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Operator
Greetings. Welcome to VTES Energy's full year 2022 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Ben Messier, Director, Investor Relations. Thank you. You may begin. Thank you.
Ben Messier
Good morning and thank you for joining Tessa's first conference call as an independent publicly traded company. Today we will be discussing our financial and operating results for the full year 2022, which we released yesterday after the market closed. You can access our earnings release on our investor relations website and our Form 10-K will be filed with the SEC in the coming days. We have also posted a new investor presentation on the website. I'm joined here this morning with Vitesse's chairman and CEO, Bob Garrity, our president, Brian Cree, and CFO, Dave McCosko. Our agenda for today's call is as follows. Bob will provide opening remarks regarding Vitesse and our return of capital strategy. After Bob, Brian will give you an overview of our asset and operations, and then Dave will review our 2022 financial results and 2023 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. We disclaim any obligation to update these forward-looking statements, except as may be required by applicable securities laws. During our conference call, we may discuss certain non-GAAP financial measures, including adjusted EBITDA, debt to adjusted EBITDA, and free cash flow. Reconciliations of these measures to the closest GAAP measures can be found in the earnings release that we issued yesterday. With that, I will turn the call over to our Chairman and CEO, Bob Garrity.
Bob Garrity
Thanks, Ben. Good morning, everyone, and thanks for participating. The TESS Energy Inc. began trading on the New York Stock Exchange under the ticker VTS on January 17th. The TESS is focused on returning capital to its stockholders through owning financial interests as a non-operator in oil and gas wells drilled by leading U.S. operators. As part of this return of capital strategy, we declared a quarterly cash dividend of 50 cents per share to be paid in the first quarter of 2023 and also approved a $60 million share repurchase program. We have a strong alignment with our shareholders as the Vitesse management team and board, combined with other members of Jeffrey's management, collectively own approximately 30% of the outstanding shares of the test. Our existing asset provides significant cash flow and includes a deep inventory of economic drilling locations. Our capital allocation strategy starts with the return of capital to our shareholders through paying our quarterly dividend. Next, our returns-based hierarchy focuses on organic CapEx and acquiring near-term development opportunities, followed by other asset acquisitions. Finally, remaining cash flow will be allocated to share repurchases or debt repayment. We are grateful to Jefferies for their support from 2014 to today, and we are excited to run Vitess as an independent, public company and look forward to our future financial success. Now I'll hand it over to our President, Brian Creed, to discuss our operations.
Ben
Thanks, Bob. Let me start by noting that the 2022 financial and operating results included in our earnings release only reflect the results of our predecessor, the Tess Energy LLC, and do not include the effects of the acquisition of Vitesse Oil LLC made on January 13, 2023, concurrent with our spinoff from Jefferies. However, the investor presentation included on our website provides pro forma financial and operating data as though Vitesse Oil was acquired at the beginning of 2022. The combined assets include approximately 50,000 net acres, primarily in the Williston although we also own assets in the DJ and Powder River Basins. We have financial interests in over 6,400 producing wells operated by over 30 leading operators. In addition, we had 16 net wells that were drilling, completing, or had been permitted for development by our operators as of December 31st, 2022. Historically, 25 to 40% of the rigs running in the Williston drill on Vitesse's acreage, which is a testament to the quality of our acreage and its diversification across the basin. Today, 33% of the rigs are actively drilling on Vitesse acreage. During 2022, Vitesse Energy and Vitesse Oil combined had drilling and completion capbacks of just over $60 million. We've been encouraged by our operators' discipline to control costs and drill productive wells. The potential for cost inflation has been a hot topic. We expect costs to increase slightly in 2023, which is incorporated within our stated annual CapEx guidance. With the rig count remaining modest in the Williston, we have not experienced the same cost inflation as other, more active basins. Thanks for your time, and now I'll turn it over to our CFO to review our financial highlights for 2022. Thanks, Brian.
Bob
I'll give a quick summary of Vitesse's financial performance during 2022. I want to remind you once again that our year-end results only include the operations of Vitesse Energy LLC and will not include Vitesse Oil until Q1 of 2023 due to that acquisition occurring when the spinoff from Jefferies occurred on January 13th. Our net income for the year was $118.9 million. This was a substantial increase over 2021 and was primarily driven by higher oil and gas prices. Our 2022 production was up 4% over 2021, totaling 10,376 barrels of oil equivalent per day. Adjusted EBITDA was 168 million, an increase of 62% from 2021, and we generated 100 million of free cash flow in 2022. Free cash flow is defined as cash flow from operations, adding back working capital adjustments less drilling and completion capex. TESA's realized oil and natural gas prices in 2022 before the impact of hedging were approximately $94 per barrel and $8 per MCF. After taking into consideration the impact of hedging, our realized oil price dropped to $76 per barrel. And as a two-stream reporter, our natural gas revenue includes revenues from NGLs. which is why we reported realized natural gas prices above Henry Hub. Production expense, including gathering and transportation, increased 6% compared to 2021 on a per BOE basis, as we saw many operators allocate more capital to workovers on existing wells. Cash G&A included approximately 8 million of spin-related costs for the year. Capital spending for 2022 was near maintenance levels, as Vitesse Energy spent $56 million on drilling and completion costs. At the end of 2022, our net debt to adjusted EBITDA ratio was 0.23 times as we had $48 million drawn on our revolver and $10 million of cash. On January 13, 2023, the spinoff date, we entered into a new revolving credit facility with a borrowing base of $265 million. On the hedging front, we have approximately 1.3 million barrels hedged in 2023 at a weighted average price of $78.14 and 660,000 barrels hedged in 2024 at a weighted average price of $75.97 per barrel. These hedges are intended to help protect the dividend while ensuring our stockholders return some exposure to increases in oil prices. We will continue to monitor oil prices and opportunistically add hedges at the appropriate time. Now, with respect to 2023 guidance, we are currently providing annual guidance for daily production, including the percentage of oil and capex. Our expected production for 2023 will range from 10,800 to 11,800 barrel of oil equivalent per day, with a 66% to 70% oil cut as a percentage of our production. Please note that our oil and natural gas production can vary from quarter to quarter based on weather, new wells coming online, and other operational matters that may arise. We expect our total capex to be in the range of 60 to 80 million for 2023. With that, I'll turn the call over to the operator for Q&A.
Operator
Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question is from Steven Richardson with Evercore ISI. Please proceed.
Steven Richardson
Hi, good morning. I was wondering if you could talk, Bob and Brian, a little bit about the M&A environment and what you're seeing in the outlook. And then perhaps, considering the fact that this is your first call, if you could talk a little bit about how you evaluate M&A and how you plan to differentiate yourself relative to some of the other public non-op companies that investors may be familiar with.
Bob Garrity
Thanks, Stephen. So this is Bob. So far this year, we've had about the same deal flow that we had last year, which is very encouraging to us. Our organic drilling has come in at about the same level as last year, which is our highest rate of return. So we're encouraged by that. On the larger M&A transactions, we look at everything. Again, we are not purchasers of flowing. We are happy with the asset that we have, both our our undeveloped and our resource base. Now that we're public, we have gotten a lot of deals that have walked into the door, but I have to tell you, to do a substantial deal, it's going to have to be pretty special. We will look at everything. Again, we've got about $200 million of fresh powder on our revolver that we could use, but we are not going to just do a deal to grow.
Steven Richardson
Great. Maybe as a follow-up, Bob, could you – I mean, one of the mentions, you know, you do own some minerals, and clearly the mineral market has been, you know, pretty hot and obviously a little bit more – you know, quite a bit more expensive than non-op. As it pertains to owning, not bidding on just PDP packages and also packages that come that may have minerals, can you talk about partnership strategies or how you would approach those types of packages and perhaps how you've done it in the past?
Bob Garrity
Yeah, that's a terrific question. We don't seek out minerals or royalties. We have a fair amount of them. But you're right, the market for minerals is pretty hot. And I will tell you that we're actually entertaining right now a package where we would sell some of our minerals. So we always look to maximize our economics. So we're not actively looking just for minerals. And at certain points, we would actually sell some minerals.
Steven Richardson
Great. Thanks very much. Best of luck. Thanks, Stephen.
Operator
Our next question is from Donovan Schaefer with Northland Capital Markets. Please proceed.
Donovan Schaefer
Hey, guys. Thanks for taking the questions, and congratulations on completing the spinoff. I'm also happy to see the board did approve the $2 dividend that you pretty much indicated in your filings before that, but also nice to see the $60 million approved for buybacks. So, you know, kudos on those fronts. I want to, so the first question though, I think I get the sense investors do want to get a better handle overall on sort of the sustainability of the dividend, just because, you know, on the face of it, it looks like a very, you know, it looks like a very high attractive dividend you know when you guys came out it was like a 13 dividend stocks come up so it's like uh 11 now so you know it still looks pretty attractive um but of course people look at 2022 they think okay that's exceptional somehow and of course the the year-over-year performance increased from 2021 to 2022 was driven a lot by oil price increases but um You know, with the hedges, it looks like, you know, effectively your oil price in 2022 was $76 a barrel. So, you know, maybe 2022 wasn't sort of as exceptional as it looks on the face of it. And that maybe makes it a more representative year. But it'd be great, I think, if you guys could just talk through that a bit, how you look at that dividend level going forward and the sort of sustainability of that in the context of like you know 2020 2020 2021 2020 you know 2022 when people kind of look at those numbers how to square the how to make sense of that absolutely uh thanks a lot for the question don the uh first thing i'll do is refer to the return space capital allocation framework
Bob Garrity
slide that we have on our presentation. We are a dividend paying company. The first capital allocation we make is to pay a dividend. So where other companies may pay the dividend after they figure out how to allocate the rest of their capital, we pay it first. You got to remember 30% of this company is owned by management and the management of FITAS and the management of Jefferies. So we like those dividends, and this company is constructed so that we don't need to make any other acquisitions. We're comfortable with the assets that we have. We're low-levered, and I think that your statement that, well, last year we got net $76,000, for oil price this year so far with our hedges and where the price of oil is, it's a very similar year. So we are very comfortable with our current dividend. And we will look to any deal that we make to be supportive of that dividend.
Donovan Schaefer
Okay. That's really helpful. And then just curious, you know, you've got the shareholder return framework and putting being, being a dividend paying company and kind of at the forefront of that on that topic, is there a, a sort of a payout ratio, you know, if that's kind of for front and center and what you want to focus on, then when you are looking at the dividend, you're going forward, is there sort of a payout ratio, like on a normalized basis, you're kind of targeting. So, you know, on trailing, free cashflow, uh, you know, it's a 66%, um, percent, I think of the a hundred million trailing free cashflow. So, you know, fast forward several years, if that were to get sort of out of walk whack, where you're at a meaningfully higher, uh, free cashflow, you know, north of the a hundred million, then does it make sense for us or for investors to start thinking, okay, they'll move back in a direction of like a 66% payout. Kind of just how do we think about that?
Bob Garrity
Very fair question. Absolutely a fair question. We allocate capital pretty much every day. So our business plan anywhere between $60 and $100 is pretty much the same thing. You got to remember with a $60 million maintenance CapEx, we do have a substantial amount of capital that we can allocate to the dividend or share buybacks. So we do not have a specific number. But again, to reiterate, we love the dividend. It's the reason why we're a public company. And we will look to adjust the dividend upwards if we continue to see these strong prices in the market.
Donovan Schaefer
Okay. Okay. Um, and then this might be a bit of sort of a housekeeping question, but just for the test oil, you know, LLC, how that's, you know, smaller piece is getting folded in with, I think an effective date of January 13th. Um, uh, it kind of just double checking here. My understanding is that is, you know, like an equity, um, it's worked out in terms of sort of an equity deal. just the way everything's structured. So it's not like there's some incremental cash spend, some purchase price associated with it that'll come up in the first quarter. It just becomes folded into the share counts. And then tied into this is the comments about management owning about 30%. That's also kind of on a prolonged, like a vesting that's based on a sort of I think are restricted stock units or something comparable to that. So I want to make sure when we factor in the Vitesse Oil Inc. equity impact plus the management, 30% management ownership, I've been calling that about 33 million shares going forward in terms of share counts. I just want to see if I'm roughly in the right ballpark there.
Bob Garrity
Yep. Again, Donovan, very good questions.
Ben
I'm going to ask Brian Cree to answer that. Thanks, Donovan. Yeah, you're right on track there. It's $33 million is kind of what we're thinking of as fully diluted shares, outstanding. And then just to address your question on the Vitesse Oil, that is kind of part, you know, since that was done at the time of the spinoff, there will be no incremental shares issued for that. It's, you know, roughly the $28.2 million of common shares that are outstanding shares. right now, that includes the Vitesse Oil acquisition.
Donovan Schaefer
Okay. And then it's sort of the, you know, we'll call it, of course, dilution. I think this can be like a dirty word, but for the sake of just how this is all structured and organized, that's really about part of what gets you guys to that 30% ownership, including Jeffries and Jeffries Management and other stuff like that. That's what gets you to the 33 million shares.
Ben
That's exactly right. It's all of those remaining restricted stock units of both our management team and the Jefferies management team.
Donovan Schaefer
Okay. Fantastic. And then, you know, I always can ask a million questions, but I want to check because I'll step back in line. So I want to check with the operator. Operator, are there other people waiting to ask questions in the queue?
Operator
You can keep going.
Donovan Schaefer
Okay. I want to talk about winter weather. So, um, some other companies in the Bakken, you know, some non-op, um, and operating as well. I talked about, you know, the winter was pretty brutal. Um, December specifically definitely impacted production levels. Um, you know, you guys reported sort of full 2022 results without breaking out as much, um, for the fourth quarter. But just in general, going forward and kind of modeling, did 2022 seem like an exceptional year in that sense? And so even without, you know, investments that drive growth, would we expect 20 in a sort of quote unquote normal year? Does it make sense to think of 2023 as getting an improvement from that, kind of just from having a tough having a tough production environment in the fourth quarter of this year, and just any other color kind of on the winter and how to think about winter. North Dakota, you know, it's cold.
Ben
Brian, I'll take a crack at that one, and anyone else can jump in here. But, look, I mean, from our perspective, winter weather just happens, and it's happened, you know, even though we've been public since January of this year, we've been doing this since 2014. in the Williston, and every year is different, right? I mean, yeah, November and December this year were pretty cold and we saw impacts, but, you know, last year in April we had, you know, there were two major winter storms that occurred in the Williston. So we've seen it every year. It varies by month. The key that I think I would point you to is that because of our experience, we try to take that into consideration into our annual guidance projections that we've given. So we do discount for expected winter weather. And none of us are meteorologists. We don't know what's going to happen. And we just try to take the best estimates that we can on a go-forward basis and, again, put that into our guidance.
Donovan Schaefer
Okay. Okay. And on the theme of the guidance, looking at the Bakken and kind of rig counts and, you know, I know natural gas prices have come down a lot. So it's not as relevant for you guys being much more oil weighted, but you know, in the, in the gas basins, for instance, there's a expectation that rig activity is likely to maybe slow down in 2023. I don't know that we're expecting as much on the oil side, but I'm kind of just, if you can clarify what the assumption is in the outlook, if you're expecting, you know, stable rig count in the Bakken, I mean, an increasing rig count, slightly declining rig count, you know, what kind of are those assumptions built into the guidance, just from activity levels?
Ben
So, again, this is Brian. I'll take a first shot at that. You know, currently today, based off of the NDIC, there's 45 rigs running the base, and as I mentioned earlier, 15 of those rigs are running on our asset. Our $60 million to $80 million of CapEx projection assumes kind of that same range of rig count. The rig count over the last four or five months has ranged anywhere from the low 40s to the upper 40s. And that's kind of how we model it on a go-forward basis. We don't expect the rig count to jump into the 50s or anything like that. But if it does, our organic CapEx, as Bob mentioned earlier, is the first place after our dividend that we want to allocate funds to. So we would certainly welcome higher rig count. Love to see that organic CapEx be developed to producing assets. But we don't model that in our 60 to 80 million or in our annual guidance of production.
Donovan Schaefer
Okay. And then I actually have two questions around kind of maintenance CapEx and how to think about that. So for the outlook, you've got the 60 to 80 million, and we talked about some cost inflation. So I guess the first one there would be, is are we still even accounting for cost inflation? Do you still see, I think you talked before of 60 million is being around a maintenance CapEx level. So, you know, you have to budget, you have to allow for the possibility that it goes up to 80 because you're not controlling, uh, the pace of the rigs and all the activity. But are you still sort of looking at this from a standpoint of, you know, On average, overall, your belief or view is that something going north of the $60 million would be more driving growth versus a maintenance CapEx?
Ben
We've tried to take into consideration the inflation that we've seen so far. And again, as I mentioned, I don't think we see massive inflation occurring in 2023. So we feel like that $60 million that we've talked about as maintenance CapEx still reflects our expectations for 2023. And remember that there's a component of that, as we've discussed before, that is the organic CapEx, which ranges anywhere from $40 to $50 million. And then the other part of that is the near-term development opportunities that we've acquired. So really, the range between 60 to 80 factors more into, we don't know what that rig count's going to be. We don't know exactly what our organic CapEx will be. And then our acquisition strategy. Typically we think about trying to acquire, make acquisitions in the $10 million range. It's kind of how we model it. But last year we spent over $20 million. So that's why we kind of take that range, Donovan, is just to give ourselves the flexibility that if we do find some really attractive high rate of return near-term development opportunities, we'll go ahead and pull the trigger on those.
Bob Garrity
Yeah, this is Bob. Another thing you need to remember about what's happening in the Bakken is is we're seeing more refracts. And refracts are very capital efficient, so we're actually getting more production than out of each dollar we spend. We think that trend will continue, and that's a very exciting trend. We're also seeing a greater amount of three-mile laterals. Again, from a capital efficiency standpoint, those are very beneficial to us. So our dream scenario is to spend the same amount of money every year and get more production. And that's generally what happened in 22. And we believe that that will continue in 23.
Donovan Schaefer
Okay. And then on the same topic, just for 2022 and the reported results. So for the free cashflow calculation, you know, you're including the organic drilling and completion and CapEx, which was 56 million. So, you know, as you noted, that's, you know, close to what you've talked about as a maintenance CapEx. So when I know, you know, that doesn't include, uh, the, the test oil LLC. So maybe if you include that, maybe that bumps that almost right on the money to 60 million or something, but, but you, you do exclude the 28.5 million for acquisitions, uh, in 2022. So I'm. Just curious, is this reflecting that same kind of framework around generating returns to investors? So you include the $56 million and doing your free cash flow because conceptually that falls more into kind of a maintenance capex bucket and then you're not including the $28.5 million. You're not subtracting that out to get your free cash flow because that's sort of icing on the cake or sort of this incremental opportunistic move to drive return to investors and drive growth, and it's not as much of a maintenance capex-type expenditure. Am I thinking about that the right way?
Bob
Yeah. Hi, Donovan. This is Dave. When we think about that, the reason we didn't include that 28.5 in our free cash flow is we look at that as discretionary spending. And going forward, we have that maintenance capex included, obviously, and some small level of acquisition in there, but nothing near the $28.5 million that we saw in 2022.
Donovan Schaefer
Okay, great. And then actually, this will be, I'll squeeze in one more, and this will be my last question, but I want to ask on the reserves, you know, it's great to see very large year-over-year increase. The reserves, you know, that does benefit from The increase in oil prices, I don't think reserves, there's not as much kind of the hedging dynamic we talked about with the dividend because they're looking on a go-forward basis. And so they use the reserve engineers as auditors. It's more a matter of just what have historical front month, first of the month, trailing 12-month pricing has been and so forth. There's a really nice increase. If I look at the deck on your website, your PV 10 shows, you know, pro forma for the Vitesse oil LLC puts you north of 1.2 billion. Um, and then because historically you were a limited partnership while you were under Jefferies. And so pastor entity, you didn't pay any taxes. And so your standardized measure and your PV 10 end up effectively being the same. But, you know, if we're trying to look at that on a go-forward basis, knowing that you will be paying taxes, if I look at the registration statement filings, you did a pro forma accounting for taxes and VITAS oil on the 2021 numbers. And that gave about a 17% haircut, like a cash tax impact on the reserves. So if I take that same 17% and sort of assume that that would apply the same way it applied about proportionally to the 2021 numbers, that still puts you right at about $1 billion on a standard as measure for the reserves, maybe even just a little bit north of the $1 billion. So I just want to check broadly in a pretty broad sense. My logic there just is, should the sort of cash tax rates, which was about 17%, um, from the, for the 2021 numbers, like in terms of the reserve impact, does it make sense that it'd be like a 17 ish percent, you know, cash tax haircut or something you say in like the 20% ballpark or is there, am I blindly missing some glaring thing there that I should know about?
Bob
Donald, I think you're in the right ballpark. I'd look at it more from a 15% to 20% haircut on that. And remember, if our CapEx goes up, that'll reduce that effective tax rate if we get more of the IDCs to take against our taxable income. But that 15% to 20% as a run rate is reasonable.
Donovan Schaefer
OK, great. Well, this checks all the boxes for me. I'm good to go on this end. I'll take any other questions offline. And congratulations on the quarter and the spin, guys. Appreciate it. Thank you, Donovan.
Operator
We have reached the end of our question and answer session. I would like to turn the conference back over to Bob for closing comments.
Bob Garrity
I want to thank everybody for their interest in VITF. And if you have any questions, please reach out to Ben. We want to answer them, and thank you very much. Bye-bye.
Operator
Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.
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