Q4 2022 Riley Exploration Permian Inc Earnings Call
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 fourth quarter 2022 earnings Conference call.
I would now like to turn the conference over to Philip Reilly CFO . Please go ahead. Thank you and good morning to everyone welcome to our conference call covering the fourth quarter and full year 2022 results.
Yesterday, the company published a number of items, which can be found on our website under the investors section in earnings release 10-K supplemental info on non-GAAP measures and two presentations.
One presentation provides an update for fourth quarter and full year results, but the second providing an overview of our company's story.
Dissipating on the call today are Bobby Reilly, Chairman and CEO , Kevin Reilly, President and myself, Philip Reilly, 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.
Reconciliations to the appropriate GAAP measures can be found in our supplemental disclosure on our website.
Now I'll 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 fourth quarter and full year 2022.
I am pleased to report that 2022 was another outstanding year for Riley Permian with performance continuing to be strong through the fourth quarter.
Before we move on to the results I'd like to take a moment to recognize the outstanding efforts of the entire RV PX team.
It is through their hard work and dedication and expertise that we were able to achieve strong operational and financial results that we're reporting today.
From our operations team, who worked tirelessly to optimize production and reduce cost through our finance and accounting teams, who ensured that we remain financially disciplined and focused on delivering value to our shareholders. Every member of the team played a critical role in our success.
Your commitment to excellence and your passion for our business, that's what makes Riley Permian such a great company and I.
I'm honored to work alongside you.
Now, let's turn to the results for the year.
We have worked tirelessly throughout the year to optimize our core business and execute on a variety of growth initiatives.
Most significantly we recently announced that we have entered into a purchase and sale agreement to acquire oil and gas assets in the yea, so trend of new Mexico.
As we continue to work towards closing the acquisition our team is already hard at work developing plans to integrate these assets into our existing operations.
And we are confident that we can achieve a seamless transition that maximizes the potential of these underdeveloped assets.
We look forward to updating our shareholders on our progress as we move towards closing the transaction early in the second quarter.
In 2022, Riley Permian delivered strong financial and operating results to highlight just a few of the full year items.
We increased our net oil production by 31% year over year to 8.8 M. B O per day, and total net equivalent production by 25% year over year to 11.5 M. B O E per day.
We generated $176 million of adjusted EBITDAX $170 million of operating cash flow from continuing operations.
And 56 million of free cash flow.
We continue to invest in our business with total cash capital expenditures before acquisitions of $113 million.
Corresponding to a reinvestment rate of 66% of operating cash flow from continuing operations down from 88% in 2021.
We remain committed to returning value to our shareholders paying $25 million in dividends during the year corresponding to 44% of free cash flow.
We have now paid dividends for 16 consecutive quarters.
Overall, we are proud of our financial and operating results in 2022 and believe they reflect the strength of our assets and the dedication of our team.
We remain focused on creating long term value for our shareholders and delivering sustainable growth for years to come.
I will now turn the call over to Kevin to discuss operational results and give more details on the acquisition.
Thank you Bobby and good morning to everyone.
Echo Bobby's sentiment because we were proud of our team's dedication and resilience.
Which enabled us to overcome inflationary pressures shortages of material equipment and labor to deliver outstanding results.
Before we dive into our exciting new initiatives I want to take a moment to highlight a few of the accomplishments we achieved in executing our plan during 2022.
First we maintained our momentum through the fourth quarter.
Production growing from $12 seven.
213.3 M. B O you per day in the fourth quarter.
It presented in a 4% increase quarter over quarter.
On a full year basis, we grew our year over year average production from 9.2 to 11.5 M. B O E per day, which is a 25% increase.
This growth was all achieved organically with the 15 gross or 11.8 net wells brought online during the year.
In addition, our lease operating expenses were $8 8 million.
Our $7.16 per BOE for the three months ended December 31.
And $32 5 million or $7 73 per BOE for the year ended December 31.
This represents a 5% decrease quarter over quarter.
And a 5% increase year over year.
Regarding our U R pilot, we continue to inject water and C O two.
But are still early in the process of re pressurizing the reservoir.
Now, let's turn our attention to some of the exciting new initiatives, we have planned for 2023 and beyond.
On February 28, we announced we have entered into a purchase and sale agreement to <unk>.
The oil and gas assets of pick us oil and gas LLC in Eddy County, New Mexico.
These assets are focused on the development of the Asa trend of the northwest shelf.
The ACO trend and Riley Permian existing core assets focused on the St Andrews, Sir several similarities in geology.
Reservoir type drilling completion and production techniques.
Though this asset will boost rather Permian production near term. We believe this is an underdeveloped assets with extensive development potential allowing for value creation through the drill bit.
In addition, acquiring the asset adds a new area to rallies operating footprint.
Diversifying the company's portfolio and reducing single Aerie area concentration risk.
Lastly, but no less important.
On March 2nd we announced we have formed a joint venture that will own and operate on site power generation for Yoakum County, Texas assets.
The first phase of the project will provide 10 megawatts of onsite power generation.
<unk> is expected to be operational by June of 2023.
We believe initiatives like this further differentiate us from our peers.
Is it will not only provide us with more control over long term energy cost power supply and reliability, but also help us reduce carbon emissions by utilizing gas that may otherwise be flared to power operations.
At this point I'll now turn the call over to Philip.
To review our financial results.
Thank you Kevin for the quarter total revenue net of derivative settlement losses was approximately $64 million or $7 million and 10% below the third quarter, driven primarily by 13% lower realized oil prices and partially offset by higher production and lower derivative settlements.
Cash costs were approximately $3 million or 15% lower quarter over quarter, despite higher volumes.
On a per BOE basis, cash costs were 19% lower quarter over quarter.
The combination of these factors in turn drove a 12% decrease quarter over quarter in cash flow from operations before changes in working capital from $50 million of $44 million, which you can see visually in the chart on slide four of our fourth quarter results presentation.
For the full year, our cash flow from operations before working capital increased 89% year over year from 89 million $269 million.
This was driven by a combination of higher volumes and price.
I'll offer some comments on capital allocation referencing slide five the same deck.
First we grew volumes materially more in 2022, then in 2020, one while reinvesting a lower amount of cash flow.
Very few companies out there grew more than low double digits and we grew by 30%.
In 2022, we allocated two thirds of cashflow to cash capex down materially from 88% in 2020 one.
The lower reinvestment allowed us to allocate more to dividends and the balance sheet.
Total dividends paid were up 22% versus 2021.
And we paid debt down by 14% with a small increase in the fourth quarter for several large surface land positions we acquired.
Operating cash flow growth more than offset capex increases for net benefit increased free cash flow of more than six X year over year.
Okay, let's talk about forward guidance.
In both the earnings release and the results update presentation, you'll find summary tables of our guidance, including for both the first quarter in the full year.
Our new Mexico acquisition is scheduled to close at the beginning of the second quarter.
For the first quarter represents Standalone legacy production and cash flows.
We have a January one effective date with the acquisition. So the cash flows between Jan one and closing will represent a forecasted downward adjustment to purchase price and.
And then the acquisition production and cash flow is captured effectively for the second quarter through fourth quarter for 75% of the full year.
We've included a column at far right for illustrative pro forma at 100% contribution as if the acquisition hypothetically closed January one. This offers you an idea of the run rate production metrics.
Just starting with oil production.
You'll see we're guiding to roughly 10000 barrels a day for the first quarter flat with fourth quarter.
We only brought online one well in the fourth quarter, we have a large amount of activity occurring now, but with wells coming on now and into the second quarter. So we see a bigger bump to legacy production in the second quarter, and then declining modestly in the third and fourth quarters.
But for the year, maybe it's a bit over 10000 barrels a day average, which would represent 15% year over year growth from the 8.8 thousand barrels a day in 2022 to some good organic growth before accounting for the acquisition.
And then looking at the New Mexico acquisition production, we won't take over the asset until second quarter.
It was just a modest delay there to get developments started.
Second quarter production could decline.
Just a bit.
And the growth would come in the third and fourth quarters. Following a mid year development hopefully exiting the year at a higher rate, but averaging overall for the year something closer to the current level of a bit over 4000 barrels a day.
So combining the two legacy and acquisition the development growth profiles and timing could complement each other well comparing to 2022, we see full year 2023, total Boe production, but growing by more than 60% or an illustrative pro forma run rate basis by nearly 80%.
Now a few words on investing.
The legacy assets, it's very much weighted to the first half of the year, even the first quarter with roughly 30% of total combined investment for twenty-three occurring in the first quarter.
This could lead to a modest amount of outspend on a free cash flow basis in the first quarter, but something we encourage you to look beyond for the full year view.
This is a function of honoring some rig and other service commitments, we've made to secure those offerings.
For the year, we've got a fair amount allocated for gas and power infrastructure not directly related to the power JV.
And investment in the U R pilot, which was delayed from the fourth quarter.
We forecast ramping the acquisition Capex, starting in the second and third quarters.
And then separate from E&P Capex, we're forecasting investing approximately $10 million to $15 million into our power JV, which could flex based on speed of development there.
For the full year, we're seeing our overall reinvestment rate at least when compared to adjusted EBITDAX declined even further from last year, while still achieving this impressive volume growth.
Lastly, a huge thank you to our team for another year of strong performance and for your efforts across the various new ventures and acquisitions, we've been pursuing thank.
Thank you to our board and our shareholders for your continued support.
I'll turn it back to Bobby for closing comments.
Thank you Philip and again, thank you for your support.
We remain focused on driving profitable growth and investing in our business for the long term.
Operator, you May now open it up for questions.
Thank you all for joining us today.
At this time, if you'd like to ask a question simply press star followed by the number one on your telephone keypad. Our first question will come from the line of Neal Dingmann with Truest Securities. Please go ahead.
Good morning, all thanks for the time My first question just on operations might be a little early for this but.
Just wanted to ask what your thoughts are the Pecos.
Assets look quite good. So I'm just wondering do you know it looks like you talked to them about in early second quarter close how quickly with those assets compete against others like using you know I know Philipp you talked about sort of potential cadence.
Going forward here for the first half for better part of this year and I'm. Just wondering does that include or some wells from the new assets immediately competed there.
Yes. This is Kevin Neil So we do anticipate starting operations in mid April we are currently working with the operator, and we will have a transition services agreement with too.
Prepare for those operations to start.
And with that we anticipate bringing on new production hopefully by early to mid summer.
Got it okay. So I'd like to hear and then Phil.
Just on that same vein just could you maybe hit on inflation cost what you see there things mitigating a bit or just.
I'm sorry, Kevin for you maybe are what are prices doing that on the upside of inflation side.
And we certainly started to see prices, maybe start to come down a little bit, but nothing too material, yet, but we do believe that adding this acquisition will give us some economies of scale. We can hopefully start to drive more efficiencies and bring fast out of outside of other inflationary cost increases.
Okay, great to hear.
If I could ask one last one just to help you didn't say anything I think you did a little bit last quarter call just on the <unk>.
To have some conversation just if you could give a little color just anything.
Going on on that side.
Yes, sure. So we put a comment there in both the earnings release and the.
Presentation that we are working with partners in advancing a project for us.
Well, we consider a large scale storage hub and our region.
But we're not giving too many details about that but what I can say is we're working with people in the mix.
Working to do something Thats, most efficient with our shareholders' capital.
That includes using other people's money.
And frankly, we're looking up and down the spectrum on both the capture and then the storage part, but obviously our area of core expertise is going to be the storage. So.
Hopefully he can.
Understand we've had a few other things going on on some priorities.
That's.
Near and Dear to our Hearts and we're working on it.
We're going to keep pushing forward there no.
Just glad to hear its progressing along thank you all.
Your next question will come from the line of John White, with Roth and Cam capital.
Capital. Please go ahead.
Good morning, and congratulations on the strong results.
I wanted to follow up on Neal's question on the CEO to project.
Are you are you at a point in any of the negotiations where you could point us to a potential timeframe.
Time frame.
Before closing a deal with somebody or several several parties.
Well John I appreciate the question.
You know what one of the Counterparties, we're dealing with is a you.
You know a large slow moving organization that has a very large balance sheet.
Without giving too much away there.
And so we're.
We're cognizant of the pace that they move out.
The other thing is you know.
The definition of what do you consider closing.
Our scoping projects.
As a N F E R sector, so I'm, hoping that we can.
We can share something with you here at least as.
As far as certain.
Applications and so forth, but we are getting the asset ready we've taken certain moves to to further I guess the positioning there's different philosophies on how to sequence those different steps for all the difference.
Permits and needs there we've done certain of those and then I think we'll be better positioned to share more with you kind of midyear.
I understand the position you're in and I appreciate that.
A little bit of additional detail. Thank you.
On the Capex split between.
New Mexico, and Texas, It looks like you've carefully design the program to do all our all in first quarter, all drilling will be in Yoakum County, and that's of course to account for the closing date of the new Mexico deal.
But I have to think it's also to <unk>.
Give your technical team some time to.
Do further detailed work subsurface work on the new Mexico assets is that correct.
Yeah.
Yeah, that's fair way to put it John .
We set a complement each other there are the way that those overlap.
And we.
Why I went into that extended description of how they are how they tie in there and let me just give a little bit more color. There. So you know what.
Not giving totally explicit or disaggregated capex, but if you look at it on a legacy basis, we're actually down year over year.
Basically flat to a little bit down and I would challenge you to find many other companies that are growing are forecasting to grow at the level. We are with capex being down now some of that is because last year was a little bit higher with more EUR pilot project spend.
But you know it.
Either way that that's a bit lower and then we've got.
A decent amount for.
The acquisition.
Capex there there's a couple of ways you can back into that including from the data. We gave you in the press release, but that's.
Basically reinvesting about half of the EBIT tax we see there from that asset.
So that will be more in the middle of the year with our with the way Kevin described that coming on.
By summer.
For the overall year, we see the reinvestment rate declining yet again, Bobby described in his opening remarks, and we've got there on our slides how our reinvestment rate cash flow went from 88%, 66%, we see that getting down even lower so I think that's pretty exciting.
There has been maybe a little bit of confusion I recognize it's hard to forecast.
The coming year before we even gave guidance and with an acquisition, but overall, we see that exciting for those that do.
All components of the the legacy Capex being down and then they're really efficient capex on the new acquisition.
Hey, that's great additional detail and thank you for it and I'll respectfully decline to accept your challenge because I know you know your numbers.
Can you refresh me one last time on the completed well costs for the new Mexico asset.
Okay.
Okay.
Hi, Betsy.
Okay.
Hey, Ross.
I'm sorry, the line is breaking up.
Currently.
Five.
Five eight dollar.
Whats, mostly driven by the legacy costs on that asset.
Alright. Thanks.
Thanks, very much and I'll pass it back to the operator.
Okay.
Yes.
Once again for any questions. Please press star one on your telephone keypad. Our next question will come from the line of Jeff Robertson with water Tower Research. Please go ahead.
Thank you good morning.
So assets can you talk a little bit about.
Any infrastructure issues that youll have to deal with as you start.
Okay.
Riley you still have a plan.
Right.
Alright.
Okay.
Foreign necessity.
Both my full year horizontally.
Yeah 15, well.
Well multiple disposal.
We have approximately 70 miles of gathering line.
Plenty of oil and natural gas infrastructure. That's currently in place.
Outside of Lane, just small lines that connect to new facilities or new pad sites, we don't anticipate any large infrastructure capex.
Foreseeable future.
Okay.
Kevin is there are there any take.
I Couldnt hear the first part of your response or are there any takeaway constraints or anything like that that effects.
That area are those the assets in that area.
No there are not I'm, sorry about the connection, but we do not have any takeaway constraints at this point in that area.
Okay are there Jeff incremental this is Phil.
I'm, sorry to interrupt that I'd just add to that.
We're excited it's actually a less remote area. This Eddy county areas and surely know than where we are in yoakum and so we have quite a few options actually more than one midstream provider. So that provides a little bit of competition and we like what we see out there with lots of different options.
Philip do you have do you have some flexibility with the midstream contracts you will inherit to try to maximize do anything there.
It might be able to maximize economics versus what the prior operators were doing.
We do over the medium term not immediately out of the gate.
This is the yes is the short answer.
A question on the power projects that the first phase is due and I think in middle of this year in June and the second phase late this year. Early next can you talk about what impact that might have on either just your operating efficiency in yoakum county, and or your operating costs.
Yes.
So at a high level, we are doing this first and foremost just to improve operational quality. What you may see from the public point of view may not be quite so visible, but we can assure you that it is meaningful to us.
Behind our power, we've got fluctuating power quality dirty power that affects everything from line pressures too you've got something and you've got a you've got a an outage and an ESP electric submersible pump.
If you lose it drops it ends up being a costly workovers. So it really ripples throughout the operations there.
And we hope that improves just overall oil production, which at the end of the day.
More than anything else every barrel, we can produce more makes the biggest impact to our business at.
At the same time, the second tenant I guess would be cost controlling cost I don't know that were out of the gate is going to do.
Drop cost so much as what we see is hopefully controlling the cost increases going forward.
Clearly, it's been a very volatile time for natural gas pricing.
And we're in a lower environment vastly lower environment now than.
And then we were.
Last year, but on the margin.
We certainly see volatility.
Increasing are continuing and then prices, we certainly see a scenario where gas prices could be high again.
We haven't and increasingly intermittent grid, but with gas price often influencing obviously power prices in our region. So on the whole, we're hoping to kind of control those costs.
We've got an increasing load with our continued growth out there with some compressors, we're going to be starting here in the spring with EUR project that increases the power load and so overall, we saw that because there is a exciting opportunity and then lastly, it's.
It's very important to us to control the flaring.
And for the most part that's out of our control.
Based on midstream capacity so.
Where we could we liked to be able to control that and this is an exciting way to take that otherwise flared gas and creates.
Something useful with it.
So.
The power project will allow you to displace compressors in the field, which.
Ultimately it kind of.
Positive from a cost standpoint.
No to clarify there.
Power project will provide electrical power to the compressors that will run on electricity.
And so.
Instead of necessarily pulling it from the grid youre pulling from our onsite power generation now we will have <unk>.
Back up.
Backup capacity from the grid that we can pull to from and.
For overall operational redundancy.
It's having the more reliable source of power or is there a greater premium.
On that aspect of operations as you move into the EMR project.
I think Thats fair.
Yeah. That's in general the overall load is increasing and I think that's a fair way to put it.
But for the most part it's we have a large field. The pilot is one small part of it in a section and lots of different places that we need and use power.
Thank you.
Your next question will come from the line of David <unk> with <unk> companies. Please go ahead.
Good morning, guys and congratulations on having quite a productive year in some really interesting projects coming up I've got really three.
Three questions.
One addresses if you.
Could elaborate on the.
The response Youre seeing.
So far on the water and Cotwo injection.
And then secondly, kind of a little unrelated.
What is your how do your hedged positions look like on oil going forward.
And then thirdly on the electric generation I think Thats, a wonderful project congratulations on that.
Wondering if you'll have any excess capacity.
To sell back into the grid nature.
Alright. Thank you David Yes, sure we can rip through these so the first question on the EUR.
What we'd say is we're early in the life of re pressurizing. The reservoir as you may be familiar EUR projects are very long term in nature. It takes a lot to re pressurize those were.
We're producing from this field are from this section, including adjacent sections and so you've got a little bit of a competition for the deep pressuring and refreshing there.
But that's that's a longer term deal and we will be.
Sure to update you when we have something different to say there.
Let's see the second question I believe involved selling power back to the grid.
We do have some flexibility there.
To take the non.
Non dedicated gas and sell back to the grid to.
To the degree we have excess power. So that's certainly a consideration there and.
Some flexibility there.
We're happy about.
Let's see the third third question remind me there.
On your hedge positions for rate hedged.
Hedging we disclose that both in the appendix of our presentation and in the earnings release I'd note that there is a slight difference.
Some in the 10-K as of 12 31, and then some more recently.
The short answer is on hedging is that we are choosing to increase hedge positions as a result of this acquisition.
Both given that we've agreed to a purchase price and the financing capital structure and thus we want to protect some of those cash flows.
We will have further covenants for hedging.
I can tell you just in general with a larger.
Debt load, we're going to be much more amenable to to hedging.
That said, we're pretty happy with some of the trades. We've made so far in the year. We did a fair amount earlier in January when prices were higher got a lot of nice colors.
That allow for protection.
A little bit below where we are but didn't quite a bit higher including some of the $90 range and such.
Just to elaborate there David just a little bit more on the deleveraging profile that we see with this asset.
Coming out of the gates, we may be.
Kind of in the neighborhood 1314 times Levered.
But then we hope to pay down.
Quite a bit of that here.
In the back half of the year.
As we described first quarter, we have quite a bit of Capex may have a slight outspend second quarter.
Absolutely the same but then back half really start to pay that down and then with that increasing EBITDA youre going to see leverage come down we're hoping to get it down to about one times by the end of the year. So that gives us a little bit more flexibility potentially with hedging but you can you can expect that we will be hedged going forward.
That answers my questions. Thanks, guys.
We have a follow up question from the line of John White with Roth Capital. Please go ahead.
Thank you operator, I was going to ask about power sales to third parties, which was just asked and answered by David. Thank you.
We also have a follow up question from the line of Jeff Robertson with water Tower Research. Please go ahead.
Thanks, Kevin backup too I think part of what Neal was asking earlier can you talk about how you think about it.
About the flexibility that the new Mexico assets provide in terms of capital allocation and competition for capital between.
Your legacy assets in Texas, and now the new operating area.
Sure happy to.
The term competing for capital I see that so many competitors press releases and I recognize the concept there, but I think we're thrilled the fact that while this does compete for capital and a lot of ways the ask.
It's very similar we've got a whole lot of tier one wells that we see as good or some even better than our best over in Yoakum.
And we're going to really mix and really mix and the allocation there for the most part the way we've guided.
Both the activity and the spend.
And the budget, we've just disclosed it really doesn't stray too much and taking away from the legacy it's really just added to it Jeff.
So we've got a similar amount of wells and frankly.
D&C type of investing over on the legacy kind of gillikin properties.
Slightly less <unk> spend and hence the lower year over year effective total spend on our legacy.
Whereas the new we're reinvesting roughly half of the asset level EBITDAX.
And so I think it's really a proportionate amount of allocation. There if you think of the the acquisition.
Kind of.
Cost and such as roughly half of where we are it's really proportionate there.
Philips is the right way to think about it than you do you have more geographic diversity and a new asset that still.
Just the way you initially planned capital.
We'll generate pretty substantial excess cash flow that you can allocate as you see fit.
Yeah absolutely.
We do appreciate the geographic diversity for certain operational constraints, we face from time to time.
Midstream power and such as we described.
The differentials are volatile in our industry in our region.
I'd say on those just quick note as.
Those are for the most part are out of our control right and we give guidance there mainly for your benefit, but it's not something we control so lower confidence on those.
The appearance of lower.
Differentials, there or I guess higher differentials to the index versus last year. It was really just a function of kind of fixed fee flying.
Applying to lower index prices on the gas and the NGL.
But the geographic diversity there helps us.
At least we always at least have the the ability later in the year, Jeff to throttle up or throttle back one area versus the other if we should run into any constraints.
But yes in terms of competing that ability to flex capital between the most between the area that makes the most sense is what's really important.
Yes, exactly that's what some other big boy companies have and it's something that I think we're really going to benefit from now.
Thank you very much.
Thank you.
So we have no further questions at this time, ladies and gentlemen that will conclude today's meeting. Thank you all for joining you may now disconnect.
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