Vista Energy (NYSE:VIST) released its 2Q24 results last week. Thanks to significant drilling activity, the company expanded production by 40% year over year and 20% quarter over quarter. As is usual for Vista, operational and CAPEX efficiency figures continued to perform well.
This article analyzes the company’s results, earnings call, and expectations for the rest of the year and FY25. It deals specifically with production expansion, regulatory changes, and transport capacity.
I have been recommending VIST since October 2021 (the first Buy article on the stock), for a total return of 620%. This article revisits the company’s valuation and a simple napkin production model. Given the stock’s continued appreciation and the delay in expanding pipeline transport capacity, the stock now requires relatively high oil prices to generate an attractive return. For that reason, I believe Vista is fairly valued but no longer an opportunity at these prices.
Vista Energy Q2 Results – Great quarter with some clouds
After a more challenging 1Q24 impacted by significant peso cost inflation and drilling delays, Vista returned to excellent operational figures in 2Q24.
Production: The company drilled and completed 14 wells in 2Q24 (25 in total for 1H24) and posted hydrocarbon production of 65.3 thousand boe per day. This figure is 40% above the 2Q23 figures and 20% above 1Q24 production.
Oil prices: International oil prices were relatively stable, with an average Brent of close to $85. The company’s realized prices were lower, at $72, given the lower domestic prices, royalties and export excise taxes.
Cost efficiency: The company has continued to perform extraordinarily well on the cost front. Its lifting costs were $4.5/boe, within guidance. The same can be said of SG&A, which is $7.6/boe.
Capital costs increasing: The cost of capital per boe continues to increase, albeit this seems normal given the global bull market for oil. 2Q24 D&A was about $100 million, which implies a cost per boe of $17.
VIST D&A/boe (Author)
When we look at the quarter’s CAPEX, the drilling of 14 wells represented a direct cost of $266 million, $19 million per well, or $13.5/boe based on Vista’s EUR of 1.4 million boe per well. Adding other CAPEX, like facilities, CAPEX per well climbs to $24 million, or $17/boe based on the same EUR. However, the facilities or geology study CAPEX should be spread over more wells than only the ones drilled this quarter.
Transport challenges: Vista is showing signs of starting to have transport challenges. Based on the company operating the pipeline, the country’s main oil pipeline (known as Oldelval) is expected to double its capacity to accommodate the oil boom in Vaca Muerta. The project will be finished by the end of this year. However, in the meantime, Vista has to send oil by trucks, which is extremely expensive. Trucking adds $15 of cost per barrel, according to the 2Q24 call. This is almost equivalent to the capital cost per barrel and three times extraction costs.
In 2Q24, Vista transported 8 thousand barrels per day via truck (14% of oil production of 57 thousand barrels per day). By 4Q24, the company is expecting to transport 20 thousand barrels per day by truck, or close to 27% of oil production (about 74 thousand barrels of oil per day expected by 4Q24). After the pipeline expansion is completed, trucking should decrease.
Great cash profitability: All in all, though, the EBITDA per barrel climbed to $48/boe. Operating income per barrel was closer to $30/boe, a great figure. With expanding production, Vista was able to generate close to $180 million in operating income for the quarter.
Regulatory improvements: The sanctioning of the Bases law in Argentina was positive for Vista. The law establishes the prohibition to set local oil prices and the prohibition to establish export caps. This will help the company obtain export parity prices in local sales. On the other hand, on the call management commented that the RIGI investment promotion scheme is not expected to benefit the upstream industry, although details are needed to make a final determination.
VIST Stock – Model and valuation
As I generally add for Vista articles, below is a simple back of the napkin model for Vista. The model incorporates the data available on costs and taxes, as well as different scenarios based on Brent’s price.
Based on management guidance for 4Q24, production of 85 thousand boe per day is expected. Therefore, the model below represents a no-growth model. Vista’s latest long-term guidance was for 100 thousand boe per day in 2026, but I believe this guidance might be corrected upwards in the near term, as the company will likely reach 85 thousand this year.
Simple napkin model for Vista (Author)
Vista today trades at a market cap of $4.53 billion. Like all companies, Vista generates returns from earnings and growth. Considering Vista is an oil company (a volatile market) operating in Argentina (a volatile country) I believe a return of 15% is the minimum required from it.
Vista is currently growing production at a 40% rate, but that level of production expansion cannot be maintained forever as the company grows. One reason is obvious: 1% of growth requires more wells for a larger company. The second reason is that shale oil requires consistent CAPEX. When a well is tied, it generates a lot of production very quickly and then drops (production declines 70% in the first year). This implies that in the future, most of Vista’s wells will be used to maintain, not expand production.
On the earnings side, the table above tells us that to generate a 10% earnings yield at FY24 end production, Brent prices need to be between $65 and $70. I believe these prices are not extremely high (below the 20-year average), but investors should know that oil is volatile, and it can go below $60 for extended periods.
Another possibility is to consider the company’s reserves (318 million boe) and consider their value at the current cost structure. The value is undiscounted (at current production rates the company can produce for about 10 years), and I use taxes of 35% (the Argentinian corporate tax rate).
VIST value of reserves, undiscounted (Author)
The above shows that even without the discount, the company’s market cap already implies a Brent price of above $65. With the discount, this could be probably closer to $70/75.
Conclusions
The above is not conclusive. Some assumptions are needed, like average long-term prices of oil, long-term growth rates for Vista, and the reader’s own required rate of return.
In my opinion, though, Vista’s growth cannot be eternal. The company may reach peak production in a few years, after which it will naturally plateau. At the current cost structure, even assuming a 5% long-term growth rate, the value of production to generate a 15% return requires oil prices that are not excessive but leave little space for downturns. The same conclusions are reached if estimating the value of Vista’s current proved reserves.
For those reasons, I believe the company is now fairly valued but not an opportunity anymore. I prefer to wait for lower prices or more information from management about future production plans.
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