Q4 2021 PHX Minerals Inc Earnings Call
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Good day, everyone and welcome to PHX minerals fiscal 2020 one year end earnings Conference call. Today's conference is being recorded I would now like to turn the call over to Ralph to Amigo, Thx's, Vice President and Chief Financial Officer. Please go ahead.
Thank you for joining us today to discuss our 2021 fiscal year end results with me on the call for prepared remarks are Chad Stephens, President and Chief Executive Officer, and Danielle Meso Vice President of Engineering. After prepared remarks, we will open up the call to a Q&A session.
The 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 that during today's call, including the Q&A session. We may make forward looking statements regarding expected expected revenue earnings.
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 in our most recent annual report on Form 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.
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 in todays call with that I'd like to turn the call over to Chad Stephens ph excess Chief Executive Officer.
Thanks, Ralph and thanks to all of you on this call for participating in Phx's fiscal 2021 year end conference call. We appreciate your interest in the company.
We closed out our fiscal year 2021, I would like to pause and reflect on the progress we have realized over the last two fiscal years.
I assume my role as CEO of PHX in January of 2020, we embarked on a new mineral only strategy. Since then we have transitioned the complexion of the company by changing the company name to PHX minerals completely rebuilt our management and technical team and bolstered our board.
Two new highly qualified members.
Over this two year period, we have reduced debt by 50% to approximately $17 5 million today.
We established a new bank credit facility, and just last week announced a borrowing base increase of 16%.
Dramatically improve liquidity and collateral profile.
Closed mineral acquisitions totaling approximately $40 million with another closing next week.
$5 8 million.
Divested of legacy non op working interest wells, realizing almost $5 million in proceeds.
This high grade our asset portfolio will provide improved cash margins reflected in our future financials.
DD&A per M. Cfe has decreased by 35%, which at current strip prices will begin driving profitability and increasing return on capital employed over the next few years.
We are proud of these accomplishments, especially during COVID-19 and a very difficult energy market and are a testament to the high caliber team at PHX, with whom I am proud to work with every day.
Summary, PHA acts as a much stronger company in every aspect from two years ago, with an improving asset base and a high quality prospects to continue this dramatic company transformation at this point I'd like to turn the call over to Danielle to provide a quick operational overview and then go out to discuss the financial.
Falls.
Thanks, Chad and good afternoon to everyone participating on the call.
During the fourth quarter, ending September 30th 2021 third party operators active on our minerals converted 67 gross or one seven net wells in progress or with two producing wells compared to 37 gross or one eight net with converted to PDP in the third quarter. The majority of the new wells brought online are located in the scoop.
Play we are encouraged to see this level of quarter over quarter activity growth for operators, bringing recently drilled wells online as well as their inventory of drilled but uncompleted wells or that had been delayed due to COVID-19 and economic conditions in 2020.
The inventory of wells in progress included 86, gross or 0.46 net wells at the end of the fourth quarter compared to 97 gross or 0.48 net wells as reported in our prior third quarter earnings call. The majority of the wells in progress at the end of the fourth quarter are located in the scoop and the Haynesville place notice the gross to net ratio on wells in progress at virtually.
Double compared to the world converted to P. D. P. This quarter, we are focused on continuing to improve this ratio as we execute on our mineral acquisition strategy, while our legacy administered while our legacy minerals are widespread and may contain just a few acres per section our acquisitions have focused on highly concentrated minerals and our focus areas with impactful net revenue interest.
While this will help to grow our quarterly reported volumes and smooth out volatility. In addition to well inventory we regularly monitor third party, operator rig activity and our focus areas and if there are 14 rigs president on PHX minerals in the fourth quarter, which is an increase of one rig from the 13 reported at the end of the third quarter. Additionally, we had seven.
Andy rigs active within two five miles a P E checks to ownership, which is an increase of 24 rigs from the 46 within 2.5 miles of THL ownership that we reported in the third quarter call. The number of active rigs on our minerals has stayed consistent quarter over quarter and it is important to note that activity levels near our acreage has significantly increased.
In our core areas, particularly the scoop stack and Haynesville in summary, overall activity levels have remained elevated from third quarter 2021 to fourth quarter 'twenty 'twenty. One we continued to see heightened development on both our legacy and recently acquired minerals and are excited about these positive indicators for future volumes.
We also recently completed our annual year end Reserve report for fiscal year, 2021 and is prepared by the glare Mcnaughton.
And this report is a year over year proved reserve increase of 25 D. C. S. E. This positive revision can be attributed to improved pricing and economic conditions. During the 2021 fiscal year and mineral acquisitions with regard to mineral acquisitions. In particular, we have added eight six bcf E with over half as proved undeveloped or Pud reserve.
<unk>, which we are required to be at least the permit or a well in progress in order to qualify as proved additionally, our acquisitions have added over 750 probable bringing our year end probable count to over 1500 viable locations. All 500 of these locations had been individually chosen with geologic and rather reserve engineering scrutiny.
Applied to arrive at a PV 10 value for each location the only material risks associated with each of these probable locations is timing of the development, which is a mineral owner we have no control over we categorize in scheduled eases probable to allow for this timing risk ultimately at strip pricing. Our proved PV 10 inclusive of post year end.
Actions and divestitures through November 'twenty, 'twenty, one, it's $118 million and our total three P. PV 10, our total proved probable and possible reserves value, which includes the 1500 probable and an additional 500 possible locations, it's $226 million, our diligent focus on acquisitions in our highly active.
Core areas such as the Haynesville in Scoop has resulted in meaningful value growth for the company and an increasing inventory of high quality locations under quality operators to bolster our future growth now I will turn the call back to Ralph to discuss financials.
Thanks Danielle.
First I want to thank everyone for being on our call today I'll be discussing the results for both the fiscal fourth quarter of 2021 and the full fiscal year 2021 results.
For our fiscal fourth quarter ended September 30th natural gas oil and NGL sales revenues increased 11% on a sequential quarter basis to a total of $12 1 million for fiscal year 2021 sales revenues were $37 7 million.
Which represents a 62% increase over fiscal year 'twenty 'twenty.
Total hydrocarbon production decreased 11% on a sequential quarter basis, primarily due to the high decline rate of new wells that came online.
In the second and third quarters of fiscal year, 'twenty, 'twenty, one and fewer high interest wells coming online this quarter.
Given the mineral owners do not control the timing of wells, we expect to see some lumpiness from quarter to quarter on.
For the production.
For the full fiscal year production was up 6% to nine P. C. S E.
Royalty production was actually up 25% on a year over year basis due to increased drilling activity in our acquisition activity, while working interest production was down 6% due to the natural decline of the wells and P E checks no longer participating in any.
New working interest wells since late 2019.
<unk> revenue royalty volumes accounted for 46% of total production in fiscal 2021 compared to 39% in fiscal 2020, we expect royalty revenues to be significantly over 50% of total production in 2022 given.
The previously announced legacy working interests divestitures over the last two months along with those net proceeds being reinvested into royalty production and new royalty wells coming online.
74% over fiscal 'twenty, 'twenty, one production volumes, where natural gas, which aligns with our long term strategy the natural gas as the key fuel for a sustainable and clean energy future.
Average prices received for natural gas oil and NGL in the quarter.
Up 25% on an M C S E basis from the prior sequential quarter to $5.46 for the fiscal year prices increased 53% to an average of $4.16 per M. C. S E.
As explained in more detail in our 10-K, when we moved our bank loan to independent Bank, we terminated the existing book of hedges with our prior lender and initiated a similar new set of hedges with BP Securities through independent Bank.
In our fourth fiscal quarter, we recorded a loss on derivative contracts of $8 1 million compared to a $5 5 million loss in the prior sequential quarter.
Note that on a cash basis inclusive of the unwinding of the B O K hedges and Rehabbing with BP, we realized a loss of $2 4 million compared to a loss of $1 million sequentially for the full fiscal year 2021 we had a $16 2 million loss compared to.
A gain of 900000 in fiscal year 'twenty 'twenty on a cash basis, we had a $3 1 million loss compared to a $4 1 million gang you over here.
These losses are primarily attributable to hedges, we put in place at the height of Covid in the summer of 'twenty 'twenty.
The request of our prior year lender.
The company's alaouite increased approximately 66000 or 6% in the current quarter as compared to the prior sequential quarter for the full fiscal year 2021 L. O E decreased 611000, or approximately 13% we expect L O.
The decrease in fiscal 2022 as a result of our previously announced the legacy working interest Wellbore divestitures.
On a per M. C. S E basis for working interest volumes only L. O E decreased from 92 cents to 86 cents per M. C. S E on a full year over year basis.
So transportation gathering and marketing increased 6% on an absolute basis to $1 6 million.
On a sequential quarter basis, and increased 20% to $5 8 million on a full fiscal year over year basis. These expenses are primarily tied to movements in production volumes.
Production taxes increased 4% on a sequential quarter over quarter basis, and increased to 89% on a full fiscal year over year basis. These expenses are primarily tied to movements in both production volumes and commodity prices.
Total G&A decreased 6%.
So $2 1 million in cash G&A decreased 7% to 1.8 million on a sequential quarter over quarter basis on a full fiscal year over year basis total G&A increased 2% to $8 2 million in cash G&A increased 2% to seven.
Two 2 million.
Adjusted EBITDA was $4 1 million in our fiscal fourth quarter compared to $4 7 million in the fiscal third quarter. The decrease is primarily associated with lower sequential quarter over quarter production volumes as explained earlier.
For the full fiscal year 2021.
Adjusted EBITDA was 15 million compared to $13 5 million the prior year.
Pretax loss for this quarter was $3 3 million compared to a loss of $2 2 million during the prior sequential quarter.
For the full fiscal year 2021 pretax loss was $6 9 million compared to a pretax loss of $32 2 million, which includes a.
29 million.
Noncash impairment in 2020.
I'd also like to point out that absent that $5 7 million unrealized mark to market loss on the hedges during the quarter and the 13 million loss for the full year recall, our hedges were put in place in the middle of Covid. In 2020, we would have generated positive pretax income of approximately.
Emily $2 4 million for the quarter and $6 2 million for the full year, which demonstrates the earnings power of PHX. We anticipate this earnings power would translate into profitable quarters in the near term.
We had total debt of $17 5 million as of September 30th a 12% reduction from the prior sequential quarter.
Our debt to trailing 12 months EBITDA decreased to 1.17 times on December seven we entered into an amendment to our credit facility with independent financial and mid first bank to increase our borrowing base to 32 million, which improves our liquidity. This is a pause.
<unk> reflection on the strategy to high grade our asset base and also gives us additional bandwidth to continue to grow the business over time pro forma the latest predominantly PDP Haynesville acquisition, which we announced last week, our total debt outstanding will be approximately $20 million post closing.
Once closed we all hedged the majority of the estimated PDP production in order to lock in returns and applied the cash flow to maintain our stated leverage targets.
As Chad mentioned, we were very pleased with achieving our goal of strengthening the corporate balance sheet over the past two years, Despite COVID-19, India associated energy market downturn.
Since the first fiscal quarter of 2019, 100% of our free cash flow has been dedicated to paying down debt now, though we have attained our targeted leverage metrics, we will allocate a majority of our free cash flow towards acquisitions of minerals per our corporate strategy instead of <unk>.
Solely debt repayment.
Finally, the audit process related to the audit for the fiscal year.
Management together with the company's independent auditor identified a material weakness in the company's internal controls related to the review of the annual income tax provision prepared by a third party firm.
Specifically the company's review of the annual tax provision did not include a process to sufficiently evaluate deferred tax assets to determine if a valuation allowance was necessary. It is important to note that this event does not cause any restatement in current or.
Prior financial statements looking forward. This issue will not have any material impact on future cash flows of the company.
With that I would like to turn the call over to Chad for some final remarks.
Thanks, Ralph to summarize our fiscal year 2021 results.
We reduced debt by 40% and achieved our debt to EBITDA target.
Proved liquidity by increasing our bank borrowing base by 16%, reflecting an improving collateral profile closed on $30 million in mineral acquisitions in our core areas of focus.
Since year end September 32021, we have closed on an additional $10 million in mineral purchases with $5 8 million to close later this month.
Yeah.
Divested of legacy non op working interest wells, realizing 5 million in proceeds and eliminating 700000 of a R O from our balance sheet.
This high grading process of acquiring minerals and divesting of non op working interest is driving improved cash margins were.
We are excited about the momentum we have built to date in fiscal year first quarter of 2022 with our announced acquisitions.
Confident of our prospects to continue to build shareholder value. The remaining of this year. This concludes the prepared remarks portion of the call operator, let's please open the queue up for questions.
Thank you at this time, we will be conduct.
A question and answer session.
Ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue.
Using speaker equipment, it may be necessary to pick up your handset before pressing the star one moment, please volleyball for questions.
Our first question is from Derrick Whitfield at Stifel. Please proceed with your question.
Good afternoon, all and congrats on your distribution increase in high grading transactions over the last several weeks.
Thanks, Eric.
With my first question I wanted to start at a high level with your free cash flow priorities are for yourself chatter Ralph.
Now that you have reached leverage targets as you noted could you share some thoughts on how you envision balancing your growth versus return of capital priorities over the next few quarters and when or at what scale I should say would you envision becoming a pure return of skills or return of capital story.
Yeah, Derrick we are peddling as fast as we can we are extremely small company.
We want to grow.
To a larger company and be relevant and competitive.
And larger deals. So we think we can get better rates of return allocating as much capital as possible to these acquisitions and it's it's kind of as I've said before to some of our investors is kind of a good news bad news we are small.
But the good news is were small and we can look at these and close on these smaller acquisitions. These two to $4 million to $6 million acquisitions, making great rates of return and it's relatively.
It's not that competitive these size deals, but it's material to us. So we can grow pretty quickly doing using all of our cash flow allocating as much as we can of our capital our cash flow to these smaller deals getting great rates of return and a relatively noncompetitive arena.
Great that makes perfect sense, and then with my follow up based on your recent acquisitions could you share.
Some visibility on your production for the next six to 12 months as best as you guys can see today.
Yeah.
Hey, Derek it's Ralph.
So I would say obviously, we don't we don't necessarily provide forward looking guidance at this point I think I think what you would expect to see on the on the working interest.
Side is a continuing absent of selling any additional working interests, which we're always looking at right.
I think you would you can look at a decline rate on the base working interest production and are in the low teens I think is a pretty decent.
Approximation right and then the if you think about on the royalty interest side on the base production that we did the base PDP that we have today at decline rates, probably in the sort of high teens is what I would say and that's just from a function of.
Higher interest our NRI wells that we've acquired that have come on production right, but I think as you see the.
The the Puds.
<unk> the wells in progress and then also quite frankly, the probable is coming online over the next 12 months.
I think I think in there on the royalty side, you know achieving a growth rate that is year over year pretty similar to what we achieved from last year to today, right, which I think was 25% right. It certainly it certainly achievable.
Obviously, we don't control timing of wells right, but I think if we can repeat the.
Or or even improve upon what we did on a year over year basis. When the royalty volumes I think that's that we you know I think we would expect to have something similar to what we saw this year.
That's great very helpful and congrats again on the distribution increase and you're a high grading transactions.
Yeah. Derrick this is Chad let me, let me just add a little bit to the left you hanging on your answer on your question.
We did announce on our press release Youll see that we announced an increase in our dividend.
Relatively modest increase on a percentage basis quite a bit but on on a dollar basis is pretty small but.
We just want to.
To let the shareholders know that we're mindful of the dividend and when and where we can we will continue to tiptoe into a greater dividends.
Turn of capital type return on capital type.
Dividend increases.
Yeah.
That's great. Thanks, Chad.
We have reached the end of the question and answer session I will now turn the call back over to Todd Stevens for closing remarks.
We're excited again as I've said.
Called out we're excited about the momentum we've created and we look forward to updating our shareholders on the next quarterly call very soon thank you all for joining us today.
Yeah.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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