Vital Energy Inc. V.VUX

FINANCIALS are out

[kiskadog]

• The Company reported net income for Q3 2023 of $1,210,993 as compared to net income of $410,580 in Q3 2022.
• •
  Revenue was $4,506,172 for Q3 2023 as compared to $4,061,493 in Q3 2022, an increase of $444,679.
• •
  The Q3 2023 realized oil price was $84.14 as compared to $89.19 in Q3 2022.

VITAL ENERGY INC. MANAGEMENT DISCUSSION and ANALYSIS September 30, 2023

Vital Energy Inc. (the “Company” or “Vital”) is a public company and is incorporated in the Province of Alberta, Canada. The Company’s activities are the exploration for, development and production of oil and natural gas properties in Western Canada.

The discussion and analysis that follows is a summary of Vital’s activities and results for the three and nine months ended September 30, 2023, its financial position as at September 30, 2023 and its future prospects. This Management’s Discussion and Analysis is dated as of November 29, 2023 and provides information on the activities of the Corporation and should be read in conjunction with the annual audited financial statements for the year ended December 31, 2022. All amounts are expressed in accordance with International Financial Reporting Standards (“IFRS”) and in Canadian dollars unless otherwise stated. Additional information is available on the Company’s website at www.vitalenergyoil.com or on Sedar’s website at www.sedar.com.

---

Forward-Looking Statements

Certain statements contained in this document constitute "forward-looking statements". When used in this document, the words "may", "would", "could", "will", "intend", "plan", "propose", "anticipate", "believe", used by any of the Company’s management, are intended to identify forward-looking statements. Such statements reflect the Company’s forecasts, estimates and expectations, as they relate to the Company’s current views based on their experience and expertise with respect to future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause the Company’s actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The Company does not intend, and does not assume any obligation, to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments unless required by law.

Actual results achieved will vary from the information provided herein as a result of numerous known and unknown risks and uncertainties and other factors. Such factors include, but are not limited to: risks associated with the Company’s stage of development; competitive conditions; share price volatility; risks associated with crude oil and natural gas exploration and development; risks related to the inherent uncertainty of reserves and resources estimates; possible imperfections in title to properties; the volatility of crude oil and natural gas prices and markets; environmental regulation and associated risks; loss of key personnel; operating and insurance risks; the inability to add reserves; risks associated with industry conditions; the ability to obtain additional financing on acceptable terms if at all; non operator activities; the inability of investors in certain jurisdictions to bring actions to enforce judgments; equipment unavailability; potential conflicts of interest; risks related to operations through subsidiaries; risks related to foreign operations; currency exchange rate risks and other factors, many of which are beyond the control of the Company. Accordingly, there is no representation by the Company that actual results achieved during the forecast period will be the same in whole or in part as that forecast. Further, the Company undertakes no obligation to update or revise any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as required by applicable securities laws.

Financial outlook information contained in this MD&A about prospective results of operations, financial position or cash flows is based on assumptions about future events, including economic conditions and proposed courses of action, based on management’s assessment of the relevant information currently available. Readers are cautioned that such financial outlook information contained in this MD&A should not be used for purposes other than for which it is disclosed herein.

Non-IFRS Measures

The financial data presented herein has been prepared in accordance with IFRS. The Company has also used certain measures of financial reporting that are commonly used as benchmarks within the oil and natural gas production industry in the following MD&A discussion. The measures are widely accepted measures of performance and value within the industry and are used by investors and analysts to compare and evaluate oil and natural gas exploration and producing entities. Most notably, these measures include “operating netback” and “funds flow from (used in) operations”. Operating netback is a benchmark used in the crude oil and natural gas industry to measure the contribution of oil and natural gas sales and is calculated by deducting royalties and operating expenses from revenues. Funds flow from (used in) operations is cash flow from operating activities before changes in non-cash working capital, and is used to analyze operations, performance and liquidity. These measures are not defined under IFRS and should not be considered in isolation or as an alternative to conventional IFRS measures. These measures and their underlying calculations are not necessarily comparable or calculated in an identical manner to a similarly titled measure of another entity. When these measures are used, they are defined as “non IFRS” and should be given careful consideration by the reader.

Note Regarding Boe and Mcf

In this MD&A, barrels of oil equivalent (“boe”) is derived by converting gas to oil in the ratio of six thousand cubic feet (“Mcf”) of gas to one barrel (“bbl”) of oil (6 Mcf: 1 bbl) and one thousand cubic feet of gas equivalent (“Mcf”) are derived by converting oil to gas in the ratio of one bbl of oil to six Mcf (1 bbl: 6 Mcf). Boe and Mcf may be misleading, particularly if used in isolation. A boe conversion of 6 Mcf of natural gas to 1 bbl of oil, or a Mcf conversion ratio of 1 bbl of oil to 6 Mcf of natural gas is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the well head.

Other terms used in this report are as follows:

boe - barrel of oil equivalent boe/d – barrel of oil equivalent per day bbl – barrel of oil bbl/d – barrel of oil per day WTI – West Texas Intermediate (a light oil reference price) WCS – Western Canadian Select (a heavy oil reference price)

---

Description of the Business

Vital Energy Inc. is a public company whose shares trade on the TSXV under the symbol “VUX”. Vital is incorporated in the Province of Alberta, Canada and its activities consist of exploration for, development and production of primarily light and medium gravity crude oil in Western Canada.

The Company operates from its head office in Calgary, Alberta located at Suite 620, 634 6th Avenue S.W., Calgary, Alberta, T2P 0S4.

---

Overall Performance

Highlights

• •
  The Company reported net income for Q3 2023 of $1,210,993 as compared to net income of $410,580 in Q3 2022.
• •
  Revenue was $4,506,172 for Q3 2023 as compared to $4,061,493 in Q3 2022, an increase of $444,679.
• •
  The Q3 2023 realized oil price was $84.14 as compared to $89.19 in Q3 2022.

---

Selected Financial Information

Selected financial information for the three and nine months ended and as at September 30th is as follows:

 

---

Properties

The Company has gradually extended from its original two core property areas in 2020 to its current four core property areas. The four core property areas include the SE Saskatchewan property area, West Central Alberta property area, the original SW Saskatchewan property and East Central Alberta property areas.

The SE Saskatchewan property includes a total of six (6) areas : Lampman, Steelman, Dalesboro, Gainsborough, Hume and Weyburn.

• •
  Lampman and Steelman: includes a total of seven (7) producing wells.
• •
  Dalesboro : the plan is to drill and complete two (2) additional Frobisher wells in Q4
• •
  Weyburn: this land was sold in Q3, maintaining a 3% Overriding Royalty
• •
  Hume: Undeveloped Area

The SW Saskatchewan property area includes two producing properties - Gull Lake and Pennant.

The East Central Alberta property area includes two producing properties - Sullivan Lake and Baxter Lake.

The West Central Alberta property area includes three undeveloped and non-producing properties -Pembina-1, Pembina-2 and Ante Creek.

The Company successfully completed its 2022 new drill program by drilling five Frobisher horizontal (“Hz”) wells in three individual properties in the SE Saskatchewan property area. Four wells are on production and one well was uneconomic.

The Company acquired 5.75 sections of crown land at Pembina-2 in the West Central Alberta property area in Q1 2023 and plans to drill 6 Hz wells in Q4 2023.

Core Properties SE Saskatchewan property area

Lampman

Three (3) Frobisher Hz wells were drilled from one pad in July 2021 and completed in August 2021. All three (3) Hz wells have been demonstrating stable production rates with very reasonable natural production declines. During the initial year of production, the three wells reflected the Frobisher formation production type curve in the Estevan area. Starting in July 2022, the three wells had a relatively stabilized water cut and have now transitioned into a low natural decline producing phase. Based on current well performance, the forecasted annual oil decline in 2023 will be around 5~10 %. All wells are fully equipped with electrical primer drivers and pipelines and are periodically tested with the Company’s own onsite 2 phase separator (satellite).

In Q3 2022, the Company drilled one additional Hz well in the southern part of the Lampman property in order to produce the remaining Frobisher reserves. The well was put on production in August 2022 and was producing approximately 2 bbls/d. The initial production rate is lower than expected as the well is geologically located on the edge of the reservoir, and the limestone target zone changes in both lateral and vertical directions. In order to increase productivity, the Company completed an acid squeeze workover in August, and the production was increased to 83 bbl/d in August and 61 bbl/d in September 2023.

For the nine months ended September 30, 2023, the average production at Lampman was 137 bbls/d, (sweet light oil, API ranging from 32.5 -36.0) as compared to 163 boe/d in Q4 2022 and 128 boe/d in the first half of 2023.

Steelman

Vital acquired a quarter section of crown land in Saskatchewan in April 2022 and drilled 3 Frobisher Hz wells from the same surface location in Q3 2022. The facility equipment has been installed and the tie-in to the pipeline completed. The average production from the three (3) wells in Q3 2023 was 89 boe/d with a low water cut.

SW Saskatchewan property area

Gull Lake

In one of the Company’s core areas of operations, Gull Lake, Saskatchewan, Vital is the designated operator and maintains a 50% working interest. The property is covered with 3D seismic data and has 9 wells producing, or capable of producing, crude oil from the Roseray, Cantuar and Upper Shaunavon formations. This project has a salt-water disposal facility and a gas collection pipeline system. A Waterflood Project (Enhanced Oil Recovery) was completed in Gull Lake Upper Shaunavon reservoir in Q4 2022. The production from well 1-29 was increased to 90 bbl/d in Q3 2023 from 30 bbl/d in Q4 2022. The Company believes that future drilling opportunities remain on these lands.

At Gull Lake, Vital’s net daily oil and natural gas production for nine months ended September 30, 2023 was 179 boe/d (2022 – 189 boe/d). The decrease in production was attributable to natural declines in the property.

Pennant

Vital is the Operator and maintains a 100% working interest in 2 sections of land. There is one (1) vertical well and six (6) horizontal wells. Three of the horizontal wells and the vertical well are on production. The Company has commenced abandonment and reclamation work on some other well sites.

The company’s crude oil production was 39 bbls/d for the first nine months of 2023 as compared to 26 bbls/d in the comparable period in 2022. The increase in production is related to two well workovers which were completed in Q4 2022.

East Central Alberta property area

Sullivan Lake

This property has two (2) Ellerslie Hz producing wells and one (1) Banff Hz producing well which were drilled in 2018 and 2019. These Hz wells have a stable production rate with a natural production decline.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This property has completed surface facilities including a desulfurization tower and a gas pipeline. There are 5 potential Banff Hz development wells.

This area produced 61 boe/d for the nine months ended September 30, 2023 compared to 87 boe/d in the 2022 comparable period.

Baxter Lake

The Company performed remedial work in 2021 to reactivate certain wells in the Baxter Lake area as oil prices have improved. To September 30, 2023, this area produced 20 boe/d as compared to 25 boe/d in 2022.

West Central Alberta property area

Ante Creek

The Company purchased 2.5 sections of crown land in Alberta in Q1 2021. As part of the Company’s 2023 strategic plan, the Montney play in Ante Creek will be the Company’s main focus. Currently, the Company has been working on a detailed geological study and finalizing development plan. The preliminary development plan indicates there are up to 25 development wells that may be drilled.

Pembina-1

The Company acquired a quarter section of crown land in Alberta in Q3 2021 and another adjoining quarter section of crown land in September 2022. The Company is currently working on a detailed geological study and development plan. This may allow the drilling of up to 4 Hz Cardium development wells.

Pembina-2

The Company acquired 5.75 sections of crown land in Alberta in Q1 2023. As part of the Company’s 2023 strategic plan, the Company has been working on a detailed geological and reservoir study and development plan. The Company plans to drill six (6) Cardium Hz wells in the second half of 2023.

---

Evaluation Properties

SE Saskatchewan property area

Dalesboro

The Company acquired a half section of crown land in SE Saskatchewan in Q4 2022. The Company commenced drilling 2 Hz Frobisher development wells in Q3 2023 which will go on production in Q4.

Hume

The property comprises 6 LSDs of crown land in SE Saskatchewan with a potential for up to five (5) Frobisher Hz development wells. The Company is working on a reservoir and geological study in order to reduce the uncertainties for drilling future wells.

Gainsborough

The company acquired 3 LSDs of crown land in Saskatchewan in April 2022. The Company is working on the reservoir and geology study, is closely monitoring the industry activities in the reservoir area and is evaluating the tie-in cost and the feasibility of the project.

---

Outlook

We have seen increased volatility in the demand levels for petroleum caused by the COVID-19 pandemic and international events in Europe in 2022 and 2023.

There is no certainty when the volatility in demand levels will stabilize and therefore the situation remains dynamic and the ultimate duration and magnitude of the impact on the economy and financial effect on the Company is not known at this time. These events have resulted in a volatile and challenging economic environment which has of late, positively affected the Company’s operational results and financial position.

The Company plans to drill eight (8) Hz wells in the second half of 2023 – two (2) Frobisher Hz wells in Dalesboro SK and six (6) Cardium Hz wells in Pembina AB. The pre-drilling and drilling work has commenced and is ongoing.

The Company acquired another larger Cardium asset in Pembina area in January 2023 in the West Central Alberta property area. The Company may drill an additional 6-8 wells in 2023/2024 depending on the drill results of the aforementioned HZ wells and the available funds.

---

Discussion of Operations

Details of quarterly petroleum pricing in 2023 and 2022 are as follows:

 

The following is a summary of Company’s realized oil pricing:

 

2022

 

The following tables detail the Company’s operational netback for three and nine months ended September 30st:

 

 

The 2023 revenue for the nine months ended September 30th was $10,927,995 as compared to $15,715,827 in 2022, a $4,787,832 decrease. The decrease in revenue is attributable to a realized price decrease of $25.50 per boe and 11,123 fewer boe were produced.

The production decrease arose primarily from the Lampman wells (24,754 boe) which was partially offset by new production at the Steelman property.

The Q3 2023 revenue of $4,506,172 was $444,679 higher than the 2022 comparable revenue of $4,061,493. This is a result of a lower realized price per boe of $5.05 offset by increased production of 8,020 boe.

Royalties of $1,817,974 were 17% of revenue for the nine months ended September 30, 2023 as compared to $2,868,644 or 18% in 2022.

The production operating costs for the nine months ended September 30, 2023 were $3,037,208 ($21.19 per boe) as compared to $2,572,613 ($16.65 per boe) in 2022. The 2023 operating costs were negatively impacted by well workover costs of $576,603 (2022 - $202,697). The Q3 2023 operating costs of $19.75 per boe were lower that the year to date of $21.19 per boe as significant amount of the workovers occurred in Q2 2023.

In addition, the 2023 production operating costs of $21.19 per boe were higher that the 2022 costs of $16.65 reflecting the effect of fixed costs per boe over lower production volumes.

The operational netback for the nine months ended September 30, 2023 was $42.36 as compared $66.51 in 2022. The decrease in operational netback of $24.15 reflects the decrease in realized selling price of $25.50 and higher operating costs of $4.54 per boe.