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Operator
Greetings. Welcome to Vitesse Energy second quarter 2023 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 of Investor Relations. Thank you. You may begin. Thank you.
Ben Messier
Good morning and thank you for joining. Today we will be discussing our financial and operating results for the second quarter of 2023, which we released yesterday after market closed. You can access our earnings release and presentation on our investor relations website, and our Form 10-Q was filed with the SEC yesterday. 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 in the quarter. After Bob, Brian will give you an update on operations, and then Dave will review our Q2 2023 financial results. 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 security litigation performance. These forward-looking statements are subject to the risks and uncertainties, some of which are beyond our control, that could cause actual results to be materially different from the expectations contemplated by these forward-looking statements. Those risks include, among others, matters that we have described in our earnings release and periodic filings. We disclaim any obligation to update these forward-looking statements, except as may be required by applicable securities laws. During our conference call, we may discuss certain non-GAAP financial measures, including adjusted net income, 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. Now, we'll turn the call over to our Chairman and CEO, Bob Garrett.
Bob Garrity
Hey, thanks, Ben, and welcome, everyone, to our second quarter Q Call. It's going to sound an awful lot like our first quarter cue call, which is what we intend to do. We are a dividend-first return of capital company. To that, we paid a 50-cent dividend, and our board has approved a second 50-cent dividend. So as a dividend-first company, a lot of our ability to pay that dividend, protect our dividend, depends on our deal flow. And our deal flow in the second quarter was excellent. We have very high economic hurdles, and we were able to source a lot of capital deals in that second quarter, and we're very thankful about that. Remember, there is about a year plus or minus lag between CapEx, and production. So first and foremost, we are underwriters. And our underwriting depends on the quality of our data. So I want to give a special shout out to our data scientists who have created and maintain our database, which we call vLuminous. Amanda Bailey and Adam Woodson have done a great job in creating that database, which is democratized over our entire organization. And what that means is that land, accounting, engineering, finance, and even management accesses our data continuously. We want to know exactly what's happening out in the field. We're in over 6,000 wells, and we call those wells the kids in the class. So our ability to accurately underwrite our capital expenditures depends on that data. So I just wanna thank you for jumping on the call. I'm now gonna turn the call over to our president, Brian Cree.
Ben
Thanks, Bob, and good morning, everyone. I'll be providing a very brief update on our operations. I'm gonna start off with our development pipeline. As of June 30th, 2023, We had 8.5 net wells that were drilling, completing, or that had been completing but not yet producing, and another 11 net wells that had been permitted for development by our operators. Capital spending through the first half of 2023 is on pace to beat the upper end of our yearly CapEx guidance, as we spent $43.3 million on development CapEx and acquisitions. As Bob mentioned, we are encouraged by the amount of well proposals and near-term drilling acquisitions that have met or exceeded our hurdle rates so far this year. While average AFE costs increased less than 10% last year and during the first quarter of 23, the average AFE cost decreased in Q2 2023. So that's a good trend for us. With the rig count remaining modest in the Williston, we just have not experienced the same cost inflation as other basins, and I know that's always a hot topic for people. That's it. I'm going to turn this over to our CFO, Dave McCosko, to review our financial highlights for the quarter.
Bob
Thanks, Brian. Good morning to everyone on the call. I'll give a quick summary of our financial performance for the second quarter of 2023. Our second quarter was much more typical than what we expect the company to look like going forward, since our results weren't burdened with the one-time spin-related charges that we saw to income tax expense, stock comp expense, and G&A expense, and we took them in Q1. Our net income for the second quarter was $9.6 million, and adjusted net income was $11.4 million. Our adjusted EBITDA was $34.8 million, which is down from $40.1 million in Q1 as a result of lower commodity prices, primarily related to natural gas and NGLs. We generated second quarter cash flow from operations of $39 million and free cash flow of $16.1 million. We define free cash flow as cash flow from operations adjusted for working capital changes, less cash spent on drilling and completion capex. This free cash flow was used to pay our quarterly dividend, reduce the balance drawn on our revolving credit facility by $4 million, and make $3.1 million of attractive near-term drilling acquisitions. We ended the quarter with $41 million outstanding on our credit facility, while elected commitments remained at $170 million with a borrowing base of $245 million. Our second quarter production was up 16% from the second quarter of 2022, totaling 11,359 barrels of oil equivalent per day, with oil representing 67% of our production and 94% of total revenue. Our year-to-date production was 11,441 BOE per day, again, 67% oil. Total revenue, including the effects of our realized hedges, was 53.2 million for the quarter. Lease operating expense in the second quarter increased a modest 3% compared to the first quarter of 2023 on a per BOE basis, which reflects quarterly variability related to work over activity. General and administrative expense for the second quarter of 2023 totaled 4.5 million, or $4.32 per BOE. a decrease of 59% on a per-unit basis compared to the first quarter of 2023. This decrease was primarily due to lower one-time costs related to the PITESC spinoff from Jefferies Financial Group, as I mentioned earlier. On the hedging front, we layered in additional oil swaps through Q1 2024 to take advantage of the increase in oil prices that occurred in April. With respect to our guidance, we are reaffirming our previously issued 2023 annual guidance. 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 2 if you would like to remove your question from the queue. and for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Chris Baker with Evercore ISI. Please proceed.
Chris Baker
Hey, good morning. My first question is for Bob. Just on the ops update provided with the release, you know, a good uptick in net activity wells, eight and a half in the second quarter, and I think some good out of detail just on the three and a half net AFEs. I was hoping you may be able to help us just tie these figures back to this year's CapEx guide. And then perhaps, Bob, as you kind of referenced earlier, any read-throughs for how we should think about 2024 production growth, just given the lag and impact from that spend?
Bob Garrity
Yeah, Chris, great questions. You can't imagine how much time our finance team sits in this room and models. So your takeaway that we've had good activity in the second quarter is correct. We've seen a lot of deals that it clearly hit our hurdle or above. So we don't know at this point, Chris, if that's going to continue in the third quarter. Early indications are good. But again, we're non-ops, and we don't hit a budget. We hit an economic hurdle. So we can't really give you a – it's fair to ask about a read-through about 2024, but we can't really give you any more biz on that, Chris.
Chris Baker
No, fair enough. I guess the other question I had was just, you know, obviously given the diversified operator exposure, I think you kind of – mentioned this earlier around service cost deflation, but I was just curious what you guys are seeing in terms of leading edge deflation on true services just beyond, I think what most have talked about is pretty visible consumable components coming down like steel, et cetera.
Bob Garrity
You know, Chris, we didn't see a bump that much last year. We are seeing a decrease in costs throughout the whole complex. steel spreads and the drilling costs. So I can't really say it's a large trend. It's trending positively. I think over the course of time, we're strong believers in that capital will become more efficient and we'll get similar production results with less money. So I think it's trending in that direction. I think part of that is technology with FRAX. Part of that is just more efficiency. You know, the infrastructure of the Bakken is pretty well built out. So no huge deflation trend, but I think things are going in the right direction.
Chris Baker
That's great. And if I could just sneak one more in. Can you just maybe... Talk about any of your sort of latest thoughts around larger scale acquisition front. It sounds like the smaller scale stuff is trending in a positive direction, which is great. But just in terms of the larger scale stuff, if there's any update, that'd be great. Thanks.
Bob Garrity
Yeah, it's fair, Chris. We bid on a number of larger transactions, you know, 100 to 300 million in the second quarter. We were not close. So we look at everything. Take a look at our balance sheet, and you can see the capacity that we have to make a good size accretive acquisition. So we're looking. We'd love to do it. We haven't won one yet, Chris, but we're trying. Thanks, Chris.
Operator
Our next question is from Lloyd Byrne with Jefferies. Please proceed.
Lloyd Byrne
Hey, good morning, everyone. Just a couple of questions. I guess on the back of Chris's question, can you speak to capital efficiency you're seeing in the Bakken? And just not deflation, but maybe our cost per foot basis, whether that's improving with technology. And then I have a quick second question.
Bob Garrity
Yeah, you bet, Lloyd. Great question. Thanks. It's good to talk to you as well. So we have seen more three-mile laterals and more refracts. We think that that is what the field is going to be in the future. It's upticked a little bit more in the second quarter than trend. But Brian Cree, I'm going to ask to elaborate on this.
Ben
Yeah, good morning, Lloyd. So, as Bob mentioned, yeah, we've seen that increase in both three-mile laterals and refracts between, you know, what we saw in the first quarter and what we saw in the second quarter. And that trend has continued from, you know, what we started to see at the latter part of 2022. So, you know, again, that capital efficiency is what we think is going to drive future results and You know, we've been doing this since 2014, and the advancement of technology, especially in the fracs and now in the refracs, is something that has really changed our asset over time. And we expect technology to continue to improve and that that and capital efficiency will continue to improve.
Bob Garrity
Yeah, just to restate that, refracs were strong believers in the extraordinary economics around them. The three-mile laterals are... pretty new, and we don't have enough information to say that that's going to move the needle very much. So thanks for your question, Lloyd.
Lloyd Byrne
Follow up? Great. Yeah. Maybe someone could just comment on kind of your deferred taxes and how you see that progressing going forward. I know a lot of it was tied to the spin, but just kind of where you are there.
Bob Garrity
I'm going to ask Dave McCostco to answer that for you, Lloyd.
Bob
Good morning, Lloyd. Yeah, so we took the big charge in the first quarter for the change in corporate structure. And so going forward, we obviously flushed that big charge through income tax expense. But going forward, we're looking at a tax rate somewhere in the 17% to 20% of our current net income as we go forward.
Lloyd Byrne
OK, perfect. Thank you, guys.
Bob Garrity
and uh good job thanks lloyd our next question is from donovan schaefer with northland capital markets please proceed hey guys um so hold on donovan i need to interrupt you uh congratulations donovan has uh is the father of young sebastian who I understand his nickname is Sabe, so it's awesome. Sabe, Sabe. Sabe, okay. Well, congratulations, Donovan, and thanks for waking up for the call. So go for it.
Bob
Yeah, yeah, thank you. Yeah, I'm going to have to go do bottle service shortly after cleaning and proceeding. So, but thank you. Thank you very much. Yeah, so congratulations on the quarter. I want to start with kind of, I guess, like a compound question where, so the first one is, you know, you're trending, you're trending to actually be above the high end of guidance on CapEx. And, you know, in a lot of contexts, like say you were building a factory or something, being above guidance on CapEx is often seen negatively. But it sounds like in this case, you're saying, well, this isn't being driven by inflation. And so it's actually a reflection of opportunities for us, where we're seeing more things to pull the trigger on. So you're actually talking about this as a positive thing. I would just want to kind of make sure I'm understanding that right. Is that a fair characterization, Brian?
Bob Garrity
This is Bob. I'll start with it, and I'll let Brian have it. Look, Vitess is a factory. We have built this machine. to convert undeveloped acreage and drilling opportunities into cash. At the end of the day, we return that cash to our equity owners, of whom management is a large chunk of. We get paid by that dividend. So the factory is a perfect example. So the widgets that we buy have to be very economic. So when you see our CapEx going up, it's because we're seeing things that really makes the factory hum. So your conclusion that if our CapEx increases is a good thing is the right conclusion. It's exactly the way we see it. We don't want to just buy stuff and ram stuff through there. We could buy a lot more than we're doing. But when you see CapEx pop for us, that's a good thing. We are at the upper end of our range. But, again, we're not changing the guidance. But deal flow is good.
Bob
So then this is kind of the related part of that is, you know, I think Chris, the first person asking questions, asked a question about, like, 2024 growth. And I understand as a non-op, you can kind of put the CapEx out there, and sometimes I think of it as kind of laying the chips on the table. But you don't have necessarily control over the exact timing of when things will land there. So I appreciate that there's a challenge saying, you know, coming up with a number for, say, 2024 growth. But given that you are spending – at this kind of a higher CapEx level. So like you're seeing the opportunities and let's just sort of assume things hold steady. I mean, none of us has a crystal ball, but let's say oil stays in a kind of 80, 80 ish dollar, you know, plus or minus, uh, $5 or so. Um, in that kind of a context or an environment with this kind of CapEx spending, When do you feel it would be like appropriate for us to kind of like bug you on growth or say, you know, because you guys are, you know, you're newly public. And then, you know, you've got the first quarter and the second quarter. So I realize it's pretty myopic and short sighted. And I know you guys are, these results can be lumpy. That's not really fair to say, well, should we grow next quarter? And should we grow the next quarter? But there is a point where you have to say, well, It's been this many quarters. When should we bug you about it and say, gee, why aren't we doing something?
Bob Garrity
Very fair. And I'm going to ask Brian Cree to elaborate on this. But look, everything we do when we wake up in the morning is to protect that dividend. So CapEx is very important if it's economic. So Brian, you want to elaborate on that?
Ben
Yeah, let me just. So Donathan, I think Your first conclusion was that CapEx is good. Bob handled that. And I think that is absolutely the way that we look at it. But you also stated that CapEx is lumpy and the timing of production is lumpy. And so to really try to get to your question of when you can start bugging us, I would say, look, at the end of the third quarter, if we have another good CapEx quarter, then we'll start looking at what that's going to mean toward 2024. So Let us get through another quarter. Let's see how CapEx looks and kind of what the trend looks like for the fourth quarter. And then we'll likely comment on production for 2024. Okay.
Bob
That's really helpful. That's actually very, very helpful. Okay. And then my last question, back to this idea of kind of everything you guys do is around protecting the dividend. And I know, you know, with the initial kind of going public and the spin-out from Jeffries, it was really – you know, given it being kind of a new story for some investors and everything, it was really nice to have, I think you had 50% of oil production hedged through 2024. I might not have the exact number there, but broadly speaking, the hedge position was pretty healthy through the end of 2024. And so you kind of look at the numbers and pretty much say, you know what, regardless of what commodity prices do, we can feel pretty darn confident the dividend is protected through the end of 24. Do you have sort of decided on sort of a philosophical approach going forward looking to 25, 26? Do you plan to just kind of continue hedging at about 50% if the opportunities present themselves? So if you are able to where prices are, if you can lock in a hedge out in 24, or sorry, 25, 26, that helps secure that dividend? Do you plan to take advantage of all that hedging? Or just how are you thinking about hedging when we get past 2024?
Ben
So Donovan, this is Brian. And great question. Clearly, hedging is important to us to protect the dividend. We're a dividend-paying company, capital return company. So we look for that hedging to help support that. At these prices, you know, first let me just talk about where we stand right now. We're not quite 50% hedged all the way through 2024. We have more hedging in place in 2023 than in 2024. A lot of that has to do with the backwardation in the market, but we constantly look at our hedging. And as we get closer to 2025 and 2026, we absolutely expect to – continue putting hedges in place at prices that we find attractive. And you'll see that in our 10Q, we talk about the exact amount of hedges and where the prices are. We're hedged at around $78 for the rest of 2023 and above $76 in 2024. So you can kind of see where we like to lock in prices. And I would say that that trend is going to continue. Those are If those prices are above, we like to go ahead and utilize that instrument to help protect our dividend.
Bob
Okay. That makes sense. Okay. Thank you very much, guys. Very helpful. I'll follow up offline with any other questions. Great.
Bob Garrity
Congratulations again. We're really happy for you, Donna. Thank you.
Operator
Our next question is from Michael Schwartz with Jefferies. Please proceed. Hi, Michael.
Michael Schwartz
Hey, guys. Congrats on the quarter. I had one question on the three-mile laterals I wanted to ask. So, of the 97 growth AFEs you got, how many have three-mile laterals? And, you know, what operators are adopting this approach? What is your average lateral length for your production in the Bakken, and when do you really expect to see the impact of these three-milers across the board and adopted more broadly in the basin?
Ben
So, Michael, this is Brian. I'll give you some quick numbers on that. During the second quarter, the number of three-mile AFEs that we got in were more than double the first quarter. Again, these things are lumpy. We're not sure that that will continue, but it seems like that is the trend that we are seeing from operators, you know, Kraken, Cord, even Continental. You know, several of these operators are moving to try to do as many three-mile laterals as they can at this point in time. And so we've seen that increase, like I said, more than double from what we saw in the first quarter. But we still see more two-mile laterals than we see three-mile laterals.
Michael Schwartz
Gotcha. That's very helpful. Thank you. Thanks, Michael.
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 remarks.
Bob Garrity
I want to thank everybody for being on the call. We look forward to talking again in three months. If you have any questions, please contact Ben. So thanks, everybody.
Operator
Thank you. This will conclude today's conference. You may disconnect your lights at this time, and thank you for your participation.
Bob Garrity
I don't care what the SOC's going to do.
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