Riley Exploration Permian - Q4 2023

Transcript

Operator (participant)

Welcome to the Riley Exploration Permian 4th Quarter 2023 Earnings Conference Call. At this time, participants are in a listen-only mode, with a question-and-answer session to follow at the end of the presentation. I will now hand the call over to Philip Riley, Chief Financial Officer, for introductions. Mr. Riley, please go ahead.

Philip Riley (CFO)

Good morning. Welcome to our conference call covering the 4th Quarter 2023 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 in 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 4th Quarter and full year 2023. I'm pleased to report that 2023 was another outstanding year for Riley Permian. I'm going to discuss some of the high points for the year, our operations highlights, and then turn the call over to Philip. We encourage questions and discussion at the end of our call today. Our overall net oil production increased by 49% year-over-year to 13.2 MBO per day, and total net equivalent production by 62% year-over-year to 18.6 MBOE per day. Riley achieved a 22% year-over-year organic growth in net oil production excluding the New Mexico acquisition.

Proved reserves increased reaching 108 million BOE, an increase of 39% year-over-year, and proved developed producing reserves reached 60 million BOE, increasing 23% year-over-year. We generated $246 million of adjusted EBITDA, $207 million of operating cash flow from continuing operations, and $70 million of free cash flow. We continue to invest in our business with total cash capital expenditures before acquisitions of $136 million, corresponding to a reinvestment rate of 66% of cash flow from operations. We remain committed to returning value to our shareholders, most recently paying our 20th consecutive quarterly dividend totaling $28 million for the year. We remain focused on creating long-term value for our shareholders and delivering sustainable growth for years to come. The company successfully launched operations for the initial phase of its baseload power generation facility operated by our joint venture, RPC Power, LLC.

Construction of the onsite power generation facility was mostly finished during 2023, with temporary power generation commencing in November of 2023. The onsite power generation facility is anticipated to be fully operational by spring of 2024. Utilizing post-processed take-in-kind natural gas as fuel, the thermal generation facility currently provides power to around 36% of our Yoakum County, Texas operations. I will note that the last well we drilled was powered 100% by self-generated electric power. Regarding our EOR pilot, in early 2024 we successfully installed CO2 compression equipment and are currently injecting 12 MMCF per day of CO2 into the reservoir. This includes 10 million cu ft per day of purchased CO2 and 2 million cu ft per day of recycled CO2. As we move forward, our testing will involve closely monitoring the movement of CO2 and reservoir fluids using tracers.

The insights gathered from the project thus far have been invaluable, and we anticipate compiling a comprehensive feasibility report by the end of 2024. We've demonstrated our ability to inject substantial volumes of CO2 into the reservoir with minimal to moderate breakthrough. Looking forward, our expansion opportunities hinge on several factors, including the availability of industrial CO2 emissions, which was the basis of our initial thesis, ongoing depletion of primary production, and the subsequent repressurization of the reservoir with water to reach the minimum miscibility pressure for optimal CO2 effects. This sets the stage for promising long-term opportunities in enhanced oil recovery. In 2023, and most recently, we achieved significant drilling efficiency improvements, with the time from spud to total depth decreasing by 50%. Additionally, drilled feet per day increased by 58%.

Leveraging these efficiencies, we set our company's record for drilling the quickest 1.5 mi well, completing spud to total depth in just 4.78 days. These gains were driven by optimized connection practices, new agitator technology, and increased bit runtimes. Moving forward, we are steadfast in our commitment to leveraging technology and best practices to enhance efficiencies further. Lastly, building on this momentum, we witnessed the successful integration of our New Mexico acquisition with our existing asset base, representing a significant milestone for our company. This integration has allowed us to establish operating synergies through a shared supply chain across the portfolio, leading to streamlined operations. At this point, I'll turn the call over to Philip.

Philip Riley (CFO)

Thank you, Bobby. Just a few minor additions here on trailing financial data. For the full year, cash flow increased by 22%. Full-year cash flow benefited from three-quarters of new volumes from our 2023 New Mexico acquisition, as well as the organic growth mentioned. We certainly could have chosen to reinvest more and to grow volumes faster, but we were focused on growing free cash flow. So halfway through the year last year, we intentionally slowed down some of the second-half activity to even out some front-half weighted activity and spend, and as we had confidence in hitting full-year production volume targets. That action helped contribute to the 26% year-over-year increase in free cash flow to $70 million. We allocated 39% of free cash flow to dividends, increasing total dividends paid per share by 9% year-over-year.

The balance was used to repay debt, which was lower by $30 million in the fourth quarter alone. That helped contribute to an $88 million or 26% year-over-year increase in shareholders' equity. Looking ahead, we're excited about our 2024 plan. Our capital program midpoint is just over $120 million, of which 78% is allocated to development operations and capitalized workovers. We're looking to drill approximately 22 wells this year while turning to sales a few more, with the benefit of having some drilled uncompleted in inventory. On a per-well basis, we're forecasting material savings year-over-year on account of both efficiencies, some of which Bobby described, as well as industry cost reductions such as casing, tubing, and chemicals. We anticipate investing materially in infrastructure across both assets, which include gas takeaway, electrical upgrades, and other aspects that will lead to better operations for 2024 and beyond.

This is separate from the power JV, which is accounted for as a contribution to an equity method investment. We have one final expected contribution there this quarter for about $5.5 million. Thus far, this has come in below cost estimates. As it translates to free cash flow, the combination of higher forecasted volumes with lower spending act as a catalyst for growth, though obviously contingent on oil price. We forecast needing WTI in the low 60s or down 20% year-over-year from 2023 to hold free cash flow flat year-over-year, and that assumes no reduction in growth CapEx, whereas we probably would start to slow down at those price levels.

If oil averaged $75 for the remainder of the year, we see the potential for free cash flow to grow year-over-year by 50% or more in excess of $100 million, which would correspond to 20% yield on the current market value of our equity. In that scenario, this would bring our reinvestment rate down to 50%-55% of operating cash flow, with the inverse highlighting a very robust 45%-50% conversion rate of operating cash flow to free cash flow. Another metric I like is the ratio of free cash flow to CapEx, which in this case would be more than $0.80 of free cash flow generated for each dollar of CapEx invested. We encourage you to compare these types of metrics to other E&Ps based on the guidance they have provided.

Some companies may have a bit higher free cash flow conversion rate, but they're generally not growing free cash flow like we anticipate doing, whereas many of the companies we've analyzed have weaker forecasts. I'll turn it back to Bobby now.

Bobby Riley (Chairman and CEO)

Thank you, Philip. Again, thank you for your support. We remain focused on driving profitable growth and investing in our business for the long term. Operator, you may now open it up for questions. Thank you all for joining us today.

Operator (participant)

At this time, if you would like to ask a question, please press star followed by the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. The first question comes from the line of Neal Dingmann from Truist Securities. Please go ahead.

Neal Dingmann (Energy Research Managing Director)

Morning, Bobby and Philip. Nice results. Guys, my first question is just on this 2024 plan, and I'd call it a capital efficiency plan. Could one of you all just discuss and Philip, you kind of were alluding to this. It seems like now the situation you're in, could you discuss maybe the needed growth, what's your baseline decline, how those things sort of stack up in order to hit that sort of 10% growth target? It seems to me like you guys are kind of in an advantaged situation, and I'm just hoping for a bit more color on maybe as far as rig activity and those things needed in order to hit this.

Philip Riley (CFO)

Yeah. Good morning, Neil. This is Philip. We do find ourselves in an advantaged opportunity. We like where we were coming out at the end of the year last year and what we're going into this year. We talked about 22 wells, just over 50% reinvestment rate, and that leads to the high free cash flow. We've got those savings on the incremental free cash flow. I think we're going to see probably the most boost from the volume growth, even at flat prices. Our hedge book is yet another thing that should be noted. It's looking better coming into this year than last. And then the CapEx savings, as you're talking about with the efficiencies, those are the main drivers for that kind of year-over-year kind of 50% type of increase we see at current prices, and we feel pretty good about that.

Is that any more question or any more color?

Neal Dingmann (Energy Research Managing Director)

No, you absolutely did. And maybe just to follow up to that, just maybe talk a little on capital allocation. Again, you've got a great dividend. What do you think about buybacks, and how does sort of debt repayment sort of fit into this, given as I agree with you, I think the free cash flow could be pretty material. So I'm just wondering what the thoughts are with this year.

Philip Riley (CFO)

Right. And I guess one more thing I'll say on the allocation is when we think about growth, we think about growing free cash flow. Production, obviously, impacts that, but I just demonstrated there's a few levers to grow free cash flow. It doesn't have to be just the production growth. So it may have a little bit slower volume growth this year, but we are excited about that free cash flow growth. So on allocation, we have three buckets of primary allocation right now. First, as you noted, we have a large dividend. The fixed versus variable nature of that dividend demonstrates our confidence in our future business. We've grown the dividend every year. We hope to grow it going forward. Oil prices, obviously, impact our cash flows, but we have confidence of the dividend coverage here, even at very low oil prices.

I'd say probably about $40 with our current hedge book. Second, we continue to identify opportunistic investments. Those could be small acquisitions. It could be this power JV, something like that. I think we tend to find interesting things to invest in, and I think investors should appreciate that. Our primary purpose is to run the business, but identify opportunities, earn a return of capital, and ultimately then return that capital. So I think the third bucket I think about is that excess after those first two is used for debt paydown. What's the right level? Currently, we're on a book basis kind of 45% debt to cap. Maybe it's down at the 25%-30% debt to cap on a long-term basis.

But as we've talked about on prior calls, I think what you'll find is us pay it down naturally, and then as we get to lower leverage levels, I think it's potential to use it again, right? Rinse and repeat. We've got the credit facility there. I think we're comfortable with that going forward. And then, look, with debt paydown, you made an allusion to buybacks. I think with debt paydown a bit more in the future, then we can explore other forms of shareholder return.

Neal Dingmann (Energy Research Managing Director)

Great to hear. Thank you so much. Nice job, guys.

Operator (participant)

Your next question comes from the line of Jeff Robertson from Water Tower Research. Please go ahead.

Jeff Robertson (Natural Resources Managing Director)

Thank you. Good morning. Bobby or Philip, given Riley's strong cash flow generation and what looks to be 50% reinvestment rate in 2024, can you talk about how you evaluate acquisitions that could complement the free cash flow capacity of the company?

Bobby Riley (Chairman and CEO)

Yeah. This is Bobby. Let me take it to begin with and let Philip give his comments also. Obviously, most of the production or most of the history of this building is through organic drilling and development. So when we look at acquisitions, we're looking for something that has actually strong inventory available, something that's close to or in the same neighborhood as some of our existing assets so we can optimize efficiencies. One of the advantages that we had this year is with the integration of the New Mexico assets, we're able to high-grade our drilling inventory and actually shift some of our development if we choose to the New Mexico Yeso trend, which really gives us, I think, a real keen advantage on being at the right place at the right time. But we continue to see numerous bolt-on opportunities.

Like I say, the key thing is not so much a PDP acquirer, basically, but buying something that has a large inventory and especially held by production or something like that is something that we're focused on.

Philip Riley (CFO)

Yeah, that's exactly right. I'd just add on to that in that we earn our best returns on development. And while the cash flow is nice, you got to pay for the cash flow. You got to capitalize that. So if we can find acquisition with a disproportionately larger amount of undeveloped inventory, that's attractive to us, allows us to earn those higher returns.

Jeff Robertson (Natural Resources Managing Director)

Bobby, you mentioned the Yeso. Is it part of what's driving the production growth at a lower capital spend in 2024 in your plan, just the performance of those wells and how they impact the overall weighted asset base?

Bobby Riley (Chairman and CEO)

So basically, I want to say that we're very detailed in research before we go spend a bunch of money drilling wells. I mean, we gather a lot of geological engineering data to put together the plan that we see is going to get the best results from efficiencies and higher EURs. We're excited about what we've seen in the first four or five wells that we drilled in that play. And as we did when we started in the Yoakum County deal, the first thing to do is to make sure you have the correct infrastructure in place, gas takeaways, and things along that nature to make it a much smoother deal. So where we are this year is just basically we have two assets in front of us.

They're pretty comparable, really, at where we are right now on rate of returns and production profile, but it just gives us an opportunity to be selective.

Jeff Robertson (Natural Resources Managing Director)

And then lastly, just on the CO2 project in Yoakum County, is the feasibility study one of the key elements, Bobby, to being able to go talk to industrial emitters and convince them to participate in your project?

Bobby Riley (Chairman and CEO)

Most definitely. I mean, basically, we know we have, we're all sitting in the Greater Wasson Field, whether it's contiguous to our east. It's been CO2-flooded for decades. And I think what we've demonstrated is that we have the ability to store a lot of CO2 also by enhancing oil recovery. So we're hoping those opportunities open us, but we'll be ready with our feasibility to be the sink or the storage.

Jeff Robertson (Natural Resources Managing Director)

Thanks. I'll jump back in the queue.

Operator (participant)

Again, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Thank you. Your next question comes from the line of Noel Parks from Tuohy Brothers. Please go ahead.

Noel Parks (Energy Research Managing Director)

Hi. Good morning.

Philip Riley (CFO)

Hi. Good morning, Noel.

Noel Parks (Energy Research Managing Director)

Good morning. Just wanted to check on a couple of things. You mentioned that you were seeing some benefit on costs from casing, tubing, and chemicals having come back. Where do you think we stand in sort of the leveling off of inflation? Do you think your current pricing is pretty much stabilized? Do you think there's any more to go?

Philip Riley (CFO)

I can try to address that, Noel. I hate to try to predict the future here. It does feel like it's stabilized. It feels like we're seeing either flat to down on most of the costs. Some of that was efficiency, like I said. Some of the items like casing and tubing, clearly, you can type in a Bloomberg and see how much hot-rolled steel has come down. So some of that is certainly material. Some of that's impacted by China, of course. Other areas, though, I think the chemicals is something that feels pretty material. Other areas, we'll see. We've tried to lock in prices and services as much as we can for the year and feel pretty good about that. But you're always going to have some floating aspect out of our control.

Noel Parks (Energy Research Managing Director)

Sure. Fair enough. And just curious, related to the larger service environment, what are activity levels like across your neck of the woods in the conventional Permian? Is this sort of a flattish year as far as overall rig activity for the industry, or do you see it creeping up?

Bobby Riley (Chairman and CEO)

Well, specifically, where our assets are located, I would guess in New Mexico, it would probably be pretty flat to last year. We're in constant communication with the offset operators in our area trying to share some services and drilling rigs and stuff like that. So I kind of think I see a pretty flat drilling profile for that area. The Texas asset may, as far as our immediate area, probably be a little bit slower than it has been in the past. But I mean, that's what I see, Philip.

Philip Riley (CFO)

Yeah. The Texas area, our neighboring assets are more developed than what we have. We've got more running room with inventory, and we're just finding that our neighbors have either mostly drilled up what they have or have chosen to slow down for different reasons.

Noel Parks (Energy Research Managing Director)

Great, thanks a lot.

Operator (participant)

Your next question comes from the line of Jeff Robertson from Water Tower Research. Please go ahead.

Jeff Robertson (Natural Resources Managing Director)

Thank you. Philip, to follow up on the power JV in Yoakum County, can you talk about what impact that will have on field operations and reliability? You mentioned that the most recent well you all drilled out there was powered by electricity and whether or not that has a material impact on the capital cost of new wells.

Philip Riley (CFO)

Yeah. I'll start, and then maybe Bobby can add on to it. On costs, we don't forecast a material improvement in operating costs. I think it's going to be mostly flat, or it's going to be immaterial relative to our overall company to really move the needle. That said, we are an investor in it, so we enjoy getting both sides there. On the capital, though, as you note and as Bobby noted in his intro, we did drill a well there using electric power. That's exciting. That's on the capital side. That could have some reduction there. Generally, we find electric power on a relative basis to be less expensive than diesel. And so that's pretty exciting. Again, it's not a major mover, but little things like that can make a difference. Bobby?

Bobby Riley (Chairman and CEO)

Yeah. I'll also tell you that basically, this gives us a great use for our gas in the basin before we try to put it in the pipelines to get it down to the Gulf Coast so we get an uplift kind of in being an investor in the power JV. And we're also looking for reliability on our operations. When we had brownouts or dirty power from our location in the co-op that we were in, we're able to our goal is to increase our runtimes and efficiencies with cleaner power and basically the use of our residue gas that we're taking in kind from our processor.

Philip Riley (CFO)

Everybody in the basin you see is experiencing weak natural gas prices, and we're doing everything we can to try to enhance that value, what we can do within our control. And so we think this is one way, and this is probably the first step for us.

Jeff Robertson (Natural Resources Managing Director)

Seems like the goal is to create value for natural gas in the field as opposed to selling it for a low price and sending it off to the Gulf.

Bobby Riley (Chairman and CEO)

Exactly.

Jeff Robertson (Natural Resources Managing Director)

Lastly, Bobby, there's obviously been a lot of consolidation in the Permian Basin, and Riley has focused more on conventional long-lived assets. Do you get a sense or what's your sense of the market for those assets over the next, let's say, two years as companies digest their asset basis?

Bobby Riley (Chairman and CEO)

The market for conventional or unconventional?

Jeff Robertson (Natural Resources Managing Director)

Conventional.

Bobby Riley (Chairman and CEO)

I wanted to clarify. Well, obviously, there's a smaller bucket to choose from. I mean, there's a lot of people with unconventional assets out there that they're drilling off some of their top inventory, and a lot of people are starting to look back at conventional opportunities for both horizontal and basically secondary operations and stuff like that. So I mean, we see assets that have a tremendous amount of PDP involved, thousands of vertical wells. It's not the most exciting thing that we want to be focusing on. I mean, like we alluded to earlier, the assets that we're looking for has running room with a drill bit. And I think we'll have a chance to look at some consolidation opportunities in our area and look at some upcoming new plays.

Jeff Robertson (Natural Resources Managing Director)

Thank you.

Operator (participant)

Your next question comes from the line of Gary Kennedy from Kennedy Trust Investments. Please go ahead.

Philip Riley (CFO)

Good morning.

Operator (participant)

I'm sorry, Mr. Gary. Please go ahead.

Gary Kennedy (CEO)

Yeah. Okay. I just want to congratulate you on your hedge book. Whoever's doing that did a great job. They look so much better than they did last year, and I see your natural gas is hedged about $2 over what natural gas prices are selling for. And going to collars on the oil seems like a heck of a good idea. So congratulations there. And hopefully, the good work will continue.

Philip Riley (CFO)

Thank you, Gary.

Operator (participant)

Again, if you would like to ask a question, please press star followed by the number one on your telephone keypad. The next question comes from Sandra VandenBrink from Tokay Capital Corp. Please go ahead.

Sandra VandenBrink (CIO)

Good morning, gentlemen. Congratulations on a good quarter. Some time ago, you had put out that you were looking to sell shares to raise cash. I wondered what had happened to that, if anything.

Philip Riley (CFO)

Sure. Sandy, this is Philip. Thanks for joining this morning.

Sandra VandenBrink (CIO)

Hi.

Philip Riley (CFO)

Last fall, we did have a registration statement for an at-the-market facility. That's something that we saw as opportunistic given the various opportunities we're looking at, including that power JV. It remains outstanding there. As you can tell, we've used it very limited amount. So far, we've been financing the business and these new opportunities through cash flow. So far, we have no plans, nothing else to announce at the moment, any change from that.

Sandra VandenBrink (CIO)

It'll remain open until?

Philip Riley (CFO)

It does, but I encourage you and others to think about it no differently than anything else. I mean, just like you see companies this morning announcing overnight deals to do some issuances, any public company has the ability to do that. Ours is an at-the-money sorry, at-the-market type of facility there. It can allow us to do it in small amounts, but it's honestly not too different there from a regular way, secondary or primary issuance.

Sandra VandenBrink (CIO)

Okay. Thanks, Philip.

Philip Riley (CFO)

Thank you.

Operator (participant)

As there are no further questions at this time, I would like to thank our speakers for today's presentation, and thank you all for joining us. This now concludes today's conference. You may now disconnect.