Vital Energy (VTLE) Valuation Update - Aug 9

[dan_s]

At the time of this post VTLE was trading at $38.01.

I have updated my forecast valuation model for Vital Energy.
> Vital's actual production for Q1 and Q2 exceeded my forecast and their production guidance.
> Crude oil was 45.77% of Q2 production and 88.75% of Q2 revenues.
> Vital's realized crude oil price was very close to my forecast, but their realized natural gas and NGL prices were way below my forecast.

I have lowered my valuation of VTLE by $3 to $104, which is just 3.25 X annualized operating cash flow per share. < In my opinion, 3.25 is a very conservative valuation multiple for a profitable upstream company, which now has a lot of high-quality running room.

TipRanks: "In the last 3 months, 10 ranked analysts set 12-month price targets for VTLE. The average price target among the analysts is $58.63."

Yesterday and today, three highly respected analysts have updated their price targets to $52, $83 and $66.

My 2025 forecast is currently below the consensus forecast being shown by TipRanks today.
> TipRanks 2025 forecast is $10.57 earnings per share with $31.48 operating cash flow per share, which compare to my forecasts of $10.11 EPS and $30.67 operating CFPS.
> Vital's production increased 17.1% year-over-year in 2023 and they are on pace to production growth of 34.5% YOY in 2024.
> 2024 well results have been very good.
> This profitable growth company should not be trading at a PE ratio under 4.

Vital Energy is a pure play on the Permian Basin with revenues heavily weighted to liquid sales. Dry natural gas was only 2.9% of Vital's Q2 revenue (including cash settlements on their hedges).

Vital has just 38.2 million shares outstanding. That is a low share count for a company of this size and quality.

Vital expects to close the Point Energy Acquisition by the end of Q3 or early Q4. It should be an accretive transaction to all financial measures. At closing it should add close to 10,000 barrels per day of crude oil production.

My updated forecast model will be posted to the EPG website later this afternoon.

[aja57]

Dan,
Are differences in price targets between you and the other"respected " analysts a result of differing opinions in production growth, future revenue stream of products (oil ,NGL,NG future price), operating costs, etc ? Or are the wide variations related to the analysis in applying a valuation multiple that is annualized for operating cash flow per share?

[dan_s]

I think the Wall Street Gang is of the opinion that Vital's leasehold in the Midland Basin is Tier Two, but the company keeps reporting very good well results. You may recall that Laredo Petroleum got into the Wall Street Gang's "Penalty Box" several years ago by drilling horizontal development wells too close together, which pissed off several of the Alpha Dogs in the Gang.

Vital also has a relatively low number of shares, which some analysts view as a negative. It also does not pay dividends; the Wall Street Gang favors dividend payers over growth companies these days.

Vital's production increased 17.1% YOY in 2023 and they are on pace for 24.5% YOY production growth in 2024.

If you look at my forecast, note that reported net income in 1H 2024 is way down from 1H 2023. < 48% of Vital's 2024 net income was from non-cash MTM gains on their hedges and a big deferred tax credit, also a non-cash item.
However, the Company's operating cash flow is up $122.5 million YOY in 1H 2024.
Production is also up significantly YOY. Vital's production exceeded guidance in Q1 and Q2 2024.

My operating CFPS forecast for 2024 is $26.83, which is lower than TipRanks' operating CFPS forecasts of $28.71 for 2024 and $31.48 for 2025.

I just can't see any reason that VTLE trades at less than 2X operating CFPS. If you can figure it out, let me.

Harry, our "Petroleum Economist" and I have discussed this one and both of us think that VTLE is grossly undervalued. I think it is a Screaming Takeover Target. Any company wanting to make a significant acquisition in the Permian Basin has to be looking at Vital Energy.

[Lbark]

Dan, vtle is one of my larger holdings and larger losses so I am also frustrated that wall street does not buys in. Have you spoken with mgmt to see if they understand the issues with the market price or are simply deaf to what it takes to get off the mat. Amazed no one has tried to take them out.

[dan_s]

I've told them of my high valuation, and I've attempted to get them on a webinar or host an EPG luncheon in Houston. So far, no interest.

We will publish an updated profile on Vital soon. I will send it to them and see if they are willing to at least host a webinar for us. Some management teams do not realize how important it is to get their story out at every opportunity.

In my opinion, Vital is a "Screaming Takeover Target".

[Fraser921]

Dan, Do you personally own shares of this dog?
I told people to sell at 60 and was chastised for my opinion

[dan_s]

I have a long position in VTLE in the form of sold PUTS.

[Petroleum economist]

I agree with Dan that Vital Energy is a good investment. I do own Vital Energy shares (as I do with all the shares that rank in my rankings top 15). I do not think that Vital is a “dog”.

Some analysts do not look further than the current year. Thanks to the Point Energy acquisition (64% oil), the oil production should jump from 58-59 K BoE/d in mid-2024 to 65-66 K BoE/d in 2026.

The natural gas production should stay around the current 200-210 MM scf/d level. However, the gas revenues will rise with far higher gas prices.
The realized natural gas price in Q2 (-$ 0.28/MM btu!) was very low and should recover to approx. $ 2.80-3.00/MM Btu in 2026 thanks to” (1) increased gas export capacity from west Texas and (2) a higher Henry Hub gas price. Gas revenues can increase from only 2.3% of the revenues in 2024 to 9.3% of the revenues in 2026.

[knusser58]

Hi Harry,
can you share the listing (ranking) of your top companies with us?
Regards,
Klaus

[cmm3rd]

Do some investors (especially institutional investors) consider debt level (and maturities) and liquidity in relation to other parameters when valuing O&G producers?

VTLE's latest presentation (8/7/24): https://investor.vitalenergy.com/static-files/24984e60-381c-4c54-a1c6-d4fa5c627480

As of 6/30, Net debt was $1.634 B (p. 19), while Consol. EBITDAX was $1.339 B (p. 18). Debt maturities are shown on p. 9 (nothing near term, if I am correctly interpreting), but with (pro forma) a fully drawn borrowing base of $1.5 B. Does that put them at risk in the event of an oil price decline and reduction in their borrowing base?

Their market cap is $1.4 B, having hit an intraday 52 week low today.

For what it might be worth, its call to put ratio is bullish.

[Fraser921]

Seeking Alpha reports:

Vital Energy cut at KeyBanc after 'underwhelming' Point Energy deal

Vital Energy (NYSE:VTLE) -0.9% in Friday's trading as KeyBanc downgrades shares to Sector Weight from Overweight, even as shares trade at two-year lows, saying it cannot recommend buying the dip given the surprising setback following a promising deleveraging story after several 2023 acquisitions.

KeyBanc's Tim Rezvan questions the price and all-cash structure behind Vital's (VTLE) Point Energy acquisition, seeing a "big step back" in deleveraging for a company the analyst believes needs lower leverage to attract long-only sponsors.

An incremental 10K bbl/day of oil is "helpful but not transformative" to justify the deal, especially with less than five years of sub-$50/bbl WTI breakeven inventory post-closing, Rezvan says, adding that he sees "continuing LOE challenges exacerbated by this acquisition."

"After updating our model, we are underwhelmed by the benefits of the deal, relative to the $820M cost and pro forma 63% debt/cap ratio," Rezvan writes, =" Vital (VTLE) has become a "'show me' story on deleveraging and cash opex normalization."

It's not a dog, it's a mangy mutt!

WOOF WOOF

[Fraser921]

New 52 week low btw has been achieved. 62.28 to 36.28.. a whopping 42 % decline!!

It's certainly not best in class

[dan_s]

A few points to consider:

> Harry and I do consider debt levels and when repayments are due in our valuations.
> Vital has no near-term debt problems. From the 8/7 press release: "Liquidity: At June 30, 2024, the Company had $90 million drawn on its $1.35 billion senior secured credit facility and cash and cash equivalents of $56 million. Upon closing of the previously announced acquisition of the assets of Point, the elected commitment on the Company's senior secured credit facility will be expanded to $1.5 billion." < This tells you that the bankers have taken a hard look at the Point Energy Acquistion and they have approved it.

> My stock valuations are based on annualized operating cash flow per share X a valuation multiple that I believe is fair, which considers debt leverage. For VTLE I am using a multiple of 3X, which is as low as I go for any profitable upstream company.
> Vital is free cash flow positive, net of interest payments on debt.
> Closing Adjustments on the Point Energy asset package (positive free cash from Effective Date to Closing Date) will lower the cash payment that Vital pays at closing. Post-Closing Adjustment should also create additional cash payments to Vital.
> Vital's balance sheet at 12-31-2024 will be a bit more leveraged than I'd prefer, but their proved reserves (1P only) should be over $5 billion discounted at 10% at year. It was $4.49 billion at 12-31-2023, which did not include the Point Energy assets AND Vital's 2024 drilling program has proved up more reserves. Like all upstream companies, Vital's credit facility (line-of-credit) is an asset-based loan.

KEY TO MY VALUATION: Vital's production set new company records four quarters in a row; going from 90,030 Boepd in Q2 2023 to 129,356 Boepd in Q2 2024. It is a pure play on the Permian Basin with a lot of quality "Running Room".

> The Forge Energy Asset Acquisition and five small acquisitions since then have been accretive to production and financial results. They've added a lot of "Running Room" in the Permian Basin. Adjusted operating cash flow during the twelve months ending 6-30-2024 was $1,006,978,000 ($26.38/share). Based on Vital's updated (increased) production guidance, 2H 2024 operating cash flow should be over $508,478,000 ($13.32/share). TipRanks' current operating cash flow per share estimates for Q3 and Q4 ($7.08 and $7.94) are higher than my forecasts because I have big "cushions" in my cash flow forecasts, due to recent commodity price volatility.

> As Harry points out in his post above, higher natural gas prices will definitely give Vital a nice revenue boost. However, if Vital's natural gas revenues are zero in 2025, it should still generate over $1 billion of operating cash flow next year, net of interest payments their debt.

Since Vital released solid Q2 results on August 7th, 8 energy sector analysts have submitted new price targets to TipRanks that range from $38 to $83. There is a wide difference of opinion on where oil prices will be in the future. The two highest price targets are from Neal Dingmann at Truist Financial (rated 4.5 Stars by TipRanks) and Gabriele Sorbara at Siebert Williams Shank & Co (rated 5 Stars by TipRanks). Tim Rezvan at KeyBanc is rated zero Stars by TipRanks.

Bottomline: If you believe that it is a Dog, then sell it and move on.

[dan_s]

PS: NOG's involvement in the Point Energy Acquisition is also a positive indication for me. NOG has a lot of experience in reviewing acquisitions and their bankers also reviewed the deal.

TULSA, OK, July 28, 2024 (GLOBE NEWSWIRE) -- Vital Energy, Inc. (NYSE: VTLE) ("Vital Energy" or the "Company") today announced the signing of a definitive joint purchase and sale agreement to acquire the assets of Point Energy Partners ("Point"), a Vortus Investments portfolio company. The transaction will significantly increase the Company’s operational scale and footprint in the Delaware Basin and add high-value development inventory.

The agreement was signed in partnership with Northern Oil and Gas, Inc. (NYSE: NOG) ("NOG"). Under the terms of the agreement, the two companies will acquire Point Energy’s assets in an all-cash transaction for total consideration of $1.1 billion. Vital Energy agreed to acquire 80% of Point’s assets, with NOG acquiring the remaining 20%. The transaction is expected to close by the end of the third quarter of 2024 with an effective date of April 1, 2024, subject to customary closing conditions.

Closing price adjustments are expected to total approximately $75 million, reducing total consideration to approximately $1.025 billion. Vital Energy expects to fund its $820 million portion, net of expected purchase price adjustments, through the use of its credit facility, which was recently expanded to $1.5 billion. Wells Fargo, National Association has committed to the increased elected commitment upon closing of the transaction.

[Petroleum economist]

This week two analysts’ reports were publicized, which took a dim view on Vital. The analysts queried (1) the all-cash structure of the Point Energy acquisition and the impact on the deleveraging of the Vital balance sheet and (2) the impact on lease and operational expenditure (LOE).

The Vital acquisition was announced on the 28th of July. The analysis was published last Friday., three weeks later. No doubt the analysis was circulated earlier to a small inner circle.

In Dutch we have a saying “het rammelt aan alle kanten” which literally translates as “it rattles at all sides”. I Know in English it makes no sense, but it means that a lot of bases were not covered.

The analyst statements made on deleveraging and the impact of increased lease and operational costs were not quantified. Let me try to amend.

Deleveraging of the Vital balance sheet.
• A $ 820 M cash payment, short term, will have a big impact on the Vital balance sheet. However, the balance sheet will recover quickly.
• Below I have attached a table which shows the revenues, costs, net profit, capex, FCF and balance sheet items for Vital in H2 2024, 2025 and 2026. This is done both for a $ 75/bbl and a $ 80/bbl WTI scenario.
• The solvency and the debt/EBITDA have deteriorated in late 2024 – solvency at a mediocre 49.5% and the debt/EBITDA ratio at a very high 2.13-2.14.
• Things however recover quickly.
• In late 2025 with WTI=$ 75/bbl, the solvency recovers to a good 55.6% and the debt/EBITDA ratio to an acceptable 1.34. In late 2026 both improve further to an excellent 62.4% and a good 1.04.
• With $ 80/bbl, the improvements happen even faster. The solvency recovers late 2025 to a good 58.1% and the debt/EBITDA ratio to a good 1.18. In late 2026 both improve further to an excellent 66.7% and an excellent 0.85.
• The above means that shareholder returns with $ 80/bbl can start early 2026 (50% payout to shareholders = 15% return) and with $ 75/bbl by mid-2026 (25% payout to shareholders = 7.5% returns).
• The down side risk on ne balance sheet is limited. Vital for 2025 has hedged 41.6% of its oil production at swaps of $ 75.39/bbl (Q1) to $ 75.00/bbl (Q4) and revenues are robust under low oil price scenarios

Conclusion: The Vital balance sheet indeed leaves lot to be desired in late 2024. The balance sheet will recover by late 2025 and improve further by late 2026. Shareholder returns can start in 2026.

Increased lease and operational costs
• The typical Vital lease and operational costs (based on the last 12 months) are $ 9.16/BoE.
• The lease and operational costs increased in Q2 to $ 9.66/ BoE.
• A 9% increase from $ 9.16/BoE to $ 10/BoE will increase the LOE cost in 2025 from $ 455 M to $ 497 M.
• The impact on the net profit and the free cash flow is only -$ 43 M. This is not enough to have a serious impact on the solvency or the debt/ERBITDA ratio.

Conclusion: Vital should control their lease and operational costs. Failure to do so however will not have a material impact on the balance sheet and the financial health. It can delay the start of shareholder returns by one quarter.

[dan_s]

Vital has hedged a high percentage of their 2H 2024 and 2025 oil, so oil price risk is very low.

Ryder Scott, a highly respected reserves engineering firm, NOG and the bankers have taken a hard look at the Point Energy Acquisition and they approved it. Neal Dingmann and Gabriele Sorbara are highly respected energy sector analysts. They both rate VTLE a BUY with price targets of $66 and $83.

My guess is that the analysts that bad mouth the deal were telling their clients that Vital would de-leverage and start paying dividends. Yes, that would be nice, but if their #1 goal is to build Vital into a Screaming Takeover Target, then the Point Energy deal makes more sense.

[cmm3rd]

Thanks, Dan and Harry, for addressing the debt and Point deal impact subjects. Greatly appreciated.

My take: institutions/investors vary considerably in how much weight they give to balance sheet and liquidity, in substantial part because of divergence of opinion regarding (and uncertainty about) commodity prices (and perhaps differing risk tolerance). Here, there is wide variation, and it is good to know that some of the most respected O&G analysts see, as you do, VTLE as significantly undervalued. Equally helpful is understanding why others are valuing it differently (and their track record). Inferring what the banks (and NOG) think about the Point asset acquisition is also very helpful.

As a retail investor, I try to focus not just on what my opinions of a company are but also on what "Mr. Market" thinks, and how Mr. Market's perceptions might change in the future (what Mr. Market will think). Afterall, I might be right, but if the market thinks otherwise and will value a company differently, I need to understand why and how long that divergence of view might last. So, valuation multiples (if intended to anticipate what Mr. Market will think in the future), after arriving at them on expert analysis, may have to be tempered by evaluation also of general market attitudes as well as how those attitudes might change (which of course is very hard to do, especially in this industry). And when/if changes in not just events but also sentiment about the sector and commodity pricing in the future occur, perhaps multiple calculus can change.

Again, thanks for putting in the time and effort to study and analyze the data as you have and for sharing it. Extremely helpful.

cmm3rd

[Fraser921]

Good discussion, might be a good entry point...

[dan_s]

I just noticed that Harry (the "Petroleum Economist") just moved VTLE up to #2 in his ranking of 80 companies. What Harry and I see is a company trading at a deep discount to its net asset value.

IMO the reason that Mr. Market has such a deep discount on this profitable company is (a) Vital's management needs to get out and tell their story and strategy (i.e. Are they building the company for a sale?), (b) when Vital was Laredo Petroleum, it made and admitted to making some mistakes, one of which was drilling horizontal development wells too close together and (c) some of the Wall Street Gang analysts got burned by those mistakes and they put out some negative comments on the old management team. The Wall Street "Penalty Box" can be tough.

Vital Energy has a new management team and well results since mid-2023 have been VERY GOOD. Time will tell if the Point Energy is good or bad, but I don't think they overpaid and they have hedges in place that reduce a lot of the oil price risk. We should know in six months.

[knusser58]

Harry,
can you share your 80 Company ranking with us?
Regards,
Klaus

[Fraser921]

Has been achieved on Vtle.
If you like it at $62 you gotta love it at 35

What does the market know that raging bulls don’t know?

Is there a glut?
Oil prices are collapsing!
Ng prices have collapsed.
Some says demand is falling in China

Is it noise or a new paradigm?

I don’t follow this one anymore since I ditched it after the first merger in the mid 50’s