Vital Energy, Inc.’s (NYSE:VTLE) debt situation has improved significantly in recent months. In September 2023, Vital issued notes with an effective interest rate of around 10%. Now Vital’s newest notes carry a 7.875% interest rate.
Vital has benefited from strong production performance as well as some deleveraging from working interest acquisitions paid for with its stock. Despite weak natural gas prices, Vital looks capable of ending 2024 with leverage around 1.0x.
I currently project that Vital can generate $338 million in 2024 free cash flow at strip prices. Vital is mostly hedged on oil, so changes in oil prices do not have a major impact on its projected free cash flow.
I now estimate Vital’s value at $65 per share at long-term $75 WTI oil and $3.75 NYMEX gas. This results in a valuation of around 0.8x proved PV-10 at those commodity prices. Vital’s estimated value is marginally lower than when I looked at it earlier this year due to its increasing share count. After its latest working interest acquisition, Vital’s outstanding share count is nearly 38 million, assuming conversion of the preferred shares.
Henry Resources Working Interest Acquisitions
Vital announced a second working interest acquisition (in producing Henry Resources wells) in February 2024. This latest acquisition is for a total consideration of approximately $78 million in stock, involving the issuance of 1.859 million common shares (after conversion of the preferred securities).
This second acquisition is expected to boost Vital’s 2024 production by 1,850 BOEPD (51% oil) and result in $25 million in 2024 free cash flow at $72 WTI oil and $2.50 Henry Hub natural gas for 2024. At the current strip, the projected 2024 free cash flow would increase to around $27 million.
When combined with the first working interest acquisition, Vital has added 3,250 BOEPD (54% oil) in 2024 production in exchange for 3.081 million common shares. The acquisitions boost Vital’s 2024 free cash flow by approximately $49 million at current strip prices, although free cash flow will likely decline in future years since the acquisitions involved working interests in producing wells.
Debt Refinancing
Vital recently announced that it was issuing $800 million in 7.875% unsecured notes due 2032. Part of the proceeds from these notes will go towards Vital’s tender offer for some of its 2028 and 2030 notes. Vital is attempting to repurchase up to $475 million of its 10.125% unsecured notes due 2028 and up to $75 million of its 9.75% unsecured notes due 2030.
Including the early tender premium, it will cost Vital $582 million (not including accrued and unpaid interest) to repurchase the full $550 million in 2028 and 2030 notes that it is attempting to repurchase.
Proforma for the new notes and tender offer, Vital’s debt maturities should look like the following table (based on year-end 2023). Vital should be able to pay off its credit facility debt and have around $83 million in cash on hand.
| Long-Term Debt | $ Million |
| 10.125% Unsecured Notes due 2028 | $225.3 |
| 7.75% Unsecured Notes due 2029 | $298.2 |
| 9.75% Unsecured Notes due 2030 | $425.0 |
| 7.875% Unsecured Notes due 2032 | $800.0 |
| Credit Facility (Net of Cash) | -$83.0 |
| Total Net Debt | $1,665.5 |
Vital’s net interest expense should go down by around $5 million to $6 million per year as a result of the transactions.
This is a positive move for Vital due to the lowered interest rate and extended average debt maturity. This also shows that the debt markets are more comfortable with Vital’s current situation compared to six months ago when its 9.75% unsecured notes due 2030 were issued at a slight discount to par.
Vital’s 2024 Guidance
Vital currently expects to average 118,000 BOEPD in 2024 production at its guidance midpoint, including around 57,000 barrels per day in oil production.
This is slightly higher than its earlier projections. With Vital’s original 2024 outlook (from September 2023), it expected 112,000 BOEPD in total production and 55,000 barrels per day of oil production at its guidance midpoint.
Vital’s two working interest acquisitions added another 3,250 BOEPD in total production for 2024, including approximately 1,740 barrels per day in oil production.
| Original 2024 Outlook | First WI Acquisition | Second WI Acquisition | Combined | |
| Total Production (MBOEPD) | 112.0 | 1.4 | 1.9 | 115.3 |
| Oil Production (MBOPD) | 55.0 | 0.8 | 0.9 | 56.7 |
Thus Vital’s preliminary 2024 outlook (adjusted for acquisitions) would involve an average of 115,250 BOEPD in total production and approximately 56,700 barrels per day in oil production.
Vital’s updated guidance for 2024 involves slightly higher (0% to 1%) oil production and around 2% higher total production than its prior 2024 outlook, adjusted for its working interest acquisitions.
Vital’s 2024 Outlook
I am currently modeling Vital’s 2024 results using 122,000 BOEPD of total production and 58,500 barrels per day of oil production. This is roughly 3% higher than the midpoint of Vital’s production guidance and reflects my belief that Vital can continue to demonstrate some production outperformance.
This results in a projection that Vital can generate $1.991 billion in oil and gas revenue at the current 2024 strip of roughly $79 to $80 WTI oil and $2.35 Henry Hub natural gas.
Vital has around 89% of its oil production hedged and around 38% of its natural gas production hedged. Vital’s 2024 hedges have around -$48 million in value at the current strip and due to its high amount of oil hedges, Vital’s free cash flow is not very sensitive to changes in oil prices.
| Barrels/Mcf | $ Per Barrel/Mcf | $ Million | |
| Oil | 21,352,500 | $80.00 | $1,708 |
| NGLs | 11,362,450 | $18.00 | $205 |
| Natural Gas | 70,890,300 | $1.10 | $78 |
| Hedge Value | -$48 | ||
| Total Revenue | $1,943 |
Vital is currently projected to generate around $338 million in free cash flow in 2024. This would reduce its net debt to approximately $1.33 billion at the end of 2024 with leverage of approximately 1.0x.
| $ Million | |
| Lease Operating Expense | $374 |
| Production and Ad Valorem Taxes | $129 |
| Marketing and Transportation | $56 |
| Cash G&A | $96 |
| Net Interest | $150 |
| Capital Expenditures | $800 |
| Total Expenses | $1,605 |
Notes On Valuation
Vital has close to 38 million outstanding shares after giving effect to the conversion of its outstanding preferred shares. I now estimate Vital’s value at around $65 per share at long-term (after 2024) $75 WTI oil and $3.75 Henry Hub natural gas prices.
This results in a total valuation of approximately $3.8 billion based on its projected year-end 2024 net debt.
For comparison, I estimate Vital’s year-end 2023 PD PV-10 to be around $3.9 billion at $75 WTI oil and $3.75 Henry Hub natural gas. This includes the impact of its most recent working interest acquisition.
Vital’s year-end 2023 proved that PV-10 is estimated at around $4.7 billion at those commodity prices.
Thus at $65 per share (and $1.33 billion in net debt at the end of 2024), Vital would be valued at 0.8x proved PV-10 and just under 1.0x PD PV-10 at my long-term commodity prices, assuming that its reserve replacement ratio is around 100% for 2024.
Conclusion
Vital Energy is extending its average debt maturity with its recent note offering and tender offer. Around 70% of Vital’s notes will mature in 2030 or 2032 after these transactions are complete, and Vital is also saving around $5 million to $6 million per year in interest costs.
Vital’s leverage should end up around 1.0x at the end of 2024 now, and it seems to be in a solid position to continue whittling down its net debt in future years. I believe that Vital can generate $338 million in free cash flow at the current 2024 strip and estimate its value at $65 per share based on long-term $75 WTI oil and $3.75 Henry Hub natural gas.
Read the full article here
