VTLE - NYSE

Good day, ladies and gentlemen, and welcome to Vital Energy, Inc., First Quarter 2023 Earnings Conference Call. My name is Abby, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session after the financial and operations report. As a reminder, this conference is being recorded for replay purposes. And it is now my pleasure to introduce Mr. Ron Hagood, Vice President, Investor Relations. You may proceed, sir.

Thank you, and good morning. Joining me today are Jason Pigott, President and Chief Executive Officer; Bryan Lemmerman, Senior Vice President and Chief Financial Officer; Katie Hill, Vice President, Operations; as well as additional members of our management team. During today's call, we will be making forward-looking statements. These statements, including those describing our beliefs, goals, expectations, forecasts and assumptions are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ from these forward-looking statements for a variety of reasons, many of which are beyond our control. In addition, we will be making reference to non-GAAP financial measures. Reconciliations to GAAP financial measures are included in the press release and presentation we issued yesterday, detailing our financial and operating results for first quarter 2023. The press release and presentation can be accessed on our website at www.vitalenergy.com. I'll now turn the call over to Jason Pigott, President and Chief Executive Officer.

Thanks, Ron. Good morning, everyone, and thank you for joining us today. Vital Energy had outstanding results for the first quarter. Our wells in Howard County are delivering consistent production, frac hit impacts have been mitigated, and we are seeing positive impacts from our multiyear implementation of cutting-edge digital technologies that are improving both base production and our new wells. Today, 74% of our wells are operated by submersible pumps. We are using the combination of larger pumps and artificial intelligence to optimize our wells on an hourly basis and believe this differentiates us in the market. Capital also came in at the low end of guidance, driven by better-than-anticipated efficiencies from our e-fleet, a short frac holiday due to freezing weather and a cessation of some of the inflationary pressures we experienced last year. While our program was front loaded with two frac crews this year, we nearly achieved cash flow neutrality for the quarter and expect to have positive free cash flow for the remainder of the year now that the additional completions crew is released. We recently closed our Driftwood acquisition, continuing our run of disciplined accretive acquisitions to build scale and add to our eight years of high-quality inventory. We are active on the new acreage with our first four-well package currently being completed in Upton County. As we have executed on our strategy, we have created value by moving rigs to these new areas, growing production and testing new zones that have increased our inventory. [59%] of our production now comes from the areas we acquired over the last four years. I'm also very proud to highlight our 2022 emissions results. These results represent a tremendous achievement for the organization. These efforts resulted in achieving our 2025 emissions reduction goals for both Scope 1 greenhouse gas emissions and methane emissions last year. This achievement sets us up well to advance our more aggressive 2030 goal to reduce the combination of both Scope 1 and 2 emissions to 10,000 metric tons of CO2 per BOE. Vital Energy has the right strategy to create long-term value for our shareholders. We are executing extremely well today, exercising capital discipline to profitably develop our high-quality inventory in a sustainable manner. We are focused on generating free cash flow, reducing leverage, building scale through accretive acquisitions and continuing to lower emissions. I will now pass the call over to Katie Hill for operational highlights.

Thank you, Jason. We executed very well in the first quarter. Total production was 8% higher than our guidance midpoint and oil production was about 12% above midpoint. This was driven by several factors, including new wells reaching peak production faster than anticipated, lower downtime related to offset completion activity and better production uptime across base and new wells. These positive drivers are the result of initiatives aimed at increasing operational efficiency and the application of advanced digital solutions to our production operations. For example, we have created specialized teams that focus on optimizing artificial lift and compression operations, bringing key services in-house and accelerating adoption of artificial intelligence. We use AI to identify inefficiencies and artificial lift and compression operations, which allows us to proactively reduce associated downtime. We are now able to remotely adjust artificial lift up point in real time to optimize performance. This culture of technological innovation has supported a 15% increase in gas lift run time and a 4% increase in submersible pump run time, directly impacting base production performance and efficiency. Another significant contributor to recent production results has been our program in Howard County to accelerate dewatering of new wells. By upsizing equipment and working with our partners to upgrade the water system, we are able to achieve higher peak oil production rates. In addition, larger pumps and wells impacted by offset completions can dewater more quickly, returning base oil production to sales. We have been able to reduce the operational impact from weather over the last two quarters through a proactive winterization program. Our operational standards during winter months, included proactive fluid management ahead of colder temperatures, dramatically limited freeze off and associated production downtime. In addition to outperforming production expectations, we continue to gain efficiencies in our completion operations. In the first quarter, we converted our primary completion crew to an electric fleet. We successfully implemented the new process, maintaining cycle time efficiencies and bringing online two new well packages ahead of schedule. As a result of this performance, we now plan to turn in line an additional four wells late this year while remaining at the midpoint of our full-year capital range. Lease operating expenses on a BOE basis were lower than anticipated this quarter. While variable production expenses increased with higher water production and disposal, LOE per BOE was diluted by maintaining fixed costs in an increasing production environment. We believe these savings will hold average unit LOE at about $7.75 per BOE for the remainder of the year. As Jason mentioned, we achieved our 2025 targets for greenhouse gas intensity and methane intensity in 2022. These reductions were primarily driven by the application of continuous emission monitoring technology, the retrofit of facilities with non-venting pneumatics and enhanced detection program. In 2023, we are expanding our continuous emissions monitoring to cover approximately 70% of our gross operated oil production, and we maintain our commitment to regularly inspecting every operated site. Additional pneumatic conversions and electrification of our field operations, including active drilling rigs and our electric frac fleet will even further reduce emissions. Similarly, we are making progress on reducing flaring associated with our operations. In 2022, we reduced routine flaring 42% from our 2019 baseline and expect to lower this further in 2023 as we work towards our target of eliminating routine flaring by 2025. This team has delivered a great first quarter, continuing our operational track record and advancing the deployment of new technology across the field. I'll now hand the call over to Bryan for a financial update.

Thank you, Katie. Vital Energy's excellent financial results in the first quarter were driven by operational success, coupled with disciplined investments. We're essentially free cash flow breakeven in the first quarter, much better than anticipated at the beginning of the year, due to the production gains Katie mentioned and lower-than-expected capital investments. For the remainder of the year, we expect to be free cash flow positive. Determining factors will be production, which has been strong to date; capital, which we have a high degree of confidence in today; and commodity price. We will use the free cash flow generated by the business to reduce debt at current commodity prices and direct some towards return of cash to shareholders if commodity prices rise significantly. Cost and expenses were in line to lower than forecasted other than G&A expenses, excluding LTIP and transaction expenses, which were $3.02 per BOE higher than our guidance of $2.40 per BOE. Primarily drivers were one-time expenses associated with the timing of accounting for the 2022 inflationary retention bonus paid out last year, first quarter waiting of benefits and accruals related to both the 2022 and 2023 compensation plans. We expect G&A, excluding LTIP and transaction expenses, to average around $2.50 per BOE for the balance of the year, which is in line with historical levels. Vital Energy is off to a great start in 2023, executing well both operationally and financially. As we generate free cash flow through the end of the year, we will remain focused on reducing debt and maintaining strong liquidity. Lastly, the strength of our capital structure was recognized by our bank group during our spring redetermination process, and our RBL borrowing base and commitments were reaffirmed. With that, I will turn it over to the operator for questions.

Thank you. [Operator Instructions] We will take our first question from Derrick Whitfield with Stifel. Your line is open.

Thanks. Good morning, all and congrats on a solid quarter. For my first question, I wanted to focus on your base and new well performance. With two very strong quarters in the book, there appears to be a firm rerate in place on your operational performance. Perhaps separating the two, could you help frame the degree your base is outperforming your expectations? And separately, if your new well outperformance is driving higher EURs or simply just the acceleration of the production response?

I'll let Katie answer the first part of that.

Good morning, Derrick, this is Katie. I think when we think about our base production performance, a lot of that is being driven by the application of technology that we've been working on over the last couple of years. I think we're starting to realize those gains, particularly in areas where we've used electric submersible pumps as our primary lift type. We're seeing a lot of that in Howard County. So with faster dewatering of wells that have been hit by frac, which is primarily base wells, but also with some of the new wells, including the wedge that you mentioned. As we think about new well performance, I'll probably turn that back over to Jason, but we're in the middle of bringing quite a few of our wells online for the year. So we have about half of our new wells for 2023 are coming online in Q2, and we'll be excited to see the performance of those over the next few weeks.

Yes. I'd say, again, for the performance, we're back to the core of Howard County. So we have a high confidence in the wells that are being brought online. Again, they're cleaning up faster due to technology. And I also mentioned, 74% of our production is on ESP. That's why we highlight that when we get ore up to 4% more run time out of those, those are real volumes that kind of start to flow through the system. What's great about the technology is they're more like an annuity, right? They're always there once we've reduced the downtime. So we're excited about the technology we put in place. It's been four years in the making to get us to this point, and I can't underscore the buy-in it takes from the build and the cultural change required to get where we are today.

That's great, Jason. And as my follow-up, I wanted to shift over to the capital side and the gains you're experiencing and capital efficiency that's allowing you to raise the TIL count for the year without raising the midpoint of CapEx. How much of the improvement is self-help versus market? And would it be safe to assume the market contribution is only what you have through the line of site two at the moment?

So on our capital plan for the year, I think we're benefiting a little bit from both. We deployed the electric frac fleet in Q1 of this year starting in early January, and we've been able to maintain efficiency from end of 2022 and are starting to actually improve cycle time, which is allowing us to pull in those additional wells towards the end of the year. That acceleration of activity is keeping us around the midpoint of guidance, but we'll bring again four wells in addition to the full-year plan. We're also benefiting from a little bit more competitive market pricing than what was in expectations. We have planned on a 4% end of 2022 into 2023 inflation and the market is experiencing a little bit below that. So we're benefiting from both.

Yes. The first quarter performance was really good. Our spot crew is not as efficient as our e-fleet can be. And so now that we're just on the e-fleet, again, we're picking up almost a stage a day. So that's one of the things that's pulling the TIL count forward.

Great. Thanks for your time.

And I will now turn the call back to Ron Hagood for closing remarks.

Well, thank you for joining us this morning. We appreciate your interest in Vital Energy, and this concludes today's call.