VIST - Vista Energy Still Has Plenty Of Upside For Long-Term Holders

Summary

• Forward looking and adaptable, Vista Energy is likely to find long term success.
• Growing both revenue and income, they should eventually offer a dividend.
• Plenty of room for the share price to rise as the company matures, they are is still over 40% below sector average.

Thesis

Vista Energy, S.A.B. de C.V. (VIST), is a rapidly growing oil and gas company based in Mexico. With a strong focus on operational efficiency, technological innovation, and strategic acquisitions, Vista Energy is setting itself up for both short term growth and long term success.

This company transitioned out of its startup phase over a year ago and they look like they are determined to stay relevant through evolving market conditions. That's one of the most important things I look for in potential long term holds, companies that are adaptive are less likely to lose their already established edges and are more likely to develop new ones. I am assigning a Buy to Vista because they have been steadily growing revenues, are forward thinking, and still have more room to grow as a company.

Company Background

Vista Energy was founded in 2017 by Miguel Galuccio , who was the former CEO of Argentina's state-owned oil company YPF. In June 2017, they became the first Latin American company to conduct an IPO on the NYSE. The IPO raised $650 million. Vista has acquired several exploration and production contracts for oil and gas fields and continued to expand its operations in Mexico and other Latin American countries, including Argentina and Brazil .

The company has been actively pursuing acquisitions of other oil and gas companies with strong potential for future growth, this strategy is already proving successful for Vista Energy. In 2021, the company completed the acquisition of Jaguar Exploration and Production , a leading independent oil and gas company operating in the Eagle Ford Shale in Texas. This acquisition was a significant milestone for Vista, as it gave the company a strong foothold in the United States, one of the world's largest oil and gas markets.

In addition to its strategic acquisitions, Vista Energy is also focused on operational efficiency and technological innovation. The company has invested heavily in new technologies and processes that improve efficiency and reduce costs across its operations. This includes the use of artificial intelligence, machine learning, and advanced analytics to optimize drilling, production, and maintenance processes.

An Eye Towards Responsible Stewardship

Another key factor in Vista Energy's long term viability is its commitment to sustainability. As the world becomes increasingly concerned about the environmental impact of oil and gas production, companies that prioritize sustainability are less likely to slip into irrelevancy.

In 2021 the company went through a greenhouse gas reduction initiative with the goal of reducing their emissions by 30% , and has pledged to become carbon neutral by the end of 2026. They work with environmental experts to build healthy ecosystems around their well sites and have initiated a tree planting regime. It is unclear how much land they will need to offset their carbon footprint but this goal is achievable.

Long-Term Trends

Oil & Gas Market Size is projected to have a CAGR of 5.4% and Reach 252.56 Billion by 2028; for an already mature industry this is a healthy growth rate. The long-term outlook for oil and gas is highly dependent on the pace of energy transition towards renewable energy sources. While it is expected that the demand for oil and gas will eventually decline due to the increasing adoption of renewable energy technologies, the rate of this transition remains uncertain.

In the short to medium term, oil and gas prices are likely to remain volatile and subject to a range of economic, political, and environmental factors. Over the long term, macro factors will determine price. If the decline in demand caused by renewables outpaces the decline in available supply due to peak oil, then the price of oil and gas will fall. If the decline in demand caused by renewables fails to outpace the decline in available supply due to peak oil, then the price of oil and gas will rise.

Financials

In addition to its growth opportunities, Vista Energy also has a strong financial position that should provide support for future investments and expansion. The company has a solid balance sheet with low debt levels, this means it has the flexibility to pursue new acquisitions and investments as opportunities arise. The rate of revenue growth has been outpacing the rate of cost increases. Even though net income varies significantly as the price of the underlying commodities change, the company has been making noticeable improvements that show up in its financials

Valuation

As of Feb 17, 2023, VIST has a market capitalization of $1.58B, trades at a trailing P/E of 9.94 and had a share price of $17.47. It has a trailing EV/Sales of 1.92, a forward EV/Sales of 1.72, and a Price/Book ratio of 2.10. On their own these numbers don't seem to place the company into either clearly overvalued, or clearly undervalued territory.

However, looking at valuation vs cash flow compared to the rest of the sector things become more clear. Trailing EV/EBITDA is only 3.06 which is 48.54% below the average. Forward EV/EBITDA is only 2.59, which is 52.18% below average. Trailing price to cash flow is 2.58, which is 42.41% below the sector average. This company is still undervalued and as it approaches maturity, it will begin offering a dividend and it's valuation will come closer to the sector averages.

The company has a Seeking Alpha Quant score of 4.91 and has been listed as a strong buy since last August.

Risks

The oil and gas industry is notoriously cyclical, which can impact the company's revenue and earnings. Additionally, there is always the risk of operational issues, including accidents or natural disasters, which can impact production and costs.

There are also geopolitical risks that could impact the company's operations. For example, changes in government policy or regulatory environments could impact the company's ability to operate in certain markets. The overall level of conflict in the world affects the insurance premiums for oil tankers and so changes the global price of oil. When conflicts break out in oil producing countries, this effect is amplified. Conversely, peace can cause the price of crude to fall.

While I am talking about risks I want to bring up the companies pledge to reach carbon neutral. It is very likely that most Oil & Gas companies are about to spend the next decade or more lobbying against the initiation of a carbon tax. Vista will theoretically never have to pay such a tax and so will view spending money on lobbyists as a waste. Not only have they removed themselves from that risk, the onset of such a tax would only make them more competitive than their peers.

Catalysts

Looking ahead, Vista Energy has a number of growth opportunities that should continue to drive its success. One key area of focus is the development of its Vaca Muerta shale assets in Argentina. Vaca Muerta is one of the world's largest shale formations and is expected to play a critical role in Argentina's energy future. Vista has already made significant investments in this region, and the company is well positioned to benefit from the growing demand for energy in Argentina and beyond.

The company has a strong track record of discovering and developing new reserves, and continues to explore new opportunities for incorporation into its portfolio. By leveraging its operational expertise and cutting-edge technologies, Vista is well positioned to identify and develop new reserves that can drive long-term growth and profitability. This company is the opposite of stagnant, expect more expansion.

Eventually, new opportunities will become less frequent, the pace of growth will slow, and the company will begin offering a dividend. Once that happens, the behavior of the share price will change as value investors will begin buying dips. Dividend rate increases directly translate to increases in the fair value of the company and typically come with a rise in share price.

Conclusion

It is rare to come across a growth company in an already mature industry. With its focus on operational efficiency, technological innovation, strategic acquisitions, and sustainability, Vista Energy is well positioned to become a leading player in the energy sector.

What is my plan with VIST?

I had never heard of Vista Energy until a couple of weeks ago and do not currently have a position, but am considering initiating one. I typically try to invest into companies right before they transition from a speculative venture into a growth company, for Vista that was over a year ago.

However, I also invest into companies based on how competitive their overall strategy is in comparison to their peers. Vista is both innovative and forward thinking, those are highly valued whenever I produce weighted analysis tables on a sector. I mostly invest into disruptive technology and have not taken the time to do an analysis on the Oil & Gas sector, so I cannot tell you if Vista Energy would come out on top. But if I were to, this company, with its strong growth prospects and innovative attitude, would score very well.

While I missed the breakout, this company still has a long way to go before it reaches maturity so I will likely buy a pullback if one presents itself.

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