Vital Energy and its solvency

[Petroleum economist]

Vital Energy (formerly Laredo) has demonstrated in 2023 that its priority is its balance sheet. The acquisitions of Driftwood, Maple, Henry, and Tall City were paid for mostly in shares. This diluted the earnings per share, but boosting the solvency. In view of its history in the last 10 years the Vital focus on the balance sheet is quite logical.

2015-2016
In 2015/2016 the oil price had collapsed from $ 95-100/bl to $43-48/bbl. This led for Vital/Laredo to major impairments. Consequently, Vital/Laredo ended up with dodgy balance sheets (solvencies 6-10%) and only just survived. Production at the time was 18 K BoE/d.

2016-2019
With oil prices recovering to $ 60-65/bbl, Vital/Laredo managed to improve its solvency by late 2019 to 48.5%. These were the days of “drill baby, drill” and acquisitions. Production increased massively (factor 4.5) from 18 K BoE/d to 80-85K BoE/d.

2020-2021
In 2020 the oil price collapsed once more (Corona) and fell to $ 30-35/bbl. This lead again to massive impairments: $ 629 M (2019 report) and $ 899 M (2020 report). Equity late 2021 was -$ 21 M and the solvency a miserable-1.5%. Vital/Laredo was very close to a chapter 11.

2021-2022
Vital/Laredo survived the 2021 dip and tightened its belt. With good cash management, a flat production (78-85 K BoE/d) and oil prices recovering to $ 65-95/bbl, Vital/Laredo managed to gradually restore its solvency. By late 2022 solvency has improved to a still lowish 40.7%.

2023
In early 2023, with (1) a lowish solvency, (2) a lowish free cash flow and (3) a high debt/EBITDA ratio, Vital must have realized that it would not be able to afford shareholder returns for some years to come. The money invested in Vital was “trapped”.

To get out of this trap, the strategy changed. Vital acquired Driftwood, Maple, Henry and Tall City, mostly paying with shares. The number of shares more than doubled - from 16.4 M (late 2022) to 35.4 M (late 2023). The earnings per share were diluted.
However more important, the acquisitions improved the balance sheet. The solvency increased from the lowish 40.7% (late 2022) to a reasonably good 54.1% (late 2023).
Production grew from 78 K BoE/d (Q4 2022) to 114 K BoE/d (Q4 2023). Reserves grew from 302 M BoE (2022) to 405 M BoE (2023).

2024
Vital has hedged for 2024 92% of its oil production. Through the hedging, the 2024 free cash flow is virtually guaranteed to be around $ 280 M. With the 2024 free cash flow directed towards the balance sheet, solvency by late 2024 can improve to a very good 60%. The 2024 debt/EBITDA ratio can end as an acceptable 1.02.
Some minor acquisitions in 2024 (the possibility has been indicated by Vital), will not change this overall picture, provided they are paid for at least by 50% in shares.
The 2024 eps is estimated to be $ 11.40 and the PE will be a low 4.9.

2025
At the start of 2025, the balance sheet will have been restored and Vital can consider the start of shareholder returns.
Vital has sufficient reserves for the production from 2025 onwards to grow with 3-4% per year, increasing the eps in 2025/2026 to $ 14.00-1500. The PE can drop close to 4.0.

The combination of a solid balance sheet, a growing production and a low PE make Vital Energy earl 2025 a very attractive investment.

[Finn352]

Thanks a lot, very interesting and useful to have the longer term view. I have followed LPI/VTLE only since 2020 but it is one of my bigger positions, along with PR and SBOW. So it probably will take still more time before the market recognises its value, let's be patient..

[knusser58]

Hi Dan,
can you comment on the large difference in the numbers (EPS and free cashflow) for 2024 between your Model and Petroleum Economist's.
Since some 90% of Income is hedged and therefore given, why are there such large differences in EPS (9.2 vs 11.4) ND free cash flow (150MM$ vs. $280MM$)?
Thankyou and Regards,
Klaus

As per Petroleum Economist:
2024
Vital has hedged for 2024 92% of its oil production. Through the hedging, the 2024 free cash flow is virtually guaranteed to be around $ 280 M. With the 2024 free cash flow directed towards the balance sheet, solvency by late 2024 can improve to a very good 60%. The 2024 debt/EBITDA ratio can end as an acceptable 1.02.
Some minor acquisitions in 2024 (the possibility has been indicated by Vital), will not change this overall picture, provided they are paid for at least by 50% in shares.
The 2024 eps is estimated to be $ 11.40 and the PE will be a low 4.9.

[Fraser921]

One thing regarding Dan's models, his "operating cash flow" is not to be confused with FCF main dif is it's before cap ex.
FCF = free cash flow is all cash flow, so operating cash flow less cap ex

He has Vital operating cash flow roughly 950. He has cap ex (750 to 850). (950-800) = 150 m fcf. I dont know what PE is using in his model

I like using FCF as my main metric. CRK for instance will have negative FCF this year due to low NG prices but positive Operating cashflow. With a negative FCF they will have to raise money or go into debt to cover the shortfall. With regards to CRK they did both raising 100 m from JJ and selling some junk bonds to cover the cash gap

[Fraser921]

Another man's opinion... 338 m FCF

https://seekingalpha.com/article/4680571-vital-energy-extends-its-debt-maturities-and-continues-to-deleverage

Interestingly, His FCF is double Dan's model but his valuation is less at $65 vs Dan's TP of $ 102. This could be a timing difference vs now and future TP after 2025. All 3 conclude it's improving.

Vital has close to 38 million outstanding shares after giving effect to the conversion of its outstanding preferred shares. I now estimate Vital's value at around $65 per share at long-term (after 2024) $75 WTI oil and $3.75 Henry Hub natural gas prices.

[Fraser921]

Vital last qtr earnings and guidance

https://investor.vitalenergy.com/news-releases/news-release-details/vital-energy-reports-fourth-quarter-and-full-year-2023-financial

Presentation

https://investor.vitalenergy.com/static-files/0a7614e2-e566-4cc2-9767-b64240c9b3c2

Transcript

https://seekingalpha.com/article/4672391-vital-energy-inc-vtle-q4-2023-earnings-call-transcript

Hedges

90 % oil.
40 % NG

I wish this was flip flopped

FCF slide 10 they have an estimate of 350 m, with debt/ebitda of 1.0 at YE

[Petroleum economist]

Fraser921 and Knusser58, thanks for your comments.
I had a look at the differences between my Vital Energy model and that of Dan (march version). There are three areas where we have different opinions.

I already had contact with Dan. I have the advantage that I have seen Dan’s model, but he has not yet seen mine. We agreed that I will share my cost models with him, such that we can come to a common understanding.

For the time being, the three areas with differences are:

Production
Vital issued a 2024 outlook of 116.5-119.5 K BoE/d.
Vital is normally is conservative with their outlooks. Further, with higher oil prices I assume they will aim to exceed their guidance. Therefore, I assumed a 2024 production of 121.4 K BoE/d.
Dan is more conservative and at 119 K BoE/d in the middle of the guidance.

Interest payments
Vital refinanced $ 1.0 B in March and will save $ 20 M/year in interest payments. I took this in to my model and carry $ 188 M interest payments. Dan caries $ 205 M. I assume that Dan has not yet updated the interest payments with the latest financing and that this will be done in the next update.

Taxes
Vital has $ 1.6 B on NOL’s. Therefore, I assume that tax payments in 2024 will be a minimal $ 7 M (effective 1.4% tax rate). Dan carries $ 5 M current and 82 M deferred (tax rate 1% current and 22% deferred). I ignored the deferred tax as it is noncash and never will be paid as it can be offset against the NOL's. I am no tax expert and maybe I am too optimistic. Discussions with Dan and Q1 results hopefully will bring some clarification.

[knusser58]

Hi everybody,
that clears up the difference :
1. difference in production levels
2. difference in interest expenses
3. difference in tax expenses
4. others?
Dan, can you comment on this and are you going to adjust your model?
thank you and regards,
Klaus

[dan_s]

I had to focus on the newsletter all weekend. I will take a hard look at the model for Vital today.

VTLE closed on Friday at $53.79, which is below book value of approximately $73/share. There is nothing I see that justifies this stock trading below book value.

My current value of $102/share is based on 3.25 X annualized operating cash flow per share for 2023 through 2025. Obviously, my valuations depend on the accuracy of my forecasts. My valuations are based more on the future than on the past.

Vital's Q1 results and updated guidance will go a long way toward confirming my model assumptions. Based on what I've read here, the interest expense used in my model for 2024 and 2025 is probably a bit too high, offset by the share count of 37 million maybe being a bit too low. Other than that, I don't expect any significant revenue or expense cash items being too far off what's in my model. Non-cash items like DD&A, MTM adjustments on hedges and Deferred Income Taxes have no impact on my valuations.

Vital is in "Growth Mode", so using free cash flow to value this stock is not justified. They are spending most of their operating cash flow to grow production and increase proved reserves, with any remaining FCF used to make acquisitions or to pay down debt. All of which should increase shareholder value.

It appears to me that Vital is following Earthstone Energy's strategy of building a significant acreage position in the Permian Basin. It is a pure play on the Permian Basin, that looks more like a prime takeover target each quarter.

BTW the 2024 oil & gas revenues shown in my forecast model ($1.8 billion) are $100 million lower than what TipRanks is showing this morning. TipRanks' 2024 earnings per share forecast of $9.48 is much higher than my forecast of $6.51 because a few of the nine analysts' reports in the TipRanks' data base are still using the outstanding share count at December 31, 2023. The Wall Street Gang has some work to do on this one.

[knusser58]

Dan,
thank you for the details.
This helps.
Regards,
Klaus