Vitesse Energy, Inc. (VTS) Earnings Call Transcript & Summary

Greetings. Greetings. Welcome to the TESS Energy second quarter 2026 earnings call. At this time, all participants are in listen-only mode. The question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to the Director, Investor Relations and Business Development at Vitesse, Ben Messier. Thank you. You may begin.

Good morning, everyone, and thanks for joining. Today we will be discussing our second quarter 2026 results. Our 10Q and earnings release were released yesterday after market close, and a newly redesigned investor presentation can be found on the VITES website. I encourage everyone to spend time with the new presentation. It lays out Vitesse's business model, capital allocation framework, and dividend philosophy in greater detail. And we will touch on many of these themes this morning. I'm joined this morning by our CEO and President, Jamie Barnard, and our CFO, Jimmy Henderson. Before we begin, please be reminded that this call may contain estimates, projections, and other forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are subject to several risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. Please review our Earth's Release and Risk Factors Discuss in our filings with the SEC for additional information. In addition, today's discussion may reference non-GAAP financial measures. For reconciliation of historical non-GAAP financial measures to the most directly comparable GAAP measure, please reference our 10Q and earnings release. Now I will turn the call over to Vitesse's CEO and President, Jamie Barnard.

Thanks, Ben. Good morning, everyone, and thank you for joining today's call. I want to start this morning by addressing something directly. Over the past several months, following this year's resizing of our dividend and leadership transition, we've received a number of questions about whether Vitesse's strategy has changed. The answer is simple. It is not. Our priorities are what they've always been, pay a durable dividend funded by free cash flow, flow, allocate capital only where returns exceed our hurdle rates, and maintain a strong conservative balance sheet. to spend a few minutes this morning on why we have such conviction in this strategy. The commitment starts with the dividend, which is our primary use of cash. Last week our Board declared a third quarter cash dividend at an annualized rate of $1.75 per share. This marks the 15th consecutive quarter, every quarter since our January 23, 2023 spinoff without interruption that we've declared a dividend, bring the total cumulative dividends declared to to $7.6375 per share. That's half our current share price returned to shareholders in under four years. I also want to be clear about how we think about the dividend, because it's the primary output of our entire business model, not a residual. We size the dividend at a level that free cash flow can cover. and allow for economic reinvestment. The current dividend was set with exactly that durability in mind and Every dollar of reinvestment we make is screened to support it. We then hedge to protect cash flows. After the dividend, we allocate capital strictly by rate of return. Priorities are organic CapEx on our existing acreage, then near-term drilling opportunities, then producing property acquisitions. Throughout this process, we maintain a conservative balance sheet targeting a net debt to adjusted EBITDA ratio of less than one times. Our organic acreage conversion continues to drive results and is our highest return opportunity. As of June 30th, 2026, we had 19.4 net wells in our development pipeline, including 6.4 net wells that were either drilling or completing in another 13 net locations. locations that had been permitted for development. Every well proposal is a standalone election underwritten at strip prices through Luminous, our proprietary data platform. And since 2023, 93% of the wells proposed on our acreage have cleared our return hurdles. We also consistently evaluate and underwrite opportunities for acquiring larger producing properties. Our combination of non-op expertise with operating capabilities provides enhanced flexibility in our investment strategy. We remain focused on pursuing only those opportunities that meet our rigorous return thresholds, our accretive to net asset value and distributable cash flow per share, and support the dividend. And we are selective at scale. Since 2013, The test has closed 175 acquisitions comprised of both near-term development and five larger producing property acquisitions, in total representing roughly $800 million of acquisition spend. Because field level work sits on our operating partners, new non-op assets integrate into Luminous without materially increasing G&A costs, thereby further driving shareholder value. This is the heart of the non-op model. It is why the business is built for durability. We own fractional interest in 7,868 productive wells across more than 30 leading operators in the Williston, Powder River, and DJ basins. An average working interest of roughly 3.6% per well. can go well can make or break FITESA's results. And the returns have been there since 2022. cash return on capital invested has averaged approximately 14%, well above our weighted average cost of capital. The trend towards three and four mile laterals in the Williston Basin continues across our acreage, driving greater efficiencies. These extended laterals reduce cost per foot for well participation while delivering higher EURs. Year-to-date 2026, three-mile or longer laterals constitute 69% of our AFEs, resulting in an average lateral length of nearly 15,000 feet, marking a 38% increase from 2022. On a per-foot basis, these longer laterals cost approximately 25 percent less than traditional two-mile laterals, significantly enhancing capital efficiency. Just as important, longer laterals decline more slowly, which flattens out our corporate base decline, reducing the maintenance capital required to hold production flat and leaves more cash flow for available for the dividend. And finally, our interests are aligned with you all's. As shareholders ourselves, every capital allocation decision we make is guided by a single objective, creating durable long-term value per share through a sustainable dividend, disciplined capital allocation, and a strong balance sheet. I'll now turn the call over to our CFO, Jimmy Henderson. Good morning, everyone, and thanks, Jamie.

I want to highlight just a few items from our financial results for the second quarter of 2026. You can refer to our earnings release and 10Q both of which were filed last night for any further details. Production for the second quarter averaged 17,354 barrels of oil equivalent per day, a sequential increase of 9% from the first quarter with a 60% oil cut. Oil production contributed 95% of total revenue in this quarter. These results include contributions from the Powder River Basin acquisition that we closed early in April. For the quarter, adjusted EBITDA was $40.2 million, and we had adjusted NID income of Gap mid-income was $33.1 million, driven by a $40.2 million of unrealized hedging gains. As a reminder, this gain is due to the forward price of oil at June 30 and is a non-cash item. Despite the volatility of our unrealized gains and losses, our cumulative realized hedge loss since spinoff less than 1% of total revenue during that period. Hedging creates a margin of safety around our dividend, which locks in a revenue floor through downturns in commodity prices. Free cash flow for the quarter was $16.3 million, after $21.1 million of development capital expenditures. With our hedge book now extending into 2029, we remain well positioned to support our $1.75 annualized dividend. As for the balance sheet, we ended the quarter with a total debt of $158.5 million, putting net debt to adjusted EBITDA at just less than one times on a last quarter annualized basis, which is in line with our target. Total liquidity before internal cash flows sits at roughly $117 million. I would also highlight the simplicity of our capital structure. It consists of our revolving credit facility and common shares. So no senior notes, no preferred stock, no convertibles. That simplicity is deliberate. It keeps the dividend protected and the balance sheet ready to act on opportunities. We also maintain a 60 million share price repurchase authorization, which provides some flexibility alongside the dividend. We have opportunistically layered on additional oil hedges through the end of 2029 at a weighted average price of approximately $67, which is supportive to our dividend. For the remainder of 2026, we have approximately 70% of our oil production hedged through swaps and collars with a weighted average floor of 63.57 and a ceiling of 66.53 per barrel. We have approximately half our 2026 natural gas production hedged through collars with a weighted average for 373 and a ceiling of 490 per mm BTU. Both percentages of hedged oil and natural gas volumes are based on our midpoint of the revised annual guidance. We did revise our 2026 annual guidance for the remainder of the year by narrowing the Annual production has been narrowed to 16,300 to 17,200 BOE per day. with the tightened oil as a percentage of oil production now at 60 to 62%. We raised the bottom end of our total cash capital expenditure guidance, which now ranges from $65 to $80 million for the year. Taken together, a hedge book extending into 2029, leverage at target, ample liquidity, and simple capital structure, we believe a test is well positioned to fund the dividend through the cycle. With that, let me pass the call back to the operator for your questions.

Thank you. We will now be conducting a question and answer session. like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Jeff Gramp with Northland Capital Markets.

Please proceed with your question. Hey, good morning, guys. I was curious, you know,.

Last quarter, obviously, markets are dynamic and things can change from call to call given a few months' time. But you guys had mentioned operated activity as a potential vector for some organic growth capex. Any update there on contemplations there? And was that a factor at all with respect to the new market? and narrowing of the CapEx guide. Thanks. Hey Jeff, this is Jamie. I'll take that one.

Yes, on the operated piece for development, we are in the heat of evaluating that. You know, when we talk about extended laterals, that's obviously the optimal situation. So we're looking at acreage that is... by others around us to see if there's partnering opportunities to extend those laterals. to come there that's very much in the works right now. Understood. That makes a lot of sense.

And my follow-up, first off, I have a new slide deck that you guys put up. You know, on slide, I think it's 10, that you guys kind of talk about different investment buckets. And just curious to get an update, maybe in particular buckets three and four for near-term development acquisitions and producing property acquisitions. Like what – What's the latest on those markets? Obviously very volatile commodity markets. So I imagine underwriting dynamics kind of change day to day, but is that affecting your ability to transact or having an impact on timing of deals you're looking at? Just any kind of updates in those particular markets would be interesting. Thanks.

Thanks, Jeff. Yes, I'm glad you like the slide deck. We put it out for that exact reason. We get a lot of questions over the last two and a half years since being public around the different buckets where we allocate capital and wanted to be clear on the differences between each one and where we source them and how we underwrite them. I would say the near-term development acquisition market has has gotten a little bit more competitive in the last year or two. You can just tell from the dollars we spend each year on acquisitions that we're not spending quite as much as we have in prior years. Big reason for that is we kept our return hurdles high there, and we're hesitant to adjust those downwards. To the extent we can buy near-term drilling, it's a really, really economic use of our capital. The producing property acquisitions, there was an article that came out about how deal flow slowed down in the second quarter. We did not find that to be true in the non-op specific part of the market. There were a lot of large packages that came to market in our backyard right after the Iran war started. So I'm talking Powder River Basin, DJ Basin, Williston Basin, which obviously is where we have a lot of data with our Luminis system. And what's nice about these larger packages is they generate a lot of cash flow on day one, and we tend to be able to buy those at sort of teens to low 20% free cash flow yields for the next few years. So obviously very accretive to the dividend. and coverage in general of that dividend. So that market has been very robust. I think there are some soft spots in that market that are less competitive than other basins. And we're doing everything we can do to exploit that advantage that we have in data, and cost of capital, and access to deal flow.