and welcome to Vital Energy's second quarter 2025 earnings conference call. My name is Demi, and I will be your operator for today.

Speaker #1: At this time, all participants are in a listen-only mode. We'll conducting a question and answer after the financial and operations report. As a reminder, this conference is being recorded for replay purposes.