Laredo Petroleum, Inc.

Good day, ladies and gentlemen, and welcome to Vital Energy's first quarter 2024 earnings conference call. My name is John, and I'll be your conference operator for today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. As a reminder, this conference is being recorded for replay purposes. It is now my pleasure to introduce to you Mr. Ron Haged, Vice President of Investor Relations for the company. Please go ahead.

Thank you and good morning.

Joining me today are Jason Piegut, 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 four 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. The press release and presentation can be accessed on our website at www.vitalenergy.com.

We'll now turn the call over to Jason Pygott, President and Chief Executive Officer. Good morning and thank you for joining us today.

First quarter results were solid as we achieved record production exceeded adjusted free cash flow expectations, and delivered outstanding operational execution across our leasehold, again demonstrating our ability to create additional value on acquired acreage. We've integrated our 2023 acquisitions, and we are working to optimize operations to lower capital, reduce operational costs, and enhance productivity. We have already recognized significant gains on our properties versus what we underwrote, and we will continue to focus on creating additional value. As a company, we are highly focused on development that will both extend our inventory and reduce our break-evens. I'd like to highlight three examples of ways that we are accomplishing this. To start, we recently completed a 20-well package of 15,000-foot wells in western Glasscock on leases that we acquired in 2019 and 2021. Notably, seven of the 20 wells target the Wolf Camp C and D horizons, to which we did not assign value at the time of the acquisitions. The Wolf Camp Sewells are our first modern test of this horizon in the area and are currently not included in our publicly stated inventory. The initial results are very encouraging with just a couple weeks of flow back. The entire package was brought online ahead of schedule and is a significant contributor to our production outperformance for the quarter. Next, from our Southern Delaware position, we're observing strong production results from the assets we acquired. Highlighted in our investor deck, the Teller Wells are from the Forge acquisition and the Niedermeyer Wells are from Tall City. The Teller Wells, Vitals Energy's first horseshoe-shaped wells, are designed to optimize productivity and reduce break-even costs on smaller leases. These wells, paired with our high-intensity completion techniques, are outperforming offsetting industry wealth. Third, the success of the Teller Wells gave us confidence to expand the use of this innovative design in the Midland Basin. In Upton County, We drilled three horseshoe wells averaging 13,900 feet of lateral length instead of six short lateral wells. This markedly improved our capital and operational efficiencies. More significantly, we expect to apply this concept to 84 short lateral wells that are in our public inventory, saving as much as $140 million in capital and reducing the average break-even of these combined wells by $20 per barrel. As a company, we're pursuing multiple paths to reduce break-evens and extend inventory. We are improving productivity by extending lateral links, pumping high-intensity completions, testing and proving up new horizons, implementing a wide array of new technologies, acquiring new assets, improving base operations, and so much more. We've increased our average well productivity by 35% since 2019, and nearly 95% of our oil production comes from assets we acquired in the past five years. We've been consistent in our strategy to create value by building depth and quality of inventory, while also improving our financial structure and generating free cash flow. We'll now turn the call over to Katie for an operational update.

Thank you, Jason.

First quarter production exceeded expectations, driven primarily by the outperformance of our 20-well package in Western Glasscock and a three-well package in the Delaware Basin. The Western Glasscock package was a full DSU development, consisting of 20 15,000-foot laterals targeting four horizons. This is the largest package Vital has ever developed, and our team did an incredible job safely executing ahead of schedule. In this package, completions operations spanned three months, utilized two crews, and achieved a 10% efficiency improvement over our previous development in the area. These wells began producing oil 19 days ahead of schedule. As of mid April, all wells are producing with gross oil production from the package currently beating peak expectations by 15%. We are particularly encouraged by the performance of the two Wolf Camp C wells drilled as productivity appraisal tests. The early results are promising. Since our current public inventory does not include Wolf Camp C, positive outcomes here could significantly extend our inventory life and enhance its quality, leveraging organic appraisal within our existing footprint. The first quarter marked our first complete quarter, managing the three assets we acquired last November. These assets are now fully integrated, both operationally and administratively. When acquiring properties, we unlock value by decreasing well costs, and enhancing productivity compared to prior operators. Since our initial acquisition in southern Delaware in mid-year 2023, we've reduced the well cost from $12 million to $10.5 million for a 10,000-foot lateral by improving well design, enhancing operational efficiencies, and leveraging lower service costs due to increased scale. Moreover, the productivity of the two Delaware packages we've completed is approximately 45% higher than comparable industry wells adjacent to our acreage. due to our optimized development spacing and completion design. Of the two completed Delaware packages, one was acquired with the Forge assets in mid-2023. They had drilled a two-well package of horseshoe wells in the teller unit that we subsequently completed and brought online. Between capital efficiency, completion design, and development strategy, we are lowering break-evens on our southern Delaware inventory by $5 to $10 a barrel. We have successfully transferred the horseshoe well design to our midland position and have drilled three long lateral horseshoe wells in Upton County. This converted what would have been six 6,500-foot laterals into three extended laterals, averaging close to 14,000 feet of lateral length per well. We are currently completing these wells, and the economics are extremely compelling. Development is less capital intensive and more efficient, reducing expected break-evens on the package to $45 per barrel. Preliminary impact to our total inventory converts 84 stated locations to 42 extended laterals, reducing break-evens by an average of $20 a barrel. In addition to the inventory enhancement and capital efficiency work completed since close, our integration of the producing assets is also beating plan. In Q1, we exceeded production expectations, averaging 124,700 BOE per day and 58,500 barrels of oil per day. We deliver 20 new wells ahead of schedule and anticipate bringing online roughly 60% of our planned 2024 wells by mid-year. Thanks to this accelerated schedule, we expect higher production rates in the first half of the year while maintaining our full-year oil guidance of 55,000 to 59,000 barrels of oil per day. We've already identified several opportunities to improve operating costs on our new Delaware position. In the first quarter, we spotted inefficiencies in the chemical usage program carried over from the preceding operators, along with outsized water production driven by improper well design and targeting. These two impacts caused higher operating costs in a limited area of our leasehold. We are temporarily shedding in the wells that are not meeting our profitability requirements, which will result in a reduction in both total and per unit LOE starting in the second quarter. The shed and wells were forecasted to produce 400 net barrels of oil per day throughout the remainder of the year. This reduction in volume has been accounted for in our second quarter and reaffirmed annual production ranges. Permanent solutions will be implemented that will further drive down LOE in the second half of the year, including expanding the chemical optimization program, using our consolidated operating footprint to centralize surface infrastructure and treating equipment and further leveraging the shared water gathering system for new wells coming online. We're encouraged by the speed and effectiveness with which we've been able to integrate new assets. And the first quarter results speak to the strength of our acquisition strategy. We are continuing to focus on opportunities to further improve both quality and quantity of available inventory, increase effectiveness of operating expenses, and enhance free cash flow generation.

I'll now turn the call over to Brian.

Thank you, Katie. In the first quarter, we delivered solid financial results, generating cash flows from operating activities of $159 million and adjusted free cash flow of $43 million, driven by higher than expected production and lower capital investments. Lower capital in the first quarter was largely timing-related, and our full-year guidance is unchanged at $750 million to $850 million. We continue to be focused on further strengthening our balance sheet. We made great progress on this front in the first quarter, executing two transactions in the bond market that extended maturities and redeemed higher rate debt to reduce interest expense. In March, we issued 800 million of seniors unsecured notes at an interest rate of 7.875% compared to around 10% just six months prior. Due to strong demand for the notes, we subsequently issued another 200 million at just under 7.7%. utilize these proceeds of the issuance to fully redeem our 10.125% notes due 2028 and to redeem a portion of our 9.75% interest notes due 2030. These opportunistic moves will save us 11 million annually, and we now have no term maturities until 2029. Additionally, as part of our regular semiannual redetermination process for our RBL, Our banks increased our elected commitment to $1.35 billion from $1.25 billion, and we added an additional bank to the facility. We consistently use hedging to reduce commodity price volatility, ensure we can deliver strong returns with our drilling program, and generate cash to reduce debt and reduce our leverage ratio. Hedging is an integral part of delivering on this commitment. For the year, we are 97% hedged on our anticipated oil production at around $75 per barrel. This produces a very consistent cash flow profile, insulating us from risk associated with lower prices. Net debt to consolidated EBITDAX ratio is currently 1.13 times. Our ratio rose slightly as a result of our new debt issuance and redemption of 2028 and 2030 notes. Due to debt issuance costs, and redeeming the notes at a premium to their par value. We have significantly improved our capital structure since mid-2023. Capital efficiency benefits from our successful integration of acquisitions are driving sustainable free cash flow generation. We're focused on paying down debt, reducing interest expense, and targeting smart, accretive acquisition that builds scale and strength in our business.

Please open the line for questions. Thank you. We will now begin our question and answer session.

At this time, if you would like to ask a question, please press star followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again. We'll pause for a moment to compile the Q&A roster.

Thank you.

The first question comes from the line of Neil Dingman from TruWiz Securities. Please go ahead.

Morning, all. Nice quarter. Jason, my first question maybe for you and Katie on slide seven on the latest presentation. Specifically, I like on that slide where you talk about the optimized development. You know, you highlight the spacing, completion design, you know, all these things that have seemed to improve results. I'm just wondering, can you talk about now what, you know, how has that changed and what is now that you consider the most effective type of spacing and completion both in the Midland and Delaware versus, you know, let's say even last year?

Good morning, Neil.

This is Katie. There's a few pieces of this that we're pretty excited about. I think the first is that we've upspaced compared to some of the previous development plans. You can see in the productivity results that that's really well supported. But the other piece of the Delaware story is that we've been able to drive down capital costs really effectively in the first six to nine months of operating. So we've reduced well costs for a 10,000 foot lateral by about 15% already. And together between that and the upspacing is certainly having a really strong profitability impact on the Delaware inventory. We also are continuing to test some of the completion design in the area, and I think that we'll be able to see results of that across 2024. That'll influence the 2025 plan as well, but promising results so far from the Delaware acreage.

No, that's great to hear. Go ahead, Jason.

I think you also had Midland in your question. I think for Midland, part of what we're working through right now is just the co-development. We've We talked about these new zones both last quarter and this quarter. As Katie mentioned in her commentary, we have the wine rack for the Western Glasscock development. There's a new zone in there, the sea, that is a new test for us that wasn't underwritten. So when we think about Midland, we're really working through how do we co-develop these new zones that we're finding with the existing inventory that we have. And so that's something that we're going to continue to optimize into 25.

Will you bake that into the inventory at some point?

those additional zones yes I mean we talked about some last quarter and then the sea zones again they look really good but they're they have just two weeks of production it's the first test with this kind of new higher intensity design so and they're but very very promising and those sea zones are one of the contributors contributors to our outperformance of that western glasscock package okay then just lastly on capital allocation you know Jason for you or Brian

Well, you know, we show in our estimates that the pre-cash flow continues to ramp very nicely, especially second half this year. Will the almost entire focus continue to be debt repayment or, you know, could you talk about it? I mean, are there acquisitions you've already seen that you would try to slip in there? Maybe what thoughts to do with the capital?

Sure. This is Brian. I would say, you know, absent any acquisition opportunities, it will definitely go towards debt pay down. On the M&A front, it's been a slow first half of the year, but there are numerous packages coming from operators, consolidation operators, et cetera, in the back half of the year. So we've got our eyes looking at that stuff, and we'll be focused on it. you know, that will be somewhat dependent upon what packages come out, how we see those fitting into our portfolio, and whether or not they're accretive to our business. But we're definitely looking at those things. But in the absence of any of that, we'll be continuing to pay down debt.

We're trying to highlight what this quarter is, you know, the impact of the acquisitions we've done in the past and what they're doing for us now. We're Katie and team are getting more out of these wells via the new completion techniques. We're reducing capital costs. We're finding new zones. And so we still think that that is a great use of capital for us when we find the deal that works and fits in our portfolio and expect to see several things kind of come into market the next few months.

Look forward to that, guys. Thank you. Thank you.

The next question comes from the line of Zach Barham from JP Morgan. Please go ahead.

Thanks for taking my questions. First, could you talk a little bit more about the opportunity set on the horseshoe wells? You talked about the break-even on those wells being reduced by $20 per barrel. Going forward, how do you think about those wells slotting into your future inventory plans or future development plans? Do those get moved forward? Just trying to think about that. how we should think about you developing those going in the future.

Thanks for the question. This is Kyle Kohlbeiner. So I think ultimately we think about this, these U-turn wells as another tool in our toolbox that allows us to strategically unlock acreage that perhaps wasn't available to us before. In this case, you can see that development could have been 6,000-foot laterals, which ultimately is not the most capably efficient way to develop Our ability to drill these as almost 14,000-foot laterals with this horseshoe-shaped design really drives a ton of capital efficiency into the program. And as you mentioned, the break-evens dropping by $20 a barrel is really incredible. The team is looking at where do we deploy this opportunity or this tool in our toolbox going forward. We already have wells towards the back end of this year and early next year that we're planning on drilling as horseshoe laterals in the Delaware Basin. So it's something that we're going to put to work right away.

I'd say, too, we've got these wells that we have improved the economics on. We don't talk about wells that aren't in our inventory, that this technology will now move or have the ability to move into our inventory in the future. So it's both a win for reducing costs or break-evens on wells in our inventory and then creating new inventory that we haven't counted before.

Thanks.

And then, Jason, maybe following up on some of your earlier comments, you talked about the early success of those Wolf Camp C wells, and I know it's early on. But if the Wolf Camp C does prove to be successful on that glasscock pad, what's the potential impact to inventory? And maybe could you remind us how much inventory you've already booked in the Wolf Camp D and, you know, the spacing that you've assumed for that inventory versus what you drilled on this latest glasscock pad?

zach this is kyle again so to your answer on the wolf camp c we think it could unlock up to 70 locations over there in our western glasscock acreage so it's obviously a big ad for us uh we're like jason said we're very encouraged by what we see so far but you know we're only just a few weeks into our our flow back period on the wolf camp d we did book our locations there at five wells per section which is what we drilled this 20-well package at the results so far again have been encouraging It's early on. These wells, both the Wolf Camp C and D, had a lot of pressure during drill out. And in fact, free flowed a five and a half casing to start for a number of weeks before we ultimately put them on ESB. So strong bottom hole pressure, strong results so far.

We're encouraged with what we see. Thanks. Really appreciate the color. Thanks, Zach. The next question comes from the line of Derek Whitfield from Stiefel. Please go ahead.

Good morning, all, and congrats on a strong quarter and operational update. Thanks, Jared. Leaning in on the 20-well package in Western Glasgow, could you speak to the actions that led to the faster-than-expected oil cut and how you've accounted for the production response in your Q2 guide? It's clearly inflecting hires shown on page six, but expected to roll over, as the chart indicates.

Morning, Derek. I think there's a couple pieces here to hit on.

So the first is there's really strong execution by the team across all phases. This is the largest package that we've developed at Vital and really excited by the team's ability to deliver at or faster than planned cycle time. So we started drilling on this package mid-year last year. We were completing really Q4 of last year. And across all the teams, the handover between disciplines was better than planned. We were able to get the wells online earlier. And then really, to speak to Kyle's point earlier, really good performance on the C and D help support cutting oil before plan. So there's a couple pieces of both day one being sooner than plan and then getting to oil cut sooner as well that supported the Q1 outperformance. In terms of how that influences the full year, we are not re-forecasting yet this package until the wells start to turn over. It's really just too soon. There's enough with the C and D test that we want to get better data support before we start to build that in. I think that the key part is it has accelerated volume from later in the year, and so we now expect the first half of the year to be a heavier weighting from a volume standpoint on our dailies.

Terrific. And, Katie, perhaps staying with you, just on the higher LOE expenses, could you elaborate on your near and medium-term objectives that you would like to implement to lower or drive the LOE lower?

You bet. So LOA in Q1, I think, is a reflection of the team getting these assets integrated and really quickly trying to understand where there's some operating cost efficiencies. The two that so far we're tackling and making progress on in Q2 is around chemical costs and around saltwater disposal costs in the Delaware. So there's a small subset of wells that have effectively flat water production with declining oil, so an increasing water cut over time. This seemed to have turned over early in Q1, and so had some opportunity for us to shut in and make sure that we're only producing profitable wells. This came from one of the assets that we bought late last year and were drilled across some lineaments in the area. I think we've got good subsurface control that that would not be our development plan, but is now from a producing well set, something that we're managing on the LOE side. For chemicals, you know, I think I'm really encouraged by the opportunity that we have in front of us this year. The way that these assets were previously operated, there really wasn't much consolidation or shared cost and infrastructure support from a treating standpoint. So the high H2S area in the Delaware, we're continuing to focus on how do we improve the efficiency of our chemical program? How do we reduce the cost associated with it? And then how do we better leverage our scale? with these assets that are, you know, right bolt onto each other to more effectively treat and get everything to sales.

Terrific. Great update, guys. Thanks, Derek. Thanks, Derek.

The next question comes from the line of Tim Resvin from KeyBank Capital Markets. Please go ahead.

Good morning, folks, and thank you for taking my question. Go ahead, Tim. I wanted to ask... I don't know if this is more for Katie or Jason, but can you provide an update on where you stand with base production optimization on the recently acquired assets? I know it takes some time to get all the tech in place and work to optimize production. I know that's sort of a critical part of the value proposition. So just any color on that now that you have a full quarter under your belt.

We're continuing to evolve our base optimization tools in the Midland.

So I think there's been a great expansion of that into Southern Midland as we've picked up the driftwood and some of the Henry acreage. That has really been focused on ESP wells, and we're starting to transition that over to the Delaware. At this stage, I would frame it as we've completed a lot of the technical expertise and sort of support from the Midland team. They've expanded over into the Delaware. They're leading a lot of our Delaware operations. I think we're taking advantage of a lot of the knowledge and the technical ability from our group. We are not yet in a spot that we've fully deployed any of the hardware that would support some of the machine learning and AI tools that we've talked about before. That'll really take most of 24 to be able to effectively complete across the Delaware side. So I think there's quite a bit of opportunity still in leveraging our base optimization toolkit.

Okay.

That's great. That's great. And then just as a Follow-up, some Midland Basin peers over the last couple years have been reporting really strong dean results. You've seen them in Martin County and farther north. Is that something that's on your radar as you look to kind of fully develop the rest of your Midland inventory? Just kind of curious what your thoughts are on that interval. Thank you.

This is Kyle again. So the dean has been a great interval for us up in our Howard County acreage. As we developed up there, essentially the dean sits between the Lower Sprayberry and the Wolf Camp A, and so there were times where we would target the dean explicitly and other times where we would essentially hit the boundaries between the dean and the Wolf Camp A or the dean and the Lower Sprayberry. We know the dean was a huge contributor to the outperformance we saw in the Howard County assets, so we took a full advantage of it where it was available to us. And then, you know, as you've seen in other parts of the basin on other acquisitions that we've purchased, we are always looking for upside zones that we can test and appraise and add inventory to. We've demonstrated that in Howard County, in Western Glasscock, in South Upton, and on the Delaware.

It's a part of our acquisition and value unlocking model. Okay. Thank you. The next question comes from the line of Hanman Chang from Wells Fargo.

Please go ahead.

Thanks for taking my questions. I want to follow up on the development of the horseshoe wells and the potential upside to inventory and lowering your break-evens. Are there any specific areas or producing zones in the Milan Basin or the Delaware Basin that could disproportionately benefit from it? Thank you.

When we look at the opportunity set across the assets, we probably see a two-thirds weighting to the Midland Basin side, just in terms of our footprint and having a greater opportunity set because of the size of our footprint on the Midland side. But what we're really excited about is that we have now demonstrated that this opportunity can be done on the Delaware side and the Midland side, which really unlocks the opportunity for us across our portfolio.

I don't think it's so much basin-weighted as your acreage footprint-weighted. Where is a zone, a set of wells trapped because you've got development on either side? But that could be, again, an opportunity for us as we're looking to do bolt-ons and things like that as we're kind of testing this technology and testing longer laterals compared to a lot of our peers.

Thank you. Could you provide some colors on your outlook for gas price differentials in the second half of 2024? Thank you.

Yes, from a gas price standpoint, we're definitely looking at a strengthening specifically in the basin. We are expecting some additional capacity with the Matterhorn Express pipeline to come online later in the year, in the third quarter. That's going to add another 2.5 BCS a day of capacity to the basin. The last few months has been hampered with not only tight capacity, but on and off maintenance. of the existing brownfield and greenfield projects that have already been put into place earlier last year. And so getting through this period of time until the Matterhorn Express pipeline comes online is going to be tight, but we are expecting a rise as soon as the next quarter.

Thanks, guys. Thank you. The next question comes from the line of 12J from Daniel Energy Partners.

Please go ahead.

Hi, guys. My question is really about sort of the cadence of CapEx this year. It looks like it changed a bit from your expectations last quarter. Obviously, you spent less than you thought, Q1. And, you know, it looks like CapEx is going to crest in Q2. And I'm just wondering, you know, what that is. Are you pulling some things forward? Is it purely a function of sort of the increased efficiencies you guys have seen?

Good morning. I appreciate, on slide nine, I think there's some good visuals to help support this, but I appreciate your point about Q2. So a lot of the movement that we're seeing in the first half of the year is timing-related, small movement between Q1 and Q2, but over the first half, we plan to stay flat. It's less reflective of capital reduction in Q1 and more just movement into Q2. And then, as you'll notice, in the second half of the year, we have some opportunity to continue to moderate capital spend with a spot crew in the fourth quarter. We'll use that to ensure that we're hitting our full-year plan.

Okay, great. And then around the horseshoe wells, I was just wondering, I guess my understanding is the real savings is sort of having the needs for vertical casing. Are there other savings associated with these wells that maybe I'm not aware of?

Yeah, I think you're thinking about it correctly. It's all the things associated with the wellhead, the pad, the vertical portion of the well, ESPs, when the wells go on production. Effectively, it's cutting those costs in half. And so your ability to spend more time drilling productive rock in the lateral and spending your dollars there as opposed to spending dollars to get to that point, that's where the real true savings comes from.

Excellent. Hey, that's all from me. Thanks, guys. Thank you. The next question comes from the line of Paul Diamond from Seabee.

Please go ahead.

Thank you. Good morning, all. Thanks for taking my call. Just got a quick point to state on the horseshoe wells. Can you talk a bit about decline rates, performance relative to standard wells, kind of anything you're seeing that differentiates these versus, you know, a standard lateral?

Yeah, so if you look at slide seven, one thing that we wanted to make sure and highlight here is that the teller wells are horseshoe wells that are drilled in a very similar pattern to what we drilled the Allison wells on the Midland Basin side. You can see from the production versus time profile on the bottom right that those wells are performing very well relative to industry benchmarks in the area. So that's just one example of how these wells can perform. When we look at the opportunity set, when we think about our design, we have always taken a more conservative approach to spacing. As we come into these assets, we space a little bit wider than industry peers have in the past, and we think that that is a big driver of our outperforming. and our well results in the area, we've seen the same approach with these U-turns, and they are spaced in our wider spacing pattern. So ultimately, we do not anticipate seeing any kind of degradation or differential performance that's negative as a result of the horseshoe. We think of them as being as efficient at draining the reservoir as a straight long lateral would be. The benefit really comes from the saved capital that you get by not drilling six wells and only drilling three effectively.

Understood. And just a quick follow-up on kind of quarterly capital spending. There's some optionality for just how does that, what drives that? Is that going to be, I mean, versus, what drives that versus how it's kind of set up into, you know, 25? I know it's a bit early to talk about that, but is that more of a function of what you want to see this year, or is it more of a function of kind of how the market is going to connect?

This is really an opportunity for us to continue to optimize development throughout the year. So we're really excited about the work so far in the Delaware, but where we will see capital efficiencies throughout 24 that can help support maintaining that spot crew later in the year. We're really using that to help make sure that we stay where we want to be on total spend in 24 and moderating that with getting into 25 in a sustainable way.

Understood. Thanks for the clarity. All the best. question comes from the line of Greg Brody from Bank of America.

Please go ahead.

Hey, guys. Appreciate all the details on these horseshoe wells. Obviously, everyone's really interested in it. You gave a split of how much opportunity there is to sort of leverage this technology based on Midland versus Delaware. Do you have a cumulative number of how many wells that you could convert that are inventory in inventory and out of inventory?

Yeah, so you can see on slide eight, on the bottom bullet, we talk about within our previously public stated inventory, 84 of those wells have this opportunity. So effectively it becomes 42. It is a reduction in the count of inventory, but as Jason said in his comment, it's $140 million of capital saved for effectively recovering the same resource that you would have with those 84 wells. The other thing to think about, and we'll update this when we come up with our updated inventory counts, is that there are now wells that, because of increased capital efficiency, will be pulled into our public inventory that previously weren't there, making up for the effectively lost 42 laterals that we're talking about. So we view this as a positive all around. It high-grades our inventory. It improves break-evens by a dramatic amount. And ultimately, our inventory counts will stay flat or even go up as a result.

Is that where the two-thirds, one-third Midland Delaware came from? That's how we should think about it?

That total 84%?

The two-thirds, one-third is really talking about where the opportunity set is. As Jason and I said earlier, it's really a function of how big is your footprint and how many opportunities are there based upon the way our acreage is laid out. The 84 to 42 is reflective of that two-thirds, one-third split that we talked about.

Got it. I guess the question is, why not do this with some of your core inventory. Is there an opportunity to go longer? What's the physical limit that you think that you have degradation in performance?

So, you know, to date we've drilled wells 15,000 and even just above. The industry is continuing to extend lateral links. It's obviously one of the largest drivers of capital efficiency that's available. We are certainly thinking about that, open to that possibility. These wells that we drilled on the Allison package were near 15,000 feet themselves, so we will continue to push lateral lengths to the optimum limit, driving capital efficiency, improving capital efficiency, and getting all that we can out of these wells.

Do you think there's a time where we could actually see you drill, take your 10,000-foot laterals, and try to do a U-turn there with two wells like that?

The team is always thinking about creative opportunities to do something like that. There have been situations where we've been locked in with a land position where we've considered those types of creative opportunities, but it's just something that we have to evaluate on a case-by-case basis.

You need to consider the risk, too, and that much capital being invested in any one well. This is our first shot at it, so I think there's going to be lots of opportunities in the And the future and the team again quickly took a technology from an acquired asset in Delaware Basin and immediately moved it to the new assets in the Midland Basin. So again, it's great execution. They did this on their first try. So really proud of the team. But we're trying to highlight today there's just lots of potential for us in the future as we take technology and take it from one acquired asset to another and just really kind of build this one vital energy culture that's embracing technology and trying to take the best techniques from all the acquisitions and drive ultimately a corporate performance.

Just as I look at the data set you have here, you have two wells from the tower unit and it looks like 240 days of data. You're saying for the Midland, you'll have similar performance How much data do you have there in terms of time? And maybe just contextually, how much other data is there out in the industry that gives you the confidence that this is repeatable throughout wherever you drill?

On the Midland side, we have successfully drilled and cemented those wells, and we are in the middle of our completion operations, and everything is going well, going according to plan. In terms of industry data, we're aware of 43 wells, including these, that have used this horseshoe shape, and we have not seen any kind of production degradation associated with the shape, with that type of well plan.

Got it. I appreciate that. One last question for you. Usually you get asked about M&A. Obviously, horseshoe wells have been dominant today. What's your sense of what's out there and the opportunities set? just as you look at it today?

I think there's still a pretty good pipeline of opportunities that we see. Some of them have data rooms out there. Some we expect to come. I think there's several, but as a result of these large corporate deals, we could see some assets hit the market from other public companies, which will be new and haven't been a lot of those here recently versus just privates that are selling. So see a good pipeline. For us, it's still something that we're very interested in. Again, as we've tried to highlight with these quarterly results, we've been really good at being able to drive out cost, find new zones, implement new technology on acquired assets. These Allison wells were things that we acquired from the Henry team, so we immediately took, again, a technique from one acquired company and took it to assets acquired from another one. I think there's lots of opportunity there. What we've done a really great job, I think, of is just squeezing more out of these assets after we've acquired them. And so we still think that's an important part of our portfolio. But we're trying also to build inventory organically in case some of these acquisitions don't go in our favor or we're not successful this year. We're extending inventory through technology. and finding new zones. We'll have a great year whether we do acquisitions or not, but it's still something that's important to us as a company.

Thanks for all the time, guys. I appreciate all the color.

Thank you.

The next question comes from the line of Brian Ville from Capital One Securities. Please go ahead.

Good morning, everyone. Thanks for taking my question. Just one more on M&A while we're at it here. As you look at future possibilities, should we think about your current trading multiples, free cash flow yields as metrics that any future deals would have to be accretive on for you to transact or those guidelines? How do you think about that in terms of deals that you go after?

Great question. Yes, I think with the transactions we accomplished last year, we got the balance sheet where we want it. I think going forward, you'll see any transaction that we do will need to be accretive to shareholders on on virtually every metric i mean sometimes that's hard to catch every single one of them but uh that that will be our focus is to make sure that the acquisitions this year um you know are creative to all metrics for shareholders and are protective of the balance sheet going forward so we believe we can we can do that through uh all the all the tools we've used in the past for acquisitions and and that that is the focus

Perfect. Thank you very much. That's very helpful. Thank you.

If there are no further questions at the queue this time, this concludes our Q&A session. I would like to turn the call over back to Ron Hagood for brief closing remarks.

Thank you for joining us this morning. We appreciate your interest in vital energy, and this concludes today's call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.