Q1 2023 PHX Minerals Inc Earnings Call

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be muted during the presentation of the call with an opportunity for a Q&A session at the end.

As a reminder, this call is being recorded. I would now like to turn the call over to Rob Fink with F-N-K-I-R. Please go ahead, sir.

Thank you, operator, and thank you everyone for joining us today to just discuss pH minerals December 31st, 2022, quarter-end results.

Joining us on the call today are Chuck Lins, President and Chief Executive Officer Ralph Tameco, Vice President and Chief Financial Officer Daniel Mezzo, Vice President of Engineering.

The earnings release that was issued yesterday after the close is also posted to PHX's investor relations website.

Before I turn over the call to Chad, I'd like to remind everyone that during today's call, including the Q&A session, management may make forward-looking statements regarding expected revenue, earnings, future plans, opportunities, and other expectations of the company.

These estimates and other forward-looking statements involve known and unknown risks and uncertainties that may cause actual results, so we've materially different from those expressed or implied on the call. These risks are detailed in pH X minerals, most recent annual report on form 10K, as such may it be amended or supplemented by subsequent quarterly reports on form 10.

information, future events, or otherwise unless required by law. With that, I'd like to turn the call over to Chad. Chad, the call is yours.

Thanks Rob and thanks to all of you for participating in PHX's December 31st, 2022 quarter-end conference call. We appreciate your interest in the company.

The decline in natural gas prices that impacted the December quarter continued into the new year.

PHX's quarterly financial results reflect a 26% sequential drop in realized natural gas prices.

Since then, and in the month of January alone, natural gas front-month prices have dropped up a further 40%.

This being the largest one month drop since 2001, 22 years ago.

This precipitous drop was driven by reduced demand due to warmer weather and less power burn along with the free port LNG export terminals continued in service delay.

This terminal represents 2.2 BCF a day of natural gas demand. This important LNG export terminal has been out of service due to an explosion since last summer and represents over 500 BCF a total gas demand being removed from the market.

We estimate this event alone represents somewhere between a dollar and two dollars of negative impact to the current natural gas market.

This drop in prices will reduce industry cash flow, which will additionally reduce industry capital expenditures.

though the total US rig count has remained relatively flat over the last months.

recent indications are that operators, especially in gas basins, will begin reducing their drilling budgets and thus laying down rigs and frack crews.

which should reduce domestic U.S. natural gas supply by roughly 1 BCF per day during the year of 2023.

Under a conservative assumption of weather and free port back in service, officially announced February 1st of this year.

It appears that during the second half of 2023 into the 2024 timeframe, natural gas supply demand macro should reach equilibrium and set the stage for a price rebound.

PHX has purposely built a strong balance sheet and maintained ample liquidity supported by our hedge book to be able to withstand the current headwinds we face.

you can access our head schedule that is in our latest investor relations slide deck on our corporate website.

Over the last three years, we have enhanced our asset base by selling mature legacy assets.

Specifically, we exited our relatively higher cost, lower margin, non-off working interest business.

We use the proceeds from these detestiturs to build a high quality core mineral position in two of the most active areas under reputable credit worthy operators who are actively drilling.

These minerals we have acquired are in the core of these basins and can be economically developed by the operators at almost any commodity price environment.

We believe this will allow us to continue to report year over year steady royalty volume growth. Our most recent quarter underscores this as our current quarter reflects a 33% royalty volume growth over the same quarter in 2021.

During the quarter, we closed on $14.7 million of mineral acquisitions, and since the quarter end, we have closed on or signed binding agreements for an additional approximately $7 million.

Our deal flow remains robust and our discipline approach evaluating each opportunity remains in place and I am confident we can continue to build 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, Chas, and good morning to everyone participating on the call. For our December 31, 2022 ended quarter, total production decreased 15% from the prior sequential quarter to 2,215 MMCFE. However, year over year, our royalty volumes increased by 33%.

This volume growth is the result of our successful Mineral Acquisition Program on which we have been executing for the last three years.

Quarterly, royalty production decreased 12% sequentially. This decrease was primarily a result of two factors, the first being four wells in the Haynesville where we have a high royalty interest.

that were temporarily shut in to crack offsetting well. Note that all four wells are back online and that we also own mineral interest in the offsetting pad that was being cracked. These volumes will be reflected in the next few quarters.

Secondly, the timing of new wells turn to sales. Let me give some additional color to what I mean by timing of new wells turn to sales. When comparing sequential quarters, volumes can be lumped due to timing within the quarter of when each new wells production is introduced.

Thus, new wells with partial quarters are the culprit. As I will discuss in a moment, our active wells in progress, or WIPs, are the source of new well volume.

And some quarters will have more widths completed and turn to sales than other quarters. As a result, the lumpiness is smoothed out when you compare annual volumes.

As a mineral owner, we do not control timing of well development, which rests with each operator. As such, there can be some reported volume volatility on a quarter to quarter basis.

On the working interest side, production volumes declined 22% sequentially to 587,330, and NCFE in the December 31, 2022 quarter as a result of the sale of our legacy spay at the working interest wells in late September 2022.

and the natural decline of reserves. Note that the working interest volumes will also decrease in the next quarter as we close on the sale of our Legacy Eagleford and Arcoma working interest assets on January 31, 2023.

This is consistent with our stated strategy to exit this part of our business.

Royalty volumes represented 73% of total projection during our December 31, 2022 quarter, and should exceed 80% in the current quarter post the Eagle Ferdinand Arcoma divestitures. As recently as calendar year 2021, Royalty volumes were only 45% of our total volumes. As we have grown our Royalty volumes and divested of our non-op working interests, the quality of our asset-based...

enhanced with improving margins. Additionally, 75% of our quarterly production volumes were natural gas, which aligns with our long-term position that natural gas is the key transition fuel for a sustainable energy future.

During the quarter ended December 31, 2022, third-party operators active on our minerals acreage converted 60 gross or 0.27 net weld in progress or WIP to producing welds compared to 49 gross or 0.22 net WIP converted to PDP in the quarter ended September 30, 2022.

The majority of the new wells brought online are located in the scoop and the haze sill. At the same time, our inventory of wells in progress remained consistent at 203 gross or .83 net wells compared to the 172 gross or .85 net wells reported as of September 30, 2022. The continued track record of well conversions and replenishment of the inventory of wells in progress were .85 net wells.

and observe 22 rigs present on PHX Minerals acreage as of January 17.

Additionally, we had 91 rigs active within 2.5 miles of PHF's ownership. The number of active rigs on our mineral acreage has stayed consistent quarter over quarter despite the recent decrease in natural gas prices.

In summary, we continue to see steady development on both our legacy and recently acquired mineral assets which should lead to annually increasing royalty volumes. Now I will turn the call back to Ralph to discuss financials.

Thanks Danielle and thank you to everyone for being on the call today.

As we shared in our last quarterly call, we are transitioning to a calendar year reporting schedule this year to bring us in line with the rest of our public peers and to make it easier for our business and reported results to be evaluated. With that on today's call, I'll be generically referring to 1231 period as the quarter or the quarter end at 1230.

lower realized prices during the December 31st, 2022 quarter. Realized natural gas prices averaged $5.66 per MCF, 26% lower than the prior sequential quarter.

Realized oil prices averaged $82.52 per barrel, 12% lower, and NGL's average $28.77 per barrel, 24% lower. Realized hedge losses for the quarter were 3.8 million. For the quarter, approximately 65% of our natural gas,

57% of our oil and none of our NGL production volumes were hedged at average prices of $3.43 and $49.27 respectively. At the end of January 2023,

The lower priced hedge contracts put in place during the height of COVID have officially expired. Approximately 40% of our anticipated 2023 natural gas production has downside protection at between $3.15 and $3.45 per MCF. On the oil side.

Approximately 68% of our anticipated production has downside protection between approximately $71 and $75 per barrel. Our current hedge book is available in both the 10Q and our corporate presentation. Total transportation, gathering and marketing decrease...

quarter over quarter basis to approximately 618,000.

These expenses are primarily tied to movements in both production volumes and commodity prices.

L.O.E. associated with our legacy non-operated working interest wells increased 6% on a sequential quarter basis to 1 million. While the L.O.E. from the sale of our legacy Fayetteville assets sold in September 2022 came off the books.

we experienced an increase in LOE associated with our working interest oil production in the Eagleford. Note that the Eagleford asset sale closed on January 31, 2023, and we expect a significant decrease in LOE for the coming quarters.

We only have 563 legacy, non-operated working interest well-bores remaining in our portfolio. And those on average have lower fixed Eloise than the well-bores that we have sold over the prior 12-plus months.

Task GNA was flat at 2.6 million compared to the prior sequential quarter and would have been slightly lower. Had we not incurred the cost associated with terminating our ATM program?

Adjusted EBITDA was 5.3 million in our quarter end of December 31st, 22, as compared to 8.4 million in the September 30th, 2022 quarter. EBITDA was positively impacted by...

an 11% decrease in total cash expenses, but revenues were negatively impacted by 25%, mainly pulled down by the drop in natural gas prices as we pointed out.

The non-tashing pyramid of 6.1 million

was associated with health for sale accounting associated with our coma properties.

The sales price is lower than our book value for the assets which led to the impairment. Note that, given the impairment, there will not be a loss on sales associated with the asset in the upcoming quarter. The Eagle Ford, on the other hand, had a had an had a sales price higher than its book value.

which will lead to a non-cash gain in the upcoming quarter. Net income for the quarter was 3.34 million compared to 9.2 million for the prior sequential quarter. Note that this includes a non-cash impairment I just spoke about, which means that...

backing that out, net income would have effectively be flat on a sequential quarter over quarter basis.

We had total debt of 33.3 million.

as of December 31st, 2022. And our death to trailing 12 month EBITDA was 1.25.

As of February 23,

Proforma for closing of the working interest sales or total debt was 23 million and we had cash on hand of approximately 2.5 million.

Lastly, our asset portfolio has been high-graded with improved development visibility. And in an effort to improve transparency and better communication with investors, we have made this strategic decision to provide an operational outlook for calendar year 2023.

This is the first time in the history of PHX in which an annual outlook has been issued. We estimate 2023 royalty production to grow approximately 20% at the midpoint of the range compared to calendar 2022. Key expense metrics are expected to remain flat on a per unit basis.

and LOE is expected to significantly decline, perform the sales of the working interest assets we closed on January 31st. A detailed summary can be found in both our press release and our corporate presentation. With that, I'd like to turn the call over to Chad for some final remarks.

Thank you, Ralph. As I have repeatedly highlighted over the past two years, we continue to enhance our asset base.

by the investing of mature, non-core, non-op working interest well-bores, and reinvesting the proceeds into high-quality minerals in our areas of focus.

This provides us with a clear path to annual volume growth.

However, as Danielle reported, the multi-production in the quarter was impacted by a short-term disruption in the Hainesville due to temporary shut-ins of a few high-interest wells to accommodate a crack completion on a set of offsetting wells.

reported, royalty production in the quarter was impacted by a short-term disruption in Haynesville due to temporary shut-ins of a few high-interest wells to accommodate crack completions on a set of offsetting wells, a common industry practice.

And fewer new whales coming online due to typical seasonal volatility for lumpiness has also explained about Daniel a moment ago

However, our inventory of WIPs continues to increase, giving us an increase in near-term rebound in reported volumes and our long-term prospects.

Results were also impacted by lower commodity prices, but our strong balance sheet and success in the vestiture of working interest continues to help us navigate near-term headwinds.

We are bullish on our recovery and natural gas prices in the second half of 23 going into 2024 as short-term impacts dissipate. Additionally, I'm also pleased to announce that given the confidence in our strategy and the steady conversion of our inventory or the whips.

We have the visibility to begin providing an annual outlook, which you can access on our Investor Relations presentation from our Cooper website.

As you can see, despite the current natural gas price headwinds, our strategy is sound and we expect increasing royalty volumes in 2023. Our pipeline for acquisitions continues to be robust, but to be sure, we will maintain during the downturn in natural gas prices.

the same level of technical and economic discipline we have used over the last three years.

I believe 2023 will be a tremendous year for PHX. It's employees and it's shareholders.

I would like to thank our dedicated employees for their hard work and congratulate them on our achievements today. Additionally, I would like to thank our board of directors for their support and insightful wisdom they provide in executing our corporate strategy.

This concludes the Repair, Prepair Germard portion of the call. Operator, please open up the queue for questions.

Thank you. And at this time we will conduct our question and answer session. If you would like to ask a question please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue.

You may press star followed by the number two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, to ask a question, press star one. We'll pause for a moment while we poll for questions.

Our first question comes from Donovan Schaefer with Northland, Capital Markets, please take your question. Hey guys, thanks for taking the questions. So...

I'll admit my own errors here in that I personally was forecasting a 3% quarter of a quarter increase after this quarter and then you guys had the 15% quarter of a quarter decline.

And I'll just say, the logic I have is representing Chris was this thesis of, okay, we're hitting this inflection point with companies zeroing in on key locations and the acreage clusters that you guys have. And so we should start to see a sort of pickup from this we've talked about before, this embedded growth where...

he's laid the chips on the table, and then as activity picks up. And then, so the Haynesville wells, that's a good explanation in the lumpiness and the timing of whips being turned in line. But I wanna check myself on just the broader thesis here of this sort of embedded growth.

Should we still expect this idea of there being in better growth where the chips are on the table and you can Continue to even grow production without without necessarily spending additional money as Properties get developed

And how do I reconcile that with the outlook? Because the outlook you guys shared shows basically flat production being at the high end. So just curious if you can talk to that.

So, Donna, but I think you're confusing it. It's Ralph. I think you're confusing a couple things, right? So.

Total corporate production, which we've stated for the last three years, right, is going to consist of growing royalty volumes and decreasing working interest volumes because we're monetizing or just allowing the working interest to deplete. Right? So, um.

Royalty volumes are actually, if you look at the midpoint of the guidance, are actually expected to grow 20% on a year-over-year basis. Right? The majority of those volumes are going to be accounted from from wells that we already own the minerals underneath and they're currently being worked on or PDP, right? Already. So theoretically,

If we spent no money this year, right, there's a high degree of certainty that we're going to hit those numbers on the royalty side. Right, the other thing to keep in mind, and this is very important, right, a molecule of working interest is generally worth half of a molecule of royalty volumes, right, because...

on average that royalty volume has twice the cash flow margin as the as the working interest Molecule, so if you hold prices constant, right? Even if total corporate vol if you help prices cost

If you put a corporate volumes do not increase, if you see the increase in royalty volumes, you're still generating additional cash flow at the corporate level because of that difference in margin.

Just real quick to kind of rephrase what Ralph is saying and make sure I'm getting it. So if I'm just looking at the outlook table.

This idea of like an embedded growth or the ships have been set on the table and the rigs and the one you're seeing that embedded growth

on the royalty side for the outlook. And on the working interest side, it makes sense that you have a large decline there because there's some sales of working interest assets, but then also even the working interest they still have.

If the similar phenomenon we're playing out, where rig comes on and whatever, you guys are also actually electing to go non-consent on those. Then you're not actually even participating in those anyway either, right? So that's kind of what's being reflected there.

Well, so it's the natural decline and the sale on the working interest side. And just to be clear also on ongoing non-consent, generally speaking, whenever somebody proposes an AFE, we try to monetize that AFE and create value for the company. So I don't think that you can make the blanket statement that we just go non-consent.

We try to modify that, allow somebody else to put their money up and we get compensated for giving them that opportunity. But this phenomenon of owning something, owning something acreage in a sense somewhere and then the rig comes onto it.

From the working interest and when it's a working interest situation, that's not going to translate into additional volumes for you guys the way that I wrote it generally speaking. Okay, let me see.

Let me be clear to you.

When we say working interest, when we say mature assets, they mature in the sense that they've been fully developed, there's really no...

consistent, high quality drilling locations or drilling opportunities on those assets on that leasehold. Most of the AFEs we do get are workovers. Old wells do need to be worked over, clean out the wellbores, refract or whatever on those existing wellbores.

to be clear what we're selling has no real true upside growth from a working interest perspective from operators coming in to drill well. That's one of the reasons we're selling these assets. They have no real growth story or growth upside and we want to be able to...

demonstrate to the market that year over year we can grow volumes by way of royalty and that so speaking of growing wealthy volumes this quarter or quarter drop to be clear and to highlight it we're a victim of our own success because we this particular four set of wells that was shut in we had a very high

net revenue interest royalty interest in those four wells and again we can't control it it's an industry practice to shut wells into frack offset wells we have an interest in the offset wells as well so the four wells are back on the new wells are producing we have an interest in those wells so what our volumes will be back up but we again we're kind of a victim of our own.

success buying in high quality areas for development going on.

Yeah, and and and and Donna went one thing just to just to kind of

finish off the point. Most of the working interest aside from the Eagle Fert, right?

The prior management teams participated as a working interest owner through their mineral ownership.

So, what you actually have the ability to do, and in the rare case that somebody comes to drill a well, adjacent to it where you still own minerals, even if we choose not to participate on that well, we actually, and that well gets drilled, we actually still maintain the mineral and thus a royalty ownership in that knee well.

that generates additional cash flow from us. So what we're selling is literally a well-bore and leasehold interest, right? And we're retaining the minerals and the royalties associated with all that acreage, right? So I want to be crystal clear about this. We are very cognizant about

creating value and not giving away any value. So when we're selling this, it is effectively a well-bore working interest assignment. And if there's any new development in those sections, we will benefit from that development.

through the legacy ownership of the minerals. Okay, and then as a follow-up, the hands will...

Shut-ins there is really interesting and you know I from when I was a petroleum engineer I know the importance of you know shutting another well to pressurize and so they don't you know basically become like a magnet for adjacent tracks to you know get drawn into them and you know cause interference and all that stuff, but um

For your business model, having such small sort of fractional interests, I think it immensely creates this just a little bit of a disconnect even for myself.

that the idea of four wells in the Haynesville having such a large impact when you know you own your royalty interests tend to be somewhere between you know a fraction of a single percentage point to maybe up to two percentage points and I realized that can be a factor of ten difference you know point two percent is

1 tenth of 2 percent. Can you give us a sense of how, because I'm assuming you're talking about four gross walls,

You know just roughly how four gross wells can move the needle, you know, is it impacting you know eight adjacencies and then you've got you know two percent relative interest there. There's something that kind of helped us wrap our minds around this.

It feels like a disconnected idea that you have so many gross wells, the tiny fractional interest within how to four wells being shut in really moved the needle. And then another question there is just do the adjacent wells that you also have an interest in. Are those also high royalty interests?

Is it higher? Is it a smaller? No, no. So on these, it's a good question. So on average, if you look at the corporate presentation, and if you look at our average NRI for well, I think it's in the 0.6 to 0.7%.

So on these, it's a good question. So on average, if you look at the corporate presentation and if you look at our average NRI for well, I think it's in the 0.6 to 0.7%.

right and if we're that's about the number these wells we actually had a 4.6 4.7 percent interest in these four wells right yeah they were big interest wells but but also right and I think with Danielle try to get to on the call is that

There are two factors, right? That's one of the factors. The second factor is, so for example, right? There is a set of wells. We cannot book revenue, right, until the production volume associated with the well is publicly made available.

Right, and operators, and this is a state regulation, have X amount of time. Some of them have six months to report production data. So there are instances where we know the well is online, but we cannot book that revenue because there's no production data available. Okay. Okay.

So on a quarter to quarter basis, here's what happens, right? And some of it happened in this quarter, which is there are wells that were online, right? But there's no production data. And fast forward to today, right? Some of those wells literally started reporting production data.

or last or this week, right, within the last couple of days. So what ends up happening is you have that lumpiness that we talked about. So the volumes that should have been reported last quarter will be reported in this 3-31 quarter. And so on a quarter to quarter basis,

Some quarters are going to be high, some quarters are going to be low, and that's why we have consistently set over.

the last three years that you kind of have to use a 12-month period, whether it's a rolling for quarters or year-over-year to really compare the performance because in this situation, right, there were wells that were on production, but we just couldn't book them.

Right, and now there are, and now there's that production data and they will be booked. So that, that's what creates that sequential quarter volatility. And some are going to be in our favor, some are going to be against this, right? But they will be true to up over a 12 month period. And to add to that, Donovan, this chat, the four wells that were shut in, where we have the 4 plus percent.

net revenue interest were relatively new wells completed last fall so they're still high up on their decline curve and their volumes are very high so it was a perfect storm of advance. They caused this corridor or corridor reduction. Those wells are back online.

We'll flow those volumes through the next quarter as well as the lumpiness on these whips that were out for just a while.

And by the way, these four wells with a high interest have been some of the best wells or best assets that we have purchased in the last three years.

And you said that, and this is you had interest in the ones that, these four wells are shut in to allow adjacent wells to be completed and that you had interest in those. The adjacent wells, you know, if this is a pad, I can see it being a case where maybe it was just, maybe it was only one new well.

That was drilled and all three had to be shut in but um, so was it was it one well two wells three wells how many wells

were being completed that led to the four shut-ins and are these also like 4.7% rose? They've had the call generally speaking. So there are four wells that there are four new wells coming in and honestly we don't have what our interest in those four new wells is. It's less than 4.6%.

But I don't remember off the top of my head what it is. Okay, okay. All right, thank you. I'll take, I'll jump back in the queue.

Thank you and a reminder to everyone to ask a question, press star one on your telephone keypad. To remove yourself from the queue, press star two on your telephone keypad.

Our next question comes from Derek Whitfield with Steeple. Please state your question.

Good morning, all.

Good morning, all. Hey, Derek.

With regard to your 23-out look, could you speak to the expected trajectory for production for the year and your activity assumptions for the hains will more broadly?

So for the Haynes World War broadly, again as I alluded to in my comments, Rick Count is not dropped in the Haynes World. We've been kind of steady at around 75 rigs and today we haven't seen any reduction. We try to buy out in front of the drill bed in these areas, the core areas, what are the

provided in the queue and in our investor relations slide deck. So we're confident. We're confident because of the quality of the minerals we've acquired out in front of the drill bit, so to speak. Yeah, I mean I think Derek, you know, broadly speaking, right? I mean, we're

While the numbers haven't shown it, right? I mean, we're sort of anticipating, you know, maybe a 10% drop in the Hangzhou Rake count. You know, obviously because we're reporting this as a regular quarter and not a Fiscoe or End, we're the lucky recipients of having to go first.

Right. So a lot of the public guys haven't yet came come out with their 23 plans. But as we've modeled all of our, you know, activity, right, we're we're being conservative in terms of the slow down and pace. But Chad's point that we believe is coming. But to Chad's point, right? The

23 volumes are the majority of which are spoken for by Wells and progress, right? So that's already been Started so even if you lay down a rig today you assume they're not going to stop Drilling the well in the middle of drilling it to lay it down, right? So So we're pretty confident about those numbers and going into 24

Assuming the 75 current 75 read count remains constant.

I almost half those rigs are within a two and a half mile proximity to PHX minerals.

So again, we feel the outlook for 2024 volumes look pretty good in terms of our market share of the overall recount in the Haynesville.

Terrific and maybe for the follow-up shifting over to the M&A environment. Want to ask if you guys could speak to the broader environment for minerals in light of the cell-off and natural gas, particularly the next call it 18 months of the curves.

And if you sense the bit-ass spread is narrowing and post the cell off.

Well, we were seeing...

as we move through kind of Thanksgiving and going into December .

A lot of money moving in, especially private equity money moving into the Haynesville, vote on the Louisiana and Texas side.

And our partners who are out on the ground helping us acquire these minerals were seeing some increase in competition, a little rise in prices. And now with this.

As I characterized in my comments, this precipitous drop in natural gas prices over the last few days are discussions with our boots on the ground, so to speak. Obviously, our valuations have come down a little bit.

And the the the the men are owners who are selling are still expecting the same prices that were being paid a couple of months ago And so there's gonna be a probably a time period here where there's a little market therapy

owners who are selling are still expecting the same prices that were being paid a couple of months ago. So there's going to be probably a time period here where there's a little market therapy. So speak.

But we're still able to, some of the stuff we're acquiring right now at, again, our overall economic analysis. We're able to transact on, but we are seeing.

some disruption in deal closings so to speak. Yeah, I think what you see and it's interesting, it's a good question because what you saw in the last quarter, right, if you look at the, you know, well, we even reported in the September 30th quarter, we were doing

doing a lot more of the smaller deals to deploy the same amount of capital right to make to stay true to our return requirements. And I think what we're seeing here, you know, January and February is the same thing, right? You kind of have to, you're sticking to the smaller stuff because...

Again, it takes time for them market therapy as Chad said to work its way through. So the smaller guys are sort of the mom and pops who...

you know, who are less, how do I put it? They require shorter periods of market therapy to be able to transact. So, you know, I think you're gonna see a smaller, smaller or smaller average deal size in the 331 quarter, right? And then we sort of get back to normal.

targets. To follow on to that, the smaller deals are really our bread and butter, our sweet spot. We're a little bit below the radar. The larger private equity firms and a lot of money are looking for much bigger deals, the 20 to 25 to 50 million dollar deals.

and the one, two, and three million dollar deals, we're a tiny little company, and those deals are material to our results and success. So that's where and why we are having the success we've been having.

And maybe Chad just a question to build on that response. Would you further suggest that the environment for the smaller deals is better now than it was maybe a quarter ago, two quarters ago? Or do you have the expectation that it could be?

Yes, again, market therapy, to Ralph's point, it may or may not take a little time, but we are optimistic that it'll probably open up some more opportunities.

because of

of value expectation.

Very helpful. Thanks for your time.

Thanks, thank you, Derek.

Thank you. Our next question comes from Dottomund Schaeffer with Northland and Capital Markets. Please go ahead.

A Diamond.

Hi guys.

Glad I'm able to get another couple ones in here. One question I have on natural gas prices and kind of your outlook for expecting equilibrium to get near the end of 2023.

I'm curious if you have a take or if you factored in, there's this idea that as air conditioning has become a more important part of people's lives and air conditioning adoption becomes more widespread in the US.

And then, you know, if you take climate change and hotter temperatures, you can actually have an increase in natural gas demand in the middle of summer.

I'm wondering is that something you like when you

I'm wondering, have you considered or why are you not, or if not, why not considering potential for some natural gas price recovery more towards the middle of the year? I mean, we saw a bit of that in 2021. I think we saw some of that in 2022, but of course, it's complicated by the invasion in Russia and so forth.

But, you know, do you see the potential for increased power burn through the summer if we were to, say, get a very hot summer?

Yeah. Let's get to bed now. So.

current prices have been impacted by

hedge funds shorting short contracts increased by 60% year over year today.

So, the hedge guys, shorting from a financial perspective, have had a huge negative impact on prices as well as, on top of that, kind of a self-fulfilling prophecy, larger EMPs as prices started dropping, they started hedging more to protect their...

cash flows and their capex budgets and so when those companies start hedging the back into the curve is suppressed as well So those two in dance Just kind of as I said a self-fulfilling prophecy that being said

the CAPEX budgets and so when those companies start hedging the back end of the curve is suppressed as well. So those two in dance, you know, just kind of a, as I said, a self-fulfilling prophecy. That being said, we're still dependent upon weather.

But not as much as we were once free port is back in service. And once that 2.2 BCF today comes back online, we're probably currently with that online, maybe one to one and a half BCF today oversupplied.

If prices stay where they are, two more dynamics. Coal-to-gas switching for power burn, as you just alluded to, and natural gas is much cheaper than coal right now, so coal-to-gas switching will increase natural gas power burn.

So that will be a big impact and then catpex budgets will drop. Cash flows are going to be dropped reduced. So rigs will lay down so less supply, more demand. My guess is it will flow through. The hedge funds will get squeezed.

It will flow through going into the third and fourth quarter this year. Prices will start being uplifted coming into the winter. We're worried about a cold winter. So we'll see the price dynamic improve 23 going first quarter 24 is my guess.

Okay, okay. So yeah, any hot summer maybe does more to sort of impact storage levels or something, setting conditions up as you head into winter and not as much driving an outcome for pricing in the summertime itself.

When you have these drop in prices, think about on the working interest side. Even on our non-opt, we reported our margins get squeezed even more because you have the impact of inflationary pressures coming from the service side that affects L.O.E., affects rate costs, etc., that affect the working interest side of things way more than the mineral side of things. And there's a mineral-only company, right?

we can generate pretty good returns at even $3 to $4, which is effectively what the strip shows today. So, you know, $8 gas was nice, right? But maybe $8, $10 gas wasn't realistic, neither is $2, right? But if you look at the strip at $3 to $4, we still make a pretty good rate of return.

So I want to make sure that you understand that. We're not...

sitting here hoping for higher prices to bail us out. Sure, business is like that. You know, there's the balance sheet super clean and the returns are there at even three to four dollars, which is what the strip shows today.

Okay, and then for the 2023 outlook with transportation gathering and marketing, you have that coming down on a per-MCFE basis. So I'm just curious what is driving that, you know, what assumptions are built in there?

Is it just lower gas prices if that's getting used as a fuel for compressors? What's the degree of confidence and what's driving that expectation for transportation costs?

It's also a geographic location of where the production is coming from, right? There's a lot more production closer to, you know.

It's going to cost more to move gas into your coma as an example, right, then into Hainesville.

So, you know, it's really associated with the working interest volumes going away from the vestitures that we've made, right, and continued growth in the Hainesville.

Okay, great. Well, thank you guys. I'll take the rest of my questions offline.

Sounds great. Thanks, Eric.

Thank you, and we have reached the end of the question and answer session, and I will now turn the call over to Chad Stevens for closing remarks.

Again, I'd like to thank our employees and shareholders for the continued support and hard work. I'd also like to note that Ralph and I will continue to expand our investor marketing activities over the coming weeks and months through a series of non-deal roadshows and conference presentations aimed at expanding investor awareness.

If you would be interested in meeting, please don't hesitate to reach out to myself or out for the folks that think I or we look forward to hosting our next quarterly call in mid-May. Thank you.

Thank you and that concludes today's conference. Well, part of me is to connect. Have a great day. Thank you.