Q3 2022 Riley Exploration Permian Inc Earnings Call, ending 30 Sep 2022

Okay.

Hello, and thank you for standing by my name is Regina and I will be your conference operator today at this time I would like to welcome everyone to the O'reilly exploration Permian incorporated fiscal third quarter 2022 earnings release and conference call. All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session. If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question Press Star One again I would now like to turn the conference over to Philip Reilly, Chief Financial Officer, and Executive Vice.

President at strategy. Please go ahead. Thank.

Thank you and good morning to everyone welcome to our third quarter 2022 conference call. The company recently changed its fiscal year from September 30 to December 31st So we will be covering today results for the three and nine months periods ending September 30th.

We'll report full year 2022 results in March of 2023.

Yesterday, the company published for items, which can be found on our website under the investors section in earnings release 10-Q, and two presentations. One presentation provides an update for third quarter results. The goal here was to provide simple and transparent drivers of performance to be used in conjunction with our other public filings.

We may reference a few slides from this on the call today.

The second presentation provides an overview of the company's story with minor updates from previously released versions.

Participating on the call today are Bobby Reilly, Chairman and CEO , Kevin Reilly, President and myself celebrate CFO and EVP of strategy.

Today's conference call contains certain projections and other forward looking statements within the meaning of the federal Securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements.

We will also reference certain non-GAAP measures the reconciliations to appropriate GAAP measures can be found in our earnings release for presentations issued yesterday.

I'll now turn the call over to Bobby.

Thank you Philip and thank you again to everyone for joining us on today's call.

Yesterday after the close of the market, we announced the results of our third quarter.

This is the first quarter for Riley reporting since we completed our change in fiscal year end from September 30 to December 31st IRA.

Our rationale behind the change was simply to align better with other e&ps for reporting and analytical comparisons for both investors and analysts.

Riley delivered a very strong financial and operating results in the third quarter.

Again being driven by continued organic growth.

To highlight a few items for the third quarter.

We averaged oil production of 9413 barrels per day, which exceeded our high end of guidance and represents an increase of 36% as compared to year over year to the third quarter of 2021, and an increase of 13% as compared quarter over quarter to the <unk>.

Quarter of 2022.

We began full scale water injection on our E O. Our pilot during the third quarter and commenced C. O two injection on November the first.

We generated $51 million of adjusted EBITDAX, and 55 million of operating cash flow.

Representing an increase of 14% and 25% respectively over the prior quarter.

We paid dividends of 31 cents per share during the third quarter.

And have since announced and paid an increased dividend of 34 cents per share during the fourth quarter, representing a 10% increase on new declaration.

Riley strong financial position provides us with the flexibility needed to navigate through both product price volatility and periods of economic uncertainty.

This also allows us to patiently seek attractive opportunities to enhance the per share value of the company.

I will now turn the call over to Kevin to discuss operational results.

Thank you Bobby and good morning to everyone.

As Bobby mentioned, we had a great quarter as a result of our low decline production base. In addition to the outperformance of a number of development wells recently brought online.

Ali Permian average daily oil sales of 9413 barrels per day for the quarter.

Which is a 13% quarter over quarter growth or 36% year over year growth as compared to the third quarter of 2021.

The company averaged total equivalent sales of 12717 barrels of oil equivalent per day for the same period.

Which is a 25% quarter over quarter increase or 33% year over year growth.

As compared to the third quarter of 2021.

The natural gas and NGL volumes increased quarter over quarter at a higher rate than oil volumes due to the additions and plant processing capacity by our midstream counterparty.

The company also continued its efforts on its development activity during the three and nine months ended September 30th 'twenty 'twenty. Two we brought online seven gross four point to net and 14 gross 10, eight net horizontal wells respectively.

Regarding the EUR pilot project in Yoakum County, Texas.

As Bobby had previously mentioned, we began full scale water injection in August and.

And have since commenced C O two injection on November one.

Early indications as a result of the water injection appear to have slowed <unk> arrested production decline for the three horizontal producers within New York pilot.

We anticipate a production response from the C O two injection within six to nine months, so sometime near late spring or the summer of 2023.

During the quarter, our average completed lateral length on operated horizontal wells turned to sales was approximately 7800 feet.

Which is a 10% increase in average completed lateral length per well.

Quarter over quarter.

With drilling and completion costs remaining relatively flat as compared to the previous quarter for similar well designs.

Our lease operating expenses were $8 $8 million or $7 53 per Boe for.

For the three months ended September 30th this came in at the midpoint of guidance, but was a 9% increase quarter over quarter.

While lower than our quarter over quarter growth production growth, both on the oil and oil equivalent basis.

I'll now turn the call over to Philip Riley to review our financial results. Thank you Kevin.

Total revenue was 88 million for the third quarter 2022, consistent with the level in the second quarter, driven by higher production volumes, but offset by lower pricing.

Third quarter 2022 derivative settlement losses were approximately 9 million less at 34% lower than settlement losses in the second quarter, combining those two revenue net of settled hedges was 13% higher quarter over quarter. These.

These factors in turn drove a 16% quarter over quarter increase in cash flow from operations before changes in working capital from 44 million to $50 million, which you can see visually in the chart on slide four of our third quarter results presentation.

If you look at the nine month period year to date, our cash flow from operations before working capital has increased 94% year over year.

From 64 million to $124 million.

About 40% of the increase has been due to production volume growth with the balance due to net price that is price net of hedge settlements.

The company was approximately 50% hedged during 2022 with legacy hedges bought during 2020 in 2020 one.

Looking to next year, we're about 20% hedged at lower prices.

Now I'll offer some comments on capital allocation referencing slide five and that same presentation.

First we've been able to grow volumes materially more than last year, while reinvesting a lower amount of cash flow. This is driven by a few factors, including some really strong production from new development wells and materially improved operating cash flow.

This slower reinvestment rate in turn has allowed us to allocate more to dividends and the balance sheet with a third of cash flow from operations before working capital year to date versus 19% last year.

Total dividends paid for the nine month period were are up 25% versus last year, and we've paid the debt down by 25% year to date.

And while investment is up year over year operating cash flow is still outpacing the capex increases for a net benefit this leads to the higher free cash flow for the year about $41 million year to date.

We acknowledge our company may be producing less free cash flow than some other companies on a relative basis, but as many of you realize this is mostly a function of the higher reinvestment for growth with many other companies choosing zero growth and which of course requires significantly less reinvestment.

Looking ahead to next year.

While we won't be giving detailed 2023 guidance today, we believe that we can generate low double digit oil production growth with a lower reinvestment rates in 2022.

This could be driven from a combination of the tailwind of very strong 2022 growth improved net price realizations as a result of further hedge roll off as well as lower EUR spin off.

I'll caveat this is conditioned upon roughly $70 or better oil prices.

Only modest increases from here on D&C costs and absent additional new venture spending.

Final quick comment on the credit facility. We recently completed a regular semiannual borrowing base redetermination and elected to increase the base by 25 million to $225 million total.

While we are largely undrawn, we believe the increased liquidity in a volatile market justify the small incremental undrawn fees.

Thank you and I'll turn it back to Kevin now.

Thank you Philip I'll now give guidance for the company's activity for the fourth quarter.

We forecast accrual basis capital expenditures of between 34% and $41 million, which excludes amounts for corporate and Orlando acquisitions or other opportunistic investments.

We forecast fourth quarter 2022 oil production to average between 9000 and 409900 barrels per day and total equivalent production to average between 12000 and 613200 barrels of oil equivalent per day.

Just on estimates of available gas processing capacity.

We anticipate fourth quarter low of approximately 9% to $10 $5 million in cash G&A expenses of approximately $4 seven to $5 $2 million.

The company. Additionally, anticipates cash income taxes of approximately $3 million to $5 million to be paid during the fourth quarter.

I'll now turn the call over to Bobby for closing remarks.

Thank you, Kevin and again, thank you to everyone for joining us today for our third quarter call.

We remain focused on a disciplined model of low leverage moderate production growth and return of capital through dividends to our shareholders.

Thank you again for your support operator, you May now open it up for questions.

At this time, if you'd like to ask a question simply press Star then the number one on your telephone keypad. Our first question will come from the line of Neal Dingmann with Jewish Securities. Please go ahead.

Good morning, all thanks for the time My first question is on capital allocation specifically.

Could you all speak to I'm just wondering.

Bobby Kevin really any of the guys. How you are thinking about per share growth going forward and really what I'm, what I'm focused on here I was wondering if you all would consider boosting production more next year, obviously it can be done by just boosting the pure share volumes or even buying shares back.

Either of those to boost share growth or will focus remained more on the maintenance capital and shareholder returns you. Obviously to me seem to have opportunities to do bolt said I'm. Just wondering how you all are looking at that.

Yeah Neal this is Philip I can take that.

Yes, we certainly look at per share metrics.

We havent finalized the budget for next year, we do plan to grow the question is how much.

We believe our level of growth differentiates us very few e&ps are growing at our at our pace.

Based on the midpoint oil production guidance that Kevin just gave.

For fourth quarter, you know frankly, we can hold that flat next year.

For each of the quarters and that would imply 10% year over year growth.

We could grow more theres crosscurrents for oil price, we're watching the economic indicators trying to understand how impactful up our U S and global recession could be and what impact that may have on oil price.

You know as a positive contributor to price we see.

We see the lower reinvestment levels by many of the multinationals and even U S. E&ps.

I made the comments on the lower reinvestment rates in my comments just before.

We can grow and yet still have a lower reinvestment rate and so in turn that that corresponded more capital available for discretionary allocation such as shareholder return.

So I guess a few more notes on that we're going to continue to pay a dividend we plan to raise that once annually most likely in that fourth quarter like we just did absent some transformational event.

We like the steadier pattern there versus the variable methodology used by some companies we saw how that can flip on them such as this quarter in the down the <unk>.

Downward impact there.

There's potential for continued debt pay down, though admittedly at certain low levels, we could decide to keep it flat.

We're also considering other investments outside of traditional D&C, such as carbon capture activities.

But then you've got the question of what's leftover.

Depending on the price environment.

There you do have some potential for shareholder buyback.

That of course has to be approved by the board, but it's it's a topic. We've discussed what we're trying to do there is balance multiple objectives.

Increasing the float on the one hand.

Managing private equity overhang potential for future distributions.

Offsetting annual increases due to customary stock based compensation.

But in any event, which does those all factor into that per share metric growth that youre talking about and so it's something that's important to us and the board.

Yes, Im glad that you are looking at all of that and then secondly, just maybe on development activity.

Things you've talked about Philip I know, specifically, there's been more focus it seems like the last quarter or so on co development and maybe what I would call other large development strategies and so I'm just wondering if you're able to discuss maybe your approach going forward and really how to get the Max efficiencies.

Auto.

Again, you all and others, obviously are operating a bit of a smaller program.

It does seem like you are still getting some pretty nice efficiency. So I'm just wondering if you could kind of maybe talk about your development strategy.

Our development strategy is pretty much remained the same.

Neil is since we've started I mean, we've got a nice foothold.

We're holding through development, we're operating through cash flow, we're trying to maximize our efficiencies and utilization of our infrastructure that's in place.

While.

Holding the field.

And create a creating an H b P asset.

I don't know that we're going to be drilling no.

Too many.

Parent child Wells co development in that sense.

In the coming year.

But we continue to look at every opportunity to optimize what we're doing and to be efficient and you can see that even through.

Our growth in completed lateral length quarter over quarter than the 10%.

That does help to drive down costs. As you are you are getting more reservoir for the same well so you're effectively draining more rock. So we're looking at every option and as we continue nothing's set in stone, but we are.

Trying to be as efficient as we can in this volatile world.

Great and then Kevin.

Sort of tack on.

With infrastructure in anything it seems like you all are in better shape now anything that prevents that development strategy infrastructure wiser, meaning anything youll will need to build out or anything on that regard.

We continue to build out small piece.

Pieces to it.

Included within our infrastructure we have.

Initially in 2015, when we started we invested heavily in infrastructure to get kind of what we consider to be our base.

But as we continue to branch out and hold more acreage, we have small lines delay whether it be water gathering oil gas or power distribution.

We're looking at.

Opportunistic ways to continue to be more efficient there.

To be sustainable and sufficient and self sufficient in some ways.

And we're excited to be able to talk more about that in the coming quarter.

Look forward to it thanks guys.

Your next question will come from the line of John White with Roth Capital. Please go ahead.

Good morning, Thank you operator.

Very nice results congratulations to you and your team.

The significant increase in the production guidance for the fourth quarter.

Is that primarily due to the increased capex in the third quarter and the increase in Capex guidance for the fourth quarter.

Or.

Does your youre drilling longer slightly longer laterals.

Does that play a part in it or have you found a better better portion of the reservoir can you talk about.

Yes, I think.

Overall, if we look at the last several quarters and year to date our PDP.

Has hung in and outperformed our expectations in what was.

Forecasted through our third party reservoir Engineers in addition to the development wells that we brought on.

Outperforming type curve, so it's a combination of both.

The wells coming online faster than previously anticipated, but from a timing perspective, we're generally complete.

Completing wells.

As we planned.

Last quarter, we were right on and bringing online the same amount of wells that we had guided to.

And we.

Seem to be.

Online going forward in this current quarter.

Okay. Thank you and.

The.

Your gas processing.

The main upgrades to that.

Or expansions of that processing facility is that finished or are there some some more.

Expansions and upgrades to come.

That phase of the expansion and upgrade is complete and operational we have sense.

Along with other producers in the area agreed to an additional expansion which is.

14 to 16 months out to bring on additional capacity for future growth.

But for the time being with what we have and what we're looking to do operationally I believe that we have sufficient capacity.

For our continued growth.

Thank you for that detail and congratulations again I'll pass it I'll pass it back to the operator.

Okay.

Your next question will come from the line of Noel Parks with Tuohy Brothers. Please go ahead.

Hi, good morning.

Good morning, good morning.

Just a couple of things.

Just.

Just maybe thoughts on on costs.

Wondering if you have any sense of.

Whether we sort of hit the peak of service cost inflation.

Or is it leveling off at all just as you can.

Modeling the next year.

How much are you looking at.

From what we've seen you know that has come in quarter over quarter and year to date looking back.

It appears as if we've kind of reached the peak and flattened out a little bit quarter over quarter.

Our per unit cost generally were about the same or similar type wells.

We've also tried to be proactive in.

And doing some bulk buying and procurement for next year to help to lower the cost so.

Or even lower or arrest further inflation.

So from what I've seen I would say, yes, we peaked out I hope.

But to be determined.

Great Thanks and.

And I'm just wondering is is there anything meaningful going on with the exploration of other horizons beyond the San Andres.

They're going to either work Youre looking at yourself R. R.

Competitors in the area that you're aware of.

This is Bobby.

We always continue we have a great exploration team led by some really qualified geoscientist.

So we're looking for footprint expansion in the existing area, obviously around the St. Andrews and then we also have drilled a few wells.

In South, Texas, and the Eagle Ford.

Austin chalk area.

Still early Appraisement, so nothing really to announce here, but.

We're very encouraged by what we're seeing in that area and there is a.

Great opportunity for us there.

Okay, great. Thanks, a lot.

Your next question will come from the line of Richard Dearnley with long <unk> partners. Please go ahead.

Good morning.

In the fourth quarter guidance discussion.

You it seemed like you were.

Calling out gas processing capacity is limited in the sector.

And you.

Could you provide some color in light of the.

The expansion a year and a half or so.

As soon as to where your how much capacity you have there.

Well, so I guess the last quarter, we just completed and we're reporting on.

Two thirds of the quarter was operational with the current plant capacity that was finished in July .

So theres still some.

Guesses and estimates as to how everything lines out and the facilities. So that's why we just kind of caveat to that too.

To allow for a little bit of cushion gas and NGL volumes and sales are a very small percentage of our.

Of our revenue.

Though we do understand that they influence our per Boe metrics.

So we tried to talk in some sense on an absolute basis, we're speaking of low.

G&A figures.

Because if you look at them on a per BOE basis that is driven by.

Our processing capacity processing capacity so.

Bear with us as we get through another quarter or two and we continue to optimize.

Our gas and NGL sales and the utilization of those products.

Yes, I think we'll be able to give clearer guidance.

As to what those numbers should level out to be.

Okay. Thank you.

And.

The Eagle Ford is a well known basin.

Europe tends seems too.

Give spun off companies little.

A little.

Little bits.

The interest in diversified basins.

Some large packages available some of which look like they might get split up into smaller pieces.

No.

Yeah.

Yeah.

Could that be a potential interest to you all.

Well as you know most of our our production is all organic.

And we have not relied on making acquisitions of existing.

PDP.

Were developed care area, we are developing organic leasing opportunities.

Specific target that we're looking at we've got some experience in the Eagle Ford going back to the early mid 2000, 2009 2010 period.

I don't see us at this point biting off one of those acquisitions.

We're more focused on the quality of rock that we're wanting to target.

<unk>.

Okay.

We just need to keep that lined up so.

I think dollar for dollar or rate of return is much better on <unk>.

Organic development.

Right.

Thank you.

Once again for any questions. Please press Star then the number one on your telephone keypad. Our next question will come from the line of Rick Nelson with Investor. Please go ahead.

Hi, Thank you guys great quarter.

I did have a question regarding the releases of the earnings and that the mention of earnings per share.

I guess the lack of mentioning it.

No.

Maybe not the most accurate measure of your guys' performance, but it is a metric that.

Pretty much every investor it looks for and I really don't.

Not invested in any other companies that.

Really don't release their earnings per share and I didn't know if that's something you could add to your.

Reports coming out.

Okay.

Yes happy to Rick we understand we try to find a balance of side.

Citing those more traditional metrics like that.

The caveat, we do have certain factors that influence the bottom line net income such as our unrealized hedge gains and losses.

We had nice looking net income this quarter.

Partially.

As a result of that $34 million mark to market gain that you'll find in our 10-Q that drives a higher net income and hence earnings per share.

With prices, where they are now higher than when we closed the quarter that will in turn result, if they stay where they are for the remainder of the six weeks for the quarter that would flip them to a loss and so it just causes a little bit of a <unk>.

<unk>.

On net income and earnings per share, but we heard the comment and certainly taken into consideration. Okay. I appreciate that thank you.

Okay.

We have no further questions at this time, ladies and gentlemen that will conclude today's call. Thank you all for joining you may now disconnect.

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