Vitesse Energy, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Vitesse completed its spin-off from Jefferies on January 13, 2023; 2022 comparative results are those of the predecessor, which was not subject to corporate income taxes. Comparability is also affected by the inclusion of Vitesse Oil following the spin-off.
Business and operating context
Vitesse owns non-operated working and royalty interests, principally in the Williston Basin, with additional interests in the Denver-Julesburg and Powder River Basins. Q2 average production was 11,359 Boe/d, 67% oil, up 16% year over year. At June 30, it had interests in 5,507 gross productive wells, 278 gross wells being drilled or completed, and 432 gross permitted wells.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $51.6 million | $78.8 million | $109.5 million | $143.8 million |
| Operating income (loss) | $12.7 million | $29.4 million | ($1.0 million) | $59.7 million |
| Net income (loss) | $9.6 million | $16.8 million | ($38.2 million) | $9.6 million |
| Operating cash flow | $39.0 million | Not stated for quarter | $78.2 million | $57.5 million |
| Capital expenditures and acquisitions, cash basis | Not stated for quarter | Not stated for quarter | $43.3 million | $39.8 million |
| Debt at period end | $41.0 million | Not stated for quarter | $41.0 million | Not stated for six-month period |
Q2 oil and gas revenue fell 35%, as a 43% decline in realized prices before hedging more than offset 16% production growth. Q2 oil revenue was $48.7 million and natural gas revenue was $2.9 million. Realized oil price after hedging was $72.18/Bbl versus $77.40/Bbl a year earlier; realized gas price was $1.41/Mcf versus $8.35/Mcf.
For the first half, revenue declined 24% while production rose 18%. Lower commodity prices and a $47.2 million income tax provision drove the net loss; the tax provision includes a one-time $44.1 million deferred tax charge associated with the change from partnership to corporate tax status. The filing also identifies a $2.4 million deferred tax liability related to the Vitesse Oil acquisition. The reported six-month net loss includes this tax effect.
Q2 commodity derivatives produced a $4.8 million net gain, versus an $11.6 million loss in Q2 2022. The six-month gain was $12.2 million versus a $48.4 million loss. These totals include unrealized mark-to-market changes. Q2 operating expenses included $18.7 million of depletion, depreciation, amortization and accretion and $1.4 million of equity-based compensation. First-half equity compensation was $29.4 million, including immediate expense recognition for retirement-eligible awards.
Cash, debt and shareholder returns
At June 30, cash was $3.4 million, long-term revolving-credit borrowings were $41.0 million, and working capital was a $3.6 million deficit. Cash declined $6.6 million from year-end. First-half financing cash outflow was $41.6 million, including $29.0 million of dividends paid; Vitesse also repaid $12.0 million net under its revolving facility. The company declared $32.8 million in dividends during the first half. On July 27, the board declared a subsequent $0.50-per-share quarterly dividend, payable September 29.
The credit facility matures April 29, 2026. At June 30, the borrowing base was $245 million, elected commitments were $170 million, and $41 million was outstanding; the facility’s interest rate was 8.00%. A May redetermination reduced the borrowing base, primarily reflecting lower commodity prices. Vitesse reported compliance with facility financial covenants at quarter-end. It had a $60 million repurchase authorization but had repurchased only $0.2 million of shares in the first half; no repurchases occurred in Q2.
Outlook, commentary and risks
Management expects operating cash flow and borrowing availability to meet liquidity needs, planned capital spending and dividends for at least the next 12 months, while noting that acquisitions or other opportunities could require additional borrowing or new capital. Capital spending is discretionary and may be adjusted for commodity prices, costs, drilling outcomes and liquidity. No specific full-year production, revenue or earnings guidance is provided in the supplied filing text.
Management expects commodity-price volatility to continue. Oil and gas prices, regional price differentials, operator drilling and completion decisions, inflation and service costs, and infrastructure constraints may materially affect results. Vitesse hedges a substantial but varying share of oil production and had no natural gas hedges at June 30. Its oil swaps covered approximately 680,000 barrels for the remainder of 2023 at a weighted average $77.95/Bbl and approximately 680,000 barrels for 2024 at $76.00/Bbl. A hypothetical $1 change in the WTI strip would change the net derivative position by approximately $1.3 million.
Other risks include dependence on third-party operators, concentration among operators, floating-rate debt, counterparty and banking risks, and potential changes in reserve estimates. Three operators generated 50% of Q2 revenue; four generated 57% for the first half. Management reported no material legal proceedings known to it and no material changes to previously disclosed risk factors, while noting general financial-institution liquidity risks. Disclosure controls were assessed as effective, with no material Q2 changes to internal control over financial reporting.
Most important facts for investors to verify
- Reconcile the $47.2 million first-half income tax provision, including the $44.1 million spin-off-related deferred tax charge, against the six-month net loss and deferred tax liability.
- Review the borrowing-base reduction, actual borrowing availability, covenant definitions and headroom, especially given the reported $3.6 million working-capital deficit.
- Assess how much of expected production is hedged, the timing and settlement terms of swaps, and the sensitivity of cash flows to commodity prices and basis differentials.
- Evaluate whether production growth and operator activity can offset lower realized prices, higher workover and service costs, and increased depletion rates.
- Confirm the sustainability of the $0.50 quarterly dividend against operating cash flow, capital requirements, facility restrictions and potential acquisition spending.