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spk13: Good day, ladies and gentlemen, and welcome to Vital Energy's Inc. Third Quarter 2023 Earnings Conference Call. My name is Desiree, and I will be your operator for today. At this time, all participants are in listen-only mode. We will be conducting a question and answer session after financial and operations report. As a reminder, this conference is being recorded for replay purposes. It is now my pleasure to introduce Mr. Ron Haygood, Vice President, Investor Relations. You may proceed, sir.
spk05: Thank you, and good morning.
spk15: Joining me today are Jason Pigott, President and Chief Executive Officer, Brian Limmerman, Senior Vice President and Chief Financial Officer, Katie Hill, Vice President, Operations, as well as additional members of our management team. During today's call, we'll be making forward-looking statements. These statements, including those describing our beliefs, goals, expectations, forecasts, and assumptions, are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results may differ from these forward-looking statements for a variety of reasons, many of which are beyond our control. In addition, we will be making reference to non-GAAP financial measures. Reconciliations to GAAP financial measures are included in the press release and presentation we issued last night describing our financial and operating results. The press release and presentation can be accessed on our website at www.vitalenergy.com.
spk05: And I'll turn the call over to Jason Puget, President and Chief Executive Officer. Thanks, Ron. Good morning, everyone, and thank you for joining us today.
spk07: Our results in the third quarter were outstanding and were a continuation of our exceptional execution throughout the year. We are delivering on all aspects of our strategy. In the third quarter, we announced three acquisitions, making a total of five for the year. These acquisitions increased scale, are created to free cash flow, and add high-value inventory. We generated $91 million of free cash flow and also achieved company record production levels. We continue to demonstrate capital efficiency improvements, coming in below guidance on capital investments and reducing our leverage ratio. We have successfully integrated the driftwood and forged properties we acquired earlier this year, and are completing well on those properties that are outperforming what the previous operators achieved. Additionally, we are making progress upgrading operations to our standards and seeing opportunities for synergies, future cost reductions, and base production enhancement. As we close out 2023, we have high confidence in our ability to execute on the plan for 2024 that we communicated in September. We have a proven track record of integrating and creating value through acquisitions by applying our operational expertise and proprietary technologies to enhance base production. To reduce risk and ensure cash flow, we have hedged around 90% of our 2024 expected oil production. Free cash flow will be allocated to reduce absolute debt and decrease our leverage ratio to about 1.0 times by the end of 2024. Today, we also released our 2023 sustainability report and our inaugural climate risk and resilience report. updating the company's progress and performance on sustainability-related matters. This is the company's fourth sustainability report, and the first is vital energy. In these reports, you will see that we, one, achieved two of our four 2025 environmental targets three years ahead of schedule. Second, have reduced Scope 1 greenhouse gas emissions by 59 percent and methane emissions by 87 percent, both from the 2019 baseline levels. Third, Earn Trustwell's AAA low methane rating, the first company to achieve this rating. Vital Energy is now stronger than it's ever been. Our scale, inventory depth, free cash flow yield, and balance sheet strength position us to build sustainable value in 2024 and beyond. I will now turn the call over to Katie for additional details on our strong operational performance and our success integrating the Driftwood and Forge acquisitions.
spk10: Thank you, Jason.
spk11: Today, I'm excited to share details about our successful integration of the Driftwood and Forge properties, including how we are driving down operating costs, improving capital efficiency, and increasing production. I will also address our increased fourth quarter and full year guidance. To start, I'd like to compliment and congratulate the entire organization for the work they are doing to integrate these assets, along with the two assets still in progress. Everybody is energized and going above and beyond to make these acquisitions successful. We have a track record of rapidly onboarding and finding creative ways to capture synergies to enhance our returns. Our Driftwood and Forge deals are no exception. From a development perspective on Forge, we have now executed on all phases of operations, drilling new packages, completing acquired ducts, and managing new turn in lines. Development planning process has been successful and the operational results have been extremely encouraging. Oil production from these wells is outperforming historical results from the previous operator by nearly 30%. And we have already reduced well costs by 10% through excellent execution work from our drilling and completion team. It is a similar story on the driftwood assets. We have completed the four ducts that were acquired from the previous operator. We are seeing gains through the application of our frac design and first artificial lift, which has resulted in oil production from these wells outperforming previous results by 7%. We will soon drill the first vital energy-designed wells and will work to identify significant cost reductions and efficiencies, just like we have on the Forge asset. We will also deploy necessary hardware to begin applying our production technology platform, and we look to see optimization results from that effort over the next six months. Operationally, we are implementing our best practices and have already optimized routes for lease operators. Our team is now handling an average of 30 wells per operator versus 7 to 15 for the previous owners. In addition to a faster deployment of the vital energy operating platform, this also allows for a meaningful impact on lease operating expenses when scaled across assets. Approximately 45% of base production on the Forge assets is produced by ESP. We are currently building out data infrastructure in the field to be able to incorporate these wells onto our digital platform, and we see the potential for the same 4% increase in runtime that we've experienced on our base production in the Midland Basin. Turning to service costs, we have consistently outperformed our capital expenditure guidance this year, in part due to our supply chain group. They did great work keeping us ahead of some of the big inflationary pressures observed last year by the industry, and we are seeing deflation in certain areas this year. OCTG, or tubular goods in particular, we tend to buy out about six to nine months to meet our tubular needs. This kept us from hitting the extreme price peaks last year, but it also muted the positive deflationary impact this year. Today, we are seeing an approximate 20% reduction in our current OCTG cost when compared to last year's average. For simulation services, about three-quarters of our cost for 2024 are locked in. One place we saw some benefits was in contracting of our second completions crew, where we saw a 30% decrease in pricing since earlier this year. These savings are significant and have been factored into our $750 to $850 million budget range for 2024. On the production front, we updated our Q4 total and oil production guidance to reflect strong recent performance across the asset base and earlier than estimated closing dates for all three acquisitions. Fourth quarter capital guidance is also lower than what we communicated in September, again for adjustments related to timing and capital being reflected in purchase price adjustments. We also increased our full year production outlook to incorporate the outperformance in third quarter, higher production expectations in the fourth quarter, and the earlier closing dates. In closing, our execution teams are continuing to deliver high performance. We are successfully integrating our new properties and optimizing our existing assets to increase production and lower costs.
spk10: I'll now turn the call over to Brian.
spk05: Thank you, Katie.
spk12: Metal Energy has made substantial progress in 2023, significantly strengthening our overall capital structure, generating sustainable free cash flow, and furthering our ability to grow through future accretive transactions. We announced five transactions this year totaling $1.7 billion, three of which have closed, with the other two expected to close in early November. These acquisitions grow scale and facilitate deleveraging as we remain disciplined in our spending to generate free cash flow to pay down debt. We had a thoughtful approach to how we finance these transactions using a balanced split of debt and equity. When combined with our recent public debt and equity issuances, this has resulted in a simple, easy-to-understand balance sheet that provides us significant flexibility. Upon closing of all transactions, the discharge of the 2025 notes, and the conversion of Henry's preferred stock to common stock, we will have no debt maturities until 2027, more than $1 billion of liquidity, and a simple capital structure of common stock, secured credit facility, and unsecured notes. We are laser focused on generating free cash flow to reduce absolute debt and interest expense. We have hedged about 90% of our expected 2024 oil production at prices we feel are well above the long-term average price of crude. We are well positioned to reduce interest costs, even after we pay down the RBL balance, since we have $700 million of unsecured notes that are currently callable. We expect to generate approximately $425 million in free cash flow over the next 15 months. and are targeting a leverage ratio of 1.0 times or less by year-end 2024. I will now turn the call back to Jason for some final comments.
spk07: In closing, I want to thank all the Vital Energy team for their efforts to integrate and acquire five assets this year. Combined with our operational outperformance, we will enter 2024 in a position of strength. Thank you. Operator, you may now open the call for questions.
spk13: Thank you. The floor is now open for your questions. To ask a question this time, please press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. We have one question comes from the line of Derek Whitefield with Stifel. Your line is open.
spk06: Thanks, and good morning to all. Congrats on another solid quarter.
spk00: Morning, Derek.
spk06: For my first question, I want to focus on your 2024 outlook with the understanding that you're reiterating your previous output metrics. Could you shed some light on activity expectations between basins in the shape of your production profile throughout the year?
spk05: Yeah, for the guidance for next year, again, it's not really –
spk07: changed at this point i think one of the things the team is really working on is optimizing uh development between the the two basins and i think there's opportunity seeing the outperformance on the new assets that we highlighted um so again i think there's going to be opportunities there in the future but we're working through it uh for us the key thing is getting these transactions closed and we closed maple this week we should be closing on tall city and henry relatively soon so we're very excited about that and once we've got those closed We'll continue to optimize the profile for next year. I'll turn it over to Kyle. He can give you a little bit of guidance kind of on the shape of the curve. Again, as a reminder, we do have this big package coming on Western Glasscock, but I'll turn it over to him for that.
spk03: Yeah, so... You know, as you can see in our materials, the investment opportunity in the Delaware side of the basin is very compelling. And so as we integrate these assets and we optimize around that, we are certainly kind of looking there and figuring out how we can deploy more capital to that area. But as Jason said, you know, we'll come out with kind of a full update on where we plan to be when we come out in February of 24. You know, now that we have essentially – you know, diversified asset base we can invest across both the Delaware and the Permian and the Midland side of the basin. We're seeing a flatter oil profile than we have in the past. As we've talked about, we have this large 20-well Cook-Hoffman package that's coming online in one Q of 24 and it's going to ultimately peak in two Q of 24. And so ultimately we kind of view two Q and three Q as the peak in 24, but ultimately a flatter profile than we've seen in past years.
spk07: That's one of the benefits of scale is, again, when you've got two rigs running, there's more volatility in the production profile than when you have four rigs running to five rigs.
spk05: And that's something that we're excited about as we've achieved scale is less volatility in the production profile.
spk06: That's great. And then with the benefit of an additional quarter of experience in the Delaware in your first completion, Could I ask you to share your broad thoughts on areas of upside relative to your initial assessments? And then more broadly, or more specifically for the quarter, I should say, could you speak to some of the drivers of your initial well outperformance versus the legacy wells?
spk10: Good morning, Derek. This is Katie.
spk11: We've had a really strong start over the last couple months with the Forge asset and the Delaware. We've already achieved a 10% capital reduction. with the first few months under our belt. So really excited to see our ability to continue to find capital efficiencies. I think the fact that we have a more stable program, we're able to use that scale and gain some efficiency on the services side. We've been able to go to market this quarter as we plan 2024 and already have a lot of the services for next year under contract. So really excited to be able to apply that program in the Delaware. I think we also see A lot of opportunity with the digital platform. We've seen success on the Midland Basin in achieving about a 4% improvement in uptime on ESPs, about a 15% improvement in uptime on compression. And a lot of that technology will have great application in Delaware as well. That's probably a mid-24 expectation as we think about getting hardware deployed first and then building sort of the software pieces on top of that. But we're excited to get these assets closed here in the next couple weeks and go from there.
spk03: Derek, I think I also heard you ask a question about slide eight, essentially our successful integration of a recent acquisition looking at the profiles of production of the wells that we've kind of been involved with and thinking over the assets versus the legacy results. I think what you can see there is a combination of, you know, for those wells that we've designed the completion and pumped the completion We've definitely hit those with high profit intensity, high fluid intensity, with very tight cluster spacing. We ultimately believe that that has a big impact on well results, and we think that we're seeing that here. The other thing is really our operations team and our artificial list strategy. We have an aggressive drawdown profile and strategies that we employ on these wells. We've seen it work for us in 23 in Howard County, and we're also seeing it work for us here on these new assets. We think that also contributes to this outperformance that we're seeing on slide eight.
spk08: That's terrific. Thanks for your time. Thanks, Terry. There are no further questions at this time.
spk13: Mr. Haygood, I turn the call back over to you.
spk05: Well, thank you for joining us this morning. We appreciate your interest in vital energy, and this concludes our call.
spk13: This concludes today's conference call. You may now disconnect. Hello. Thank you. Thank you. music music Good day, ladies and gentlemen, and welcome to Vital Energy's Inc. Third Quarter 2023 Earnings Conference Call. My name is Desiree, and I will be your operator for today. At this time, all participants are in listen-only mode. We will be conducting a question and answer session after financial and operations report. As a reminder, this conference is being recorded for replay purposes. It is now my pleasure to introduce Mr. Ron Haygood, Vice President, Investor Relations. You may proceed, sir.
spk05: Thank you, and good morning.
spk15: Joining me today are Jason Pigott, President and Chief Executive Officer, Brian Lummerman, Senior Vice President and Chief Financial Officer, Katie Hill, Vice President, Operations, as well as additional members of our management team. During today's call, we'll be making forward-looking statements. These statements, including those describing our beliefs, goals, expectations, forecasts, and assumptions, are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results may differ from these forward-looking statements for a variety of reasons, many of which are beyond our control. In addition, we will be making reference to non-GAAP financial measures. Reconciliations to GAAP financial measures are included in the press release and presentation we issued last night describing our financial and operating results. The press release and presentation can be accessed on our website at www.vitalenergy.com.
spk05: And I'll turn the call over to Jason Puget, President and Chief Executive Officer. Thanks, Ron.
spk07: Good morning, everyone, and thank you for joining us today. Our results in the third quarter were outstanding and were a continuation of our exceptional execution throughout the year. We are delivering on all aspects of our strategy. In the third quarter, we announced three acquisitions, making a total of five for the year. These acquisitions increased scale, are created to free cash flow, and add high value inventory. We generated $91 million of free cash flow and also achieved company record production levels. We continue to demonstrate capital efficiency improvements, coming in below guidance on capital investments and reducing our leverage ratio. We have successfully integrated the driftwood and forged properties we acquired earlier this year, and are completing well on those properties that are outperforming what the previous operators achieved. Additionally, we are making progress upgrading operations to our standards and seeing opportunities for synergies, future cost reductions, and base production enhancement. As we close out 2023, we have high confidence in our ability to execute on the plan for 2024 that we communicated in September. We have a proven track record of integrating and creating value through acquisitions by applying our operational expertise and proprietary technologies to enhance base production. To reduce risk and ensure cash flow, we have hedged around 90% of our 2024 expected oil production. Free cash flow will be allocated to reduce absolute debt and decrease our leverage ratio to about 1.0 times by the end of 2024. Today, we also released our 2023 sustainability report and our inaugural climate risk and resilience report. updating the company's progress and performance on sustainability-related matters. This is the company's fourth sustainability report, and the first is vital energy. In these reports, you will see that we, one, achieved two of our four 2025 environmental targets three years ahead of schedule. Second, have reduced Scope 1 greenhouse gas emissions by 59 percent and methane emissions by 87 percent, both from the 2019 baseline levels. Third, Earn Trustwell's AAA low methane rating, the first company to achieve this rating. Vital Energy is now stronger than it's ever been. Our scale, inventory depth, free cash flow yield, and balance sheet strength position us to build sustainable value in 2024 and beyond. I will now turn the call over to Katie for additional details on our strong operational performance and our success integrating the Driftwood and Forge acquisitions.
spk10: Thank you, Jason.
spk11: Today, I'm excited to share details about our successful integration of the Driftwood and Forge properties, including how we are driving down operating costs, improving capital efficiency, and increasing production. I will also address our increased fourth quarter and full year guidance. To start, I'd like to compliment and congratulate the entire organization for the work they are doing to integrate these assets, along with the two assets still in progress. Everybody is energized and going above and beyond to make these acquisitions successful. We have a track record of rapidly onboarding and finding creative ways to capture synergies to enhance our returns. Our Driftwood and Forge deals are no exception. From a development perspective on Forge, we have now executed on all phases of operations, drilling new packages, completing acquired ducts, and managing new turn in lines. development planning process has been successful and the operational results have been extremely encouraging oil production from these wells is outperforming historical results from the previous operator by nearly 30 percent and we have already reduced well cost by 10 percent through excellent execution work from our drilling and completion teams it is a similar story on the driftwood assets we have completed the four ducts that were acquired from the previous operator We are seeing gains through the application of our frac design and first artificial lift, which has resulted in oil production from these wells outperforming previous results by 7%. We will soon drill the first vital energy-designed wells and will work to identify significant cost reductions and efficiencies, just like we have on the Forge asset. We will also deploy necessary hardware to begin applying our production technology platform, and we look to see optimization results from that effort over the next six months. Operationally, we are implementing our best practices and have already optimized routes for lease operators. Our team is now handling an average of 30 wells per operator versus 7 to 15 for the previous owners. In addition to a faster deployment of the vital energy operating platform, this also allows for a meaningful impact on lease operating expenses when scaled across assets. Approximately 45% of base production on the Forge assets is produced by ESP. We are currently building out data infrastructure in the field to be able to incorporate these wells onto our digital platform, and we see the potential for the same 4% increase in runtime that we've experienced on our base production in the Midland Basin. Turning to service costs, we have consistently outperformed our capital expenditure guidance this year, in part due to our supply chain group. They did great work keeping us ahead of some of the big inflationary pressures observed last year by the industry, and we are seeing deflation in certain areas this year. OCTG, or tubular goods in particular, we tend to buy out about six to nine months to meet our tubular needs. This kept us from hitting the extreme price peaks last year, but it also muted the positive deflationary impact this year. Today, we are seeing an approximate 20% reduction in our current OCTG costs when compared to last year's average. For simulation services, about three-quarters of our costs for 2024 are locked in. One place we saw some benefits was in contracting of our second completions crew, where we saw a 30% decrease in pricing since earlier this year. These savings are significant and have been factored into our $750 to $850 million budget range for 2024. On the production front, we updated our Q4 total and oil production guidance to reflect strong recent performance across the asset base and earlier than estimated closing dates for all three acquisitions. Fourth quarter capital guidance is also lower than what we communicated in September, again for adjustments related to timing and capital being reflected in purchase price adjustments. We also increased our full year production outlook to incorporate the outperformance in third quarter, higher production expectations in the fourth quarter, and the earlier closing dates. In closing, our execution teams are continuing to deliver high performance. We are successfully integrating our new properties and optimizing our existing assets to increase production and lower costs.
spk10: I'll now turn the call over to Brian.
spk12: Thank you, Katie. Metal Energy has made substantial progress in 2023, significantly strengthening our overall capital structure, generating sustainable free cash flow, and furthering our ability to grow through future accretive transactions. We announced five transactions this year totaling $1.7 billion, three of which have closed with the other two expected to close in early November. These acquisitions grow scale and facilitate deleveraging as we remain disciplined in our spending to generate free cash flow to pay down debt. We had a thoughtful approach to how we finance these transactions using a balanced split of debt and equity. When combined with our recent public debt and equity issuances, this has resulted in a simple, easy-to-understand balance sheet that provides us significant flexibility. Upon closing of all transactions, the discharge of the 2025 notes, and the conversion of Henry's preferred stock to common stock, we will have no debt maturities until 2027, more than $1 billion of liquidity, and a simple capital structure of common stock, secured credit facility, and unsecured notes. We are laser focused on generating free cash flow to reduce absolute debt and interest expense. We have hedged about 90% of our expected 2024 oil production at prices we feel are well above the long-term average price of crude. We are well positioned to reduce interest costs, even after we pay down the RBL balance, since we have $700 million of unsecured notes that are currently callable. We expect to generate approximately $425 million in free cash flow over the next 15 months. and are targeting a leverage ratio of 1.0 times or less by year-end 2024. I will now turn the call back to Jason for some final comments.
spk07: In closing, I want to thank all the Vital Energy team for their efforts to integrate and acquire five assets this year. Combined with our operational outperformance, we will enter 2024 in a position of strength. Thank you. Operator, you may now open the call for questions.
spk13: Thank you. The floor is now open for your questions. To ask a question this time, please press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. We have one question comes from the line of Derek Whitefield with Stifel. Your line is open.
spk06: Thanks, and good morning, all. Congrats on another solid quarter. Morning, Derek. For my first question, I want to focus on your 2024 outlook. with the understanding that you're reiterating your previous output metrics, could you shed light on activity expectations between basins in the shape of your production profile throughout the year?
spk05: Yeah.
spk07: For the guidance for next year, again, it's not really changed at this point. I think one of the things the team is really working on is optimizing development between the two basins, and I think there's opportunity seeing the outperformance on the new assets that we highlighted um so again i think there's going to be opportunities there in the future but we're working through it uh for us the key thing is getting these transactions closed again we closed maple this week we should be closing on tall city and henry relatively soon so we're very excited about that and once we've got those closed uh we'll continue to optimize the profile for next year i'll turn over to kyle he can give you a little bit of guidance kind of on the shape of the curve again as a reminder we do have this big package coming on Western Glass Cots, but I'll turn it over to him for that.
spk03: Yeah, so as you can see in our materials, the investment opportunity in the Delaware side of the basin is very compelling. And so as we integrate these assets and we optimize around that, we are certainly kind of looking there and figuring out how we can deploy more capital to that area. But as Jason said, we'll come out with kind of a full update on where we plan to be when we come out in February of 24. You know, now that we have essentially, you know, diversified asset base, we can invest across both the Delaware and the Permian and the middle side of the basin. We're seeing a flatter oil profile than we have in the past. As we've talked about, we have this large 20-well Cook-Hoffman package that's coming online. in one Q of 24, and it's going to ultimately peak in two Q of 24. And so ultimately, we kind of view two Q and three Q as the peak in 24, but ultimately a flatter profile than we've seen in past years.
spk07: That's one of the benefits of scale is, again, when you've got two rigs running, there's more volatility in the production profile than when you have four rigs running to five rigs.
spk05: And that's something that we're excited about as we achieve scale is less volatility in the production profile.
spk06: That's great. And then with the benefit of an additional quarter of experience in the Delaware in your first completion, could I ask you to share your broad thoughts on areas of upside relative to your initial assessments? And then more broadly or more specifically for the quarter, I should say, Could you speak to some of the drivers of your initial well outperformance versus the legacy wells?
spk10: Good morning, Derek. This is Katie.
spk11: We've had a really strong start over the last couple months with the Forge asset and the Delaware. We've already achieved a 10% capital reduction with the first few months under our belt, so really excited to see our ability to continue to find capital efficiencies. I think The fact that we have a more stable program, we're able to use that scale and gain some efficiency on the services side. We've been able to go to market this quarter as we plan 2024 and already have a lot of the services for next year under contract. So really excited to be able to apply that program in the Delaware. I think we also see a lot of opportunity with the digital platform. We've seen success on the Midland Basin in achieving about a 4% improvement in uptime on ESPs. about a 15% improvement in uptime on compression. And a lot of that technology will have great application in the Delaware as well. That's probably a mid-24 expectation as we think about getting hardware deployed first and then building sort of the software pieces on top of that. But we're excited to get these assets closed here in the next couple weeks and go from there.
spk03: Derek, I think I also heard you ask a question about Slide 8, essentially our successful integration of recent applications, looking at the profiles of production of the wells that we've kind of been involved with since taking over the assets versus the legacy results. I think what you can see there is a combination of, for those wells that we've designed the completion and pumped the completion, we've definitely hit those with high profit intensity, high fluid intensity, with very tight cluster spacing. We ultimately believe that that has a big impact on well results, and we think that we're seeing that here. The other thing is really our operations team and our artificial list strategy. We have an aggressive drawdown profile and strategies that we employ on these wells. We've seen it work for us in 23 in Howard County, and we're also seeing it work for us here on these new assets. We think that also contributes to this outperformance that we're seeing on slide eight.
spk08: That's terrific. Thanks for your time. Thanks, Terry. There are no further questions at this time.
spk13: Mr. Haygood, I turn the call back over to you.
spk05: Well, thank you for joining us this morning. We appreciate your interest in vital energy, and this concludes our call.
spk13: This concludes today's conference call. You may now disconnect.
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