Vital acquires 80% of Point Energy – a good acquisition, but shareholder returns delayed.

[Petroleum economist]

Introduction
At the end of Q3 Vital Energy will acquire 80% of the Point Energy assets in the Delaware basin. The 18,300 acres are located close to the Vital assets in West Texas. Vital pays $ 880 M (adjusted $ 820 M) for 60.6 M BoE reserves and a Q4 production of 15.5 K BoE/d.

Summary
It looks like Vital made a good acquisition. The acquisition increases the reserves base and allows production to grow. The balance sheet initially will deteriorate, but will recover quickly. The start of returns to shareholders will slip one year (from 2025 to 2026). Returns from 2026 onwards will be very high. The net profits will increase and the PE ratio will drop to very low level.
Shareholder will be disappointed with the delayed returns. The share price initially may drop (it usually does after an acquisition), but then should recover. The drop can be a good buying opportunity.

Reserves
• Point Energy adds 60.6 M BoE to the Vital proven reserves of 404.9 M BoE, increasing the total reserves to 471.5 M BoE. This is assuming that 2024 bookings will replace the 2024 production.
• The increased reserves increase to 8.2 years of 2025 production, still below industry average of 9.5-10 years.
• The increased reserves allow a short term (2025-2028) minor growth of production.

Production
• Without Point Energy, production till 2028 would have been flat at 122 K BoE/d.
• With Point Energy added, production can grow with a moderate 1%/year to 140 K BoE/d in 2028.
• The oil content of Point Energy fluids (64%) is considerable higher than that of Vital (47%).
• Oil content of the combined fluids should increase from 47% to 49%.

Balance sheet
• The $ 820 M, to be paid in late 2024, will deteriorate the balance sheet, as it increases debt.
• Solvency in Q1 was 49.4% with a long-term debt of $ 2,097 M.
• Without Point Energy, Vital would have ended up late 2024 with a debt of around $ 1,860 M and a decent solvency of 53.5%. This would have triggered shareholder returns in 2025.
• With the extra $ 820 M for Point Energy, debt will be $ 2,480 M and solvency is reduced to a mediocre 46.3%. This will delay shareholder returns until 2026.
• 2024 debt/EBITDA ratio will be a too high 1.9.
• Vital expects to have the ratio down to an acceptable 1.3 in 12 months. Solvency late 2025 should be restored to an acceptable 53%.
• By late 2025 the balance sheet health is restored and allows shareholder returns

Profitability
• Interest payments will increase due to the extra debt. Assuming $ 820 M @ 8%, interest payments will increase with $ 66 M on an annual basis. Also, depreciation, operating cost and transportation costs will increase.
• The break-even price of Point Energy assets is quoted as < $ 50/BoE. Assuming this is discounted at 10%, this should be <$ 35/BoE undiscounted, close to the Vital unit costs of $ 34.38/BoE. Unit costs thus should stay flat.
• As the oil content increases, Vital will become less sensitive to fluctuations in gas prices.
• Vital announced in July increases to their 2025 oil hedging positions. 2024 positions are unchanged
• Vital now has 10.6 M bbl (41.7%) of the 2025 oil hedged, all in swaps at $ 75.00- 75.39/bbl. This is well below the > 90% hedging levels of 2024.
• With WTI=$ 80-85/bbl, the eps in 2024 will rise $ 0.60 to $ 10.10-10.15 (PE=4.3). In 2025 the eps can rise by $ 2.00 to $ 14.15-15.90 (PE= 2.7-3.1).

Shareholder returns
• With the deterioration of the balance sheet, shareholder returns will be delayed until early 2026.
• Assuming a 50% of the FCF targeted for shareholders, I can see share buybacks of $ 240 M/year, equivalent to a yield of 14.5%.

Conclusions
It looks like Vital has made a good acquisition. Reserves and production increase. The balance sheet deteriorates, but will recover quickly. The eps will increase, and a PE ratio will drop.
Shareholder will be disappointed with the delayed returns in 2025 and the share price initially may drop. A drop can be a good buying opportunity.

In my oil and gas company ranking Vital jumps from 9th to a high 5th (out of 80). We will have an EPG webinar on ranking coming Friday, explaining how it works. Attend if you are interested.