Riley Exploration Permian, Inc. Q4 FY2022 Earnings Call

Hello, and thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Riley Exploration Permian Incorporated Fourth Quarter 2022 Earnings Conference Call. I would now like to turn the conference over to Philip Riley, CFO. Please go ahead.

Thank you, and good morning to everyone. Welcome to our conference call covering the fourth quarter and full year 2022 results. Yesterday, the company published a number of items which can be found on our website under the Investors section, an earnings release, a 10-K, supplemental info and non-GAAP measures and two presentations. One presentation provides an update for fourth quarter and full year results, with the second providing an overview of our company's story. Participating on the call today are Bobby Riley, Chairman and CEO; Kevin Riley, President, and myself, Philip Riley, CFO and EVP of Strategy. Today's conference call contains certain projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements. We will also reference certain non-GAAP measures, the reconciliations to the appropriate GAAP measures can be found in our supplemental disclosure on our website. I'll now turn the call over to Bobby.

Thank you, Philip, and thank you again to everyone for joining us on today's call. Yesterday, after the close of the market, we announced the results of our fourth quarter and full year 2022. I'm pleased to report that 2022 was another outstanding year for Riley Permian with performance continuing to be strong through the fourth quarter. Before we move on to the results, I'd like to take a moment to recognize the outstanding efforts of the entire REPX team. It is through their hard work, dedication, and expertise that we are able to achieve the strong operational and financial results that we are reporting today. From our operations team who worked tirelessly to optimize production and reduce costs, to our finance and accounting teams who ensured that we remain financially disciplined and focused on delivering value to our shareholders, every member of the team played a critical role in our success. Your commitment to excellence and your passion for our business is what makes Riley Permian such a great company and I'm honored to work alongside you. Now let's turn to the results for the year. We have worked tirelessly throughout the year to optimize our core business and execute on a variety of growth initiatives. Most significantly, we recently announced that we have entered into a purchase and sale agreement to acquire oil and gas assets in the Yeso trend of New Mexico. As we continue to work towards closing the acquisition, our team is already hard at work developing plans to integrate these assets into our existing operations, and we are confident that we can achieve a seamless transition that maximizes the potential of these underdeveloped assets. We look forward to updating our shareholders on our progress as we move towards closing the transaction early in the second quarter. In 2022, Riley Permian delivered strong financial and operating results. To highlight just a few of the full year items, we increased our net oil production by 31% year-over-year to 8.8 MBbl per day and total net equivalent production by 25% year-over-year to 11.5 MBoe per day. We generated $176 million of adjusted EBITDAX, $170 million of operating cash flow from continuing operations, and $56 million of free cash flow. We continue to invest in our business with total cash capital expenditures before acquisitions of $113 million, corresponding to a reinvestment rate of 66% of operating cash flow from continuing operations, down from 88% in 2021. We remain committed to returning value to our shareholders, paying $25 million in dividends during the year, corresponding to 44% of free cash flow. We have now paid dividends for 16 consecutive quarters. Overall, we are proud of our financial and operating results in 2022 and believe they reflect the strength of our assets and the dedication of our team. We remain focused on creating long-term value for our shareholders and delivering sustainable growth for years to come. I will now turn the call over to Kevin to discuss operational results and give more details on the acquisition.

Thank you, Bobby, and good morning to everyone. I echo Bobby's sentiment, as we are proud of our team's dedication and resilience, which enabled us to overcome inflationary pressures and shortages of material, equipment, and labor to deliver outstanding results. Before we dive into our exciting new initiatives, I want to take a moment to highlight a few of the accomplishments we achieved in executing our plan during 2022. First, we maintained our momentum through the fourth quarter, with production growing from 12.7 to 13.3 MBoe per day in the fourth quarter, representing a 4% increase quarter-over-quarter. On a full-year basis, we grew our year-over-year average production from 9.2 to 11.5 MBoe per day, which is a 25% increase. This growth was all achieved organically with the 15 gross, 11.8 net wells brought online during the year. In addition, our lease operating expenses were $8.8 million or $7.16 per BOE for the three months ended December 31 and $32.5 million or $7.73 per BOE for the year ended December 31. This represents a 5% decrease quarter-over-quarter and a 5% increase year-over-year. Regarding our EOR pilot, we continue to inject water and CO2, but are still early in the process of repressurizing the reservoir. Now let's turn our attention to some of the exciting new initiatives we have planned for 2023 and beyond. On February 28, we announced we have entered into a purchase and sale agreement to acquire the oil and gas assets of Pecos Oil & Gas, LLC in Eddy County, New Mexico. These assets are focused on the development of the Yeso trend of the Northwest Shelf. The Yeso ASO trend aligns with Riley Permian's existing core assets focused on St. Andrews. There are several similarities in geology, reservoir type, and drilling completion and production techniques. Though this asset will boost Riley Permian's production near-term, we believe this is an underdeveloped asset with extensive development potential allowing for value creation through the drill bit. In addition, acquiring the assets adds a new area to Riley's operating footprint, diversifying the company's portfolio and reducing single area concentration risk. Lastly, but no less important, on March 2, we announced we have formed a joint venture that will own and operate on-site power generation for our Yoakum County, Texas assets. The first phase of the project will provide 10 megawatts of on-site power generation and is expected to be operational by June of 2023. We believe initiatives like this further differentiate us from our peers as it will not only provide us with more control over long-term energy costs, power supply and reliability, but also help us reduce carbon emissions by utilizing gas that may otherwise be flared to power operations. At this point, I'll now turn the call over to Philip to review our financial results.

Thank you, Kevin. For the quarter, total revenue net of derivative settlement losses was approximately $64 million to $7 million and 10% below the third quarter, driven primarily by 13% lower realized oil prices and partially offset by higher production and lower derivative settlements. Cash costs were approximately $3 million or 15% lower quarter-over-quarter, despite higher volumes. On a per BOE basis, cash costs were 19% lower quarter-over-quarter. The combination of these factors in turn drove a 12% decrease quarter-over-quarter in cash flow from operations before changes in working capital from $50 million to $44 million, which you can see visually in the chart on Slide 4 of our fourth quarter results presentation. For the full year, our cash flow from operations before working capital increased 89% year-over-year from $89 million to $169 million. This is driven by a combination of higher volumes and price. Now I’ll offer some comments on capital allocation, referencing Slide 5, the same deck. First, we grew volumes materially more in 2022 than in 2021 while reinvesting a lower amount of cash flow. Very few companies out there grew more than low double-digits, and we grew by 30%. In 2022, we allocated two-thirds of cash flow to cash CapEx, down materially from 88% in 2021. The lower reinvestment allowed us to allocate more to dividends and the balance sheet. Total dividends paid were up 22% versus 2021, and we paid down debt by 14% with a small increase in the fourth quarter for several large surface land positions we acquired. Operating cash flow growth more than offset CapEx increases for a net benefit, increasing free cash flow of more than six year-over-year. Okay, let's talk about forward guidance. In both the earnings release and the results update presentation, you'll find summary tables of our guidance, including for both the first quarter and the full year. Our New Mexico acquisition is scheduled to close at the beginning of the second quarter, so the first quarter represents standalone legacy production and cash flows. We have a January 1 effective date with the acquisition, so the cash flows between Jan 1 and closing will represent a forecasted downward adjustment to purchase price. Then the acquisition production and cash flow is captured effectively for the second quarter through fourth quarter for 75% of the full year. We've included a column at far right for illustrative pro forma at 100% contribution as if the acquisition hypothetically closed January 1. This offers you an idea of the run rate production metrics, so starting with oil production, you'll see we're guiding roughly 10,000 barrels a day for the first quarter, flat with the fourth quarter. We only brought online one well in the fourth quarter, but we have a large amount of activity occurring now, and wells coming online now and into the second quarter, so we anticipate a bigger bump to legacy production in the second quarter, with a modest decline in the third or fourth quarters. For the year, we see a bit over 10,000 barrels a day on average, which would represent 15% year-over-year growth from the 8,800 barrels a day in 2022. Some good organic growth before accounting for the acquisition. Regarding the New Mexico acquisition production, we won't take over the asset until the second quarter and with just a modest delay there to get development started, so second quarter production could decline a bit, with growth coming in the third and fourth quarters following mid-year development, hopefully exiting the year at a higher rate, averaging overall for the year closer to the current level of a bit over 4,000 barrels a day. Combining both legacy and acquisition, the development growth profiles and timing could complement each other well. Compared to 2022, we see full year 2023 total BOE production growing by more than 60% or on the illustrative pro forma run rate basis by nearly 80%. Now, a few words on investing: for the legacy assets, it’s very much weighted to the first half of the year, even the first quarter with roughly 30% of total combined investment for 2023 occurring in the first quarter. This could lead to a modest amount of outspend on a free cash flow basis in the first quarter, but something we encourage you to look beyond for the full year view. This is a function of honoring some rig and other service commitments we’ve made to secure those offerings. For the year, we’ve got a fair amount allocated for gas and power infrastructure, not directly related to the power JV, and investment in the EOR pilot, which was delayed from the fourth quarter. We forecast ramping the acquisition CapEx starting in the second and third quarters, and then separate from E&P CapEx, we are forecasting investing approximately $10 million to $15 million into our power JV, which could flex based on the speed of development there. For the full year, we’re seeing our overall reinvestment rate, at least when compared to adjusted EBITDAX, decline even further from last year, while still achieving this impressive volume growth. Lastly, a huge thank you to our team for another year of strong performance and for your efforts across the various new ventures and acquisitions we’ve been pursuing. Thank you to our Board and our shareholders for your continued support. I’ll turn it back to Bobby for closing comments.

Thank you, Philip. And again, thank you for your support. We remain focused on driving profitable growth and investing in our business for the long-term. Operator, you may now open it up for questions. Thank you all for joining us today.

Our first question will come from Neal Dingmann with Truist Securities. Please proceed.

Good morning, all. Thanks for the time. My first question is on operations. It might be a little early for this, but just wanted to ask what your thoughts are on the Pecos assets, which look quite good to us. I'm just wondering, it looks like you talked about them closing in early second quarter. How quickly would those assets compete against others like you? I know Philip, you talked about sort of potential cadence going forward here for the first half of this year, and I’m just wondering if that includes some wells from the new assets immediately competing.

Yes, this is Kevin, Neal. So we do anticipate starting operations in mid-April. We are currently working with the operator and we will have a transition services agreement in place to prepare for those operations to start, and with that, we anticipate bringing on new production hopefully by early to mid-summer.

Got it. Okay. That’s what I’d like to hear. And then Philip, just on that same vein, could you maybe hit on inflation costs, which you’re seeing today? Are things mitigating a bit or just – I’m sorry, Kevin, for you maybe, what are prices doing there on the upside, on the inflation side?

We started to see prices maybe start to come down a little bit. Nothing too material yet, but we do believe that adding this acquisition will give us some economies of scale that we can hopefully start to drive more efficiencies and bring costs down outside of any other inflationary cost increases.

Okay, good to hear. And then last, I guess, one last one, just Philip, you didn’t say anything – I think you did a little bit last quarter call just on the CCUS. I know you are continuing to have some conversation just to – if you could give a little color, just anything potential going on, on that side.

Yes, sure. So we put a comment there in both the earnings release and the presentation that we are working with partners in advancing a project for what we consider a large scale storage hub in our region. We’re not giving too many details about that. But what I can say is, we’re working with people in the mix, working to do something that’s most efficient with our shareholders’ capital that includes using other people’s money. And frankly, we’re looking up and down the spectrum on both the capture and then the storage part, but obviously our area of core expertise is going to be the storage. So hopefully you can understand we’ve had a few other things going on, and other priorities, but that’s something that’s near and dear to our hearts, and we’re working on it and we’re going to keep pushing forward there.

No, just glad to hear it’s progressing along. Thank you all.

Your next question will come from the line of John White with ROTH MKM Capital. Please go ahead.

Good morning and congratulations on the strong results. I wanted to follow-up on Neal’s question on the CO2 project. Are you at a point in any of the negotiations where you could indicate a potential timeframe for closing a deal with somebody or several parties?

Well, John, I appreciate the question. One of the counterparties we’re dealing with is a large, slow-moving organization that has a very large balance sheet without giving too much away there. And so we’re cognizant of the pace that they move at. The other thing is, the definition of what constitutes closing a scoping project versus an FID or similar. So I’m hoping that we can share something with you here at least as far as certain applications and so forth, but we are getting the asset ready. We’ve taken certain steps to further, I guess, position ourselves in this regard. There are different philosophies on how to sequence the various steps for all the different permits we need, and we’ve completed some of those. I think we’ll be in a better position to share more with you by mid-year.

I understand the position you’re in and appreciate a little bit of additional detail. Thank you. On the CapEx split between New Mexico and Texas, it looks like you’ve carefully designed the program to do all – in first quarter all drilling will be in Yoakum County, and that’s of course to account for the closing date of the New Mexico deal. But I have to think it’s also to give your technical team some time to do further detailed work, subsurface work on the New Mexico assets. Is that correct?

Yes, that’s a fair way to put it, John. As we said, it complements each other there. The way those overlap is why I went into that extended description of how they tie in. Let me just give a little bit more context there. So, we’re not giving totally explicit or disaggregated CapEx, but if you look at it, on a legacy basis, we’re actually down year-over-year, basically flat to a little bit down. I challenge you to find many companies that are growing or forecasting to grow at the level we are with CapEx being down. Some of that is because last year was a little bit higher with more EOR pilot project spending. But either way, that’s a bit lower. We have a decent amount for the acquisition CapEx. There are a couple ways you can back into that, including from the data we provided in the press release. We’re reinvesting about half of the EBITDAX we see from that asset. As I said, that’ll be more in the middle of the year with the way Kevin described that coming on by summer. Overall, we see the reinvestment rate declining yet again. Bobby described in his opening remarks and we’ve got it on our slides how our reinvestment rates cash flow went from 88% to 66%. We see that getting down even lower, so I think that’s pretty exciting.

That’s great additional detail and thank you for it. I will respectfully decline to accept your challenge, because I know you know your numbers. Can you refresh me one last time on the completed well cost for the New Mexico asset?

Currently, the costs are between $5.3 and $5.86, which is mostly driven by the completion cost of that asset.

All right. Thanks very much and I’ll pass it back to the operator.

Our next question will come from Jeff Robertson with Water Tower Research. Please go ahead.

Thank you. Good morning. On the Yeso assets, can you talk a little bit about any infrastructure issues that you’ll have to deal with as you start? Is Riley’s still on a plan?

Fortunately, they have 15 wells, so they have put in multiple disposals. They have approximately 70 miles of gathering line. There is plenty of oil and natural gas infrastructure currently in place. Therefore, aside from tying in small lines that connect to new facilities or new pad sites, we do not anticipate any large infrastructure capital expenditures in the foreseeable future.

Kevin, are there – are there any takeaway constraints or anything like that that affects that area – or those assets in that area?

No, there are not. I’m sorry about the connection, but we do not have any takeaway constraints at this point in that area.

Okay. Are there…

Jeff, incremental – this is Philip. I’m sorry to interrupt. I just want to add that we’re excited. It’s actually a less remote area, this Eddy County area, as we surely know than where we are in Yoakum. And so we have quite a few options actually, more than one midstream provider, which provides a bit of competition, and we like what we see out there with lots of different options.

Okay. Philip, do you have some flexibility with the midstream contracts you will inherit to try to maximize – to do anything that might be able to maximize economics versus what the prior operators were doing?

I think we do over the medium term, not immediately out of the gate. Yes, is the short answer.

Question on the power project that the first phase is due in, I think, in the middle of this year in June, the second phase late this year, early next. Can you talk about what impact that might have on either just your operating efficiency in Yoakum County and/or your operating costs?

Yes. So at a high level, we are doing this first and foremost just to improve operational quality. What you may see from the public's point of view may not be quite so visible, but we can assure you that it is meaningful to us behind. Power – we’ve got fluctuating power quality, and dirty power affects everything from line pressures to you have an outage with an ESP, electric submersible pump. If you lose it, it drops, it ends up being a costly workover. So it really ripples throughout the operations there. We hope that improves just overall oil production, which at the end of the day, every barrel we can produce more makes the biggest impact to our business. At the same time, the second tenant would be cost – controlling costs. I don’t know if we’re going to out of the gate drop costs substantially, but we see this as a way to control the cost increases going forward. Clearly, it’s been a very volatile time for natural gas pricing. We’re in a lower environment – vastly lower environment now than we were last year. However, on the margin, we certainly see volatility increasing or continuing. Then gas prices could be high again. We have an increasingly intermittent grid, but gas prices often influence obviously power prices in our region. On the whole, we’re hoping to control those costs. We’ve got an increasing load with our continued growth out there, along with some compressors. We plan to start here in the spring with our EOR project that increases the power load. So overall, we saw that as an exciting opportunity. Lastly, it's very important to us to control the flaring, and for the most part, that’s out of our control based on midstream capacity. Therefore, we like to control that where we can, and this is an exciting way to take that otherwise flare gas and create something useful with it.

So the power project will allow you to displace compressors in the field, which will ultimately be positive from a cost standpoint?

No, to clarify there, the power project will provide electrical power to the compressors that will run on electricity. And so just instead of necessarily pulling it from the grid, you’re pulling it from our onsite power generation. We’ll have backup capacity from the grid that we can pull from for overall operational redundancy.

Having a more reliable source of power, does that increase the premiums on that aspect of operations as you move into the EOR project?

I think that’s fair. Yes, in general, the overall load is increasing and I think that’s a fair assumption. But for the most part, we have a large field; the pilot is one small part of it in a section and lots of different places that we need and use power.

Thank you.

Your next question will come from the line of David Dernick with Dernick Companies. Please go ahead.

Good morning guys, and congratulations on having quite a productive year and some real interesting projects coming up. I’ve got really three questions. One addresses if you could elaborate on the response you’re seeing so far on the water and CO2 injection? And then secondly, kind of unrelated, what does your hedge position look like on oil going forward? And then thirdly, on the electric generation, I think that’s a wonderful project. Congratulations on that. I’m wondering if you’ll have any excess capacity to sell back into the grid.

All right. Thank you, David. Yes, sure. We can run through these. So the first question on the EOR. What we’d say is we’re early in the life of repressurizing the reservoir. As you may be familiar, EOR projects are very long term in nature. It takes a lot to repressurize those. We’re producing from this field or from this section, including adjacent sections. You have a competition for the de-pressuring and repressing there. But that’s a longer-term deal, and we will be sure to update you when we have something different to say there. The second question, I believe, involves selling power back to the grid. We do have some flexibility there to take non-dedicated gas and sell it back to the grid to the degree we have excess power. So that’s certainly a consideration and some flexibility that we’re happy about. Let’s see. The third question, remind me there.

On your hedge positions for oil going forward?

Hedging. We disclose that both in the appendix of our presentation and in the earnings release. I’d note that there’s a slight difference. We show some in the 10-K as of 12/31, and then some more recently. The short answer on hedging is that we are choosing to increase hedge positions as a result of this acquisition. Both given that we’ve agreed to a purchase price and financing capital structure, we want to protect some of those cash flows. We will have further hedging. I can tell you just in general with a larger debt load, we’re going to be much more amenable to hedging. That said, we’re pretty happy with some of the trades we’ve made so far this year. We did a fair amount earlier in January when prices were higher. Got a lot of nice collars that allow for protection a little bit below where we are, but then quite a bit higher, including some of the $90 range and such. Just to elaborate there, David, just a little bit more on the de-leveraging profile that we see with this asset. Coming out of the gates, we may be kind of in the neighborhood of 1.3 to 1.4 times levered, but we hope to pay down quite a bit of debt in the back half of the year. As we described, in the first quarter, we have quite a bit of CapEx, may have a slight outspend second quarter roughly the same, but then in the back half, we plan to really start to pay that down. We expect with increasing EBITDA to see leverage come down, hoping to get it down to about one times by the end of the year. That gives us a little bit more flexibility potentially with hedging, and you can expect that we’ll be hedged going forward.

Great. That answers my questions. Thanks, guys.

We have a follow-up question from the line of John White with ROTH MKM Capital. Please go ahead.

Thank you, operator. I was going to ask about power sales to third parties, which was just asked and answered by David. Thank you.

We also have a follow-up question from the line of Jeff Robertson with Water Tower Research. Please go ahead.

Thanks. Kevin, back up to I think part of what Neal was asking earlier, can you talk about how you think about the flexibility that the New Mexico assets provide in terms of capital allocation and competition for capital between your legacy assets in Texas and now the new operating area?

Sure. Happy to. The term competing for capital, I see that in so many competitors' press releases, and I recognize the concept there. But I think we’re thrilled with the fact that while this does compete for capital, in a lot of ways the asset is very similar. We’ve got a whole lot of tier-one wells that we see as good or even better than our best over in Yoakum. We’re really going to mix in the allocation there. For the most part, the way we’ve guided both the activity and the spend in the budget we just disclosed doesn't stray too much in taking away from the legacy. It’s really just added, Jeff. We’ve got a similar amount of wells and frankly, the DNC type of investing over on the legacy kind of Yoakum properties is slightly less on EOR spending, hence the lower year-over-year effective total spend on the legacy. Whereas, for the new, we’re reinvesting roughly half of the asset-level EBITDAX. I think it’s a really proportionate amount of allocation. If you think of the acquisition cost and such as roughly half of where we are, it’s really proportionate there.

So Philip is the right way to think about it that you have more geographic diversity and a new asset that, while still releasing the way you initially planned, capital will generate pretty substantial excess cash flow that you can allocate as you see fit?

Yes, absolutely. We do appreciate the geographic diversity for certain operational constraints we face from time to time regarding midstream power and such, as we described. The differentials are volatile in our industry and region. I’d say on those points, those are for the most part out of our control, right? The appearance of lower differentials compared to last year is really just a function of kind of fixed fees applying to lower index prices on the gas and the NGL. The geographic diversity helps us at least. We can throttle up or throttle back one area versus the other if we should encounter any constraints.

I guess in terms of competing, that ability to flex capital between the areas that makes the most sense is what’s really important?

Yes, exactly. That’s what some other larger companies have, and it’s something that I think we’re really going to benefit from.

Thank you very much.

Thank you.

We have no further questions at this time. Ladies and gentlemen, that will conclude today’s meeting. Thank you all for joining. You may now disconnect.