Vital Energy - Q1 Results

[Petroleum economist]

Vital Energy is a small US oil company, producing light tight oil in the Delaware and Midland basin in the Permian in West Texas and New Mexico.

Summary
Vital reported Q1 results close to expectation with an impairment as a negative surprise. Production was as expected and soon will start a steady decline. The balance sheet is weak, needs reinforcement and does not allow shareholder returns. Q1 profit was close to expectation. Profits in 2025 will be good thanks to extensive hedging, but after 2025 will start to decline. Short-term, shareholder returns are unlikely. Long-term, shareholder returns are highly dependent on the oil price and FCF.

With oil at $70/bbl or more. the eps, PE and shareholder returns are good and Vital is an attractive investment. With oil at $ 60/bbl or less Vital is not robust.

At $ 62.50/bbl Vital ranks 30h in my ranking of 85 oil and gas companies.

Production
• Vital production has been growing since 2019 from 80.0 K BoE/d (2019) to 133.8 K BoE/d (2024). Most of the growth is due to acquisitions.
• Q1 production (140.2 K BoE/d) was at the high end of the Vital guidance (135-141 K BoE/d) and slightly below my expectation (141.5 K BoE/d). Q1 was 6.6 K BoE/d below Q4 (147.8 K BoE/d).
• Vital is forecasting a Q2 production of 139 K BoE/d. The outlook includes the effect of the sale of Reagan County assets with a production of 1.3 K BoE/d.
• Vital tightened its 2025 production outlook from 130-140 K BoE/d to 135.3-139.8 BoE/d.
• The outlook is indicating a flat to slowly declining production. My 2025 production forecast is 139 K BoE/d, as Vital tends to be conservative in their outlooks.
• After 2025 a steady production decline should set in.
• With limited reserves (453 M BoE) and a moderate RRR (0.66), I expect production to fall with 2-3%/year to 130-132 K BoE/d in 2029. See charts below.

Vital Q1 Production.jpg (51.23 KiB) Viewed 138 times

• Q1 fluids were 46% oil, 28% NGL and 26% gas.

Balance sheet
• The Vital balance sheet is not strong and needs reinforcement.
• The equity ratio (=equity/balance sheet total) was 47.0%, up from 45.9% late 2024; The equity ratio still is lowish.
• Debt is high following $ 880 M cash acquisition of Point Energy in 2024.
• Debt was reduced in Q1 with $ 144 M from $ 2,454 M (late 2024) to $ 2,310 M (Q1). Vital targets a reduction to $ 2,140 M by the end of 2025.
• The Q1 debt/EBITDA ratio on an annual basis is a highish 1.63.
• 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. I assume that debt needs to be reduced to $ 1.6-1.7 B before shareholder returns can start.

Profitability
• In 2025 Vital is a profitable company.
• Q1 adjusted eps ($ 2.37) was slightly below my expectation of $ 2.50 and above the adjusted $ 2.30 eps from Q4 2024.
• Realized gas prices remained positive and increased from $ 0.59/MM (Q4) to $ 1.38/MM Btu (Q1). The gas price was above my expectation of $ 1.16/MM Btu
• In 2025 > 90% of the oil is hedged at prices of $ 67-74/bbl. In 2026 hedging falls to 17% of the oil volume.
• Q1 realized hedging gains ($ 20.7 M) contributed significantly to the $ 89.5 M adjusted profit.
• For 2025, with WTI = $ 60-65/bbl, I expect an eps of $ 7.29-7.35 (PE = low 2.3).
• After 2025, with a declining production and limited hedging the eps will fall. The eps can fall to $ 1.67-3.87 and the PE from 4.4 – 10.2. See charts below.

Vital Q1 Profit.jpg (49.09 KiB) Viewed 138 times

• Vital is not robust under low oil prices of $ 55-60/bbl, but has attractive profits at $ 65-70/bbl oil prices.

Impairments
• Due to falling energy prices Vital took in Q1 a non-cash impairment of $ 158.2 M. The impairment is a consequence of unamortized cost of evaluated oil and natural gas properties being depleted exceeding the full cost ceiling.
• Vital has indicated that if oil prices stay low, in Q2 another impairment of $ 200-400 M will have to be taken, with possible additional impairments in H2.

Shareholder returns
• Vital shareholder returns are highly dependent on future oil prices.
• Regardless of the oil price, in view of the balance sheet, shareholder returns in 2025 -2027 are unlikely.
• Shareholder returns can start in 2028 at levels of 4-5%.if the oil price is $ 70/bbl.
• With lower oil prices the FCF will be limited or even negative. The low/negative FCF can delay shareholder returns with WTI= $ 55-65/bbl indefinitely. See charts below.

Vital Q1 returns.jpg (44.59 KiB) Viewed 138 times

Conclusions
Vital reported Q1 results close to expectation with an impairment as a negative surprise. Production was as expected and soon will start a steady decline. The balance sheet is weak, needs reinforcement and does not allow shareholder returns. Q1 profit was close to expectation. Profits in 2025 will be good thanks to extensive hedging, but after 2025 will start to decline. Short-term, shareholder returns are unlikely. Long-term, shareholder returns are highly dependent on the oil price and FCF.

With oil at $70/bbl or more. the eps, PE and shareholder returns are good and Vital is an attractive investment. With oil at $ 60/bbl or less Vital is not robust.

At $ 62.50/bbl Vital ranks 30h in my ranking of 85 oil and gas companies.

[dan_s]

Harry:
> As we are seeing today in the futures market, I expect the WTI oil price to rebound as FEAR of recession, caused by the FEAR of the Tariff War fades. Team Trump will not force the world into a recession because it would be political suicide. They are going to wrap up the revised trade agreements with most countries by the end of Q2. Without a significant global recession, WTI will be back over $70/bbl by year end and probably average over $75/bbl in 2026 because U.S. oil production has peaked.
> The big bullish move will come when the Republicans FINALLY pass the Income Tax bill. If they do lower the top corporate tax rate to 15%, which is what I'm hearing is being discussed, the stock market will go way up. My WAG is a 1,000 point gain in the S&P 500 Index.
> Lowering the corporate income tax rate is the #1 thing that will get a lot of companies to move manufacturing back to the U.S. Lowering the individual income tax rates for most Americans will be like giving all workers a pay raise (this is what the Democrats fear the most because it will doom the party).
> The oil "Paper Traders" FEAR the OPEC+ quota increase, but it is becoming clear that the amount of addition physical oil supply coming to the market will be much less. More than half of the quota increase to adjust for actual production on the market from the OPEC cheaters.
> I also believe that a lot of Iranian oil will soon be coming off the market. Everyone knows that an agreement on paper with the Iranians to abandon their nuclear enrichment program is worthless. Israel, with support from the U.S. will bomb a lot of Iran's nuclear facilities within a few months. Regime change is coming to Iran.

Based on my updated forecast/valuation model. Vital's current share price is less than 1X my operating cash flow per share in 2025. TipRanks operating CFPS forecast is actually higher than my forecast.