Vital Energy(VTLE) - 2022 Q4 - Annual Report

Part I Business Vital Energy, Inc. is an independent energy company focused on the acquisition, exploration, and development of oil and natural gas properties exclusively in the Permian Basin of West Texas Overview and Strategy Vital Energy is an independent energy company focused on oil and natural gas properties in the Permian Basin, holding 163,286 net acres as of December 31, 2022 - Vital Energy is an independent energy company focused on the acquisition, exploration, and development of oil and natural gas properties in the Permian Basin of West Texas, with 163,286 net acres as of December 31, 2022[39] - The company's strategy focuses on creating long-term value through efficient development, prudent balance sheet management, and sustainable environmental practices[40] - In 2022, the company utilized Free Cash Flow and divestiture proceeds to repurchase and retire $284.8 million in senior unsecured notes, reducing its consolidated total leverage ratio to 1.2 times[43] - An equity repurchase program was initiated in May 2022, resulting in the repurchase of $37.3 million of equity, reducing outstanding shares by 490,536[43] - The company has established ESG goals, including targets for reducing greenhouse gas intensity, methane emissions, eliminating routine flaring by 2025, and increasing recycled water use[46] Operations and Properties The company's operations are concentrated in the Permian Basin, focusing on horizontal drilling in the Wolfcamp and Spraberry formations Productive Wells as of December 31, 2022 | | Gross | Net | Average WI % | | :--- | :--- | :--- | :--- | | Operated | 1,689 | 1,235 | 73% | | Non-operated | 227 | 57 | 25% | | Total | 1,916 | 1,292 | 67% | Drilling Activity (Completed Wells) | | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Gross | 49 | 71 | 48 | | Net | 47.1 | 70.1 | 47.3 | Key Financial and Operational Metrics (2022 vs 2021) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Sales Volumes (MBOE) | 30,076 | 29,827 | 1% | | Oil Sales Volumes (MBbl) | 13,838 | 11,619 | 19% | | Average Sales Price ($/BOE) | $59.66 | $38.46 | 55% | | Average Oil Sales Price ($/Bbl) | $97.65 | $69.32 | 41% | | Lease Operating Expenses ($/BOE) | $5.78 | $3.42 | 69% | | DD&A ($/BOE) | $10.36 | $7.22 | 43% | Reserves As of December 31, 2022, Vital Energy's total estimated net proved reserves were 302.3 million barrels of oil equivalent (MMBoe) Estimated Proved Reserves (as of Dec 31) | Reserve Category | 2022 (MBOE) | 2021 (MBOE) | | :--- | :--- | :--- | | Total Proved Developed | 222,917 | 232,048 | | Total Proved Undeveloped | 79,401 | 86,592 | | Total Estimated Proved Reserves | 302,318 | 318,640 | | Percent Developed | 74% | 73% | - Independent reserve engineers, Ryder Scott Company, L.P., estimated 100% of the company's proved reserve information as of December 31, 2022, 2021, and 2020[66] - In 2022, the company incurred $337.9 million to convert 23,722 MBOE of proved undeveloped reserves to proved developed reserves, with 30,291 MBOE of new PUDs added during the year[70] - The estimated total future cost to develop proved undeveloped reserves is $1.3 billion, with all 153 PUD locations scheduled to be developed within five years from their initial recording date[71][70] Acreage and Marketing As of year-end 2022, the company held 163,286 net acres in the Permian-Midland Basin, with 98% of this acreage held by production (HBP) Acreage as of December 31, 2022 | Basin | Developed Net Acres | Undeveloped Net Acres | Total Net Acres | % HBP | | :--- | :--- | :--- | :--- | :--- | | Permian-Midland | 160,496 | 2,790 | 163,286 | 98% | Material Firm Commitments as of December 31, 2022 | Commitment Type | 2023 | 2024 | 2025 | 2026 and after | | :--- | :--- | :--- | :--- | :--- | | Crude Oil Sales (MBbl) | 7,875 | — | — | — | | Crude Oil Transportation (MBbl) | 23,725 | 23,790 | 12,775 | 15,925 | | Natural Gas Sales (MMcf) | 11,402 | 8,435 | 7,378 | 27,163 | - The company has a transportation commitment with Gray Oak Pipeline, LLC extending into 2027 to transport 35,000 barrels of oil per day from Crane, Texas to the U.S. Gulf Coast[78] Regulation Vital's operations are substantially affected by federal, state, and local laws governing conservation, waste disposal, and environmental protection - Operations are significantly affected by federal, state (primarily Texas), and local regulations governing drilling, production rates, well spacing, waste disposal, and environmental matters[84][86] - Hydraulic fracturing is subject to state regulations, including chemical disclosure requirements in Texas, with ongoing governmental review and proposed federal legislation potentially increasing costs[103][106][112] - The company is subject to air quality regulations under the Clean Air Act and EPA rules, which require permits and emission controls for facilities, with expanding standards for methane and VOCs[114][117] - The Inflation Reduction Act of 2022 (IRA) imposes a new federal fee on methane emissions starting in 2024 and provides incentives for renewable energy, which could decrease demand for oil and gas[123] - The company's use of derivatives is subject to regulation under the Dodd-Frank Act, but it qualifies for the "End User Exception" to mandatory clearing rules[132][136] Human Capital As of December 31, 2022, Vital Energy employed 289 full-time employees, focusing on talent development and diversity - As of December 31, 2022, the company employed 289 full-time employees, with 141 based in field offices[138] Workforce Diversity (FY 2022) | Metric | Percentage | | :--- | :--- | | Diverse based on ethnicity | 28% | | Diverse based on gender | 28% | | US military veterans | 3% | | Women in professional roles or higher | 37% | - The company offers a comprehensive total rewards program, including competitive salaries, short and long-term incentives, a company-matched 401K, and flexible working schedules[142] Risk Factors The company faces high risks across business, financial operations, and regulatory environments, including commodity price volatility and extensive regulations Risks Related to Business The company's business is exposed to significant operational risks, including commodity price volatility, inflation, and intense competition - Inflationary pressures have increased and may continue to increase drilling, completion, and operating costs, potentially hurting financial results[146][147] - The volatility of oil, NGL, and natural gas prices heavily influences revenue, profitability, and access to capital, with lower prices potentially reducing cash flows and borrowing ability[149][150] - The company's producing properties are geographically concentrated in the Permian Basin, exposing it disproportionately to regional risks like transportation constraints, weather events, and regulatory changes[187] - Reserve estimation is a subjective process with numerous uncertainties, and negative revisions could lead to increased depletion expenses or impairment charges[167][168] - The company faces security threats, including cyber-security attacks, which could lead to disruptions in critical systems, loss of sensitive information, and have a material adverse effect on operations[183] Risks Related to Financing and Indebtedness Vital Energy's business requires substantial capital, with significant indebtedness and restrictive covenants limiting operational flexibility - As of December 31, 2022, the company had total long-term indebtedness of $1.12 billion and may incur substantial additional debt in the future[204] - Debt agreements contain restrictive covenants that limit the ability to incur more debt, pay dividends, sell assets, and engage in other specified transactions, with a breach potentially leading to default and acceleration of debt[215][216] - Availability under the Senior Secured Credit Facility is subject to a borrowing base that is redetermined semi-annually and can be reduced by factors like lower commodity prices, potentially impacting liquidity[210] - Borrowings under the Senior Secured Credit Facility expose the company to floating interest rate risk, and recent rate increases by the U.S. Federal Reserve have increased borrowing costs[208] Risks Related to Regulation The company's operations are subject to significant regulatory risks that could increase costs and restrict activities, including climate change legislation - Federal and state legislation relating to hydraulic fracturing and water disposal could result in materially increased costs, operating restrictions, or delays[218] - Regulatory initiatives intended to address seismic activity, particularly in the Permian Basin, could restrict drilling and the disposal of produced water, increasing operating costs[223][224] - The adoption of climate change legislation like the IRA, which includes a methane emissions fee, could increase operating costs and reduce demand for the company's products[228][229] - Derivatives reform legislation (Dodd-Frank Act) could increase the cost and reduce the availability of derivative contracts used to hedge commodity price and interest rate risks[236] Risks Related to Common Stock Investors face risks related to corporate governance, anti-takeover provisions, no dividend policy, and potential future stock dilution - The company has no plans to pay cash dividends on its common stock and is restricted from doing so by covenants in its debt agreements[245] - Provisions in the company's charter, bylaws, and Delaware law could make it more difficult for a third party to acquire control, potentially affecting the stock price[241][242][243] - Future sales of common stock to raise cash for acquisitions or other purposes could dilute ownership and have an adverse impact on the stock price[244] Unresolved Staff Comments Not applicable. The company reports no unresolved staff comments - The company has no unresolved staff comments from the SEC[246] Properties Information regarding the company's properties is contained in Item 1 of this report - The information required for this item is located in "Item 1. Business"[247] Legal Proceedings The company is subject to various legal proceedings in the ordinary course of business, none expected to be material - The company is subject to various legal proceedings from time to time, but does not currently believe any will have a material adverse effect on its financial condition or operations[247] Mine Safety Disclosures The company's Howard County sand mine operations are subject to MSHA regulation, with disclosures in Exhibit 95.1 - The company's Howard County sand mine operations are subject to MSHA regulation, with required mine safety disclosures provided in Exhibit 95.1[248][249] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Vital Energy's common stock trades on NYSE under 'VTLE'; the company has not paid dividends and initiated a share repurchase program - The company's common stock is listed on the New York Stock Exchange under the symbol "VTLE"[252] - The company has not paid any cash dividends and is restricted from doing so by covenants in its debt agreements[253] Issuer Purchases of Common Stock (Q4 2022) | Period | Total Shares Purchased | Weighted Average Price Paid | Maximum Value Remaining in Program | | :--- | :--- | :--- | :--- | | Oct 2022 | 100,749 | $66.87 | $166,676,279 | | Nov 2022 | 59,939 | $66.17 | $162,710,185 | | Dec 2022 | — | $— | $162,710,185 | | Total Q4 | 160,688 | | | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, Vital Energy's financial performance improved significantly due to higher commodity prices and increased oil production, driving net income and Free Cash Flow growth Executive Overview In 2022, Vital Energy saw significant financial performance increases, driven by higher sales and oil volumes, with a corporate name change in January 2023 Financial and Operating Performance Summary | Metric (in thousands) | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Oil, NGL and natural gas sales | $1,794,374 | $1,147,143 | 56% | | Net income | $631,512 | $145,008 | 336% | | Net cash provided by operating activities | $829,620 | $496,671 | 67% | | Free Cash Flow (non-GAAP) | $219,941 | $(2,829) | 7,875% | | Adjusted EBITDA (non-GAAP) | $913,482 | $505,917 | 81% | - Effective January 9, 2023, the company changed its corporate name from Laredo Petroleum, Inc. to Vital Energy, Inc.[264] - Expected capital expenditures for full-year 2023 are projected to be in the range of $625.0 million to $675.0 million[262] Results of Operations For 2022, total revenues from oil, NGL, and natural gas sales increased by 56% to $1.8 billion, driven by higher prices and oil volumes Revenue Analysis (2022 vs 2021) | Metric | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total Oil, NGL, Gas Sales (in thousands) | $1,794,374 | $1,147,143 | $647,231 | 56% | | Average Sales Price ($/BOE) | $59.66 | $38.46 | $21.20 | 55% | | Oil Sales Volumes (MBbl) | 13,838 | 11,619 | 2,219 | 19% | Selected Costs and Expenses (2022 vs 2021) | Expense (in thousands) | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Lease operating expenses | $173,983 | $101,994 | $71,989 | 71% | | Production and ad valorem taxes | $110,997 | $68,742 | $42,255 | 61% | | Depletion, depreciation and amortization | $311,640 | $215,355 | $96,285 | 45% | | General and administrative (excluding LTIP) | $57,501 | $45,906 | $11,595 | 25% | - Lease operating expenses (LOE) increased primarily due to inflationary pressures and costs associated with integrating newly acquired assets[279] - The net loss on derivatives decreased to $298.7 million in 2022 from $452.2 million in 2021, mainly due to a smaller non-cash mark-to-market loss, partially offset by higher cash settlement payments[292][293] Liquidity and Capital Resources As of December 31, 2022, Vital Energy had total liquidity of $974.4 million, driven by strong operating cash flow used for capital expenditures and debt reduction - As of December 31, 2022, total liquidity was $974.4 million, consisting of $44.4 million in cash and $930.0 million available under the Senior Secured Credit Facility[307] Cash Flow Summary (in thousands) | Cash Flow Activity | 2022 | 2021 | Change ($) | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $829,620 | $496,671 | $332,949 | | Net cash used in investing activities | $(475,952) | $(796,811) | $320,859 | | Net cash (used in) provided by financing activities | $(366,031) | $308,181 | $(674,212) | Incurred Capital Expenditures (in thousands) | Category | 2022 | 2021 | | :--- | :--- | :--- | | Oil and natural gas properties | $566,831 | $444,337 | | Midstream service assets | $1,595 | $2,842 | | Other fixed assets | $12,150 | $6,807 | | Total | $580,576 | $453,986 | - As of December 31, 2022, the company had $1.12 billion in total long-term debt, including $1.05 billion in senior unsecured notes and $70.0 million outstanding on its Senior Secured Credit Facility[320][322][515] Non-GAAP Financial Measures The company uses non-GAAP measures like Free Cash Flow ($219.9 million) and Adjusted EBITDA ($913.5 million) to evaluate performance Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow (in thousands) | Line Item | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities (GAAP) | $829,620 | $496,671 | | Less: Changes in operating assets and liabilities, net | (29,103) | (45,514) | | Cash flows from operating activities before changes | 800,517 | 451,157 | | Less: Incurred capital expenditures | (580,576) | (453,986) | | Free Cash Flow (non-GAAP) | $219,941 | $(2,829) | Reconciliation of Net Income to Adjusted EBITDA (in thousands) | Line Item | 2022 | 2021 | | :--- | :--- | :--- | | Net income (GAAP) | $631,512 | $145,008 | | Plus: Share-settled equity-based compensation, net | 8,403 | 7,675 | | Plus: DD&A | 311,640 | 215,355 | | Plus: Mark-to-market on derivatives adjustments | (185,573) | 89,754 | | Plus: Interest expense | 125,121 | 113,385 | | Plus: Income tax expense | 5,502 | 3,645 | | Plus: Other adjustments | 16,877 | (68,905) | | Adjusted EBITDA (non-GAAP) | $913,482 | $505,917 | Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to market risks from commodity price volatility and interest rate changes, managed through derivatives - The company's primary market risks are from adverse changes in oil, NGL, and natural gas prices, and in interest rates[339] Commodity Derivative Sensitivity Analysis (as of Dec 31, 2022) | Scenario | Impact on Income Before Taxes | | :--- | :--- | | Commodity derivative asset position | $16,433,000 | | Impact of a 10% increase in forward prices | $(27,299,000) | | Impact of a 10% decrease in forward prices | $25,878,000 | - The Senior Secured Credit Facility bears a floating interest rate, exposing the company to interest rate risk, with the rate was 6.897% as of December 31, 2022[342] Financial Statements and Supplementary Data This section includes consolidated financial statements and Management's Report on Internal Control over Financial Reporting, asserting effectiveness - Management assessed the company's internal control over financial reporting as effective as of December 31, 2022[347] - Ernst & Young LLP, the independent auditor, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[349][351] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company changed its independent auditor to Ernst & Young LLP on June 3, 2022, with no reported disagreements with the former auditor - On June 3, 2022, the company changed its independent registered public accounting firm from Grant Thornton LLP to Ernst & Young LLP[358] - There were no disagreements with the former auditor, Grant Thornton, on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure[360] Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of December 31, 2022, with no material changes - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[362] - No material changes were made to the company's internal controls over financial reporting during the fourth quarter of 2022[364] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's definitive proxy statement for the 2023 Annual Meeting - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive proxy statement to be filed within 120 days of year-end[369] Executive Compensation Information for this item is incorporated by reference from the company's definitive proxy statement for the 2023 Annual Meeting - Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement[370] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's definitive proxy statement for the 2023 Annual Meeting - Information regarding security ownership is incorporated by reference from the company's definitive proxy statement[371] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's definitive proxy statement for the 2023 Annual Meeting - Information regarding related transactions and director independence is incorporated by reference from the company's definitive proxy statement[372] Principal Accounting Fees and Services Information for this item is incorporated by reference from the company's definitive proxy statement for the 2023 Annual Meeting - Information regarding principal accounting fees and services is incorporated by reference from the company's definitive proxy statement[373] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and exhibits filed as part of the Annual Report, with consolidated financials in Item 8 - This item contains a list of all financial statements, schedules, and exhibits filed with the Form 10-K[376][379] Form 10-K Summary No Form 10-K summary is provided in this report - The company has not provided a Form 10-K summary[383]