Riley Exploration Permian, Inc. Q4 FY2021 Earnings Call

Good morning. My name is Lilian and I will be your conference operator today. At this time, I would like to welcome everyone to Riley Permian Fiscal Fourth Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. Philip Riley, CFO. You may begin your conference.

Thank you and good morning to everyone. Welcome to our fiscal fourth quarter and full year conference call. 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. Reconciliations with the 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 statement about forward-looking statements can be found in our investor presentation on our website. Participating on the call today are Bobby Riley, Riley’s Chairman and CEO; Kevin Riley, Riley’s President; and myself, Philip Riley, CFO and EVP of Strategy. I will now turn the call over to Bobby.

Thank you, Philip. Good morning and thank you for joining us today on the call. We’re pleased to report that Riley Permian completed another strong fiscal year. It was an eventful year in which we completed our merger with Tengasco in February, raised capital in July, began progress on our EOR project this fall, and we’re now reporting that we met our operational guidance metrics for the fiscal fourth quarter and the fiscal year. You will hear from our team shortly that we reported record results across a number of operating and financial metrics. We are proud of the organic growth we achieved over the past year. We recognize the market prefers that many larger oil and gas companies not pursue growth, while we have been encouraged by investor support of our continued growth. We believe our reinvestment for growth is warranted to improve our scale, cost structure, and cash flow. At the same time, we achieved this growth while allocating significant cash flow from operations back to shareholders in the form of dividends. Finally, we have continued to progress our efforts in developing CCUS projects, including for permanent storage projects on our property, and we’re optimistic in initiating our first project during 2022. We’re having meaningful discussions and diligence efforts with counterparties from CO2 sources, capture equipment providers, and regulatory advisers. We are seeking to construct commercial arrangements that provide attractive economic returns in the current regulatory environment with the potential for improvement should regulations change at the federal or state levels. I will now turn the call over to Kevin Riley to review operational results.

Thank you, Bobby, and good morning to everyone. As Bobby mentioned, I plan to review operational results for the full fiscal year ended September 30, 2021, and for the fourth quarter ended September 30, 2021. As previously mentioned on our last call, the quality of our assets combined with the strong financial position of the company allows for continued growth while maintaining capital discipline. Our execution during fiscal year 2021 proved to be the company’s best fiscal year performance across numerous operational and financial metrics. To start, I will review the results for the full fiscal year, followed by results for our fourth fiscal quarter ending September 30, 2021. For the full year, we increased net production by 22% to 8.6 MBoe per day, as compared to the same period in 2020, which consisted of 74% crude oil. The company brought online 20 gross and 14 net horizontal wells during the year, investing total cash capital expenditures of $60.1 million, of which 80% was invested towards drilling and completion capital, 7% capitalized workovers, and the remaining for other expenses. We reduced our lease operating costs by 11% to 697 per Boe as compared to 2020. We just finished doing our third-party reserves report for the year, which was issued by Netherland, Sewell & Associates. We increased our total approved developed reserves by 37% year-over-year to 41.5 MMBoe, an increase of 11.3 MMBoe, and we increased our total approved reserves by 27% year-over-year to 72.2 MMBoe, which is an increase of 15.4 MMBoe. Now for our fourth quarter ending September 30, 2021, results. We increased our total net equivalent production by 35% to 9.6 MBoe per day for the three months ended September 30, as compared to the same period in 2020 or by 5% quarter-over-quarter compared to our third quarter 2021. During the quarter, the company brought online six gross and 5.7 net horizontal wells. We invested total cash capital expenditures of $20 million. We reduced our lease operating costs by 20% to $6.45 per Boe as compared to the same period in 2020 or by 7% quarter-over-quarter. The improvement in lease operating cost is a testament to our team’s effort to control costs, as well as the benefit of increased scale, though we do acknowledge costs may still vary from quarter-to-quarter, including from the impact of workovers. Since October 1, 2021, the company has continued to progress on its EOR pilot program. The company has drilled six of six currently planned vertical injection wells and has commenced the installation of water and CO2 injection lines. We anticipate being able to initiate water injection for the project during the second quarter of 2022, which will continue until the reservoir sufficiently re-pressurizes and CO2 tap has been installed in the summer of 2022. Also, the company executed two agreements in October 2021, including an agreement with the Cortez Pipeline Company relating to the connection and establishment of a delivery point for CO2 for Riley Permian, as well as an agreement with Kinder Morgan CO2 Company relating to the purchase and sale of CO2. I will now turn the call over to Philip Riley for the review of our financial results.

Thank you, Kevin. Today, in an effort to be efficient with everyone’s time, I’ll aim to limit stating all of the standard financial results and instead try to highlight a number of smaller metrics. For the fourth quarter, we are reporting net income of $15.7 million. For the fiscal year, we reported operating income of approximately $60 million and an overall net loss of $65.7 million, with the largest driver here being derivatives loss of nearly $90 million, of which only about $16 million were realized losses. Switching to non-GAAP measures, we had adjusted EBITDAX of $24.5 million for the quarter and approximately $90 million for the year. These amounts closely resemble our cash flow from operations. On free cash flow, we generated $7.2 million in the quarter and $26 million for the year, with the latter representing 30% of our operating cash flow. Most of our cash flow growth this year was driven by higher production. Our revenue is largely driven by oil sales and index oil prices were up materially this year. For the fiscal year period for derivatives, our realized oil price was up 60% year-over-year. Including the effect of derivatives, our realized oil price was up only 4%, owing to the fact that we were not only hedged largely this year but also last year, reducing the year-over-year impact. For the recent quarter, our realized price was $52 per barrel. For this first fiscal quarter of 2022, the current fourth calendar quarter will still largely be hedged approximately 85% at the midpoint of our oil production guidance disclosed. For calendar 2022, we chose to restructure some hedges, moving 20,000 barrels per month in oil derivatives to calendar 2023. This reduced our calendar 2022 position by about 4% to 5% per quarter, allowing a bit more exposure this year. So when you look at where we are today for the calendar first and second quarters, our hedge volumes drop about 22% in the current quarter, down to about 65% forecasted volumes at midpoint guidance. And again in the calendar third and fourth quarters, about 35% down from current quarter levels to about 55% of forecasted volumes at midpoint guidance. Average quarter volumes for oil derivatives in 2023 are about a third of the current quarter levels, which, when combined with anticipated growth, leads to materially lower percentage hedge positions. Final note here on hedging is that we anticipate using collars more often and wider collars, which provide downside protection as the current price is far above our cash operating cost levels, while also allowing more upside potential for the exposure we know many investors want. Moving on now to some operating costs for the quarter. Kevin discussed LOEs, so I won’t repeat that. Just make a note here that we changed one slight reporting matter there. We’re now excluding ad valorem taxes from LLP as we reported in the past. Those are now grouped with production taxes. We made that change in an effort to be more aligned with peers for more consistent reporting. On cash G&A, the non-GAAP measure one that we defined as excluding share-based compensation and benefiting from the effects of revenues from contract services, cash G&A for the quarter was $4.3 million or $4.92 per Boe. This is higher than we anticipated last quarter and we attribute the average to a number of categories, including professional services, insurance, and other matters. We’re spending more time and advisory dollars now on efforts such as carbon capture initiatives, as Bobby alluded to earlier, which we believe may materialize into more actionable opportunities this year. Total interest expense for the fiscal fourth quarter was $963,000 or $1.09 per Boe, which is a decrease of 23% from the fiscal third quarter. Interest expense in our income statement includes amortization of deferred financing costs. Guidance previously provided did not include amounts for this non-cash amortization of deferred financing costs. As included on the statement of cash flows presented in our earnings release, you’ll see amortization of deferred financing costs was $170,000 for the fiscal fourth quarter. When you compile these costs discussed, then add production taxes and ad valorem taxes, you get a total of $15.38 per Boe for the quarter, and then compare that to a realized average price of $54.46 per Boe for the quarter, and you get a cash margin of just over $39 before derivatives. After realized derivative losses of $12.67, we had a cash margin of $26.41. Based on analysis and calculations of cash margins for various other Permian companies, we believe we have among the highest cash margins on both an unhedged and hedged basis. You can see our presentation for this analysis and comparison. Moving on to cash flow and cash flow allocation. For the year, we allocated 70% of operating cash flow to CapEx, 21% to dividends, with 9% excess used for debt repayment. For the quarter, we had $19.5 million in cash drilling and completions capital expenditures during the fiscal fourth quarter or $57 million for fiscal year 2021. Within the $57 million, about $4 million was related to capital workovers. We then have $1.7 million of other property and equipment additions including a new field office, some field trucks, and other small investments. Final points here, in October, we raised our dividend about 11% to $0.31 per share, which was about $6 million in total. As of December 8th, we had $65 million drawn and $110 million of availability on our credit facility, following a 30% increase in our borrowing base in October. At this point, I’ll turn it back to Kevin to discuss our forward guidance.

Thank you, Philip. I will now give guidance for the company’s activity in fiscal year 2022 and the current quarter. The company recently commenced its fiscal year 2022 development program. Based on the current market conditions, the company forecasts full year fiscal 2022 accrued capital expenditures before acquisitions to total approximately $85 million to $95 million, which includes amounts for drilling and completion, operated and anticipated non-operated capital workovers, infrastructure, minor additions to land and existing working interests, as well as investments in our EOR program. We plan to drill 18 gross and 12.5 net wells during the year with 12 gross and 11.6 net wells being operated. The company forecasts fiscal first quarter of 2022 accrued capital expenditures before acquisitions to total $26 million to $32 million. Riley Permian forecasts fiscal first quarter of 2022 oil production to average 7,100 barrels per day to 7,400 barrels per day, with total equivalent production to average 9,500 Boe per day to 9,900 Boe per day. Company forecasts first quarter of 2022 LOE of approximately $725 per Boe to $775 per Boe, cash and G&A expenses of approximately $4 per Boe to $4.75 per Boe, excluding share-based and unit-based compensation expense. We believe this level of capital investment may correspond to a full year growth of approximately 11% to 15% over full fiscal 2021 production levels. This growth level is attainable due to our low base decline PDP production, which the company estimates to be around 21% for the coming year. I will now turn the call over to Bobby for closing remarks.

Thank you, Kevin. In summary, we believe the company delivered another solid quarter and an overall excellent year. Comparing to the prior fiscal year, this year we grew production, reserves, operating cash flow, free cash flow, and dividends. Our year-end results on capital allocation were consistent with the framework we shared earlier in the year. Looking forward, we’re forecasting another year of material production growth and we’re excited about our EOR and CCUS projects. Thank you again for your support and for your time today. Operator, you may now open it up for questions.

Thank you. Your first question comes from Neal Dingmann from Truist Securities. Please go ahead. Your line is open.

Good morning, all. It’s Jordan Levy on for Neal. Really nice quarter. I wanted to start out and see if I could get your comments related to the progress on the EOR project. Nice to see that the six vertical injections have been drilled and you have the water and CO2 injection lined up coming, and the agreement you discussed with the pipelines. I wanted to get your thoughts around how things are progressing from a timing perspective versus your expectations there and how we should view kind of the next steps in terms of the EOR project, both near-term that I think you talked more to on the prepared remarks and longer-term for that project?

Okay. This is Bobby Riley. I’ll take that question. I think as we indicated in the presentation, we have completed the drilling phase of six of the initial injection wells that we plan to start water injection as early as the first or second quarter of our fiscal year 2022. The water injection lines are currently in place and we’re making the final tie-ins to the wellhead where new pressure testing and start injection. We intend to do that for several months for two or three reasons. One is just to start re-pressuring the reservoir so we can have a better effect once we get CO2 in the ground. The other is just to continue to analyze the injectivity profiles and how we can maximize the scope and the ultimate recovery from the project. But overall, I’d say it’s on schedule or a bit ahead of schedule as far as getting water in the ground and then the construction is underway for the tap coming in from Kinder Morgan. So I hope that answered your question. But I would say, overall, we felt very good about where we are and not being behind at all.

Yeah, absolutely. It certainly seems that way. And for my next question, maybe move on to the other event new venture that you all have been discussing with the carbon capture and sequestration initiatives. Curious what the high-level timeline for that could look like? You mentioned earlier optimism around initiating a first project sometime next year. Curious what needs to get done there, how this process has been going so far, and that sort of thing?

Yeah. Thanks, Jordan. This is Philip Riley. As we noted in the remarks and in the press release, we’re working with various different parties, beginning with these source hosts themselves, guys in the middle, the equipment makers, and also regulatory advisers and such. What we’re trying to do is solve a bit of a multivariable equation with different decision tree branches. We’re trying to do this in a way where we’re not completely contingent upon what comes out of any new potential law, while acknowledging that that could have a profound impact on what we structure. Just a quick example there is, if it’s the new law that’s being debated up in Washington, where to get an accurate, at least as we’ve seen it most recently, it would include a direct pay aspect to the 45Q credit. In that world, you don’t need an intermediary to necessarily help you monetize the tax credit. For the foreseeable future, we don’t anticipate being exposed to significant cash taxes and so we would want another way to monetize that. You can use tax equity, you can do a different model than perhaps with a fee-for-service and have someone else that may want the tax credit themselves. That’s just one example where if you don’t have that, if you do have the direct credit, then that eliminates that. So just trying to be careful and return and how we think about this to optimize where we’d be happy with any of the outcomes. We’re not going to give specific guidance right now on the timing, but I just reinforced that we are having constructive talks where we’re working with equipment providers. As you can imagine, you’ve got the supply chain constraints that are pushing up prices across many areas of industry, and we’re trying to keep those manageable to where project costs still look attractive for us. But we look forward to sharing more information soon.

That makes a lot of sense. Maybe if I could just sneak one more in, with your 2022 guidance, I’m curious if you could talk around some of the activity assumptions and that could get to that $85 million to $95 million both on the EOR side, which appears to be pretty loaded into the first and second quarter, and on the D&C side, I know you talked to the 18 gross and 12.5 net wells. But maybe just some more specifics around how that looks from kind of a cadence perspective and that sort of thing?

You say from a cadence perspective?

Yes, sir.

Okay. Sorry. So we have commenced, like I said earlier, our 2022 development program. We started that at the end of September and drilled four wells, laid the rig down from the D&C perspective, and won’t pick it back up until February. At that point, we’ll commence drilling six more operated wells. Then we’ll pick back up in June and drill the remaining two. From an EOR capital perspective, most of that capital is being spent in the first quarter as we’ve drilled the injection wells and we’ve started laying the lines for injection and the surface infrastructure being put in place. So, I guess, there’s some anticipated non-op work during the year, one of which has already been brought online, and the others we don’t anticipate until the spring.

Got you. That answers all my questions and nice quarter, guys.

Your next question comes from John White from ROTH Capital. Please go ahead.

Good morning, guys, and congratulations. A lot of good numbers in the report. In your new presentation, I liked your slide number eight; those reserves were very impressive. I wonder if you could talk about the frac market. Are you seeing any tightness? Are you seeing any price increases and any other comments you’d want to add on drilling and completion costs across the spectrum?

Absolutely. John, this is Kevin. I’ll address that question. So in the frac market, it is getting tighter and harder to tie up crews for calendar 2022, especially starting out in 2022 as a lot of the service providers are being booked up with the companies that have the new budgets for the year. But fortunately, we do have most of those lined up. So we’re not anticipating much delay in bringing on our new drills. The wells that we drilled in this previous or current quarter have all been completed and are now online, so there wasn’t more than three weeks or four weeks between the rig release and completion date. From a cost perspective, we’re starting to see slight increases from, say, fiscal Q2 or fiscal Q3, but nothing substantial. If you look on a per-foot basis, D&C per foot by total measured depth, we’re seeing costs maybe go up between 5% and 10% for the remaining wells this fiscal year.

Okay. Well, you are…

Still remains at a level that is below the peak levels that we’ve seen in the past.

Yeah. That’s pretty consistent with what the September 30 report said on their calls, of course. Appreciate it. Thank you. I will pass it on.

From a steel perspective, we were able to pre-buy most of the casing and tubulars for the whole drill program, and we bought that back in June. So we’re protected a little bit from continued price increases.

Great job. Once again, an excellent quarter and I will pass it on.

Thank you.

Your next question comes from Noel Parks from Tuohy Brothers. Please go ahead.

Hello.

Good morning, Noel.

Just had a few quick questions. Could you talk a little bit more about the progress you made on LOE in the quarter? You may just drill down a little bit into what some of the ingredients of that one?

The largest factor this quarter was a decrease in workover activity, which was simply due to pumps not failing during the quarter as they had in the past. This explains why we mentioned that lease operating expenses could vary from quarter to quarter depending on the timing and costs associated with workovers. But that was the main contributor.

Great. And you mentioned that you were looking to start using wider collars and I don’t have a great sense of either what those would look like. I am thinking especially around whether there’s enough liquidity in the curve to be able to do what you want. So, any extra detail on that would be great?

Yeah. Hi, Noel. This is Philip. What I meant there is that we can use collars instead of swaps for some of the hedging. You’re familiar with collars; you’ve got the call and the put, so you’re basically creating a straddle around the current price. With increased volatility, you can basically take advantage of that with the higher embedded option premium on the options in there. An example is that instead of say, a $10 spread around the current spot price, you could do a $20 spread or maybe even a $30 spread. At recent levels, we’ve seen those stay with the foot price there above $50, and the collar just below maybe $80 gives you some ability kind of a hybrid where you’ve got some exposure, while at the same time, protecting your downside that’s far above our operating costs.

Right, right. And then the balance sheet in good shape. That $50 floor is still pretty attractive.

Right, right. That’s how we see it.

Got it. Got it. And just one thing about the CO2 purchase and sale agreement with Kinder Morgan, can you just refresh my memory? Is that going to be a price that is tied to oil prices and will fluctuate going forward? That’s sort of what I think is being difficult for a lot of CO2 pricing.

Yeah. Sure. It can. It’s tied to oil price. It’s got a floor. But it’s in the neighborhood of 2% of WTI. That’s a small amount we are starting off with there and we have about a three-year term.

Okay. And so did you say what kind of WTI?

2, 2.0.

Got it.

And for three years.

Okay. Great. That’s all I have.

The next question comes from Walter Morris from Baraboo Growth. Please go ahead. Your line is open.

Excellent, and strong finish to the year, gentlemen, and solid projections to fiscal 2022. As John White indicated, impressive reserve growth would have developed up 37% and proved reserves up 27%. Can you give us a rough NAV number for those reserves using the current strip?

Yeah. This is Philip Riley. I guess, I’d point you to our 10-K, which will be filed tomorrow afternoon. Towards the very back of there, we’ll have the Netherland, Sewell numbers in there. Ask you to be patient for that, but hope you’re happy with the outcome.

Okay. Thank you, Philip.

We have no further questions in queue. I turn the call back over to Bobby Riley for any closing remarks. Mr. Bobby Riley, do you have any closing remarks?

No. That’s it. I appreciate everybody’s time today for dialing in, and we’ll just keep the ship going the way we’re going. Thanks a lot, guys.

This concludes today’s conference call. Thank you for your participation. You may now disconnect.