Riley Exploration Permian, Inc. Q3 FY2021 Earnings Call

Good day. And thank you for standing by. Welcome to the Riley Permian Fiscal Third Quarter 2021 Earnings Conference Call. At this time all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I'd like to hand the conference over to your speaker today, Philip Riley. Please go ahead.

Thank you, Pasha, and good morning, everyone. And welcome to Riley Permian's fiscal third quarter earnings conference call. Participating on the call today are Bobby Riley, Riley's Chairman and CEO; Kevin Riley, Riley's President; Mike Rugen, Riley’s CFO; and myself, Philip Riley, Executive Vice President of Strategy. As a reminder, today's conference call contains certain projections and other forward-looking statements within the meaning of the Federal Securities Laws. These statements are subjects of risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements. We will also be referencing certain non-GAAP measures. These reconciliations with appropriate GAAP measures can be found in our earnings release issued yesterday afternoon. Additional information on the risk factors that could cause results to differ is available in the Company's SEC filings. The full cautionary statements for forward-looking statements can be found in our investor presentation on our website. I will now turn the call over to Mr. Bobby Riley, Chairman and CEO.

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 June 30, 2021, which is our third fiscal quarter. I remind everyone that we are a 10/1 to 9/30 reporting company. This is our second earnings call as a public company. Riley Exploration Permian, LLC, through a reverse merger on February 26, 2021, entered the public markets. Riley again performed strongly in this third quarter. Unlike many EMP companies today, we continue to grow across a number of measures for another consecutive year, including in production, cash flow, and dividends. At the same time, we continue to adhere to our capital discipline and capital allocation structure. Kevin will be providing details of the quarterly and nine months financial and operations updates shortly. We continue to progress on the implementation of our EOR project on a 960-acre track in the Champions acre position. As previously stated, our ultimate goal is to utilize anthropogenic CO2 when available. Initially, water production should begin in early calendar year 2022 with natural CO2 to follow in early summer. By making the tie-in to the CO2 pipeline network, we have created the required link to be able to offload any available anthropogenic CO2 from the market directly to our properties. We continue to evaluate opportunities to capture anthropogenic CO2 within this pipeline network. As Kevin will elaborate, we continue to pay our quarterly dividends as part of our capital allocation structure. I'll now turn the call over to Kevin to review the operational and financial results of the quarter.

Thank you, Bobby. And good morning to everyone. As Bobby mentioned, I plan to review the operational and financial results for the quarter ending June 30, 2021. The quality of our assets, combined with a strong financial position of the company, allows for continued growth while maintaining capital discipline. While the stock prices are often volatile and behave unpredictably, our execution is on track for the company's best fiscal year performance in history, across numerous operational and financial performance metrics, including the continued quarterly dividends. Now getting into the results for fiscal Q3 and year-to-date 2021, we increased our total net equivalent production by 35% to 9.1 MBoe/d for the three months ended June 30, as compared to the same period in 2020, or by 10% quarter over quarter, compared to fiscal second quarter of 2021. We generated cash flow from continuing operations at $58.8 million for the nine months ended June 30; reported a net loss of $21.5 million for the three months ended June 30, 2021, with income from operations of $19.3 million for the same period. The net loss included $35 million in non-cash unrealized losses on derivatives as a result of the change in oil price. Additionally, we reduced our cash costs per BOE by 7% quarter-over-quarter and realized a cash margin of $35.11 per BOE before derivative settlements or $25.80 per BOE after derivative settlements. The cash capital expenditures before acquisitions was $40.1 million for the nine months ended June 30, corresponding to 61% of our adjusted EBITDAX. We generated free cash flow of $18.8 million for the nine months ended June 30, and we completed a $47 million net capital raise in July with the issuance of 1.67 million shares, which secured the funding for the acceleration of our Enhanced Oil Recovery project and increased our estimated trading float by 77%. We exited the quarter with $6.9 million in cash and $97.5 million drawn on our credit facility. Subsequently, we reduced our credit facility borrowings to $62 million in July. We announced our latest dividend subsequent to the fiscal third quarter of $0.28 per share or $5.5 million in total, which was paid on August 6. The current dividend applies a 5.8% annualized yield based on the August 6 closing price of $19.27 per share. During the quarter, Riley Permian brought online seven gross 4.8 net horizontal wells and drilled one gross one net vertical injection well, in line with our budgeted guidance previously disclosed. The company has accelerated the development of its EOR project, which now includes 12 vertical injection wells in our 960-acre project area. The drilling rig for the vertical injection wells has been contracted and is scheduled to arrive during September. The company will conduct drilling, casing and logging operations on the injection wells through the end of calendar year 2021. Water and gas line infrastructure has been ordered, and we anticipate installation during the calendar fourth quarter of 2021 and calendar first quarter of 2022. The physical infrastructure connection to the CO2 pipeline source, commonly called a tap, has a turnaround time of six to nine months due to the specialty nature of the product and supply chain constraints. Based on current estimates, we anticipate initiating water injection for the project during calendar second quarter 2022, which will continue for several months, such that the slower timing of the CO2 tap may not impact our planned development schedule. After the reservoir is sufficiently re-pressurized and the CO2 tap has been installed, we plan to initiate a combination of CO2 and water injection. Regarding the choice of CO2 and procurement, the EOR project will begin using natural CO2 due to its ease of availability, reliability and price. The company is currently finalizing customary agreements with a reputable counterparty for both the supply of CO2 product and for the CO2 tap connection. We maintain the optionality to potentially switch to using anthropogenic CO2 with this or subsequent project areas as sources become available at attractive economics. With the CO2 tap installed, Riley Permian will have access to a wider network of CO2 pipelines, creating flexibility for sourcing CO2, including the anthropogenic potential. The company continues to investigate numerous anthropogenic source possibilities in conjunction with carbon capture, utilization and sequestration efforts, including ongoing discussions with several counterparties. At the same time, we are monitoring potential changes to federal tax incentives and other regulations currently being discussed at the national and Texas state levels. We continue to believe that a possible CCUS project, with Riley Permian participating as a developer, has the potential to be an attractive opportunity by itself as well as a synergistic opportunity with our core upstream business. Based on the current market conditions and the acceleration of our EOR program, the company forecasts fiscal fourth quarter 2021 capital expenditures before acquisitions of approximately $20 million to $26 million. Separately, certain drilling and completions capital expenditures are now forecasted to be invested during the fiscal fourth quarter of 2021. With that, I will turn the call back over to Bobby for closing remarks.

In closing, our past quarter was exceptionally busy and productive. We generated operating cash flow, free cash flow, and paid dividends. Our objective remains to continue to grow within the capital allocation framework that we've laid out. Thank you again for your time today. Operator, you may open it up for questions at this time.

Please be advised that today's conference is being recorded. Operator Instructions. And our first question is from the line of Neal Dingmann with Truist Securities.

Good morning, guys, and a very nice quarter. Bobby, just something – my first question is just something you had just mentioned on just the capital allocation. By our numbers, you guys licensed some nice free cash flow ahead. Can you talk just a little bit about – you’re already paying a very strong dividend, obviously based on today's price. Could you talk about, you mentioned the capital allocation, your thoughts, you and Kevin going forward just with the free cash flow? It sounds like the plan is pretty well set, but would you take some of that excess capital for even more shareholder return? Would you use it for more growth? Could you just talk about sort of capital allocation a little bit more?

Neal, we laid out the capital allocation based on roughly 60% to 65% of our expected EBITDA to go toward our normal development activities, which does allow for growth. The EOR capital that we're spending is basically using the capital that we made in the raise that we did this last month. I believe we've made statements that our goal is to grow our production and grow our dividend. That is what we have in our internal plan. But to say exactly how much, I don't know if I have that number down. But it is our objective to grow both our production and our dividend.

So not necessarily growing the allocation percentage, but on an absolute amount, we are looking to grow that.

Absolutely. Good clarification. Got it. And then secondly, could you just talk about just on more of the traditional business? Maybe – Kevin, maybe give us some operational, I think it was kind of four odd wells. I know obviously the plan will be a bit lumpy, but could you talk about two things there? Just activity-wise you anticipate just being kind of mixed. I know you've got 4Q guide out and I'm not asking for – guide for 2022 calendar yet, but just kind of on the plan, two things. One, will you stay in the same region drilling-wise? And two, do you anticipate just the growth to be kind of along the level that we just saw in the most recent quarter? I mean, or I should say activity to be on the same level that we just saw in the recent quarter?

I would say, are you talking about for fiscal Q4 or so? Unclear.

That's exactly right, Kevin.

Yes. So fiscal Q4, I'd say there'll be a little bit more activity specifically as it relates to CapEx and funding of the CO2 project. Initially, we're having to pay for the CO2 tap, which we have to pay for up front, in addition to procurement of materials for the water and CO2 injection lines of which have already been ordered and the material for the WAG units. So activity-wise for our ordinary core upstream business, I would say is going to be in line with what we saw in fiscal Q3, but there will be additional capital spent as it relates to the EOR project.

Very good. Very good. And then just lastly, I think the answer to this that you guys continue to have a great nice conservative balance sheet. Hedging-wise, just going forward, any change to those plans? Or can you just talk about what are the thoughts around that, Bobby or Kevin?

We continue to monitor our hedge book as things roll off. We feel like we're in a pretty good position right now, which we’ve got a fair amount of the business protected going forward, but we also have the exposure to upside. We will continue to layer on, but nothing substantial.

Very good. Again, nice quarter, nice call. Thanks, guys.

Thank you,

Your next question is from the line of Noel Parks with Tuohy Brothers.

Good morning.

Good morning, Noel.

I've had a couple of questions. As you get closer to the point where you're going to have arrangements for anthropogenic CO2, you mentioned you're talking with potential counterparties. Can you just kind of give a sense of, I'm thinking in terms of timeframe, for say the simplest most straightforward sort of project that you might be able to arrange? And then what's at the other end of the spectrum for a particularly large scale or complex project? Are we talking about single-digit years for something simple or like five years or more for something complex? Just to give a sense of what might be available and how long it might take to implement?

Yes, sure. Noel, this is Philip. I can try to address that. An example of a simpler one is going to be some kind of industrial facility that's nearby in the region and nearby that existing CO2 pipeline network, where you're not building a connection of 50 miles or so. Lots of different types of industrial facilities in the region. And so, without going into specifics, those are examples. And I think definitely our objective is to be in this single-digit years, yes. The idea is just to get something that works for everyone. As we alluded to in the press release, the mandates or the credit at the federal level are a little bit fluid right now. You've got these two competing bills in Congress, $1 trillion and $3.5 trillion. They're talking about different levels of incentives being contemplated for that or even something new. So, I think as those remain a little fluid, people are watching and waiting. And so, it'll be helpful to get some clarity there. On a bigger project, I think there's different options that could potentially one day include something greenfield. We liked the idea of maybe partnering with a larger industrial facility if there's something even greener and cleaner to build, but that's a bit more speculative and I guess years off. So, I think I'd focus you more on the nearby existing industrial facilities that are going to be pretty quick and easy to tie into.

Great, thanks. And for your EOR project, just curious, do you have sufficient power or utility access on the site, substations with capacity or is that going to be something you're going to have to address as you ramp up and install facilities and so forth?

Well, I believe at this time we have sufficient infrastructure from the power standpoint. But we also look as we build this out to where we at some point may even generate some power ourselves with our gas supply. But right now, at the site that we're building the gathering facility and the injection facilities, we previously brought underground power to that facility. So, I think we're good to go from that standpoint.

Great. And just the last one for me. In the nearby fields that have done like the EOR projects, were those mostly similar to your projects that alternated CO2 and water WAG type projects? Is that the method used elsewhere?

Yes. That's the most common method used in the area in the San Andres formation that we're involved. And just assist in the version of the CO2 so that the water, it kind of forms a block so that the CO2 will migrate and contact additional rock instead of finding a straight pathway through. So that's a common practice.

Your next question is from the line of Thomas Landstreet with N3L Capital.

Good morning, gentlemen. Thank you for taking my question. So even though the two bills in Congress, there's not a lot of clarity there. And the 45Q credits aren't really defined, that's true right?

They are defined, I would say. Are you saying in the new bills we have or the existing?

I guess my question is, and forgive me for any ignorance here. So, obviously you have a great deal of confidence in the opportunity with the sequestration opportunity. I'm just wondering what your model is for those credits. For instance, how much could they add to your revenues, your opportunity? Have you done – is there anything out there that you have or others have where we could somewhat quantify a best case, maybe medium case on those credits and the opportunity there? Is that a fair question?

Yes. The credit values are publicly available. At the federal level, our lawyers have summaries of those out there. For example, it's often referenced to the $35 credit per ton in a couple of years for that EOR, and then $50 for permanent sequestration for the same year.

$35 for what again, please.

Net per ton CO2.

To translate that to an Mcf, you divide it by about 19.25. So, it comes out somewhere in the $1.80 range.

There are a few ways to think about it, but we've got the upstream side that we're trying to ensure good economics. So, you've got CO2 as a cost component of your OpEx.

Yes.

And then on the other side, what we're talking about with the credits is you can think about it a few ways. It could be a potential offset and there’s potentially revenue there from the CCUS point of view, you have to be able to monetize those credits. And so, for that, you need to be either currently a taxpayer or your partner needs to be a taxpayer or there are other ways to monetize it. We've talked about this on the last call; there are tax equity financing options and such, but one of the items being discussed and pushed for at the national level is to make that direct pay, which is another way of saying, you don't have to be a taxpayer to get the credit. It's just a direct pay of the credit.

Okay.

One other thing I’ll clarify for you that the credits are available for a 12-year period. You can do a little bit of math and you multiply it by the amount of cubic feet per day you think you'll be using. We talked about this project using up to 15 million a day, cubic feet of CO2. You can see what that math implies for a 12-year period. You look at solar and wind; those PTCs, ITCs have been extended a number of times over the years. We're not assuming that in any kind of base case, but it may be reasonable also that those types of credits get extended at some point.

Okay. So, I did just find by the way, the tax credits are – so I can go do that math. And then – so you've got that and that's exciting to you and worth the investment, gravy or added to that are the two bills in Congress. Can you give any sort of explanation of the nature of those two bills? And then I might hunt them down, kind of get a sense of what those do on top of the 45Q credits?

Yes, I'll do a disservice if I try to summarize what's in $4.5 trillion worth of all this. What I'd say in general is that they're working in general; some of it is more infrastructure-related and some of it is more social type spending and such. But I guess what I'd say is that the key components that those in the CCUS industry are looking for include potentially an increase of the credit by some amounts. Not just the $35, but potentially increasing it to some amount, whether that be $50 a ton, $60, some amount. That's one. Another one would be direct pay.

Okay.

Like we just talked about with the tax credits. And then there's a number of other measures that people are just looking for improvements effectively.

Okay. All right. And thank you very much for that.

You do have a follow-up question from the line of Thomas Landstreet with N3L Capital.

Hey, it's me again. Sorry. And I'm a relatively new owner by the way. Thank you. Just curious what – you've obviously got a lot of ESG investors out there that are low to invest in hydrocarbons, unfortunately, but then this may attract their attention when you are able to sequester carbon, etc. So, I'm curious what your thoughts are about that: one, is that part of your motivation? Two, are you getting any feedback from investors that are, say, restricted to the ESG type of investing any interest? Just kind of curious about what the opportunity there is to attract a new set of investors along those lines if you don't mind.

Yes, sure. In general, we've got a couple of ideas and strategies there. First and foremost, we're an oil and gas company. Our goal there is to position ourselves low on the supply cost curve. We believe the planet is going to need hydrocarbons for decades to come. We want to be a provider of low-cost supply there. We're a small player, obviously on the global scale, but we want to be a low-cost supplier. At the same time, clearly the countries across the planet are asking for lower emissions, lower CO2, and such. If you can somehow link those two together, you can be a supplier of hydrocarbons that the world still needs. President Biden just asked OPEC to pump a lot more oil, right? So, at the same time, he's negotiating a green stimulus bill; he is asking the Middle East to produce more oil. Well, if we can do that in a cleaner way and produce a lower carbon barrel, maybe a no-carbon barrel, then we think that helps to maybe it's not only doing the right thing, but it's potentially a differentiating product. We're talking about a commodity product here, but maybe we live in a world one day where it's potentially differentiated if you can create a low carbon sometimes referred to as a blue barrel of oil.

So is there anything that – sorry, I apologize.

That’s kind of a high-level view of some of the initiatives. We do see carbon capture; clearly, a lot of excitement around there. So, we see it as a natural complement to the EOR and such. People love to talk about the capture, the carbon capture side of it, but sometimes overlook the fact that you need what we call a 'sink.' We believe that our properties in particular create a great sink because of the pipeline networks, some of our subsurface qualities, and so forth. At a high level, a lot of observers believe the U.S. is really well positioned because, I think, there's statistics out there that suggest that the U.S. holds two-thirds of the world's geologic storage. Some of that you're referring to is just the empty saline formations, and that's a harder economic proposition when you're not creating any economic value. You're just putting the molecules in a space. We think the EOR can be interesting because you're doing that; you are not totally reliant on the subsidy. You're also creating economic value on the EOR side. To finish this up and sorry, I did a long answer, but you asked about the ESG investors. We're certainly open to that. They typically are not going to target an oil and gas company, but I think certain groups try to make exceptions and do appreciate efforts like we and others are making. So, we'll obviously do what we can to try to be friendly with those folks.

Okay. And then finally, I know that there are some, a couple of other companies that are seeking to do what you're doing, which of course is to use anthropogenic CO2. I would assume some of them are a little more advanced. Can you give me any color on how those are going and how those are working or is there a place I could go look that research lab?

Yes, look, the other companies doing this, there is a handful. ExxonMobil has been talking about this on the sequestration side, permitted sequestration; they talked about doing it under the Houston Ship Channel. Oxy has been talking about this for probably a couple of years now. They are a bit of an analog for us and they are directly across the fence line with one of their biggest EOR projects that's in the Wasson Field. They are trying to couple that with different forms of anthropogenic, including direct air capture. That's a noble endeavor, but it can be challenging with the economics. And then I guess the third one I mentioned is Denbury is focused more on the Gulf Coast. They've been in the EOR business for a long time. That's focused, like I said, more on the Gulf Coast; those are usually older type legacy fields that you're trying to squeeze the last bits of oil out of versus a less developed field.

Yes, okay. That's a good comparable. Okay, that's what I was looking for. I really appreciate that.

You're welcome. Thanks for the questions.

Sure.

At this time, there are no further questions. Thank you for participating in today's conference call, and I ask that you now disconnect your lines.