Vital Energy – Q3 results slightly above expectation

[Petroleum economist]

Vital Energy reported Q3 results slightly above expectation. The Point Energy acquisition was closed. Production was higher than expected, but the gains were mainly in NGL and gas. Profit increased versus Q2. Operating costs reduced. Vital did not return funds to shareholders.

Production
• Q3 production (133.3 K BoE/d) unexpected was up on Q2 (129.4 K BoE/d).
• Vital had provided a Q3 outlook of 121-127.0 K BoE/d. I had expected 127 K BoE/d
• The acquisition (Point Energy) was included for ten days in Q3 and added approx.1.1 K BoE/d.
• Q3 oil production (59.2 K bbl/d) was flat versus Q2 (59.2 K bbl/d), meaning that the extra Q3 production came in the form of the less valuable NGL and natural gas.
• Oil cut has reduced from 47.0% in Q1 2023 to 44.4% in Q3 2024, indicating that Vital is slowly is moving towards the oil cut of the reserves (39%). Point Energy with a 62% oil cut can arrest the reducing oil cut trend a bit.
• With Point Energy included for the whole of Q4, production can increase to 140 K BoE/d. Vitals Q4 outlook is 137-143 BoE/d.
• Vital increased its 2024 outlook from 127-131 K BoE/d to 131.0-132.5 K BoE/d. I expect a production of 131.9 K BoE/d for 2024.
• Production can grow to 140-142 K BoE/d in 2025 and can stay at this level for an extended time.

Balance sheet
• Debt increased by $ 771 M from $ 1,662 M (Q2) to $ 2,433 M (Q3), almost solely due to the $ 815 M Point Energy acquisition.
• Debt is heading for $ 2,335 M by the end of 2024, resulting in a high debt/EBITDA ratio of 1.89. The ratio can fall to 1.3 in 2025 and below 1.1 in 2026.
• The equity ratio (=equity/balance sheet total) at the end of Q3 was a lowish 48.9%, down from 53.9% in Q2.
• I except the equity ratio to improve to a better 50.5% by the end of 2024 and to 56% in 2025.
• The balance sheet does not allow shareholder returns in 2024/2025.

Profitability
• Q2 results were impacted by negative realized natural gas (-$ 0.28/MM Btu). The negative gas prices continued in Q3 with gas at -$0.48/MM Btu. Gas prices in Q4 may turns positive.
• Despite lower oil prices, Q3 eps ($ 1.61). was above Q2 ($ 1.46). This was due to reduced lease operating costs, reduced financial costs, higher realized hedging gains, and no losses on debt refinancing.
• Lease operating costs which were an area of concern in Q2, improved from $ 9.55/BoE (Q2) to $ 8.78/BoE (Q3).
• For 2024 with WTI = $ 71.77/bbl, the eps (excluding non-cash hedging results) is heading for $ 5.69. This is equivalent to a low PE of 5.1
• With WTI at $ 71.77/bbl, the eps can reach $ 10.44 (PE=2.8) in 2025

Shareholder returns
• Vital did not pay a quarterly dividend or bought back shares in Q3. I expect this continue in Q4 and in 2025
• Returns can start in late 2026 and can reach 12-14% in 2027/2028, once the balance sheet has been restored

Vital had a good Q3. With a growing production, an improving balance sheet, good profitability, low PE and increasing shareholder returns Vital Energy justifiable sits near the top (3rd) of my ranking system.

[dan_s]

The Point Energy Acquisition (67% oil) should increase oil to 48.5% of production in Q4 and it adds a lot of high-quality / low-risk development drilling locations. Vital is on pace to generate over $28/share of operating cash flow per share.