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

Riley Exploration Permian, Inc. (AMEX:REPX) Q4 2023 Earnings Call Transcript March 7, 2024

Riley Exploration Permian, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Riley Exploration Permian’s Fourth 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: Good morning. Welcome to our conference call covering the fourth 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 and 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. 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: 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 fourth 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 MBoe 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 EBITDAX, $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 cubic feet per day of purchased CO2 and 2 million cubic feet 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 re-pressurization of the reservoir with water to reach the minimum miscibility pressure for optimal CO2 affects.

This sets the stage for promising long term opportunities and 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 mile 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 a 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: 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 is lowered 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 in 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% to 55% of operating cash flow, with the inverse highlighting a very robust 45% to 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 other companies we’ve analyzed have weaker forecasts.

I’ll turn it back to Bobby now.

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: [Operator Instructions] The first question comes from the line of Neal Dingmann from Truist Securities. Please go ahead.

Neal Dingmann: Good morning, Bobby and Phil. Nice results, guys. My first question is just on this 2024 plan, and I’d call the capital efficiency plan. Could — what do you all just discuss, and Phil, 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 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: Yes. Good morning, Neil. This is Philip. We do find ourselves 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. Does that answer the question or any more color [Multiple Speakers]

Neal Dingmann: No, you absolutely did, and maybe just a follow up to that, just maybe talk a little on capital allocation on — again, you’ve got a great dividend. Would you think about buybacks and how does sort of debt repayment sort of fit into this, given — yes, 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, this year.

Philip Riley: Right. And I guess one more thing I’ll say before 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 continued 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. That’s — 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 pay down. 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% to 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 paid down, you made an allusion to buybacks, so I think with debt paid down bit more in the future, then we can explore other forms of shareholder return.

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

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

Jeffrey Robertson: 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?