Riley Exploration Permian, Inc. Q2 FY2021 Earnings Call

Good morning, my name is Philip and I will be your conference operator today. I would like to welcome everyone to the Riley Permian Fiscal Second Quarter Earnings Conference Call. All lines have been muted to avoid any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Philip, you may start your conference.

Thank you, Rische. Good morning, everyone. Welcome to Riley Permian's fiscal second quarter earnings conference call. Participating on this call today are Bobby Riley, Riley's Chairman and CEO, Kevin Riley, President, Mike Rugen, CFO, and myself.

Thank you, Philip. Good morning and thank you for joining us today on the call. My comments this morning will focus on key highlights for the quarter ending March 31, 2021, which is our second fiscal quarter. As previously announced, we closed the reverse merger transaction on February 26, 2021, which represented a public debut for our predecessor Riley Exploration Permian LLC. Riley Permian performed strongly during our fiscal second quarter of 2021, during which we overcame the extreme operating challenges presented by Winter Storm Uri, and we continue to create value for our shareholders. Halfway through our fiscal year, which ends on September 30, 2021, we remain firmly adhered to our capital allocation framework, including reinvesting less than 70% of EBITDAX and capital expenditures as evidenced by our year-to-date allocation of only 51%. Combined with our robust operating performance, such capital discipline allowed us to generate over $20 million in adjusted free cash flow during our fiscal year-to-date. Further, we are pleased to pay a dividend of $0.28 per share. The payment of regular quarterly dividends has long been a priority for Riley Permian, dating back to its predecessor entity as a private company. Going forward, one of Riley Permian's core priorities is to continue to pay and grow a regular quarterly dividend consistent with our shareholder-focused business model. Finally, we have formally begun operations on our EOR pilot after several years of extensive technical studies internally and with world-class partners. Our core assets in Yoakum County, Texas, are ideal candidates for EOR for both geologic and geographic reasons. They are directly adjacent to several of the largest and most successful EOR projects in the United States.

Thank you, Bobby, and good morning to everyone. As Bobby mentioned, I plan to review the operational activity results for the last quarter. Despite production impacts, and what management estimates to believe to be 18.4 MBoe from the impact of Winter Storm Uri and another windstorm that impacted our production in March, our total net production for the quarter totaled 746 MBoe or 8293 Boe per day. This represents a 9% increase from our first fiscal quarter ending December 31, 2020. As a result of increased gathering and processing capacity from our midstream partner, our production mix for the quarter was 73% oil, 13% natural gas, and 14% natural gas liquids. The additional gathering and processing capacity allowed us to reduce our flaring of natural gas by 35% quarter-over-quarter. In February of 2021, Riley Permian commenced a seven-well growth program on our Permian asset, and today we have spent about $11.2 million towards that endeavor, resulting in drilling five growth wells, 4.5 net wells, and the completion of two drills and 1.5 net wells during the quarter. This investment rate implies a 53% reinvestment rate of EBITDAX for the quarter. One of the results of our program is our drilling times, reaching total depth has continued to improve, with the results for wells drilled to date during the fiscal year averaging five days for a one-mile lateral and six and a half days for a mile and a half lateral. On the financial aspect of the drilling program, the average realized un-hedged prices were $56.41 per barrel of oil, $7.51 per MCF of natural gas, and $13.60 per barrel of natural gas liquids, resulting in a total equivalent un-hedged price of $49.12 per Boe. After the impact of hedges, our realized price was $45.64 per Boe. Our all-in cash costs for the second quarter were $16.16 per Boe, which is inclusive of interest expense of $1.56 per Boe. We generated $21 million of EBITDAX and $23.2 million of adjusted EBITDAX after the exclusion of transaction costs related to the merger. With that, I will now turn the call back over to Philip to discuss our recently announced EOR pilot.

Thank you, Kevin. As Bobby previewed, we are pleased with the company has begun operations on our EOR pilot program. This will start with a 960-acre unit in Yoakum County, Texas, applying water and CO2 through vertical injection wells adjacent to horizontal producing wells. We have already begun drilling the first vertical injection well this month, with approximately $1.5 million of capital estimated to be incurred during fiscal 2021. We are kicking off this operational effort after several years collecting extensive cores, logs, and 3-D seismic data over the Platang Field, which we call our Champions asset, to evaluate the resource potential. After studying the data, we believe that in addition to significant recovery from primary production, we can use EOR methods including water flooding and CO2 injection to increase recoveries in the Champions area. These methods, which have been highly successful in the Washington field, which is directly adjacent to us, should work very well for us. Our assets have similar reservoir rock properties, and most concentrated areas of CO2 infrastructure in the U.S. are directly adjacent to our Champions asset, including the CO2 pipeline in Denver City, Texas. Just a few more thoughts here for why we believe this is the right time to begin this pilot. Historically, EOR operations were most often applied to older legacy oil fields past the production and development stage. But we believe our Champions asset is an excellent candidate for EOR methods, even as a more undeveloped property, as we recognize the efficiency gained by early applications of water flooding and CO2 injection. There is a time value component to this, both from a reservoir and financial perspective. We think beginning these applications early, concurrently with primary depletion, while the reservoir still has sufficient pressure, can lead to more efficient oil displacement, operating synergies, and higher ultimate recoveries, which we hope may approach three times the recovery of primary operations. Doing so may also accelerate the lifecycle of our assets. We have always believed that EOR represents a crucial step in the evolution of its development. The historical sequencing of primary to secondary to tertiary recovery can lead to an extremely long lifecycle, whereas implementing these processes concurrently allows for an acceleration of the full value capture of a field in a notably shorter timeframe. Finally, there is another forward-looking element to this pilot related to our ambition to use anthropogenic sources of CO2, or ACO2, as we call it. Why are we focused on this? Well, we believe the track with economics may be achievable, while providing a service to society by consuming significant amounts of CO2, which much of the planet is calling for, and which could lead to Riley producing a differentiated low-carbon barrel of oil.

Thank you, Philip. Alongside additional CapEx related to some unplanned participation in three additional non-operated wells and the initiation of our EOR pilot, we reaffirm our fiscal year CapEx aligned with the reinvestment rate of approximately 65% of our EBITDA. The company expects fiscal year 2021 capital expenditures to total approximately $54 million to $56 million. Additionally, the company forecasts full-year fiscal 2021 oil production to average between 6.3 and 6.5 MBoe per day, with total equivalent production averaging between 8.3 and 8.7 MBoe per day, representing a year-over-year growth of approximately 17% to 23%. With that, I will turn it over to Bobby for closing remarks.

Thank you, Kevin. In closing, our past quarter was extremely busy and productive. We generated operating cash flow, free cash flow, and paid dividends. Our objective remains to continue to grow within our capital allocation framework. Thank you again for your time today. Operator, you may now open for questions.

Your first question comes from the line of John White from ROTH Capital.

Good morning, guys, and congratulations on your inaugural earnings call of the company. So in part and on Slide 16, the last bullet point, right-hand side of the page says Riley's participation in CCUS could be direct for off-take only. By that do you mean, you could use CO2 as part of your EOR project or you could take the CO2 from an industrial emitter and simply store it in a saline reservoir?

Kind of two questions there from what I have heard, John. First, thanks for the warm note there. One is it off-taker participation and two is the user storage. On the latter, we are going to be using the CO2 in our initial endeavor that is with the EOR rather than permanent sequestration, which differs slightly from both these scenarios. The 45Q tax credits qualify as a $35 credit in the coming years, whereas permanent sequestration is a $50 per tonne credit.

Well, I can appreciate that. This has been referred to as basically a new industry within our traditional E&P industry. And it looked like you were federal - you incurred some federal income tax in the quarter. So I guess that would lead to your application of potential 45Q credits?

Yes. On the tax, what I would say, John, is it is frankly still being developed at the federal level. Whether you have to be an approved taxpayer or whether these can potentially be direct tax, meaning it is the truth credit whether or not you are a taxpayer. One way or another, in modern capital markets, you can find a way to monetize these credits, as you are familiar in the renewable industry, especially with tax equity structuring. So, as we see, the value is fundable, this original source person may be a taxpayer, and can effectively share economic benefit with us through a potentially reduced price.

I appreciate that. And my final question is, on your 960-acre pilot EOR. Are you aware of any other projects where vertical injection to horizontal producing wells is underway?

John, that is a good question. I mean, this is an early technique since horizontal drilling. These types of mature fields have not been around for a long time. The adjacent fields and offset operators have already drilled horizontal wells to increase their efficiency from recoveries. There has been some of this work done internationally. I think the presentation indicates that we have partnered with both Baker Hughes and William Cobb and Associates in designing the injectivity, patterns, volumes, rates, etc. We have designed our wellbores in this project where we have sliding sleeves instead of traditional plug-and-perform completions that allow us to open and close the sleeves throughout the rest of the wellbore, enabling us to control and monitor sweep.

Well, that sounds very exciting. I salute you on your technical foresight on setting up your horizontals that way. Thanks for taking my questions, and I will pass it on.

Thank you, John.

Your next question comes from Neal Dingmann from Truist Securities.

Good morning. First question kind of around that. I really like the potential around this EOR pilot. And I think some of the comments you made about the potential there, not only financially but obviously different aspects of that are certainly there. Just my question around that is, will that be predicated on? I'm just wondering, the size and scale, is that going to be predicated on bringing the partner in? Or I guess what I'm thinking for sort of the second part of that question is, funds allocated there; will that take away from funds allocated just to the traditional business? I'm just wondering sort of early on how you all are thinking about that?

Sure. Thanks, Neal. At this point, we have only disclosed that we have begun this initial vertical injection well; we haven't disclosed or provided guidance on how we are going to do the wider project. We are going to watch how this performs for a while. Again, previously, I said we have only allocated $1.5 million of the capital for fiscal 2021. So, that is the following two quarters. It is going to give us a time to see how the world responds, and we will look at it after that to see how we go from there. We are mindful of the capital allocation framework that we have presented to the investment community, and we think that is one of our core differentiating factors compared to some of the other companies, so we are mindful of that.

Your next question comes from an unidentified analyst.

Good morning, fellows. Again, I want to tell you how great it is that you all have been successful in your merger and going public. My question today is assuming success with your CO2 recovery. How much additional acreage will you have available to expand this and with that in mind, what percentage of your acreage is being held by production now, and what are your plans for that acreage that is still not held by production?

On the EOR, I guess we haven't fully disclosed that. What we say is we are generally being mindful of how we are developing the field that Bob described as a flight and pleased to have forward-looking thoughts for designing it optimally. We generally see a lot of running room for this. This is the first unit; we have got a large footprint, so we have got a long way to go there. Maybe on the HP or HBO operations, as we call it, I will pass it over to Kevin.

I don't have the exact numbers in front of me, but looking back to our last filing which was close, I believe HPC plus HBO was somewhere between 70% and 80% of our acreage position. So we are well underway in development and having delineated positions. I hope that answers your question.

Yes, I would say one more thing, to follow Kevin's comment, we are generally trying to optimize the development to spend capital efficiently with dollars going into the ground versus releasing acres, so we are mindful of that.

Okay. Thank you.

And we do have a follow-up question from John White from Roth Capital.

Just thought I would jump back in. CapEx for drilling and completions in this quarter was a little light versus my take. Was that due to the storm, or is your cadence set up for more drilling in the latter part of the fiscal year?

There was a little bit of delay due to the storm, and such the rig was originally scheduled to be to us starting in February. I don't think we commenced drilling operations until late in February, and we were able to get a completion of two wells. You are correct in that our cadence does kind of pick up next quarter or in this current quarter and then begins to taper off a little in our fiscal Q4, prior to picking back up for fiscal 2022.

Okay, thanks. And you mentioned a windstorm. Anyone that has spent time in West Texas is familiar with that. Did that knock down some power lines, or what equipment did that windstorm affect?

It did impact some power lines from our power provider, Yoakum County Electric.

And there are no other questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.