Vital Energy (VTLE) Valuation Update - March 28

[dan_s]

I have posted the updated profile and forecast model for VTLE to the EPG website.

[knusser58]

Hi Dan,
in your Model for VTLE you substract 55MM$ and 220MM$ from the cashflow from operations, respectively for 2025 and 2026.
Especially for 2026 this is material, since cashflow from operations ends up only being about 1Bn$ after you substract the 220MM$ (about 20%).
Can you explain why you take out the 220MM$?
Thank you and regards,
Klaus

[dan_s]

My valuation of VTLE is so far above the TipRanks' consensus price target that I am just putting big "cushions" in my 2025 and 2026 forecasts just to cover the risk of anything I might be missing.
BTW Harry's forecasts for 2025 and 2026 are higher than my forecasts. VTLE ranks #5 out of the 84 companies that he follows.

See Neal Dingmann's comments on page 6. Neal is a very sharp energy sector analyst.

[knusser58]

Thank you Dan

[knusser58]

Hi Dan,
for 2025 as per your model:

VTLE has about 70% of its oil production hedge above 74$/B for Q2-Q4, low downside risk.
For NG its more like 55% at 2.31 $/mmBTU, nothing but upside.

CFFO/Mcap: 0.6
Price to Book Value: 0.2
FCF yield: 30%, even with your 55MM$ markdown in CFFO.
Still, the market punishes VTLE disproportionally.
What are we missing?
Regards,
Klaus

[dan_s]

FEAR based selloffs seldom last.

Crescent Energy (CRGY) is also a Screaming Buy today because of their oil hedges and production mix of 42% natural gas, 17.5% NGLs and 40.5% crude oil. < ~40% of their crude oil Q2 to Q4 is hedged at ~$70.45.

[knusser58]

Hi Dan,
are companies like VTLE not considering buying back shares?
Her is a theoretical exercise, just to make the point:
With CFFO/MCAP of 0.5 and a Price to Book Value of 0.2, if VTLE would temporarily cut back significantly their capex (with all of the well known negative consequences) and would buy back shares at current prices, it would take only months to buy back all of the outstanding shares and the buyback would be at a very large discount 1:5. Companies should make good business decisions and deploying capital in an efficient way. Buying back shares at a 80% discount seams like a better business the drilling.
In reality this is not how it works, but the message that such a policy, even if limited, would send would be very powerful and would back up prices.
Comments? Is this something the companies (VTLE and others) are contemplating? If not, Why?
Prices are just to far from where the reasonably should be.
Food for thought.
Regards,
Klaus

[allen46]

Knusser brought up a great point that I've been thinking about all day. Why don't all the companies you follow stop all dividends and a lot of their oil drilling (especially with the drop in WTI) and put all the money toward buying back their shares - at least until the share prices improve to reasonable levels. Seems like an obvious move to me. NG prices should rise with the drop in associated NG production.

[Petroleum economist]

Based purely on cash flow generation in 2025 and 2026 Vital looks like a very attractive investment. However, there is a catch.

Long-term Debt
Vital paid in 2024 $ 880 M cash Point Energy acquisition. As a consequence, the long-term debt in late 2024 increased to $ 2,454 M. This debt is too high in relation to the FCF and the EBITDA. The debt needs to be reduced.
The banks which provided the 2024 loans will have dictated that Vital is not allowed to return funds to its shareholder until a certain amount debt reduction has been achieved.

Debt reduction
I am assuming that the long-term debt needs to be reduced by $ 1.0 B.
Using the ranking model, I can calculate for Vital the FCF per year and the accumulative FCF as a function of the oil price. Using these data, I can see how long it takes until an accumulative FCF of $ 1 B is reached.

My base oil price scenario is WTI = $ 70/bbl. With this oil price the debt reduction can be achieved within 3 years. This means that shareholder returns can start in 2027. With WTI = $ 75/bbl this could down to 2 ½ years.

Vital has hedges in place for 2025 and 2026, which to a degree guarantee the FCF in these two years. However, after 2026 with no hedges and at lower oil prices ($ 60-65/bbl) the FCF can fall off quickly as shown below.

VItal FCF 2025-2029.jpg (37.04 KiB) Viewed 16019 times

Low oil prices
With the WTI = $ 65/bbl it will take 5 years to achieve an accumulative FCF of $ 1 B. This means that shareholder returns will not start until 2030. At $ 60/bbl the $ 1 B level will not be achieved.

Effect of realized gas price
Note that in above I assume that Vital realized gas prices together with the Waha gas prices will remain depressed. With the start of new gas pipelines on 2026 there is a good chance that gas prices will recover. This can bring in an extra $ 100 M FCF per year.

Conclusions
With oil price of $ 70-75/bbl the Vital long-term debt can be reduced in 2.5- 3.0 years and shareholder returns can start in 2027.
If the oil price falls to $ 65/bb, then the start of shareholder returns can be delayed to 2030. With an oil price of $ 60/bbl or less there will be no shareholder returns.

[dan_s]

I agree. Vital should be using all free cash flow to pay down debt. Vital's hedges will keep it free cash flow positive. VTLE closed at less than 20% of book value on April 4th and at 0.51 X 2025 operating cash flow based on WTI averaging $70/bbl for 2025. I cannot recall any profitable company ever trading at 0.51 X CFPS.

I do think a lot of our model portfolio companies will increase their share buybacks. Cutting dividends is not a good idea. Civitas was in our High Yield Income Portfolio until it "changed the rules" by cutting dividends and using the funds to buy back stock and pay down debt. People that invest for dividends always panic and sell when a company cuts their dividends.

My opinion is that last week's selloff was way overdone unless you think WTI is going down to $50 and staying there for years. My opinion is that if WTI just stays at $60 for the rest of 2025, it will mean much higher oil prices in 2026 because the global oil market will be extremely tight in 2026 with no supply growth this year.

OPEC+ will not allow oil to go to $50/bbl.