Riley Exploration Permian - Q1 2024

Transcript

Operator (participant)

Good day, everyone, and welcome to the Riley Exploration Permian, Inc.'s first quarter 2024 earnings conference call. At this time, I would like to hand the call over to Mr. Philip Riley. Please go ahead, sir.

Philip Riley (CFO)

Good morning. Welcome to our conference call covering the first quarter of 2024 results. I'm Philip Riley, CFO. Joining me today is Bobby Riley, Chairman and CEO. Yesterday, we published a variety of materials which can be found on our website under the Investors section. These materials and today's conference call contain certain projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements. We'll also reference certain non-GAAP measures. The reconciliations to the appropriate GAAP measures can be found in our supplemental disclosure on our website. I'll now turn the call over to Bobby.

Bobby Riley (Chairman and CEO)

Thank you, Philip, and thank you again to everyone for joining us on today's call. Yesterday, at the close of the market, we announced the results of our first quarter in 2024. I'm pleased to report that Q1 was another outstanding quarter for Riley Permian, and we are on track to deliver our previously disclosed 2024 operating plan, targeting year-over-year oil growth with a reduction in CapEx. Our net oil production saw a 4% increase compared to the previous quarter, reaching an average of 14,200 barrels per day. Looking ahead to our Q2 guidance, we're forecasting a range of 14,400-14,800 barrels per day, and we expect the majority of our incremental growth to occur in this period and stabilize for the remaining quarters as we work towards achieving our year-over-year targets.

From an operational standpoint, we drilled 7 net wells, which represents approximately one-third of our projected total for the year. We released the rig in March and plan to resume drilling operations in June. Our team has achieved significant advancements in drilling efficiency by adopting cutting-edge technologies and streamlined processes. These improvements have allowed us to rely on a single rig for a portion of the year while still delivering double-digit volume growth. We completed four wells and brought six wells online during the period, benefiting from two drilled but uncompleted wells or DUCs from late 2023. On Tuesday of this week, we closed our previously announced bolt-on acquisition in Eddy County, New Mexico. This will expand our existing operating footprint in New Mexico by adding 13,900 contiguous net acres.

The acreage is largely underdeveloped, but is 99% held by production through legacy vertical wells. This acquisition enhances the optionality of our total development inventory by providing high-quality horizontal drilling locations, primarily in the Yeso Trend, including the Blinebry, Glorieta, and Paddock formations. Furthermore, the acquisition includes valuable infrastructure, such as saltwater disposal wells, which will optimize operations across our existing New Mexico footprint. We remain focused on creating long-term value for our shareholders and delivering predictable and sustainable growth for years to come. To achieve this, our capital strategy prioritizes discipline to allocate resources to support our growth objectives, while also delivering on our commitment to strengthen the balance sheet and return capital to shareholders in the form of dividends. Looking ahead, we remain excited about the opportunities in front of us, and we are well positioned to execute our 2024 plan and beyond.

We will continue to focus on operational excellence, cost control, and capital efficiency to drive long-term value creation for our shareholders. With that, I'll now turn the call over to Philip to provide more details on our financial results.

Philip Riley (CFO)

Thank you, Bobby. First quarter operating cash flow before working capital increased by 7% quarter-over-quarter, despite 2% lower oil prices. The largest driver of quarter-over-quarter improvement was our settled hedges, as lower priced legacy swaps rolled off in December and despite some generally strong prices during the quarter. Then production volume increases and cost reductions contributed to a combined $5.5 million of cash flow improvement. Oil price ended the quarter about $11 higher than at year-end, which in turn led us to book the non-cash derivatives loss and which drives the lower net income this quarter. As of today, that dynamic is already partially reversed with lower oil prices. The non-cash derivatives values flip-flop frequently by quarter, yet correspond infrequently with ultimate settled amounts, as one of the reasons we focus less on net income.

Reinvestment rate of operating cash flow into upstream CapEx was 45% on an accrual basis and 60% on a cash CapEx basis. The larger ratio of cash to accrual CapEx this quarter was driven by some larger prepayments, including on infrastructure for work that had not yet occurred, and that will drive success for the full-year development plan. We converted 40% of operating cash flow to free cash flow in the first quarter, representing continued improvement with this metric from prior years. Free cash flow declined quarter-over-quarter, but there's no concern there. First, we used cash CapEx for our free cash flow calculation, while many companies use accrual CapEx. If we had used accrual CapEx, free cash flow would have increased by 11% quarter-over-quarter. In the fourth quarter of 2023, at especially light cash CapEx, opposite of this quarter's dynamic...

... Second, we regularly encourage observers to focus on a four-quarter measure of free cash flow over a single quarter. We'll now turn it back to the operator for questions. Thank you.

Operator (participant)

Thank you, Philip. We will now take a question from Neal Dingmann from Truist Securities.

Neal Dingmann (Energy Research Analyst)

Morning, guys. Nice quarter. Philip, for you or Bobby, could you talk maybe a little bit more about the acquisition? Looked pretty positive, maybe in terms of, you know, what it added in terms of production, maybe how we should think about the incremental volumes throughout the year on this and, you know, impact on guidance and, you know, maybe even on the oil cut throughout the year. Just wondering how this might impact things.

Philip Riley (CFO)

Yeah, sure. I can start with that, Neal. This is Philip. You know, the acquisition, it, it's producing about 400 barrels a day. You know, that closed a couple days ago, so you really only get the benefit for about two-thirds of the year. So when you divide that by a full year, you know, it adds maybe 260 barrels a day, average, over the year. So some of what we're dealing with is, you know, the dynamic of averages over a year. So the guidance range we gave, 14.4-14.8, if you use the midpoint there, and if we held it flat, as Bobby was describing, that gets you to 14.5 for the year, right kind of smack in the middle of the previously disclosed guidance range.

You know, to reach that high end, we'd have to get to 15.3 on average for the remaining, you know, for all three quarters here. So we think it's, you know, pretty representative of a full year. The existing inventory... Or the existing production is, mostly, it's kind of a mix of some, a few small, non-horizontal, contributors there and then some, older vertical. We do like it for that underdeveloped horizontal inventory, which, we don't plan to drill this year. So that's, I guess, the color on how it affects our production ranges. You know, in general, we're excited about it. We like the idea of maintaining, you know, roughly a decade of inventory, and we think that this gets us there.

It's also got some invaluable infrastructure that we need both for our operations, and then frankly, we can, you know, even charge non-partners, neighbors, and such, the fees as they use our saltwater disposal wells and such. Does that answer the question?

Neal Dingmann (Energy Research Analyst)

Yeah. Great. That it certainly does. Good to hear. And then just to follow up, if you'd maybe, you or Bobby, just talk a bit on oil field services. It seems that both maybe just talk about cost and availability. It seems like if, you know, you're able to let the rig go, bring the rig back when you choose. It seems like you have, number one, just a lot of flexibility on availability side. So I was wondering, just is that the case? And then secondly, just on the OFS cost side, where do you all see it? Thank you.

Bobby Riley (Chairman and CEO)

Yeah, Neal, this is Bobby. I'll take that. So, yeah, we have a great relationship with the drilling contractor that's in the area that we're able to bring in and drill a batch of wells and then releasing to some of our offset partners there that to drill, but keeps them in the same area. As we go to more pad drilling type applications, it has... We have lower cost on rig moves and more efficiencies on days from spud to TD, et cetera. So those costs are really falling in where we want them to be. Otherwise, on the pressure pumping side, we're seeing a softer market so that we're getting more competitive bids and pricing. I think we talked about that dynamic as some of these larger mergers and acquisitions have occurred.

It's freed up a lot of frac teams and services that, as they want to maintain their market share, they're more aggressively pricing services for us. So we're taking advantage of that as we can right now in that market.

Neal Dingmann (Energy Research Analyst)

Yeah, love the flexibility. Thanks, guys.

Operator (participant)

Again, for those who would like to ask questions, please press star one on your telephone keypad and wait for your name to be announced. Our next question comes from the line of John White from Roth Capital. Please go ahead.

John White (Senior Research Analyst)

Good morning, and congratulations on closing your New Mexico acquisition.

Bobby Riley (Chairman and CEO)

Thank you, John.

John White (Senior Research Analyst)

Wanted to ask about the RPC Power project. In the press release, you said you put in another $5.6 million, and that completes the funding for the current project. So that's the funding. How would you describe the work out in the field on the actual infrastructure?

Bobby Riley (Chairman and CEO)

Yeah, I would say we're kind of right on schedule where we thought we'd be. We're installing 20 MW of power out there. We've had 10 MW solar for some time, and we're just now receiving the second package of generators to get us up to our total design. We're currently getting all of that stuff tied into our private use network, which basically allows us to self-distribute power to all of our wells. So I think operationally, that should be 100% operational, probably by the end of summer. And so far, I think we're really excited about that opportunity, at least for producing our baseload, and then looking at other opportunities that we might see coming our way with power.

John White (Senior Research Analyst)

Thanks for that. When it's fully up and running, how much of your electricity or your power needs will this project satisfy?

Bobby Riley (Chairman and CEO)

Yeah. So it's basically almost 100% of our power demand in Yoakum County, on what we call our Champions. When we first designed the infrastructure out there, we laid that network in place, and now that's, we're able to utilize that, and we'll be self-providing practically 100%. There might be one or two wells that's still on an isolated meter, but the majority of it will be self-generating.

John White (Senior Research Analyst)

That's great. And, does a similar opportunity exist on your New Mexico properties?

Bobby Riley (Chairman and CEO)

It does. As we're building out and looking at our infrastructure requirements in New Mexico going forward, we are, instead of tying individual meters back into the grid, we are installing, I don't know if it's the, the term is a private use network or our primary point of take from the provider out there, so that eventually we can tie our own gen systems into that as well. But that's a little bit long term. We probably won't get there this year, but we're still in the laying out. It has to do with establishing drilling schedules and timing to water infrastructure and all of that at the same time. But it's definitely what we do in our operation, and we will be doing that going forward.

John White (Senior Research Analyst)

Okay, thanks for the additional detail. I appreciate it.

Bobby Riley (Chairman and CEO)

Yeah.

Operator (participant)

For those who would like to ask question, please press star one on your telephone keypad and wait for your name to be announced. Our next question comes from the line of Jeff Robertson from Water Tower Research. Please go ahead.

Jeff Robertson (Managing Director on Natural Resource)

Thank you. To follow up on the power venture, Bobby or Philip, can you try to quantify the economic impact of supplying your own power to the Champions acreage, compared to the alternative, which might have been selling the produced natural gas just into the grid at a relatively low price?

Bobby Riley (Chairman and CEO)

Yeah, so that's what we're trying to do, is basically, increase the margins on the, on the hydrocarbons that we produce in the area. So, you know, as you know, as Waha goes negative, sometimes the residue gas has little or no value to us. And because we're able to take that residue gas in kind and power our gensets to offset our baseload production, our baseload operations. So from a individual well lease operating cost, it probably is somewhat neutral, but since we're a JV partner in the, in the, in the power company, you know, roughly we'll, we'll benefit from 50% of, of the, revenues from generating power.

Philip Riley (CFO)

35% ownership right now that we're set to benefit from, and we think it's kind of a high-teen type of return, Jeff. But that's a nice stable return, right? This isn't an oil well that's declining. So, it's something that we're excited about.

Jeff Robertson (Managing Director on Natural Resource)

Is it fair that the other part of the return is just coming from having a more reliable source of power, which might lead to-

Bobby Riley (Chairman and CEO)

Ab- ab-

Jeff Robertson (Managing Director on Natural Resource)

- fewer unscheduled issues?

Bobby Riley (Chairman and CEO)

Absolutely. Absolutely. I mean, that was one of the primary reasons there is because we're kind of at the end of the grid there, and we were experiencing some brownouts or frequent power disruptions that cost an extensive amount of money to bring some of those wells back on. So, that's again, it's one of the main reasons for doing this, is more reliable power.

Jeff Robertson (Managing Director on Natural Resource)

In New Mexico, you talked about the saltwater disposal, excuse me, the wells you acquired in the most recent acquisition in your SWD assets that serve that area. Do you need to spend much capital to either upgrade or enhance those to be able to handle Riley's activity, plus be able to maybe take third-party volumes?

Bobby Riley (Chairman and CEO)

I think we're gonna focus on just tying those wells in with some flowlines to loop them into our system, to give us excess capacity. Primarily, we want to make sure that our 100% of our disposal requirements are met with some spare capacity for emergencies and stuff like that. But as we continue to look at opportunities there, I think there would be some commingling where you could be charging some third party. But for the most part, right now, we're 100% focused on our own disposal requirements.

Jeff Robertson (Managing Director on Natural Resource)

Bobby, will you ultimately get some LOE benefit from as you work through that process?

Bobby Riley (Chairman and CEO)

Yeah, we should. I mean, basically, the more wells that we have, you know, the less amount of water each well has to take, which means less energy it takes to push it downhole, et cetera, like that. So that gives us some savings there. It just gives us some redundancy, some fallback, spare capacity, and then, the ability to, you know, bring in some third-party water if we, if we see that we have the excess capacity. Yeah. Moving water is important to us out there, and that's one of our main focuses, to make sure we stay on top of that.

Jeff Robertson (Managing Director on Natural Resource)

Thank you.

Operator (participant)

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.