PHX Minerals - Q3 2024

Executive Summary

• Q3 2024 delivered $9.14M total revenue and diluted EPS of $0.03, with net income of $1.10M; revenue was roughly flat year over year but down sequentially due to lower volumes and pricing, while Adjusted EBITDA fell to $4.91M from $6.43M in Q2.
• Royalty volumes were the second-highest in company history despite a bearish gas macro; management reaffirmed the $50M borrowing base and maintained quarterly dividend at $0.04 per share, highlighting balance sheet resilience and cash returns.
• Guidance for the remainder of 2024 was effectively maintained versus Q2’s outlook (production mix/cost metrics), and management reiterated volume growth on a rolling 12‑month basis driven by well conversions and a strong inventory of wells in progress (278 gross; 0.93 net).
• Stock-relevant catalysts: stable borrowing base, continued dividend at $0.04, visible well conversion pipeline (SCOOP/Haynesville), and hedging gains; headwinds remain from gas prices and higher transportation/gathering rates in Louisiana Haynesville.

What Went Well and What Went Wrong

What Went Well

• Second-highest royalty volumes in company history; management emphasized asset quality and resilient profitability in volatile pricing environments (“risk‑mitigated business is built for resilient and sustainable profitability”).
• Balance sheet strength: debt reduced to $27.75M, debt-to-adjusted EBITDA (TTM) at 1.36x; borrowing base reaffirmed at $50M.
• Hedging program delivered $932K realized gains in Q3 and a net $1.09M contribution to revenue; royalty volumes up year over year on new Haynesville and SCOOP wells.

What Went Wrong

• Sequential production decline: total volumes down 20% and royalty volumes down 23% versus Q2 due to fewer Haynesville wells turned to sales and normal quarter-to-quarter lumpiness.
• Pricing headwinds: realized natural gas ~$2/Mcf and oil ~$74.83/bbl, with NGL ~$19.60/bbl; macro commentary remained cautious on near-term demand and weather impacts.
• Higher transportation/gathering/marketing costs (+60% YoY) driven by activity in Louisiana Haynesville, pressuring per‑Mcfe unit costs.

Transcript

Operator (participant)

As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Steven Li, Investor Relations for PHX Minerals. Please go ahead, Steven.

Stephen Li (Head of Investor Relations)

Thank you, Operator. And thank you, everyone, for joining us today to discuss PHX Minerals' September 30th, 2024, quarterly results. Joining us on the call today are Chad Stephens, President and Chief Executive Officer, Ralph D'Amico, Executive Vice President and Chief Financial Officer, and Danielle Mezo, Vice President of Engineering. The earnings press release that was issued yesterday after the close is also posted on PHX 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 other forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to materially differ from those expressed or implied on the call.

These risks are detailed in PHX Minerals' most recent annual report on Form 10-K, and such may be amended or supplemented by subsequent quarterly reports on Form 10-Q or other reports filed with the Securities and Exchange Commission. The statements made during this call are based upon information known to PHX as of today, November 7th, 2024, and 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 that, I'll turn the call over to Chad Stephens, PHX Chief Executive Officer. Chad.

Chad Stephens (President and CEO)

Thanks, Steven, and thanks to all of you on this call for participating in PHX's September 30, 2024, quarter-end earnings call. We appreciate your interest. A continuing theme, which we have highlighted over the last several quarters, is the challenging macro environment in which we operate. This quarter is no different. We are largely a natural gas-focused company. The weather-adjusted natural gas supply-demand macro during the quarter remained bearish. As a result, realized natural gas prices were down. This impacted cash flows and overall industry activity. The natural gas macro over the past 24 months has produced various headwinds, with most recent weather a disappointment, second warmest October and November since 1950. This removed about 150 to 200 BCF of total natural gas demand since the end of September.

The silver lining to this is the 78 BCF of storage injection reported this past week suggests a 2 to 3 BCF undersupplied domestic natural gas market. Also, total year-to-date storage injection is at the low end of the five-year average and has reduced the large natural gas inventory surplus from a high of almost 700 BCF seen in March of this year to approximately 325 BCF surplus currently versus the five-year average. Thus, we remain optimistic for the outlook for natural gas prices as new LNG export facilities begin service. It is projected that U.S. LNG export volume should double to almost 25 BCF per day by 2028, with the advent of seven new facilities currently in various stages of construction. This is an incremental increase of roughly 13 BCF a day from current.

Additionally, base case estimates of increased power demand to meet the growing needs of AI and data centers create a critical call for gas of about 7 BCF per day by 2030. That is a total increase in natural gas demand from both LNG and power of around 20 BCF per day over the next five years. This doesn't even include the need to replace the annual average natural gas decline rate of U.S. gas production of around 15% or 15 BCF per day annually. When you look at the current natural gas forward strip price, we don't believe it reflects these bullish macro dynamics that will begin to lift forward prices over the next 12 to 24 months. Also, the recent election results should introduce a positive catalyst to U.S. GDP growth, government deregulation, a favorable federal tax regime, and reduced market volatility.

This should have a positive influence on demand for commodities and the energy sector at large. With this backdrop and in spite of reduced pace of development in natural gas basins due to the suppressed prices, we are pleased with our quarterly results and would like to highlight a few notable items. One, the current quarter's royalty volumes represent the second highest in the history of the company, despite the negative natural gas macro I just mentioned. Sequential quarter volumes were down 20%, and we indicated to you last quarter this was coming and is due to the positive impact in the last quarter of reporting several new high-interest wells in the Haynesville. Over the past 12 months, we're excited about what we're witnessing as a dramatic increase in drilling in the Springboard 3 area of Oklahoma, mainly by Continental.

This time last year there in the Springboard, there were around 20 gross wells in some phase of permitting, drilling, or turning to sales, and today we see that number double to around 40 gross wells in some stage of progress. Also, since the same period last year, there have been 30 gross wells converted to producing in the Springboard 3. This increased activity is a big counter to the industry narrative I just laid out because the production in Springboard 3 is two-thirds liquids and one-third gas by volume. Additionally, and as Danielle will discuss in a moment, we see an overall steady pace of well development on our minerals. This highlights the quality of our mineral assets. Danielle will detail our steady historical volume growth in a moment.

While reducing debt by $5 million year-to-date or 15%, we have also acquired approximately $6.5 million of minerals as well as focusing on return of capital to our shareholders through the $0.04 per share quarterly dividend. This all speaks to the strong financial position of PHX and our resilient, sustainable business model throughout the commodity cycles. Our conservative focus on leverage and proactive hedging programs helps support our financial strength. Additionally, we reaffirm the borrowing base under our existing bank credit facility at $50 million, a direct reflection of the quality of our asset base and maintaining modest leverage. And we continue to see steady deal flow in our focus areas, which emphasizes the sustainability of our strategy. 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. And good morning to everyone participating on the call. For our quarter ended September 30th, 2024, total corporate production decreased 20% from the quarter ended June 30th, 2024, to 2,379 MMCFE. Royalty production for the quarter decreased 23% to 2,098 MMCFE compared to the prior sequential quarter, resulting in the second highest quarterly royalty production record for PHX. It's important to note that as a mineral holder, we do not control timing on well development, so there can be some volatility both up and down on a quarter-to-quarter basis, and volumes associated with our business model are better evaluated on a rolling 12-month basis. Our last 12 months' royalty production is up 10.3% to 8.6 BCFE from the prior 12 months. Total corporate production, including working interest, is up 3.8% to 9.7 BCFE. Royalty volumes represented 88% of total production during our September 30th, 2024, quarter.

80% of our quarter's 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%. During third quarter 2024, third-party operators active on our mineral acreage converted 46 gross or 0.18 net wells in progress, or WIP, to producing wells compared to 55 gross or 0.4 net in the prior sequential quarter. We are pleased with our well conversion rates, particularly given the challenging natural gas macro environment, which includes some operators deferring bringing completed wells online until there is an improvement in natural gas prices.

At the same time, our inventory of wells in progress on our minerals, which includes DUCs, wells being drilled, and permits filed, remains strong with 278 gross or 0.93 net wells compared to 241 gross or 0.93 net at the end of June 30th, 2024. The continued track record of well conversions and replenishment of the inventory of wells in progress, or WIP, reflects the high-quality portfolio of assets we have assembled to provide steady, sustainable future growth. In addition to our WIP, we regularly monitor third-party operator rig activities in our focus areas and observed 18 rigs present on PHX Minerals acreage as of September 30th, 2024. Additionally, we had 70 rigs active within 2.5 miles of PHX ownership. In summary, we continue to see steady development in both our legacy and recently acquired mineral assets, which should lead to annually increasing royalty volumes.

Now I will turn the call to Ralph to discuss financials.

Ralph D'Amico (EVP and CFO)

Thanks, Danielle, and thanks to everyone for being on the call today. For the third fiscal quarter ended September 30th, 2024, natural gas, oil, and NGL sales revenues decreased 20% to $7.9 million compared to the prior sequential quarter, due primarily to a decrease in production volumes of about 20%, which, as Danielle mentioned, is a result of fewer new wells being brought online primarily in the Haynesville as natural gas prices remain under pressure and the normal lumpiness we see in volumes on a quarter-over-quarter basis. Realized natural gas prices for Q3 '24 averaged $2 per MCF compared to $2.05 in Q2 '24. Realized oil prices averaged $74.83, down 3% from Q2 '24, and NGL prices averaged $19.60 a barrel, down 18% from Q2 2024. Realized hedge gains for the quarter were $932,000.

Approximately 48% of our natural gas, 31% of our oil, and none of our NGL production volumes were hedged at average prices of $3.28 per MCF and $63 per barrel. Most of these hedge contracts were added over the course of the last 24 months. We continue to be consistent with our hedge program and are structuring our natural gas hedges using both swaps and costless collars, which means that we also have upside exposure on certain volumes. Our current hedge position is available in our most recently filed 10-Q. Total transportation gathering and marketing decreased 28% on a sequential quarter basis to $1.1 million, primarily due to the lower volumes during the quarter, mainly on the Louisiana side of the Haynesville.

Production and ad valorem taxes decreased 28% on a sequential quarter-over-quarter basis to approximately $429,000 due to slightly lower prices and lower production volumes, again, primarily in Louisiana, where taxes are based on volumes and not as a percentage of revenue. LOE associated with our legacy non-operated working interest wells was flat on a sequential quarterly basis at about $295,000. Cash G&A increased 6% to $2.17 million compared to the prior quarter. Adjusted EBITDA was down to $4.9 million in Q3 2024 compared to $6.4 million in Q2 2024. The decrease, again, is due primarily to lower volumes offset by also lower transportation gathering, marketing, and production tax expenses. Net income for the quarter was $1.1 million or $0.03 per share compared to $1.3 million or $0.04 per share in the prior sequential quarter. We had total debt of $27,750,000 as of Q3 2024.

As Chad mentioned, that's down five million from the $32,750,000 as of year-end 2023. Our debt-to-trailing 12-month Adjusted EBITDA was 1.36 times as of September 30th, 2024. We also just finished a regularly scheduled forward determination of our borrowing base, which remained flat at 50 million. I'd like to thank our bank group for their continued support of PHX. We deployed about three million on accretive mineral acquisitions during Q3 2024. However, as I've mentioned over the several prior quarters, our acquisition program remains disciplined, and if the deals in the marketplace don't generate our required return profile, we are not chasing them. It is also important to note that we have an almost seven-year inventory of high-quality drilling locations, which means that we can continue to perform without chasing acquisitions that do not meet our underwriting criteria.

We are happy to build liquidity, pay down debt, and return capital to our shareholders through our quarterly dividend. With that, I'd like to turn the call over to Chad for some final remarks.

Chad Stephens (President and CEO)

Thanks, Ralph. And just to recap, highlight the quarter's results. One, we reported our second highest royalty volumes in PHX history. This is supported by a consistent pace of development activity on our minerals of over 300 well conversions to producing annually, about what Danielle just discussed. I'd like to emphasize that the annual well conversion, which drives our annual volume growth, comes from PHX's approximately 2,000 gross undeveloped well location inventory, which we lay out clearly in our slide deck and which Ralph just talked about. Two, we reduced our debt by $5 million, or approximately 15% since year-end 2023, and reaffirmed our bank credit facility, emphasizing our financial strength. Three, board approved the quarterly $0.04 per share dividend.

I'd like to recall that the board increased the dividend our last quarter from $0.12 per share annually to $0.16 per share annually, which represented a 33% increase. This reflects confidence in our ability to grow our asset base, and again, I'd like to point out it corresponds with our stated intention over the last several years of increasing the dividend when we feel it's appropriate. We're excited. We've been talking about it for several quarters and are excited about the activity we're seeing on our Springboard 3 asset with the gross WIPs in play, with LNG power demand driving a bullish natural gas macro in the next 12-24 months and this abundant well activity on Springboard 3. We look forward to reporting our financial results to our shareholders over the coming quarters.

We're extremely optimistic about the broad well activity across our minerals, especially Springboard 3, which should positively impact our future financial performance. With this and the bullish macro LNG demand and power demand already discussed, we see real upside for PHX. As always, I thank both our employees and board of directors for their dedication and hard work. This concludes the prepared remarks portion of the call. Operator, please open up the queue for questions.

Operator (participant)

Certainly. We're now beginning the question and answer session. If you'd like to be placed in the question queue, 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'd like to remove your question from the queue. One moment, please, while we pull up for questions. Our first question is coming from Jeff Gramp from Alliance Global. Your line is now live.

Jeff Gramp (Analyst)

Hey, guys. Thank you for the time. Ralph, wanted to start on the SCOOP and all that development going on. Looking at the breakout in your WIPs, it looks like it's probably like half, maybe a little over half of your net WIPs now. Just thinking out loud, how should we expect the commodity mix for the company to develop over the next couple of quarters, given that the SCOOP tends to be a little bit more liquids-rich than your corporate mix as it stands today?

Chad Stephens (President and CEO)

We've got quite a bit of activity in the Haynesville as well. The Haynesville wells, any single initial production rate from any given Haynesville well is extremely robust, 20-30 million a day, versus a single well initial production rate of a Springboard 3 well isn't quite as robust, let's say. We don't see a dramatic change in the overall production mix over the next year or two.

Ralph D'Amico (EVP and CFO)

Yeah. I think the other thing to keep in mind also is that in the Midcontinent, there are several operators, including some of the larger operators on our minerals in Springboard 3, that pay us, that pay for the NGLs as part of rich gas. Said differently, you're going to see a positive impact. You're not going to be reporting NGL volumes. You're going to be reporting a higher realized natural gas price to account for the fact that that gas is being sold at 1,400 BTU, right? That includes pricing, but it keeps part of the volumes down because you're not counting the NGLs, if that makes sense.

Jeff Gramp (Analyst)

Got it. No, that's really helpful. Thank you, guys. And then another question on just, I know you guys don't guide quarter to quarter, but just with the results to date and the Q4 guide that you guys maintained, it looks like volumes need to stay, at least on a royalty side, volumes probably need to stay relatively steady just to keep within the guidance range that you guys have. I'm wondering, do you guys have the conviction to call Q3 potentially a trough level for production? I know you ultimately are not the operator and can't control things, but to the extent you guys, do we have conviction that we're at a trough level, or is that still potentially not quite there yet, just given the potential timing and work in progress you guys have? Thanks.

Ralph D'Amico (EVP and CFO)

I mean, I think that's a tough question because I don't know what gas prices are going to do in the future, right? I mean, we think that there's more upside than downside given the macro-dynamic points that Chad discussed earlier on the call. I think your assumption on Q4, the fact that we didn't change the guidance, right, I think that answers the question. In terms of what any particular quarter is going to look like, I think that's a we tend to stay away from quarterly guidance. I think, as Danielle said, the right way to look at it, in our opinion, is that rolling 12 months. And I think if you look at any rolling 12-month period, you see continued growth, right? And I think that's really what we aim for.

Jeff Gramp (Analyst)

Got it. That's helpful commentary. Thank you, guys.

Operator (participant)

Thank you. Next question is coming from Charles Meade from Johnson Rice & Company. Now live.

Charles Meade (Analyst)

Yes. Good morning, Chad, Danielle, and Ralph. Thanks for the time. Chad, I want to go back to a quote in the press release where you said that you're seeing a growing pipeline of attractive M&A opportunities. And I look at what you guys are aware you were buying in 3Q. It looks like it was 80%-90% in the Haynesville. And so I'm wondering, is that uptick in the Haynesville an early indication of where that attractive M&A opportunity is, or is there more going on there?

Chad Stephens (President and CEO)

We continue to use both or focus both on the Springboard or what I consider the SCOOP STACK fairway of Oklahoma as well as the Haynesville. We see probably the Haynesville consists of the state of Louisiana as well as across the state line in Texas, and we're actually seeing some more or an increase in deal flow on the Texas side than we were on the Louisiana side, so I wouldn't say it's growing, but just a steady, what I consider what was and still is a steady deal flow because of the increase in activity we're seeing on the Texas side.

We've expanded, given the activity up in Oklahoma in that fairway, the SCOOP STACK fairway, we're expanding our focus and looking for more opportunities outside the Springboard 3 and some other areas that are very interesting and just as attractive as the Springboard 3. I wouldn't say that we're going all in on just the Haynesville. We still see a lot of attractive stuff in the Springboard, I mean, in the whole SCOOP STACK.

There's going to be some variability, Charles, quarter over quarter between Haynesville and the Anadarko Basin. And again, it just when we're closing deals and how they come in. I wouldn't read too much into it in terms of a higher component in one quarter being in one area or the other. I think the important thing is that across everywhere that we look, every deal competes against every other deal for capital. And on any given quarter, we're deploying our capital where we see the highest potential rate of return, right, whether that be in the Anadarko or the Haynesville.

I do think that in the Haynesville, I do think that there is enough time has sort of bled off since commodity prices came or natural gas pricing came down, where you're seeing a little bit more rationalization, let's put it that way, by folks that are on the sell side, right, in terms of realizing that at a lower natural gas price, you're going to have to sell at a lower price your minerals, right? There's a little bit of that going on as well.

Charles Meade (Analyst)

Got it. That's good color on that, Ralph. Thank you. Chad, I really appreciated your natural gas macro comments. It's interesting to hear your perspective. And I think broadly, we agree with you. I want to ask if you could share with us the benefit of something else. When I think about you guys, I know that you guys have exposure to a lot of different operators in the Haynesville. You also make it your business to understand even what your operators are doing around you. What are you seeing in the way of any early indications of any uptick in activity in 2025? Or are you seeing any?

Chad Stephens (President and CEO)

We watch the public records and the public statements made by our operators, probably just like you do. We in our investor relations slide deck lay out who the more active operators in and around our minerals are. Chesapeake and Aethon, not as much Comstock. Chesapeake obviously has moderated their rig activity and shut in or deferred some production in both the Haynesville and the Appalachia Marcellus because of gas prices. Their statements are saying they're waiting to see where gas prices are going in the next few quarters before they start completing their DUCs and ramping up their production. It's hard to really read the impact of their slowing activity on our minerals. We watch the rig counts on our minerals, directly on our minerals and around. That hasn't changed.

To answer your question, we think, and I guess along Jeff's questions too, we feel comfortable with decent quarter-to-quarter production. As Ralph alluded to, it's more like watching it annually, year-over-year royalty volume growth. It's a hard to determine what the operators are going to do. Given the rig activity on and around our minerals, we're not concerned about where volumes are headed.

We're also hearing from some of the smaller guys, right, that at least as of recently, they had plans of turning on wells in the Haynesville in December, right, and that shouldn't come as a shock as everybody sort of plans for higher winter pricing. Whether that happens or not remains to be seen, but I think what you normally see from a seasonality standpoint in terms of people expecting higher gas prices in the winter, I think that's playing out again this year. Just, we just have to wait and see.

Charles Meade (Analyst)

I tell you, it's really hot for November down where I am in New Orleans, so. Anyway, thanks for the added detail. I appreciate it.

Ralph D'Amico (EVP and CFO)

Thanks, Charles.

Operator (participant)

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.

Chad Stephens (President and CEO)

Again, I'd like to thank our employees and shareholders for continued support. I'd also like to note that Ralph and I will continue to expand our investor marketing activities and outreach over the coming weeks and months. If you'd be interested in meeting with us, please don't hesitate to reach out to myself, Ralph, or the folks at Fink IR. We look forward to hosting our next call in March of 2025 to discuss our fourth quarter and full-year 2024 results. Thank you. Have a good day.

Ralph D'Amico (EVP and CFO)

Thank you.

Operator (participant)

That does conclude today's teleconference and webcast. You may now disconnect your line at this time and have a wonderful day. We thank you for your participation today.