Is Vital Energy’s Recent Large Acquisition Good or Bad to Bondholders?

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• On 28 July, Vital Energy announced that the company jointly acquired the oil asset of Point Energy Partners with Northern Oil and Gas. Vital Energy and Northern Oil and Gas will hold 80% and 20% equity interest in the oil asset respectively, with a total transaction value of approximately USD 1.025 billion. The company expects to fund its USD 820 million portion.

• Vital Energy plans to utilize its credit facilities for this acquisition, with its credit facilities currently expanded to USD 1.5 billion. For Vital Energy, this acquisition of about USD 820 million represents around 50% of its total debt (as of March 2024: USD 1.67 billion net debt). If the company chooses to fund the acquisition by borrowings, then it will significantly increase its debt level.

• Vital Energy mentioned that the acquisition is priced at approximately 2.4x forward EBITDAX. Compared to the acquisition deals this year, the peer acquisitions were priced generally from 3 to 5 times enterprise multiple, so this acquisition appears attractive for Vital Energy. The PV-10 of the oil projects project (a discounted cash flow method based on the proved oil reserve in the oil industry assuming a 10% discount rate) is USD 742 million, equivalent to 1.1 times of P/PV-10, indicating a fair acquisition price.

• After the completion of the acquisition, Vital Energy expects an increase in daily production by approximately 30,000 barrels of oil equivalent, leading to over 30% increase in free cash flow and over 20% increase in EBITDAX. This suggests that under the current oil price environment (with WTI oil prices around $75 to $80 per barrel), the company could achieve an EBITDAX of USD 1.4 billion annually or more, with a projected net debt/EBITDAX ratio of around 1.5 times. The leverage level is still manageable.

• The breakeven point for these additional productions is WTI $47 per barrel, with oil exposure accounting for 67%. A higher oil proportion aligns with Vital Energy's current strategic focus of enhancing its product mix to increase the oil production proportion (oil to gas ratio).

• Due to the lower acquisition price, the potential significant increase in production and profitability after the acquisition and the manageable leverage levels afterward, we believe that this acquisition will have a positive impact on Vital Energy's credit profile. Additionally, the company plans to use part of the cash flow post-acquisition to reduce debt, implying a gradual improvement in the company's balance sheet over time. The time becomes a positive factor for bond investors.

• Therefore, investors may still consider the "VTLE 7.750% 31Jul2029 Corp (USD)" bond, with manageable default risk and a yield to maturity of 7.4%, offering considerable attractiveness. The bond is available on Bond Express.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds "VTLE 7.750% 31Jul2029 Corp (USD)" and the analyst who produced this report holds a NIL position in the abovementioned securities.