Riley Exploration Permian - Q3 2023

Transcript

Operator (participant)

Thank you for standing by. At this time, I would like to welcome everyone to the Riley Permian third quarter 2023 earnings release and conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. After the speaker's remarks, if you'd like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question again, press star one. Thank you. Philip Riley, CFO, you may begin your conference.

Philip Riley (CFO)

Good morning. Welcome to our conference call covering the third quarter of 2023 results. I'm Philip Riley, CFO. Joining me today are Bobby Riley, Chairman and CEO, and Kevin Riley, President. 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. Good morning and welcome to our Q3 2023 earnings call. We are pleased with our performance in the third quarter, in which we met or exceeded plans across all metrics. Here are some of the accomplishments in the past quarter. Averaged oil production of 14,000 barrels of oil per day are 19.9 thousand barrels of oil equivalent per day, generated $72 million of Adjusted EBITDAX, $53 million of operating cash flow, and $31 million of free cash flow. We reduced debt by $10 million quarter-over-quarter. We paid dividends of $0.34 per share in the third quarter, totaling approximately $6.8 million. Also, after the end of the quarter, the company declared a cash dividend payable on November 9, 2023, of $0.36 per share, which represents a 6% increase in the dividend amount.

We planned for modestly lower production in the third quarter and also experienced some unplanned third-party gas midstream disruptions that caused us to curtail production. We see other producers impacted by midstream constraints in similar ways. Optimizing infrastructure will remain a core focus for us into 2024. We remain focused on strategic growth, operational efficiency, and returning capital to our shareholders while reducing the debt we took on to acquire the New Mexico properties. We look forward to sharing more details about our performance during this call. I will now turn the call over to Kevin to discuss operational results for the quarter.

Kevin Riley (President)

Good morning, and thank you, Bobby. I will now discuss the operating results for Q3. Riley Permian achieved production at the high end of guidance, with capital spending below the low end of guidance for the quarter. We sold 19,939 barrels of oil equivalent and 14,043 barrels of oil per day. The production results represent a combination of planned and unplanned reduction dating back to May of 2023, and is a decrease of approximately 6% from the previous quarter. We remain focused on year-over-year production growth instead of quarter-over-quarter as we emphasize the value of free cash flow, but look to better smooth production growth out in 2024.

As previously disclosed in our second quarter 10-Q, the unplanned portion of the decrease in production is attributed to the unexpected maintenance issue at a third-party processing facility servicing our Red Lake assets in New Mexico. Upon receipt of the notice in mid-July from the midstream provider, the company began voluntary shut-in procedures on its impacted wells to forgo the flaring of natural gas until the volumes could be processed again. As of early August, substantially all of the impacted production had been reestablished and the company resumed operating at or near production levels before the disruption. The company continues to work with third-party midstream providers, along with evaluating alternative options to optimize and secure long-term, sustainable midstream capacity.

Along those lines, we are in the final phases of commissioning phase I of our on-site power generation and hope to have the first generator set operational within the coming weeks. Lease operating expenses were $9.21 per BOE within the company's previously announced guidance of $8.50-$9.50 per BOE for the third quarter. We've continued to incur additional expenses from the newly acquired properties, along with increased workover activity associated with optimizing production. The company incurred $30 million in total accrued capital expenditures during the third quarter, lower than the company previously released guidance for, primarily due to the timing of certain infrastructure projects.

During the third quarter, the company drilled three net operated horizontal wells, completed 4.7 net operated wells, and turned to sales 5.7 net operated wells, some of which did not come online until the latter half of the quarter. The company had previously decided to slow down in the fourth quarter while being faced with declining commodity prices and rising service costs. However, the company adapted to the changing environment and has since been able to secure certain services and tangible items for the remainder of 2023 and most of 2024 at favorable cost, with new well costs averaging 15%-20% less than similar type wells drilled and completed in late 2022.

While substantial production contributions for the current year are not anticipated, we have commenced a drilling program in the last few days that anticipates drilling four net, completing three net, and turning to sales one net operated well during the fourth quarter. I will now turn the call over to Philip to discuss our financial results.

Philip Riley (CFO)

Thank you, Kevin. Third quarter 2023 operating cash flow before changes in working capital increased by 22% quarter-over-quarter to $63 million, as $10 higher oil prices more than offset a 1,000 barrel per day production decline. Quarter-over-quarter, realized oil prices were up 13%, realized natural gas prices were up to $0.58 from a very low $0.02 last quarter, and realized NGL prices were up $3, or nearly 60%. Improved pricing benefited from improved basis differentials. I'll caution that some of those improvements have already reversed in October. Increased negative hedge settlements offset 29% of price increases. So differently, 71% of price increases were realized. Operating costs per BOE were flat quarter-over-quarter. LOE increased following some downtime in workovers, which was offset by lower G&A.

CapEx declined by 24% on an accrual basis and by 35% on a cash basis, driven primarily by our planned slowdown in activity following the very active first half of 2023. Reinvestment rate, defined as cash CapEx over cash flow from operations before changes in working capital, was 50% for the quarter and 76% for the nine months through September. We're forecasting that the reinvestment rate could fall below 70% level for the full year. We're also hopeful that this level of third quarter spending could be more indicative of quarterly run rate levels than the higher spending level in the second quarter of this year. Looking to the fourth quarter CapEx and beyond, we're quite encouraged by what we're seeing. We're procuring services and inventory at improved rates, as Kevin discussed.

We're realizing operational synergies, including sharing rigs or other services across both assets, and we're generally making efforts to smooth our development pace, which ideally corresponds with smoother quarterly spending cadence. The combination of higher operating cash flow and significantly reduced CapEx led to $31 million of free cash flow for the quarter. The allocation of this quarter's free cash flow was $10 million for debt paydown, $7 million for the dividend, with the balance to working capital. Year to date, the allocation has been 55% to dividends and 45% to the balance sheet. Currently, we're forecasting good free cash flow in the fourth quarter, despite modestly lower production and lower prices. The majority of fourth quarter free cash flow will be used for debt reduction.

We're hoping to reduce the total balance by an additional $25 million by year-end, which is somewhat oil price dependent. This would lead to an increase in the full year allocation percentage to de-levering versus dividends, maybe closer to 60% delivering and 40% to dividends. On our capital base, we ended the quarter with $400 million of principal value of debt, including $190 million principal value on the unsecured notes. Shares outstanding as of the beginning of November, including unvested amounts, total 20.4 million, an increase of approximately 1% year-over-year. I'll now pass it back to Bobby for closing.

Bobby Riley (Chairman and CEO)

Thank you. And again, we value your time and interest in our company. We are pleased with our performance in the third quarter and are confident that our strategic focus and operational excellence will continue to drive growth and profitability to our shareholders. Operator, you may now open the call up for questions.

Operator (participant)

Thank you. To ask a question, please press star one on your telephone keypad. Your first question is from Bert Donnes of Truist. Please go ahead. Your line is open.

Bert Donnes (Financial Analyst)

Hey, good morning, guys. On the first question, I just wanted to touch on M&A. You seem to be pleased with the results you've seen in the New Mexico side of things. So I'm just trying to understand, are you seeing more opportunities to add assets on the Texas side or New Mexico?

Kevin Riley (President)

We're seeing more opportunities in New Mexico right now as the Texas side that adjoins our acreage is mostly PDP, but remain opportunistic in both areas.

Bert Donnes (Financial Analyst)

Would you characterize it as, you know, similar sizes, or is there any difference from the last deal?

Kevin Riley (President)

There's multiple sizes. There was recently a large package, but we see also several smaller bite-size assets.

Bert Donnes (Financial Analyst)

I appreciate that. Then on the dividend increase, it sounds like you guys are, you know, shifting towards the balance sheet for the near term, but by, you know, consensus and our estimates, you know, there is a significant jump in free cash flow next year. So I just wasn't sure, is that strategy, you know, maybe gonna carry into 2024, or do you think you'd reevaluate and maybe pivot to more dividend or share repurchases even next year?

Philip Riley (CFO)

Yeah, sure. Thanks, Bert. This is Philip. I would say that we wanna get the dividend in line with overall allocation. I think we have one of the highest allocation rates for a base dividend, you know, frankly, in the industry, especially among small caps. We put out some materials you'll see in our presentation, allocation suggesting this is... It's been more than 50% year to date.

I think that'll decline for the full year as we get additional free cash flow and allocate more to debt pay down. I think next year you shouldn't be surprised if that decreases a bit. We're still increasing at an absolute basis, but we're just talking about percentage allocation. We want to remain flexible. We recognize that paying down debt accretes equity value to shareholders indirectly. You know, you can forecast what we're going to be doing for free cash flow. We'll be paying roughly $27 million-$30 million in a dividend, assuming that's approved next year. You got the balance to the debts that's worth, you know, $2-$3-$4 there by itself.

Bert Donnes (Financial Analyst)

Very helpful. Thank you, guys.

Operator (participant)

Your next question is from Noel Parks of Tuohy Brothers. Please go ahead. Your line is open.

Noel Parks (Managing Director of CleanTech and E&P)

Hi, good morning.

Philip Riley (CFO)

Morning.

Noel Parks (Managing Director of CleanTech and E&P)

So, just on a couple. You know, I was just interested in your thoughts on the hedging environment right now. We certainly been having some volatility on the oil side and have seen people maybe getting a little more opportunistic overall in laying in hedges. So I guess, as you look ahead out to the curve, are you sort of more concerned with protecting the downside or more about sort of preserving upside?

Philip Riley (CFO)

Yeah, sure, Noel. It's a bit of both, and to be honest, we've got a pretty systematic hedging process where we're not trying to be too speculative. We put on new volumes in the spring at the time of closing the acquisition and taking on the financing. That was a mix of collars and swaps. What I'd say generally is that as cash flows, development gets near term, we're gonna wanna protect those a bit more with some swaps for certainty of the cash flow and given commitments, rigs, pipe, so forth. As you go out, and especially with a backwardated curve, we're using more collars. That has been helpful to us, even this past quarter. It gives you a range, you know, you're not settling there necessarily for cash.

We had quite a bit of cashless settlements, even this past quarter. So I think we'll continue that strategy. We're in a good place right now. We wanna have a program that protects that downside, and then retains some of the upside as well. We're certainly not giving away the upside. I think that can be a misconception. We did use leverage for this asset, and so, when you've got a small change in the price of oil, yes, you've got some negative settlements, but the asset value and the cash flow more than offsets any of those, any of those settlements, and especially on a hedge basis or a levered basis, excuse me. You can recognize that an increase, small increase in asset value, when you're 35% levered or so, has a disproportionately large impact on equity value.

Noel Parks (Managing Director of CleanTech and E&P)

Sure. Absolutely. And then just thinking about the infrastructure, gas infrastructure, third-party issues that cropped up. I guess, as you look ahead, any changes in your thoughts as far as what sort of spending you might be doing, looking to, I don't know, head more towards trying to either shift vendors or you consider contributing some capital of your own towards improving infrastructure. Just any changes in your thinking on that recently?

Kevin Riley (President)

Our view on that is somewhat stayed consistent, as we've always been looking for opportunities to better optimize the field and production and long-term takeaway in both assets, both the legacy and the new. We do see opportunity to continue and invest alongside current midstream providers, in addition to opportunities that we'll take on our own. But I don't think that will materially sway capital allocation or the amounts of capital we spend going forward relative to what we have in the past.

Noel Parks (Managing Director of CleanTech and E&P)

Sure. I mean, in a perfect world, I guess for Riley and then the other producers that offset you. In a perfect world, would it just be sort of, you know, just unlimited capital to get out and fix and upgrade a bunch of different, you know, facilities or pipelines? Or is it just one of those things that there's only so much you can do, you know, so fast, just given, you know, trying to keep your current infrastructure up and running and, you know, sort of making changes incrementally?

Kevin Riley (President)

I think there's a combination of both. Both assets are challenged with different midstream constraints or issues. New Mexico is more of a legacy system, so older pipe, looking to help build and put some more integrity into that system for sustainable gathering, in addition to plant capacity expansions, both of which are currently ongoing in New Mexico and Texas. So we do have line of sight into 2024 for some more capacity. In addition to that, we have our own internal projects such as the on-site power generation, which, as I mentioned, that will be coming online shortly, which will utilize some infield gas, along with other initiatives we are working on.

Noel Parks (Managing Director of CleanTech and E&P)

Great.

Philip Riley (CFO)

[crosstalk] Yeah, just to add one more thing, Noel. You know, we do see, we do see this as an opportunity, for, for capital investment. Some of it might be remediation, but some of it is, is absolutely an opportunity for investment. This goes back to Bertrand's question on capital allocation, ensuring we have liquidity to capitalize on these opportunities. So what's interesting about this, it can be capital intensive, but we're finding smaller, more modular type of opportunities. An example is the power, Kevin mentioned and other things that could be analogous to that. What's interesting for that, when you mix it with an E&P, is the type of decline profile that has, which is typically flat or an even an incline.

So these are things that we're excited about, we're working on now, and, you know, we're earmarking some capital, potentially for next year.

David Dernick (Private Investor)

Okay, great. Thanks a lot.

Operator (participant)

Your next question is from David Dernick of the Dernick Companies. Please go ahead. Your line is open.

David Dernick (Private Investor)

Good morning, gentlemen. My question for you today is more operational. Can you give us any insights into the ongoing repressurization, CO2 water flood that you have going on the Texas side? And are there any plans to expand that? And then secondly, are there any updates on any movement for the potential sequestering of the CO2 project?

Bobby Riley (Chairman and CEO)

David, this is Bobby. I'll start that. We're continuing the pilot program on what we call our Brushy Bill lease. We have what we believe as obtained miscibility pressure over the last 30-45 days. And we're at the point now where as we're injecting gas, we see production response. As we shut the gas off, the production drops. So we do know that we are in a miscible state. So it's still a long-term project, though, for us to evaluate what the ultimate impact could be in a field-wide application. But so far, we're encouraged with what we're seeing in the field. I don't know exactly how to discuss this, the carbon sequestration.

You know, we continually look for opportunities out there because that would obviously have a tremendous impact on the viability of a wider spread tertiary project using CO2. But, you know, at the current time, what we're seeing out there doesn't really compete for capital. And it's a little early for us to take on tremendous volumes of CO2, but, you know, it's on our radar, David, and we're looking for that opportunity as they evolve.

David Dernick (Private Investor)

Okay. Thank you, gentlemen.

Operator (participant)

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