Business context and reporting period
Vitesse Energy, Inc. is a non-operated oil and gas producer focused primarily on the Bakken and Three Forks formations in the Williston Basin, with additional interests in the Denver-Julesburg and Powder River basins. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023. Vitesse completed its spin-off from Jefferies on January 13, 2023; therefore, periods before that date reflect the Predecessor, and comparisons are affected by the change in corporate and tax structure.
At quarter-end, Vitesse reported interests in 5,642 gross (155.4 net) productive wells, 263 gross (7.7 net) wells being drilled or completed, and 389 gross (10.0 net) permitted wells. Average production was 11,009 Boe/d in Q3, with oil representing 67%.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $55.1 million | $77.1 million | $164.6 million | $220.9 million |
| Operating income | $15.9 million | $55.9 million | $15.0 million | $115.7 million |
| Net income (loss) | $(1.5) million | $85.7 million | $(39.7) million | $95.3 million |
| Net income (loss) per share/unit | $(0.05) | $0.19 | $(1.40) | $0.21 |
| Average production | 11,009 Boe/d | 11,166 Boe/d | 11,295 Boe/d | 10,215 Boe/d |
Q3 operating margin was approximately 29%; net loss margin was approximately 3%. For the nine months, operating margin was approximately 9% and net loss margin approximately 24%, with the latter heavily affected by a one-time tax charge.
Q3 average realized prices before hedging were $78.45/Bbl for oil and $0.88/Mcf for natural gas; combined realized price was $54.36/Boe. After hedging, combined realized price was $52.95/Boe. Q3 lease operating expense was $9.86/Boe, production taxes $5.09/Boe, G&A $3.77/Boe, and DD&A $18.77/Boe.
- Cash flow: Nine-month operating cash flow was $110.3 million, investing cash outflow $77.5 million, and financing cash outflow $41.1 million. Cash declined by $8.3 million to $1.7 million. Management separately reports Q3 operating cash flow of $32.1 million.
- Capital spending: Nine-month capital expenditures were $77.3 million, including development and acquisitions; cash acquisition spending was $21.8 million. Q3 capital development and acquisitions were reported at $34.1 million.
- Debt and liquidity: Revolver borrowings were $56.0 million, up from $48.0 million at year-end 2022. Cash was $1.7 million, and working capital was negative $41.9 million, versus positive $17.7 million at year-end. The $245 million borrowing base and $170 million elected commitment had $56 million drawn. Interest rate at quarter-end was 8.42%; maturity is April 2026.
- Dividends and equity: The company declared $49.2 million of dividends during the nine months and paid $43.5 million. The Board declared a $0.50-per-share quarterly dividend on October 31, payable December 29, 2023. A $60 million repurchase authorization remained largely unused; $0.2 million had been spent through September.
Material changes versus the prior comparable period
- Q3 revenue fell 29%, principally because combined realized prices before hedging declined 28%; production was down 1%. Nine-month revenue fell 25% despite an 11% increase in production, as pre-hedging realized price per Boe declined 33%.
- Natural gas revenue fell 88% in Q3 and 71% for the nine-month period. Q3 realized gas price was $0.88/Mcf versus $7.42/Mcf a year earlier.
- Oil hedging moderated the effect of lower benchmark prices: Q3 realized oil price after hedging was $76.35/Bbl versus $73.54/Bbl in Q3 2022. The company had no natural gas hedges.
- Q3 commodity derivatives produced a $17.1 million loss versus a $31.0 million gain in Q3 2022, including a $15.7 million unrealized loss. Nine-month derivative loss was $4.9 million versus $17.3 million.
- Nine-month equity compensation was $30.5 million versus $4.9 million in 2022, including $26.8 million recognized immediately for retirement-eligible awards. Conversely, Q3 2022 included a $17.3 million equity-compensation credit, making the quarterly year-over-year comparison especially distorted.
- DD&A rose 7% in Q3 and 20% for the nine months, reflecting higher depletion rates associated with lower reserves and increased capital investment. Q3 lease operating costs per Boe rose 22%, partly due to workovers and higher service costs.
- Vitesse recorded $46.4 million of income tax expense for the nine months, including a one-time $44.1 million deferred tax charge from its transition from partnership to corporate tax status. The Predecessor was not taxed at the entity level in the 2022 comparison period.
Outlook, risks, contingencies, and unusual items
- Management expects operating cash flow and revolver availability to fund liquidity needs, planned capital expenditures, dividends, and repurchases for at least the next 12 months. No specific production, revenue, earnings, or capital-spending guidance is provided. Capital spending is discretionary and may be adjusted with prices, costs, returns, and liquidity.
- Management described production as remaining around 11,000 Boe/d and expects commodity-price volatility to continue. It stated that the company remains materially exposed to prices despite hedging, and has not hedged natural gas since March 2022.
- At September 30, oil swaps covered approximately 400,000 barrels for Q4 2023 and approximately 1.375 million barrels for 2024, at weighted average prices near $79/Bbl. Additional swaps covering 180,000 barrels for the first half of 2025 were entered into after quarter-end. Derivative fair value was a net liability of approximately $6.0 million.
- Risks include oil and gas price movements and differentials, operator-controlled drilling and costs, reserve uncertainty, infrastructure and weather constraints, inflation and service costs, floating-rate debt, borrowing-base redeterminations, and financial institution or counterparty disruption. Three operators accounted for 49% of Q3 revenue.
- The revolver requires specified leverage and current ratios and commodity hedging; Vitesse reported compliance with financial covenants at quarter-end. Distributions are subject to facility conditions and Board approval. Management reported no material legal proceeding known to it; it also noted ordinary-course legal, administrative, and environmental matters.
- No oil and gas property impairment was recorded in the periods presented. Management reported effective disclosure controls as of September 30, 2023 and no material third-quarter change in internal control over financial reporting.
Important facts for investors to verify
- How much of reported earnings and cash generation reflects recurring operations versus derivative mark-to-market movements, equity awards, spin-off costs, and the one-time tax charge.
- Whether realized oil and gas prices, local differentials, workover costs, and operator activity support production and cash-flow expectations.
- Liquidity and covenant headroom given the $41.9 million working-capital deficit, $56.0 million of revolver debt, 8.42% quarter-end borrowing rate, and borrowing-base exposure to reserve and price assumptions.
- The sustainability and contractual permissibility of the $0.50 quarterly dividend alongside planned capital spending and potential acquisitions.
- Comparability of 2023 and 2022 results, including the January 2023 spin-off, different tax treatment, acquired Vitesse Oil interests, and predecessor-unit versus public-company share reporting.