Vital Energy, formerly known as Laredo Petroleum, has a troubled history but is attempting a turnaround through rebranding and asset restructuring.
- Despite recent acquisitions and increased holdings in the Permian Basin, concerns remain about inventory issues and future well productivity.
- The company is hedged for 2024 but faces long-term sustainability challenges.
Background and Rebranding
Vital Energy rebranded to distance itself from its near-bankruptcy history. This rebranding effort was aimed at shedding the negative perceptions tied to its past financial struggles.
Business Overview
Vital Energy holds 265,000 net acres in the Permian Basin, primarily in Reeves County in the Delaware Basin and Howard, Glasscock, and Reagan Counties in the Midland Basin.
The company has recently closed several high-profile transactions to expand its Permian holdings, adding over 100,000 net acres and significantly boosting production volumes.
Drilling and Production Analysis
Vital Energy’s drilling results vary significantly across its holdings:
- Howard County: Historically preferred due to higher initial production rates (143,000 bopd vs. 108,000 bopd in Glasscock and 102,000 bopd in Reagan). Howard wells also have a higher oil cut (82.0% vs. 62.0% in Glasscock).
- Glasscock and Reagan Counties: These areas are more gas-weighted, which is less favorable given the current natural gas market conditions.
- Delaware Basin: Recently acquired with promising but more costly drilling results.
The company’s strategy to purchase more Howard County acreage in 2021 and divest gas-weighted assets was prudent. However, Howard County’s drilling inventory is depleting, and the company cannot sustain its current drilling pace there indefinitely. This depletion could lead to lower revenue per well in the future.
Recent Acquisitions and Long-Term Outlook
Vital Energy has acquired new positions in the Delaware Basin, notably from Forge Energy. These acquisitions added significant drilling locations with promising initial results.
However, Delaware wells are more expensive to drill due to higher operational costs.
2024 Outlook
Vital Energy’s 2024 production guidance is set at 119k boe/d, with 47.9% crude oil volumes. The company has hedged 93% of its expected crude oil production at $75.00 per barrel and nearly half of its natural gas production. Despite this, the high capital expenditure ($775 million) and the potential for tepid drilling results pose risks.
The 2024 drilling program is crucial for setting up 2025, but relying on early results from new acquisitions may be overly optimistic. The PV-10 reserve calculation indicates limited upside at current prices, highlighting potential challenges in sustaining profitability without significant cost inflation or better-than-expected well results.
Shift to New Properties Hold Promise
Vital Energy’s moderate scale and gas-weighted land holdings have historically constrained its performance. The focus on Howard County’s oily acreage has been beneficial in the short term but is not sustainable.
The shift to new properties in the Delaware Basin shows promise but comes with higher costs.
Given these challenges, investors should approach Vital Energy with caution.
Despite hedges protecting 2024, long-term sustainability issues and the potential for declining well productivity warrant caution. The company remains a candidate for shorting as an oil hedge, considering its vulnerabilities despite near-term protections.
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Kevin is an experienced business development strategist and content writer specializing in finance and stock market topics. He has a proven track record of driving sales and enhancing communications for small businesses by blending academic knowledge with practical experience to create engaging and accurate content.
