Vitesse Energy, Inc. Q1 FY2024 Earnings Call

Greetings. Welcome to the Vitesse Energy First Quarter 2024 Earnings Call. Please note, this conference is being recorded. I will now turn the conference over to Ben Messier, Director, Investor Relations and Business Development. Thank you. You may begin.

Good morning, and thank you for joining. Today we will be discussing our financial and operating results for the first quarter of 2024, which we released yesterday after market close. You can access our earnings release and presentation in the Investor Relations section of our website. We will file our Form 10-Q within the upcoming days. I'm joined here this morning by Vitesse's Chairman and CEO, Bob Gerrity; our President, Brian Cree; and our CFO, Jimmy Henderson. Our agenda for today's call is as follows. Bob will provide some opening remarks on the quarter. After Bob, Brian will give you an operations update, including some additional information on the recently announced near-term development acquisitions. Then Jimmy will review our first quarter financial results and updated production and CapEx guidance. After the conclusion of our prepared remarks, the executive team will be available to answer any 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 Act. 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, net debt, adjusted EBITDA, net debt to adjusted EBITDA ratio, 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'll turn the call over to our Chairman and CEO, Bob Gerrity.

Thank you, Ben. Good morning, everyone, and thanks for your participation in today's first quarter 2024 earnings call. Management at Vitesse is committed to the dividend as a vehicle to return capital to our stockholders. To sustain this return of capital strategy, we must have a very economic return on capital invested. We continue to spend capital in a dividend supportive manner, which led us to raise production and CapEx guidance for 2024. We are sharing the fruits of this labor with our stockholders by increasing our second quarter fixed cash dividend to $0.525 per share to be paid in June, an increase of 5% over the first quarter dividend. This is really a harvest of the economic deals we have done starting in the second half of last year and continuing into this year. We continue to look at near-term development deals and larger asset acquisitions that would bolster our dividend. So far this year, deal flow has been healthy. As Brian will describe, we have agreed to acquire additional self-sourced highly economic interests that will allow us to invest over $40 million of CapEx incremental to our original projection. When we find these highly economic acquisitions, we will act on them. We do not have a fixed budget; it's all opportunistic. We will continue to pursue all of these opportunities that meet our strict economic parameters. Before I turn it over to Brian, I just want to compliment everyone on our team at Vitesse. We are all rowing in harmony. We work hard every day to allocate capital in a way that supports our dividend, which belongs to our shareholders. So with that, I'll turn it over to our President, business partner, Brian Cree.

Thanks, Bob, and good morning to everyone, and thanks for participating in today's call. In the first quarter, we had production of 12,557 barrels of oil equivalent per day. As previously mentioned in our February earnings call, production was negatively impacted by the severe weather event in North Dakota in January, as many of the wells were offline for more than a week. Despite this event, we are increasing our 2024 production and CapEx guidance as a result of the additional acquisition activity that Bob mentioned. We continue to find highly economic opportunities to invest capital through our acquisition pipeline that we have developed over the past 10-plus years. The majority of these near-term development acquisitions are more traditional in nature than those closed during the second half of 2023. Thus the drilling and completion activity will occur over the summer and fall with production not likely until the fourth quarter and into 2025. As of March 31, we had 5.9 net wells that were either drilling or in the completing phase and another 10.6 net wells that have been permitted for development by our operators. Through the first 4 months of 2024, we've experienced an increase in planned development on our existing assets in addition to the recent near-term development acquisition activity. We're excited about these trends, which are expected to enhance our return on capital invested over the course of this year and into next. Our oil differential in the first quarter was greater than it has been historically, which we expect to improve as the Trans Mountain pipeline expansion comes online in Canada, reported to have occurred earlier this month. We have continued to add oil hedges during the year, and we now have swaps in place through the end of 2025. At the midpoint of our revised guidance for 2024, we have approximately 60% of our remaining oil production hedged at above $78 per barrel and a portion of our 2025 oil production hedged at above $74 a barrel. Thanks for your time. Now I'll turn it over to our CFO, Jimmy Henderson, to review our financial highlights.

Thanks, Brian and Bob. I appreciate the introduction. Good morning, everyone. I wanted to highlight a few financial results from the first quarter. And as always, I'll assume you can refer to our earnings release and our upcoming 10-Q for further details. As Brian mentioned, our production for the quarter was approximately 12,500 BOE per day with a 71% oil cut. Our production was affected by extreme winter conditions in January, but thanks to the great work by our operators, we quickly recovered. I can't say enough about the men and women out there that are getting the job done day in and day out in North Dakota. Lease operating expenses were also negatively impacted by the severe weather event in addition to continued elevated workover expense coming in at $11.8 million for the quarter or $10.32 per BOE. For the quarter, adjusted EBITDA was $39.1 million and adjusted net income was $10.2 million. GAAP net income was a loss of $2.2 million, with that difference being primarily attributable to the unrealized noncash hedging loss due to the increase in oil prices in the quarter. Cash CapEx and acquisition costs for the quarter were $32.2 million, which included costs paid related to acquisitions made earlier in 2023. As a reminder, our CapEx can be variable from quarter to quarter depending on activity levels and acquisition opportunities. During the first quarter, 332,840 shares of Vitesse's common stock were retired after being exchanged for $6.9 million of tax withholding relating to the vesting of restricted stock units. This transaction occurred at a price of $20.85, which is about 8% below our current stock price. While this effectively functions as a share buyback, it does not decrease our repurchasing power under our $60 million share buyback authorization. We funded first quarter CapEx and the share retirement with operating cash flows and draws on the credit facility. Debt at the end of the quarter was $98 million, resulting in a leverage ratio of just 0.6x on a trailing 12-month EBITDA basis. The elected commitments on our credit facility currently stand at $210 million, but we expect them to increase to $245 million when we complete our semiannual redetermination in the next couple of weeks. As previously mentioned, we are increasing our original 2024 annual guidance due to the recently acquired or agreed to be acquired near-term development assets in North Dakota. These acquisitions are anticipated to result in over $40 million of incremental capital expenditures and are expected to provide material increases to production and cash flows, primarily late 2024 and end of 2025. Our expected production for 2024 now ranges from 13,000 to 14,000 BOE per day with a 67% to 71% oil cut, and we have increased our 2024 capital expenditures guidance range, which now stands at $130 million to $150 million. Please note that our oil and natural gas production as well as our CapEx varies from quarter to quarter based on new wells coming online and other operational matters that happen. Commensurate with this increased activity, the Board has approved an increase in our dividend to $0.525 per share, which demonstrates our confidence in the accretive nature of these investments. With that, let me turn the call over to the operator for Q&A.

Our first questions come from the line of John White with ROTH Capital Partners.

Could we get a little more detail on the acquisitions? Like what counties are they predominantly located? How much existing production is being acquired? And any comments on the undrilled inventory?

Absolutely, John. This is Brian. I'll take a first crack at that and let anyone add in if they want. But these are different than what we did last fall. Last fall, many of the acquisitions that we completed were very developed in terms of the timing of when those wells were going to come online. There were wells that were drilled at the time or were just shortly ready to come on. These are more traditional in nature. They span the entire basin, some in Williams and McKenzie, but they're with operators that we have a lot of confidence in. But these are wells that are going to get drilled over the summer and the fall. And so there's really no production coming with these, unlike the last time where we had a lot of wells that were just about ready to start producing. These will start producing, kind of like I said, in the fall, sometime into the fourth quarter. And so they're a little bit different in nature than what we did last year, but very economic from our standpoint, again, with some of our favorite operators in areas of the field that we have a lot of confidence in. They are higher working interest wells. Typically, our average working interest is around 3% if you look at our entire portfolio. These are working interests that are north of 20%. These are deals that we've been working for a long time and just luckily, they came together in April, and we're able to move forward with them.

And Bob used the term sales source. Does that mean this was not a bid situation?

Yes. The operators will approach several different companies. These are not like investment banking bid processes. This is simply part of our pipeline. We have been doing this for over 10 years and have built relationships with various operators and sellers. It involves putting in an offer. Unlike the deal we made last year with Marathon, which was more negotiated, these deals have very limited visibility from the operators. They distribute them to their preferred potential buyers, and we proceed from there.

And net acreage involved?

Most of these are wellbore deals. So there's not really much additional new acreage. This is all wells that are really wellbore AFEs that are, again, being drilled over the course of the summer.

Our next questions come from the line of Michael Schwartz with Jefferies.

Congrats on the acquisition. My first question is, given that these wells are going to be coming online at the end of the year, how should we be thinking about production CapEx in 2025?

It's a bit early to provide guidance for 2025. However, we are confident that the increase in the dividend will lead to higher production and cash flow as we transition from 2024 into 2025. We are pleased with the year-over-year changes, but we want to remain cautious. While it's not our main goal, we expect to see some production growth as we move into next year. Regarding capital expenditures, we anticipate that they will return to a maintenance mode as we approach 2025.

Makes sense. I completely understand that it's early. So I just also wanted to ask about the decision to raise the dividend. From your comments, it sounds like it's tied to the kind of growth you're seeing. What do we need to see to grow the dividend further? Is there any kind of metrics that we should be thinking about after that?

Well, it's really a function of the economics of our drilling. We're capital allocators. And when we can allocate capital in a way that gives us a very high rate of return, we will return that money to the shareholders. So that can happen in a lot of different ways. If we continue to find the deals we're discovering in the last 9 months, that's very constructive to the dividend. Obviously, we hedged those acquisitions to the degree that we can, and stable oil prices will certainly be supportive to the dividend. But Michael, this is what we look for. The calculus of this is very complex. Ben, do you want to add something to that?

Yes, we like to think about our dividend coverage in a flat production environment, really. So when we set this dividend level, we're thinking about the maintenance CapEx level of around $90 million, with the production flat in the mid- to high 13 MBOE per day range. So, if you look at our business model in that environment, we're generating more than enough operating cash flow at current commodity prices to conservatively cover the dividend and the maintenance CapEx. We look at that and feel really good about where we are from a dividend standpoint. As Bob said, we've been fortunate enough to find really attractive acquisitions since we've spun off. That has allowed us to grow production more than maybe we originally thought we could, and we're happy to draw our RBL to fund those. We're still 0.6x levered. We're 40% drawn on our revolving credit facility, so we have a lot of capacity there to drive growth in these attractive rates of return. It comes with the short-term hit of more CapEx, but that's to the benefit of longer-term production and free cash flow growth. We're not as concerned about covering the dividend in the short term because we know that having more free cash flow over the next 30 years is ultimately the goal, which represents the dividend. That's some of the calculus that goes into how we set it and when we raise it.

Our next questions come from the line of Stephen Richardson with Evercore ISI.

I would like to hear more about the in-process and permitted wells mentioned in the remarks. Can you share what you are observing in terms of operator activity on your lands, especially in relation to your earlier guidance for the year and how the situation is evolving, keeping in mind the weather impacts you faced in the first quarter?

Sure, Stephen. This is Brian. Earlier, I briefly mentioned that we are observing an increase in activity regarding our assets. Normally, we anticipate about $40 million to $50 million in organic capital expenditures each year. While it's still early in the year, we are currently experiencing an accelerated pace. We've received more application for expenditures in the first four months, which suggests we may exceed that $40 million to $50 million range. We find this encouraging. There has been an increase in three-mile laterals, as operators are shifting toward this option whenever possible. We've also seen a notable number of refracs this year, likely exceeding the levels we experienced in 2023 and approaching those of 2022. This is exciting for us, and we believe that operators are actively considering refrac activities. While we’re uncertain if this accelerated pace will persist, we are enthusiastic about the current situation. We feel confident that operators are equally enthusiastic about three-mile laterals, as they appear to be more economical than the two-mile alternatives. Ultimately, we will see how this unfolds. Overall, the combination of these factors enhances our optimism for 2024 compared to early in the year.

Maybe, Brian, I've got you as well on the acquisitions. Could you appreciate that the activity on these wellbores is going to be in the back part of the year? One, based on your risking, and I appreciate that you don't have full visibility. But as you looked at it, will you have production contribution from all these wellbores by year-end? Like will it be in the exit rate or does it trickle into Q1, Q2 of next year as you kind of looked at it and risked it?

Based on our underwriting, Stephen, we definitely expect all of these wells to be on at some point in time in the fourth quarter. But as you know, it's hard to tell for sure. That's how we've modeled them. We modeled things last fall when we made those acquisitions with the production coming online a little slower. We do a pretty good job in our underwriting in terms of estimating timing. But as Jimmy mentioned, it's not in our control. It is in the control of the operators. Again, these are operators that we have confidence in, and I believe they'll meet our timelines.

Last one for me, if I could squeeze it in with just following up on Ben's previous comment on financial resources of the company in terms of the reinvestment opportunity set. So, if you think about that, can you just remind us where you're happy, where you're comfortable taking that considering depending on how you look at it? This is probably a little bit above mid-cycle oil price for most investors. So like where are you willing to take that considering if the opportunity set continues to present itself?

Yes, I'll jump in here. This is Jimmy. I think we've always stated that we plan to stay below 1x levered. I am confident we'll maintain that with the opportunities we have and the possibility to invest further. I don't anticipate much increase from our current position since we are seeing contributions from the acquisitions we made late last year for the rest of this year, along with the new acquisitions coming in. Therefore, I believe we are in a very comfortable position regarding leverage and liquidity given our current resources.

Our next questions come from the line of Jeff Grampp with Alliance Global Partners.

I was curious with the near-term development acquisition market, obviously, really active here so far. Is that just a function of those being higher working interest if you guys were to look at it maybe on a gross deal basis? Are things pretty consistent? Or how might you guys characterize current market dynamics versus, say, 2023 or whatever reference period you'd like?

Yes, Jeff, this is Brian. I'll jump in again. The market remains very robust at this point in time. We see a lot of deals. We still evaluate a lot of deals. As we said in the past, our hit rate is probably 10% for these. But for us, when you look at those higher working interest opportunities, we've had a little more success there. There's likely a lot less competition when you're talking about those kinds of dollars versus those in the $1 million or $2 million deal range with smaller working interest. We've tried to take advantage of that. It's always very lumpy, right? We see a lot of deals in the first quarter, bid on a lot of things, and nothing comes to fruition. Then all of a sudden, some things come together. It's just a timeline that we have to work through with the various operators and sellers to ensure we really understand what's going on and bid these at the attractive hurdle rates we find appealing. One thing to add is that while our pipeline is good, when oil prices get higher, it makes it a bit more difficult to close some of these because others become a bit more optimistic. We typically underwrite these at a price deck below the strip. So when prices get a bit higher, it becomes a little more difficult for us. That $70 to $75 range seems ideal for us, where our underwriting works well against the competition.

And maybe a question for Jimmy. Hedges bumped up nicely, especially the first part of '25. Should we expect more volumes there, perhaps as these new acquisitions come online? Or how are you guys thinking about the hedge book here, especially in the context of the increased dividend?

Yes, definitely. Obviously, hedging is a key component of our dividend decision-making and protecting the cash flow so we can continue to make these investments going forward. You'll definitely see volumes added to 2025 as we move forward. We have a couple of things working against us, the backwardation of the market. So we've got to be patient and let that wave move forward. At the same time, we're only allowed to hedge a certain percentage under our credit agreement. So as we move forward in time, we can continue to fill that bucket. We've tried to methodically push ahead on hedging. As the new acquisitions come online, they add to that PDP level so we can enter into transactions to support those. We always try to have a little room versus our limits so we can support acquisitions as we do them, but we're somewhat limited until we do that. However, we can push it as far as we can.

Our next questions come from the line of Jeffrey Robertson with Water Tower Research.

Bob or Brian, a question on Luminis. Are you able to adapt that system as you see consolidation in the basin and assets change hands from one operator to another to help you identify acquisition opportunities?

Absolutely, Jeff. Luminis gets more vibrant every day. Everyone has a relationship to Luminis. We’re developing some AI capacity. It's amazing the amount of information you can get when you've got over 15,000 wells loaded into your system. We rely on Luminis. Everybody enjoys it. It democratizes the information so everyone in the organization, whether they're a revenue clerk, landman, engineer, or in finance, learns from Luminis every day. We're thrilled with it. We had a 1.5-hour meeting yesterday about further developments we're looking forward to with Luminis. It's an important part of our company, and it continues to improve every day.

And does the ability to understand not only your asset base but what's going on in the basin and where opportunities lie factor into the decision to raise the dividend in the context of understanding Vitesse's runway?

Yes, I'd say that the dividend decision is an output, I guess, from the inputs derived from Luminis. Luminis certainly allows us to analyze these opportunities and make smart investments which, of course, drives the ability to increase the dividend. So, it's an indirect output but certainly supportive.

Our next questions come from the line of Donovan Schafer with Northland Capital Markets.

So my first question is just if we can get an update on the original deeper denser expanded thesis that I know you guys had when you created this company to kind of repeat what has been done before in the DJ Basin. But if we can connect, can you offer an update as to whether this ties into the $40 million CapEx increase? Are there specific opportunities tied to tighter infill drilling or maybe with a three-mile lateral, allowing you to step out a bit further? Are there opportunities that you've been looking at?

Yes. Donovan, this is Bob. The deeper denser cheaper better expanded concept that we had is about the field becoming more economic over time. We saw that in the DJ, and we're seeing it in the Bakken at an accelerated pace. It seems that every well being drilled is more economic than its offset well simply because technology improves every day. When we look at the Bakken, we analyze it through the lens of technology. It's amazing what has happened in the field. Of course, technology needs to be cost-effective. Costs in the field have stabilized, if not gone down a little. You're correct, the field has expanded, and we're getting Tier 1 economics on a map that not many years ago was considered Tier 3. We love the position we have in the Bakken. It improves every day, and we're excited to discover what's next.

And then as another question, just a bit odd, but Jimmy, can we get an update on your experience? I just noticed during his quarters back you joined, and I collected that information for insight. I was curious if we can get an update on how your presence has been a factor in the new focus, particularly on the acceleration of these near-term drilling development program opportunities?

You nailed it, Donovan. Bringing Jimmy on was a win for Vitesse in every way. His experience is unparalleled. Having that knowledge and hard-earned experience is invaluable. You learn that through hard knocks, not in a book. Jimmy was a perfect fit for Brian and me. He came in as if we had been partners for a long time. You can call him the accelerator. I think it is fair to give Jimmy a lot of credit for sourcing additional deals.

Okay. Enough of that. I'd like to say that as much as I would like to take credit for our accomplishments over the last few months, it is really a testament to the team that has been assembled here. Things we've talked about with Luminis are the culmination of what has been developed over the years for this company. I truly appreciate the comments, but I’m here to take advantage of what has already been built and keep it moving forward. Thank you for your kind words.

Just my last question is about the dividend stress testing. When presenting to the Board for approval on raising the dividend, I assume you do some kind of stress testing. Can you confirm that and what parameters you used? For example, if you test at $60 oil, how long can you maintain that? What are some of the stress test parameters you've applied?

Yes, Donovan, this is Jimmy. I can take the first part of that. Yes, we certainly run stress tests. The strip itself provides a good litmus test based on its structure. We look at if we can maintain our coverage ratio for the dividend, even with that backwardation. We adjust the model for a lower-for-longer scenario knowing costs go down. We are confident we can maintain the dividend level in most scenarios and can make adjustments to support it for some period. Yes, we evaluate multiple scenarios and usually consider a flat production model which gives us confidence.

Yes, this is Bob. I'll just briefly comment that the dividend is critical for us. It's essential to understand that when oil prices decrease, activity declines as well. So when that happens, our CapEx decreases. While doing stress testing, we have to acknowledge that if oil prices fall to $50, activity will decrease accordingly. The critical measure is that our maintenance CapEx is around $90 million. That is a crucial number. Any spending over that must be very attractive. We consider this regularly.

The only thing I would add, Donovan, is that Vitesse maintains leverage for flexibility. We don't want to use debt to pay the dividend, but if oil prices fall short-term, our debt capacity allows us to maintain that fixed dividend. It's crucial for us, as we've talked about. That extra debt capacity factors into our calculations.

Our next questions come from the line of Noel Parks with Tuohy Brothers.

I was curious about the continued focus on capital efficiency and how beneficial the non-operated model can be, especially with the diversification it offers across various operators. Have you noticed any new entrants or non-operated companies looking to engage in the Bakken or your other basins?

Yes. We constantly see new family offices come in. There have been some transactions so far this year with new entrants into the Bakken, and there are some other operators looking to sell their assets. That, along with consolidation, is exciting to us. Seeing consolidation in the basin means operators are taking on the best of what each side has looked at. From a non-op perspective, competition increases for smaller deals. However, I don't think we've seen new entrants in the non-op segment on larger deals.

It's tough to buy your way into the Bakken. It's tightly held and has been for 7 or 8 years. We could never reconstruct the 50-some-thousand acres we have; we purchased it at a very low cost per acre.

That's a helpful consideration. I'm curious about that number of deals that came together last month. How do potential sellers interact with you? Are they more price-sensitive or time-sensitive just looking to get interests sold?

Yes. For sellers, price is always important, but they have a trust factor with us. They often have AFEs, and typically, they have 30 days to make decisions. They try to move AFEs within that time frame. Having someone they can trust to close the deal and move forward provides them confidence. We aim to provide them with a reasonable offer.

There are no further questions at this time. I would now like to hand the call back over to Bob Gerrity for closing remarks.

Thank you all for the time you've spent with us this morning. If you have any follow-up questions, Ben Messier does a great job of filling in the gaps here. We look forward to seeing everybody or talking to you in 3 months. Thank you. Bye-bye.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect at this time. Enjoy the rest of your day.