Vitesse Energy, Inc. (NYSE:VTS) Q4 2022 Earnings Conference Call February 14, 2023 9:00 AM ET
Company Participants
Ben Messier – Director of Investor Relations
Bob Gerrity – Chairman and Chief Executive Officer
Brian Cree – President
David Macosko – Chief Financial Officer
Conference Call Participants
Stephen Richardson – Evercore ISI
Donovan Schafer – Northland Capital Markets
Operator
Greetings. Welcome to Vitesse Energy 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 of Investor Relations. Thank you. You may begin.
Ben Messier
Good morning, and thank you for joining the Vitesse’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. 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 Gerrity; our President; Brian Cree; and CFO, Dave Macosko. 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 assets 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, net 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 Gerrity.
Bob Gerrity
Thanks, Ben. Good morning, everyone, and thanks for participating. Vitesse Energy, Inc. began trading on the New York Stock Exchange under the ticker VTS on January 17. Vitesse is focused on returning capital to its stockholders through owning financial interest as a non-operator, in oil and gas wells drilled by three U.S. operators.
As part of this return of capital strategy, we declared a quarterly cash dividend of $0.50 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 Jefferies management, collectively own approximately 30% of the outstanding shares of the Vitesse.
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 Vitesse as an independent public company and look forward to our future financial success.
I now hand it over to our President, Brian Cree, to discuss our operations.
Brian Cree
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 Vitesse Energy LLC and do not include the effects of the acquisition of Vitesse Oil LLC made on January 13, 2023, concurrent with our spin-off 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 Basin, although we also own assets in the DJ and Powder River Basins. We have financial interest in over 6,400 producing wells operated by over 30 leading operators. In addition, we had 16 net wells that we are drilling, completing or had been permitted for development by our operators as of December 31, 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, Vitesses Energy and Vitesse Oil combined had drilling and completion CapEx 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, Dave Macosko, to review our financial highlights for 2022.
David Macosko
Thanks, Brian. 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 Vitesses Oil until Q1 of 2023 due to that acquisition occurring when the spin-off from Jefferies occurred on January 13.
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.
Vitesse’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 0.23x as we had $48 million drawn on our revolver and $10 million of cash. On January 13, 2023, the spin-off 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 barrels 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 million to $80 million for 2023.
With that, I’ll turn the call over to the operator for Q&A.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question is from Stephen Richardson with Evercore ISI. Please proceed.
Stephen 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 this effect, 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 maybe familiar with?
Bob Gerrity
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 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.
Stephen Richardson
Great. Maybe as a follow-up, Bob, could you – I mean one of the dimensions, you do own some minerals and clearly, the mineral market has been pretty hot and obviously, a little bit more – quite a bit more expensive than non-op. So 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 maybe perhaps how you’ve done it in the past?
Bob Gerrity
Yes, 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.
Stephen Richardson
Great. Thanks very much. Best of luck.
Bob Gerrity
Thanks, Stephen.
Operator
Our next question is from Donovan Schafer with Northland Capital Markets. Please proceed.
Donovan Schafer
Hey, guys. Thanks for taking the questions, and congratulations on completing the spin-off. I’m also happy to see the Board did approve the $2 dividend that pretty much indicated in your filings before that, but also nice to see the $60 million approved for buybacks. So kudos on those fronts.
So the first question, though, I think I get the sense investors do want to get a better handle overall and sort of the sustainability of the dividend just because on the face of it, it looks like a very high attractive dividend. When you guys came out, it was like a 13% dividend stocks come up. So it’s like 11% now.
So it still look pretty attractive. But of course, people look at 2022, they think, okay, that’s exceptional somehow. And of course, the year-over-year performance increase from 2021 to 2022 was driven a lot by oil price increases. But with the hedges, it looks like effectively, your oil price in 2022 was $76 a barrel. So maybe 2022 wasn’t sort of as exceptional as it looks on the face of it and that it maybe make it a more representative year.
But it would 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 2020, 2021, 2022 when people kind of look at those numbers, how to square the – how to make sense of that.
Bob Gerrity
Absolutely. Thanks a lot for the question, Don. The first thing I’ll do is refer to the returns-based capital allocation framework 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 Vitesse 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 in 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 Schafer
Okay. That’s really helpful. And then just curious, you’ve got the shareholder return framework and putting – being a dividend-paying company kind of at the forefront of that. On that topic, is there a sort of a payout ratio, if that’s kind of front and center and what you want to focus on then when you are looking at the dividend going forward, is there sort of a payout ratio, like on a normalized basis, you’re kind of targeting?
So on trailing free cash flow, it’s a 66%, I think, of the $100 million trailing free cash flow. So fast forward several years, if that were to get sort of out of whack where you had a meaningfully higher free cash flow north of the $100 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 Gerrity
Very fair question. Absolutely a fair question. We allocate capital pretty much every day. So our business plan anywhere between $60 and $100, it’s 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 Schafer
Okay. And then this might be a bit of a sort of a housekeeping question, but just for the Vitesse Oil LLC, has that smaller piece is getting folded in with, I think, an effective date of January 13. I kind of just double checking here. My understanding is that is like an equity it’s worked out in terms of sort of an equity deal, just the way everything is structured. So it’s not like there’s some incremental cash spend some purchase price associated with the that will come up in the first quarter, that 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 vesting – that’s based on a sort of, I think, a restricted stock units or something comparable to that. So want to make sure when we factor in the Vitesse Oil Inc. equity impact, plus the management, 30% management ownership, I’ve been going – 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 Gerrity
Yes. Again, Donovan, very good questions. I’ll ask Brian Cree to answer that.
Brian Cree
Thanks, Donovan. Yes, 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, since that was done at the time of the spin-off, there will be no incremental shares issued for that. It’s roughly the 28.2 million of common shares that are outstanding right now, that includes the Vitesse Oil acquisition.
Donovan Schafer
Okay. And then it’s sort of the – of course, dilution, I think this can be like a dirty word, but from – 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 Jefferies and Jefferies management and other stuff like that, that’s what gets you to the 33 million shares.
Brian Cree
That’s exactly right. It’s all of those remaining restricted stock units of both our management team and the Jefferies management team.
Donovan Schafer
Okay, fantastic. And then I always can ask a million questions, but I want to check because I’ll step back in line with – so I want to check with the operator. Just operator, are there other people waiting to ask questions in the queue?
Operator
You can keep that.
Donovan Schafer
Okay. I want to talk about winter weather. So some other companies in the Bakken, some non-op and operating as well. I talked about – the winter was pretty brutal December, specifically, definitely impacted production levels. You guys reported sort of full 2022 results about breaking out as much 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 investments that drive growth, would we expect 20 – in a sort of “normal” year. Does it make sense to think of 2023 as getting an improvement from that kind of just from 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, it’s cold.
Brian Cree
Don, this is 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 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, yes, November and December this year, we’re pretty cold and we saw impacts. But last year in April, we had – 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 just count 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 Schafer
Okay, okay. And on the theme of the guidance, looking at the Bakken and kind of rig counts and I know a natural gas prices have come down a lot. So it’s not as relevant for you guys being much more oil weighted, but in the gas basin, 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 stable rig count in the Bakken and increasing rig count, slightly declining rig count? What kind of are those assumptions built into the guidance just from activity levels?
Brian Cree
So again, this is Brian. I’ll take a first shot at that. Currently, today, based off of the NDIC, there’s 45 rigs running in the basin. 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, 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. So – but we don’t model that in our $60 million to $80 million or in our annual guidance of production.
Donovan Schafer
Okay. And then I actually have two questions around kind of maintenance CapEx and how to think about that. So for the outlook, you got the $60 million 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 you talked before of $60 million as being around a maintenance CapEx level.
So you have to budget – you have to allow for the possibility that it goes up to $80 million because you’re not controlling the pace of the rigs and all the activity. But are you still sort of looking at this from a standpoint – 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.
Brian Cree
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, that is a – there’s a component of that, as we’ve discussed before, that is the organic CapEx, which ranges anywhere from $40 million to $50 million. And then the other part of that is the near-term development opportunity that we’ve acquired.
So really, the range between $60 million to $80 million factors more into. We don’t know what that rig count is 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 is 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 Gerrity
Yes. This is Bob. Another thing you need to remember about what’s happening in the Bakken is we’re seeing more refracs and refracs 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 2022, and we believe that, that will continue in 2023.
Donovan Schafer
Okay. And then on the same topic, just for 2022 and the reported results. So for the free cash flow calculation, you’re including the organic drilling and completion CapEx, which was $56 million. So as you noted, that’s close to what you’ve talked about as a maintenance CapEx and I know that doesn’t include the Vitesse Oil LLC. So maybe if you include that, maybe that bumps that almost right on the money to $60 million or something. But you do exclude the $28.5 million for acquisitions 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 because – 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 tracking 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?
David Macosko
Yes. Donovan, this is Dave. When we think about that, the reason we didn’t include that $28.5 million in our free cash flow, we look at that as discretionary spending. And going forward, we have the maintenance CapEx included, obviously, in some small level of acquisition in there, but nothing near the $28.5 million that we saw in 2022.
Donovan Schafer
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. It’s great to see very large year-over-year increase in reserves, 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. But there’s really a nice increase.
And so if I look at the deck on your website, your PV-10 shows pro forma for the Vitesse Oil LLC puts you north of $1.2 billion. And then because historically, you were a limited partnership, while you were under Jefferies and so the pass-through entity, you didn’t pay any taxes. And so your standardized measure in your PV-10 and end up effectively being the same.
But 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 Form 10, the registration statement filings, you did a pro forma accounting for taxes and Vitesse 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 at applied about proportionately to the 2021 numbers, that still put to – put you right at about $1 billion on a standardized measure of 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 should the sort of cash tax rate which was about 17% for the 2021 numbers. Like in terms of the reserve impact, does it make sense that it is like a 17-ish percent cash tax haircut or something you’d say in like the 20% ballpark? Or is there – am I blindly missing some glaring thing there that I should know about?
David Macosko
Don, 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 will reduce that effective tax rate if we get more of the IDCs to take against our taxable income. But that 15% to 20% of the run rate is reasonable.
Donovan Schafer
Okay. Well, that’s all kind of checks all the Vitesse community. So I’m good to go in a sense, I’ll take any others questions offline, and congratulations on the quarter and the spin, guys. I appreciate it.
David Macosko
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 Gerrity
I want to thank everybody for their interest in Vitesse. And if you have any questions, please reach out to Ben. We love 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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