Earnings call transcript: Vital Energy Q1 2025 earnings beat expectations

Vital Energy Inc. (VTLE) reported its first-quarter earnings for 2025, surpassing Wall Street expectations with an earnings per share (EPS) of $2.37, compared to the forecasted $2.08. Revenue, however, fell short, coming in at $512.18 million against a projected $534.33 million. The company’s stock reacted positively, rising by 5.73% to close at $17.25 in premarket trading. According to InvestingPro analysis, VTLE is currently trading near its Fair Value, with analysts setting price targets ranging from $9 to $36.

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Key Takeaways

• Vital Energy’s EPS exceeded forecasts by 13.94%.
• Revenue was below expectations, marking a shortfall of $22.15 million.
• The company reduced net debt by $135 million in the quarter.
• Stock price increased by 5.73% in premarket trading following the earnings release.
• Vital Energy projects an adjusted free cash flow of $265 million for 2025.

Company Performance

While Vital Energy demonstrated progress by reducing its net debt by $135 million and generating $20.5 million from non-core asset sales, InvestingPro data reveals the company still operates with a significant debt burden, with a debt-to-capital ratio of 0.8. The company reported a significant contribution from its hedge position, adding over $20 million to its revenues. Operational efficiencies, such as a 5% reduction in lease operating expenses and a 30% improvement in capital efficiency within the Delaware Basin, are crucial as the company faces challenges with its current ratio of 0.67, indicating short-term obligations exceed liquid assets.

Financial Highlights

• Revenue: $512.18 million, below the forecast of $534.33 million.
• EPS: $2.37, surpassing the forecast of $2.08.
• Net debt reduction: $135 million.
• Adjusted free cash flow for 2025: $265 million projected.

Earnings vs. Forecast

Vital Energy’s actual EPS of $2.37 was 13.94% above the expected $2.08, marking a positive deviation from forecasts. Despite the EPS beat, revenue fell short by $22.15 million, which could indicate challenges in sales or market conditions impacting revenue streams.

Market Reaction

Following the earnings announcement, Vital Energy’s stock price rose by 5.73% in premarket trading, reaching $17.25. This increase reflects investor optimism, despite the revenue miss, likely driven by the EPS beat and strategic debt reduction. The stock trades at attractive multiples, with a price-to-book ratio of 0.23 and an EV/EBITDA of 2.1. While the stock has shown strong momentum with a 22.44% return over the past week, its performance remains volatile within its 52-week range of $12.30 to $51.71.

Outlook & Guidance

For the rest of 2025, Vital Energy aims to maintain flat production year-over-year while remaining free cash flow positive in 2026. The company targets a corporate breakeven potentially reducing to $53 per barrel and expects full-year 2026 volumes to be flat compared to 2025. InvestingPro analysis indicates net income is expected to grow this year, with analysts forecasting EPS of $7.87 for 2025, though 6 analysts have recently revised their earnings expectations downward.

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Executive Commentary

CEO Jason Pigott highlighted the company’s strategic focus, stating, "Our focus today is clear, maximize cash flow and debt repayment." He also emphasized the company’s flexibility in adjusting activity levels based on market conditions, saying, "We are not immune to today’s market challenges and we have the flexibility to meaningfully adjust activity should conditions warrant."

Risks and Challenges

• Market volatility could impact oil prices and revenue.
• Potential supply chain disruptions may affect operational efficiency.
• Macroeconomic pressures could influence consumer demand and pricing.
• The company’s ability to maintain cost reductions and operational efficiencies.
• Regulatory changes in the energy sector could pose compliance challenges.

Q&A

During the earnings call, analysts inquired about potential service cost reductions and asset sale opportunities. The company also addressed questions regarding Waha gas pricing realizations and confirmed its flexible capital spending approach, underscoring its adaptability in a fluctuating market environment.

Full transcript - Vital Energy Inc (VTLE) Q1 2025:

Operator: Good day, ladies and gentlemen, and welcome to Vital Energy Incorporated’s First Quarter twenty twenty five Earnings Conference Call. My name is Frans, and I’ll be your operator for today. At this time, all participants are in 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.

It is now my pleasure to introduce Mr. Ron Hagood, Vice President, Investor Relations. You may now proceed, sir.

Ron Hagood, Vice President, Investor Relations, Vital Energy: Thank you, and good morning. Joining me today are Jason Pygott, President and Chief Executive Officer Brian Lemerman, Executive Vice President and Chief Financial Officer Katie Hill, Senior Vice President and Chief Operating Officer 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, assumptions, are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results may differ from these forward looking statements for a variety of reasons, many of which are beyond our control.

In addition, we’ll be making reference to non GAAP financial measures. Reconciliations to GAAP financial measures are included in the press release and presentation we issued yesterday afternoon. The press release and presentation can be accessed at our website at www.vitalenergy.com. I’ll now turn the call over to Jason Pigott, President and Chief Executive Officer.

Jason Pigott, President and Chief Executive Officer, Vital Energy: Good morning and thank you for joining us. Title Energy delivered solid first quarter results driven by our ongoing optimization efforts that are making us a more resilient enterprise while creating value for our shareholders. Today’s call, we will discuss our first quarter financial and operating performance, including significant progress to reduce costs and enhance efficiencies, our 2025 outlook and how our strong start to the year provides confidence in our full year assumptions, and how our advantaged portfolio provides us with options and flexibility to effectively navigate today’s challenges. Turning to the first quarter. Our key financial results exceeded Street expectations.

I’m excited that we were able to reduce net debt by $135,000,000 Our debt reduction was supported by higher than expected adjusted free cash flow, which beat Street consensus. We also benefited from our hedge position, adding more than $20,000,000 to revenues, and a non core asset sale generated an incremental $20,500,000 Our capital investments and production were in line, and our costs are clearly moving in the right direction. The accelerated capital spending reflected our continued improvement in drilling efficiencies that pulled incremental activity into the first quarter. First quarter volumes were driven by 23 turn in line wells, all in the Delaware with 21 in the Southern Delaware. We saw good well performance and our schedule optimization allowed for early production from several development packages.

At the end of twenty twenty four, we shifted our focus from acquisitions to optimizing our asset base. Since that time, we have successfully reduced lease operating expense and general and administrative expenses by approximately 5%. In the fourth quarter of last year, LOE amounted to $121,000,000 for the quarter. We now anticipate it will be around $115,000,000 per quarter for the remainder of 2025. G and A expenses, excluding long term incentive plan, were slightly over $23,000,000 in Q4, and we project these costs will be below $22,000,000 per quarter for the duration of 2025.

Our first quarter results provide confidence in our full year outlook. Today, we reiterated the midpoints of our full year capital and production guidance as well as lowering operating costs. Let me share a few reasons why we have high confidence in our 2025 outlook. First is the high returns we expect from the packages we are completing in the second half of the year. On slide five of our investor deck, you can see how we are prioritizing our capital allocation to our lowest breakeven packages.

Our significant ramp in production later this year, which is highlighted on slide six, will be driven by a high turn in line count in the third quarter. These completions will be coming in from some of the highest return areas with low breakevens of about $45 per barrel WTI. Due to the high quality of these wells and the robustness of our hedge portfolio, we foresee substantial returns from these packages. Consequently, we do not intend to delay the generation of valuable cash flow or debt repayment. We anticipate that production in the fourth quarter supported by our hedges will contribute significantly to our adjusted free cash flow and facilitate debt repayment for the full year 2025.

Second, we are encouraged by recent cost reductions and sustainable efficiencies. Let me share a few examples. Thus far, we have seen little impact from tariff related price increases, which have been more than offset by the price concessions we have successfully secured in the softening services environment. Our drilling and completions teams continue to set records for speed and efficiency. In the first quarter, we set cycle time records for both two mile and three mile wells.

The continuous improvement demonstrated by our operations team has allowed us to improve our Delaware Basin year over year capital efficiency by 30%. In 2025, more than 50% of our completions will be simulfrac. In the first quarter, we successfully implemented this technique exceeding our expectations for completed feet per day and delivering every package in the first quarter ahead of schedule. Our operating teams are effectively using leading edge technology to drill shaped wells like Jayhook and Horseshoe’s to maximize the value of our acreage and access high quality resources. On slide 10 of our investor deck, we provide an update on two of these developments.

We have now drilled and completed our first two Jayhook wells, proving the concept and the potential to lower the breakeven for 135 wells by $5 per barrel. Third, our hedges provide confidence in our cash flow and debt reduction targets. For the remainder of the year, 90% of our oil is hedged at $70.61 per barrel WTI, ensuring returns and reducing risk. This should allow us to generate about $265,000,000 in adjusted free cash flow and reduce net debt by $300,000,000 including non core assets sold to date. Lastly, our asset quality provides us with attractive options for the allocation of our capital.

Slide nine in today’s deck shows a 300% increase in completable lateral foot with a sub $50 WTI breakeven. As we test new well shapes, we reduce well count through the combination of laterals, but not our developable reservoir footage. Not only are we improving the quality and durability of our inventory, we are reducing the breakevens of every foot we drill. Before moving to questions, let me quickly provide some thoughts on today’s macro challenges. We are not immune to today’s market challenges and we have the flexibility to meaningfully adjust activity should conditions warrant.

We have no rig or completion contracts that extend beyond early twenty twenty six and are committed to delivering positive adjusted free cash flow in 2026. Further, we are conducting a full review of our cost structure and we are confident in our ability to continue to reduce costs and enhance margins. Our focus today is clear, maximize cash flow and debt repayment. These are key ingredients to building long term value for our shareholders. Operator, we are now ready for questions.

Operator: Thank you. We will now begin the question and answer session. Session. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Just a reminder, we ask that you please limit yourself to one question and one follow-up only.

And after that, you can just simply join the queue again. Thank you. And your first question comes from the line of Derrick Whitfield from Texas Capital. Please go ahead.

Derrick Whitfield, Analyst, Texas Capital: Good morning all and congrats on a strong 1Q.

Ron Hagood, Vice President, Investor Relations, Vital Energy: Thanks Derek.

Brian Lemerman, Executive Vice President and Chief Financial Officer, Vital Energy: Thanks Derek.

Zach Parham, Analyst, JPMorgan: Good morning.

Derrick Whitfield, Analyst, Texas Capital: With my first question, really wanted to focus on maintenance capital as you guys see it going forward with really the benefit of your latest D and C efficiencies, optimize well design and base optimization work. Where would your maintenance capital be once some of your higher price service contracts roll off over the balance of this year and next year?

Jason Pigott, President and Chief Executive Officer, Vital Energy: Thanks, Derek. Our our our plan for right now is to be flat in production year over year, and our goal for next year is to remain free cash flow positive. And as as you mentioned, all of our major service contracts expire in March 2026 and provide us the flexibility to adapt activity levels as needed. If you think about service cost, the recent RICEDAD report suggested service cost could come down 10% in a sustained $60 environment. And if you use our current budget as a marker, that’s nearly $90,000,000 in savings you could see on the the cost front.

This would reduce our breakeven from 50 where it is today at about $57 per barrel down to $53 per barrel. And then that doesn’t include other things like continued LOE reductions or GNA reductions that start to push that down closer to $50 a barrel. So we’re we’re working a lot of things, a lot of time ahead of us, but, I think that’s kinda where we sit today.

Derrick Whitfield, Analyst, Texas Capital: That’s great. And then maybe as my follow-up, just leaning in on the cost initiatives. Katie, could you perhaps speak to some of the LOE self help initiatives you’ve accomplished and just comment on areas where you see further opportunity?

Katie Hill, Senior Vice President and Chief Operating Officer, Vital Energy: You bet. I love getting to talk about this. I’m just really excited about the work and the progress that the team’s making. Jason mentioned that in Q4 last year, were at 121,000,000 run rate, and we expect to be in the 110,000,000 to 115,000,000 a quarter for all of this year. We had a great Q1, dollars ’1 hundred and ’3 million.

A big driver of that is continued outperformance on point. We’ve been really successful at lowering our operating costs there. We got it fully integrated late last year. We gave ourselves about a quarter window to get the invoicing process fully onboarded. And as a result, what we saw in Q1 was actually a $6,000,000 adjustment from prior period, so continued outperformance in Q4.

So what that means is that 103 was closer to $110,000,000 run rate for the quarter. The reason we go from $100,000,000 to 114,000,000 or 115,000,000 is really driven by increased water volume throughout the rest of this year. But from a fixed cost and workover standpoint, we expect to maintain the performance that we’ve been able to deliver here over the last couple of quarters. So big drivers again on point are reduced failure rates for some of the artificial lift, specifically ESP, reducing the cost for all workovers in both Delaware and the Midland. And then really great work from both basins on reducing their fixed operating costs.

Again, we expect that to sustain for the rest of ’25.

Brian Lemerman, Executive Vice President and Chief Financial Officer, Vital Energy: Great update.

Operator: And your next question comes from Zach Parham from JPMorgan. Please go ahead.

Zach Parham, Analyst, JPMorgan: Hey, thanks for taking my question. First, just wanted to ask on your hedging strategy. You added around 20,000 barrels a day of hedges for the back half of the year in the upper 50s, but didn’t add any hedges for 2026. Just curious about how you’re thinking about building out the hedge book for next year and future years.

Jason Pigott, President and Chief Executive Officer, Vital Energy: Yeah. As you mentioned, we did raise our hedges for this rest of this year. A lot of that was driven by higher volumes coming into the fourth quarter at being our highest production volume for the year and almost we could actually see a company record of her production as we get to the fourth quarter of this year. So we added those hedges to lock in our free cash flow generation for the year and assure our debt debt reduction. In general, we we tend to be 75% hedged about a year in advance.

Taking this up to 9090% plus first quarter, we’re at that mark. But as time progresses, we’ll continue to watch the environment and layer on hedges as we see fit to, again, lock in free cash flow generation and our debt reduction goals.

Zach Parham, Analyst, JPMorgan: Thanks, Jason. And then my follow-up, just wanted to ask on the trajectory of volumes and CapEx going forward. You laid that out for the remainder of the year in the slide deck, but oil will peak in 4Q and CapEx will be at the lowest level of the year. Can you just talk about the trajectory of production going into 2026? Just given that drop off in spending later this year, would you expect a pretty decent decline into 1Q and then you kind of stabilize?

Just curious what that trajectory looks like.

Katie Hill, Senior Vice President and Chief Operating Officer, Vital Energy: You bet. The 2026 program right now, we estimate to be flat year over year for both volume and capital. Jason mentioned in some of his comments that we have most of our contracts rolling off either in Q4 of ’twenty five or Q1 of ’twenty six. We’re seeing really good movement from a market standpoint compared to our current averages. So looking forward to being able to capture some of those savings.

That will ultimately drive the capital program next year. So as we think about that volume and quarter over quarter cadence, we first will need to resolve what the activity level looks like in the first half. But I would think of full year volumes as being flat compared to ’25.

Zach Parham, Analyst, JPMorgan: Thanks, Katie.

Operator: And your next question comes from Noah Hongnes from Bank of America. Please go ahead.

Noah Hongnes, Analyst, Bank of America: Good morning, everyone. For my first question, you guys mentioned that there may be potential for future pricing weakness. But I was also wondering, do you guys see any opportunity to potentially high grade your current rigs or crews just as some of these service companies may be looking to keep some of these crews running if we do see some guys dropping them in the back half of the year in early twenty twenty six?

Katie Hill, Senior Vice President and Chief Operating Officer, Vital Energy: We stagger all of our contracts, which allows for us to have a pretty good pulse on the market. Our most recent rig was about 20% below the fleet average for us. So certainly an opportunity for us to continue to capture some of those cost efficiencies and softening or to high grade from a performance standpoint. As we look at ’twenty five and ’twenty six, the rate contracts continue to cycle through. We don’t have any that extend past the end of Q1 next year.

So a lot of opportunity within that fleet. And then similarly on the completion side, our primary contract is extended in the beginning of ’twenty six. We’ll offer some opportunity after Q1 to capture the current market rate. So yes, I do think there’s opportunity both on performance and some of the technical capabilities, technology capabilities, and then also on cost.

Noah Hongnes, Analyst, Bank of America: Got you. And then Brian, this one is probably for you. So you guys had a noncash impairment this quarter. As we move through the year and if oil prices stay where strip is implying the price would be, could you talk about how we if we may see more of these non cash impairments? And then if so, how like how much, what the quantity of it looks like?

And then also, if this will have any impact on the inventory numbers as well?

Ben Klein, Vital Energy: Yes. If you’ll notice in the 10 Q, we talk about that going out one quarter or so. That number is in there, and I’ll let you refer to it. But definitively, if we have if oil price stays where it is today, we will have non cash right now. It’s just the way the our pool is written down over time.

So I think next quarter it’s in the tune of a couple hundred million dollars. We would expect to see that. We don’t really project out a lot further than that. But if you take the SEC pricing, you could you can do the math and see that it’s something like that until we stabilize with price. Again, this is just the write down of free cash flow.

It doesn’t have to do anything with the underlying, you know, the reserves aren’t gone. They’re just a calculation.

John Martini, Analyst, KeyBanc Capital Markets: Got you. Thank you.

Operator: And your next question comes from Jon Abbott from Wolfe Research. Please go ahead.

Brian Lemerman, Executive Vice President and Chief Financial Officer, Vital Energy: Hey, good morning and thank you for taking our questions. I wanted to go back to Derek’s questions about breakeven. And you mentioned $53 per barrel next year. Is that a wellhead breakeven? And if if it is, how do you think about your corporate breakeven, the movement in your corporate breakeven as you head into next year?

Jason Pigott, President and Chief Executive Officer, Vital Energy: Yeah. The number I quoted was actually our corporate breakevens. Our well breakevens are are below that or on average. Again, we’re we’re continuing to high grade the portfolio, but we’re we’re at $57 today. And, again, if you if if cost or service cost continue to continue to come down in that 10% range, that would push it down to $53.

And then, again, great work that Katie’s doing on LOE can push it down further and then potential G and A reductions and things like that push it down even further. So we could be knocking on $50 by the end of next year or through next year.

Brian Lemerman, Executive Vice President and Chief Financial Officer, Vital Energy: Appreciate it. And then just one very quick one for me. You had a small asset sale here during the quarter. What’s the opportunity for additional asset sales this year?

Jason Pigott, President and Chief Executive Officer, Vital Energy: We’re continuing to look at our portfolio. This opportunity was one where we didn’t have any inventory on the asset. The offset operator had wells that they could extend or put inventory value on there. It’s a gassier asset at 200 roughly 200 barrels of oil per day and 1,300 BOE per day. So not a significant drop in our production as a company.

And we’ve actually absorbed that and maintained our current guidance. So for us, opportunity to bring cash in the door, accelerate our debt reduction goals, and no impact on the full year’s projection. So it’s something that we’re excited about. Maybe more difficult to do those kind of things in this price environment because these assets, again, are just taken away from your free cash flow, but this buyer was willing to pay us for inventory that we didn’t even have on the book. So it was a good fit for us, and we’re continuing to look at the portfolio all the time.

Brian Lemerman, Executive Vice President and Chief Financial Officer, Vital Energy: Appreciate it. Thanks for taking our questions.

Operator: And your next question comes from John Martini from KeyBanc Capital Markets. Please go ahead.

John Martini, Analyst, KeyBanc Capital Markets: Hi, good morning. Thank you for taking our questions. We saw Waha realizations coming in nearly 40% of Henry Hub in the quarter, which is the strongest in the past few quarters, but still on a relative basis. We recognize the Waha Swaps you have in place to mitigate the impact of the takeaway constraint dynamics in the basin and that basis could tighten with some regional peers reducing activity. I know it could be too early to tell but you know is this reduction in activity what you’re seeing or hearing on the field, maybe among the smaller private operators?

And are there some takeaway or in basin demand solutions that you’ve been looking at or planning?

Ben Klein, Vital Energy: Yeah, this is Ben Klein. So yeah, that’s a great question. We definitely are seeing an improvement in the basis. We hear that it is activity driven and but we’re not necessarily seeing anything different from a takeaway standpoint, nothing from a news standpoint or headline standpoint. We look at all of our options when it comes to taking firm and selling out of basin versus going ahead and selling in basin and simply putting on basis swaps or hedging the Waha outright.

So yes, so our expectation is for when activity levels soften for Waha to strengthen and allows for us to take advantage of that higher price, as you said. Okay.

John Martini, Analyst, KeyBanc Capital Markets: Yeah. And just to follow-up on that, the activity reductions. For you guys, how would a potential decision to trim activity levels look like? Would prioritize building ducts and deferring tills? Or would you drop a rig?

Just want to get a sense of your capital priorities in a potential lower lower price environment.

Jason Pigott, President and Chief Executive Officer, Vital Energy: Yeah. Again, as I mentioned, our our goal is to be free cash flow positive next year. A lot of variable lot of variables right now that are kind of difficult to calculate as far as whether we we build ducts or not complete wells. Again, we’ve got good line of sight on ways that we can reduce our corporate breakeven pretty close to $50 with continued efficiencies, service cost reduction. So I’d I’d say it’s too early to do those game scenarios right now, but it’s something that we’ll we have flexibility to adapt because both drilling services contracts and completion contracts expire in March.

So we’ve got all the flexibility we need to to adapt as needed.

John Martini, Analyst, KeyBanc Capital Markets: Okay. Understood. Thanks for the update.

Operator: There are no further questions at this time. I would now like to turn the call back over to Mr. Ron Heggood. Please go ahead.

Ron Hagood, Vice President, Investor Relations, Vital Energy: We appreciate your interest and thank you for joining us this morning. This concludes today’s call.

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