Q2 2021 PHX Minerals Inc Earnings Call
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Good day, everyone and welcome to P. H X Mineral's first fiscal quarter 2021 earnings Conference call. Today's conference is being recorded I would now like to turn the call over to Ralph Demicco, Phx's Vicepresident Chief Financial Officer P.
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Thank you everyone for joining us today to discuss our 2021 fiscal second quarter results with me on the call today for prepared remarks are Chad Stephens, President and Chief Executive Officer, and Carl Vandervort director of.
Geology after prepared remarks, we will open up the call to a Q&A session.
Earnings Press release that was issued earlier today is also posted on the Investor Relations website before I turn the call over to Chad I'd like to remind everyone really price could be.
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Before I turn the call over to Chad I'd like to remind everyone that during today's call, including the Q&A session. We may make forward looking statements regarding expected expected revenue.
Earnings future plans opportunities and other expectations of the company. These estimates and plans 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 our most recent.
<unk> annual report on form 10-K, as such maybe amended or supplemented by quarterly reports filed on form 10-Q, or other reports filed with the exchange and Securities and Exchange Commission. The statements made during the call are based upon information known to PHX as of the date and time of the call.
<unk> assumes no obligation to update the information presented in todays call.
With that I'd like to turn the call over to Chad Stephens ph <unk> Chief Executive Officer.
Thanks, Ralph and thanks to everyone on the line for participating in our PHX as 2021 fiscal second quarter call. We sincerely appreciate your time and your continued interest and the company.
And when you consider the most important aspects of our business PHX had a very successful fiscal second quarter, which included a modest increase in total production volume and material increase in EBITDA and operating cash flow and the continued progress on our strategy execution with the completion of another significant mineral acquisition after <unk>.
Quarter close also the company's financial strength and credit profile has clearly improved over the last four quarters with a further reduction in debt for.
For the first for the fiscal second quarter of 2021, I am pleased to report adjusted EBITDA, excluding gains on sale increased 26% to $3 4 million compared to the prior sequential quarter.
And operating cash flow before changes in working capital totaled $3 2 million or 23% improvement over the prior sequential quarter, both EBITDA and cash flow has improved year over year by over two five times.
Ralph will provide more detail behind the following numbers and a few moments. However, I also would like to emphasize that for the first time in 10 years, the company's royalty volumes exceeded our working interest volumes, which highlights the progress we are making and our mineral growth strategy.
We continue to focus on reducing our debt, which we paid down by $3 5 million during the quarter and an additional $175 million since the quarter and this brings our total debt outstanding as of April 30 to 21 $75 million and represents a 28% reduction over the last year.
We now project that our trailing 12 month debt to EBITDA will be approximately one times by calendar year end 2021.
Having this near term line of sight to a cleaner capital structure will provide us the financial flexibility to allocate and increasing amount of our feature free future free cash flow to our mineral growth strategy and driving shareholder value.
On this past Friday April 30th PHX closed on the previously announced acquisition of minerals in the southern Scoop located primarily in Stephens and Carter counties, Oklahoma and underneath Continental's self designated springboard III asset.
The company completed the acquisition for an aggregate adjusted purchase price of approximately $10 9 million comprised of approximately $8 5 million and cash and one 2 million shares of the company's common stock paid to the seller.
Cash portion of this closing amount was funded with proceeds raised from our recent common equity offering which closed week before last.
With commodity price is improving and rig activity modestly increasing and our areas of focus are improving balance sheet and free cash flow provides the company a broader platform with which to execute its mineral acquisition strategy and grow shareholder value.
Year to date oil prices and improved by 50% to a recent high of 65 natural gas is also beginning to show improved strength on macro supply and demand fundamentals year.
Year over year, the rig activity and two of our core focus areas improved with the rig count and Oklahoma, increasing by 50% and and the Haynesville by a 100%.
We believe all of this positive news is setting up 2021 to be a positive inflection point for PHX as we continue to gain momentum on executing on our strategy at.
At this point I would like to turn the call over to Carl to provide quick operational overview, and then to Ralph to discuss the financials.
Thanks, Jeff and good afternoon to everybody participating on the call.
Looking at the gross rig counts and our priority basins from the end of Q1 to the end of Q2.
We've seen a 29% increase from 14 to 18, and the Anadarko basin and a 7% increase from 30 to 32 and the Haynesville.
Seeing that our last few acquisitions have been and those basins, we feel very optimistic about those numbers, indicating that one operators are achieving strong and repeatable results and excess of their economic hurdles.
And two they're going to continue to allocate capital to those basins.
In addition to the increase and active rigs within our priority basins. The number of gross permits approved has also increased from 170 and the first quarter 2021 to a 189 approved and the second quarter of 2021.
Shifting our focus towards activity on PHX ownership and the updated well counts by reserve categories for the second quarter ending March 31 2021.
We converted 37 gross.
And $1 six net wells in progress two producing wells and.
In contrast to the first quarter, where we only converted seven gross and net 0.02 net wells two producing well raise cats.
That's an impactful increase and net which converted to producers relative to the first quarter.
The majority of the new wells brought online are located and the stack with 19.
Followed by the Haynesville with 12.
As far as wells in progress at the end of the second quarter. We had an additional 80 gross and 0.44 net wells in progress, which is down from 120 gross and 0.62 net as reported on our prior earnings call.
The majority of the wells in progress at the end of the second quarter are located in the Scoop with 42.
Followed by the Haynesville and the stack with 13 each.
The number of wells and progress will naturally ebb and flow quarter over quarter as most of our wells are at.
Most of our wells and progress or within density drilling and spacing units, meaning that.
At the time to convert four to six wells from thrilling to completing to PDP will span multiple quarters.
And the resulting well performance that we're seeing and the east, Texas Haynesville are promising.
That's where we stand operationally at the end of the second quarter and with that I will hand up the Ralph review of the financials.
Thanks, Carl for fiscal second quarter ended March 31, natural gas oil and NGL revenues increased 30% on a seat quite fond on sequential quarter basis to a total of eight $3 million total hydrocarbon production increased 11% on a sequential quarter basis as.
Loyalty volumes benefited from new wells being brought on line, new well volumes associated with our royalty acquisitions at the end of calendar 2020 accounted for approximately 35% of royalty production and 20% of total production this quarter, which we believe.
<unk> validates our acquisition and hydrating strategy recall last quarter I mentioned that we are still in the process of integrating the wells from our 2020 acquisitions I am happy to report that we have completed the integration and for the East, Texas Haynesville assets, which are included and this quarter.
This quarter's results since the end of the quarter. We have also been notified by most of the operators of wells and our 2020 Grady County acquisition that we should be and full pay status effect of this month.
Average price has received for natural gas oil and Ngls and the quarter were up 17% on and Mcse basis compared to the prior sequential quarter.
Two six point.
$363 per M. Cfe. Please note that these prices do not reflect the higher and natural gas prices realized by some operators and the February time and.
And as a mineral owner there is a lag and the payment we received from operators. We expect that any increased price realisation will be reflected in the next quarter and the June 30th.
We had a 2.3 million dollar loss on derivatives contracts for the second quarter ended.
March 31, compared to a loss of $254000. The prior sequential quarter note that on a cash basis, we realized the loss of 297000 compared to again of 613000 and the loss primarily attributable to crude oil hedges.
We put in place last summer during COVID-19 as part of the credit facility Redetermination process.
Least bonus and rental revenues were up on a sequential quarter basis to $58000. We continue to actively look for opportunities beliefs open acres, two operators and shirt and we certainly had more success this quarter compared to the prior.
Total expenses were down 1% on a sequential quarter over quarter basis to approximately six $8 million the companies L O P.
Increased approximately $26000 or 3% and the current quarter compared to the prior sequential quarter on a per mcse basis for working interest only volumes L. O increased from 75.
296 cents per Mcse as wells were taken offline for work over during the quarter.
Total transportation gathering and marketing increased 3% as volumes increased but on a per and cfe basis. It actually decreased to 8% to 57 per mcse pre.
Production taxes increased 61% on a sequential quarter over quarter basis, as a result of higher production and realized prices also note that they realized tax rate as a percentage of sales increased from 4325, 3% as a higher component of total.
Sales came from Texas, which has a higher tax rate.
Total G&A increased 19% to 2 million and cash G&A increased 18% to one $8 million on a sequential quarter over quarter basis. The increase was primarily due to higher costs associated with our annual shareholder meeting and one time costs associated with the <unk>.
Firemen of one employee next quarter, we will not have either of those costs.
Adjusted EBITDA, excluding gains on sale was $3 4 million and fiscal second quarter as compared to $2.7 million and the fiscal first quarter and increase of 26% is Chad mentioned.
We have continued to deploy inactive commodity hedging program utilizing both swamps, and costless callers, which extends out through early calendar 2023, you can see a detailed up to date schedule and the press release and 10-Q first or finally, let me also touch on our deck.
We had total debt of 23, and a half million as of March 31 of 13% reduction from the prior sequential quarter.
As of right April 30th we we have further reduced that 221 75 million also as of April 30th we had $348 million and cash on the balance sheet after giving affected the acquisitions closed since the quarter and note that three two mil.
Of that total was raised and the equity offerings since the quarter and and will be used to help fund future acquisitions are that the trailing 12 month EBITDA decreased and 234 times from $2 99 times on December 31, 2020 is Chad mentioned, we expect this metric to <unk>.
<unk> substantially and the next quarter as the June 30th 2020 quarter at the height of COVID-19 drops off the calculations and we continue to reduce our total debt debt with that I'd like to turn the call over to Chad for some final remarks.
Thanks Ralph.
Positive second quarter results reflect a few important highlights one improving volumes EBITDA operating cash flow increased substantially and we mentioned earlier and that continues to be reduced.
We are now and and clear path to allocating our future free cash flow towards our stated growth strategy and returning capital to our shareholders. We look forward to keeping you updated on our progress. Thank you. This concludes the repair prepared remarks portion of the call operator, let's please open up the key for questions.
Thank you ladies and gentlemen, the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time, we do ask if you are listening my speakerphone to please pick up your handset for optimum sound quality. Please hold for just a moment, while we pull for questions. Once again and if you had any <unk>.
Questions or comments, please press star one.
Our first question today is coming from Derek Whitfield, Please and answer affiliation and then please your question.
Good afternoon on and congrats on your on strong quarter and update dirt.
<unk> with my first question I wanted to start actually where you just ended Chad and specifically for yourself, where Ralph I wanted to focus on your longterm returned capital vision and ask how are you guys and vision balance on your cruise versus return on capital priorities over the next few years.
And that's probably a two.
Two pronged answer and I'm going to answer part of and and let Ralph and answer the other part of it as we have.
We've improved our balance sheet pay down on that were clearly on a path to being able to allocate most if not all of our free cash flow to our main strategy growing the company through mineral acquisitions, and so we're being able to expand to kind of the full.
The full broad foundation of the strategy, which is a three legged stool.
We're going to be able to implement a ground game with some of this free cash flow, which we have not been able to hence since we're.
Allocating all of our capital opinion down a bit so we will have free cash flow to to implement a ground game.
And we're going to continue to look for these mid tier sized deals similar to what we've closed on recently $10 million to $20 million type deals I think thats, a bread and butter, there's not right now we don't see a whole lot of competition and were able to negotiate one on one with the sellers, they're not competitive bid processes. So.
Those right now where we are those mid tier size deals are are really going to have more success and then we are going to look for a larger more transformative deal, making sure that any larger deal with definitely be.
Accretive, but it it would be transformative and those those deals are are more competitive harder to complete more issues governance issues.
And that sort of thing, but we're constantly scouring landscape for a day like that but as we do.
Have success and our cash flow bills on these specialties mid tier size deals and we're going to have more free cash flow either to continue to apply allocate that capital two two deals or is I'm gonna, let ralph kind of speak to what else, we might do with with free cash flow yeah. We've.
Talked before about.
On prior earnings calls about.
Returning additional capital to shareholders and and obviously that subject to to the board approving it right, but and we said that it's a it's a process not and event right.
Our plan is to overtime increase.
Dividend distributions to shareholders in terms of when and how much again, that's up to the board, but but but certainly it's something that we think about every day in terms of how to optimize.
Given growing the business is number on priority right per realizing that.
We also have the ability to to increase the dividend overtime. So so I think the answer is stay tuned and and.
Over the coming quarters right.
We will continue to have these discussions internally and we'll put out some additional information.
As we make these decisions.
Great and it makes sense and and for my follow up I wanted to ask a question on your working interest volumes with the improvement we've experienced and both the commodity and capital markets over the last few months there appears to be.
And increasing interest and P D P heavy assets and the A&D market.
<unk> is that is that a fair assessment and and be does this environment and your recent success and mineral acquisitions open up working interest volumes as a divestiture opportunity for Ya.
Yeah. So.
That's a very good question with Ralph and I'll talk about that a lot. So.
Really at the highest level and when you think about the future of the company is not in our existing asset base and.
So that.
Current SMH, excluding and minerals that we've acquired recently.
The existing asset base is going to be a tool. They will use one of the many tools. We have that will use to redeploy proceeds as we divest of wells working interest wells, especially redeploy those proceeds into acquiring minerals. So that when we talk about high grading asset base, that's exactly what we're going on.
Do but it's most likely where we are today.
It's not going to be an event and it's gonna be a process, where we sell five wells here 10 wells. There is 20 wells, they're scattered there over across the entire state of Oklahoma for the most part of the legacy wells.
And it'll be more of a process, where we peel off a few wills at a time, but we are going to work on that and it's a project on actually internally working on as we speak. So if you think about when you look at our our slide deck. We talk about 7000 wells half of those are working interest well bores is 3500 wellbore is that we need to figure.
And what to do we have product try to maximize the value and redeploy as we sell them redeploy those proceeds so it's and it's going to be an ongoing process.
Maybe some day, when we grow up and get real big we might be able to do and event and sell a whole bunch of and at once but I envision just.
Doing more of a process and peeling off a few at a time and Ah.
Good opportunity for this Eric as as as operators propose.
Send us afp's for Workovers right, we take the opportunity to basically sell that working interest wellbore back to the operator, and we've had some pretty good success with that.
Again, it's it's Ah.
<unk> at a time and they are not material number's, right, but but over time.
We think they will it will let up and it will become you'll see a drastic change.
Detail and thanks for your time and response guys.
Thanks, Thanks to.
Thank you.
Our next question today is coming from <unk> Chandra Please and actor affiliation and then what was your question.
Yeah, Thanks, guys Northland, so the 10th and the sweet spot the $10 million to $20 million acquisition and you will you be mainly sort of motivated by that number you know be open minded with where those packages or or or what.
And your first prioritize regionally and then look for dollar amounts and that sweet spot.
Yeah, you can you can certainly get.
Distracted if.
If you look at every deal it comes along so.
There at the and you you really stayed the real Genesis of any acquisition, we do has to be and the three areas of focus that we've kind of defined for ourselves one is and the scoops deck area and we know the rock we know the geology, we know the operators.
Texas Haynesville, we've already done several deals there we're gonna we're looking at several more right now we will do more deals.
And East, Texas, and we're actually trying to get our arms around a couple of deals and the Marcellus right. Now is you know my background 30 years at range resources and in the Marcellus on no it well and I'd love to try to get some deals and get some kind of a nucleus core of of assets up there and and start expanding our presence up there. So it's those.
Three areas that we would focus on and then in the deal size.
Just the the perfect size for US is that 10 to 20, just in terms of our cash flow our balance sheet kind of what we can afford and.
As we as we grow and we get more cash flow that that 10 to 20 will expand to 15 to 30 or 20 to 40 or so it will expand.
And and the larger deals with us it on a little bit more competitive you see and some of these larger funds.
Doing the 100 plus million dollar deals that are that are going to be looking for those those type packages and.
And the same areas, so they're going to be a little bit more competitive, but we'll always keep our ear to the ground and look for that right deal on the right moment to strike on a on a bigger deal.
Okay I got it and then I guess.
Your exposure can you just remind us.
<unk> Marathon I think it's not imminent, but it will be and the next several quarters they'll bring activity back to stack I suppose.
Do you have a lot of exposure there to them.
Well, so marathon they have somewhere around 300000, net leasehold acres across the stack going south and east through the Scoop, where we just announced on most recent acquisition. So they have some leasehold day.
Down and right in the area, where we just acquired the stronghold.
<unk> and it's our understanding and there's a few permits floating around out there that marathon is file at the Corporation Commission, they moving back up into Grady County.
Where we closed on some minerals.
Here last fall.
They have a big corps position, there and they actually have a JV with continental developing continental developing the Woodford shale and marathon developing the sycamore.
Which is just above the woodford so they're underneath the same sections.
Continental developing one zone marathon developing the other zone. So it it's a it's a focus for them and I think obviously with some of the limitations coming in the back and especially of baffles shut in marathons got to figure out where they're going to allocate your capital and where they're gonna grow. So this is given the right to return the well costs.
And the well performance, we see marathon coming back how meaningful I don't know, what we see them coming back in this area and and the government.
Thanks, guys and congrats.
Thanks.
Thank you we have no further questions and thank you at this time do you have any closing comments you'd like to finish.
I do not we again, we were pleased with a quarter and we look forward to keeping you updated and the quarters to come thanks for your attention and have a good day.
Thank you ladies and gentlemen. This does conclude today's event you may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation.