PHX Minerals Inc (PHX) 2020 Q4 法說會逐字稿

Thank you for joining us today to discuss our fiscal 2020 results. With me on the call today for prepared remarks are Chad Stephens, President and Chief Executive Officer and Freda Webb, Vice President of Mineral Operations. After the prepared remarks, we will open up the call to a Q&A session.

The earnings press release that was issued earlier today is also posted on the 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, we will make forward-looking statements regarding expected revenue, earnings, future plans, opportunities and other expectations of the company. These estimates or plans and other 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 our 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 Securities and Exchange Commission. The statements made during the conference call are based upon information known to PHX as of the date and time of this call. PHX assumes no obligation to update the information presented in today's call.

With that, I'd like to turn the call over to Chad Stephens, PHX's Chief Executive Officer.

Thanks, Ralph, and thanks to everyone on the line for participating in PHX's 2020 fiscal year end conference call. We sincerely appreciate your time and your continued interest in the company. The environment PHX weathered in 2020 was one of the most difficult I've ever experienced in my 40 years in the industry. The COVID-19 pandemic and the subsequent collapse of oil and natural gas prices created a detrimental tsunami of bankruptcies, layoffs and cuts in capital outlay throughout the year.

During fourth fiscal quarter, however, we started to see crude oil prices stabilizing and natural gas searching for equilibrium, as macro supply demand fundamentals appear to be improving. Rig counts after reaching lows not seen since the benchmark was introduced are showing signs of a moderate recovery. Most importantly, with promising test results, it appears a vaccine for the COVID-19 is on the horizon. This will hopefully allow the economy to return to some level of normalcy in 2021.

In our most recent quarter, which Ralph will discuss in more detail in a minute, we are happy to see our sequential quarterly financial performance improve materially. For the full year, the company maintained an earnest focus on continuing to reduce debt down $6.7 million or 19% during the fiscal year, which has strengthened our financial position. Control costs down $4 million or 19%, helping bolster operating cash flow and generating promising mineral deal opportunities, $16 million closed during the last two fiscal years, which helped high-grade our asset base.

Over the course of fiscal 2021, we will continue to dedicate a majority of our free cash flow to pay down debt and further strengthen our financial position. When using current strict pricing, we estimate fully eliminating our debt through free cash flow in just over three years. As we continue to strengthen our financial position, we will be able to allocate more of our cash flow to our core acquisition strategy.

Since the September 30, 2020 fiscal year end, we closed on the previously announced mineral acquisition in Grady County, Oklahoma and Harrison, Panola and Nacogdoches Counties, Texas for $5.75 million. In addition, we closed on the purchase of 134 net mineral acres in San Augustine County, Texas for $750,000, which is in East Texas and have signed a PSA to purchase additional minerals, overlapping the same well pad in San Augustine County, Texas for $1 million, which we expect to close in fiscal Q1 2021.

This 16 well pad in San Augustine County operated by Aethon is currently in various stages of completion. All of these acquisitions were funded using proceeds from our equity offering, which we completed in September. The offering not only allowed us to complete these transactions, but has also expanded our sphere of influence, evidenced by a material increase in deal flow. We are excited about the opportunity set of deals in front of us, which fit well with our growth strategy.

Lastly, in concert with our change in strategy we changed the company's name to PHX Minerals, Inc. in October of 2020. This new name honors the rich history of the company by retaining its New York Stock Exchange, ticker symbol while highlighting the focused strategy on minerals. The name change includes a new corporate logo that symbolizes the proactive sense of urgency by which we work every day. We look forward to keeping you (technical difficulty) of our progress over the next year.

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

Thank you, Chad, and hello to everyone on the line. During the quarter ended September 30, we had 76 gross 0.18 net wells convert from wells in progress to producing, as compared to 48 gross 0.22 net wells during the quarter ended June 30. At the end of the quarter, we had an additional 115 gross 0.51 net wells in progress, up from 85 gross 0.44 net from the prior quarter. Also as of the quarter end, we had four rigs present on PHX acreage and 32 within 2.5 miles, compared to no rigs on our acreage and 15 within 2.5 miles at June 30. Leasing on our open minerals is slightly up for fourth quarter as operators continue to find efficiencies to reduce drilling cost and look to resume drilling and completion activity.

During the fourth fiscal quarter of 2020, we leased 205 net acres for $118,000 as compared to 120 net acres for $23,000 the prior quarter.

I will turn the call over to Ralph for a review of the financials,

Thanks, Freda.

First, I'd like to thank everyone for being on the call today. I'll be discussing the results for both the fourth quarter of 2020 and the full fiscal year 2020 results. Before I start, please note that the SCOOP and Haynesville acquisitions we announced in August were closed on October 6, 2020. And as such, our fourth quarter results do not include any contribution from these acquisitions.

For our fourth quarter ended September 30, 2020, total revenues were $4.4 million, which is a 62% increase from $2.7 million in the third quarter of 2020. The quarter-over-quarter changes were caused by the following: one, natural gas, oil and NGL revenues increased to $5 million or 43% on a sequential quarter basis.

Total natural gas and oil production increased 7% as curtailed volumes started being brought back online and new wells were put on production, particularly in the STACK region. Volumes were derived 38% from royalty interests and 62% from working interest during the quarter. Higher average prices received for natural gas, oil and NGL in the quarter or 34% on an MCFE basis also had a large impact on sales. Average MCFE price realized was $2.47 versus a $1.85 the prior quarter.

Two, we had a $1.5 million loss on our derivative contracts in the fourth quarter compared to a $840,000 loss the prior quarter. Note that on a cash basis, we realized a gain of $880,000 this quarter compared to a $1.7 million gain the prior quarter.

Three, lease bonus revenues were up on a quarter-over-quarter basis to $118,000, which is still lower than any other -- than any quarter in 2019. But moving in the right direction as operators restart leasing programs. Total expenses were $6.9 million for the fourth quarter compared to $7.1 million in the prior quarter, a 4% decline. The company's LOE decreased $178,000 or 16% in the fourth quarter compared to the third quarter. This is partially due to lower working interest volumes and lower service costs. On a per MCFE basis, LOE decreased about 20% to $0.48 per M. Transportation, gathering and marketing increased 17% and production taxes 40% on a quarter-over-quarter basis as a result of higher production and realized prices.

G&A decreased to 190,000 or 10% in the fourth quarter compared to the third quarter. This is the third straight quarter in which G&A has decreased. For the full year 2020, G&A was $8 million compared to $8.6 million in 2019. We expect the fiscal year 2021 G&A will be lower than 2020 as we benefit from four full quarters of our newly implemented cost control measures.

Adjusted EBITDA, excluding gains on sales was $2 million in the fourth quarter of 2020 as compared to $1.2 in the third quarter. For the full fiscal year 2020, adjusted EBITDA, excluding gains on sales, was $9.5 million compared to $18.6 million in 2019, primarily as a result of the previously discussed negative macro conditions the industry experienced this year.

We continue to deploy an active commodity hedging program, which extends out through the end of calendar 2022. Generally, we have locked in costless collars on natural gas between $2.30 and $3.15, and on oil between approximately $36.75 and $45.75. You can see a detailed up-to-date schedule in the press release and the 10-K.

Let me also touch on debt. We had total debt of $28.75 million as of September 30, which as Chad mentioned, was a 19% reduction from the prior year. As of December 1, we had further reduced debt to $27.25 million. Also as of December 1, we had $2.3 million in cash on the balance sheet after giving effect to the transactions that closed in October and November. Note that $1.5 million of the $2.3 million remaining in cash is from the equity offering proceeds. The pending acquisition, Chad mentioned earlier, will be paid for with cash from the equity raise.

On December 4, we entered into an amended credit agreement with our lending group, led by BOK, which reiterated our $30 million borrowing base and reduce the required quarterly amortization from $1 million a quarter to $600,000 a quarter. Going forward, as Chad mentioned, we will continue to focus on reducing debt as part of our strategy. With that, I'd like to turn the call over to Chad for some final remarks.

PHX had definitely navigated through unparalleled economic and industry turmoil in 2020. We believe 2021 will prove to be a tipping point for the mineral space as deal flow and mineral consolidation increases. PHX is in the right position with the right strategy to participate in that consolidation and create shareholder value. This concludes the prepared remarks portion of the call. Please open up the queue for questions.

Thank you. The floor is now open for questions. (Operator Instructions) Derek Whitfield, Stifel.

Thanks. Good afternoon all and also thanks for the updated disclosures in your PowerPoint. For my first question, I wanted to focus on M&A, perhaps for Chad or Ralph. Could you offer some additional color on the degree of deal flow you're seeing at present and seller expectations now that the commodity has drifted a little bit higher?

Yes, Derek, this is Chad. I think, given we've seen the worst of the COVID, the economy seems to be at kind of bottom coming off, seller expectations have been reset -- that at least asset values. And we're -- as we indicated, given the offering that we did that kind of put us into the mainstream of deal flow. We're getting a lot of unsolicited inbound offerings. The deals we've done to date, it seems that the sellers, their expectations were reasonable, and we are able to do deals. I do want to stress that the deals we do, that we're looking at and the deals we do we will be very disciplined. And we'll let the facts and the numbers speak for themselves and we're not going to just chase deals, but we do see a definite material increase in inbound deal flow with asset values more reasonable and expectations for asset values.

Great. And stay with you, Chad, perhaps bigger picture, could you speak to the business implications from the record levels of M&A activity we're seeing across the sector and that will likely continue for the next few years. But really what does that mean to your business from an activity perspective?

Well, we're focused on just a couple of basins, material amount of our minerals are in the mid-continent now in East Texas, we're going to focus on a couple of other basins as well. But for right now, mid-continent and a good deal of our minerals in the core of the SCOOP/STACK are as such, meet very low breakeven point when you compare well economics from the Permian Basin to the mineral -- where are the footprint of our minerals in the SCOOP/STACK they compete.

So you see continent, like we have Bakken, they're coming back down to the SCOOP/STACK. And they've got several rigs running. They've announced recently some really excellent wells and brought in several zones. They're exporting three different zones and they've announced some really excellent completions in there.

So, the implications for us. One, I wouldn't mind a consolidation. I think the industry overall needs consolidation. I think the stronger balance sheets have better implications for capital allocation with the fragmented industry that we have. It's kind of difficult to capital allocate between basins and between plays. But we think the SCOOP/STACK and where we are focused in the SCOOP/STACK can compete for capital allocation.

Great. Thanks, Chad. And my final question perhaps for Ralph or Freda. With the improvement you're reporting in both wells in progress and permits, could you offer any color on expectations for the completions of your well in progress wells or really thinking about the likely production profile that you guys could see in the first half of 2021?

Yes. So what we are saying is that some of the dogs that were sitting out there from early 2020 and then instead of being completed, the companies took the completion rigs off and shut down. We're now seeing the shut-in wells come back online as well as completion rigs starting to come back. So we expect the first half of 2021 to see some of those ducks completed, which would then show up on our production profile.

Great. That's very helpful. Thanks for your time, guys.

Thanks Derek.

Thanks Derek.

Jeff Grampp, Northland.

Afternoon, guys. Appreciate the time. Can you guys kind of touch on what you're seeing activity-wise you see in four rigs in the SCOOP? Do you have a sense of the sustainability of those rigs or where else we might see rigs popping up based on, where you guys are seeing your acreage and conversations with operators?

Yeah, Jeff, just to follow up what I was talking about earlier; Continental is really gone all in on the SCOOP/STACK for 2021 and they stated so and they make really great rates of return at current strip prices. They advertise in their investor relations slide deck where Woodford wells and their Sycamore wells are in excess of 50% rates of return and then make it some really excellent wells were there first --. And I think one of the important metrics that you look at on these wells is the first 100 days of production and they have several recent wells online, where they're advertising in excess of 100,000 barrels a day for the first 100 days. Those are -- that's good wells. Those are excellent wells.

You'll see in the core of the STACK and the SCOOP, the main players are Devon, Cimarex, Ovintiv, Continental, Marathon has got a huge footprint there. And they've got to come back there at some point, I think because they have some really excellent, right in the course, that really excellent rock quality underneath of their acreage position. So those five, at some point and anything above $40 oil, they're making really good rates of return. And I see them all coming back at some point in 2021.

Once you kind of get a sense or a feel that the gas prices really are going to recover, obviously, all weather-dependent. But there seems to be a little impetus for gas prices improving and especially Continental saying they're going to be drilling more gas wells in the SCOOP than they are oil wells. So we're optimistic and Panhandle has an excellent mineral position throughout the core of the SCOOP/STACK. So we're excited about the opportunity to see our volumes and cash flow improve with all that capital coming into the play.

All right. Great. That's helpful. And bigger picture question for you. I appreciate the comment that you guys can organically pay down our debt over the next few years. That sounds great. So when we kind of think about the return of capital strategy -- I know you guys have been able to maintain the dividend through the downturn here. What do you guys kind of need to see to look at maybe reevaluating, bringing that back up, whether that's -- I imagine trying to balance capital for acquisitions versus return to capital is probably a bit of a debate internally. But bigger picture, how do you guys view or evaluate increasing the dividend going forward?

I'll let Ralph contribute to this this question, but I will say that it's important to me to get our debt to EBITDA down to one or so. I think the market is kind of dictated that. I think it's just in terms of surviving through the commodity price cycles, you need to be conservative with your balance sheet. So I want us to get down to that area, that zip code before we start increasing our dividend. But it's going to be important to me just to show the shareholders that we're going to be willing to return a good percent of our free cash flow back to our shareholders once our debt is -- at a manageable place. Ralph?

Yes, no. And I would also say, no, look, I mean, I think from a standpoint, right, we have set up the company where we can manage a significantly larger asset footprint, right? And so we think the rates of return that we can generate for the company via acquisitions and the scalability of what we set up the company to be, right? Our next to paying down debt, right, growing the production base is also an important part of the strategy.

So I think it's -- I think we've stated this before that in the long run right, and whether that is two, three, however, many years down the road, right, whatever amount of time it is right, we're looking at doing something where it's -- you're returning 50% of the capital to shareholders and redeploying 50% of the capital into the ground. Right? But I don't have anything more specific to you on timing as it pertains to that right? I think as Chad said, that's number one. Growing the production base is number two. And once we get that figured out then we'll start looking at increasing our -- the return of capital to shareholders.

Yes, that makes perfect sense. That's it from me. Thanks, guys.

Thanks, Jeff.

Rich Howard, Boiling Point Resources.

To expand on that last question, it sounded like the bank credit agreement was improved and that you too are only going to be paying down $600,000 a quarter, which is far less than you can pay down based on that three year, three-plus year to eliminate the debt. So first of all, was this an improvement in the bank credit agreement? And secondly, thank you, Chad?

And yes, I mean, look, I think it's -- they reiterated our borrowing base and reduced the amortization that they wanted to see. So from my standpoint, what they're basically saying is that they think they were in a better credit worthiness position relative to six months ago. So to me, that's an improvement, right? I mean, I do think that, as Chad said, and we talked about --. As we talk about leverage, we're not -- our intent isn't to pay down the minimum required by that by the bank.

We think that you know that the appropriate long-term leverage ratio for the business is and given everything that's happening in a macro environment. It's really closer to one times rather than two times where we are today. So if anything, we're going to repay more of that debt. And as we grow the production base and cash flow, that's good. That's going to reach that one times debt to EBITDA and then we're going to reevaluate how we allocate capital internally. Obviously, we have some ideas, but we're not ready to share that with the market just yet.

That's great. Thank you very much. I was very pleased for the call.

Thanks, Rich.

Thanks, Rich.

This does conclude our question-and-answer portion. We will return to Chad Stephens for closing remarks.

We appreciate you being on the call with us today, and I want to reiterate what I said in my prepared remarks that we believe that we are in the right position to participate in 2021. And what we think is going to be a real tipping point for mineral consolidation where we see some really attractive opportunities right now. We think we will see more. So we look forward to keeping you all up-to-date as the quarters progress.

Thanks very much. Have a great day.

Thank you.

This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.