Q3 2021 PHX Minerals Inc Earnings Call

And went up the call to a Q&A session that 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 that during today's call, including the Q&A session. We will make forward looking statements regarding expect the expected revenue.

Q earnings future plans opportunities and other expectations of the company. These estimates and plans and other forward looking statements involve both 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 and our most recent annual report on form 10-K, as such and May be amended or supplemented by subsequent quarterly reports on form 10-Q, or other reports filed with the Securities and Exchange Commission the.

The statements made during this conference call are based upon information known to PHX as of the date and time of this call PHX assumes no obligation to update the information presented and today's call.

With that I'd like to turn the call over to Chad Stevens Phx's Chief Executive Officer.

With completion of 3 separate transactions in the third quarter located in the Haynesville and scoop for $13.2.5 million and total consideration.

This brings our total consideration and year to date for minerals acquired to $21.2 million and.

You will hear and a moment the increased levels of operator activity on our minerals is very encouraging to see and we believe will support volume and cash flow growth in the coming quarters.

At this point I would like to turn the call over to Danielle to provide a quick operational overview and then to Ralph to discuss the financials. Thanks.

Thanks, Chad and good afternoon to everyone participating on the call.

During the third quarter, ending June 30th 2020, 1 third party operators active on our minerals converted 37 growth of 1.8 net wells in progress or went to producing this is nearly equal to the number of wells converted to producing reported and the second quarter. The majority of the new wells brought online are located in the Scoop and Haynesville plays we are.

<unk> 50, this quarter over quarter consistency and operators converting well to PDP.

The inventory of wells and progress increased to 97 growth of 4.8 net wells at the end of the third quarter up from 80 growth or 4.4 net wells as reported and our prior second quarter earnings call. The majority of the wells in progress at the end of the third quarter are located in the Scoop stack and Haynesville again, and it's very encouraging to see quarter over quarter.

Consistency and both growth and net wells in progress.

In addition to well inventory, we regularly monitor third party, operator rig activity and our focus areas and observed 13 rigs present on PHX minerals and the third quarter, which is an increase of 8 rigs from the 5 reported at the end of the second quarter. Additionally, we had 46 rigs active within 2.5 miles of PHX ownership, which is.

And increase of 19 rates from the 27 rigs within 2.5 miles of PHX ownership that we reported and the second quarter earnings call. It is important to note that the number of active rigs on our minerals has more than doubled during the third quarter also of note our activity levels in relation to our April 2020, 1 group acquisition, which is primarily located.

And continental springboard III.

The conservative development pace to which we underwrote the acquisition assumed 5 new gross wells will be turned on to sales and 1 additional well permitted by the third quarter and actuality there had been fixed gross wells turned to sales 9 gross wells spud and 2 additional wells permitted we are excited by the heightened activity in the area and we'll continue to monitor these wells for initial.

Production results.

In summary activity levels have remained incredibly consistent from Q2 to Q3, we are seeing continued growth and our PDP well count our inventory of wells in progress and and rig activity on PAGP ownership, all of which are direct indicators for potential increased volume and the upcoming quarters now I will turn the call back to Ralph to discuss financials.

Thanks, Danielle for fiscal third quarter ended June 30th natural gas and oil and NGL revenues increased 31%.

Sequential quarter basis to a total of 19 of $10.9 million total hydrocarbon production increased 9% on a sequential quarter basis as working interest volumes benefited from Workovers performed during the prior quarter and new royalty wells came online while royalty.

Volumes were relatively flat on a sequential quarter basis. They are up approximately 50% from the year ago period as Chad mentioned this is an indication of our acquisition strategy is succeeding about 28% of the royalty volume produced during this quarter are associated with acquisitions.

We have completed since October of 2020.

Average prices received for natural gas and oil and Ngls in the quarter were up 20% on and Mcf fee basis from the prior sequential quarter to $4.37 and.

Please note that these prices reflect the higher natural gas price realized like some operators and February that we received payment for and this quarter as a mineral owner there is a lag and the payment we received from operators and we do not expect these.

Higher price realizations to continue and upcoming quarters, we had a $5.5 million loss on our derivative contracts and the fiscal third quarter compared to a $2.3 million loss and the prior sequential quarter. It is important to note that on a cash basis, we realized a law.

Loss of $1 million compared to a loss of 297000 and.

The last quarter 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.

Lease bonus and rental revenues were up on a sequential quarter basis to 259000, primarily from activity in Dawson County, Texas, which is part of the Midland Basin.

We continue to actively look for opportunities to lease open acres to operators and certainly had more success this quarter compared to the last few.

The company's low increased approximately 3.

$34000 or 3% and the current quarter compared to the prior sequential quarter on a per Mcf basis Theyre working interest.

And for working interest volumes only low decreased from 97.2.

<unk> thousand 80 <unk>.

Transportation gathering and marketing expenses increased 17% on an absolute basis and 9% on a per mcf fee basis as volumes increase the increase is primarily associated with higher treating and processing expenses associated with the increased natural gas.

<unk>, we had production taxes increased 35% from a sequential quarter over quarter basis, as a result of both higher production and realized prices.

Total G&A increased 11% to $2.3 million and cash G&A increased 5% to $1.9 million on a sequential quarter over quarter basis. The increase was primarily due to higher legal costs associated with our increased activity levels.

Adjusted EBITDA was $4.7 million in our fiscal third quarter compared to $3.4 million in the fiscal second quarter or an increase of 38%.

$13.2 million and acquisitions.

And year to date, roughly $21 million and total reported.

We reported a 9% increase and prior quarter volumes and significantly we book a material year over year increase and royalty volumes, which underscores the impact of our acquisitions are having for PHX, adjusted EBITDA of $4.7 million or 38% and 292% increase compared to prior.

Order and year over year quarter, respectively, and lastly, we are encouraged to see the increasing operator activity on and and proximity to PHX minerals with a clean balance sheet and the ability to use our increasing free cash flow toward our mineral acquisition strategy. We have set the foundation for a material growth.

Driving shareholder value.

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

Thank you at this time, we'll be conducting a question and answer session and he would like to ask a question. Please press star 1 on your telephone keypad and a confirmation tone will indicate your line is and the question queue. You May press star 2 if he would like to remove your question from the queue.

For participants using speaker equipment, and it may be necessary to pick up your handset before pressing the star team 1 moment. Please while we poll for questions.

Our first question is from Derrick Whitfield of Stifel. Please state your question.

Hello, and good afternoon, all and congrats on a very strong quarter.

Thanks Terry.

With my first question I wanted to start at a high level with your free cash flow priorities.

For yourself for Ralph.

Now that you have reached your leverage target could you share some thoughts on how you envision balancing your return.

Really balancing your growth versus return of capital priorities over the next few quarters and years.

Yeah. So.

And our long term, we're going to continue to tip toe into.

More dividend to our shareholders.

But thats going to be a process not an event.

And Ralph and I are discussing with the board.

And just in the coming quarters, what that looks like and long term, but we are focused on that but for the most part a disproportionate amount of our free cash flow is going to go to.

Mineral acquisitions, we see a really strong deal flow and lots of deals out there.

Sure.

Prior to and most recently and.

The prior equity offerings, we've done April and September last year.

And we've really gotten into the mainstream of deal flow.

We're a little bit more.

And relative in the marketplace, we have a lot more credibility so people are bringing us deals.

So we can we can really pick and choose which deals we want to look at and I think the smaller deals are for us <unk> million to 3.4 million dollar deals, we're really making good rates of return on those deals the larger the deals yet or a little bit more competitive returns are not quite as strong.

So we're going to continue to focus on our main strategy, which is to grow the company through mineral acquisitions, but we are focused on continuing to grow the dividend along the way as well.

Great and then with my follow up I wanted to shift over to project springboard.

Guys like we noticed during continental's earnings call. Their management team is quite excited about what they're seeing and project springboard 3 and 4.

From your perspective could you offer any color on how the loans.

Low results compare versus the assumptions you guys used to underwrite the acquisition and then Daniel perhaps if you can build a bit more just on the pace of activity versus how you guys underwrote the deal.

Yes, absolutely as far as performance and continental have been very clear and we've seen and the public data that's available to us that their performance is completely repeatable and compared to springboard 1 and 2 so we are very heartened by those results. We believe that these wells to perform to the degree that we predicted in our underwriting and the acquisition.

And the results are inline with what we thought we would see them at the time and acquisition as far as and development pace. We're very excited to see the progress. We are a couple of quarters ahead of what we thought we would see by this time, we expect and very little well movement.

And by July of this year, not really think pace pick up until early next year and 2022 does it the movement with and 60 P versus the 5 we predicted and.

And with that we didn't see coming and that's all very good news.

Terrific and maybe I'll just sneak in 1 more question shifting over to hedges could you guys speak to your appetite to further hedged through 2022 production.

More than what your historic program would suggest given the strength and the curves.

Yeah, I mean, I think I think clearly.

And you know we were 1 of those companies that as we went through the debt the bank Redetermination.

The termination processes last year.

We were asked to to hedge a meaningful portion of our of our PDP reserves right I think I think the macro.

Not only is the macro factors around that change but also.

The strength of our balance sheet is significantly improved compared to 2 a year ago. So it's something that we are in.

<unk> with the bank, we certainly want more flexibility in terms of how we utilize.

Hedges are review on hedges is that you know, they're there to protect day, a minimal level of return and still low.

We've enough upside exposure for you know for our investors and you know and you can see even even with what Chad and I have done.

Over the over the past few quarters really utilizing.

Collars as opposed to swaps to try to maintain debt upside exposure. So so the answer is.

We're working on it.

And we certainly think that the current market dynamics and our in our balance sheet dictate that.

And your requirements be changed.

Very helpful. Congrats again on the quarter.

Thank you thank you Sir.

Our next question is from Nick Pope shareholder. Please state your question.

Good afternoon everybody.

And yeah good afternoon.

I was hoping you could talk a little bit on the balance between.

First quarter of production from debt pad is pretty is.

And we're pretty happy with that.

And I think as we go forward we expect the.

As as new Wells go go online and <unk> were predicting that debt royalty volume is going to increase but at some point you may see some more lumpiness, where and 1 quarter. It goes up more and then it stays flat just because of the way that operators and bring the wells online.

On the working interest if you remember last quarter.

We had a we had a a drop and working interest volumes that were beyond the the natural decline anticipated and in those wells and we found out is that the operators are actually taking the wells down to work them over and they're specifically there were about 3 or 4 wells, where we have a higher.

And average.

Interest and that were taken down and they were worked over and they were also put back onto production. This quarter. So you actually had those workovers being done successfully and and we had higher production as a result of it I think our expectation is barring any any workovers on the existing working interest rate that.

Gonna continue on on on a natural decline.

That's <unk>.

Very detailed very helpful and.

The the acquisitions you know but.

Between the.

The mid continent, and you know mid court and middle Middle part of the quarter and.

And the Seinfield. That's more recent is that all royalties or do you all take working interest and some of those and some of that acreage. If you have the opportunity.

Yeah no.

So.

And that's the difference between Canada legacy corporate strategy, and our new corporate strategy.

Fire to much coming CEO over the decades managers Smith and the senior management would they would not proactively Lisa minerals, they would wait for operators to come and propose wells and they would study the economics of that well and either decide to participate as a non up working interest or.

And the minerals and take a royalty interest and thus we have all these well force where we have non up working interest when I became CEO, we completely changed and strategy, we no longer participate and have not participated and any working interest wells since I became CEO were purely we're moving to.

Truly into a mineral only strategy, we're slowly selling off our non op working at 12 Wars and it's just purely minerals. So the stuff we've acquired over the last year and a half.

And the Redstone stuff and and.

Scoop stack and Haynesville and these other haynesville deals all minerals all royalty.

If it comes if there's a working interest component will strip it out of the deal or will just pass is just not we have zero interest and bringing on any additional working interest wellbores.

Got it that's that's all very helpful. That's all I needed. Thanks.

As a reminder, and he would like to ask a question. Please press 9.

And 1 and your telephone keypad.

And can tell about indicate your lines and the question Kim.

And do you think speaker and Clinton it may be necessary to pick up your handset and with my partner and thank him.

1 moment, please lollipop per question.

Our next question and from Richard Howard and boiling point Me Thursday. Please state your question.

Hi, Yes. My question was 90 per cent answered and.

But on the hedges.

Oh, we were colored $3.20 and correct on that.

The ceiling on the on the on the natural gas callers I think average I think it's like $3.12 somewhere around there okay, okay and.

And that far on currently gas prices are about $4.

So shouldn't should we expect that the assuming gas price to stay the same.

The the cost of the hedges and and the recently completed quarter.

Would not increase that much and I am I, correct or am I, if I Miss something on that.

Yeah, So I mean, the mark to market on the and realized right I mean, it should not.

And could not change it should not issue not changed that drastically just remember that the difference is that you know does.

Does the you're really looking at forward months right and every every every hedge contract settles on a monthly basis right and so you are looking at the comparable month on the forward curve, so spot prices, sometimes are and sometimes they're not.

And indicator of what.

Hydrocarbons will sell for as an example, 3 months from now right. So so it's not you know it I don't want to unequivocally say that you can hold it to spot prices because of the curve makes a difference and as well this is Chad right.

The current from.

Month spot prices for 12, I think it is but the curb going out is back per day, and the price drops dramatically back down toward the low threes.

Got it.

But again that <unk>.

The <unk> the past.

And.

Yeah, I don't want to put words and your mouth, but yes.

And and the follow up to this is do you would you expect that the bank.

<unk> <unk> read the termination would allow you to have a lower level and <unk>.

After you get to the 1.2.

That's the EBITA number at your and.

Yeah, I mean, you know look I mean, I think that too.

And 2 things have changed and then as I stayed and and are prepared remarks, right. I mean, 1 day macroenvironment significantly different from a year ago and that hedge requirement was was asked of US right by the bank. So so that's 1 and then 2 right I mean, our our our our leverage position is also significantly.

Different I mean, if you think back to a year ago. I think we were at about 3 times debt to EBITDA, where we are now at 1.45 times somewhere around there and went through a combination of further debt reduction and increasing EBITDA is Chad said, we'll get to 1.2, I mean, I think I think a reasonable person.

Would expect that.

That that hedge requirement should should.

It should be changed.

[noise] that's music to my ears. Thank you for answering my questions.

Sounds good thanks rage.