Riley Exploration Permian Inc (REPX) 2022 Q3 法說會逐字稿

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Riley Exploration Permian, Inc. Fiscal Third Quarter 2022 Earnings Release and Conference Call. (Operator Instructions) I would now like to turn the conference over to Philip Riley, Chief Financial Officer and Executive Vice President of Strategy. Please go ahead.

Thank you, and good morning to everyone. Welcome to our third quarter 2022 conference call. The company recently changed its fiscal year from September 30 to December 31. So we will be covering today results for the 3- and 9-month periods ending September 30. We will report full year 2022 results in March of 2023. Yesterday, the company published 4 items, which can be found on our website under the Investors section, and earnings release, the 10-Q and 2 presentations. One presentation provides an update for third quarter results. The goal here was to provide simple and transparent drivers of performance to be used in conjunction with our other public filings. We may reference a few slides from this on the call today. The second presentation provides an overview of the company's story with minor updates from previously released versions.

Participating on the call today are Bobby Riley, Chairman and CEO; Kevin Riley, President; and myself, Philip Riley, CFO and EVP of Strategy. Today's conference call contains 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 will also reference certain non-GAAP measures. The reconciliations to appropriate GAAP measures can be found in our earnings release or presentations issued yesterday. I'll now turn the call over to Bobby.

Thank you, Philip, and thank you again to everyone for joining us on today's call. Yesterday, after the close of the market, we announced results of our third quarter. This is the first quarter for Riley reporting since we completed our change in fiscal year-end from September 30 to December 31. Our rationale behind the change was simply to align better with other E&Ps for reporting and analytical comparisons for both investors and analysts. Riley delivered a very strong financial and operating results in the third quarter, again, being driven by continued organic growth to highlight a few items for the third quarter. We averaged oil production of 9,413 barrels per day, which exceeded our high end of guidance and represents an increase of 36% as compared to year-over-year to the third quarter of 2021 and an increase of 13% as compared quarter-over-quarter to the second quarter of 2022.

We began full-scale water injection on our EOR pilot during the third quarter and commenced CO2 injection on November 1. We generated $51 million of adjusted EBITDAX and $55 million of operating cash flow, representing an increase of 14% and 25%, respectively, over the prior quarter. We paid dividends of 0.31 per share during the third quarter and have since announced and paid an increased dividend of 0.34 per share during the fourth quarter, representing a 10% increase on new declaration. Riley's strong financial position provides us with the flexibility needed to navigate through both product price volatility and periods of economic uncertainty. This also allows us to patiently seek attractive opportunities to enhance the per share value of the company. I will now turn the call over to Kevin to discuss operational results.

Thank you, Bobby, and good morning to everyone. As Bobby mentioned, we had a great quarter as a result of our low decline production base in addition to the outperformance of a number of development wells recently brought online. Riley Permian average daily oil sales of 9,413 barrels per day for the quarter, which is a 13% quarter-over-quarter growth or 36% year-over-year growth as compared to the third quarter of 2021. The company averaged total equivalent sales of 12,717 barrels of oil equivalent per day for the same period, which is a 25% quarter-over-quarter increase or 33% year-over-year growth as compared to the third quarter of 2021. The natural gas and NGL volumes increased quarter-over-quarter at a higher rate than oil volumes due to the additions and plant processing capacity by our midstream counterparty.

The company also continued its efforts on its development activity. During the 3 and 9 months ended September 30, 2022, we brought online 7 gross, 4.2 net and 14 gross, 10.8 net horizontal wells, respectively. Regarding the EOR pilot project in Yoakum County, Texas. As Bobby had previously mentioned, we began full-scale water injection in August and has since commenced CO2 injection on November 1. Early indications as a result of the water injection appear to have slowed and/or arrested production decline for the 3 horizontal producers within the OR pilot. We anticipate a production response from the CO2 injection within 6 to 9 months, so sometime near late spring or the summer of 2023. During the quarter, our average completed lateral length on operating horizontal wells turned to sales was approximately 7,800 feet, which is a 10% increase in average completed lateral length per well quarter-over-quarter, with drilling and completion costs remaining relatively flat as compared to the previous quarter or similar well designs.

Our lease operating expenses were $8.8 million or $7.53 per BOE for the 3 months ended September 30. This came in at the midpoint of guidance but was a 9% increase quarter-over-quarter while lower than our quarter-over-quarter growth production growth both on oil and oil equivalent basis. I'll now turn the call over to Philip Riley to review our financial results.

Thank you, Kevin. Total revenue was $88 million for the third quarter of 2022, consistent with the level in the second quarter, driven by higher production volumes, but offset by lower pricing. Third quarter 2022 derivative settlement losses were approximately $9 million less a 34% lower than settlement losses in the second quarter. Combining those 2, revenue net of settled hedges was 13% higher quarter-over-quarter. These factors, in turn, drove a 16% quarter-over-quarter increase in cash flow from operations before changes in working capital from $44 million to $50 million, which you can see visually in the chart on Slide 4 of our third quarter results presentation.

If you look at the 9-month period year-to-date, our cash flow from operations before working capital has increased 94% year-over-year from $64 million to $124 million. About 40% of the increase has been due to production volume growth with the balance due to net price that is price net of hedge settlements. The company was approximately 50% hedged during 2022 with legacy hedges bought during 2020 and 2021. Looking to next year, we're about 20% hedged at lower prices.

Now I'll offer some comments on capital allocation, referencing Slide 5 in that same presentation. First, we've been able to grow volumes materially more than last year, while reinvesting a lower amount of cash flow. This is driven by a few factors, including some really strong production from new development wells and a materially improved operating cash flow. The slower reinvestment rate in turn has allowed us to reallocate more to dividends in the balance sheet with 1/3 of cash flow from operations before working capital year-to-date versus 19% last year. Total dividends paid for the 9-month period are up 25% versus last year, and we paid the debt down by 25% year-to-date.

And while investment is up year-over-year, operating cash flow is still outpacing the CapEx increases for a net benefit. This leads to the higher free cash flow for the year, about $41 million year-to-date. We acknowledge our company may be producing less free cash flow than some other companies on a relative basis. But as many of you realize, this is mostly a function of a higher reinvestment for growth with many other companies choosing 0 growth and which, of course, requires significantly less reinvestment.

Looking ahead to next year, while we won't be giving detailed 2023 guidance today, we believe that we can generate low double-digit oil production growth with a lower reinvestment rate than 2022. This could be driven from a combination of the tailwind of very strong 2022 growth, improved net price realization as a result of further hedge roll off as well as lower EOR spend. Our caveat, this is conditioned upon roughly $70 or better oil prices, only modest increases from here on D&C costs and absent additional move interest spending. Final quick comment on the credit facility. We recently completed a regular semi-annual borrowing base redetermination and elected to increase the base by $25 million to $225 million total. While we are largely undrawn, we believe the increased liquidity in a volatile market justify the small incremental undrawn fees. Thank you, and I'll turn it back to Kevin now.

Thank you, Philip. I'll now give guidance for the company's activity for the fourth quarter. We forecast accrual basis capital expenditures of between $34 million and $41 million, which excludes amounts for corporate and/or land acquisitions or other opportunistic investments. We forecast fourth quarter 2022 oil production to average between 9,400 and 9,900 barrels per day and total equivalent production to average between 12,600 and 13,200 barrels of oil equivalent per day based on estimates of available gas processing capacity. We anticipate fourth quarter LOE of approximately $9 million to $10.5 million and cash G&A expenses of approximately $4.7 million to $5.2 million. The company additionally anticipates cash income taxes of approximately $3 million to $5 million to be paid during the fourth quarter. I will now turn the call over to Bobby for closing remarks.

Thank you, Kevin. And again, thank you to everyone for joining us today for our third quarter call. We remain focused on a disciplined model of low leverage, moderate production growth and return of capital through dividends to our shareholders. Thank you again for your support. Operator, you may now open it up for questions.

(Operator Instructions) Our first question will come from the line of Neal Dingmann with Truist Securities.

My first question is on capital allocation, specifically, could you all speak to -- I'm just wondering, Bobby, Kevin, really any of the guys, how you all are thinking about per share growth going forward? And really, what I'm focused on here is wondering if law would consider boosting production more next year. That obviously can be done by just boosting the pure share volumes or even buying shares back to either of those to be share growth or will focus remain more on the maintenance capital and shareholder return? You obviously to be seem to have opportunities to do both. And I'm just wondering how you all are looking at that.

Yes, Neal, this is Philip. I can take that. We certainly look at per share metrics. We haven't finalized the budget for next year. We do plan to grow. The question is how much. We believe our level of growth differentiates us. Very few E&Ps are growing at our pace. Based on the midpoint oil production guidance that Kevin just gave for fourth quarter, frankly, we can hold that flat next year for each of the quarters, and that would imply 10% year-o-year growth. We could grow more. There's cross currents for oil price. We're watching the economic indicators, trying to understand how impactful a U.S. and global recession could be and what impact that may have on oil price.

As a positive contributor to price, we see the lower reinvestment levels by many of the multinationals and even U.S. E&Ps. I made the comments on the lower reinvestment rate in my comments just before we can grow and yet still have a lower reinvestment rate. And so, in turn, that correspond is more capital available for discretionary allocations such as shareholder return. So I guess a few more notes on that. We're going to continue to pay a dividend. We plan to raise that once annually, most likely in the fourth quarter, like we just did, absent some transformational event. We like the steadier pattern there versus the variable methodology used by some companies.

We saw how that can flip on them such as this quarter and a downward impact there. There's potential for continued debt pay down, though admittedly, at certain low levels, we could decide to keep it flat. We're also considering other investments outside of traditional B&C such as carbon capture activities but then you got the question of what's left over, depending on the price environment. And I think there, you do have some potential for shareholder buyback. That of course, has to be approved by the Board, but it's a topic we've discussed. What we're trying to do there is balance multiple objectives, increasing the float on the one hand, managing private equity overhang, potential for future distributions, offsetting annual increases due to customary stock-based compensation. But in any event, those all factor into that per share metric growth that you're talking about. And so, it's something that's important to us and the Board.

Why do you looking at all that? And then secondly, -- and just maybe on development activity. Kind of things you talked about, Philip, I know specifically, there's been more focus. It seems like in the last quarter or so on co-development and maybe what I'd call other large development strategies. And so, I'm just wondering if you all to discuss maybe your approach going forward and really how to get the MAX efficiencies out of -- again, you all and others obviously are operating in a bit of a smaller program. It does seem like you're still getting some pretty nice efficiencies. So I'm just wondering if you could kind of talk about your development strategy.

Current development strategy pretty much remain the same Neal since we've started. I mean we've got a nice foothold we're holding through development. We're operating through cash flow. We're trying to maximize our efficiencies and utilization of our infrastructure that's in place. while holding the field and creating an HBP asset, I don't know that we are going to be drilling too many parent-child wells and our co-development in that sense in the coming year. But we continue to look at every opportunity and to optimize what we're doing and to be efficient. And you can see that even through our growth and completed laterally quarter-over-quarter over 10%. That does help to drive down costs as you're getting more reservoir for the same well so you're effectively gaining more rock. So we're looking at every option as we continue. Nothing set in stone, but we are trying to be as efficient as we can in this volatile world.

Yes. Great. And then (inaudible) of tack on, with infrastructure, anything, it seems like you're in better shape now anything that prevents that development strategy, infrastructure meaning anything you'll need to build out or anything in that regard?

We continue to build out small pieces to include within our infrastructure. We had -- initially in 2015, when we started, we invested heavily in infrastructure to get kind of what we consider to be our base. But as we continue to branch out and hold more acreage, we have small line to lay, whether it be water gathering, oil, gas or power distribution. We're looking at opportunistic ways to continue to be more efficient there and to be sustainable and efficient and self-sufficient. In some ways, we're excited to be able to talk more about that in the coming quarter.

Your next question will come from the line of John White with ROTH Capital.

Very nice results. Congratulations to you and your team. The significant increase in the production guidance for the fourth quarter, is that primarily due to the increased CapEx in the third quarter and the increase in CapEx guidance for the fourth quarter? Or as you're drilling longer -- slightly longer laterals, -- does that play a part in it or -- and have you found a better portion of the reservoir. Can you talk about that.

Yes. I think overall, if we look at the last several quarters and year-to-date, our PDP has hung in and outperformed our expectations and what was forecasted through our third-party reservoir engineers in addition to the development wells that we brought on outperforming tech curve. So it's a combination of both, wealth come online faster than previously anticipated. But from a timing perspective, we're generally completing wells as we planned. I think last quarter, we were right on and bringing online the same amount of wells that we had guided to and we seem to be online going forward in this current quarter.

Okay. And the -- your gas processing, the main upgrades to that or expansions of that processing facility, is that finished? Or are there some more expansions and upgrades to come?

That phase of the expansion and upgrade is complete and operational. We have since along with other producers in the area, agreed to an additional expansion, which is 14 to 16 months out to bring on additional capacity for future growth. But for the time being with what we have and what we're looking to do operationally, I believe that we have sufficient capacity for our continued growth.

Congratulations again.

Your next question will come from the line of Noel Parks with Tuohy Brothers.

Just a couple of things. Just maybe thoughts on costs. Wondering if you have any sense of whether we sort of hit the peak of service cost inflation? Is it levelling off at all? Just as you model into next year, just how much are you looking at?

From what we've seen that has come in quarter-over-quarter and year-to-date looking back, it appears as if we've kind of reached the peak and flattened out a little bit quarter-over-quarter, our per unit cost generally were about the same or similar type wells. We've also tried to be proactive in doing some bulk buying and procurement for next year to help to lower the cost. So -- or either lower or rest further inflation. So from what I've seen, I would say, yes, we've peaked out, I hope, but to be determined.

Great. And I'm just wondering, is there anything meaningful going on with the exploration of other horizons beyond the San Andres in your affinity either you're looking at yourself or your competitors in the area that you're aware of.

This is Bobby. We always continue. We have a great exploration team led by some really qualified geoscientists. So what we're looking for footprint expansion in the existing area, obviously, around San Andres. And then we also have drilled a few wells in South Texas and the Eagle Ford, Austin Chalk area, still early appraisement. So nothing really to announce here. But we're very encouraged by what we're seeing in that area, and there's a great opportunity for us there.

Your next question will come from the line of Richard Dearnley with Longport Partners.

In the fourth quarter guidance discussion, you -- it seemed like you were calling up gas processing capacity is a limiting factor. And could you provide some color in light of the expansion 1.5 years or so out as to where you are, how much capacity do you have there?

So I guess the last quarter we just completed and we're reporting on 2/3 of the quarter was operational with the current plant capacity that was finished in July. So there's still some guesses and estimates as to how everything lines out in the facility. So that's why we just kind of caveated that to allow for a little bit of cushion. Gas and NGL volumes and sales are a very small percentage of our revenue, though we do understand that they influence our per BOE metrics. So we tried to talk in some sense on an absolute basis when we're speaking of LOE or G&A figures because if you look at them on a per BOE basis, that's driven by processing capacity. So (inaudible) we get to another one or 2, and we continue to optimize our gas and NGL sales and the utilization of those products. And I think we'll be able to give clearer guidance as to what those numbers should let out to be.

Okay. And the Eagle Ford is a well-known basin. Your (inaudible) seems to give spin-off companies little bits of interest in diversified basins. There are some large packages available, some of which look like they might get split up into smaller pieces. Could that be a potential interest to you all?

Well, as you know, most of our production is all organic, and we have not relied on making acquisitions of existing PDP. We're developing our area. We're developing organic leasing opportunities, a specific target that we're looking at. We've got some experience in the Eagle Ford going back to the mid-2000 -- 2009, 2010 period. I don't see us at this point biting off one of those acquisitions. We're more focused on the quality of rock that we're wanting to target. And we just need to keep that lined up. So I think dollar for dollar, our rate of return is much better on organic development.

(Operator Instructions) Our next question will come from the line of [Rick Mauser with Investor].

Great quarter. I did have a question regarding the releases of the earnings and that the mention of earnings per share, I guess, the lack of mentioning it, I know it's maybe not the most accurate measure of your guys' performance, but it is a metric that pretty much every investor looks for. And I really don't -- I'm not invested in many other companies that really don't release their earnings per share. And I didn't know if that's something you could add to your reports coming up.

Yes, happy to, [Rick]. We understand. We try to find a balance of citing those more traditional metrics like that. The caveat, we do have certain factors that influence the bottom-line net income, such as our unrealized hedge gains and losses. We had nice looking net income this quarter, partially as a result of that $34 million mark-to-market gain that you'll find in our 10-Q that drives the higher net income and hence, earnings per share. With prices where they are now higher than when we closed the quarter, that will in turn result -- if they stay where they are for the remainder of the 6 weeks for the quarter, that would flip then to a loss. And so, it just causes a little bit of the purposing on net income and earnings per share. But we hear the comment, and we'll certainly take it into consideration.

We have no further questions at this time. Ladies and gentlemen, that will conclude today's call. Thank you all for joining. You may now disconnect.