Vital Energy Low Valuation

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Roadster
Posts: 85
Joined: Tue Dec 14, 2010 7:34 pm

Vital Energy Low Valuation

Post by Roadster »

Vital Energy (VTLE) Low Valuation

Merger mania in the Permian basin continues with the $600+ million acquisition of a private oil company by a publicly traded oil & gas producer. Callon Petroleum (NYSE: CPE) is buying Permian assets from Percussion Petroleum while selling non-core Eagle Ford shale assets to Ridgemar Energy, both backed by the private equity firm Carnelian. This transaction dynamic is reminiscent of the recent deals between Ovintiv (NYSE: OVV) and the private equity firm EnCap, which set a recent high marker for Permian transaction valuations.

Callon Acquisition and Implications

Callon is buying 14,100 boe/d of production (70% oil), for a consideration valued at $475MM at the time of announcement, including cash and stock. In this transaction, Callon is also assuming some of the existing contingent liabilities of position: absolute;2.5MM for 2023, as well as $25MM for 2024 and 2025 if oil prices average $60+/bbl. Also, sources indicate that Callon is assuming liabilities in this transaction including out of the money commodity price hedges, which we estimate at $75MM:


After relevant transaction adjustments, Callon is paying $43,000 per boe/d, a healthy valuation which is reflective of improving transaction multiples:


It is worth noting that CPE likely paid a higher price for these Permian assets to add to quality inventory, adding 80 net operated drilling locations with a mid-range breakeven price of $52/bbl.

Implications for Vital Energy
This Permian transaction reads-through well for Vital Energy. Vital has similar but larger assets, that are valued in the public market at a fraction of the price implied by this transaction. We estimate that this transaction implies 100% upside for Vital Energy based on management’s 2023 production guidance, which has been conservative recently:


$43,000 per boe/d is on the low end of the rising transaction value trend for oil & gas production assets in the Permian basin. While it is not the highest value recent deal, it is continuing the rising price trend, and indicates a hot market with numerous potential buyers for these assets. Factors including limited inventory, a history of legacy low performing wells, and comparatively small asset size at 14,100 boe/d may have contributed to this lower deal valuation. It is noteworthy that Vital is much larger than Percussion but is otherwise similar in many respects, making this a relevant deal “comp” that could represent the low end of a reasonable value expectation range in a sale. With more inventory and a larger size, Vital might sell for more than a 100% premium.

While deal valuations at $43,000 per boe/d are healthy, they are nowhere near the high end of deal valuations we’ve seen recently. and it helps that valuation multiples in private/public oil deals are rising. As such, this is meant to illustrate a base case for Vital at the current valuation. Additionally, this may represent the value of Vital’s assets to a potential acquirer like Callon.

Conclusion/Takeaways
It is worth noting that there are still many publicly traded, smaller capitalization oil equities that are currently trading at lower multiples than that implied by this and other recent transaction, despite having similar assets. Even at reasonable mid-cycle valuations, the premiums implied in these transactions offers potential significant upside, likely due to depressed public market valuations and numerous funded bidders. This seems particularly true for Vital, which screens cheap even against heavily discounted small cap peers.
dan_s
Posts: 34570
Joined: Fri Apr 23, 2010 8:22 am

Re: Vital Energy Low Valuation

Post by dan_s »

I have an interview at 1PM CT and then I will focus on updating my valuation of VTLE. My valuation will be over $100/share.

Vital Energy is likely to be the most profitable company in the Sweet 16 for the 2nd year in a row.

We discussed Vital at yesterday's luncheon and how little coverage it gets for such a profitable company.

TipRanks: "In the last 3 months, 5 ranked analysts set 12-month price targets for VTLE. The average price target among the analysts is $72.80." The five price targets range from $53 to $110.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34570
Joined: Fri Apr 23, 2010 8:22 am

Re: Vital Energy Low Valuation

Post by dan_s »

I decided to finish the SilverBow profile first. Vital will be next.
Dan Steffens
Energy Prospectus Group
knusser58
Posts: 63
Joined: Wed Feb 22, 2023 7:39 am

Re: Vital Energy Low Valuation

Post by knusser58 »

Dan, by when shall you update Ring Energy? Seems to stay at the lower end of prices even though it had good results and trades at very low multiples. Regards, Klaus
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