Vitesse Energy, Inc. (NYSE:VTS) Q4 2023 Earnings Call Transcript

Vitesse Energy, Inc. (NYSE:VTS) Q4 2023 Earnings Call Transcript February 27, 2024

Vitesse Energy, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to the Vitesse Energy Full Year 2023 Earnings Call. [Operator Instructions] 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.

Ben Messier: Good morning and thank you for joining. Today, we will be discussing our financial and operating results for the full year of 2023, 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-K with the SEC yesterday. I am 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 year; after Bob, Brian will give you an operations update; then Jimmy will review our 2023 financial results and 2024 guidance. 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 maybe required by applicable securities laws. During our conference call, we may discuss certain non-GAAP financial measures, including adjusted net income, adjusted EBITDA, net debt, net debt-to-adjusted EBITDA ratio, free cash flow in the PV-10 of our reserves.

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.

Bob Gerrity: Thanks, Ben. Good morning, everybody and thanks for participating in today’s call and thanks a lot for everybody’s support this year. ‘23 was a successful year, our first year being an independent publicly traded company. We paid a $2 per share fixed dividend. And in addition, we were able to source some highly economic acquisitions that allow us to grow our production while maintaining a conservative balance sheet. Vitesse is a long-duration asset that is high yielding, inflation protected and leveraged to technology. Looking forward to 2024, our strategy remains the same. We will continue to return capital to our shareholders. To that end, last week, our Board declared a 2024 first quarter cash dividend of $0.50 per share to be paid at the end of March.

After our fixed dividend, we allocate capital using our returns based hierarchy and extensive internally created database. We are very selective with how we spend our money. Cash goes to the highest return projects. We do not have a capital budget. Rather, we allocate capital to as many projects that meet our stringent return hurdles. With that, I will turn it over to Vitesse’s President, Brian Cree. Brian?

Brian Cree: Thanks, Bob and good morning everyone. As Bob mentioned, we increased our 2023 production to 11,889 barrels of oil equivalent per day, with fourth quarter production of 13,652 BOE per day. The production from the acquisitions announced in October ‘23 came on sooner and slightly better than we had underwritten. So far in 2024, our production was negatively impacted by the severe weather event in North Dakota in January. Despite this event and the acceleration of production into the fourth quarter of ‘23 from ‘24, we are maintaining our ‘24 production and CapEx guidance, as Jimmy will discuss shortly. As a reminder, our production and CapEx can be lumpy from quarter-to-quarter. Our oil differential in the fourth quarter was wider than it has been historically as increasing oil production from Canada was transported through Bakken regional infrastructure.

We expect oil differentials to improve when the Trans Mountain pipeline comes online in Canada currently expected in the second quarter of 2024. As of year end, we had 6.7 net wells that were either drilling or in the completing phase and another 9.9 net wells that have been permitted for development by our operators. Proved reserves at December 31, 2023 were 40.6 million barrels of oil equivalent, which was 70% proved developed. These proved developed reserves increased 5% from year end 2022. Total proved reserves decreased 7% from 2022 due to our removal of proved undeveloped drilling locations from our reserve report as a result of lower rig activity in North Dakota during 2023, partially offset by the addition of reserves associated with wells drilled in ‘23 from our unproven inventory.

As a non-operator, our unproven locations are often drilled even though they are not included in proved reserves under the required SEC 5-year development schedule. Total proved reserves had a PV-10 value of $682 million and decreased from 2022, primarily due to the reduction in SEC benchmark prices. SEC oil prices used for 2023 reserves decreased by $15.93 a barrel compared to 2022. SEC natural gas prices decreased by $3.72 an MMBtu. And when combined with the decrease in NGL prices reduced our realized gas price used for reserves from $7.98 an Mcf in ‘22 down to $1.71 per Mcf in 2023. To help moderate these price movements, Vitesse has oil hedges in place for all of 2024 and the first half of 2025. At the midpoint of our guidance, we have approximately 42% of our full year 2024 oil production hedged at approximately $79 per barrel and 285,000 barrels of our first half 2025 oil production hedged at above $74 per barrel.

Thanks for your time. Now I’ll turn it over to our CFO, Jimmy Henderson, to review our financial highlights.

Jimmy Henderson: Thanks, Brian and good morning everyone. Now to a quick review of our financial results for the year and our financial status. I want to highlight a few items from the fourth quarter and for 2023. And I’ll assume that you can refer to our earnings release and 10-K, which were filed last night for any further details. Our production levels increased to 13,652 for the quarter with a 72% oil cut, bringing our annual production to 11,889 BOE per day with about 68% of that being oil. Both amounts were above our updated guidance as production came on better and faster than we expected, as Brian just mentioned. For the year, adjusted EBITDA was $157 million and adjusted net income was $53.6 million, while our GAAP net income was a loss, $19.7 million.

You can see that reconciliation in our press release that we just filed last night. Cash CapEx and acquisition costs for the year was $120.5 million, which is right at the midpoint of our latest revised guidance. We funded this investment with operating cash flows and withdrawals on our credit facility and debt at the end of the year stood at $81 million, resulting in an overall leverage ratio right at 0.5x. Our elected commitments were increased in January to $210 million as we added a fifth lender to our bank syndicate. With respect to our 2024 guidance, we are reaffirming our preliminary 2024 outlook. Our expected production for 2024 ranges from 12,500 BOE to 13,500 BOE per day with the 67% to 71% oil cut. We expect our total cash CapEx to range from $90 million to $110 million during the year.

And note that our oil and natural gas production as well as our CapEx can vary from quarter-to-quarter based on whether new wells come online and from other operational matters that may arise. As Brian mentioned, our production was affected by extreme winter conditions in January of ‘24. But thanks to the great work of our operators, we quickly recovered and our total year expectations now remain unchanged. The big kudos to the men and women on the ground, they are working to keep that production online. Those efforts are truly appreciated. Also I want to touch on the S3, which we filed on February 1. We filed this shelf as a bit of corporate housekeeping as we became S3 eligible after trading on the New York Stock Exchange for 1 year. It provides us maximum flexibility, if needed, to find an attractive acquisition, but it was not put in place to fund anything imminent or any planned transaction.

We will – we still plan to stick with our strategy of maintaining a simple capital structure with minimal leverage and even if we consummate a large, more transformative acquisition. With that, let me turn the call over to the operator for Q&A. Thanks, everybody.

See also 20 Best Personal Injury Lawyers in NYC and Jim Cramer Was Right About These 10 Stocks.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Michael Schwartz with Jefferies. Please state your question.

Michael Schwartz: Hi, Bob, Brain, Ben and Jimmy. Congrats on the strong 4Q and the successful execution of your strategy in 2023.

Bob Gerrity: Thanks, Michael.

Michael Schwartz: I wanted to ask about M&A opportunities you are currently seeing in the market. How does 2024 – the opportunity set in 2024 compared to 2023? Are these primarily self-sourced deals and are there larger packages out there that we’re seeing in the market?

Bob Gerrity: Thanks, Michael. Just want to remind everybody that we have a very full deal team at Vitesse, including accountants, finance people, engineers, land department and management. And we spend a tremendous amount of our time, both sourcing deals, self-sourcing deals and analyzing deals. So the fact that we have not done a deal of transformative size should not be indicative of what we’re going to do in ‘24. As a public company, we are seeing a lot more deal flow bespoke deal flow than we did as a private company. But again, we are extremely picky, selective and analytics. So we do not – with the deal flow that we have from an A&D perspective, our organic drilling and our near-term bought deals, we don’t have to do a deal.

So we’re looking to do that transformative deal in a very greedy fashion. So I would – I’d say that because we haven’t done a deal, it’s not because we’re not looking and not because there’s not a lot of opportunities, but again, it would – we self-source almost everything we do. And we’re happy with what we’re seeing.

Michael Schwartz: That’s – that’s great to hear. And I just had one more follow-up on the same point and then a second question. So how does the Chord Enerplus deal and the consolidation that’s happening in the Bakken impact M&A opportunities there? Do you think it increases the opportunities for you guys or decreases? Just trying to get a sense of how you assess the impact.

Bob Gerrity: Yes. Brian, would you handle it?

Brian Cree: Yes, Michael, obviously, we’re always a big fan of any of the consolidation, new operators coming into the basin. And that situation specifically, Chord has done some great things with 3-miles – 3-mile opportunities. So we really look forward to that type of consolidation and the enhancement of everyone kind of using the best of all technologies. From an M&A perspective, I mean, our hope there would be that as some of that non-op may get monetized if they look to do that. We’ll be right there to try to pick any of that up.

Michael Schwartz: That makes a lot of sense and great to hear. So as one more point, I wanted to ask about differentials. You mentioned TMX. And Bakken 4Q dips were quite wide and TMX has the potential to narrow that. Could you walk us through a little bit more on your outlook about where you think dips could go in the Bakken, and over kind of what time frame? And – is this kind of structural and will be sustained? Or is it a temporary change that will be mitigated and changed going forward?

Bob Gerrity: Jimmy?

Jimmy Henderson: Sure, Michael. Yes, I think, obviously, right now, we’re impacted by the delay and the Trans Mountain expansion coming online, but a pretty large pipeline that Canadian government’s building up there, and we’ll take a lot of oil further to the west and not down into the infrastructure of the services in North Dakota. So we do think that once that pipeline comes online, which I think is still expected in the second quarter here coming up very soon, then we should see tightening of the dips that we realize in North Dakota as those volumes exit our marketing area. And I think that – you can call that a systemic change, sort of returning back to what we’ve seen in the near distant future. I think the differentials that we saw earlier in the year, 350-ish is probably what we should expect going forward once that all works its way out, and so we’re optimistic about that.

Returning to fruition as we go through the remainder of the back half of ‘24.

Michael Schwartz: Perfect. That’s very helpful. And thank you for your time today. Really appreciate it.

Bob Gerrity: Thanks, Michael.

Operator: Our next question comes from Chris Baker with Evercore ISI. Please state your question.

Chris Baker: Yes, guys. Good morning.

Bob Gerrity: Hi, Chris.

Chris Baker: First question, I just wanted to touch on something you mentioned in the prepared remarks around Bakken weather. Can you maybe just frame up how many days? And then maybe kind of to the extent possible, connect that to where quarter volumes could shake out? I understand the guide for the full year is unchanged, and it’s sort of a temporary impact, but just curious in terms of the trajectory near-term. Any help there?

Bob Gerrity: Yes, sure. I mean I think there were a lot of articles that came out, obviously, from our standpoint as a non-operated working interest owner. We’re not out in the field, but we do get some dailies and certainly, the weather impact was 7 to 10 days up there, pretty substantial. We saw some reports where well more than 50% of production was offline. So we’ve made our estimates for that month of January, and they are significantly lower than what we saw in December. From a guidance standpoint, I think we still believe the first quarter will be in the range of the lower end of our guidance, plus or minus, which is why when we look at everything as a whole, we decided to keep our guidance the same.

Chris Baker: That’s helpful, thanks. And then just maybe sticking on the 2024 guide, any sort of relevant operator trends? And then maybe in terms of the activity backlog, if you could connect the dots in terms of where you guys stand today versus what’s baked into the guide would be helpful, just a broader context?