Q1 2022 PHX Minerals Inc Earnings Call

Good day, everyone and welcome to the PHX Minerals' 2022 first quarter first fiscal quarter earnings Conference call.

A question and answer session will follow today's presentation. As a reminder, today's conference is being recorded.

Now I'd like to turn the call over to Ralph Jamaica, Phx's, Vice President and Chief Financial Officer. Please go ahead.

Thank you for joining us today to discuss our 2022 first fiscal quarter results with me on the call today for prepared remarks, Chad Stephens, President and Chief Executive Officer, and Daniel 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 yesterday 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 revenue 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 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 S. E C.

Statements made during this conference call.

Are based upon information known to PHX as of the date and time of this call ph X assumes no obligation to update the information presented on today's call with that I'd like to turn the call over to Chad Stephens Ph X as Chief Executive Officer.

Thanks, Ralph and thanks to all of you on this call for participating in PHX as 2022 first fiscal quarter Conference call. We appreciate your interest in the company.

In my annual shareholder letter included in Ph exit 2021 annual report recently issued to our shareholders.

Laid out all of the material accomplishments, we achieved in fiscal year 2021.

Inflection point in the company's strategic direction. These material 'twenty, one accomplishments represent and the successful completion of the company's financial transition as our fiscal year end 2021.

I believe these accomplishments represent a very solid foundation from which we have and will continue to create shareholder value.

We are proud of these achievements, but recognize we have much work remaining and we will continue to proactively execute the defined strategy, which I'll talk about in a minute.

As we move into PHX as fiscal year 2022, you will note our first quarter 'twenty two results clearly demonstrate the traction we continue to gain from our mineral acquisition strategy with royalty volumes, increasing and working interest volumes declining. This is the direct result of our.

Previously announced mineral acquisitions and the sale of legacy working interest properties on which we closed last October and November .

This is a methodical process that involves divesting mature non operated working interest properties and redeploying the cash proceeds into acquiring minerals and our core basins, the scoop and Haynesville with high rock quality attributes and active drilling under reputable and credit worthy operators.

These mineral acquisitions provide immediate royalty volumes and cash flow along with an inventory of drilling locations that as these locations are developed in the near future will contribute additional growing royalty volumes and cash flow.

I would also like to point out that the non producing locations. We have purchased over the last two years are being converted to producing wells at a faster pace than we forecasted during our underwriting process, which validates our strategy.

This buy and sell high grading process generates a dynamic of declining working interest volumes with no capital allocated to the working interest assets to increase production and slowly divesting of lower valued mature working interest properties, while materially growing our royalty volumes through the acquisition costs.

Yes.

This dynamic is dramatically highlighted when you consider year over year royalty volumes have grown by over 60% and non operated working interest volumes have declined year over year by 33% percent.

We project that royalty volumes will present more than 75% of overall corporate volumes by the end of fiscal year 2024 is our inventory of Unreal locations are developed this timeline may be accelerated as we find good opportunities to divest additional working interest well bores.

This will drive better operating margins decrease lease operating expense grow cash flow and generate an attractive return on capital employed.

You see this materializing in the first quarter 2022 with impressive reported net income and earnings per share.

You will see our financial results only approved from here.

Low value hedges, which were put in place as a defensive measure in the depths of Covid in 2020 will fully roll off in the next several quarters thereafter, our hedges had been placed for more opportunistic posture, taking advantage of the improved commodity price macro and our increasing royalty.

Volumes, which provide us with increasing cash flow in the very near future.

We have a great partner in independent bank, who understands our strategy and has demonstrated their willingness to grow with us we have a strong balance sheet and more than ample deal flow and wish to allocate our free cash flow.

We are confident that the almost $50 million a mineral acquisitions, we have closed over the last two years, we will begin to bear fruit in the coming quarters, which will help achieve our ultimate goal of building shareholder value.

At this point I would like to turn the call over to Danielle to provide a quick operational overview and then to route to discuss the financials. Thanks, Chad and good morning to everyone participating on the call. During the first quarter third party operators active on our minerals converted 68 credits a 0.19 net wells in progress or web to print.

Do you think compared to 57 gross or one seven net converted to PDP in the fourth quarter with the majority of the new wells located in the Scoop and Haynesville plays it is encouraging to see activity levels remain elevated on our acreage and consistent conversion to PDP quarter over quarter, our inventory of wells in progress included 65 gross or 40.

<unk> net wells compared to 86 gross or four six net wells as reported in our prior fourth quarter earnings call. The majority of the wells are located in the scoop and the Haynesville players.

Over the past four quarters, we have been able to replace all of the net well convert into producing with new wells in progress also note that the ratio of net to gross for our current web inventory is more than double the net to gross for our converted PDP this quarter and although our gross inventory of wells is down quarter over quarter. The net inventory is relatively consistent.

The continuing improvement of this ratio is a direct result of successfully executing on our mineral acquisition strategy.

Hang on highly concentrated minerals with impactful net revenue interest per well and near term development visibility. In addition to well inventory we regularly monitor third party, operator rig activity and our focus areas and observe 20 regs present on THX minerals as of January 31st which is an increase of 30% over the 15 reported in the fourth.

Our earnings call. Additionally, we had 92 rigs active within two five miles of Phs ownership, which is an increase of 25% from the 70 ranked within 2.5 miles that we reported in the fourth quarter.

Overall, the heightened rig activity on our legacy and acquired mineral acres paired with a strong inventory of high quality with are positive indicators for future growth in production volumes now I will turn the call back to Ralph to discuss financials.

Thanks, Danielle and thanks to everyone for being on the call today for the first fiscal quarter ended December 31, 2021 total hydrocarbon volumes decreased 4% on a sequential quarter basis. This was comprised of a 23% increase in royalty volumes primarily attributable to new.

<unk> drilled and completed wells on recently acquired minerals.

And a 26% decline in our working interest volumes, primarily due to the sale of noncore working interest well bores, which had an effective date of October one 2021, the divestitures accounted for about two thirds of the working interest production volume decline also to know natural gas represented.

74% of our total production volumes.

Natural gas oil and NGL sales volumes increased 13% on a sequential quarter basis to a total of $13 7 million average prices received for natural gas oil and Ngls in the quarter were up 18% on an mcf fee basis from the prior sequential quarter to $6.

<unk> 43.

Companies are we increased 11% to $1, two 5 million or $8 39 per M. Cfe based on working interest volumes only the increase was primarily attributable to three things first higher workover activity in our Eagle Ford leasehold Wells second.

Higher service price inflation, which we're seeing across the industry third prior period charges related to the working interest well bores, we sold at the end of <unk>.

2021.

We are very disappointed with the yellow results.

And are in the process of reaching out to remain working interest operators to inquire about the abnormal abnormal amounts and timing of these charges going forward. We do expect that our LOE costs will decrease to a range of between 800000 and 900000 per quarter based on the current.

Working interest well bores in our portfolio that that may change, depending on future sales of additional working interest well bores.

Total product total transportation gathering and marketing decreased 26% on an absolute basis to $1 2 million on a sequential quarter basis, primarily due to the divestiture of working interest well bores that had high transportation expenses.

In the Fayetteville shale area and an increase in the Haynesville production, which has relatively lower associated transportation expenses production taxes increased 9% on a sequential quarter basis due to higher realized commodity prices of G&A and cash G&A were relatively.

Flat on a quarter over quarter basis at $2 1 million and $1 8 million respectively.

Adjusted EBITDA was $4 4 million in our 2022 first fiscal quarter as compared to $4 2 million in the 2021 fiscal fourth quarter. The increase is primarily associated with higher royalty production higher realized prices and lower overall cash expenses.

Partially offset by lower working interest production.

Pretax income for the quarter was $7 4 million compared to a loss of $3 3 million during the prior sequential quarter and net income. During this quarter included a net loss on sale of assets of $2 1 million and a $4 5 million unrealized mark to market gain on our hedge book.

Backing out these items, we would have generated $5 1 million of pretax net and net income as I have stated in prior quarter THX continues to demonstrate its true earning power. Once you strip out. These are noncash items, our total debt increased to $20 million as of December 31.

2011 from $17 5 million the increase is associated with the previously announced acquisition of drilled uncompleted wells in the Haynesville.

Please note that these wells are already online and producing however, they're not reflected in none of those volumes are reflected in our December 31 quarterly results our debt to trailing 12 month EBITDA stands at about one two times.

Lastly, just on the hedges have Chad mentioned the legacy hedges that.

They asked us to put in place in the middle of Covid. Those volumes are going to continue to decline over the next several quarters and should drop by by the summertime should drop by about a third and by about two thirds.

By the end of the calendar year, and we as Chad mentioned, we have opportunistically layered on additional hedges and gas every time that we've seen a spike in prices and as the volumes that were hedged at $2 90 from Covid roll off the new hedges are coming in at a price between.

$3, 50, and $4 per Mcf, which should drastically change the cash generating position of the company as we've worked through our calendar 2022 with that I'd like to turn the call over to Chad for some final remarks.

Thanks, Ralph the positive macro supply demand fundamental outlook has drastically increased the industry rig count with the Haynesville up 20% year over year from 53 rigs. This time last year to 64.

In the Scoop up a 100% from 10 rigs to 20 rigs this supply demand outlook, along with global geopolitical disputes has kept commodity prices rising with oil up roughly 30% and natural gas up almost 20% in the last six months.

We are confident that this increased activity in our areas of focus will translate into increasing royalty volumes and associated cash flow in the coming quarters and will be part of that driving the shareholder value I referred to earlier, we look forward to keeping you updated on our progress in the coming quarters. Thanks again for joining us today.

This concludes our prepared remarks operator.

Let's please open up the queue for questions.

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Our first questions come from the line of Derrick Whitfield with Stifel. Please proceed with your questions.

Good morning, all and congrats on your update.

Thanks Derek.

With my first question I wanted to focus on the acquisitions, you've made to date and ask you to elaborate on a comment made during your prepared remarks.

Specifically as you guys perform look backs on the acquisitions, you've made how are the royalty volumes and activity trending relative to your deal expectations.

Yeah, so just to get into dive into a little bit more detail when we look at any any opportunity.

And Ralph has talked about this in the past the overall profile of an of an acquisition or a after we've done two or three we liked it typically make it shake create a shape of a third PDP a third ducks in Webster wells in progress.

And a third are on drilled locations that will be drilled out in the near future.

So the especially those Puds are reservoir engineer looks at the rig activity in the area and sets out a very conservative pace on windows and drill locations will be developed because that cash flow stream, obviously drives value for the overall.

Acquisition, so cheap cheap follows that on a regular basis and when we do a forecast or a budget and show the board that we have all of these.

Drilling locations that we've acquired slotted in our timed over the next 12 to 24 to 36 months.

And we compare that on a quarterly basis, what we under wrote in terms of pace of development and what's actually going on and it's easy to do so because you can go out into the public records and see permits see where rigs are and just follow the operators and where the wells are being spud it being frac being completed and put online.

And to date on all of these acquisitions. We've done we're ahead of schedule in terms of how many wells. We said we were gonna have drilled by now and the actual number of wells that have been drilled and completed so we're well ahead of the game and that ultimately drives since that those volumes are online sooner and we're getting cash.

Cash flow from those well sooner obviously the.

With the accelerated value of that new earlier volte.

Volumes coming online just helps the overall rate of return and that's helping our volumes and cash flow upfront and near term.

That makes sense.

It does that's great and then.

Maybe just staying on royalty volumes, you're certainly outperforming our model at the moment.

Im not holding you to an absolute number could you maybe share some visibility for.

The royalty production profile over the next six to 12 months.

I'm going to let Ralph talk about we have acquired some properties that are not reflected as he said are not reflected in our financials at this point and I'm going to let Ralph So I'll get in trouble when they let Ralph.

Talk about that yeah.

I think you asked a similar question on the last earnings call, Derek and and the answer I gave was that on a.

Fiscal 2021 or fiscal 2022 compared to fiscal 2021.

We expect that our royalty.

Volumes to increase you know when the 30% to 35% range on a year over year basis, we still standby by that number what we're seeing is is consistent with that so I think that's a pretty good.

Pretty good pretty good guide.

As we sit here today.

Early you're going to see some.

Quarterly a little bit of quarterly volatility right, but when you compare it on a year over year basis, I feel pretty good about those numbers. So remember like next quarter.

As we talked about the acquisition that we made in the in the Haynesville, which included six six wells eight wells.

Six which included six net six gross wells and we have a high NRI on that was right. We know that those are already online and producing because we can see the public data on that they came on in December . So you should have some nice flush production coming through on the $3 31 quarter.

And then you know obviously, depending on what first production looks like when other wells and you know when.

In the following quarters may have a little bit of up and down but.

But for the full year again, 30% to 35% I think is a pretty good number to use.

Great and as my follow up perhaps for yourself Brown for chat. However, you guys would like to tackle it but could.

Could you speak to the A&D environment or minerals, and you're focused basins and separately you speak to the potential of your working interest volumes and noncore mineral positions to serve as a source of capital we.

We were certainly positively surprised by the $2 $1 million net mineral acreage divestiture announced this quarter.

Yeah. So on acquisitions, we see a very robust deal flow.

And are very excited about a couple of deals we actually have our arms around and should be probably closing in the next well next week.

Yeah.

And our.

This one acquisition. We're closing next week is a relatively for us a sizable deal and will bring with us bring to us producing wells with some drilling locations in the future as well so.

We're very excited about the opportunity set before us we're evaluating some other larger deals.

So we see over the next couple of years, especially with commodity prices where they are.

Owners of minerals.

Willing to kind of test the market to sell their minerals. So we're we're we're pretty encouraged about what we're seeing in terms of divestitures again when you go back two years ago. When I first took on this role.

Commodity prices are extremely low and it was the overall environment. The macro environment was very negative and it was very difficult for us to.

Even enter into discussions with with any potential buyers operators of these properties. These non op working interest properties or just overall the market was really nonexistent and as commodity prices have improved we've moved through the worst of Covid.

And the market has come back there's a lot more liquidity in the.

In the divestiture market and we're confident that if we wanted to we could sell a lot more today and we're trying to manage our.

Overall cash flow because as you can see this particular quarter, our royalty volumes were way up but our working interest volumes through the just the natural decline and the divestiture of our working interest our overall quarter over quarter volumes were a little bit down. So we want to manage that be methodical and manage the overall divestiture.

Yes.

So as we do but overall damage our cash flow profile.

But what we will at the right time and the right opportunities continue to sell the non op working interest where it in the near future over the next 18.

18 months to 24 months, the working interest assets will really not be material to the company.

And Derik just to just to touch on.

You picked up on the on the open mineral sales right I think that's another source of capital that's very important to us.

Weekend.

If they were non core minerals that are not in our focus area and they're not producing don't have any activity on them today, if we can monetize that and redeployed into assets in the haynesville.

The springboard areas of the scoop to have more near term activity like the acquisitions that we've done to date.

We think that's that's right in line with the the high grading of the asset base that we've talked about.

And frankly, it's probably it's also easier from a management standpoint right because.

It's a lot easier to manage an asset that has where we own you know let's call. It.

Two we have a 2% NRI versus a five.

Five NRI right. So if weekend again continue to high grade in that fashion.

We think that creates value in the long run and just on the acquisition that Chad mentioned.

I think we announced we put out a press release on that but we haven't we have a PSA on this acquisition closes next week. It's also in the Haynesville when it's very similar to the deal that we announced in December it's actually just a few sections away from it.

[noise] directly offsetting it and we're going to finance at the exact same way cash the cash on hand.

A little bit of debt will hedge the production pay down the debt and look at these divestitures as a way to fund it. So it it's going to be accretive on a cash flow basis and it doesn't really change the overall picture from a balance sheet standpoint, and so we're pretty positive that we can continue repeating that.

Throughout the rest of the year.

Great and then my final question for you guys.

And I'm looking at this space longer term could you share your views on the industry consolidation that has taken place in the E&P sector, particularly in the Haynesville.

And speak to the expected implications on your business.

I do think you'll continue to see upstream E&P consolidation, it's just got to happen.

The lack of capital overall sources of capital.

<unk> have really moved away from giving the E&P upstream E&P companies.

Access to capital so you're going to see a lot of consolidation cost cutting cost saving G&A, especially G&A.

But where we're focused especially in the haynesville, both the southern Scoop and Haynesville are the economics of those wells the well head economics.

Really can compete for capital so.

Whether there is consolidation or not where we are acquiring minerals, we think that they will be developed at.

At the pace at which we're projecting them to be because of that compelling wellhead economics.

They are realized.

We're not that worried about it.

The influence is if there is consolidation will that slow down our pace of development I think that there will be especially in the Permian some of that but the haynesville is really the.

The marginal Mcf.

Gas that's meeting the demand the overall demand and meeting that supply and demand fundamental so that's why we like the haynesville. The economics. The fact that the Haynesville is really that marginal Mcf, that's what's required to meet the market demand for natural gas. So we like where we are and what were.

What we're consolidating here and we think we'll continue to see that consolidation both in the scoop and the Haynesville I'd love to get into the Marcellus again natural gas.

Haven't been able to find the right opportunity there yet so we're just going to continue to keep our head down and do what we're doing in the scoop and the Haynesville.

In China, it's possible with the diversified requiring the.

The Haynesville Directionally I mean that could be a positive for the basin in the sense that you might get outsized production growth out of the Haynesville.

That's kind of where I thought things might be headed particularly with what's occurred to date.

Would you agree with that yes.

Yes, and youre going to Youre going to see some I would not necessarily call it consolidation, but youre going to see some of these private equity companies who have been the early.

Developers in the Haynesville there.

Gonna be selling their assets that private equity partners are going to want.

A liquidity event and so youre going to see some of these assets trade hands and those who acquire those assets are going to be.

Not forced but they're gonna be acquiring.

At such a level of value that they're going to need to develop those assets. They can't acquire them and then just slow down the pace of development. So we see that happening in the Haynesville and there's rumors out there of.

Several different large.

<unk>.

Asset sales or assets changing hands from one private equity group to a maybe a larger public company. So I think that would help us.

Great that makes sense and very helpful and certainly congrats on your update again.

Thanks.

Thank you our next questions come from the line of Jon Evans with SG capital. Please proceed with your questions.

Can you just talk a little bit about you know with the strip elevated above for as far as you can go out into 'twenty three into fab 23, well has that changed anything for you guys relative to the competitiveness of doing deals and the gas market since you're pretty gassy.

<unk>.

You know John .

Over the last year to year and a half as gas prices have moved up.

The overall <unk>.

Price at which we are acquiring these minerals has not theres not been a direct correlation or increasing what we're paying we are paying a little bit more but that's probably.

More reflection of the overall competition the amount of dollars that have moved in to acquire minerals in the haynesville.

And then a direct correlation to natural gas price increase so we're not seeing a direct correlation that we're not paying that much more as natural gas prices have moved up that being said, especially on PDP volumes that were acquiring we immediately heads out 12 to 18 months to help lock in and out.

Our return.

Yes. This is Ralph the one other thing or would add to that also is that.

We're sort of focused in that one to 5 million dollar acquisition size, which to us.

You can have a material impact and in that size range.

There is actually less competition and we really have.

Partner with some great folks on on on what I call, what we call a ground game right, where we're buying on the door knocking on doors and going to the courthouse on looking for minerals that way, so theyre not necessarily.

Marketed packages that are bigger and we're gonna have way more competition right. So it's a bit of a niche that we focused on and it's been working its been working for us thus far.

Increasing the price for which we pay for those minerals.

Got it and then just a follow up you've you've obviously.

Done a nice job, but you've used.

A majority part of you know that the money that you have on the line and I guess, what I'm curious as you kind of alluded to that you have another bigger acquisition that it sounds like it may close et cetera. When will you be able to go back and get a redetermination with the banks potentially.

Up the line et cetera.

So so.

One the acquisition that we're that we have under PSA. That's closing is again similar to the ones that we did in December so around the <unk>.

$5 million size, right, which is a nice which is a nice bite size for us right and that's we're going to use a combination of open mineral sales proceeds cash on hand, and some leverage to go fund that right. So I don't think it changes really much of.

Much of anything from a credit profile standpoint.

Our next scheduled borrowing base Redetermination as is.

Is early June .

So you know look based upon where prices are today the acquisitions that we've done and just the conversion of locations two to production right I suspect a reasonable person would see an increase in that line.

I can't speak for the bank and that's still a few months out, but but I think it's reasonable to expect that that line should increase.

We have the next redetermination.

And certainly if we if there is an opportunity that require us to.

You know look at going back to the bank right.

We have a good relationship with them.

And frankly whenever we look at an acquisition.

We have a conversation with them to get their thoughts on how we're financing and making sure that everybody is in agreement with.

With the balance sheet looks like and so far so good so.

I don't expect it to be an issue.

Okay.

John This is Chad we have a very open dialogue with the bank, it's a great relationship and.

From our perspective and in discussions with them there will be an increase we just don't know what that is once we know what it is we're still going to keep our debt to EBITDA between one and 1.2.

And once we have an increase in the borrowing base, we can use up to but want to stay around.

50% to 60% draw on that borrowing base amount.

We want to keep our balance.

Balance sheet strong.

The last question that I have for you is I know your strategy is different relative to your you know your payout ratio because you're really trying to grow. This thing and you think there's a lot of opportunity and recycling that capital what I'm curious to ask you is.

Obviously, you've had a lot more success in growing minerals than than you had anticipated and obviously pricing is better.

Do you should well the dividend announcements that you make is that more of a quarterly issue, where you actually reevaluate it on a quarter or do we just look at this like you announced one and a half and then that's kind of for the next three quarters and Youre going to recycle all of that capital or what's just kind of the strategy and I know you can't make.

And announcement about dividends right now I'm, just trying to understand the strategy.

John We talk about this at the board level.

Board meeting.

As it stands right now we're going to have a.

Methodical measured pace in terms of increase increasing the dividend we like the success, we have and using our free cash flow to acquire minerals, we need to get bigger we're too small we need to grow we're doing so in a disciplined and methodical way. We don't think we're overpaying for the minerals, but we.

Need to try to grow and pedal as hard as we can as fast as we can to grow. This thing. So we want to continue and especially at the rates of return the economics at which we're acquiring these minerals, we want to continue to redeploy our free cash flow into acquiring these minerals. So that we can grow that being said we.

We will and the board discusses it we will try to tiptoe into overtime.

Larger dividends, increasing the dividend.

Okay, Great Hey, Thank you for your time I appreciate you taking my questions. Thanks.

Thanks, John .

Thank you there are no further questions at this time.

It does conclude today's teleconference. We appreciate your participation you may disconnect your lines at this time.

Enjoy the rest of your day.