Vitesse Energy, Inc. Q2 FY2024 Earnings Call

Greetings, and welcome to Vitesse Energy Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. 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, everyone, and thank you for joining. Today, we will be discussing our financial and operating results for the second 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 filed our Form 10-Q with the SEC yesterday. 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 opening remarks on the quarter. After Bob, Brian will give you an operations update. Then Jimmy will review our financial results. After the conclusion of our prepared remarks, the executive team will be available to answer 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 will turn the call over to our Chairman and CEO, Bob Gerrity.

Thanks, Ben. Good morning, everyone. Thanks for jumping on the call. Vitesse's return of capital strategy continued in the second quarter. We paid an increased dividend of $0.525 a share in June and recently declared another $0.525 dividend to be paid in September. As I've said before, in addition to our organic drilling, we are always looking at both near-term development deals and larger asset acquisitions that will support the dividend. We are a dividend-first company. Deal flow continues to be healthy, and we direct capital to the highest rate of return projects. We only make acquisitions if they fit our rigorous underwriting criteria and then we hedge to protect the returns. We rely heavily on our database that we call Luminis, which is democratized over our entire organization to help direct our investment decisions. This strategy remains consistent despite the recent decline in oil prices. I'll now hand the call over to our President, Brian Cree, to discuss our operations.

Good morning, everyone. Thanks, Bob. In the second quarter, our production averaged 13,504 barrels of oil equivalent per day, an increase of 8% from the first quarter, bringing our year-to-date production up to 13,030 barrels of oil equivalent per day for the first six months of the year. As previously announced, during the second quarter, we closed on additional near-term development acquisitions in North Dakota that will result in over $40 million of capital expenditures. The drilling and completion associated with these acquisitions will occur late this summer and fall, and we expect significant increases to both production and cash flows during the second half of the fourth quarter of 2024 and into 2025. As we've said before, production will likely be bumpy over this period depending on when wells are turned online. As of June 30, we had 19.8 net wells in our development pipeline, including 11.1 net wells currently being drilled and completed. The overall pipeline has increased by 3.3 net wells or 20% from the end of the first quarter. This increase is a result of both higher-than-normal acquisitions in the second quarter and an acceleration of drilling on our organic acreage. Our second quarter oil differential of $5.90 below WTI improved by 9% from the first quarter as the Trans Mountain pipeline expansion turned online on May 1. We have continued to add oil hedges through 2025. At the midpoint of our guidance, we have 57% of our remaining 2024 oil production hedged at above $78 per barrel and 2025 hedges at above $74 per barrel. Thanks for your time. Now I'll turn the call over to our CFO, Jimmy Henderson, for our financial highlights.

Good morning, everyone, and thanks for joining the call. I want to highlight just a few financial results from the second quarter. As always, you can refer to our earnings release and 10-Q, which were filed yesterday for any further details. As Brian mentioned, our production for the quarter was just over 13,500 Boe per day with a 70% oil cut. This was an increase from our first quarter production by roughly 950 Boe per day, bringing our half year production within guidance to just over 13,000 Boe per day. Lease operating expense came in at $12.3 million for the quarter or $9.99 per Boe, a slight decrease from the first quarter on a per unit basis. For the quarter, adjusted EBITDA was $43.1 million, and adjusted net income was $11.7 million, which produced an adjusted earnings per share of $0.39 per share as compared to $0.34 last quarter. GAAP net income was $10.9 million, and GAAP EPS was $0.31. Cash CapEx and acquisition costs totaled $37.6 million for the quarter and $69.8 million for the first half of the year, which is right at the midpoint of our current guidance on an annualized basis. Like our production, CapEx varies from quarter to quarter depending on activity levels and acquisition opportunities. Operating cash flow net of working capital changes was $40.4 million in the quarter, which covered our dividend and our maintenance CapEx, providing excess discretionary cash flow to fund some of the acquisitions spending in the quarter. The remainder of our CapEx was funded through withdrawals on the credit facility. Debt at the end of the quarter was $115 million and is currently down to $111 million. The quarter-end number resulted in a leverage ratio of 0.67x on an annualized adjusted EBITDA calculation. The elected commitments on our credit facility currently stand at $245 million after their increase during our semiannual redetermination in May. Thanks as always to the banks and the group for their continued support. Lastly, given the level and timing of development activity that Brian described, we are reaffirming our previously revised 2024 guidance for both production and CapEx.

Thank you. We will now begin the question-and-answer session. Our first question comes from Jeff Grampp with Alliance Global Partners. Please go ahead with your question.

Good morning, everyone. Brian, you mentioned in the prepared remarks that activity levels at quarter-end increased quite a bit sequentially. I know a lot of that was acquisition related from what you guys talked about last quarter. But you also noted an acceleration, I think was the term you used on your organic acreage. I'm curious to dive into that a bit more. Was that expected going into the year? Is that kind of a newer development that you guys are maybe not anticipating? Just any thoughts on what might be driving that?

Yes, thank you. Good morning, Jeff. I mentioned briefly at the end of our first-quarter call that we were observing a higher number of AFEs. We were uncertain if this trend would persist, but it has continued into the second quarter and through the first half of the year. We are on track for a notable increase year-over-year in our organic CapEx. While we are not certain if this will carry on into the second half of the year, we are definitely seeing activity. Although the rig count hasn't risen significantly, our presentation at the end of the second quarter showed that we had 20 rigs operating out of approximately 37. Typically, we have around 30% to 50% of the rigs running in the basin. Currently, just over 40 rigs are active, and we have 18 of those drilling on our wells. It’s encouraging to see operators working on acreage that we already have in our inventory.

Great. Appreciate those details. And for my follow-up, I'm curious, Vitesse is obviously not a new company, but you are newer a bit to public investors still. I'm curious for Bob or anyone to hear how Vitesse has historically run when we're kind of on the lower end of oil price ranges. I mean, obviously, not panic mode by any sense of the imagination. But what has Vitesse typically done during weaker periods in the market from a capital allocation, balance sheet operations perspective? Just any thoughts there would be great.

Yes, thanks, Jeff. This month marks our 13th anniversary. Although we've been public for just 1.5 years, my wife and I started this company 13 years ago, joined shortly after by Brian Cree. We've experienced both negative and $120 oil prices, so we’ve seen a wide range. I can assure you that Vitesse has a strategy for every oil price scenario. We tend to make better acquisitions in the $70 oil price range, which means we often find more economically viable opportunities. At this price point, we encounter less competition, allowing us to be more active in acquisitions. Currently, our deal flow is excellent. When oil hit $85, our organic growth improved, but our near-term drilling slowed a bit due to increased competition. This is a long-term investment for us. We've been in business for 13 years, and we continue to follow our established processes and develop steadily.

All right. Great. I appreciate those details and thanks for the time.

Thank you, Jeff.

Thank you. Our next question comes from the line of Donovan Schafer with Northland Capital Markets. Please proceed with your question.

Hey guys. Just as a follow-up sort of from Jeff's question. If oil is in closer to the $70 range and that presents an opportunity for more economic acquisitions, how would you think about tapping capital for that? You're still fairly conservatively levered, but directionally, you have been increasing debt. So is that something you think you have a good runway on that to kind of lever up further if opportunities present themselves? Or would you look at it differently, approach this in a different way?

Yes, I think because we have maintained a conservative balance sheet, we have some flexibility for the right opportunities. If they benefit the dividend and we can see a path to reducing debt, we may consider increasing our leverage a bit. We have consistently stated that we will stay below 1x debt to EBITDA, and we are currently well below that threshold, and we plan to maintain it. However, we do have resources available for the right acquisition opportunities that could enhance the company's dividend coverage.

That's helpful. Can you provide any insight into the stress testing you conduct in light of concerns around oil prices or the possibility of a recession? Specifically, do you analyze scenarios like $50 oil for 12 months or $60 oil for 24 months, especially with the hedges you have in place? Any information on this would be appreciated.

Yes, Donovan, this is Brian. I'll take the first crack at that and let Jimmy or Bob jump in. But obviously, yes, we always run stress tests. It's why we focus on the hedging and make sure that we have the hedges in place that we do to protect that dividend in case the price of oil does go down. We run it at $50. We run it at $60. We run some even disaster cases to look. Obviously, you have to also factor in that if prices go down, you're also going to see your capital expenditures also decline during that time frame. So it's not just as easy as dropping in a lower oil price or gas price into a model and seeing that result; you have to take a lot of things into consideration. So for us, we take a look at that, and we run it for different periods of time. I think as we've said before, and Jimmy just mentioned, we keep our leverage low for really a couple of different reasons. One is to take advantage of those acquisitions that crop up. That was your real first question. And I think we did a really good job of that last fall, and we also did that at the beginning of the second quarter here. Hopefully, that opportunity will exist as we go through the remainder of 2024 if oil prices stay in this price range. The other side of that is just making sure that the dividend is covered, and the lower debt allows us some flexibility there. Obviously, if prices are down for an extended period of time, we would have to look at our dividend. But I think if price is going down to $60 for a short period of time, we don't anticipate that that would have an impact on our dividend in the short term.

The other thing that I might add is that because a significant part of our capital spending is in the acquisition arena, we have a lot of flexibility in our spending. So unlike maybe an operator that is committed to a certain rig cadence and completion crews, we can adjust very quickly to the pricing environment and kind of get into more of a harvest mode, if you will.

Right. Related to that last point, Jimmy, has there been a change in the consent rate? I assume maybe not yet. Are you still above 95% consenting for the AFEs that come in? Or have there been any changes or adjustments there?

There really hasn't been much change in that area. It's generally around the 95% mark, and it is influenced more by geographical or operator statistics than the pricing we underwrite. However, the consent rate has remained very consistent.

Okay. Great. Thank you. I'll take the rest of my questions offline.

Our next question comes from the line of Jeff Robertson with Water Tower Research. Please proceed with your question.

Thank you. Bob or Brian, given your experience in the Williston Basin, how do you think the ongoing consolidation in the industry will impact the market for near-term development opportunities that have been essential for your growth in 2025? Is utilizing your Luminis system to maintain close contact with operators who are achieving the most economic success in their development programs crucial for that success?

So Jeff, this is Brian. I'll start and Bob can add to it. But yes, clearly, Luminis and all of our data plays a key role in that as it is just our history. Bob mentioned, we've been doing this for 13 years. So we've developed a lot of relationships among those operators. And that consolidation does generate opportunities at certain times. Not every consolidation generates that new opportunity. But from our standpoint, again, I think we've discussed this in the past, we're a big fan of the consolidation. We love to see operators get together because typically what happens when they put those two teams together is they're taking the best of both worlds and those enhanced and better economics flow down to us as a non-operated working interest owner. So we're excited about that. Will some of these recent developments increase the opportunity for us to get near term? Yes, probably. And perhaps it even gives us a larger acquisition opportunity. We'll see if any of the non-op assets that are out there come to market. It's something that we'll always take a look at. As we've always said, we're in the market all the time for both near-term development and larger acquisitions as long as they can meet our hurdle rate.

Thanks. And one question just on the philosophy at Vitesse. You all have focused on the Bakken because it's a long-term asset with a chance that technology will improve. Are you seeing any operators explore different ideas, whether it's engineering or development or drilling wise that you think offer maybe near and intermediate term upside to the type of inventory that you have?

Jeff, this is Bob. The trend toward 3-mile lateral is becoming a little bit more universal. And we were not initially enamored with that concept. But the recent results over the last 6 months have been really positive for the 3-mile lateral. And I think that's what it encouraged a company like Devon to come in and be so aggressive in their acquisition. So, technological increases are slow, grinding and very consistent. So each dollar spent in the Bakken right now is much more productive than even a year ago. So the Bakken is leveraged to technology, and we don't see that changing any time in the future.

And Jeff, I would like to mention that we remain enthusiastic about the refracs. The results from these refracs have been very positive. We are on track to execute more refracs this year than ever before. While they still represent a small portion of our capital expenditures, we are very hopeful that refracs will play a significant role in our narrative over the next five years.

Thank you.

Thank you. Our next question comes from the line of Noel Parks with Tuohy Brothers. Please proceed with your question.

Hi, good morning.

Hey Noel. I had a couple. I was just wondering, as far as what you're seeing either on the market or coming to the market these days for acquisition or bolt-on opportunities, is there any pattern to sort of the vintage of what you're seeing? I'm wondering if you're just seeing interest or assets from the very earliest days of the play or maybe from that period, say, like 10 years ago when operators first started really going to the max with frac intensity and so forth with mixed results. So I was wondering, any pattern of what you're seeing coming to market these days? Well, this is Brian. We don't focus much on PDP opportunities, so most of what we evaluate in the near term consists of development opportunities. I'm not sure if I'm fully addressing your question. However, we recently completed a small PDP acquisition that involved some flat production, as the seller was looking to exit the basin, and it was relatively minor. We do encounter such opportunities occasionally, but generally, our analysis revolves around development opportunities at this time, unless a larger transaction presents itself. Currently, there isn't much in terms of larger transactions available in the Bakken market.

Yes. Clearly, no. This is Bob. The Bakken is, as a basis, just under stimulated. It was the last to come to the Gen 2 frac. So we really look forward to refracs being a dominant capital force in the future.

Got it. To what extent are sellers aware of the ideal assets for refrac and what that opportunity entails? On the surface, it appears to be developed acreage. Are sellers generally aware of the potential upside, or are some, like the example you mentioned, more focused on simply making a transaction without delving into the details?

In the PDP acquisitions we've made, we have never included any value for refracs in our analysis. I'm not sure if this means that people are less aware of it. I think everyone knows that several refracs have been done in the Bakken, but perhaps they don’t assign much value to it. From our perspective, we do pay attention to it. Our database enables us to analyze all the refracs that have been conducted in different areas, giving us a solid understanding. However, we don’t see many PDP opportunities arise. When they do, we recognize that the refrac has some potential upside, but we never assign any value to it.

Yes, this is Bob. Interestingly, many operators treat refrac operations as workovers. As a result, we often don't receive an AFE for a refrac, making it challenging to schedule them. They are like hidden treasures; they are fantastic when discovered. Therefore, diligence is key. Our data suggests where refrac activity might occur, but scheduling them remains difficult.

Okay. Thanks. Interesting.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Bob for closing comments.

Well, thanks, everybody, for joining in. Please reach out to Ben if you have any other questions, and management will always answer whatever we can for you. Thank you very much, and see you next quarter.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.