Welcome to the Riley Exploration Permian’s Fourth Quarter 2023 Earnings Conference Call. At this time, participants are in a listen-only mode with a question-and-answer session to follow at the end of the presentation. I will now hand the call over to Philip Riley, Chief Financial Officer for introductions. Mr. Riley, please go ahead.

Good morning. Welcome to our conference call covering the fourth quarter 2023 results. I'm Philip Riley, CFO. Joining me today is Bobby Riley, Chairman and CEO. Yesterday, we published a variety of materials which can be found on our website under the Investors section. These materials and today's conference call contain 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'll also reference certain non-GAAP measures. 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, at the close of the market, we announced the results of our fourth quarter and full year 2023. I'm pleased to report that 2023 was another outstanding year for Riley Permian. I'm going to discuss some of the high points for the year, our operations highlights and then turn the call over to Philip. We encourage questions and discussion at the end of our call today. Our overall net oil production increased by 49% year-over-year to 13.2 MBoe per day and total net equivalent production by 62% year-over-year to 18.6 MBoe per day. Riley achieved a 22% year-over-year organic growth in net oil production, excluding the New Mexico acquisition. Proved reserves increased, reaching 108 million Boe, an increase of 39% year-over-year, and Proved Developed Producing Reserves reached 60 million Boe, increasing 23% year-over-year. We generated $246 million of adjusted EBITDAX, $207 million of operating cash flow from continuing operations, and $70 million of free cash flow. We continue to invest in our business with total cash capital expenditures before acquisitions of $136 million, corresponding to a reinvestment rate of 66% of cash flow from operations. We remain committed to returning value to our shareholders, most recently paying our 20th consecutive quarterly dividend totaling $28 million for the year. We remain focused on creating long-term value for our shareholders and delivering sustainable growth for years to come. The company successfully launched operations for the initial phase of its baseload power generation facility operated by our joint venture RPC Power LLC. Construction of the onsite power generation facility was mostly finished during 2023 with temporary power generation commencing in November of 2023. The onsite power generation facility is anticipated to be fully operational by spring of 2024, utilizing post-processed, take-in-kind natural gas as fuel. The thermal generation facility currently provides power to around 36% of our Yoakum County, Texas operations. I will note that the last well we drilled was powered 100% by self-generated electric power. Regarding our EOR pilot, in early 2024 we successfully installed CO2 compression equipment, and are currently injecting 12 MMcf per day of CO2 into the reservoir. This includes 10 million cubic feet per day of purchased CO2 and 2 million cubic feet per day of recycled CO2. As we move forward, our testing will involve closely monitoring the movement of CO2 and reservoir fluids using tracers. The insights gathered from the project thus far have been invaluable, and we anticipate compiling a comprehensive feasibility report by the end of 2024. We've demonstrated our ability to inject substantial volumes of CO2 into the reservoir with minimal to moderate breakthrough. Looking forward, our expansion opportunities hinge on several factors, including the availability of industrial CO2 emissions, which was the basis of our initial thesis, ongoing depletion of primary production, and the subsequent re-pressurization of the reservoir with water to reach the minimum miscibility pressure for optimal CO2 effects. This sets the stage for promising long-term opportunities and enhanced oil recovery. In 2023 and most recently, we achieved significant drilling efficiency improvements, with the time from spud to total depth decreasing by 50%. Additionally, drilled feet per day increased by 58%. Leveraging these efficiencies, we set our company's record for drilling the quickest 1.5-mile well, completing spud to total depth in just 4.78 days. These gains were driven by optimized connection practices, new Agitator technology, and increased bit runtimes. Moving forward, we are steadfast in our commitment to leveraging technology and best practices to enhance efficiencies further. Lastly, building on this momentum, we witnessed a successful integration of our New Mexico acquisition, with our existing asset base representing a significant milestone for our company. This integration has allowed us to establish operating synergies through a shared supply chain across the portfolio, leading to streamlined operations. At this point, I'll turn the call over to Philip.

Thank you, Bobby. Just a few minor additions here on trailing financial data. For the full year, cash flow increased by 22%. Full year cash flow benefited from three quarters of new volumes from our 2023 New Mexico acquisition as well as the organic growth mentioned. We certainly could have chosen to reinvest more and to grow volumes faster, but we were focused on growing free cash flow. So halfway through the year last year, we intentionally slowed down some of the second half activity to even out some front half weighted activity and spend, and as we had confidence in hitting full year production volume targets. That action helped contribute to the 26% year-over-year increase in free cash flow to $70 million. We allocated 39% of free cash flow to dividends, increasing total dividends paid per share by 9% year-over-year. The balance was used to repay debt, which is lowered by $30 million in the fourth quarter alone. That helped contribute to an $88 million or 26% year-over-year increase in shareholders' equity. Looking ahead, we're excited about our 2024 plan. Our capital program midpoint is just over $120 million, of which 78% is allocated to development operations and capitalized workovers. We're looking to drill approximately 22 wells this year, while turning to sales a few more with the benefit of having some drilled uncompleted in inventory. On a per well basis, we're forecasting material savings year-over-year on account of both efficiencies, some of which Bobby described, as well as industry cost reductions such as in casing, tubing and chemicals. We anticipate investing materially in infrastructure across both assets, which include gas takeaway, electrical upgrades and other aspects that will lead to better operations for 2024 and beyond. This is separate from the Power JV, which is accounted for as a contribution to an equity method investment. We have one final expected contribution there this quarter for about $5.5 million. Thus far, this has come in below cost estimates. As it translates to free cash flow, the combination of higher forecasted volumes with lower spending acts as a catalyst for growth, though obviously contingent on oil price. We forecast needing WTI in the low 60s or down 20% year-over-year from 2023 to hold free cash flow flat year-over-year, and that assumes no reduction in growth CapEx, whereas we probably would start to slow down at those price levels. If oil averaged $75 for the remainder of the year, we see the potential for free cash flow to grow year-over-year by 50% or more in excess of $100 million, which would correspond to a 20% yield on the current market value of our equity. In that scenario, this would bring our reinvestment rate down to 50% to 55% of operating cash flow, with the inverse highlighting a very robust 45% to 50% conversion rate of operating cash flow to free cash flow. Another metric I like is the ratio of free cash flow to CapEx, which in this case would be more than $0.80 of free cash flow generated for each dollar of CapEx invested. We encourage you to compare these types of metrics to other E&Ps based on the guidance they have provided. Some companies may have a bit higher free cash flow conversion rate, but they're generally not growing free cash flow like we anticipate doing, whereas many other companies we've analyzed have weaker forecasts. I'll turn it back to Bobby now.

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.

The first question comes from Neal Dingmann from Truist Securities. Please go ahead.

Good morning, Bobby and Phil. Great results. My first question is about the 2024 plan, specifically the capital efficiency plan. Could you discuss the required growth, your baseline decline, and how these factors align to achieve the 10% growth target? It seems like you're in a favorable position, and I would appreciate more details on the rig activity and other elements necessary to meet this goal.

Yes. Good morning, Neil. This is Philip. We do find ourselves in an advantaged opportunity. We like where we were coming out at the end of the year last year and what we're going into this year. We talked about 22 wells, just over 50% reinvestment rate. And that leads to the high free cash flow. We've got those savings on the incremental free cash flow. I think we're going to see probably the most boost from the volume growth, even at flat prices. Our hedge book is yet another thing that should be noted. It's looking better coming into this year than last. And then the CapEx savings, as you're talking about with the efficiencies. Those are the main drivers for that kind of year-over-year, kind of, 50% type of increase we see at current prices. And we feel pretty good about that. Does that answer the question or any more color?

No, you absolutely did. As a follow-up, could you discuss your approach to capital allocation? You have a solid dividend, but are you considering buybacks, and how does debt repayment factor into your strategy? I agree that the free cash flow could be significant this year, so I’m interested in your thoughts on this.

We are focused on growing free cash flow, and while production does play a role, there are several ways to achieve this growth beyond just increasing production volumes. Although we may see slower volume growth this year, we are optimistic about our free cash flow growth. Regarding capital allocation, we have three main priorities. First, our significant dividend reflects our confidence in our future business, and we have consistently increased it every year, with hopes for continued growth. While oil prices affect our cash flows, we are confident in our ability to maintain dividend coverage even at low oil prices, with a threshold around $40 given our current hedging strategy. Second, we are actively seeking opportunistic investments, which could include small acquisitions or partnerships like the Power joint venture. We take pride in identifying promising investment opportunities that can generate capital return. Lastly, any excess funds after addressing these priorities will go towards debt repayment. Currently, our debt to capital ratio is around 45%, but we aim to reduce it to a long-term range of 25% to 30%. As previously mentioned, we anticipate naturally paying down debt, and once we reach lower leverage levels, we can consider further opportunities. With reduced debt, we can also explore other ways to return value to shareholders, including potential buybacks in the future.

Great to hear. Thank you so much. Nice job, guys.

Your next question comes from the line of Jeff Robertson from Water Tower Research. Please go ahead.

Thank you. Good morning. Bobby or Philip, given Riley's strong cash flow generation and what looks to be a 50% reinvestment rate in 2024, can you talk about how you evaluate acquisitions that could complement the free cash flow capacity of the company?

Yes, this is Bobby. Let me take it to begin with, and let Philip give his comments also. Obviously, most of the production or most of the history of this building is through organic drilling and development. So when we look at acquisitions, we're looking for something that has actually strong inventory available, something that's close to or in the same neighborhood as some of our existing assets, so we can optimize efficiencies. One of the advantages that we have this year is with the integration of the New Mexico assets, we're able to high-grade our drilling inventory and actually shift some of our development, if we choose, to the New Mexico Yeso Trend, which really gives us, I think, a real keen advantage on being at the right place at the right time. But we continue to see numerous bolt-on opportunities, and like I say, the key thing is not so much a PDP acquirer, basically, but buying something that has a large inventory and especially held by production or something like that is something that we're focused on.

Yes, that's correct. I want to emphasize that we achieve our best returns through development. While cash flow is beneficial, it requires investment to realize it. Therefore, if we can find an acquisition with a significantly larger amount of undeveloped inventory, it becomes appealing to us, as it enables us to achieve those higher returns.

Bobby, you mentioned the Yeso. Is it part of what's driving the production growth at a lower capital expenditure in 2024 in your plan? I'm referring to the performance of those wells and their impact on the overall weighted asset base.

So basically, I want to say that we're very detailed in research before we go spend a bunch of money drilling wells. I mean, we gather a lot of geological engineering data to put together the plan that we see is going to get the best results from efficiencies and higher EURs. We're excited about what we've seen in the first four or five wells that we've drilled in that play. And as we did when we started in the Yoakum County deal, the first thing to do is to make sure you have the correct infrastructure in place, gas takeaways, and things along that nature that make it a much smoother deal. So where we are at this year is just basically, we have two assets in front of us; they're pretty comparable, really, on where we are right now on rate of returns and production profile, but it just gives us an opportunity to be selective.

And lastly, regarding the CO2 project in Yoakum County, is the feasibility study one of the key elements to being able to engage industrial emitters and persuade them to participate in your project?

Most definitely. I mean, basically, we know we have, we're offsetting the great Wasson Field, where that's contiguous to our East. It's been CO2 flooded for decades. And I think what we've demonstrated is we have the ability to store a lot of CO2 also by enhancing oil recovery. So, we're hoping those opportunities open us, but we'll be ready with our feasibility to be the sync or the storage.

Thanks. I'll jump back in the queue.

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

Hi, good morning.

Hi, good morning, Noel.

Just wanted to check on a couple of things. You mentioned that you were seeing some benefit on cost from casing, tubing and chemicals having come back. Where do you think we stand in sort of the leveling off of inflation? Do you think your current pricing is pretty much stabilized? Do you think there's any more to go?

I can try to address that, Noel. I hate to predict the future here. It does feel like things have stabilized. We're seeing most costs either flat or declining. Some of this is due to efficiency. For instance, casing and tubing prices have dropped significantly, as you can easily check with Bloomberg for the decrease in hot rolled steel prices. This has definitely made a material impact, and it's also influenced by the situation in China. In other areas, I think the impact from chemicals is notably significant, but we'll have to see how other aspects unfold. We've aimed to secure prices and services for the year to the best of our ability and feel optimistic about that, although there will always be some unpredictable factors beyond our control.

Sure. Fair enough. And, I'm just curious, related to the larger sort of service environment, what are activity levels like across your neck of the woods in the conventional Permian? Is this sort of a flattish year as far as overall rig activity for the industry or do you see it creeping up?

Well, specifically where our assets are located, I would guess it in Mexico would probably be pretty flat to last year. We're in constant communication with the offset operators in our area, trying to share some services and drilling rigs and stuff like that. So, I kind of think I see a pretty flat drilling profile for that area. The Texas asset may, as far as our immediate area, probably be a little bit slower than it has been in the past. But that's what I'd see. Philip?

Yes. The Texas area, our neighboring assets are more developed than what we have. We've got more running room with inventory, and we're just finding that our neighbors have either mostly drilled up what they have or have chosen to slow down for different reasons.

Great. Thanks a lot.

Your next question comes from the line of Jeff Robertson from Water Tower Research. Please go ahead.

Thank you. Philip, to follow up on the Power JV in Yoakum County. Can you talk about what impact that will have on field operations and reliability? And you mentioned that the most recent well you all drilled out there was powered by electricity. And whether or not that has a material impact on the capital costs of new wells.

Yes. I'll start and then maybe Bobby can add on to it. You know on costs, we don't forecast a material improvement in operating costs. I think it's going to be mostly flat, or it's going to be immaterial relative to our overall company to really move the needle. That said, we are an investor in it, so we enjoy getting both sides there. On the capital, though, as you note, and as Bobby noted in his introduction, we did drill a well there using electric power, that's exciting. That's on the capital side. That could have some reduction there. Generally, we find electric power on a relative basis to be less expensive than diesel. And so, that's pretty exciting. Again, it's not a major mover, but little things like that can make a difference. Bobby?

Yes, this allows us to effectively utilize our gas in the basin before transporting it to the Gulf Coast, which benefits our investment in the Power joint venture. We are focused on improving the reliability of our operations; during instances of brownouts or poor-quality power from our location, we aim to enhance our run times and efficiencies with cleaner energy sources. Additionally, we are utilizing the residue gas that we receive from the processor.

Everybody in the basin, you see is experiencing weak natural gas prices. And we're doing everything we can to try to enhance that value, what we can do within our control. And so we think this is one way, and this is probably the first step for us.

Seems like the goal is to create value for natural gas in the field as opposed to selling it for a low price and sending it off to the Gulf.

Exactly.

Lastly, Bobby, there has been significant consolidation in the Permian Basin, and Riley has concentrated more on conventional long-lived assets. What is your perspective on the market for those assets over the next couple of years as companies assess their asset portfolios?

The market for conventional or unconventional, I want to clarify.

Conventional.

Well, obviously, there's a smaller bucket to choose from. I mean, there's a lot of people with unconventional assets out there that they're drawing off some of their top inventory. And a lot of people are starting to look back at conventional opportunities for both horizontal and basically secondary operations and stuff like that. So, I mean, we see assets that have a tremendous amount of PDP involved, thousands of vertical wells. It's not the most exciting thing that we want to be focusing on. I mean, like we alluded to earlier, the assets that we're looking for has running room with the drill bit. And I think we'll have a chance to look at some consolidation opportunities in our area, and look at some upcoming new plays.

Thank you.

Your next question comes from the line of Gary Kennedy from Kennedy Trust Investments. Please go ahead.

Yes. Okay. I just want to congratulate you on your hedge book, whoever is doing that, did a great job. They look so much better than they did last year, and I see your natural gas has hedged about $2 over what natural gas prices are selling for and going to about $70 on the oil seems like a heck of a good idea. So congratulations there. And hopefully, the good work will continue.

Thank you, Gary.

Thank you, Gary.

The next question comes from Sandra van den Brink from Tokay Capital Corp. Please go ahead.

Good morning, gentlemen. Congratulations on a good quarter. Some time ago you had put out that you were looking to sell shares to raise cash. And I wondered what had happened to that, if anything.

Sure. Sandy, this is Philip. Thanks for joining this morning. Last fall, we did have a registration statement for an at-the-money facility, that's something that we saw as opportunistic given the various opportunities we're looking at, including that Power JV. It remains outstanding there. As you can tell, we've used it in a very limited amount. So far, we've been financing the business and these new opportunities through cash flow. So far, we have no plans, nothing else to announce at the moment any change from that.

So it will remain open until?

It does, but I would encourage you and others to think about it the same way as anything else. Just like you've seen companies announcing overnight deals for some issuances, any public company has the ability to do that. Ours is at-the-market type of facility that allows us to do it in small amounts, but it's honestly not too different from a regular secondary or primary issuance.

Okay. Thanks, Philip.

Thank you.

As there are no further questions at this time, I would now like to thank our speakers for today's presentation, and thank you all for joining us. This now concludes today's conference. You may now disconnect.