BACKGROUND

Vital Energy is a petroleum company focused on the Permian and Delaware basins of west Texas. Their profitability is unpredictable with 2019 and 2020 being negative and the past 3 years being positive. As is common for the industry, they have a large amount of leverage totalling around $1.6B in long term debt, which is roughly equal to one year’s revenues. For the quarter ending June 30, 2024, they paid $40M in interest expense to service this debt.

THE ACQUISTION

Vital entered into an agreement with Northern Oil and Gas to acquire Point Energy at a valuation of $1.1B, the deal is expected to close by the end of Q3 2024. Vital has agreed to take 80% of the deal with NOG taking the remaining 20%, Vital expects to pay about $820M for their portion. Among other things, Vital expects to gain the following from the transaction:

• They expect the transaction to have a 30% increase on next 12 months free cash flow and 20% increase on consolidated EBITAX
• Will increase their Delaware Basin position by about 25%, ending at 84k acres and over ⅓ of their oil production
• Add 68 gross inventory locations (49 net) with a breakeven oil price of $47 per barrel
• Expects to invest $45M in the new properties in Q4 2024

In order to facilitate the transaction they have come to an agreement with Wells Fargo to expand their credit facility to $1.5B upon the closing of the transaction. This means they are getting more leveraged in order to complete the transaction. After adding the $820M for the acquisition, they will have around $2.4B in long term debt. They say “leverage is expected to be approximately 1.5x at closing” and they expect to reduce “leverage to approximately 1.3x within 12 months”. This lines up with their market cap of $1.1B.

IS IT A GOOD IDEA?

It certainly seems like an aggressive play to buy out a company that is essentially the same size as yourself, and to increase leverage by 50% to complete the transaction. The market isn’t sure about the idea, with the stock being down 30% since the acquisition was announced. That being said it seems that if their current financials hold it should work out for them.

In the most recent quarter they were able to turn a $36M profit even while paying $40M for interest on their current debt and $40M for extinguishment of debts. If the interest rate is comparable on their new 50% of debt, then they should be paying around $60M per quarter going forward, which would still see them turning a profit of $16M if everything were to hold equal. In addition, they may be able to refinance the debts for lower rates as interest rates start to come down.

CONCLUSION

It seems possible that Vital may be able to navigate this massive acquisition while still staying profitable. This could be a huge increase for their business in the long term. The question then is how much will they need to invest to take full advantage of the new assets and how long will they take to get up and running?