Q4 2019 Earnings Call

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Good day, everyone and welcome to Panhandle oil and gas thing incorporated 2019 fiscal year.

And earnings Conference call. Today's conference is being recorded I would like to now turn the call over to Ralph Demicco.

In handles Vice President Investor Relations. Please go ahead.

Thank you for joining us today to discuss Panhandle's fiscal fourth quarter and year end 2019 results with me on the call today.

For prepared remarks, or Chad Stephens, Chief Executive Officer, Rob Winfield, Chief Financial Officer, and myself after prepared remarks, where you will open up the call.

Stuart QNX.

During the Q1 a session. We will also be drawing to buy freedom Web Vice President of operations. Please note that we are also webcasting this call on our Investor Relations website, and Panhandle oil and gas Dot Com. The earnings press release that was issued earlier today is also posted on the investor.

The website before it turned a call over to Chad I'd like to remind everyone did during today's call, including the Q1. Each session. We may have we may make forward looking statements regarding expected revenue earnings future plans opportunities in other expectations of the company These estimates and plans and other.

Looking statements involve known and unknown risks and uncertainties that may cause the actual results to differ from materially materially from those expected or implied on the call. These risks are detailed in our most recent annual report on form 10, 10-K, as such maybe amended or supplemented by.

Subsequent quarterly reports on Form 10-Q , or other reports filed with the Securities and Exchange Commission.

Statements made during this conference call were based upon information known to Pan handle as of the date of this call Panhandle assumes no obligation to update the information presented into call in today's call I.

With that I'd.

Turn to call over to Chad Stephens Panhandle's, Chief Executive Officer.

Thanks, Ralph and thanks to everyone on the line for participating in Panhandle's 2019 fiscal yearend conference call. We sincerely appreciate your time and your continued interest in the company.

First I'd like to address.

This change in strategic direction in the board of directors decision in September to change the leadership, a panhandle to implement this new strategy.

Panhandle's longstanding history was to harvest value for its shareholders from its deep and broad existing inventory of minerals across the U.S.

Hello.

I will talk in more detail later panhandle is shifting to a pure play minerals and royalty strategy.

This strategy includes proactively participating in the consolidation of the mineral sector to grow the company on it in a be accretive basis.

Prior to assuming my current role here at Panhandle.

I was a member of the Panhandle Board of directors for the immediately preceding two years surrendering My title is lead independent director to assume the interim CEO position.

You are in 2018 I retired from range resources as senior VP of corporate development, having been there for 30 years serving.

In various corporate and leadership positions.

From day, one here the whole Panhandle team has been engaged in supported this change and of our new strategy.

Look forward to continuing to work with them to create shareholder value for you.

Hi, I'm very pleased with pen needles 2019 fiscal year performance.

Yes, we generated significant cash flow by executing our strategy of actively managing our mineral portfolio.

Our proactive leasing effort continues to yield meaningful organic royalty production growth bias toward oil production, which is supplemented by the least bonuses we received on the.

Minerals.

In absolute terms royalty volumes have increased a little over 13% over the last four years.

We believe we're also generating material shareholder value through our targeted divestitures of mineral acreage in the largely tax deferred redeployment of those proceeds into.

<unk> acreage, we deemed to have lower risk from both the geologic and a development timing perspective.

In addition, we have materially pay down our debt.

Our total return to shareholders for fiscal 2019 was 25.7 million through stock repurchases dividends and debt.

Production.

This equates to an effective annualized yield.

Of 11.3% for that period.

As we look to maximize the value of our portfolio moving forward, we have shifted away from working interest participation and move back towards being a pure play mineral and royalty.

Company as we see the mineral sector continuing to be a shining light in the energy space with active deal making opportunities.

Our strategy shift shift will take some time as we currently own material working interest production and non mineral related working interest participation rights and we have.

Tend to maximize the value of those assets be it by monetizing at the right time or producing out.

Our focus moving forward is to create value through generating royalty revenue extracting maximum lease bonuses and optimizing our mineral holdings through thoughtful acquisitions and divestitures.

Yes.

At this time Panhandle does not anticipate investing its own capital in working interest participation.

As a result of the strategy shift total year over year 2019 volumes decreased due to new 2018 wells with high working interest.

Coming online in subsist subsequently incurring natural hyperbolic declines off of initial flush production.

We have also incurred a noncash impairment associated with our decision not to participate in working interest wells, which Rob will discuss later.

Going.

Fourth we will focus on growing royalty volumes and expect working interest volumes to continue to decline.

Further we will continue to strive to bill a balanced portfolio that can generate value across various pricing environments.

This means internally applying rigorous.

Technical science to areas with high quality rock underneath well funded low cost operators and bringing our hydrocarbon mix closer to 50 50 oil gas gas mix over time.

Based on the opportunity set we see currently in the marketplace. We are confident this can be achieved.

Right.

At this point I would like to turn the call over to Ralph to provide quick operational overview.

Thanks, Chad I'd like to start by saying that over the prior few quarters. We have made an effort to providing more granular review of activity on our acreage position as we shift to a mineral on royalty focus only our goal is to continue to.

Improve on how we provide this information to the market.

And handle continues to see strong activity on its minimal position as of September Thirtyth 2019, We had 120 gross wells and progress on our acreage with an additional 72 permits filed the majority of the activity continues.

To be focusing the scoop stack in the Bakken regions as of November Twentyth 2019, we had 20 rigs present on Panhandle's acreage and 50 within two and a half miles again predominantly focused on scoop stack and the Bakken.

We continue to actively lease or open minerals, including <unk> minerals.

The had previously been held back for working interest participation. During fiscal 2019, we leased 1700 85 net acres for an average bonus of $855 in an average royalty of 21%.

Two also highlight that the scoop stack region, we have seen leases with.

Bonus in excess of $1500 an acre in royalty rates up to 25%.

On the acquisition and divestiture fronts, we had a very active fiscal 2019, we sold 890 mineral acres in the Permian at an average price of over $21000 per net acre since the end of this.

Fiscal year, we have also sold an additional 530 net mineral acres in Eddy County, New Mexico for 3.4 million consistent with our strategy. These acres were predominantly undeveloped and had more development timing risk associated with them on to buy side, we purchased 408.

Net mineral acres.

For an average of $9400 per net acre in the Bakken and 382 net mineral acres for an average of $4958 into scoop stack since the end of this fiscal year. We have also signed up PS eight to purchase an additional 700.

For net mineral acres in the core of the stack for nine 9.65 million here again I'd like to highlight that the minerals, we're purchasing have existing cash flow and more visible line of sight for development opportunities relative to the minerals that we have divested our deal pipeline continues to be strong.

And as Chad mentioned, we believe the Pan handle is well positioned to participate in the mineral sector consolidation, we continue to see opportunities in the Bakken and the scoop stack for growth and.

We plan on focusing on sections with active permitting and drilling activity as dose provide the best risk adjusted.

Returns in our opinion with that I'd like to turn the call over to Rob who will provide a review of their financials.

Thanks, Ralph first I want to thank everyone for being on the call today before I get into the details I'd like to share that the company had a very good fiscal year and fourth quarter of 2019, especially in light of the tough.

Pricing environment noted in the industry over the past year.

Outside of the noncash impairments in the fourth quarter of 2019 that Chad alluded to earlier the company had a very good year in regards to adjusted pretax net income and adjusted EBITDA as noted in our press release I.

I will now share we do some more details regarding our financial results for the.

Fiscal year ended September 32019.

In 2019 Panhandle generated 66 million in revenues. This was a 47% increase compared to the 45 million from 2018. This was primarily due to the sale of predominantly undeveloped minerals in the Permian basin in New Mexico in Texas for 19.

For a $19 million gained during 2019 oil NGL and natural gas revenues were down 9 million in 2019, primarily due to natural production decline on the significant working interest properties from our 2017 drilling program that came on line during the early parts of 2018 production.

From these properties has experienced a natural hyperbolic decline, which we expected from their high initial rates. The company also had a gain on derivatives of 6.1 million in 2019 versus a loss on derivative contracts of 4.9 million in 2018.

Total expenses before the noncash impairment in 2000.

18 increased 0.7% to 43.4 million from 43.1 million in the prior year. The company recorded a non cash impairment of 76.8 million in the fourth quarter of 2019, which related predominantly to our Eagle Ford shale assets. The impairment on Eagle Ford assets was caused by the company strategic.

And to cease parted is participating with a working interest on the mineral and leasehold acreage going forward and therefore, removing all of the working interest proved undeveloped reserves from the reserve reports.

The removal of the Puds also eliminated approximately 85 million of capital expense obligations net to Panhandle's working.

Interest ownership.

The removal of the proved undeveloped reserves also caused the assets to fail to step one test for impairment as its undiscounted cash flows were non high enough to cover the book basis of the assets. These assets were written down to their fair market value as required by GAAP at 932013 no.

No impairment was recorded during 2018.

Our DNA was also negatively impacted in the fourth quarter of 2019 do that accompanies strategic decision I noted just a moment ago. The company's DDNA rate in the fourth quarter of 2019 temporarily spike to $2, a 50 cents per mcf fee versus $1.45 cents per Mcf.

Fee in 2000 in 2018 fourth quarter.

Based on the company strategic decision to focus on mineral ownership. The company removed all working interest proved undeveloped reserves from the yearend 2019 Reserve report, which caused the DNA rate to increase as those volumes could no longer be used in the calculation of DDNA on our leasehold positions.

This impact was predominantly noted on our Eagle Ford assets.

The approximate increase from the previous quarters DDNA was 1.5 million.

Considering the impairment on the Eagle Ford noted before we expect our DNA rate going forward to be significantly lower.

The company saw a 20%.

The increase in total cost per Mcf via excluding DNA and impairment in 2019 relative to 2018. The increase was primarily driven by lower working interest production as noted previously.

Most expensive production taxes were also influence respectively.

Higher bankrupt interest rates and production.

In rate increase in Oklahoma that was effective beginning the last quarter of 2018.

Our DNA expense also increased primarily due to a onetime severance of 670000 upon the resignation of the company's former CEO as well as nonrecurring restricted stock another compensation.

Expenses expense increases due to retirements and changes in personnel.

Approximately 800000 of the increased G and H expenses are attributable to nonrecurring expenses.

Our adjusted pretax net income increased a 186% to 16.7 million in 2019 from five point.

An 8 million at 2018.

Our adjusted EBITDA was 37.6 million in 2019, which was a 45% increase compared to the 26 million in 2018.

For 2019, both the adjusted pretax net income and the adjusted EBITDA included a $19 million gain on the sale.

Of assets.

The company generated excess free cash flow, enabling us to returned 25.7 million to shareholders through dividend payments stock repurchases and debt reduction.

We continue to deploy inactive commodity hedging program, which extends out through 2020.

And into early 2021.

Currently we have 120000 barrels of oil hedged at a price of approximately $60 per barrel for calendar 2020.

We also have 1.4 Bcf of natural gas hedge at a price of $2.75 per Mcf for calendar through 2020.

Which has meaningfully above the current natural gas price.

We have continually been able to lock in favorable favorable returns for our shareholders through this hedging program and plan to continue.

We are pleased that we continue to generate good sustainable cash flow given our ability to strategically produced revenue in multiple ways.

Now I'll turn the call back to chat to conclude.

Thank you Rob.

I would like to reiterate how pleased we are with our 2019 results and would like to take this opportunity to thank all of the Panhandle employees for their tireless efforts in contributing to this success I'm excited about the new stroke.

TG direction, we have set for the company and look forward to keeping you apprised of our progress in the coming year.

This concludes the prepared remarks portion of the call operator, let's please open up the queue for questions.

Yes.

Thank you.

It is now open for questions.

The question.

Our comments please press star one.

Thank you Paul at any time to join the queue and if you're using speakerphone. Please pick up your hands that provide the best sound quality.

Again, ladies and gentlemen, it is star one of your telephone keypad to join the queue.

Just a moment to give everyone a chance to signal.

Your first question comes from John White with Roth Capital. Please go ahead.

Good afternoon, everyone.

Hey, John .

So I understand the impairment related to the.

Change in the strategic direction.

On the.

Actual.

Right right down of the reserve volumes.

I understand that but just to clarify.

You will be.

Will you be seeking will you be undertaking a marketing effort to sell the to sell the.

Associated with ER with your working interest properties.

Ah Yes, John we are currently working on a couple of different opportunities we found one.

One company, that's particularly interested.

Non up working.

This development opportunity. So yes, we are we're working on that.

Yes, so that many could come back in.

Well.

A portion of portion of that money could come back at all.

Paul a small portion that the market is not really a robustly.

The valuing drilling locations. So we have to just take what we can get it's not a real robust market, but we we will try to get as much cash flows we can from the drilling locations and John It's Ralph I mean, I think you know I think it's not you know it's not buying area, whether we just satellite or don't salad right. I mean, I think theres other options like you know.

And for four and override are getting a spike fee from somebody to take over in a feed there's a variety. We're we're exploring in lots of different options.

That they could create value from ddos undeveloped.

Locations.

Okay.

Well congratulations on all the work you've done and on the on the transition and I'm sure you have more to do.

But oh.

Look forward to staying staying is staying on top of the story.

Thank you Jack to John .

And our next question.

Income from rich Howard with bowling boiling point research. Please go ahead.

Good afternoon.

Hi, Rich Wonder has there been is there a tax realization effect with the impairment charge or do we need to other transactions and I have a couple.

A follow up so I'm not as well.

Yes, there's going to be a realization overtime with our.

Cost depletion.

So we are going to get some tax advantage. If there would have been a sale and that would've been a loss that would have all been ill available right away, but since there was no sale.

That impairment it will just get cost depleted over time, but there will be a tax benefit of it.

And and have we gone.

Non consent on any wells or is that not.

Option.

Yes.

The operator of the.

Eagle Ford assets, which is the major impact of the.

The impairment has sent recently hey, a fees associated with drilling more wells on the asset and we have gone non consent.

And while we're working on looking for someone to.

But to take on those.

Those those drilling obligations.

And what the what are the.

<unk>.

What are the considerations on non consent I mean, if that well pays out say, 150%.

Would it not then become.

Valuable to us.

But the non.

Consent penalty is 400%.

I was 400% not 150%.

But burton virtually who would never come back in India.

Well.

We would hope it would but no.

Okay that sounds very reasonable Oh, the one more question Chad.

So if we continue to generate 20 million.

EBITDA.

When would we well I guess is for Rob to one would we begin to feel the impact of.

Current taxes.

I would say.

That it's going to be with our cost depletion and with our AMTI Carey Ford, it's going to be.

Probably three or four years before we pay a cash tax.

That's a rough estimate rich but.

Realistically unless commodity prices up come up significantly.

It's.

Going to be a little bit of time before we have to pay cash taxes and rich. That's a good question because we did realize.

As we cease participating in working interest wells that will lose the tax benefit of the the idcs.

Exactly at the end at the end of the day, we still think we can create more and Avi.

Go in this direction.

Yes, Okay, no I'm happy with thank you very much.

Yeah.

And thats the remainder ladies and gentlemen, if he would like the question. Please press star one on your telephone.

Anytime.

And there appeared to be no further questions from that's all I'll turn it back over to management for any closing remarks.

We we appreciate everyone participating on the call and like I said before look forward to keeping you up to date as we move through the year. Thanks again.

And that does conclude.

Today's teleconference. We appreciate your participation you may disconnect your lines and have a great.

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