Analysis of Vital Energy Q1 results

[Petroleum economist]

Vital reported mixed Q1 results. Production was above the outlook. The balance sheet is in flux. The profitability is sound, but costs were higher than expected. Shareholder returns are on the horizon.

Production
• Q1 production (124.7 K BoE/d) was above the outlook (117.5-122.5 K BoE/d).
• Production was 9.7% above Q4 (113.7 K BoE/d). Small acquisitions contributed 1.4 K BoE/d.
• Vital stated that the peak of 2024 production will be in H1. Q2 outlook (122-126 K BoE/d) and 2024 outlook, (116.5-121.5 K BoE/d) are in line with this.
• Vital has proven reserves of 405 M BoE, equivalent to 9.1 years of 2024 production (industry average = 9.5-10 years). This adequate for sustaining production, but insufficient for long term growth. Production in the period 2025-2030 therefor should be flat at 2024 levels.
• Fluid composition was 47% oil, 26% NGL and 27% gas, indicating a focus on liquids and a limited exposure to sustained low gas prices.
• Q1 composition (47/26/27) is not in line with reserves (39/30/39), meaning that production over time will become gassier.

Balance sheet
• The balance sheet is in flux.
• With the ongoing refinancing of $ 1.0 B 7.785% senior notes, long term debt temporarily increased $ 487 M to $ 2,097 M, while cash at hand increased by $ 409 M to $ 423 M. This mismatch will be rebalanced in the rest of 2024.
• Due to the non-cash hedging losses in Q1, the accumulative of the derivatives on the balance sheet was down -$ 127 M, impacting solvency.
• The value of assets on the balance sheet increased $ 136 M.
• As a result of above, solvency dropped from 54.1% (Q4) to 47.4% (Q1).
• With 100% of the free cash flow running towards the balance sheet and derivatives reducing, the solvency late 2024 should recover to a healthy 53-54%.
• At the end of 2024 expect a long-term debt of $ 1.4 B and a debt/EBITDA ratio of 1.3.
• The balance sheet does not allow shareholder returns during 2024. With an acceptable debt/EBITA and solvency in late 2024, shareholder returns can start in 2025.

Profitability
• Q1 cost were higher than expected. This was due to (1) higher expenses for chemicals and water disposal on acquired properties ($ 10 M) and (2) a once-off cost of $ 25.8 M for the $ 1.0 B senior note refinancing.
• Vital has increased its 2024 oil hedging to 91%, thus guaranteeing 2024 profits. Oil hedging for 2025 sits at 29%.
• Unit costs in 2024 are a medium $ 34.00/BoE. Interest payments contribute $ 4.00/BoE and should come down over time.
• Q1 net loss was -$ 66 M (eps $ 1.24). The net loss included -$ 143 M non-cash hedging losses. I exclude these, as I take them in as cash hedging results in the rest of 2024, 2025 and 2026.
• The adjusted eps ($ 1.84) was below the analysts’ average expectation ($ 1.94), mainly due to the higher costs.
• For 2024 (WTI = $ 80-85/bbl) I expect a net profit (excluding non-cash hedging losses) of $ 345-350 M (eps = $ 9.10-9.20). The PE is a medium low 5.8.
• Due to higher gas and NGL prices, the eps in 2025/2026 can increase to $ 12.20 – 13.70 (PE =3.9-4.4).

Shareholder returns
• Vital will pay no dividends or buy back shares in 2024.
• With the improved balance sheet late 2024, shareholder returns can start in 2025.
• With 40-50% of the free cash flow routed to shareholders, returns in 2025can be $ 3.20-4.50 per share, equivalent to a yield of 6-8%.
• After 2025 returns can increase.

Conclusion
Vital is an attractive investment with a low PE, upcoming shareholder returns and reasonable risk profile.

In my project ranking of seventy-two companies, Vital slipped from 4th to 5th place, as I took in the higher operating costs and lowered my production forecast for 2024/2025. Sitting in the top ten, indicates that Vital Energy has lots of upside.

[Cliff_N]

Question: I used the consensus estimate off Yahoo Finance of EPS 1.94, but then found Zacks reported a new "consensus" of a lower estimate of $1.78, hence my post:

EPS Beat was $1.84 a surprise of 3.3% over the expected $1.78.

Is there a reliable source that the street worships prior to earning reports?

From Zacks:

Vital Energy (VTLE Quick QuoteVTLE - Research Report) came out with quarterly earnings of $1.91 per share, beating the Zacks Consensus Estimate of $1.78 per share. This compares to earnings of $4.50 per share a year ago. These figures are adjusted for non-recurring items.

This quarterly report represents an earnings surprise of 7.30%. A quarter ago, it was expected that this oil and natural gas company would post earnings of $2.44 per share when it actually produced earnings of $2.55, delivering a surprise of 4.51%.

Over the last four quarters, the company has surpassed consensus EPS estimates three times.

Vital Energy, which belongs to the Zacks Alternative Energy - Other industry, posted revenues of $482.34 million for the quarter ended March 2024, surpassing the Zacks Consensus Estimate by 6.02%. This compares to year-ago revenues of $332.51 million. The company has topped consensus revenue estimates three times over the last four quarters.

The sustainability of the stock's immediate price movement based on the recently-released numbers and future earnings expectations will mostly depend on management's commentary on the earnings call.

Vital Energy shares have added about 17.8% since the beginning of the year versus the S&P 500's gain of 8.8%.

Thanks

Cliff

[Petroleum economist]

I never bother too much with analysts' estimates. Those I quote in my posts originate from Yahoo. Zacks estimates may very well be different.

I do not like analysts' estimates, as I have no clue on (1) what oil/NGL, gas price they are based, (2) what is included and what not and (3) how up to date they are.

I make my own estimates, done in a similar way as those from Dan. I share my estimates with Dan.
I prefer to use my own estimates because:
- I know they are based on the same oil/NGL/gas reference price for all companies, albeit with different deltas to the realized prices.
- I know they are compiled on a similar basis (e.g. excluding non-cash hedging, including cash hedging).
- I have early updates.

I know from experience that consistency is important if you want to compare stocks for investing selection. Absolute accuracy (does not exist anyway) does not matter that much.

[dan_s]

Cliff;
My opinion is that Vital doesn't get the coverage it deserves because it has such a small number of shares outstanding, just 36,661,000 at 3/31/2024. That's low for a company of this size, over 124,000 Boepd.
Low share count = high volatility as small changes in a forecast model can have a big impact on stock price target. Analysts therefore tend to be very conservative on their price targets. Plus, the low share count keeps large funds from buying the stock. Big funds want stocks with high trading volume.

TipRanks as of today: "In the last 3 months, 9 ranked analysts set 12-month price targets for VTLE. The average price target among the analysts is $61.38. The 9 price targets range from $42 to $96." < That is a very wide gap for a company of this size.

The $42 price target is from Bank of America. It is the oldest PT in the TipRanks database and it will drop out of their consensus average soon; I prefer TipRanks over First Call (Reuters) because TipRanks only includes reports which are within the last 90 days.

The good news is that most recent price target update is $96 that is dated today (5/9/2024) from Gabriele Sorbara, a highly regarded energy sector analyst at Siebert Williams Shank & Co. Gabriele has held a 5-Star rating by TipRanks for many years.

Vital's current share price is below book value. There is nothing to justify the current share price.

[dan_s]

Josh Young at Bison Energy wrote an article about Vital on 2/26/2024 that concluded that VTLE had over 300% upside when compared to what Diamondback Energy has paid for Permian Basin acquisitions.

I agree with Josh that Vital Energy is a screaming takeover target. It is a pure play on the Permian Basin.