PHX Minerals Inc. (NYSE:PHX) Q4 2022 Earnings Call Transcript December 14, 2022
PHX Minerals Inc. misses on earnings expectations. Reported EPS is $0.12 EPS, expectations were $0.18.
Operator: Good morning and thank you for attending today’s PHX Minerals Fiscal 2022 Fourth Quarter and Year End Earnings Conference Call. At this time, all lines will be muted during the presentation of the call with an opportunity for a Q&A session at the end. As a reminder, this call is being recorded. I would now like to turn the call over to Steven Li with FMK IR. Please go ahead, sir.
Steven Li: Thank you, operator, and thank you all for joining us today to discuss PHX Minerals fiscal 2022 fourth quarter and year end results. Joining us on the call today are Chad Stephens, President and Chief Executive Officer; Ralph D’Amico, Senior Vice President and Chief Financial Officer; and Danielle Mezo, Vice President of Engineering. The earnings press release that was issued yesterday afternoon is also posted on PHX’s Investor Relations website. Before I turn the call over to Chad, I would like to remind everyone that during today’s call, including the Q&A session, management may make forward-looking statements regarding expected revenue, earnings, future plans, opportunities and other expectation of the company.
These estimates 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 PHX Minerals 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 this call are based upon information known to PHX as of today, December 14, 2022, and the company does not intend to update these forward-looking statements whether as a result of new information, future events or otherwise, unless required by law.
With that, I would like to turn the call over to Chad Stephens, PHX’s Chief Executive Officer.
Chad?
Chad Stephens: Thanks, Steven, and thanks to all of you on this call for participating in PHX’s fiscal 2022 year end conference call. We appreciate your interest in the company. This year was a year of tangible progress for PHX, and we entered the new fiscal year 2023 poised for significant improvements in our financial results. Our strategic transition began in late 2019 under new leadership. This strategy to high grade our asset base by exiting high cost legacy assets and transition to a low fixed cost pure royalty production model is coming into sharp focus. The results reflect significant improvements in our profitability and cash generation and we expect this trend to continue. We are executing according to our stated plan, growing our royalty reserves through our targeted mineral acquisition program.
Both royalty production and royalty reserves reached all-time high levels in the fourth fiscal quarter of 2022. 2023 will prove to be the final year of this formative transition as we plan to divest a material portion of our remaining legacy non-operated working interest assets, after which royalty volumes will represent greater than 90% of total corporate volumes and working interest volumes will be virtually immaterial. Our stated strategy is to allocate capital through the acquisition of existing and near term potential royalty production with a heavy weighting toward natural gas. This strategy is working, delivering returns ahead of our expectations. Encouragingly, our pipeline for acquisitions in our targeted regions remains robust. We operate in something of a sweet spot in the industry with sufficient scale and operational expertise to outperform small competitors, but nimble enough to pursue acquisitions, the size of which are not material enough to capture the larger competitors’ interest.
In addition, supply and demand for natural gas remains favorable, giving us the commodity price leverage to improve profitability and cash flow. Our plan remains the same, to utilize most of our free cash flow to acquire more natural gas weighted mineral and royalty assets that contain additional development drilling locations, which we expect will quickly convert to increase royalty production volumes. Simultaneously, as we continue to scale and expand profitability, we will be positioned to continue to increase our cash dividend which has risen 125% over the last six quarters. At this point, I’d like to turn the call over to Danielle to provide a quick operational overview and then to Ralph to discuss the financials. Danielle?
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Danielle Mezo: Thanks, Jeff, and good morning to everyone participating on the call. At September 30, 2022, our proved royalty reserves increased year over year by 45% to 52.8 Bcfe with the PV-10 of $172.6 million at SEC pricing. And our near term development probable royalty reserves increased 42% to 87.9 Bcfe with a PV-10 of $247.7 million, primarily due to the successful execution of our acquisition strategy and increased drilling activities in the Haynesville and the SCOOP. Our total proved reserves decreased 2% to 81.1 Bcfe with a PV-10 of $237.9 million at SEC pricing, primarily as a result of the divestiture of our legacy non-operated working interest assets as we continue to execute our corporate strategy to exit this portion of our business.
Going forward, we expect our royalty reserves to continue to increase and our working interest reserves to continue to decrease. During the fourth quarter, third party operators active on our minerals converted 49 gross or 0.22 net wells in progress or WIP to producing wells, compared to 96 gross or 0.25 net WIPs converted to PDP in the third quarter. The majority of the new wells brought online are located in the SCOOP and the Haynesville. For the full fiscal year 2022, we had 1,318 gross, 1.07 net wells convert to producing compared to 147 gross or 0.56 net wells in fiscal 2021. That is effectively a 100% year over year increase. At the same time, as of September 30, 2022, our inventory of wells in progress also increased to 172 gross or 0.85 net wells compared to 155 gross or zero 0.79 net wells as reported as of June 30, 2022.
The continued growth of well conversions and inventory of wells in progress show the repeatability of our business strategy. In addition to well inventory, we regularly monitor third party operator rig activities in our focus areas and observed 26 rigs present on PHX Minerals acreage as of November 28. Additionally, we had 99 rigs active within 2.5 miles of PHX ownership. The number of active rigs on our minerals acreage has stayed consistent quarter over quarter. And it is important to note that active levels near our acreage have increased in our core areas in the SCOOP and Haynesville. In summary, we continue to see heightened development on both our legacy and recently acquired mineral assets and are excited about these positive indicators for increasing our future royalty volume.
Now, I will turn the call back to Ralph to discuss financial.
Ralph D’Amico: Thanks, Danielle, and thank you to everyone for being on the call today. We had a very successful fiscal €˜22 from both an operational and financial standpoint. Our royalty production volumes reached an all-time high for fiscal 2022 and adjusted EBITDA increased 64.2% compared to fiscal 2021. For fiscal fourth quarter ended September 30, 2022, natural gas, oil and NGL sales revenues increased 12% on a sequential quarter basis to a total of $21.8 million. For fiscal 2022 — fiscal year 2022, sales revenues were $69.9 million, which represents an 85% increase over fiscal 2021. Royalty production increased 15% and total production increased 7% on a sequential quarter basis, primarily due to new royalty wells converting to production and the natural decline on working interest wells.
For the full fiscal year, royalty production was up 49% to 6.2 Bcfe and total production was up 6% to 9.6 Bcfe. This is above the 35% year over year royalty volume growth rate we discussed in prior calls as operators continue to accelerate the pace of drilling in our core areas. The lower total corporate production growth is primarily attributable to the sales of legacy non operated working interest wells. Royalty volumes represented 71% of total production during the fiscal fourth quarter and 65% during the full fiscal year. Note, that these figures include production from the Fayetteville working interest wells we sold in late September 2022. Pro forma for that sale, our fiscal fourth quarter royalty volumes would represent over 75% of total corporate production volumes.
78% of our fiscal 2022 production volumes were natural gas, which aligns with our long term strategy to natural gas as the key transition fuel for a sustainable energy future. Average prices received for natural gas, oil and NGL in the quarter were up 5% on an Mcfe basis sequentially to $8.42. For the fiscal year prices increased 75% to an average of $7.27 per Mcfe. Realized hedge losses for the quarter were $7 million and $22 million for the full fiscal year. For the quarter, approximately 58% of our natural gas, 62% of our oil and none of our NGL production volumes were hedged at an average price of $3.38 and $44.25, respectively. And for the full year approximately 62% of natural gas, 72% of oil and none of our NGL production volumes were hedged at average prices of $3.06 and $44.25, respectively.
Recall, that the majority of these hedged volumes were layered in during COVID in mid to late 2020 at the request of our lenders at the time. The remaining contracts entered into during that time will completely roll off in the next couple of months, which should lead to improved realized prices and higher cash flow assuming the same commodity prices in 2023 that we saw in 2022. Total transportation, gathering and marketing increased 23% on an absolute basis to $1.75 million on a sequential quarter basis and increased 2% to $5.9 million on a full fiscal year over year basis. These expenses are primarily tied to movements in production volumes, but also have an inflation component, which we experienced in recent quarters. Production taxes were flat on a sequential quarter over quarter basis at approximately $930,000, an increase of 67% on a full fiscal year over year basis to $3.2 million.
These expenses are primarily tied to movements in both production volumes and commodity prices. LOE associated with our legacy non operated working interest wells increased 7% on a sequential quarter basis to $961,000, and decreased to $4 million on a year over year basis. These figures include the legacy assets in the Fayetteville that we sold at the end of September. Since we announced our strategic shift to a mineral only company, we have sold over half of our legacy working interest wells and expect that LOE will continue to become less relevant to the overall performance of the company. Cash G&A increased 19% to $2.7 million for the sequential quarter and 27% to $9.1 million for the full year, primarily due to wage inflation, higher activity levels and costs associated with our reincorporation to Delaware.
Adjusted EBITDA was $8.4 million in our fiscal fourth quarter as compared to $7.2 million in the fiscal third quarter. For the full fiscal year 2022 adjusted EBITDA was $25.8 million compared to $15.7 million the prior year. Net income for the quarter was $9.2 million compared to $8.6 million for the prior sequential quarter. For full year 2022, net income was $20.4 million compared to a net loss of $6.2 million in 2021. We had total debt of $28.3 million as of September 30, and our debt to trailing 12 month adjusted EBITDA remained flat at 1.1 times compared to a year ago, which continues to show our financial discipline as we execute on our growth strategy. On December 7, we entered into an amendment to our credit facility and our borrowing base was reaffirmed at $50 million.
We also welcome UMB Bank into our bank group joining Independent Financial in mid first. As part of our effort to streamline our financial reporting and enhance our Investor Relations effort, we are going to migrate to a calendar year reporting schedule in 2023 and change the end of our fiscal year from September 30 to December 31. This will bring us in line with the rest of the publicly traded minerals companies and make it easier for investors to evaluate our business and key performance metrics within the industry group. From an SEC reporting and earnings release standpoint, the company will file four 10-Qs and release earnings four times prior to the next annual report being filed. Our next annual report on Form 10-K will be filed in calendar year 2024 for the fiscal year ended December 31, 2023.
We plan to provide forward looking guidance for calendar and fiscal year 2023 when we report our results for the period ended December 31, 2022 in mid-February. Finally, we have made the determination to terminate our at the marketing — at the market offering program. The costs associated with the program no longer justify keeping the program in place, given how little we have actually used it. In addition, our liquidity position has improved significantly from when we implemented the program a little over a year ago to facilitate the execution of our growth strategy. Note that the shelf registration will remain in place until it expires as this represents good corporate practice. With that, I’d like to turn the call over to Chad for some final remarks.
Chad Stephens: Thanks, Ralph. As you can see, our strategy is financially sound, leading to growth, profitability and cash generation and we are increasingly turning that cash into additional mineral assets to further expand our platform. Our pipeline for acquisitions and our core areas under active repeatable operators with line of sight development is robust and growing and we have a great team that is advancing targets to further our growth. I believe fiscal 2023 will be a tremendous year for PHX, its employees and its shareholders. As we close out our fiscal year end, I would like to thank our dedicated employees for their hard work and congratulate them on achieving outstanding results in 2022. Additionally, I would like to thank our Board of Directors for their support and insightful wisdom they provide in executing our corporate strategy. This concludes the prepared remarks portion of the call. Operator, please open up the queue for questions.
Q&A Session
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Operator: Thank you. We will now be conducting a question-and-answer. Our first question has come from the line of Derrick Whitfield with Stifel. Please proceed with your questions.
Derrick Whitfield: Good morning all and congrats on your quarter and recent A&D progress.
Chad Stephens: Thanks, Derrick.
Derrick Whitfield: With the — understanding that you will provide formal 2023 guidance in February, I wanted to focus my question on your royalty production trajectory based on line of sight activity. Can you comment on the trajectory and any sizable well packages you’re expecting over the next six months? And looking at pages 16 and 17, it certainly appears you have a wave of activity at Springboard III that’s expected to come on?
Ralph D’Amico: Yes. Hey Derrick, it’s Ralph. Let me start it and then Danielle is going to chime in as well. I think it’s important that if you look at what we converted in fiscal ’22, right, we converted 1.08 net wells, right? The gross well is 300 in change, but really the net is the important number to look at. And that grew volumes by upwards of 40% on a year over year basis. As we go into 2023, we have an inventory of wells in progress. So these are wells that have already been spud and are being worked on. Approximately 0.08 in change and we have permits that have been filed of another 0.22, right, which brings the total number of net wells currently being worked on in our asset base to pretty much the same number that we saw convert to PDP last year, right.
So if that trend follows, right, even without any probable locations or new permits being filed, which I think is a very conservative assumption. We should see a pretty healthy double digit year over year royalty volumes increase. Obviously, you’re starting from a higher base than you did last year, right. But we’re pretty encouraged that as the year progresses, right, you may see even additional activity beyond what the 1.07, 1.08 that’s currently being worked on our asset base.
Danielle Mezo: And we continue to see very strong activity in the Haynesville, lots of WIPs and DUCs wells in progress out there right now. That will really help to support our royalty growth over the course of the next year. We are also seeing an activity increase in the Springboard III. We’ve consistently seen five, six wells a quarter being converted out there for the last six quarters or so. But in the recent months, we’ve seen an acceleration of permits, more drilling and completion activity, particularly for Continental on the East side of the play. So we do expect that to start coming in and supporting our growth as well here in late 2023. So strong activity on both fronts.
Chad Stephens: Derrick, this is Chad. Also we can direct the investment community to our most recent IR slide deck that we’re putting out on our website. And in there, you can see that really the tangible sense of our royalty volume growth starts with the number of probable — gross probable locations we have. We are approaching 2,000 that’s in the SCOOP and the Haynesville and some of our legacy STACK. And that’s the source of all of this activity that Danielle and Ralph are talking about. And you can see over the last couple of years our gross conversions, which are coming from that probable category have been in the 200 to gross and this time last year it was about 0.5, now it’s — this year it was 1 time. So we doubled the net from last year to this year, which speaks to the interest, the core interest that we’re acquiring in these Haynesville locations, the actual royalty interest.
And last year at this time, we were about 0.5 net wells in inventory — drilling inventory and today we’re double that, we are about 1. So again, the real source of all this royalty volume growth is the probable locations and those are we have maps, we have geology, we have engineering, we have tight curves, there’s operators in the area drilling, they obviously want to develop their leasehold. So it’s real, it’s tangible and it’s going to continue to feed our overall royalty volume growth and that trend that you’re inquiring about.
