Vitesse - Q4 2022

Transcript

Operator (participant)

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 (Director of Investor Relations)

Good morning, thank you for joining 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 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, 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 (Chairman and CEO)

Thanks, Ben. Good morning, everyone, thanks for participating. Vitesse Energy Inc. began trading on the New York Stock Exchange under the ticker VTS on January seventeenth. Vitesse is focused on returning capital to its stockholders through owning financial interests as a non operator 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, 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 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. We are excited to run Vitesse as an independent public company and look forward to our future financial success. Now I'll hand it over to our President, Brian Cree, to discuss our operations.

Brian Cree (President)

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 13th, 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 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 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 others more active basins. Thanks for your time.

Now I'll turn it over to our CFO, David Macosko, to review our financial highlights for 2022.

Dave Macosko (CFO)

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 Vitesse 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. 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 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. With respect to 2023 guidance, we are currently providing annual guidance for daily production, including the % 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%-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-$80 million for 2023. With that, I'll turn the call over to the operator for Q&A.

Operator (participant)

Thank you. If you would like to ask a question, please press star one 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. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. Our first question is from Stephen Richardson with Evercore ISI. Please proceed.

Stephen Richardson (Senior Managing Director and Senior Equity Research Analyst)

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. Perhaps, you know, considering this fact, this is your first call, if you could talk a little bit about how you evaluate M&A and, you know, how you plan to differentiate yourself relative to, you know, some of the other public non-op companies that investors may be familiar with.

Dave Macosko (CFO)

Thanks, Stephen. This is Bob. 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. 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. I have to tell you, to do a substantial deal, it's gonna have to be pretty special. We will look at everything.

We've got about $200 million of fresh powder on our revolver that we could use, but we are not gonna just do a deal to grow.

Stephen Richardson (Senior Managing Director and Senior Equity Research Analyst)

Great. Maybe as a, as a follow-up, Bob, I mean, one of the mentions, you know, do you own some minerals? 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, you know, not bidding on just PDP packages and also packages that come that may have minerals, can you talk about, you know, partnership strategies or how you would approach those types of packages and may perhaps how you've done in the past?

Bob Gerrity (Chairman and CEO)

Yeah, that's a terrific question. We don't seek out minerals or royalties. We have a fair amount of them. 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. You know, we always look to maximize our economics. We're not actively looking just for minerals. You know, at certain points, we would actually sell some minerals.

Stephen Richardson (Senior Managing Director and Senior Equity Research Analyst)

Great. Thanks very much. Best of luck.

Bob Gerrity (Chairman and CEO)

Thanks, Stephen.

Stephen Richardson (Senior Managing Director and Senior Equity Research Analyst)

Thanks.

Operator (participant)

Our next question is from Donovan Schafer with Northland Capital Markets. Please proceed.

Donovan Schafer (Managing Director and Senior Analyst)

Hey, guys. Thanks for taking the questions and congratulations on completing the spin-off. I'm also happy to see, you know, the board did approve the $2 dividend that you know, you pretty much indicated in your filings before that. Also, you know, nice to see the $60 million approved for buybacks. You know, kudos on those fronts. 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 looks like a very high, attractive dividend. You know, when you guys came out, it was like a 13% dividend. Stock's come up, it's like 11% now.

You know, it still looks pretty attractive. Of course, people look at 2022, they think, okay, that's exceptional somehow. Of course, the year-over-year performance increase from 2021 to 2022 was driven a lot by oil price increases. You know, with the hedges, it looks like, you know, effectively, your oil price in 2022 was $76 a barrel. 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.

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, 2021, 2020, you know, 2022, when people kind of look at those numbers, how to make sense of that?

Bob Gerrity (Chairman and CEO)

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. Where other companies may pay the dividend after they figure out how to allocate the rest of their capital, we pay it first. You gotta remember, 30% of this company is owned by management and the management of Vitesse and the management of Jefferies. We like those dividends. 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. I think that your statement that...

Last year we got net $76 for oil price. This year so far with our hedges and where the price of oil is, it's a very similar year. 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 (Managing Director and Senior Analyst)

Okay. That's really helpful. Just curious, you know, you've got the shareholder return framework and being a dividend-paying company kind of at the forefront of that. On that topic, is there a sort of a payout ratio? You know, if that's kind of front and center and what you wanna focus on, 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? You know, on trailing free cash flow, you know, it's a 66%, I think, of the $100 million trailing free cash flow.

You know, fast-forward several years, if that were to get sort of out of whack, where you're at a meaningfully higher free cash flow, you know, north of the $100 million, 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? Kinda just how do we think about that?

Bob Gerrity (Chairman and CEO)

Very fair question. Absolutely a fair question. We allocate capital pretty much every day. Our business plan anywhere between $60 and $100. It's pretty much the same thing. You gotta 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. We do not have a specific number. Again, to reiterate, we love the dividend. It's the, 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 (Managing Director and Senior Analyst)

Okay. Okay. This might be a bit of sort of a housekeeping question, but just for the Vitesse Oil, you know, LLC, how that, you know, smaller piece is getting folded in with, I think, an effective date of January 13th. kind of just double checking here. My understanding is that is, you know, like an equity. it's worked out in terms of sort of an equity deal, just the way everything's structured. It's not like there's some incremental cash spend, some purchase price associated with it that'll come up in the first quarter, that it just becomes folded into the share counts. 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, a restricted stock units or something comparable to that. I wanna make sure when we, when we factor in the Vitesse Energy, 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. Just wanna see if I'm roughly in the right ballpark there.

Bob Gerrity (Chairman and CEO)

Yep. Again, Donovan, very good questions. I'm gonna ask Brian Cree to answer that.

Brian Cree (President)

Thanks, Donovan. Yeah, you're right on track there. It's 33 million is kinda what we're thinking of as fully diluted shares outstanding. 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 spin off, there'll be no incremental shares issued for that. It's the, you know, roughly the 28.2 million of common shares that are outstanding right now. That includes the Vitesse Oil acquisition.

Donovan Schafer (Managing Director and Senior Analyst)

Okay. 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 Jefferies and Jefferies management and other stuff like that. That's what gets you to the 33 million shares.

Brian Cree (President)

That's exactly right. It's all of those.

Donovan Schafer (Managing Director and Senior Analyst)

Yeah.

Brian Cree (President)

-restricted stock units of-

Donovan Schafer (Managing Director and Senior Analyst)

Got it.

Brian Cree (President)

Both, our management team and the Jefferies management team.

Donovan Schafer (Managing Director and Senior Analyst)

Okay, fantastic. You know, I always can ask a million questions, but, I wanna check 'cause I'll step back. I wanna check with the operator. Just operator, are there other people waiting to ask questions in the queue?

Dave Macosko (CFO)

You can keep going.

Donovan Schafer (Managing Director and Senior Analyst)

Okay. I wanna talk about winter weather. Some other companies in the Bakken, you know, some non-op, and operating as well, have talked about, you know, the winter was pretty brutal, December specifically, definitely impacted production levels. You know, you guys reported sort of full 2022 results without breaking out as much for the fourth quarter. Just in general, going forward and kinda modeling, did 2022 seem like an exceptional year in that sense? 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, kinda just from having a tough, having a tough production environment in the fourth quarter of this year?

Just any other color kind of on the winter, and how to think about winter. North Dakota, you know, it's cold. Yeah.

Brian Cree (President)

Donovan, this is Brian. I'll take a crack at that one, and anyone else can jump in here. 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. Every year is different, right? I mean, yeah, November and December this year were pretty cold, and we saw impacts. You know, last year in April, we had, you know, there were 2 major winter storms that occurred in the Williston. 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. We do discount for expected winter weather. None of us are meteorologists. We don't know what's gonna happen. 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 (Managing Director and Senior Analyst)

Okay. Okay. Then on the scheme of the guidance, looking at the Bakken and kind of rig counts and, you know, I know, you know, natural gas, natural gas prices have come down a lot, so it's not as relevant, you know, for you guys being much more oil-weighted. You know, in the, in the gas basins, for instance, there's expectation that rig activity is likely to maybe slow down in 2023. I don't know that we're expecting that 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 and an increasing rig count, slightly declining rig count, you know, what kind of are those assumptions built into the guidance just from activity levels?

Brian Cree (President)

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 basin. As I mentioned earlier, 15 of those rigs are running on our asset. Our $60 million-$80 million of CapEx projection assumes kind of that same range of rig count. The rig counts, you know, over the last 4 or 5 months has ranged anywhere from the low 40s to the upper 40s, and that's kinda 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. If it does, you know, our organic CapEx, as Bob mentioned earlier, is the first place after our dividend that we wanna allocate funds to. We would certainly welcome higher rig count.

Love to see that organic CapEx be developed to producing assets. We don't model that in our $60 million-$80 million or in our annual guidance of production.

Donovan Schafer (Managing Director and Senior Analyst)

Okay. I actually have two questions around kinda maintenance CapEx and how to think about that. For the outlook, you've got the $60 million-$80 million, and we talked about some cost inflation. I guess the first one there would be, are we still even accounting for cost inflation? Do you still see, I think you talked before of $60 million as being around a maintenance CapEx level? You know, 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.

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, you know, driving growth versus a maintenance CapEx?

Brian Cree (President)

We've tried to take into consideration the inflation that we've seen so far. Again, as I mentioned, I don't think we see massive inflation occurring in 2023. We feel like that $60 million that we've talked about as maintenance CapEx still reflects our expectations for 2023. Remember that there's a component of that, as we've discussed before, that is the organic CapEx, which, you know, ranges anywhere from $40 million-$50 million. Then the other part of that is the near-term development opportunities that we've acquired. Really, the range between $60 million-$80 million factors more into we don't know what that rig count is gonna be, we don't know exactly what our organic CapEx will be. Our acquisition strategy.

Typically, we think about trying to acquire, make acquisitions in the $10 million range, is kinda how we model it. Last year, we spent over $20 million. That's why we kinda 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 (Chairman and CEO)

Yeah. 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. Our dream scenario is to spend the same amount of money every year and get more production. That's generally what happened in 2022, and we believe that that will continue in 2023.

Donovan Schafer (Managing Director and Senior Analyst)

Okay. On the same topic, just for 2022 and the reported results. For the free cash flow calculation, you know, you're including the organic drilling and completion CapEx, which was $56 million. You know, as you noted, that's, you know, close to what you talked about as a maintenance CapEx level. I know, you know, that doesn't include the Vitesse Oil LLC, maybe if you include that, maybe that bumps that almost right on the money to $60 million or something. You do exclude the $28.5 million for acquisitions in 2022. I'm just curious, is this reflecting that same kind of framework around generating returns to investors? You know, you include the $56 million because...

In doing your free cash flow 'cause conceptually, that falls more into kind of a maintenance CapEx bucket, and then you're not including the $28.5 million. You know, you're not subtracting that out to get your free cash flow 'cause that's sort of icing on the cake or sort of this incremental opportunistic move to drive return to investors and, you know, drive growth, and it's not as much of a maintenance CapEx type expenditure. Am I thinking about that the right way?

Dave Macosko (CFO)

Yeah. Hi, Donovan. This is Dave. When we think about that, the reason we didn't include that $28.5 in our free cash flows, we look at that as discretionary spending. You know, going forward, we have that maintenance CapEx included, obviously, and some small level of acquisition in there, but nothing near the twenty-eight and a half million that we saw in 2022.

Donovan Schafer (Managing Director and Senior Analyst)

Okay, great. Actually this will be I'll squeeze in one more, and this will be my last question. 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, you know, the reserve engineers or the auditors. You know, 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. It'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. Because historically you were a limited partnership while you were under Jefferies, and so pass-through entity, you didn't pay any taxes. Your standardized measure and your PV-ten end up effectively being the same. 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 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.

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 standardized measure for the reserves, maybe even just a little bit north of the $1 billion. I just wanna, I just wanna check broadly, in a pretty broad sense my logic there. 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 viewed like a 17-ish%, you know, cash tax haircut or something you say in like the 20% ballpark? Or am I blindly missing some glaring thing there that I should know about?

Dave Macosko (CFO)

No, Donovan, I think you're in the right ballpark. I'd look at it more from a 15%-20% haircut on that. Remember, is 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. That 15%-20% as a run rate is reasonable.

Donovan Schafer (Managing Director and Senior Analyst)

Okay, great. This all kinda, this checks all, it checks all the right boxes for me, so I'm good to go on this end. I'll take any other questions offline and, you know, congratulations on the quarter and the spin, guys. Appreciate it.

Dave Macosko (CFO)

Thank you, Donovan.

Operator (participant)

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.

Dave Macosko (CFO)

Want to thank everybody for their interest in Vitesse. If you have any questions, please reach out to Ben. We'd love to answer them. Thank you very much. Bye-bye.

Operator (participant)

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.