Energy Prospectus

Vital Energy is the only company in the top 10 of my oil and gas companies ranking, whose share price has fallen in 2024. Where the top 10 on average are up 16.6%, the Vital Energy share price is down –21%. The massive shorting of Vital (27-30% of the float) may be one of the reasons for this.

After the Point Energy acquisition, various analysts lowered their price targets for Vital. In view of this I decided to see if my ranking of Vital is not too optimistic. I checked a couple of ratios to establish if the stock price of Vital looks low or high.

Vital in ranking
• I do not set price targets for stocks. I pick my stocks based on the ranking (I owe all the top 14 stocks). Vital currently ranks 2nd.
• I checked the effect of a higher share price on the Vital ranking.
• With a share price = $ 60, Vital still sits at a high 19th position, and with a share price = $ 70 at a good 31st position.
• Based on ranking an increase of the Vital share price to $ 60-70 is realistic. Call it a price target if you want.

Ratio Enterprise value (EV) and proven reserves
• Enterprise value is the sum of a company's market capitalization plus long-term/short-term debts, minus cash/cash equivalents on hand.
• For Vital (excluding Point Energy) the EV is $ 1,370 M + $ 2,427 M - $ 312 M = $ 3,585 M.
• Late 2023 Vital had proven reserves of 404 M BoE.
• Based on the EV and the proven reserves, the reserves are only valued at 3,585/404 = $ 8.87/BoE. This is very low compared with industry. where the value is typically $ 15-20/BoE.
• If I add the $ 820 M for the Point Energy acquisition to the EV and 60.5 M BoE to the reserves, then the EV/reserves ratio goes up from $ 8.87/BoE to a still low $ 9.47/BoE.
• The EV/reserves ratio indicates that the share price of Vital is low.

Enterprise value versus production
• Taking the EV of $ 3,585 M and dividing it by the 2024 production rate (121 K BoE/d), I get a ratio of 3,585/121 = $ 29.6 M/1,000 K BoE/d.
• Adding in Point Energy (+14 K BoE/d) the ratio goes up (3,585+820)/(121+14) = $ 32.6 M/1,000 BoE/d.
• Acquisitions are done in the range of $ 40-70 M/1,000 K BoE/d.
• The EV/production ratio indicates that the share price of Vital is low.

Equity per share versus share price
• The Vital equity mid 2024 is $ 2,825 M.
• With 38.165 M basic shares in Q2 2024, this gives an equity per share of $ 74.31/share.
• The $ 74.31 is more than twice (207%) the current share price.
• The normal ratio is 60-80%.
• The equity per share/share price ratio indicates that the share price of Vital is low.

Conclusions
It the Vital share price would increase to $ 60-70, it still would rank well. The ratios of EV/reserves, EV/production and the equity per share/share price all indicate that the share price of Vital is low.

Vital is undervalued and deserves a higher share price.

Always question the narrative.
Have any of you considered what happens if bullish narrative is flat out wrong?

VTLE new one year low at 33.70.

"Based on the EV and the proven reserves" - Proven reserves don't get mark to market. They are stale numbers.

Be careful using proven reserves. Reserves were calculated on numbers derived at year end 2023 which were derived by using first day pricing during 2023.

I expected "proven reserves" will fall for all energy companies when they are recalculated YE 2024.

The gassers will be hammered. As pointed out by Aegis WAHA pricing has been negative for most of the year. Crude is down too. What are ng reseres at Waha worth when you have to pay someone to take it?

Inflation is up, which means costs are up. Costs up, with prices falling , means lower cash flows and lower cash flows mean lower reserve valuationss

Of course the perma-bulls will say it's only an Accounting charge, not real, and worst of all a "non cash" IMPAIRMENT

You know why its called non cash ? Because the cash was already spent.

That doesn't show up in models that ignore cap ex. Take operating cash flow and put a mark up on it.

I'm old fashion, I don't like Impairments

Bill, thanks for the comments. A few observations.

Reserves/EV and production ratios
• My observations on proven reserves/production ratios and proven reserves/EV ratios are based on comparing Vital with other oil and gas companies.
• If lower energy prices would result in de-bookings and impairments, than this not only applicable to Vital, but also to the other companies.
• Thus, the comparison of Vital on proven reserves/production and reserves/EV with others in general will not change.

Proven reserves-de-bookings and impairments
Your “I expected "proven reserves" will fall for all energy companies when they are recalculated YE 2024”
• The energy prices utilized for reserves reporting are based on the average price on the first of each month.
• I do not track the oil and gas prices for the first of each month, but if I look at average WTI oil prices then I see for 2023 an average price of $ 77.61/bbl and for 2024 to-date a price of $ 78.41/bbl.
• Even if the oil prices in the rest of 2024 would be around $ 70/bbl, then oil prices for reserves in 2024 should not deviate significantly from 2023.
• Thus, in general there should be no major oil reserves de-bookings, including Vital.
• I agree that gas companies will be more liable to de-bookings, although the biggest gas price drop happened between 2022 and 2023 and not between 2023 and 2024.
• Vital gas is mostly associated gas. If the oil reserves are not de-booked then the gas will not be de-booked either.
• Note that the C$ 59.2 M impairment of Surge in 2024 was gas related. It is an impairment for the Northwest Alberta Gas Conditioning Unit (GCU).
• I agree with your “I do not like impairments”. I do not like impairments either, but I do not foresee any for Vital.

Vital share price
• The Vital share price fell yesterday by -6.8%, while the average oil and gas companies lost on average -3.9%.
• The logic is missing. Vital has the most oil price hedges of all oil companies - 92% in H2 2024 and 41% in 2025.
• With a fall in oil prices the Vital share prices should fall less not more than other companies.
• I think the Vital share price fall is due to a negative sentiment (better sell now before it falls even lower). The sentiment is encouraged by the shorts (27.2%) in Vital.
• We all know that emotions (fear and greed) are bad investment advisors. I expect that the sentiment in due course will turn as common sense will prevail.
• If you believe that oil prices will continue to fall (I do not believe that) and that gas prices will stay low (I do not believe that either), then maybe you should not invest in ten oil and gas sector.
• If you believe in decent oil and gas prices, then Vital looks like a good investment compared with other oil and gas companies.

VTLE new low achieved again. At some point this will be a huge bargain.

The current situation reminds me of the expression "“Can’t See the Forest for the Trees”

We can study data , talk about the future, OCF, markups on OCF, the importance of energy in our society, tightness, loseness, Ducs, running room, smart people. Bottom line is price stink. Too much supply and prices are falling.

The main thing that matters for our beloved energy names is net realizable prices. Lower crude and NG prices means lower stock values. All of 2024 gains have been given up. Names are at all time lows, cash flows will suffer, this is a cyclical business

I'm out of everything until prices improve.

Tech appears to be rolling over as well as retail names. You have the possibility of Harris running the country. Very, very concerning. Focus on big picture. See the forest!

Opec + will not increase production until prices are higher

Another new low

What a ride from 63 to 29! Pitiful!

2x.xx

29 might not hold, here comes 28!!!

What a wonderful bargain! I bet you aren’t buying despite the 100 TP

This stock hasn't been this price since March 2021. Set up for a takeover?

Update of the ranking model
I have included in this week presentation on the ranking model a slide, trying to explain why the oil price dropped. I think the oil price fall is overdone, but I know: the market is always right.

I have updated the ranking model with the latest oil, NGL and gas prices. This brings the model in line with the current situation. I also lowered shareholder returns, as the FCF reduces with lower oil prices, thus having less funds available for shareholder returns. For certain companies (including Vital) I had to delay the start of the returns.

Impact of energy prices on Vital
• The impact of lower energy prices on the eps of Vital drop is limited in 2024 (due to the hedging), clearer in 2025, and is significant in 2026 onwards.
• The Vital eps as a function of the old and new oil price scenarios are shown below:
o $ 75.00/bbl: 2024 - $ 8.05, 2025 - $ 12.58, 2026 - $ 13.40, 2027 - $ 13.99, 2028 - $ 14.65
o $ 68.16/bbl: 2024 - $ 7.42, 2025 - $ 9.96, 2026 - $ 9.48, 2027 - $ 10.40, 2028 - $ 11.15

Ranking of Vital Energy
• The Vital share price ended this week at $ 28.40, a fall of -21%, far more than the average oil and gas shares (-7.3%).
• The -21% drop was the biggest fall of all oil and gas companies last week.
• As Fraser and Aja pointed out, the Vital share price is now at the lowest point for a long time.
• I paid special attention in the ranking to Vital Energy, double checking all the assumptions.
• After all the changes in the model on share prices, energy prices and shareholder returns, Vital still ranks the same as last week: a very high no 2.
• The 2024 PE is a low 3.8 and will fall to a very low 2.5 in 2028.
• The start of shareholder returns is delayed from 2026 to 2027, but once the returns are started, they can range from 15-17%.
• If I increase the share price Vital to $ 50, Vital still ranks a high 17th. At $ 60 Vital is a good 28th and at a share price of $70 Vital becomes an average ranking 37th.

Conclusion
I think the sell-off of Vital is way overdone. I am holding on to my Vital shares and will wait patiently until the share price recovers.

VTLE is a "Head Scratcher".

I agree with Harry that the oil price drop is overdone and out of whack with the fundamentals.
> U.S. and OECD Petroleum inventories are tight, below normal for this time of year.
> FEAR of a China recession is ignoring the increased oil demand coming from India.

There is a wide range of opinions among the energy sector analysts on this stock.
TipRanks: "In the last 3 months, 12 ranked analysts set 12-month price targets for VTLE. The average price target among the analysts is $54.67. The 12 price targets range from $38 to $83."

VTLE is trading now at less than 40% of book value. I cannot recall ever seeing a profitable upstream company trading at such a deep discount to book value. Plus, it is a pure play on the Permian Basin and the Company's oil hedges significantly lower their exposure to the recent dip in WTI.

BTW they will have a big non-cash gain on their hedges in Q3, so reported Net Income will exceed First Call's EPS forecast.

Questions regarding Vital's debt.

Their 8/7/24 presentation (https://investor.vitalenergy.com/static-files/24984e60-381c-4c54-a1c6-d4fa5c627480), slide 9, shows a "borrowing base" of $1.5 billion (pro forma the Point acquisition). It also shows an "elected commitment" of $1.5 bn. These appear not to count an additional total of $1.6 bn in senior debt.

Does the "elected commitment" of $1.5 bn mean that they have fully drawn their credit facility of $1.5 bn? If so, does that mean that they have a total of $3.1 bn in debt? How would the market view that amount of debt for this company, especially if they have fully drawn their credit facility?

Regarding their credit facility, is that recalculated every six months? If so, if the price of oil when the credit facility is next recalculated has declined from when it was last calculated, would that mean that the borrowing base could decline, say, to $1.25 bn? If so, and if they have fully drawn the $1.5 bn, would a lowering of the borrowing base to $1.25 bn mean that they must within a short time come up with the difference, in this example, $250 mm, and pay that $250 mm to the lender(s) of the credit facility in order to avoid some type of default? Would they have to sell assets (at perhaps fire sale prices) in order to come up with the difference?

Do the covenants of their senior debt come into play, that is, restricting them from selling assets without the lender's permission, so that they might not have any way of coming up with the hypothetical $250 mm? If so, what, as a practical matter, would then happen?

Hopefully my interpretations and assumptions implicit in the above are incorrect.

Any help in understanding the situation would be sincerely appreciated.

I am an economist and not a financial expert. Your knowledge of credit facilities apparently to go deeper than mine. However, I will give it a shot.

As per the Q2 balance sheet Vital had a long-term debt of $ 1,662 M. This equates roughly to the $ 1.600 M senior notes due in 2029, 2020 and 2032 and leaves $62 M to sit under the Credit facility.
The suggestions that Vital would have a debt of $ 3.1 B I cannot reconcile. Total debt should be about $ 1,662 (Q2) + 820 (point) = 2.482 M and not $ 3.1 B.

The slide 9 also shows the $ 1.5 B credit facility as a figure, with $ 90 M previous drawn (the $ 62 M from above and some sundries). On top of it comes the $ 820 M for Point Energy, leaving $ 590 M undrawn as shown in the figure.

As such I think Vital have not full drawn the $ 1.5 B credit facility and your doom scenario should not come true.

Further Vital has hedged 91.3% of the H2 2024 production at $ 77/bbl and 70.0% of the 2025 oil production at $ 74-75/bbl (also shown on slide 9 although not as a percentage).
A reduced oil price sin 2024 and 2025 will not hurt Vital that much. With the current oil price ($ 68.16/bbl), the FCF in H2 2024 and 2025 combined will be about $ 450 M, sufficient to significantly reduce the debt under the credit facility and thus preventing any possible future fire sales.

I see no real problems. Let me know if you think I have misinterpreted something.

Thank you, Harry, for the clarification.

After rereading the Q2 report and the presentation, I now understand that "elected commitment" refers to what the bank(s) had committed to lend (and here, what the bank has committed to increase upon closing of the Point acquisition), not what the company had drawn or plans to draw. I interpret their Q2 report thus to mean that as of June 30, they had drawn only $90 million on the credit facility and that they plan to draw an additional $820 million +/- to fund the Point acquisition, so that by YE they expect to have drawn $910 million of a $1.5 billion commitment.

Still unclear is the frequency with which the facility will be renewed. I have seen elsewhere, with other companies, that credit facilities are periodically reexamined, adjusted to reflect then-existing reserves and strip pricing, in some cases every six months, and am wondering whether in Vital's case, there will be such a process at some point after 2024 YE, perhaps based in part upon a YE reserve report and then prevailing strip (or other) prices. Hopefully, commodity prices will be high enough at YE and in 2025 (not the $60 WTI figure a few banks are now predicting) to support continuation of a $1.5 bn commitment (or at least a commitment above the anticipated $910 million draw), so as to avoid a liquidity problem.

Agree that the hedging program, recently increased, should help cushion effect of lower oil prices.

Thanks for your FCF estimate. Hopefully price of oil firms up and Vital's FCF for H2 2024 and 2025 will be at least $450 mm so that they can pay down the credit facility draw.

Just a guess, but perhaps the disproportionate share price weakness is related to the companies' leverage relative to that of other companies (if its leverage is higher than average) at a time when the price of oil is unstable to the downside.

Again, thanks for your clarifications.

From our recent profile on Vital. "At June 30, 2024, the Company had $90 million drawn on its $1.35 billion senior secured credit facility and cash and cash equivalents of $56 million. Upon closing of the previously announced acquisition of the assets of Point Energy, the elected commitment on the Company's senior secured credit facility will be expanded to $1.5 billion."

As previously announced, Vital will need $820 million in cash to close the Point Energy acquisition. They have more than enough liquidity to close the deal.

Vital has a high percentage of their oil production hedged, so the recent dip in the oil won't have much impact on the operating cash flow.

Even if WTI averaged $70 in 2025, they should generate approximately $1 billion of operating cash flow, net of interest expense.

PV10 value of just Vital proved reserves should be over $4.5 billion at 12-31-2024.

>"doom scenario"

What is the scenario called from $62 to 27 and new lows daily.

Wall Street doesn't like acquisition's at top of market pricing.

The so called "good hedges" don't last for the life of the assets obtained.

>PV10 value of just Vital proved reserves should be over $4.5 billion at 12-31-2024.

That mean 10 % return at prices assumed .

How did you arrive at 4.5b?? What if it is 2.5b? From that you have to subtract the debt of 2.5 b means 0 net worth

Bill, despite the falling Vital share price, I do not think it is time to head for the lifeboats.

I gathered from the SEC filing the data utilized for the book value calculation in 2023. I used the data to re-calculate (1) the impact of the current oil price and (2) the impact of the Point Energy acquisition. The calculations are shown in the figure below.

The book value of Vital depends on the discount rate you want to use. SEC provides details for 0%, 5%, 8%, 10%, 12% and 15% discounting. In the oil industry discount rates of 7-10% are normal. As 7% data are not available, I used 8% and 10%

Book value per share at 2023 energy prices:
• The 2023 book value per share for Vital (8-10% discounting, late 2023 long term debt $ 1,609 M, WTI= $ 78.22/bbl, without Point Energy) varies from $ 75 - 85 per share.
• With Point Energy included (debt up to $2,429 M), the book value varies from $ 75 - 89 per share
• Point Energy has a minor impact on the book value per share.

Book value per share at current energy prices:
• Using the current oil price ($ 68.00/bbl), the Vital book value (excluding Point Energy) drops to $ 47– 56 per share.
• With Point Energy included, the book value drops to $ 39-50 per share.
• Point Energy reduces the book value per share for Vital with $ 6-8 per share.
• If probable and potential reserves are added to the proven reserves and if the 2024/2025 hedges would be considered, then the book value can go up 10-15%.

Conclusions
• The book value of Vital is oil price dependent.
• Based on the current oil price, the book value of Vital is $ 39-50 per share, 49%-92% above the current share price of $ 27.36. This is excluding the 10-15% upside of probable/potential reserves and hedging.
• If the oil price jumps back to $ 78/bbl (which is what I expect) then the book value increases to $ 75-90 per share.
• Point Energy is not adding to the Vital book value per share, unless the oil price > $ 80/bbl.

I do not know the reason for the Vital share price fall. Vital is undervalued at current oil prices based on book values. It is not yet time to head for the life boats.

New lows day after day 26.50 today! weeeeeee

too many ifs for the positive case:

Why are we using 78?

What happens if crude is 65 or lower? How about 55?

PV10 means the cash flows are discounted at 10%. Using year end 2023 means you are using average prices for 2023 which were much higher than they are today.

The value of VTLE or anyone else is dependent on anticipated prices, leverage cap ex and resultant free cash flows

If a model is always wrong than adjustments need to me made to the model. Just my humble opinion

People have been wiped out when told to buy VTLE at 60

Frasier, since you seem to be such an expert, what price do you think should be used for oil in 2024, 2025 and 2026?

EIA's oil price forecast was updated on 9/10: "We expect the Brent crude oil spot price to average $82/b in 4Q24 and average $84/b in 2025."

See EIA's reasoning here: https://www.eia.gov/outlooks/steo/

Vital has over 90% of their 2H 2024 oil hedged at ~$77/bbl, so the recent oil price dip has minimal impact on my forecast. They also have over 60% of their 2025 oil production (my forecast since they have not provided 2025 guidance) hedged at $74.85.

Vital will be reporting a big mark-to-market gain on their oil hedges in Q3. These non-cash MTM gains and losses have no impact on my valuation, but they will impact reported Net Income.

Allen, I do not claim to be "such an expert". My comments are to balance the non stop super bullish mantra that never gets challenged by anyone

I have no idea what WTI will be or should be but I can read the strip and WTI is about $ 65 after today's gains. Secondly, I'm not interested in any name with a 65 dollar strip.

In my opinion, it doesn't ,make sense to model 78 when the current price is 65. It can go down 10 as easily as go up 10. In fact , October WTI is down 20% and $ 15 since beg of July. >> That's huge and significant

When you have a forecast that relies on 10 good things happening, the probability is very high all 10 positive things won't happen

Now since your such a great investor, why doing you keep hoping and denying reality? If you held VTLE when they made their first deal, you need 140 % up move to break even.

An NPV10 sucks imho. You can get 5% with no risk. I wouldn't invest unless I had a shot at 20% return.

VTLE may be a great investment here at 25 but it needs higher prices and I am not interested until I see proof of higher oil prices, not hope. Same goes with the gassers.

As an aside, Celsius, is hoping for a NG rebound and the other day he said he was hoping to pick up AR at 15. Ar is 26. So someone that is super bullish on future of NG is waiting for the pullback or a pullback before he plows money into the name

If you play hold em , do you bet like a farmer and hope to get 2 aces "in the hole" or do you wait to see your cards and bet accordingly?

Bill, if somebody provides an answer to your post, it would be nice to start a reply post with “thank you” or something similar and not with “New lows day after day 26.50 today! Weeeeeee”. That sounds almost like you are cheering the fall of the share price on.

I am not optimistic. I am logical. I know: Logic is a method of reaching the wrong conclusion with confidence, but still….…

Oil price for book value of reserves.
Why was $ 78/bbl used for the 2023 book value? The $ 78/bbl was the average oil prices on all the first days of the twelve months in 2023. This is as per SEC standard.
For 2024, assuming the oil price until the end of 2024 will stay at $ 69/bbl, the value will be around $ 75/bbl.

What happens to the book value of the reserves if the oil price changes to $ 65/bbl, or $ 55/bbl?
The chart below answers your questions. In words:
• If the long-term WTI oil price would be $ 75-80/bbl, then the NPV10 book value per Vital share is $ 64-77. You should be willing to pay $ 64-77 per share. to get a return of 10%. This a premium of 142-193% over the current share price. In plain English: double or triple.
• $ 69.50/bbl (current oil price). NPV10 = $ 49 per share. Premium = +86%
• $ 65.00/bbl: NPV10 = $ 37.00 per share. Premium 40%.
• $ 55.00/bbl: NPV10 = $ 10.00 per share. Discount of -61%.

Only if the oil price would fall below $ 42.50/bbl, you would not be able to get any returns at all on Vital even if they gave you the shares (=bankruptcy).

The price someone should be willing to pay for Vital depends on his long-term outlook of the oil price and our desired return.
There are upsides and downsides. Hope you get your desired 20% returns somewhere. Lots of wisdom to you.

Thank You, Harry!

I hope Vtle moves up, so Allen, (since he is such a whiner) can move on with his life.

Own your screw ups, and if you can't live with the answer , don't ask the question

I let you cheer leaders grope each other so you can just have happy thoughts.

If any wants a more realistic view , questions on models , assumptions, I'm using, send me a private message. Too many losers are triggered here with contrarian thoughts even though they are down 50 % or more!

PS: I won't charge you for my opinions

Thank you , thank you, so very much.

Harry,

I simply asked you why you are using 78 when the current strip is 65. Your model is only as good as the data entered into your model.

Now since we are now giving advice to other members, I advice you to give your stuff away for free. Asking 350 for it , is a joke

Thank you, Thank you very much!

I forgot to mention the lows achieved this week for VTLE. I solemnly present the fact and I apologize in advance if this triggers you

On Mon 27.33
On Weds 26.10
On Thursday 26.01

This name was 62 before the acquisition binge. The perma bulls have been 100 % wrong on this name and others. Rather than getting mad at me, own your mistakes, don't blame the perma bulls either. Try using your brain that assumes you... nevermind

If this was # 2 on your list, I hate to see the other 50 names behind it.

PS : Please thank me

This has gotten childish.

Fraser, I'm not a whiner, but I don't like your immature posts that insult Dan and Harry. What you want to say can be said in a much more professional and courteous manner. You need to apologize to both of them.

VTLE up over 10% in the past two days. Maybe Fraser is taking a position?