Vital Energy Inc (NYSE:VTLE). (ticker: VENI) has reported a robust third-quarter performance for 2024, with oil production exceeding expectations and the Point acquisition playing a crucial role in boosting operational efficiencies. The company's production reached approximately 59,200 barrels of oil per day, outpacing their projected range of 55,000 to 58,000 barrels. Operating expenses were reduced to $878 per barrel of oil equivalent (BOE), which fell below guidance figures.
Capital expenditures were slightly above guidance at $242 million, with a strategic focus on the Delaware Basin, particularly the Point asset. Looking ahead, Vital Energy Inc. is poised to generate over $400 million in adjusted free cash flow in the upcoming five quarters, with plans to maintain flat production while simultaneously reducing capital costs.
Key Takeaways
- Vital Energy Inc.'s production exceeded guidance, with approximately 59,200 barrels of oil per day.
- Operating expenses were reduced to $878 per BOE, lower than expected.
- Capital expenditures stood at $242 million, with 75% of 2025 capital allocated to the Delaware Basin.
- The company aims to generate over $400 million in adjusted free cash flow in the next five quarters.
- Vital Energy Inc. is 88% hedged for the remainder of 2023 and 66% for 2025, with a target hedge range around $75 per barrel.
Company Outlook
- Vital Energy Inc. anticipates operational improvements to drive profitability and extend inventory life.
- The company targets reducing well costs to $925 per foot by 2025.
- A positive outlook was maintained for continued operational excellence and strategic investments.
Bearish Highlights
- Initial costs for Barnett wells were higher than expected, although promising production rates were observed.
- Capital expenditures slightly exceeded the guidance by totaling $242 million.
Bullish Highlights
- The Point acquisition significantly contributed to increased production and operational efficiencies.
- Lease operating expenses are expected to decrease from $9.35 per BOE to the high $8 range by end of next year.
- The company has successful cost-reduction efforts in place, with a 5% reduction in drilling and completion costs anticipated.
Misses
- No specific misses were discussed in the provided summary.
Q&A highlights
- Katie Hill emphasized the strategic importance of the Delaware Basin and the Point asset for future capital investment.
- Jason Pigott provided insights into early results from the Barnett wells and discussed plans for future testing.
- Hill outlined the hedging strategy, noting the company's significant hedging for 2023 and 2025.
- Ron Hagood expressed confidence in the company's operational excellence and its positive impact on free cash flow and debt reduction.
Vital Energy Inc.'s earnings call revealed a company on a strong upward trajectory, with significant operational achievements and strategic maneuvers positioning it for future success. The management's focus on cost reduction, operational efficiency, and prudent hedging strategies underscore the company's commitment to delivering value to its shareholders. As the company continues to navigate the complexities of the energy market, its proactive approach to capital investment and cost management appears to be paying dividends.
InvestingPro Insights
Vital Energy Inc.'s strong third-quarter performance is reflected in its financial metrics from InvestingPro. The company's revenue growth of 26.94% over the last twelve months as of Q3 2024 aligns with the reported production increase and operational efficiencies. This growth is particularly impressive given the challenging market conditions in the energy sector.
The company's profitability is evident in its low P/E ratio of 2.07 (adjusted for the last twelve months as of Q3 2024), suggesting that the stock may be undervalued relative to its earnings. This valuation metric is especially noteworthy considering Vital Energy's robust production numbers and cost-reduction efforts.
However, investors should be aware of some potential risks. An InvestingPro Tip indicates that Vital Energy "operates with a significant debt burden." This aligns with the company's focus on generating free cash flow to reduce debt, as mentioned in the earnings call. Another InvestingPro Tip notes that the "stock has taken a big hit over the last six months," which is corroborated by the InvestingPro Data showing a -43.0% price total return over the past six months.
Despite these challenges, Vital Energy's strong operational performance and strategic focus on the Delaware Basin suggest potential for future growth. The company's ability to exceed production guidance while reducing operating expenses demonstrates effective management and operational efficiency.
For investors seeking a more comprehensive analysis, InvestingPro offers 7 additional tips for Vital Energy, providing a deeper understanding of the company's financial health and market position.
Full transcript - Vital Energy Inc (VTLE) Q3 2024:
Operator: Good day ladies and gentlemen and welcome to Vital Energy Inc. Third quarter 2024 earnings conference call. My name is Jericho and I will be your operator for today.At this time, all participants are in listen-only mode. We will be conducting question-and-answer session after the Financial and Operations report. As a reminder, this conference is being recorded for replay purposes. It's now my pleasure to introduce Mr. Ron Hagan, Vice President, Investor Relations. You may proceed, sir.
Ron Hagood: Thank you and good morning. Joining me today are Jason Pigott, President and Chief Executive Officer, Brian Lemmerman, Executive Vice President and Chief Financial Officer Katie Hill, Senior Vice President and Chief Operating Officer, 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, forecasts 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 afternoon. Press release and presentation can be accessed on our website at www.vitalenergy.com. We'll now turn the call over to Jason Pigott, President and Chief Executive Officer.
Jason Pigott: Good morning and thank you for joining us today. We are delighted to announce that Vital Energy has delivered exceptional results in the third quarter, surpassing our expectations. Our recent strategic acquisitions, particularly the transformative Point acquisition, have propelled us to new heights. We reached a new production record during the quarter and our cost reduction initiatives are significantly improving our cash flow. Before we take your questions today, I'll cover four key items. First, some quick highlights from the third quarter. Importantly, recent results will increase our fourth quarter production outlook. Next (LON:NXT), I'll provide additional information about our recent Point acquisition. This asset has exceeded expectations early on and provides us with the luxury of adding activity in a higher productivity area in 2025. Then, I will discuss how our team is continuing to improve and extend our inventory. Lastly, I will share some early thoughts on our 2025 outlook. While we won't share full details until early next year, we expect to build on the strengths we've reinforced with our third quarter results. Now, let's talk about the third quarter. Our financial results surpassed expectations driven by higher-than-expected production in line capital and a solid demonstration of our ability to lower operating costs over time on acquired assets. For the quarter, both standalone Vital Energy and the Point Energy assets delivered at the high end of production expectations combining to produce about 59,200 barrels of oil per day. Our oil production guidance for the quarter was 55 to 58,000 barrels of oil per day and did not include any volumes per Point. However, the team did a great job to close this transaction early giving us a boost for the quarter. If it weren't for some weather-related flooding in Howard County which caused approximately 650 barrels of oil per day to be shut in, our beat would have been almost 6% altogether. To help demonstrate why we are so excited about the Point transaction, we have a slide in today's deck with two charts showing Point production surpassing underwriting expectations for both base production and on a new 10 well package. Additionally, these wells were completed with an optimized FRAC design on wider spacing than the previous operator, paving the way for us to develop this asset at a significantly reduced cost compared to the prior operator lease. Operating expenses substantially improved during the quarter, coming in at 878 per BOE below guidance of 895 per BOE, a 9% improvement over our second quarter operating expense. These costs are inclusive of higher LOE related to the Point assets. Excluding Point LOE would have been just over 870 per BOE. In the third quarter we delivered on our planned reduction in operating costs through several targeted initiatives aimed at improving efficiency and optimizing resource use. Key projects included optimizing our workover fleet and transitioning several rigs to 24-hour operations which reduced downtime and improved cost efficiency. We also implemented changes to our H2S chemical processing and introduced chemical improvements across both the Midland and Delaware basins, reducing material cost and improving product quality. Throughout the quarter. We made strategic labor and staffing adjustments to better align with the long-term base operational needs. We continue to use our cross-basin scale to support a cost-effective power strategy and have locked in a significant portion of our power cost through hedging to reduce volatility and de risk future cost pressure. These combined efforts have delivered substantial cost savings, enhancing our overall profitability and positioning us for sustained operational efficiency. Capital investments for standalone Vital Energy were $236 million for the quarter within guidance of $215 million to $240 million. The early close-up Point resulted in $6 million of additional capital in the quarter resulting in a total capital expenditure of $242 million for the quarter. The momentum from production outperformance and cost savings will carry into the fourth quarter. We have increased the midPoint of our oil production guidance by 1500 barrels of oil per day and 3000 BOE per day of total production while reiterating our previous capital guidance. Since April of 2023, we have completed six acquisitions and have fundamentally changed our Permian Basin footprint, growing our Delaware position to almost 90,000 acres. The Point acquisition materially enhanced the quality of our Delaware Basin assets and complements our overall Permian position. Our portfolio today has more optionality and flexibility to shift capital to our highest return projects than ever before. Our team has done an incredible job of adding inventory organically over the last couple of years through innovating on well designs like horseshoe shaped wells, reducing our cost structure and testing new formations. Through these efforts we have added over 300 locations representing just under three and a half years of inventory. We have a large number of wells that sit just above our $50 break even cutoff. As little as a 5% improvement in the cost of these wells would shift 155 wells into the sub $50 breakeven range, extending our Runway of sub $50 breakeven wells to just over 6 years; 5 times the number of wells we had available to us in January of 2023. Our operations team has already reduced costs in the Delaware basin from $1,200 per foot to $1,040 per foot since we entered the basin 2025 expectation is $925 per foot with longer laterals and faster drill times next year. We have delivered at a rapid rate of change and we see plenty of opportunities to continue this trend. In addition to adds via cost cutting measures, new formations like the Barnett could also lengthen our inventory Runway. Crane County Barnett well reached a peak rate over 1,000 barrels of oil per day. These initial results are very encouraging. Our second Crane County well is being completed right now with a smaller, more efficient completion design. The relative performance of these two wells will help triangulate the optimal design for the future. The rapid increase in inventory, length and quality that we have delivered on over the last few years allows us to take a pause on M&A and put more emphasis on operational excellence instead of asset transitions. Going forward, we will use nearly all of our free cash flow for debt reduction which will provide the greatest positive impact for our shareholders. We anticipate that at current commodity prices we should be able to generate more than $400 million of adjusted free cash flow over the next five quarters or through the end of 2025. Our strong hedge position over this time frame supports our cash flows and our forecast for lower debt and maintaining leverage. Looking forward, we expect to hold oil production flat with our original 4Q guidance range midPoint of 66,500 barrels of oil per day with a capital range of around $900 million below consensus expectations of around $925 million for 2025. And as efficiencies continue to improve, our intention is to maintain flat production with improving capital efficiency and we believe we can maintain this trend for the next five years. To conclude my comments for this morning, we beat expectations for the third quarter. We are raising guidance for the fourth quarter. Point is a great asset for us. Our operating efficiencies are progressing on all fronts resulting in lower expected capital spending for 2025 and well quality and operational efficiencies should allow us to maintain production for the next five years with flat to decreasing capital costs. Operator we are now ready for questions and we will now begin the question-and-answer session.
Operator: [Operator Instructions].Our first question comes from Neal Dingmann from Truist Securities. Your line is now open.
Neal Dingmann: Morning guys. My first question just on your cost reductions on slide 6 where you show the DMC per foot targeting 925 mixture. I'm just wondering how much this improvement is driven by the lateral length efficiency you mentioned and maybe could you give details about other upside within that well cost that you're experiencing? It sort of notable on that slide.
Jason Pigott: Neal, we were really excited about all the progress we've made in the Delaware Basin and both basins. Really. The team has not had a lot of swings at bat but have been improving very quickly over time. But I'll turn it over to Katie to give you some more color on the future
Katie Hill: Morning, Neal. Like Jason said, we're really excited about that 925-afoot. It reflects a lot of great work across both the operations team and our land team and getting a position put together that allows us to drill extended laterals next year. Like Jason said, we've already reduced costs in the basin by about 20% since we entered a little over a year ago. And I think something that's really worth noting is that it's really less than 15 wells that we've had the opportunity to take from spud to turn line and we've been able to deliver that dollar per foot reduction with a small program so far. So excited about the opportunity going forward. That 925 reflects both the operating efficiencies that we've already implemented and are executing on today. Plus some additional work that we have line of sight on being able to implement over the next few months. And then also the ability to drill extended laterals next year. That's helping to drive that cost down even further. One of the areas that we're really pleased with progress is looking at drilling cycle times. When we first started and looked at underwriting, you know, back at the end of '23, the expectations were 25-to-30-day wells from spud to rig release. And we're consistently delivering much lower than that today. Closer to 20 days of well and I've even set a record at 16 days per well and that trend is really consistent across all phases. So just great work by the execution team and still some opportunity in front of us.
Neal Dingmann: Great details, Katie. And then maybe just my follow up. I think it's still so important on just your operations is looking at 25 regional operations. Could you remind me maybe broadly how much ops will be in Dell (NYSE:DELL) versus Midland and within the Dell will most of that be the Point? And I assume so, and if so, what type of potential LOE benefit or sort of trajectory could we get if you continued in that direction?
Katie Hill: The Delaware is a great opportunity for us, particularly with the Point asset that we're working to integrate today. You can see on Slide 5 early outperformance on the Point wells. So really excited about what that can do to our portfolio. We're going to take capital to that asset almost immediately. We're shifting activity there towards the end of this year and certainly really heavily investing next year. About 75% of our 2025 capital will be in the Delaware, 25% in the Midland. Of that 75%, about half will be on the Point asset and then half will be on other Delaware assets that we put together over the last year or so. I think the LOE question is a great one and an important one for us to address. We had a great quarter, really pleased with the 878 that we were able to report in Q3. We executed on a lot of the projects that we've talked about delivering in '24 that helped to drive costs down across both basins. And a lot of those opportunities are absolutely applicable to Point. We've left Q4 at 9.35per BOE really just to reflect that we're in a period of asset integration and onboarding that is not our expected long term run rate. A lot of the work that again we've done in '24 in both Midland and Delaware we can take to Point and we're starting to do that already. So I'd expect to exit this year around 935. We'll be driving cost down across 2025 and expect by end of next year to be back into the high eight. So just really pleased with the opportunity to be investing great asset. It does a lot for our portfolio. It's great details. Look for that.
Operator: Our next question comes from Zach Parham with JPMorgan (NYSE:JPM). Your line is now open.
Zach Parham: Hey, guys, thanks for taking my question first. You commented on the Barnett wells a little bit earlier. Can you talk a little bit about the cost there and how those will compete with your wells in the Delaware and Midland Basin?
Jason Pigott: We're really excited about the Barnett, Zach. It's also very early. I wouldn't take our cost for these wells to be what we plan on for the future. We did these about as inefficiently as you can. We drilled four wells spaced across our footprint, both on our HVP and in the new acreage. And when you're drilling a well in a new formation and completing it as one well instead of a zipper frac like those costs aren't as relative. And it's still early. As I mentioned, we pumped a very large frac with a lot of sand on it. On the first one. My message to the team was like, we're going to see exactly how much these wells can deliver and it can deliver 1,000 barrels a day or more. The next phase for us is test a smaller frac on it, which should be much cheaper, and see does the performance come down or not. We're kind of doing the same thing that you saw on Point where they pump big fracs. Then you step it down to a smaller frac. So I think it's just still too early. These wells are new, they haven't hit. We don't have a good estimate on final decline rates. They're a very different production profile than we see from other assets. These wells kind of get slowly better every day versus our Wolfcamp A wells. They start off at high peaks and decline. It's early, but we're really excited about it. For me, when I think of what we've done in Crane, this is the first time that we've gone out there and had an idea for a new concept in a zone that's been tested but not tested, where we were bought acreage and have a really good initial production test on it. We started this two years ago and then we're doing it in parallel with all of our acquisitions and that's setting up the future that we have today where we don't need M&A to add wells and we can add it organically. So we'll give you some more color in the future, but it's still really early. But results are very positive so far.
Zach Parham: Thanks, Jason. And did my follow up, I wanted to ask on the cave bear well or cave bear pad that you had in the slide deck, can you give us a detail on how that pad was developed? I knew you said it was drilled and completed by Point, but with the vital design, was that at four wells per section and is that kind of how you expect to develop those assets going forward? And did you comment on which zones that pad developed as well? Thanks.
Katie Hill: Thanks, Zach. This is a 10 well pad that was being developed during the transition. Point drilled these at a little bit tighter spacing than our long-term plans. These are five wells per section. It's across the A and the B. We did pump our completion design on all the wells. This is reflective of what our go forward completion looks like. But we expect to up space and plan to up space on the remainder of the development going forward.
Operator: Our next question. Councilman Noah Hungness, Bank of America (NYSE:BAC), your line is now open.
Noah Hungness: Morning all. I just wanted to start off here on hedges. Just given that the strip for oil in the second half of 25 and 26 is below $70, how should we think about you all adding hedges as we move through this year and into next year?
Katie Hill: We've been very consistent with our hedges. Again, we tended to be 75% hedged out into the future. What we've done, I think the team has done a great job of lately here is just playing volatility. And when we see it, we will add hedges in that $75 range. We added them when we had this conflict in the Middle East. This flare up in the Middle east. That's where we are. As we get closer to the end of next year, we may add those. But for right now we're two thirds hedged for '25. I think we're 88% hedged or so for end of the rest of this year. So that's what we've been doing. We make 24 million barrels per year. $5 a barrel has over $100 million impact to our free cash flow. So we want to give opportunity for oil prices to rise but also protect cash flows as we get closer to year end. And we're setting up a 26 budget.
Noah Hungness: That makes sense and Then could you guys give any maybe additional color on what you all may be planning to try to lower DNC costs, you know, and just noting the impact of a 5% reduction, how that adds to your inventory. Is there anything, any operational details you guys could give us on maybe what you're looking to implement?
Katie Hill: We've already implemented really good work on cycle time and that kind of spread the turn in line efficiency that's been accomplished. What is still left to do? And the team is constantly questioning and I would say learning from repeat experiences in the Delaware, but what's still left to do is really working through every service cost, making sure that we're either at or better than market and frankly working through with our partners that we're implementing best practices both in the Midland and the Delaware. You noted the continued 5% improvement. When I think about the work that we've been able to deliver on in just a year on a pretty small subset of wells, I have a lot of confidence in our ability to continue to drive costs down past that 925 a foot. The 5% sensitivity that we show on inventory is really a question of when and not if. And I think it's a really fair goal for us over the next couple of years. So excited to continue to be developing in the Delaware. We have a fair amount of capital allocation there next year, so there'll be a good opportunity for us to continue to drive costs down.
Operator: There are no further questions. I'll hand the call over to Mr. Ron Hagood.
Ron Hagood: Well, thank you all for joining us today. We discussed, and you can hear, we are very excited about this quarter and what the future has in store for us. Now as we slow down the MA for the future, you're going to see this operational excellence showing up every quarter, allowing us to again take our free cash flow and pay down our debt, which is going to be a great return for our shareholders in the future. So we look forward to talking to you on our next call. Thank you.
Operator: Conference is now completed. Thank you for joining. Have a blessed day.
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