Vital Energy (VTLE) Update - Jan 27
Posted: Fri Jan 27, 2023 10:36 am
Vital Energy (renamed from Laredo Petroluem) is getting a little love from Raymond James notes below. They raised their price target $5 to $68. My valuation of $117/share is just 2.5 X annualized operating cash flow per share.
Thoughts on the Quarter
4Q22 Outlook: Vital pre-released production estimates for the fourth quarter that came in well above expectations at 35.5 bmo/d and 77.5 mboe/d while maintaining their capex range of $135-145M. Looking ahead to 2023, Vital has already expressed plans to add another completion crew for the first half of 2023, meaning total capex (RJe $653M, Street, $655M) will be weighted towards the first half of the year with production ramping in the back half.
RECOMMENDATION
We are encouraged by Vital’s shift in focus to capital returns as well as debt reduction, but operational setbacks each of the past few quarters certainly gives us pause. At the current strip we believe buybacks may be off the menu as the company will likely focus on debt reduction in a sub $90/bbl price environment. VTLE is still valued at an incredibly low 2.5x 2023 EV/EBITDA and set for a 17% FCF yield in 2023. The valuation remains compelling despite the recent setbacks, likewise we reiterate our Outperform rating, and raise our target price to $68/share on model adjustments.
VALUATION
Our new $68 target price is based on a discounted cash flow model. We believe a DCF approach is the most appropriate method of valuing E&Ps given the industry’s focus on free cash flow and shareholder returns. We used a higher 15% discount rate given the small cap size.
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MY TAKE: As Raymond James points out, this Company has had some operational "issues" and a very low share count (just 16.9 million shares outstanding) which causes wild swings in the share price, frightening many investors. If they can just show steady production growth this year, investors will focus more on the fantastic numbers ($34 Net Income per share and $47 operating cash flow per share in 2022). My 2023 forecast is 81,000 Boepd, Net Income of $395 million ($23.78/share) and operating cash flow of $773 million ($46.55/share). VTLE will be one of the most profitable companies in the Sweet 16 on a per share basis this year.
Thoughts on the Quarter
4Q22 Outlook: Vital pre-released production estimates for the fourth quarter that came in well above expectations at 35.5 bmo/d and 77.5 mboe/d while maintaining their capex range of $135-145M. Looking ahead to 2023, Vital has already expressed plans to add another completion crew for the first half of 2023, meaning total capex (RJe $653M, Street, $655M) will be weighted towards the first half of the year with production ramping in the back half.
RECOMMENDATION
We are encouraged by Vital’s shift in focus to capital returns as well as debt reduction, but operational setbacks each of the past few quarters certainly gives us pause. At the current strip we believe buybacks may be off the menu as the company will likely focus on debt reduction in a sub $90/bbl price environment. VTLE is still valued at an incredibly low 2.5x 2023 EV/EBITDA and set for a 17% FCF yield in 2023. The valuation remains compelling despite the recent setbacks, likewise we reiterate our Outperform rating, and raise our target price to $68/share on model adjustments.
VALUATION
Our new $68 target price is based on a discounted cash flow model. We believe a DCF approach is the most appropriate method of valuing E&Ps given the industry’s focus on free cash flow and shareholder returns. We used a higher 15% discount rate given the small cap size.
---------------------------
MY TAKE: As Raymond James points out, this Company has had some operational "issues" and a very low share count (just 16.9 million shares outstanding) which causes wild swings in the share price, frightening many investors. If they can just show steady production growth this year, investors will focus more on the fantastic numbers ($34 Net Income per share and $47 operating cash flow per share in 2022). My 2023 forecast is 81,000 Boepd, Net Income of $395 million ($23.78/share) and operating cash flow of $773 million ($46.55/share). VTLE will be one of the most profitable companies in the Sweet 16 on a per share basis this year.