Riley Exploration Permian, Inc. (AMEX:REPX) Q4 2022 Earnings Call Transcript

Riley Exploration Permian, Inc. (AMEX:REPX) Q4 2022 Earnings Call Transcript March 9, 2023

Operator: 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 Incorporated Fourth Quarter 2022 Earnings Conference Call. I would now like to turn the conference over to Philip Riley, CFO. Please go ahead.

Philip Riley: Thank you, and good morning to everyone. Welcome to our conference call covering the fourth quarter and full year 2022 results. Yesterday, the company published a number of items which can be found on our website under the Investors section, an earnings release, a 10-K, supplemental info and non-GAAP measures and two presentations. One presentation provides an update for fourth quarter and full year results, with the second providing an overview of our company’s story. 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 the appropriate GAAP measures can be found and our supplemental disclosure on our website. I’ll now turn the call over to Bobby.

Bobby Riley: 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 the results of our fourth quarter and full year 2022. I’m pleased to report that 2022 was another outstanding year for Riley Permian with performance continuing to be strong through the fourth quarter. Before we move on to the results, I’d like to take a moment to recognize the outstanding efforts of the entire REPX team. It is through their hard work, dedication and expertise that we are able to achieve the strong operational and financial results that we are reporting today. From our operations team who worked tirelessly to optimize production and reduce cost, to our finance and accounting teams who ensured that we remain financially disciplined and focused on delivering value to our shareholders, every member of the team played a critical role and our success.

Your commitment to excellence and your passion for our business is what makes Riley Permian such a great company and I’m honored to work alongside you. Now let’s turn to the results for the year. We have worked tirelessly throughout the year to optimize our core business and execute on a variety of growth initiatives. Most significantly, we recently announced that we have entered into a purchase and sell agreement to acquire oil and gas assets and Yeso trend of New Mexico. As we continue to work towards closing the acquisition, our team is already hard at work developing plans to integrate these assets into our existing operations, and we are confident that we can achieve a seamless transition that maximizes the potential of these underdeveloped assets.

We look forward to updating our shareholders on our progress as we move towards closing the transaction early in the second quarter. In 2022, Riley Permian delivered strong financial and operating results. To highlight just a few of the full year items, we increased our net oil production by 31% year-over- year to 8.8 MBbl per day and total net equivalent production by 25% year over year to 11.5 MBoe per day. We generated $176 million of adjusted EBITDAX, $170 million of operating cash flow from continuing operations and $56 million of free cash flow. We continue to invest in our business with total cash capital expenditures before acquisitions of $113 million, corresponding to a reinvestment rate of 66% of operating cash flow from continuing operations down from 88% in 2021.

We remain committed to returning value to our shareholders paying $25 million in dividends during the year, corresponding to 44% of free cash flow. We have now paid dividends for 16 consecutive quarters. Overall, we are proud of our financial and operating results in 2022 and believe they reflect the strength of our assets and the dedication of our team. We remain focused on creating long-term value for our shareholders and delivering sustainable growth for years to come. I will now turn the call over to Kevin to discuss operational results and give more details on the acquisition.

Kevin Riley: Thank you, Bobby, and good morning to everyone. I echo Bobby’s sentiment as we are proud of our team’s dedication and resilience, which enabled us to overcome inflationary pressures and shortages of material, equipment and labor to deliver outstanding results. Before we dive into our exciting new initiatives, I want to take a moment to highlight a few of the accomplishments we achieved in executing our plan during 2022. First, we maintained our momentum through the fourth quarter with production growing from 12.7 to 13.3 MBoe per day in the fourth quarter, representing a 4% increase quarter-over-quarter. On a full year basis, we grew our year-over-year average production from 9.2 to 11.5 MBoe per day, which is a 25% increase.

This growth was all achieved organically with the 15 gross, 11.8 net wells brought online during the year. In addition, our lease operating expenses were $8.8 million or $7.16 per BOE for the three months ended December 31 and $32.5 million or $7.73 per BOE for the year ended December 31. This represents a 5% decrease quarter-over-quarter and a 5% increase year-over-year. Regarding our EOR pilot, we continue to inject water in CO2 but are still early in the process of repressurizing the reservoir. Now let’s turn our attention to some of the exciting new initiatives we have planned for 2023 and beyond. On February 28, we announced we have entered into a purchase and sell agreement to acquire the oil and gas assets of Pecos Oil & Gas, LLC in Eddy County, New Mexico.

Photo by Ronan Furuta on Unsplash

These assets are focused on the development of the Yeso trend of the Northwest Shelf. The Yeso ASO trend and Riley Permian’s existing core assets focused on the St. Andrews. There are several similarities in geology, reservoir type and drilling completion and production techniques. Though this asset will boost Riley Permian’s production near-term, we believe this is an underdeveloped asset with extensive development potential allowing for value creation through the drill bid. In addition, acquiring the assets adds a new area to Riley’s operating footprint, diversifying the company’s portfolio and reducing single area concentration risk. Lastly, but no less important on March 2, we announced we have formed a joint venture that’ll own and operate on-site power generation for Yoakum County, Texas assets.

The first phase of the project will provide 10 megawatts of on-site power generation and is expected to be operational by June of 2023. We believe initiatives like this further differentiate us from our peers as it’ll not only provide us with more control over long-term energy cost, power supply and reliability, but also help us reduce carbon emissions by utilizing gas that may otherwise be flared to power operations. At this point, I’ll now turn the call over to Philip to review our financial results.

Philip Riley: Thank you, Kevin. For the quarter, total revenue net of derivative settlement losses was approximately $64 million to $7 million and 10% below the third quarter, driven primarily by 13% lower realized oil prices and partially offset by higher production and lower derivative settlements. Cash costs were approximately $3 million or 15% lower a quarter-over- quarter, despite higher volumes. On a per BOE basis, cash costs were 19% lower a quarter-over-quarter. The combination of these factors in turn drove a 12% decrease quarter-over-quarter and cash flow from operations before changes in working capital from $50 million to $44 million, which you can see visually in the chart on Slide 4 of our fourth quarter results presentation.

For the full year, our cash flow from operations before working capital increased 89% year-over-year from $89 million to $169 million. This is driven by a combination of higher volumes and price. Now I’ll offer some comments and capital allocation, referencing Slide 5, the same deck. First, we grew volumes materially more in 2022 than in 2021 while reinvesting a lower amount of cash flow. Very few companies out there grew more than low double-digits, and we grew by 30%. In 2022, we allocated two- thirds of cash flow to cash CapEx down materially from 88% and 2021. The lower reinvestment allowed us to allocate more to dividends in the balance sheet. Total dividends paid were up 22% versus 2021 and we paid debt down by 14% with a small increase in the fourth quarter for several large surface land positions we acquired.

Operating cash flow growth more than offset CapEx increases for net benefit, increased free cash flow of more than six year-over-year. Okay, let’s talk about forward guidance. In both the earnings release and the results update presentation. You’ll find summary tables of our guidance, including for both the first quarter and the full year. Our New Mexico acquisition is scheduled to close at the beginning of the second quarter, so the first quarter represents standalone legacy production and cash flows. We have a January 1 effective date with the acquisition, so the cash flows between Jan 1 and closing will represent a forecasted downward adjustment to purchase price. And then the acquisition production and cash flow is captured effectively for the second quarter through fourth quarter for 75% of the full year.

We’ve included a column at far right for illustrative pro forma at 100% contribution as if the acquisition hypothetically closed January 1. This offers you an idea of the run rate production metrics, so starting with oil production, you’ll see we’re guiding roughly 10,000 barrels a day for the first quarter flat with fourth quarter. We only brought online one well on the fourth quarter. We have a large amount of activity occurring now, but with wells coming on now and into the second quarter, so we a bigger bump to legacy production in the second quarter than declining modestly in the third or fourth quarters. But for the year, maybe it’s a bit over 10,000 barrels a day average, which would represent 15% year-over-year growth from the 8,800 barrels a day in 2022.

So some good organic growth before accounting for the acquisition. And then looking at the New Mexico acquisition production, we won’t take over the asset until second quarter and with just a modest delay there to get development started, second quarter production could decline just a bit. Then the growth would come in the third and fourth quarters following a mid-year development, hopefully exiting the year at a higher rate, but averaging overall for the year, something closer to the current level of a bit over 4,000 barrels a day. So combining the two legacy and acquisition, the development growth profiles in timing could complement each other well, comparing to 2022, we see full year 2023 total BOE production, but growing by more than 60% or on the illustrative pro forma run rate basis by nearly 80%.

Now, a few words on investing, for the legacy assets, it’s very much weighted to the first half of the year, even the first quarter with roughly 30% of total combined investment for 2023 occurring in the first quarter. This could lead to a modest amount of outspend on a free cash flow basis in the first quarter, but something we encourage you to look beyond for the full year view. This is a function of honoring some rig and other service commitments we’ve made to secure those offerings. For the year, we’ve got a fair amount allocated for gas and power infrastructure, not directly related to the power JV and investment in the EOR pilot, which was delayed from the fourth quarter. We forecast ramping the acquisition CapEx starting in the second and third quarters, and then separate from E&P CapEx were forecasting investing approximately $10 million to $15 million into our power JV, which could flex based on speed of development there.

For the full year, we’re seeing our overall reinvestment rate at least when compared to adjusted EBITDAX decline even further from last year, while still achieving this impressive volume growth. Lastly, a huge thank you to our team for another year of strong performance and for your efforts across the various new ventures and acquisitions we’ve been pursuing. Thank you to our Board and our shareholders for your continued support. I’ll turn it back to Bobby for closing comments.

Bobby Riley: Thank you, Philip. And 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.

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Q&A Session

Operator: Our first question will come from the line of Neal Dingmann with Truist Securities. Please go ahead.

Neal Dingmann: Good morning, all. Thanks for the time. My first question is on operations. It might be a little early for this, but just wanted to ask what your thoughts the Pecos assets look quite good to us. I’m just wondering, it looks like you talked to them about in early second quarter close. How quickly would those assets compete against others like you? I know Philip, you talked about sort of potential cadence going forward here for the first half for better part of this year, and I’m just wondering does that include some wells from the new assets immediately competing in there?

Kevin Riley: Yes, this is Kevin, Neal. So we do anticipate starting operations in mid-April. We are currently working with the operator and we will have a transition services agreement with to prepare for those operations to start, and with that we anticipate bringing on new production hopefully by early to mid-summer.

Neal Dingmann: Got it. Okay. That’s what I’d like to hear. And then Philip, just on that same vein just could you maybe hit on inflation costs, which you’re seeing today? Are things mitigating a bit or just €“ I’m sorry, Kevin, for you maybe, what are prices doing there on the upside, on the inflation side?

Kevin Riley: We started to see prices maybe start to come down a little bit. Nothing too material yet, but we do believe that adding this acquisition will give us some economies of scale that we can hopefully start to drive more efficiencies and bring costs down outside of other inflationary costs increases.

Neal Dingmann: Okay, good to hear. And then last I guess, one last one, just Philip, you didn’t say anything €“ I think you did a little bit last quarter call just on the CCUS. I know you are continuing to have some conversation just to €“ if you could give a little color, just anything potential going on, on that side.

Philip Riley: Yes, sure. So we put a comment there in both the earnings released and the presentation that we are working with partners in advancing a project for what we consider a large scaled storage hub in our region. We’re not giving too many details about that. But what I can say is, we’re working with people in the mix, working to do something that’s most efficient with our shareholders’ capital that includes using other people’s money. And frankly, we’re looking up and down the spectrum on both the capture and then the storage part, but obviously our area of core expertise is going to be the storage. So hopefully you can understand we’ve had a few other things going on, on some priorities, but that’s something that’s near and dear to our hearts and we’re working on it and we’re going to keep pushing forward there.

Neal Dingmann: No, just glad to hear it’s progressing along. Thank you all.

Operator: Your next question will come from the line of John White with ROTH MKM Capital. Please go ahead.

John White: Good morning and congratulations on the strong results. I wanted to follow-up on Neal’s question on the CO2 project. Are you at a point in any of the negotiations where you could point as to a potential timeframe for closing a deal with somebody or several parties?