PHX Minerals - Q2 2023

Transcript

Operator (participant)

Good morning, and thank you for attending PHX Minerals' June 30th, 2023 quarter end earning conference call. At this time, all lines will be muted during the presentation of the call, with an opportunity for a question and-answer session at the end. As a reminder, this call is being recorded. I would now like to turn the call over to Rob Fink with FNK IR. Please go ahead, sir.

Rob Fink (Managing Partner)

Thank you for joining us today to discuss PHX Minerals' June 30th, 2023 quarter end results. Hosting the call today are Chad Stephens, President and Chief Executive Officer, Ralph D'Amico, Senior Vice President and Chief Financial Officer, Danielle Mezo, Vice President of Engineering. The earnings press release that was issued yesterday after the close, which is also posted on PHX's investor relations website. Before I turn the call over to Chad, I'd like to remind everyone that during today's call, including the Q&A session, management may make forward-looking statements regarding expected revenue, earnings, future plans, opportunities, and other expectations of the company. These estimates and forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to be materially different from those expressed or implied on the call.

These risks are detailed in PHX Minerals' most recent annual report on Form 10-K, as such, may be amended or supplemented by subsequent quarterly reports on Form 10-Q, or other reports filed with the SEC. The statements made during the call are based upon information known to PHX as of today, August 9th, 2023, the company does not intend to update these forward-looking statements, whether as a result of new information, future events, or otherwise, unless required by law. With all that said, I'd like to turn the call over to Chad. Chad, the call is yours.

Chad Stephens (President and CEO)

Thanks, Rob, and thanks to all of you on this call for participating in PHX's June 30th, 2023, quarter end conference call. We appreciate your interest in the company. As you may have seen a few moments ago, WhiteHawk Energy issued a public letter indicating its interest in merging with PHX Minerals. The board will be reviewing the WhiteHawk letter and evaluating the proposal carefully. At this time, we have nothing further to say about this matter, and we will not be taking questions regarding WhiteHawk's expression of interest. For the second quarter, I'm pleased with our performance, despite historically low natural gas prices, and I'm encouraged about future quarters, given the significant improvement in the macro dynamics. During the second quarter, we continued to experience robust activities across acreage.

Despite weak commodity prices, there was a notable improvement in our market share of operating rigs within our focus areas. Based on the activities in our inventory of wells, permitting, and well conversions to production, we are confident in meeting the production forecast we communicated earlier in the year. As a matter of fact, we are raising the lower end of our guidance slightly higher based on improving conditions, progress to date, and enhanced visibility. Ralph will discuss more on this later. As I have previously stated, it is more accurate to measure our royalty volume growth on a year-over-year basis instead of a sequential quarter. This eliminates the lumpiness created by operator timing. In fact, we are on track to achieve annual year-over-year royalty volume growth approximately 25% in calendar 2023.

We believe the second quarter appears to be the bottom of natural gas prices, as supply and demand imbalances continue to improve. As we look forward toward 2024 and 2025, demand from LNG export will be a significant demand driver to the natural gas market. During the quarter, several natural gas operators have signed Heads of Agreements, or HOAs, with LNG operators. As we draw closer to the commissioning of these additional LNG facilities, we believe it will drive improvement in sentiment as well as prices. The Haynesville will be the primary source to feed these LNG facilities. Even though natural gas prices were at historical low levels this quarter, PHX continued to generate cash flow, fund acquisitions, and maintain ample liquidity, demonstrating the advantage of our mineral business model.

At this point, I'd like to turn the call over to Danielle to provide a quick operational overview and then to Ralph to discuss the financials.

Danielle Mezo (VP of Engineering)

Thanks, Chad. Good morning to everyone participating on the call. For our June 30th, 2023 ended quarter, total production decreased 7% from the prior sequential quarter to 2,304 MMCFE. Note that last quarter's volumes contained a full month of production from our legacy Eagle Ford and Arkoma assets that were divested on January 31st, 2023. Excluding these divested volumes, total production from our assets decreased just 3% from the prior sequential quarter. Additionally, 80% of our quarterly production volumes were natural gas, which aligns with our long-term position that natural gas is the key transition fuel for a sustainable energy future. Oil represented 11% of production volumes and NGL represented 9%. Quarterly royalty production decreased 4% sequentially to 2,010 MMCFE.

While royalty volumes remained relatively flat compared to last quarter, year-over-year volumes have increased by 26%. It is important to note that as a mineral holder, we do not control timing on well development, so there can be some volatility on a quarter-to-quarter basis, and volumes associated with our business model are better evaluated on a rolling 12-month basis. On the working interest side, production volumes declined 24% sequentially to 294 MMCFE in the June 30th, 2023 quarter as a result of the sale of our legacy Eagle Ford and Arkoma working interest wells on January 31st, as stated above. The working interest volumes from the March 31st quarter contained a full month of production associated with these divested assets. Excluding these divested volumes, working interest volumes remained flat quarter-over-quarter.

Royalty volumes represented 87% of total production during our June 30th quarter. As recently as calendar 2021, royalty volumes were only 45% of our total volumes. Reflecting on our reported volumes over the last several quarters, you will note our total corporate volumes have remained relatively flat. This is due to the loss of volumes associated with the sale of working interest assets, offset by the gain in our growing royalty volumes. With the divestiture of our working interest assets virtually complete, we estimate our total corporate volumes will reflect steady growth in the coming quarters. As we have grown our royalty volumes and divested of our non-op working interest, the quality of our asset base is enhanced with improving margins. This growth in royalty volumes is also reflected in our corporate reserves.

Our proved reserves as of June 30th, 2023, were 68.6 Bcfe, compared to our fiscal year-end reserves of 81.1 Bcfe as of September 30th, 2022. This decrease is primarily due to sales of our working interest assets, as well as 9 months of production volumes rolling off. Over the same time frame, our proved royalty reserves have remained flat as a result of steady conversion of probable reserves to proved over the last three quarters, despite significantly lower natural gas prices. During the quarter ended June 30th, 2023, third-party operators active on our mineral acreage converted 81 gross, or 0.3 net wells in progress, or WIP, to producing wells, compared to 117 gross, or 0.42 net WIPs converted to PDP in the quarter ended March 31st, 2023.

The majority of the new wells brought online are located in the Haynesville and Scoop. At the same time, our inventory of wells in progress remained consistent at 186 gross, or 0.51 net wells, compared to the 198 gross, or 0.65 net wells reported as of March 31st, 2023. The continued track record of well conversions and replenishment of the inventory of wells in progress, or WIPs, shows the repeatability of our business strategy. Additionally, we have mineral interests under a deep inventory of approximately 2,000 gross undrilled locations that will continue to feed this WIP activity. In addition to our WIP, we regularly monitor third-party operator rig activities in our focus areas and observed 15 rigs present on PHX Minerals acreage as of July 10th.

Additionally, we had 61 rigs active within 2.5 mi of PHX ownership. Despite the recent decrease in natural gas prices, our market share of total active rigs in the Haynesville Play has doubled. As of July 31st, PHX's share of all active rigs was 18%, compared to 9% a year ago. We believe this is a result of owning minerals in the core of the basins in which we focus, with competitive economics across various pricing environments. In summary, we continue to see steady development on both our legacy and recently acquired mineral assets, which should lead to annually increasing royalty volumes. I will turn the call back to Ralph to discuss financials.

Ralph D'Amico (SVP and CFO)

Thanks, Danielle. Thank you to everyone for being on the call today. Natural gas, oil, and NGL sales revenues decreased 39% on a sequential quarter basis to a total of $7.2 million. Breaking down this number further, royalty sales revenues decreased 39% to $6.2 million because of a 4% decline in royalty production volumes and 36% lower realized commodity prices. Working interest sales revenues decreased 42% to $1 million as a result of lower production volumes associated with the divestiture of the Eagle Ford and Arkoma assets, which you recall that the March 31st quarter still had 1 full month of production from these areas, as Danielle talked about.

The working interest revenues for the June 30th quarter also had a 23% lower realized commodity price affecting them. Realized natural gas prices averaged $1.92 per MCF, 46% lower than the prior sequential quarter. Realized oil prices averaged $73.87 per barrel, 3% lower, and NGLs averaged $18.93 per barrel, 25% lower. Realized hedge gains for the quarter were $1 million. For the quarter, approximately 45% of our natural gas, 53% of our oil, and 0% of our NGL production volumes were hedged at average prices of $3.37, and $74.68, respectively. Approximately 39% of our anticipated remaining calendar 2023 natural gas production has downside protection at approximately $3.27 per MCF.

On the oil side, approximately 39% of our anticipated production has downside protection at approximately $72.98 per barrel. Most of our natural gas hedges are structured as costless collars, which means that we also have upside on these volumes, up to the $6 range. Our current hedge book position is available in our recently filed 10-Q. Total transportation, gathering, and marketing decreased 20% on a sequential quarter basis to $906,000, and decreased 13% on a per MCFE basis to $0.39, primarily because of higher Haynesville volumes as a percentage of total volumes, which have lower associated transportation costs. Where we have a meaningful number of cost-free leases.

Production taxes decreased 21% on a sequential quarter basis to approximately $462,000, due to lower sales revenues, offset by higher production in Louisiana, which applies its tax rate to production volumes and not to revenues. LOE associated with our legacy non-operated working interest wells decreased 42% on a sequential quarter basis to $314,000. This is the first clean quarter without the impact of the Eagle Ford and Arkoma working interests, which we sold in late January. Cash G&A was up 5% to $2,470,000 compared to the prior sequential quarter, primarily due to additional costs associated with legal work and tax work during the quarter.

Adjusted EBITDA was approximately $4.1 million in our quarter ended June 30th, compared to $7.7 million in the March 31st quarter. DD&A was up 17% to $2.2 million compared to the prior sequential quarter, due to new and significant overriding royalty production that is depreciated on a unit of production basis and conversion of non-producing minerals to producing minerals, which have a shorter depreciable life, as these new royalty wells come online. Net loss for the quarter was $41,000, or effectively $0.00 per share, compared to net income of $9.6 million or $0.27 per share for the prior sequential quarter.

Adjusting for the unrealized mark to market on our hedges and the gain on sale, sales in the June quarter, pre-tax net income decreased approximately 87% to $468,000 or $0.02 per share. We had total debt of $23.75 million as of June 30th, 2023, compared to $26 million as of March 31st, as we have continued to focus on maintaining a strong balance sheet and enhancing liquidity for potential future acquisition opportunities. Our debt to trailing 12 month EBITDA was 0.93x at June 30th, 2023. Lastly, we updated our company outlook for calendar 2023 to reflect higher confidence on forecasted volumes. The estimated royalty production range is now 7.6-8.6 Bcfe, compared to the prior outlook of 7.4-8.6 Bcfe.

We also reduced the estimated per unit transportation, gathering, and marketing costs to a $0.45-$0.50 range, compared to a $0.53-$0.58 range, to reflect a higher percentage of sales volumes coming from the Haynesville, which, as I talked about, has lower associated costs and where we have a significant number of cost-free leases. Production tax as a percentage of our pre-hedge sales volumes is being increased to 5.5%-6% from 4.75%-5.25%, again, as a result of higher production volumes in the Haynesville and Louisiana tax being, being, applied to volumes and not revenues.

On the G&A side, we've reduced the high end of our per unit production metric from $1.07-$1.06, to reflect the higher production volumes, production volumes estimates and a stable cash G&A on an absolute basis. With that, I'd like to turn the call over to, back to Chad for some final remarks.

Chad Stephens (President and CEO)

Thank you, Ralph. In conclusion, we have made remarkable progress in transforming PHX over the last three years and have achieved on the specific plans we originally established back then. We are now positioned to grow even further using the free cash flow from our quality assets and strong financial position, and look forward to keeping you updated. Before we close, I would like to highlight a couple of important points. First, with our non-operating interest divestitures largely complete, we expect to resume growth at a corporate level for our corporate volumes, which will be primarily driven by our increasing royalty volumes. 2, in spite of record low natural gas prices, PHX continues to see robust activity on its minerals, which will drive royalty volume growth in the coming quarters.

As the natural gas market macro dynamics improve, we are seeing additional consolidation opportunities in our core areas in the Haynesville and SCOOP. We are excited about these prospects, and we'll use the same rigorous approach to evaluate these opportunities in order to drive shareholder value. As always, I would like to recognize and thank our dedicated employees for their hard work and our board of directors for their support and the insightful wisdom they provide. This concludes the prepared remarks portion of the call. Operator, please open up the queue for questions.

Operator (participant)

Thank you. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Derrick Whitfield with Stifel. Please proceed.

Derrick Whitfield (Analyst)

Good morning, all, and thanks for your time.

Chad Stephens (President and CEO)

Hi, Derek.

Derrick Whitfield (Analyst)

For my first question, I wanted to focus on your growth outlook. While we are seeing a reduction in your WIP, your relative market share in the Haynesville is increasing and you are raising the lower end of your minerals guidance. Could you perhaps speak to your expected trajectory for the second half and your views on how the macro environment is shaping up for 2024 activity across your assets?

Chad Stephens (President and CEO)

Ralph, do you want to, you want to address that, and I'll, I'll follow up with a closing comment.

Ralph D'Amico (SVP and CFO)

Sure. Hey, Derek. Yeah, and look, I mean, I think again, you know, the, the, what, what we like about our model is this focus. As we focus on natural gas, the Haynesville is the key basin, in which, you know, to be, you know, if you're playing an improvement natural gas commodity price cycle and, and LNG exports, right? I think the basin, even at these prices, are highly economic. The fact that we're focused on the core of the core, right, is really what's enabled us to increase the market share of the operating rigs, right? What that means is, you know, to us, is that even in a down cycle, our, our acreage is so economic to operators that it, it would be the last rig that they lay down, and that as opposed to the first rig, right?

We're not around the margins, we're in the core of the core. You know, the operators that we are under are focused also on growing production, which helps, you know, which helps us, right? They're not focused on purely just maintaining production, steady. It's highly fragmented. There's lots of good operators. That visibility, you know, enables us to kind of look at the world and say, you know, we have a high level of confidence that the wells being worked on are going to convert, right? We continue to see active permitting on our acreage every day. We're encouraged about the future as it pertains to the Haynesville. If you look at the SpringBoard III play, if you look at our corporate presentation, it's just a map, right?

You look at the amount of permitting that you're seeing coming out of Continental, right? It, it certainly seems like they are picking up the pace there, as we always thought and predicted that they would. I think all of that gives us conviction that the inventory that we built should continue to be converted and drive up revenue, production volumes on the royalty side, revenues and cash flow.

Chad Stephens (President and CEO)

We can. Thanks, Ralph. We can really look back to the strategy we originally put forth in being in the best rock quality and of the best operators. When you look at rig counts in our two core areas, the Haynesville and the SpringBoard III, six months ago and today, and are virtually unchanged on our minerals. Same, same rig count. That, that really speaks to the quality of the assets and the quality of the operators. As Ralph said, we weekly watch permitting and the wells that are being drilled on our acreage and the DUCs, the wells that have been drilled and are waiting on completion.

That continues on a week-over-week and a month-over-month, remains relatively flat as these wells are being converted. Again, there's a bit of lumpiness to it, as we allude to, but we're, we're very confident, as you, as you asked, we're very confident in the trajectory of our growth going into next year. We think SpringBoard III, given what we see Continental doing, we think SpringBoard III next year should really be driving a lot of our royalty volume growth. That's our expectation. We're, we're pretty excited about that. Great, great asset, great, great operator.

Derrick Whitfield (Analyst)

That's great color. Then for my follow-up, could you speak to what you're seeing in the market from an M&A perspective at present, given the firming of commodity prices? Perhaps also speak to your preference at present for capital allocation between the Anadarko and Haynesville general opportunities.

Chad Stephens (President and CEO)

Well, we, we continue to focus on those two areas. We have great technical knowledge, and have had great success in both those areas. We're, we're, we're pretty opportunistic in, in both those areas, whichever comes first. Best, best economics, best returns, best. We'll, we'll evaluate an asset in whichever one, if we're competing, whichever one provides the best economics, we'll, we'll try to close on. 6 months ago or 3 months ago, when gas prices were at, at the bottom, there was a really wide spread in the bid ask between sellers and buyers, and we were having a hard time transacting in the Haynesville. We've had a little bit of success, acquiring over the last couple of months in the SpringBoard III area, but not so much in the Haynesville.

Then recently, we've had a lot of inbound opportunities in the Haynesville as well, and we're really excited about a couple opportunities we're looking at right now. What we think that, that the, the sellers have gotten a little bit of market therapy and have realized that they're not gonna be able to transact at, at what was $6 gas six months ago, and the strip today is $3.50-$4. They've got to, they've got to come down to, to be able to transact. We're, we're seeing that, that, that spread on the bid-ask narrower, come, come our way. We're excited about the opportunities we're, we're looking at right now.

Ralph D'Amico (SVP and CFO)

Yeah. One, one, one other thing, Derek. I mean, I think it's important to note that, you know, regardless of the commodity price environment, we use the same very rigorous approach to how we evaluate acquisition opportunities, right? You know, and I think being patient works in our favor, right? That's what we're seeing in the Haynesville today. You know, that being rigorous with our evaluation and, and not being overly, you know, not, not doing deals just for the sake of doing deals, which has never been our approach, right? Is, is paying off, and, and we're seeing a lot of opportunities at prices that are, you know, significantly better than they were a few months ago.

Derrick Whitfield (Analyst)

That's great. Thanks again for your time.

Chad Stephens (President and CEO)

Nice to hear.

Ralph D'Amico (SVP and CFO)

Thanks, Derrick.

Operator (participant)

As a reminder, just star one on your telephone keypad if you would like to ask this question. Our next question is from Jeff Grampp with Alliance Global Partners. Please proceed.

Jeff Grampp (Analyst)

Morning, guys.

Chad Stephens (President and CEO)

Morning.

Jeff Grampp (Analyst)

Understand you obviously can't comment directly on, on the WhiteHawk letter, but, you know, broadly speaking, as, as you guys think about larger M&A opportunities, what are the main boxes that, that you guys want checked off when evaluating those kinds of opportunities, when thinking about, you know, whether it makes sense from a, from a PHX and, and its shareholders' perspective?

Chad Stephens (President and CEO)

Well, yeah, the board, the board is obviously gonna. They're, they're gonna look at any and every opportunity that, that is in the best interest of the shareholders. We, we look at all, all opportunities, all requests, all inbounds with the same rigor and the same serious, sincere effort. To protect our shareholders, we want to make sure that any proposal is NAV accretive and, and is, is, in the best interest of the shareholders from that perspective. That, that's always the, I guess, the main hurdle is, is it the best deal, the right deal for our shareholders from a value perspective?

Ralph D'Amico (SVP and CFO)

Yeah. Derrick, I mean, Derrick, I'm sorry, Jeff. Jeff, I mean, I think, again, it always. Chad Stephens has always said this, right, from day one. It always starts with the rock, right? What is the quality of the rock, right? Is it in the core of the core? You know, regardless of the size of the deal, we've always evaluated every deal the exact same way. What is the rock quality? Who are the operators on them? What's the growth, you know, what's the growth rate, you know, at which those assets are going to be developed, and is it accretive? You know, it doesn't, you know.

We, we look at it the same way. I think that consistency has always been, you know, what's led to the success that we've had in terms of growing those royalty volumes. You know, over the last 3 years, I mean, we've grown that at over a 20% compounded annual rate. You know, I think that consistency is the key to our success in terms of what we've achieved on the royalty growth side.

Jeff Grampp (Analyst)

Great. I, I appreciate that. For my follow-up, obviously, the, the natural gas market's pretty dynamic right now. What kind of assumptions, as it relates to guidance, are, are you guys making in, in, in regards to, you know, operators potentially ducking up wells, maybe for early 2024? Do you view that at all as, as a material risk for hitting the 2023 full year guidance, or just kind of any thoughts, understanding that obviously it's, it's out of your control as a mineral holder?

Chad Stephens (President and CEO)

Yeah, most of the, or, 100% of the volumes we forecasted for this year are based on our existing base PDP production and wells that are already drilling or are being completed, and we have a pretty good idea of when they're gonna be put into sales. You get into 2024, and there's a little bit more risk around those volumes. Again, given the location of those assets, the footprint of where they are and the operators, we risk them and have a pretty good idea of what volumes are gonna be coming on and what our volumes look like for 2024.

Ralph D'Amico (SVP and CFO)

Yeah, Jeff, I mean, I think that's why it's a range, right? We That's not a number, but a range, right? It takes into account the, the possibility of somebody doing something that they control and that we don't control in terms of ducking up inventory, you know, etc. It's all, it's all baked into our assumptions.

Jeff Grampp (Analyst)

All right, great. Thanks for the time, guys.

Operator (participant)

Our next question is from Donovan Schafer with Northland Capital Markets. Please proceed.

Donovan Schafer (Analyst)

Hi, guys. I'm juggling a couple calls, so apologies if any of this has already been asked. The first question I have is, you know, with the challenging price environments for the quarter, it's, it's actually kind of nice to see how you still end up at, like, a break even. You know, kind of, I think it kind of highlights the business model in a positive way. Is this—it, and kind of looking back at historical performance when you had more, you know, working interest wells, it looks like maybe you didn't have as much of that, almost like downside protection, where you could, you know, you, you're really just covering overhead. Yeah, I see. You know, historically, you could have some pretty big, you know, GAAP net income losses.

Is this, is this kind of representative going forward, where, you know, now that you're really now that you're more mineral and royalty interest, you know, the cost burden really just becomes the overhead, and if you can kind of size that properly and then do some hedging, is it—should we kind of see this as, as emblematic of a floor, you know, of—by floor, I guess, I mean, you know, in the future, if natural gas prices are really kind of what seems to be a bottom, should you be in this kind of position of still being able to be break even? Is, is that kind of the strategy and the thinking? Just looking to validate my perspective here.

Chad Stephens (President and CEO)

Yeah. I, I, I think we, we, we started the business in January 2020, we built the business around scale. We have 20 employees. Half are accountants, back office financial people, do all of the public filings, SEC, and the other half is technical people. We evaluate 5 or 6 or 7 deals a month. We're evaluating 80-100 deals a year. We only do a few, a handful of those, because, as Ralph said, the rigorous technical focus we apply to any, any acquisition, whether it's a $100,000 deal or a $10 million deal, we use the same rigorous technical work. The business is set up for scale, we're built to grow.

Every new deal we acquire and close on and bring the asset in-house, we don't add G&A, the G&A stays the same. We're built to grow, and yes, as, as we move forward and as we use our cash flow to acquire more assets, that G&A will become less and less of a burden, and our breakeven will, will lower, really, overall.

Donovan Schafer (Analyst)

Okay. Then, shifting gears a little bit, this might sound like a little bit of paranoia on my part, and it's probably from my own experience. My, my first job out of college was petroleum engineering in the Marcellus Shale in Appalachia. You know, the Mountain Valley Pipeline, you know, Congress, with the Fiscal Responsibility Act, kind of greenlit that. Now, the U.S. Supreme Court has also kind of helped to greenlight that.

I haven't, I haven't looked closely at the interconnections between the different the various pipelines or anything, but it just makes me think about, you know, are there any risks kind of in the, you know, midterm or longer term kind of time horizon of lots of gas coming out of Appalachia and having, you know, putting some downward pressure on natural gas prices? Just trying to think about that and if there's a. Yeah, like, it's such a historically, such a prolific gas basin, but, you know, you just couldn't get the gas out of it with pipelines. Is there anything for us to kind of be mindful of and watching there, and what are you guys how are you thinking about it, and how are you monitoring that?

Chad Stephens (President and CEO)

Well, for really, to answer that question, you got to look at the overall, 1, the U.S. domestic natural gas supply and demand fundamentals, and then in, in that context of a global, natural gas through all the LNG terminals built around the world has become. Ralph and I were talking about this this morning, it's a fungible commodity. For instance, in Australia, there were a couple of LNG terminals that the workers were going to strike, and that hurt the possibilities of the LNG imports into Europe. European prices have spiked. Now, natural gas prices in the U.S., Henry Hub's way up this morning. It's up 6% or 7% this morning just because of news, around the world.

That doesn't really have any immediate impact here, but that, that just shows you the, the fungible nature of natural gas today. I don't think Mountain Valley, to your question, Mountain Valley Pipeline is going to in any way materially impact the macro dynamics in, in the U.S. That pipeline goes to North Carolina. It's going to serve kind of the southeastern portion of the United States. I think in the future, most of the growth in natural gas supply is going to come from the Permian Basin and the, and the Haynesville.

As these, as I alluded to in my comments, as these LNG that are under construction, these LNG terminals, the new ones, come into service in 2025 at 6.5 BCF a day of additional export capacity, which will mean the U.S. will be exporting about 20 BCF a day by 2025 of, of LNG. You've got the U.S. natural gas decline is at 18% or 20%, so you got to replace the decline first, and now you got to add another 6.5 BCF of demand from, from LNG.

You need more supply to feed just the obvious increase in demand, besides what's going to happen industrial-wise, if we come out of this, I don't know if it's a recession or nobody can decide whether we're in a recession or not, but if the overall economy in the next couple of years improves, you'll get industrial demand, commercial demand. I'm not that worried about any sort of too much supply for the most part, given the LNG export capacity that's going to really balance the U.S. natural gas macro.

Ralph D'Amico (SVP and CFO)

You know, the other—one thing to add, too, Donovan, is, I mean, I think, you know, if you think about the opera—because, again, regardless of that pipeline, right? What is the intent that's been communicated by the operators, right? I think we talked about there's sort of 3 key operators there in the, in the, in the Marcellus, right? What is, what is their desire to grow versus the pressures that they face to focus on, you know, returning capital, right? I mean, I think that's the other, that's the other piece of the puzzle that you have to think about, right? I don't, you know, I don't know if and when that ever changes, right?

I think what we like about the, the, the Haynesville is that it's more fragmented, even from an operator standpoint. There's a lot more private folks who are not, you know, as—you know, they, they don't wake up every day thinking about: What does Wall Street think about return of capital, right? They, they, they want to grow production, they want to take advantage of the market, right? I think that dynamic provides, in the Haynesville, provides a lot of opportunity for us, you know, going forward to continue to grow, you know, at similar, a similar pace to what we've done over the last three years from a royalty standpoint.

Donovan Schafer (Analyst)

Okay, that makes sense. That's, that's actually a helpful perspective. Then last question, if I can squeeze one more in, when we look at the other, there's certainly some much larger minerals or royalty-focused companies out there, and, you know, it seems like they get a premium valuation, really, probably driven by their size and scale. I think they seem to be a little bit more hands-off in approach. You know, it seems like you guys could maybe, you can make the counterargument that maybe a good multiple should be assigned to you as well, because you're, you're doing a more proactive effort to kind of see where the drill bit's gonna go. Leaving that aside, are there any. You've made great strides in shifting from working interest to royalty interest.

Are there any other kinds of things you can do or that you plan to do, or that you think explains that valuation gap, where you can start to close it? Is it just a matter of, you know, growing and trying to get to larger and larger scale over time? You know, I know that would, that would take some time, but—or are there sort of other things you think or feel you can do, that help kind of, reduce that valuation gap?

Chad Stephens (President and CEO)

That, that's probably the question of the day. We, every existing investor, shareholder, or new potential shareholders, it comes down to that question. They like the strategy, they like the execution, they like the results we've, we've achieved over the last 3 years, as I alluded to in my, my comments. It, it just comes down to, overall, the, the daily float and the ability to get into the stock and out. We're small. We need to get bigger. We know that, and we're pedaling as hard as we can in, in all these acquisitions. We've got some, some interesting things that, that we're working on to, to address, as you say, how can we, how can we better address these various issues?

That's, I think, the, the real issue of the day, is just our overall float and ability for larger investors who are interested to get in and get out. That's, we're, we're working on that.

Ralph D'Amico (SVP and CFO)

Yeah.

Donovan Schafer (Analyst)

Okay.

Ralph D'Amico (SVP and CFO)

Donovan, right, I mean, you know, look, I think, you know, look, multiple expansion is always good, right? I mean, I think, you know, I think it's also important to, to consider that at the pace that we're going in terms of our growth rate and the expanding margins associated with, you know, all minerals, etc., right? I mean, there is value creation that we are always working on, right? That is not and, and that is not dependent upon, you know, closing the gap with, you know, where we trade relative to, you know, some of the peer group, you know, some of the other mineral peer group out there.

That's the cherry on top, we do think about it, we do, we do try to, you know, behave in a way that's going to compress that spread. That's not, you know, that's not at the core of what drives value, right? It's not just multiple expansion. It's executing on the day-to-day, growing royalty volumes, growing cash flow, you're gonna create value that way as well.

Donovan Schafer (Analyst)

Yes, absolutely. You know, that makes sense. Okay, thank you, guys. I'll take the rest of my questions offline.

Operator (participant)

We have reached the end of our question and answer session. I would like to turn the conference back over to Chad for closing remarks.

Chad Stephens (President and CEO)

Thank you, operator. Again, I'd like to thank our employees and shareholders for their continued support. I'd also like to note that Ralph and I will continue to expand our investor marketing activities over the coming weeks and months through a series of non-deal roadshows and conference presentations aimed at expanding investor awareness. If you'd be interested in meeting, please don't hesitate to reach out to myself, Ralph, or the folks at FNK IR. We look forward to hosting our next quarterly call in mid-November. Thank you, and have a good day.

Operator (participant)

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you again for your participation.