Vital Energy, Inc.

Good day, ladies and gentlemen, and welcome to Vital Energy Inc's fourth quarter 2024 earnings conference call. My name is Jericho and I'll 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 the financial and operations report. As a reminder, this conference is being recorded for replay purposes. It is now my pleasure to introduce Mr. Ron Hagan, Vice President, Investor Relations. You may proceed, sir.

Thank you, and good morning. Joining me today are Jason Paget, President and Chief Executive Officer, Brian Limmerman, Executive Vice President and Chief Financial Officer, Eddie Hill, Senior Vice President, Chief Operating Officer, as well as additional members of our management team. During today's call, we'll be making forward looking statements, 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 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. Press release and presentation can be accessed at our website at www.vitalenergy.com. We'll now turn the call over to Jason Paget, President and Chief Executive Officer. Good morning, and thank you for joining us.

Vital Energy again delivered outstanding results this quarter, The results would not have been possible without our relentless pursuit to improve the quality of our assets over the last five years. Prior to taking your questions, there are four areas I would like to review. First, our fourth quarter 2024 results. Second, our significant inventory additions and how they will enhance our capital efficiency going forward. Third, our 2025 outlook, which combines disciplined investments and a focus on generating free cash flow. Finally, how we will reduce debt and maintain a strong balance sheet. Let's talk about the fourth quarter. Energy had strong financial and operating results this quarter. Consistent with our performance all year in 2024, results were driven by production that exceeded the top end of guidance for both total and oil production. We benefited from strong production from our point energy assets acquired last September. Capital investments were a little higher than guidance. This was primarily due to increased working interest and a carried interest on some bolt-on acquisitions that we developed during the quarter. This impacted DNC capital by about $17 million and increased our net production from the package. We continue to make significant, sustainable progress, reducing operating costs on our acquired properties. This was our first full quarter operating the point assets, and we are very happy with our results. We outperformed our LOE guidance by 5%, delivering at cost of $889 per BOE. Some projects were deferred to capture cost efficiencies and will bring our first quarter LOE a little higher, but both quarters together are expected to average around $9.20 per BOE. We continue to be on track to reduce LOE below $9 per BOE by the end of 2025. Financial performance beat expectations as we delivered strong EBITDAX and adjusted free cash flow. Some timing nuances are shifting the resulting debt pay down into the first quarter, specifically a $75 million increase in accounts receivable related to the closing of the point acquisition, and $20 million in non-budgeted acquisitions. January net debt was already down $50 million below year-end levels, and we expect total 1Q debt pay down to be approximately $100 million. Now, let me talk about the significant and positive move in our oil-weighted inventory. Since early 2024, we have increased our total inventory by more than 10%. We now have approximately 925 oil weighted locations representing more than 11 years of drilling at our current development pace. Recent inventory additions were related to the delineation of deeper targets and lateral length increases that provided sustainable drilling cost efficiencies. I'll drill a little deeper on these changes and provide some additional color. First, the average lateral length of our inventory is now 12,800 feet, a 16% increase over last year. In total, we have increased future developable lateral footage by approximately 30%. These changes have been instrumental in improving the quality of our inventory and reducing our average break-even oil price to approximately $53 per barrel WTI, even as we extended out our inventory life. This makes our wells more price resilient and supports our ability to maintain current levels of capital efficiency well into the future. Next, we de-risked significant inventory in deeper horizons. In 2024, we tilled 16 wells in the Wolf Camp C, the Wolf Camp D, and the Barnett. These tests gave us a robust understanding of productivity in the newer formations, the Wolf Camp C and the Barnett, allowing us to add inventory in those formations for the first time. The Wolf Camp D wells had an average lateral length of more than 15,000 feet, giving us confidence to book additional long lateral locations in the Wolf Camp D. Third, we have new operational competencies and have successfully used shaped well bores to extend lateral links, access stranded resources, and enhance returns. Inventory now consists of approximately 120 horseshoe-shaped wells that convert two 5,000-foot wells into one 10,000-foot well, improving break-evens by $15 to $20 per barrel WTI. We are now taking this concept another step, drilling J-shaped wells that convert three 10,000-foot wells into two 15,000-foot wells. We'll be drilling our first package later in 2025 with the opportunity to convert approximately 130 straight wells to around 90 J-shaped wells, reducing break-evens on those wells by around $10 per barrel WTI. Novel way we have combined leasing and shape well bores is through our eight mile project, which we are about to begin drilling. We acquired a stranded section in the heart of the Midland Basin that would have been developed with 5,000 foot laterals. Utilizing horseshoe shaped well designs, we will drill 12 10,000 foot wells that we estimate to have an average WTI break even of around $40 per barrel. Paid approximately $11 million for the section and with the additional carry, we'll have acquired these wells for an estimated $1.2 million per well in an area where operators consistently pay three to four times that amount. In addition to the 925 wells we currently have in inventory, we have identified an additional 250 wells that can be added in the future with further delineation. Now, turning to more details on our 2025 outlook, we expect to deliver 135 to 140,000 barrels of oil equivalent per day, including 62.5 to 66.5 thousand barrels of oil per day. Our full-year 2025 oil production expectation is about 2,000 barrels per day less than our initial 2025 outlook. This is due to the underperformance of a package of wells in Upton County that came online in late 2024 and included tests focused on delineating future development inventory, as well as delays in our drilling program. These delays pushed out the completions and turn in line timing for a few packages of wells, which will defer production until later in the year. Total capital investments, excluding non-budgeted acquisitions, are expected to be $825 to $925 million. Current commodity prices We expect our plan to deliver adjusted free cash flow of approximately $330 million at $70 oil. We have continued to optimize our capital costs, expecting to invest less in 2025 while shifting more capital to the Delaware Basin and completing the same amount of net lateral fee as 2024. efforts to high-grade our development plan and extend laterals is expected to drive a significant improvement in capital efficiency in 2025 versus 2024. Our focus today is squarely on optimizing our existing assets and maximizing cash flow for our investors. As a result, we will de-emphasize potential large-scale acquisitions and allocate substantially all free cash flow to reduce our net debt. Thanks again for joining us this morning. Operator, you can now open the line for questions.