Vital Energy and its solvency
Posted: Fri Apr 19, 2024 1:08 pm
Vital Energy (formerly Laredo) has demonstrated in 2023 that its priority is its balance sheet. The acquisitions of Driftwood, Maple, Henry, and Tall City were paid for mostly in shares. This diluted the earnings per share, but boosting the solvency. In view of its history in the last 10 years the Vital focus on the balance sheet is quite logical.
2015-2016
In 2015/2016 the oil price had collapsed from $ 95-100/bl to $43-48/bbl. This led for Vital/Laredo to major impairments. Consequently, Vital/Laredo ended up with dodgy balance sheets (solvencies 6-10%) and only just survived. Production at the time was 18 K BoE/d.
2016-2019
With oil prices recovering to $ 60-65/bbl, Vital/Laredo managed to improve its solvency by late 2019 to 48.5%. These were the days of “drill baby, drill” and acquisitions. Production increased massively (factor 4.5) from 18 K BoE/d to 80-85K BoE/d.
2020-2021
In 2020 the oil price collapsed once more (Corona) and fell to $ 30-35/bbl. This lead again to massive impairments: $ 629 M (2019 report) and $ 899 M (2020 report). Equity late 2021 was -$ 21 M and the solvency a miserable-1.5%. Vital/Laredo was very close to a chapter 11.
2021-2022
Vital/Laredo survived the 2021 dip and tightened its belt. With good cash management, a flat production (78-85 K BoE/d) and oil prices recovering to $ 65-95/bbl, Vital/Laredo managed to gradually restore its solvency. By late 2022 solvency has improved to a still lowish 40.7%.
2023
In early 2023, with (1) a lowish solvency, (2) a lowish free cash flow and (3) a high debt/EBITDA ratio, Vital must have realized that it would not be able to afford shareholder returns for some years to come. The money invested in Vital was “trapped”.
To get out of this trap, the strategy changed. Vital acquired Driftwood, Maple, Henry and Tall City, mostly paying with shares. The number of shares more than doubled - from 16.4 M (late 2022) to 35.4 M (late 2023). The earnings per share were diluted.
However more important, the acquisitions improved the balance sheet. The solvency increased from the lowish 40.7% (late 2022) to a reasonably good 54.1% (late 2023).
Production grew from 78 K BoE/d (Q4 2022) to 114 K BoE/d (Q4 2023). Reserves grew from 302 M BoE (2022) to 405 M BoE (2023).
2024
Vital has hedged for 2024 92% of its oil production. Through the hedging, the 2024 free cash flow is virtually guaranteed to be around $ 280 M. With the 2024 free cash flow directed towards the balance sheet, solvency by late 2024 can improve to a very good 60%. The 2024 debt/EBITDA ratio can end as an acceptable 1.02.
Some minor acquisitions in 2024 (the possibility has been indicated by Vital), will not change this overall picture, provided they are paid for at least by 50% in shares.
The 2024 eps is estimated to be $ 11.40 and the PE will be a low 4.9.
2025
At the start of 2025, the balance sheet will have been restored and Vital can consider the start of shareholder returns.
Vital has sufficient reserves for the production from 2025 onwards to grow with 3-4% per year, increasing the eps in 2025/2026 to $ 14.00-1500. The PE can drop close to 4.0.
The combination of a solid balance sheet, a growing production and a low PE make Vital Energy earl 2025 a very attractive investment.
2015-2016
In 2015/2016 the oil price had collapsed from $ 95-100/bl to $43-48/bbl. This led for Vital/Laredo to major impairments. Consequently, Vital/Laredo ended up with dodgy balance sheets (solvencies 6-10%) and only just survived. Production at the time was 18 K BoE/d.
2016-2019
With oil prices recovering to $ 60-65/bbl, Vital/Laredo managed to improve its solvency by late 2019 to 48.5%. These were the days of “drill baby, drill” and acquisitions. Production increased massively (factor 4.5) from 18 K BoE/d to 80-85K BoE/d.
2020-2021
In 2020 the oil price collapsed once more (Corona) and fell to $ 30-35/bbl. This lead again to massive impairments: $ 629 M (2019 report) and $ 899 M (2020 report). Equity late 2021 was -$ 21 M and the solvency a miserable-1.5%. Vital/Laredo was very close to a chapter 11.
2021-2022
Vital/Laredo survived the 2021 dip and tightened its belt. With good cash management, a flat production (78-85 K BoE/d) and oil prices recovering to $ 65-95/bbl, Vital/Laredo managed to gradually restore its solvency. By late 2022 solvency has improved to a still lowish 40.7%.
2023
In early 2023, with (1) a lowish solvency, (2) a lowish free cash flow and (3) a high debt/EBITDA ratio, Vital must have realized that it would not be able to afford shareholder returns for some years to come. The money invested in Vital was “trapped”.
To get out of this trap, the strategy changed. Vital acquired Driftwood, Maple, Henry and Tall City, mostly paying with shares. The number of shares more than doubled - from 16.4 M (late 2022) to 35.4 M (late 2023). The earnings per share were diluted.
However more important, the acquisitions improved the balance sheet. The solvency increased from the lowish 40.7% (late 2022) to a reasonably good 54.1% (late 2023).
Production grew from 78 K BoE/d (Q4 2022) to 114 K BoE/d (Q4 2023). Reserves grew from 302 M BoE (2022) to 405 M BoE (2023).
2024
Vital has hedged for 2024 92% of its oil production. Through the hedging, the 2024 free cash flow is virtually guaranteed to be around $ 280 M. With the 2024 free cash flow directed towards the balance sheet, solvency by late 2024 can improve to a very good 60%. The 2024 debt/EBITDA ratio can end as an acceptable 1.02.
Some minor acquisitions in 2024 (the possibility has been indicated by Vital), will not change this overall picture, provided they are paid for at least by 50% in shares.
The 2024 eps is estimated to be $ 11.40 and the PE will be a low 4.9.
2025
At the start of 2025, the balance sheet will have been restored and Vital can consider the start of shareholder returns.
Vital has sufficient reserves for the production from 2025 onwards to grow with 3-4% per year, increasing the eps in 2025/2026 to $ 14.00-1500. The PE can drop close to 4.0.
The combination of a solid balance sheet, a growing production and a low PE make Vital Energy earl 2025 a very attractive investment.