Earnings Call Transcript - REPX Q2 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to Riley Permian's Q2 2022 Earnings 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. It is now a pleasure to turn today's call over to Mr. Philip Riley, Chief Financial Officer. Please go ahead.

Philip Riley, CFO

Thank you and good morning to everyone. Welcome to our fiscal second quarter 2022 conference call covering the three-month period ending March 31, 2022. 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 be referencing certain non-GAAP measures. The 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 commentary can be found in our earnings release. In addition to our earnings release, we published an updated presentation available on our website. Participating on the call today are Bobby Riley, Chairman and CEO; Kevin Riley, President; myself, Philip Riley, CFO and EVP of Strategy. I will now turn the call over to Bobby.

Bobby Riley, CEO

Thank you, Philip. Good morning and thank you for joining us today on our fiscal second quarter call. The world has already been impacted by supply chain issues. The actions taken by Russia in February have further exacerbated the situation, not just in the Permian Basin, but globally. Inflationary cost pressures have continued to build in the labor, materials, and equipment markets, as we have seen oil prices increase 82% year-over-year. I'm happy to announce that the company has been proactive in securing a drilling rig and casing for 100% of our fiscal 2022 development activity, and for up to 14 wells already planned for fiscal year 2023. We are halfway through our fiscal year and continue to have operating and financial results exceeding both guidance and consensus expectations. To highlight a few items for fiscal second quarter: average oil production of 7,500 barrels per day, which is at the high end of guidance. We generated $34 million of adjusted EBITDAX in fiscal second quarter. We paid dividends of $0.31 per share for a total of $6 million. Estimated approved reserves of PV-10 of 1.1 billion as of March 31, 2022, based upon NYMEX strip pricing. As we turn to the second half of our fiscal year, we are excited to announce increasing guidance for fiscal third quarter and fiscal year 2022 production volumes along with other corporate initiatives starting to materialize. We have also continued to add to our staff, including the addition of an experienced carbon capture and enhanced oil recovery technical team, which is timely considering the progress of our EOR pilot project. Lastly, before turning it over to Kevin to discuss operating results, subsequent to quarter-end the company amended our credit facility to extend the maturity to April 2026, while additionally increasing our borrowing base by 14% to $200 million and relaxing minimum hedging requirements when the company is less levered. We view this as continued confidence from our syndicate of lenders in our business plan and assets. I will now turn the call over to Kevin to discuss operational results.

Kevin Riley, President

Thank you, Bobby and good morning to everyone. As Bobby mentioned, we had a great quarter and first half of our fiscal year. Riley Permian averaged daily oil production of 7,497 barrels for the quarter, which is a 3% quarter-over-quarter growth or 24% year-over-year growth as compared to the fiscal second quarter of 2021. The company averaged total equivalent production of 9,791 barrels of oil equivalent per day for the same period, which is a 2% quarter-over-quarter decrease or 18% year-over-year increase as compared to the fiscal second quarter of 2021. As previously disclosed, the gas and NGL sales during February through early May have been impacted from an expansion underway at our midstream partner's facilities. The expansion remains on schedule. Once completed, the plant will provide additional takeaway capacity to our operations, which will further reduce flaring of natural gas and is expected to increase sales volumes. Though our production on an equivalent basis decreased quarter-over-quarter, we did see oil production continue to grow. The company continued its efforts on its fiscal year 2022 development activity, including the drilling and completion of three gross, three net horizontal wells, which have all subsequently started producing past the close of the quarter. We turned two gross and 1.7 net horizontal wells onto production, and we commenced preparatory activity for three gross, three net horizontal wells to be drilled and/or completed during the fiscal third quarter. The activity above corresponds with $23.8 million in accrual basis drilling, completion, and facility capital expenditures, which also includes capitalized workovers, midstream infrastructure, and minor additions to land and working interest. The company advanced its EOR pilot project in Yoakum County, Texas, completing one of the six newly drilled injection wells and installation of the high-pressure injection lines for both water and CO2. The activity corresponds with $1.5 million of accrual basis CapEx. Subsequent to the quarter-end, the company began water injection on the EOR pilot program in early April 2022. On the capital cost side, we estimate drilling and completion costs for recently completed wells are averaging 16% higher than an equivalent well designed from a year ago, owing to some inflationary pressure, but partially offset by some efficiencies we are seeing. Lease operating costs were $6.8 million or $7.75 per Boe for the three months ended March 31st. This came in at the low end of guidance, which was partially impacted by lower workover activity due to limited workover rig availability. We anticipate higher lease operating costs in the fiscal third quarter, as we catch up on the delayed remedial work from the second quarter along with the normal anticipated activity. I will now turn the call over to Philip Riley to review our financial results.

Philip Riley, CFO

Thank you, Kevin. Today I'll discuss four primary topics: summary financial metrics, pricing and differentials, hedging, and capital allocation. First, a few summary financial metrics. We performed well across the board with production at the high end of guidance, costs at the low end of guidance, and CapEx within guidance. We're reporting a net loss for the quarter of $7 million, driven by a $49.6 million loss in derivatives, which includes $18 million of realized derivative settlements and $32 million of unrealized loss, owing to changes in future strip pricing as of 3/31. If we reran the numbers today, that loss would be lower. For the six-month period, we're reporting net income of $14 million with operating income of $74 million. Our cash margin per Boe increased 28% quarter-over-quarter to $59 per Boe before derivatives. After derivatives, cash margin increased 34% quarter-over-quarter to $38. Relative to other industries, our business is fortunate to participate in dramatically increasing top line prices. Rising costs represent a headwind, but one that is not unique to us and which we are actively managing, and for which we believe we are well-positioned as an inflationary hedge. Adjusted EBITDAX is $34.4 million for the quarter or $61.5 million for our first six months of 2022. Simply annualizing that six-month figure would correspond to $123 million. And we see potential to exceed that as the roll-off of our hedge position could more than offset the backwardation in pricing for the remaining five months to go in our fiscal year. Of course, results will depend on ultimate pricing and performance. Operating cash flow for the quarter was $30 million and free cash flow was $20 million. And if you consider the negative $18 million of hedging settlements or ignore them hypothetically for our future run rate period when we're less hedged, you can appreciate an idea of potential cash generation. Next, I'll offer some additional color on pricing, basis differentials, and commodity fee deductions, as this can be a bit confusing for some observers. Quarter-over-quarter, our realized oil price improved 22% to $92.44, representing a slight positive basis differential to WTI for the quarter. We often experience modest discounts or small premiums relative to other Permian barrels as refiners in our area prefer our slightly heavier, slightly sour barrel to mix with the very light barrels coming out of the Delaware and Midland basins. Adding in realized hedge losses of approximately $26 per barrel, our net realized price after derivatives was $66.60, 23% higher than the prior quarter. This was driven by a combination of higher market prices and lower hedging volumes. For natural gas, our net realized price declined by 18% quarter-over-quarter. Index price was $4.66, about $0.10 lower than last quarter. Basis differential was about negative $0.52, a higher deduction in the prior quarter, but not dissimilar to past quarters. Our gas is generally shipped north and west, experiencing less congestion than far south and via our EP Permian. In turn, we generally see less discount to Henry Hub. Our processing fees were about $1.50, leading to a net $2.62 before derivatives and $1.25 after derivatives. For NGLs, the market price for our composite barrel garnered $44. This quarter was about $4 less than the prior quarter. Many industry observers apply shortcuts in estimating an NGL price relative to WTI, and I just note that last quarter was probably an aberration at 62% of WTI, with this quarter being closer to the norm at 46%, but still higher than levels experienced last year. Our NGL gathering processing fees this quarter were approximately $17 per barrel, about $0.30 higher than last quarter, yielding the net $26.71 you see on the financials. This fee will likely be more flat and floating to WTI, and we have no hedging against NGLs. So, moving onto hedging. As discussed previously, our hedge strategy has evolved, which among other reasons include decreased leverage, changing supply and demand fundamentals, and steep fluctuations in pricing markets. With the amendment to our credit facility achieved a few weeks ago, which allows for lower minimum levels of hedging, we have greater discretion in decision-making. Our hedging objectives are balanced with an effort to maximize upside exposure, to maintain flexibility, to react to changing environments, and to manage risk for very low prices. We are not seeking to lock in perceived good prices. With cash costs of $16 per Boe, which by the way, include $4 of production taxes tied to commodity prices, we can cover cash operating costs at very low commodity prices. We've made no change to our hedge position since last quarter, other than the roll-off, as we faced no new requirements in response to the credit facility amendment. Slide 15 in our presentation is updated for increased forecasted production, estimating that we are approximately 57% hedged for the remainder of fiscal 2022 or just under 30% hedged for fiscal 2023. Moving on to cash flow and capital allocation. Total change in cash this quarter was $11 million. The components of which include $30 million of cash flow from operations, offset by $10 million for investing activity and $8.5 million for financing activities. The latter reflecting a $2 million net payment on our credit facility and $6 million of dividends. Free cash flow is $20 million. Free cash flow will fluctuate in tandem with our development pace, which includes on and off periods of activity. Cash balance at quarter-end was just under $20 million, with $63 million on the credit facility, which was nearly 70% undrawn based on the new $200 million borrowing base for the amended credit facility. That corresponds to over $150 million of liquidity, inclusive of revolver availability. We have the same revolver balance today, which has the potential to rise modestly in these next six weeks as we work our way through some last quarters accrued CapEx and with continued active development. That's not a given, but certainly a possibility. For the subsequent quarter, we currently see opportunity to reduce the balance, at least based on current activity, pricing, and capital allocation. Though we generally see benefits to maintaining a higher cash balance, given volatility, larger swings in revenue receipts versus hedging payments, etc. Okay. A few thoughts on capital allocation looking forward. At the core for an E&P company, cash allocation choices primarily include reinvesting to offset natural production declines and/or to grow it further, investing in new assets or new ventures, paying down debt if applicable, and returning capital to shareholders in one form or another. Many larger E&Ps believe they have less optionality for production growth in today's environment, given pressures from investors to directly return larger amounts of capital, which is understandable following poor returns last cycle and/or fears about meaningfully adding to supply and disrupting a global balance. We understand and respect these positions. At Riley Permian, however, we believe we can and should allocate more capital to growth as a smaller company. As Bobby previewed and our written materials outlined, we're choosing to increase activity and production this year. Riley Permian is, and always has been a growth story. We've been growing at an average of 20% per year for the last several years. We grew at those levels when oil was $50 and lower. We'll certainly pursue that growth at $70 or $90 oil. The great thing is we see lots of room to grow further, but to keep spending well within cash flow at current pricing and lower. Very simply, we see underappreciated value in our undeveloped assets. We see the benefit of converting the undeveloped to producing cash flow. Investors seem to be valuing companies primarily off of near-term measurable EBITDA or free cash flow, not acreage or spud value or not forecasted EBITDA, even 18 months out. We can appreciate this conservative mentality, given the volatility and uncertainty present. But we're ready to get on with it and bring some of that forward. Our management team, Board, and many of our investors with whom we've spoken believe this represents the best near-term approach to equity value creation. We appreciate your ongoing support, and we're excited about what's to come. Thank you. And I'll turn it back to Kevin now.

Kevin Riley, President

Thank you, Philip. I will now give guidance for the company's activity for fiscal Q3, 2022. The company forecasts drilling five gross, five net; completing four gross, four net; and turning to production six gross, six net horizontal wells during the fiscal third quarter of 2022. Of the six gross, six net wells being turned to production, two gross, two net are wells that were in preliminary stages of flowback at the end of the fiscal second quarter. We anticipate accrued non-EOR related capital expenditures before acquisitions to total approximately $25 million to $28 million. The company forecasts fiscal third quarter 2022 oil production to average 7,600 to 8,100 barrels per day, with the midpoint average representing a 5% quarter-over-quarter growth. The company forecasts 10 to 10.8 MMBoe per day for the fiscal third quarter as well. The midstream expansion project is expected to be fully commissioned in early June, but due to some curtailment during April and May, the sales of natural gas and NGLs during the fiscal third quarter will be impacted. Following the completion of the expansion, the company will enjoy a larger volume of contractual firm capacity, which should lead to increased sales for gas and natural gas liquids along with reduced flaring. As discussed earlier, we do anticipate higher lease operating costs of between $8 million to $10 million in the current quarter, partially due to the delay of certain workovers in the second fiscal quarter. As previously stated, we are giving this on an absolute basis versus on a per Boe basis due to the uncertainty on curtailment volumes caused by the expansion of our midstream partners' gas gathering processing facilities. For cash G&A, we anticipate $3.7 to $4.7 million. The company will continue to advance its EOR pilot project in the third fiscal quarter, completing additional injection wells and making progress with the CO2 tap and infrastructure installation. Management anticipates $3 million to $5 million of accrual basis CapEx for the EOR program during the fiscal third quarter. Based on anticipated delivery timing of the compressors needed for CO2 injection, the company now forecasts beginning the CO2 injection during calendar fourth quarter 2022. Based on current market conditions, the company has elected to add three gross, three net wells during the second half of fiscal 2022. The majority of these wells are scheduled to begin the fiscal third quarter, with completion scheduled to occur in the fourth fiscal quarter. Therefore, we anticipate incurring the capital expenditures for the additions in fiscal 2022, while production from the additional wells captured within fiscal 2022 will be modest. We anticipate our full year fiscal 2022 accrued capital expenditures to total approximately $102 million to $111 million. This includes $84 million to $89 million for drilling and completions, capitalized workovers, infrastructure, and minor additions to land and $18 million to $22 million for our EOR program. Based on our current estimates and availability, we forecast full year fiscal 2022 oil production could average 7,500 to 7,800 barrels per day, representing 17% to 22% growth from fiscal 2021 average oil production. In addition, we forecast full year fiscal 2022 total equivalent production could average 10 to 10.4 million barrels of oil equivalent per day.

Bobby Riley, CEO

Thank you, Kevin. And again, thank you to everyone for joining us today for our second fiscal quarter call. We are very pleased with our year-to-date results and remain excited about the continued forecasted growth. As we look forward, our team is taking several steps to navigate through inflationary pressure for services and products. We remain focused on a disciplined model of low leverage production growth and return of capital through dividends to our shareholders. Thank you again for your support. Operator, you may now open it up for questions.

Operator, Operator

Thank you. Your first question is from the line of Neal Dingmann with Truist Securities. Your line is open.

Neal Dingmann, Analyst

Good morning, everyone. I appreciate the details shared. Kevin, could you clarify the expected growth? It’s encouraging to hear about planning for additional growth. Is that based on the assumption that the rig will be operational for most of the year, or what are the updated expectations regarding that? Is this now a standard program?

Kevin Riley, President

We have not gone into a continuous development program yet, but the rig that we have currently will stay through mid-May and then we will drill one additional well in early July and look to pick back up a program either September or October.

Neal Dingmann, Analyst

Okay. This leads me to my next question. Kevin, can you discuss your confidence in being able to pick up that rig? Additionally, I'm curious about logistics in general. There's clearly a lot of tightness in the market. My question is whether you face the same constraints in your area as those in the heart of the Permian, where larger equipment is located. I'm also interested in your confidence regarding the workovers that you mentioned were slightly delayed. Moreover, could you provide an update on the takeaway constraints? In the last call, we anticipated these would be resolved by April, but it seems there's been further delay. Could you elaborate on the logistics regarding the services and the pipe?

Kevin Riley, President

We have secured 100% of the rigs and pipe needed for our activities planned for fiscal year 2022. For fiscal year 2023, we have already secured the necessary rig and pipe for up to 14 wells, which will make up a significant portion of our operations in the first half of the year. We are still competing for other services such as completions and frac sand. However, we maintain good relationships with various parties, which allows us to schedule their services. We are optimistic about securing those services for fiscal 2023 as well. Please repeat your second question.

Neal Dingmann, Analyst

Just on the pipeline. I think you said that because?

Kevin Riley, President

Pipeline? It's truly on target. I think the date was anticipated to be mid-May where it came back online. But it was going to be some curtailment between early February and I believe it was mid-April and that did take place. So, we reduced our amount of gas that we were selling from January through that period. They had a shutdown for seven or eight days at the end of April, a complete shutdown as they plumbed in the expansion equipment. So, that has come back online, and we're currently producing and have been producing since the 1st of May back to the capacity of which we were producing in February and March. We do anticipate as they continue to commission the compressors on the new expansion that production volumes or inlet volumes will continue to increase through the end of May and into early June, and we will be at full capacity at that point.

Neal Dingmann, Analyst

It's good to hear. I have two quick questions. Regarding EOR, it seems like that's moving forward with the injection wells. Can you share when you expect to start introducing water into those injection wells? Is that still expected in the next few weeks?

Kevin Riley, President

I would say we'll continue to be bringing additional injection wells on for the remainder of this quarter. Whether or not we have them all on by June 30th or July 31st, I'm not sure. I think we'll have them by the latter at minimum. But we have started the completion process in the last couple of weeks, and we've been running casing logs to identify our perforations, etc., and the rigs are beginning to free up to move out there. We do use a lot of the same rigs for our workovers and for our drilling out on our completions. So, just trying to manage personnel and equipment as we see fit.

Neal Dingmann, Analyst

No, great to hear. And then lastly, just maybe Bobby for you or Phil, just on the CCUS. Great to hear you've hired somebody. What just talks continue or just what more can you say on that, given obviously the exciting potential there?

Bobby Riley, CEO

Now, this is Bobby. We did hire that team that came from the CO2 industry. We're just kind of ramping up at where our opportunities are specifically looking at one or two. But they're also in there to optimize CO2 injection in the wells and how we get the most efficient sweep out of the field. But I would say, overall, we're doing what we can at the moment. We're still waiting on Kinder Morgan to get the tap finished. We will inject some gas primarily, but hopefully within the next say six to 12 months, we might have something firm in place. That looks like a potential source.

Neal Dingmann, Analyst

Very good. Great to hear. Thank you, guys.

Operator, Operator

Your next question is from the line of John White with ROTH. Your line is open.

John White, Analyst

Good morning gentlemen, and congratulations on the nice results. I'm sure everyone appreciates the increased production guidance. Regarding the CO2 and CCUS teams, how large is the team? And would you say their expertise is more focused on CO2 or CCS?

Bobby Riley, CEO

Well, I would say based upon kind of the history of CCUS actually capturing flue gas and stuff in our areas, it's relatively new. But these guys did come from a major CO2 pipeline company that know where we're going to be able to access the line, how we're going to be able to access the line. And again, the initial team is three individuals that we brought on, focusing out of North Houston. So, I mean, that shows our dedication and commitment for sure.

Operator, Operator

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

Noel Parks, Analyst

Hi. Good morning.

Bobby Riley, CEO

Good morning.

Noel Parks, Analyst

I wanted to check on a few things. I noticed the EOR CapEx and I was curious whether most of that was initiated before the recent wave of inflation, or if any of its components will be affected by inflation.

Bobby Riley, CEO

I'd say a large portion of it from when we started the project in September or October has been secured from the drilling of the six wells. So, all your steel casing in addition to the injection lines have all been acquired. Those prices though are higher in that period, and call it 12 months earlier. They're not seeing the same inflationary pressure that we're seeing today in the market. So, I think like everything, the services are still going to have some exposure. But the things that we contracted and did in the first half of the year have less exposure. So, we still feel comfortable within that capital guidance that we've given for this project.

Noel Parks, Analyst

Great. Thanks. And just for some perspective, on the Northwest Shelf, how many industry rigs are active right now would you say?

Bobby Riley, CEO

Last time I looked, I think I saw four rigs currently running within Yoakum County area.

Noel Parks, Analyst

Okay. Okay. Great. And I was curious about the business development team and what they're seeing, curious about what the thought processes of people talking about selling, and whether that's largely price driven. They have a higher for longer hopes or expectations, and they're saying this is the time, or is there anyone who comes to the table because of lack of capital or issues like that?

Philip Riley, CFO

Yeah. Noel, this is Philip. I can try to take that. I'd say on the marketing processes, we have certainly seen a lot of those. These first five months of the year, whether that's due to $100 oil or not, the statistics are there. There's a lot of deals being marketed on the broadly auctioned processes. We tend to look at more conventional assets than the shale, but I think there's clearly a lot of people out there that have been holding onto things for a long time that maybe were uneconomic at lower prices and now look better. You can't blame them for that as for their other rationale as to why to sell. I don't know whether they think prices are here for longer or not, but some of those around sponsors, some of them maybe were the unnational owners, post reorganization, or creditors and such that finally need to try to monetize that. We've seen a mix of buyers, some the larger privates that have some access to capital, guys that are willing to lean in on assumed operating cost improvements and LOE cost improvements and such. So, you see a mix out there. We certainly see some deals that are harder to get done, the types to have maybe a larger P&A obligation. There's always a bit of concern about how to manage that, especially with the current administration. So, as far as our perspective on it, we are opportunistically looking. We recognize the benefits of scale and what that could do for our business and our shareholders. At the same time, we're mindful of where prices are now relative to the last 10 years. We're mindful of backwardation, and we're just looking for the right balance. We're interested in deals where we could use equity. Those represent obviously an attraction, more so than just using debt, but we're also mindful of dilution. So, it's a lot of words there, but I'd just say we're trying to be mindful in finding just the right 'Goldilocks' type of deal for us.

Noel Parks, Analyst

Fair enough. Great. I'm considering the region as a whole and wondering if there are many acreage explorations ongoing. I'm reflecting on the timing of the last significant leasing activity and thinking about whether, after three or five years, everything of interest to you is currently held by production.

Kevin Riley, President

On the A&D front, again, we focus less in the super crowded sandbox of the Midland and Delaware basins. To make a quick comment there, we're less familiar. But what we have seen from afar is that the big companies try to manage that with their drilling programs to hold it with the rig versus releasing when they can't, but there's generally an efficient market that will solve for that constraint. I think there's a lot of private equity-type players that don't mind the smaller scale, one-off blocks and such kind of the mow-down strategy where you can buy a single unit and just kind of complete six to eight wells within it and underwrite it for cash flow. So, I think that market exists. In our area, we don't see that type of pressure with the acreage expiring. We would certainly chase them if we could. Most of the people in our area have theirs under control. We certainly make an active effort to manage ours and hold it with the drill bit, to be mindful and efficient with our dollars versus releasing. There's always a very small working interest, in fact, here and there that we have to allocate capital to. But as you can see from our financials, it's usually pretty small.

Noel Parks, Analyst

Great. And just the last one for me. I was trying to recall as far as when you start flowing CO2, is your purchase price for the CO2 tied to oil price? I'm just trying to recall if that was the nature of a contract.

Kevin Riley, President

Yes, it is. It is an index tied to oil price.

Noel Parks, Analyst

Okay. How often does that get adjusted, is it a monthly thing or a quarterly thing?

Kevin Riley, President

No. It's a percentage-based. It's got a flat floor, but at today's prices, the percentage is going to be more applicable.

Noel Parks, Analyst

Okay. Great. Okay. Thanks a lot.

Bobby Riley, CEO

Thank you.

Operator, Operator

There are no further questions at this time. Ladies and gentlemen, thank you for your participation. This concludes today's conference call. You may now disconnect.