Vitesse Energy, Inc. (NYSE:VTS) Q4 2022 Earnings Conference Call February 14, 2023 9:00 AM ET Company Participants Ben Messier - Director of Investor Relations Bob Gerrity - Chairman and Chief Executive Officer Brian Cree - President David Macosko - Chief Financial Officer Conference Call Participants Stephen Richardson - Evercore ISI Donovan Schafer - Northland Capital Markets Operator Greetings. Welcome to Vitesse Energy Full-Year 2022 Earnings Call. At this time, all participants are in a listen-only mod ...

PART I [Business and Properties](index=9&type=section&id=Items%201%20and%202.%20Business%20and%20Properties) Vitesse Energy focuses on non-operated oil and natural gas properties, primarily in the Williston Basin, aiming to return capital to stockholders through dividends and strategic acquisitions [Overview and The Spin-Off](index=9&type=section&id=Overview%20and%20The%20Spin-Off) Vitesse Energy, an independent company, focuses on non-operated oil and gas properties in the Williston Basin, completing its spin-off from Jefferies on January 13, 2023 - The company's core business is owning non-operated financial interests in oil and gas wells, primarily in the Bakken and Three Forks formations of the Williston Basin, with additional properties in the Central Rockies[24](index=24&type=chunk) - As of December 31, 2022, Vitesse owned an average working interest of **2.6%** in **5,338 gross productive wells** and royalty interests in an additional **1,005 productive wells**[27](index=27&type=chunk) - On January 13, 2023, Vitesse completed its spin-off from Jefferies, becoming an independent, publicly traded company. The transaction included acquiring Vitesse Oil, eliminating previous compensation plans, and entering into a new Revolving Credit Facility with **$53 million drawn** at closing[34](index=34&type=chunk) [Business Strategy and Competitive Strengths](index=11&type=section&id=Business%20Strategy%20and%20Competitive%20Strengths) The company's strategy emphasizes stockholder dividends, strategic acquisitions, and a strong balance sheet, supported by data-driven systems and a disciplined hedging approach - The business strategy is centered on delivering meaningful and growing dividends to stockholders, with an initial target of approximately **$66.0 million per fiscal year**[36](index=36&type=chunk) - Vitesse aims to maintain financial strength by targeting a Net Debt to Adjusted EBITDA ratio of **less than 1.0**. As of December 31, 2022, this ratio was **0.23**[36](index=36&type=chunk) - A key strength is the use of proprietary data systems (vLuminis) and real-time business intelligence dashboards to monitor operators, well performance, and costs, enabling rapid evaluation of acquisition and development opportunities[37](index=37&type=chunk) - The company employs a hedging strategy to reduce exposure to oil price volatility, with approximately **31% of expected oil production hedged** through December 31, 2024, at an average price of **$77.42/Bbl**[37](index=37&type=chunk) [Our Properties and Reserves](index=13&type=section&id=Our%20Properties%20and%20Reserves) Vitesse's primary assets are in the Williston Basin, holding 43,797 MBoe of proved reserves with a PV-10 value of $1.18 billion as of December 31, 2022 Asset Summary by Basin (as of Dec 31, 2022) | Basin | Net Acres | Productive Wells (Gross/Net) | Avg. Daily Production (Boe/d) | Proved Reserves (MBoe) | PV-10 ($ thousands) | % Oil | % Proved Developed | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Williston Basin | 46,403 | 5,255 / 122 | 9,123 | 41,379 | $1,099,090 | 70% | 60% | | Central Rockies | 197 | 83 / 16 | 1,253 | 2,418 | $80,894 | 58% | 91% | | **Total** | **46,600** | **5,338 / 138** | **10,376** | **43,797** | **$1,179,984** | **70%** | **62%** | Estimated Net Proved Reserves (MBoe) | Reserve Category | As of Dec 31, 2022 | As of Nov 30, 2021 | As of Nov 30, 2020 | | :--- | :--- | :--- | :--- | | **Proved Developed** | 27,106 | 27,504 | 25,744 | | **Proved Undeveloped** | 16,691 | 15,030 | 21,500 | | **Total Proved** | **43,797** | **42,534** | **47,244** | | **% Proved Developed** | 61.9% | 64.7% | 54.5% | Changes in Proved Undeveloped Reserves (Year Ended Dec 31, 2022) | Category | MBoe | | :--- | :--- | | **Balance at Dec 31, 2021** | **15,055** | | Acquisitions | 414 | | Extensions, discoveries and other additions | 1,810 | | Transfers to proved developed reserves | (793) | | Revisions | 205 | | **Balance at Dec 31, 2022** | **16,691** | [Production, Development, and Acreage](index=20&type=section&id=Production,%20Development,%20and%20Acreage) In 2022, Vitesse's production averaged 10,376 Boe/d, a 4% increase, with 295 gross development wells completed and 46,600 net acres held Production and Pricing Summary (Year Ended Dec 31, 2022) | Metric | Value | | :--- | :--- | | Total Production (Boe/d) | 10,376 | | Oil Production (Bbl/d) | 7,054 | | Natural Gas Production (Mcf/d) | 19,929 | | Avg. Realized Oil Price (per Bbl) | $94.16 | | Avg. Realized Oil Price with Hedges (per Bbl) | $76.09 | | Avg. Production Expense (per Boe) | $13.02 | | Avg. Production Taxes (per Boe) | $6.36 | - In 2022, the company participated in the completion of **295 gross (7.53 net) productive development wells**, with no exploratory wells drilled[68](index=68&type=chunk) - As of December 31, 2022, the company owned a working interest in **237 gross (5.8 net) wells** that were being drilled or completed[69](index=69&type=chunk) Acreage Summary (as of Dec 31, 2022) | Acreage Type | Gross | Net | | :--- | :--- | :--- | | Developed | 1,594,754 | 44,113 | | Undeveloped | 71,677 | 2,487 | | **Total** | **1,666,431** | **46,600** | [Regulation and Environmental Matters](index=26&type=section&id=Regulation%20and%20Environmental%20Matters) Vitesse's operations are subject to extensive federal and state regulations, including environmental laws and climate change initiatives, which may increase costs and impact demand - Operations are subject to extensive rules from federal, state, and local authorities that can limit production rates and drilling locations, and impose production or severance taxes[88](index=88&type=chunk)[89](index=89&type=chunk) - The company is subject to numerous environmental laws, including CERCLA (Superfund), RCRA (waste disposal), and the ESA (endangered species), which can impose strict liability for cleanup and penalties for non-compliance[98](index=98&type=chunk)[99](index=99&type=chunk) - Hydraulic fracturing is under scrutiny, with potential for new federal or state regulations that could lead to delays, increased operating costs, and process prohibitions[107](index=107&type=chunk)[108](index=108&type=chunk) - Climate change legislation, such as the Inflation Reduction Act of 2022, and EPA regulations on greenhouse gas emissions (GHGs) could increase operating costs for Vitesse's operators and potentially reduce demand for its products[113](index=113&type=chunk)[261](index=261&type=chunk) [Risk Factors](index=32&type=section&id=Item%201A.%20Risk%20Factors) Vitesse faces significant risks from volatile commodity prices, uncertain reserve estimates, reliance on third-party operators, debt covenants, spin-off tax implications, and evolving environmental regulations - **Business Risks:** The company's financial results are highly sensitive to volatile oil and natural gas prices. As a non-operator, its success depends on the performance and decisions of third-party operators[144](index=144&type=chunk)[169](index=169&type=chunk) - **Reserve Risks:** Estimated proved reserves are based on assumptions that may prove inaccurate, and the present value of future net cash flows (PV-10) is not equivalent to the market value of the reserves[158](index=158&type=chunk)[163](index=163&type=chunk) - **Indebtedness Risks:** Availability under the Revolving Credit Facility is subject to a borrowing base that can be reduced due to lower commodity prices or reserve estimates, potentially impacting liquidity. The facility also contains restrictive covenants that may limit business and financing activities[209](index=209&type=chunk)[211](index=211&type=chunk) - **Spin-Off Risks:** If the spin-off from Jefferies fails to qualify as a tax-free transaction, Jefferies and its former shareholders could face significant tax liabilities, and Vitesse may have indemnification obligations to Jefferies[222](index=222&type=chunk)[226](index=226&type=chunk) - **Regulatory Risks:** Federal and state initiatives related to hydraulic fracturing, methane emissions, and climate change could result in increased costs, operating restrictions, and reduced demand for oil and natural gas[258](index=258&type=chunk)[261](index=261&type=chunk) [Unresolved Staff Comments](index=56&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the SEC - None[268](index=268&type=chunk) [Legal Proceedings](index=56&type=section&id=Item%203.%20Legal%20Proceedings) The company is subject to various legal proceedings arising in the ordinary course of business but believes that none are expected to have a material adverse effect on its financial condition or results of operations - The company is not currently involved in any legal proceedings that are expected to materially adversely affect its business, financial condition, or results of operations[269](index=269&type=chunk) [Mine Safety Disclosures](index=56&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - None[271](index=271&type=chunk) PART II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=57&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity,%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Vitesse Energy's common stock trades on the New York Stock Exchange under 'VTS', with 28,524,435 shares outstanding as of February 1, 2023, and an initial target annual dividend of $66.0 million - The company's common stock is listed on the New York Stock Exchange under the trading symbol '**VTS**'[272](index=272&type=chunk) - As of February 1, 2023, there were **28,524,435 shares** of common stock outstanding[274](index=274&type=chunk) - The company expects to pay quarterly cash dividends totaling approximately **$66.0 million annually**. The first quarterly dividend of about **$16.5 million** was approved for payment on March 31, 2023[280](index=280&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=58&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) For 2022, Vitesse reported $118.9 million net income and $167.6 million Adjusted EBITDA, driven by higher prices and production, reducing debt to $48.0 million with $122.0 million credit facility availability [Results of Operations](index=63&type=section&id=Results%20of%20Operations) In 2022, total revenue increased 55% to $300.1 million, driven by higher commodity prices and production, resulting in $118.9 million net income despite increased G&A and derivative losses Operating Results Comparison (2022 vs. 2021) | ($ in thousands) | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | Change (%) | | :--- | :--- | :--- | :--- | | **Total Revenue** | **$300,070** | **$193,446** | **55%** | | Production Expense | $49,313 | $44,561 | 11% | | General & Administrative | $19,833 | $10,738 | 85% | | Commodity Derivative Loss | ($30,830) | ($39,891) | (23)% | | **Net Income** | **$118,903** | **$15,213** | **682%** | - The increase in 2022 revenue was driven by a **49% increase in average realized prices per Boe** before hedging and a **4% increase in production volumes**[310](index=310&type=chunk) - General and administrative expense increased significantly in 2022 primarily due to **$7.9 million in non-recurring costs** related to the Spin-Off[316](index=316&type=chunk) [Liquidity and Capital Resources](index=72&type=section&id=Liquidity%20and%20Capital%20Resources) As of December 31, 2022, Vitesse had $10.0 million cash, $48.0 million debt, and $122.0 million credit facility availability, with $147.0 million cash from operations and $84.6 million in capital expenditures Cash Flow Summary (in thousands) | Cash Flow | Year Ended Dec 31, 2022 | Year Ended Nov 30, 2021 | Year Ended Nov 30, 2020 | | :--- | :--- | :--- | :--- | | **Operating Activities** | **$147,041** | **$86,971** | **$76,309** | | Investing Activities | ($84,583) | ($43,317) | ($70,808) | | Financing Activities | ($57,807) | ($42,587) | ($5,528) | | **Net Change in Cash** | **$4,651** | **$1,067** | **($27)** | - As of December 31, 2022, the company had **$48.0 million in outstanding borrowings** and **$122.0 million of available borrowing capacity** under its Prior Revolving Credit Facility[354](index=354&type=chunk) - Total capital expenditures for the year ended December 31, 2022, were **$84.6 million**, including **$28.5 million for acquisitions** and **$56.0 million for development**[364](index=364&type=chunk)[352](index=352&type=chunk) [Non-GAAP Financial Information](index=75&type=section&id=Non-GAAP%20Financial%20Information) Vitesse uses non-GAAP measures like Adjusted EBITDA, which was $167.6 million in 2022, and PV-10, which was $1.18 billion, to evaluate performance and financial health Adjusted EBITDA and Net Debt Reconciliation (in thousands) | Metric | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net income | $118,903 | $15,213 | | Interest expense | $4,153 | $3,125 | | DD&A | $63,732 | $60,883 | | Unit based compensation | ($10,766) | $4,037 | | Unrealized loss on derivatives | ($16,294) | $22,977 | | Adjustments for non-routine items | $7,898 | $— | | **Adjusted EBITDA** | **$167,626** | **$106,235** | | **Net Debt** | **$37,993** | **$62,644** | | **Net Debt to Adjusted EBITDA ratio** | **0.23** | **0.59** | PV-10 Reconciliation (as of Dec 31, 2022, in thousands) | Metric | Amount | | :--- | :--- | | Standardized Measure | $1,179,984 | | Federal Income Taxes, Discounted at 10% | $— | | **Pre-Tax PV-10** | **$1,179,984** | [Quantitative and Qualitative Disclosures About Market Risk](index=78&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Vitesse manages commodity price risk through derivative contracts, hedging 1,340,000 barrels for 2023 and 660,000 barrels for 2024, and is exposed to floating interest rate risk on its debt - The company's main market risk exposure is from volatile oil and natural gas prices, which it manages through a derivative hedging program[389](index=389&type=chunk)[391](index=391&type=chunk) Open Crude Oil Swap Contracts (as of Dec 31, 2022) | Settlement Period | Oil (barrels) | Weighted Average Price ($/Bbl) | | :--- | :--- | :--- | | 2023 | 1,340,000 | $78.14 | | 2024 | 660,000 | $75.97 | - The company is exposed to interest rate risk due to its long-term debt, which bears a floating interest rate based on SOFR[395](index=395&type=chunk) [Financial Statements and Supplementary Data](index=80&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section contains Vitesse Energy's audited financial statements, including balance sheets, statements of operations, equity, and cash flows, along with notes and supplemental oil and gas information - The financial statements and supplementary data required by this item are included starting on page F-1 of the report[397](index=397&type=chunk) [Changes in and Disagreements With Accountants on Accounting and Financial Disclosures](index=80&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosures) The company reports no changes in or disagreements with its accountants on accounting and financial disclosures - None[398](index=398&type=chunk) [Controls and Procedures](index=80&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded disclosure controls were effective as of December 31, 2022, with no material changes to internal control over financial reporting, and no auditor attestation is required as an emerging growth company - The company's principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of December 31, 2022[398](index=398&type=chunk) - As a newly public company and an emerging growth company, this annual report does not include a management report or an auditor attestation on internal control over financial reporting[400](index=400&type=chunk)[401](index=401&type=chunk) PART III [Directors, Executive Officers and Corporate Governance](index=81&type=section&id=Item%2010.%20Directors,%20Executive%20Officers%20and%20Corporate%20Governance) This section details Vitesse's executive officers and seven-member board, including committee structures for Audit, Nominating/Governance/ESR, and Compensation, and adopted corporate governance guidelines - The executive officers are Robert W. Gerrity (CEO), Brian J. Cree (President), David R. Macosko (CFO), and Christopher I. Humber (General Counsel and Secretary)[405](index=405&type=chunk) - The Board of Directors consists of **seven members**, with Robert W. Gerrity serving as Chairman and Daniel O'Leary as Lead Independent Director[411](index=411&type=chunk)[438](index=438&type=chunk) - The Board has three standing committees: Audit, Nominating, Governance and Environmental and Social Responsibility, and Compensation, all composed entirely of independent directors[431](index=431&type=chunk)[432](index=432&type=chunk)[435](index=435&type=chunk)[436](index=436&type=chunk) [Executive Compensation](index=87&type=section&id=Item%2011.%20Executive%20Compensation) For 2022, CEO Robert W. Gerrity's total compensation was $1.71 million; the company adopted a new Long-Term Incentive Plan (VTS LTIP) with significant RSU awards post-spin-off 2022 Summary Compensation Table | Name and Principal Position | Salary ($) | Bonus ($) | All Other Compensation ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Robert W. Gerrity, CEO | 500,000 | 1,175,000 | 30,720 | 1,705,720 | | Brian J. Cree, President | 400,000 | 725,000 | 18,174 | 1,143,174 | | David R. Macosko, CFO | 315,000 | 230,000 | 17,796 | 562,796 | - In connection with the spin-off, the company adopted the Vitesse Energy, Inc. Long-Term Incentive Plan (VTS LTIP) and granted significant RSU awards to its executives, including **1,650,000 RSUs to the CEO** and **726,000 RSUs to the President**[446](index=446&type=chunk) - The company's independent directors will receive an annual cash retainer (**$125,000**, or **$150,000 for the Lead Independent Director**) and an annual RSU grant valued at **$125,000**[482](index=482&type=chunk) [Security Ownership of Certain Beneficial Owners and Management](index=94&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management) As of February 1, 2023, all directors and executive officers as a group beneficially owned 13.1% of Vitesse's common stock, with Joseph S. Steinberg holding the largest single beneficial ownership at 9.1% - As of February 1, 2023, all directors and executive officers as a group beneficially owned **3,726,608 shares**, representing **13.1% of the outstanding common stock**[486](index=486&type=chunk) - Director Joseph S. Steinberg is the largest single beneficial owner reported, with **2,592,754 shares**, or **9.1% of the outstanding common stock**[489](index=489&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=95&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions,%20and%20Director%20Independence) Vitesse entered into key agreements with Jefferies post-spin-off, including Separation and Tax Matters Agreements, governing asset/liability allocation and tax-free status, and terminated a prior Employee Participation Plan - The Separation and Distribution Agreement governs the spin-off and includes cross-indemnification provisions, making Vitesse financially responsible for its business liabilities and Jefferies for its own[491](index=491&type=chunk)[495](index=495&type=chunk) - The Tax Matters Agreement outlines responsibilities for taxes and restricts Vitesse from taking certain actions for two years post-spin-off (e.g., certain business combinations, large stock issuances) to protect the tax-free status of the distribution[500](index=500&type=chunk)[503](index=503&type=chunk) - Prior to the spin-off, loans from a Jefferies affiliate to CEO Robert Gerrity and President Brian Cree (and their related entities) were repaid via the transfer of their equity interests in Vitesse Energy[516](index=516&type=chunk) - The company terminated its Employee Participation Plan on November 30, 2022, repurchasing working interests from participants for an aggregate of **$4.9 million**, including payments to executives and their relatives[520](index=520&type=chunk) [Principal Accounting Fees and Services](index=99&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) For 2022, Vitesse paid Deloitte & Touche LLP $1,516,336 in audit fees, a significant increase from 2021, primarily due to services related to the spin-off Registration Statement on Form 10 Audit and Other Fees (to Deloitte & Touche LLP) | Fee Type | 2022 | 2021 | | :--- | :--- | :--- | | Audit Fees | $1,516,336 | $513,688 | | Audit Related Fees | $— | $— | | Tax Fees | $— | $— | | All Other Fees | $— | $— | | **Total Fees** | **$1,516,336** | **$513,688** | - The increase in audit fees from 2021 to 2022 was primarily due to services rendered in connection with the company's Registration Statement on Form 10 for the spin-off[527](index=527&type=chunk) PART IV [Exhibits, Financial Statement Schedules](index=100&type=section&id=Item%2015.%20Exhibits,%20Financial%20Statement%20Schedules) This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including key agreements like the Separation and Distribution Agreement and Credit Agreement - This section provides an index of all exhibits filed with the Form 10-K, including governance documents, material contracts, and certifications[531](index=531&type=chunk) [Form 10-K Summary](index=101&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company has elected not to provide a summary of the Form 10-K - None[534](index=534&type=chunk) Financial Statements and Supplementary Data [Vitesse Energy, LLC Audited Consolidated Financial Statements](index=103&type=section&id=Vitesse%20Energy,%20LLC%20Audited%20Consolidated%20Financial%20Statements) This section presents the audited consolidated financial statements for Vitesse Energy, LLC, including balance sheets, statements of operations, equity, and cash flows, with detailed notes and supplemental oil and gas information Consolidated Balance Sheet Highlights (in thousands) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $660,484 | $611,526 | | Total Liabilities | $91,502 | $125,662 | | Revolving credit facility | $48,000 | $68,000 | | Total Members' Equity | $564,423 | $480,074 | Consolidated Statement of Operations Highlights (in thousands) | | Year Ended Dec 31, 2022 | Year Ended Nov 30, 2021 | | :--- | :--- | :--- | | Total Revenue | $300,070 | $185,178 | | Total Operating Expenses | $146,204 | $131,281 | | Operating Income | $153,866 | $53,897 | | **Net Income** | **$118,903** | **$18,114** | - The company follows the successful efforts method of accounting for its oil and gas properties. No impairment was recorded in 2022 or 2021, but a **$13.2 million impairment** was recorded in 2020[580](index=580&type=chunk)[584](index=584&type=chunk) - The standardized measure of discounted future net cash flows from proved reserves was **$1.18 billion** as of December 31, 2022, a significant increase from **$628.4 million** as of December 31, 2021, primarily due to higher commodity prices[671](index=671&type=chunk)