Q2 2023 Riley Exploration Permian Inc Earnings Call

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Thank you and good morning, welcome to our conference call covering our second quarter 2023 results.

Yesterday, the company published a number of items, which can be found on our website under the investors section.

Form 10-Q , a summary earnings release supplemental info on non-GAAP measures and two presentations one of which provides an update for our second quarter results with the other providing a company overview.

Participating on the call today are Bobby Reilly, Chairman and CEO , Kevin Reilly, President and me, 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. These 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.

Good morning, and a warm welcome to all participants on our Q2 2023 earnings call.

We are pleased with our results for the second quarter, which reflects record high metrics across production and cash flow from operations.

As we reflect on the past quarter I want to spotlight. The following accomplishments number one we closed on the acquisition of oil and natural gas assets in new Mexico and successfully transitioned operations Southern company.

Number two we averaged oil production of 15.1 thousand barrels per day, or 21.2 thousand barrels of oil equivalent per day.

Number three we generated $66 million of adjusted EBITDAX, and 56 million of operating cash flow.

And lastly, we paid dividends of 34 cents per share for a total of $7 million.

These achievements highlight our dedication to strategic growth and operational excellence.

We look forward to providing a more comprehensive overview of our performance throughout those calls thank.

Thank you for your continued interest and support.

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

Thank you Bobby and good morning, the team successfully implemented our plan in the second quarter, including the integration of the new Mexico assets.

The results of the quarter reflect both the performance of our legacy assets in the newly acquired assets.

His body previously mentioned our production reached peak metrics during the second quarter.

Total equivalent production of 21239 Boe per day, a year over year increase of 109% in quarter over quarter increase of 61%.

Oil production of 15055 barrels per day, a year over year increase of 80% and quarter over quarter increased 52%.

The increase in production is attributable to the impact of the acquired assets as well as organic growth.

Consistent with prior guidance the company drilled eight gross horizontal wells during the second quarter, including four wells in Texas and four wells in New Mexico.

The company completed five gross 4.2 net horizontal wells during the quarter, including four wells in Texas, and one well in new Mexico to.

The company turned to sales six gross five point to net horizontal wells during the second quarter 2023.

The company incurred 39 million in total accrued capital expenditures before acquisitions for the second quarter lower than the company's previously released guidance due primarily to deferred completion activity on.

On a cash basis, the company had total capital expenditures for acquisitions of $48 million for the quarter.

Riley is committed to operating efficiently both on its legacy assets and the newly acquired assets in New Mexico.

Since closing the acquisition, we have identified opportunities to optimize production in new Mexico through well remediation efforts.

Those efforts resulted in our LOE per Boe E, Kevin and just outside the high end range of guidance and $9 six per Boe.

Additionally, the company progress its efforts on the Buildout of its onsite power generation joint venture.

We are targeting an in service date for the initial phase during the latter part of the current quarter.

Lastly regarding cost we continue to see a slight decrease in service intangible costs as compared to 2022 and hope to see continued benefits from that in the second half of the year in 2024.

With that I'll turn the call over to Philip to discuss the financial results. Thank you.

Thank you Kevin.

For the second quarter 2023, we're reporting operating income of $45 million and net income of $33 million or $1 65 per diluted share.

Operating cash flow for the three month period was $56 million or $51 5 million before changes in working capital the latter of which was up by 14 million or 38% quarter over quarter.

The primary driver of the increase as the higher production volume from both organic development and the new acquisition assets.

Quarter over quarter realized oil prices were down about 2%, while realized natural gas prices were down 96% and realized NGL pricing was down 26%.

The low natural gas and NGL realizations are a function of having some fixed midstream fees tied to volumes, which are exacerbated when market prices are very low like we experienced in the second quarter.

On an absolute basis natural gas revenue was down by less than half a million dollars, while NGL revenue increased.

<unk> makes up 98% of our revenue.

Interest expense was materially higher than the prior quarter as to be expected as we use debt to finance the acquisition.

Operating cash flow also includes $3 6 million of transaction expenses related to the acquisition.

Year to date, we have accrued $81 million of Capex with $83 million of cash Capex.

For the quarter cash Capex was $48 million about 9 million higher than accrual based cap capex.

Last quarter, we had the opposite dynamic where cash capex is lower than accrual this will vary quarter to quarter. So it's not surprising to see.

As Kevin described we had a very high level of development activity in the quarter, both in Texas, and New Mexico, which led to the strong production levels reported as well as to the higher level of Capex, which was still meaningfully under guidance.

We took over the new Mexico asset only in early April which had been idle with development activities. Since the end of last year. So it was important to us to start a development right away in order to have good levels of average production for the year.

In a normal or ideal year, we would have activity in that first quarter as well smoother throughout the year, whereas effectively loaded in the second quarter and this year.

Given the large amount of activity completed to date and corresponding good results, we've reduced our remaining activity level and capex for the end of the year.

We'll have a fair amount of activity continuing into the third quarter with forecasted accrual capex of $35 million to $40 million.

Combining this third quarter estimate with the $81 million accrued year to date that would correspond to approximately 90% of our full year capex guidance range of $130 million to $140 million through the third quarter.

So based on that you can see we currently forecast very modest activity in the fourth quarter.

When viewed in on a full year basis, which is how we encourage investors to look at most metrics. We believe a reinvestment ratio of capex to operating cash flow will appear more reasonable and closer to last year's level connect.

Connecting this to free cash flow. We report this metric using cash Capex. We also include cash items like transaction costs, which some companies exclude.

So as anticipated free cash flow for the quarter and year to date has been modest at $3 million this quarter or five 5 million year to date.

This has been driven by the concentrated development activity combined with operating cash flow impacted by softer commodity pricing in the first half of the year.

We're optimistic that full year free cash flow will balance out with the lower spending levels in the back half of the year, especially in the fourth quarter with excess cash flow beyond the dividend for incremental debt paydown.

I'll end by pointing out a few items on our balance sheet given some notable additions from last quarter at.

At quarter end, we had $394 million book value of that or 410 principal value of debt did.

The difference between the two is primarily attributed to the discount on which the notes were issued in deferred financing costs. I'd also highlight that $20 million of the notes is booked as a current liability.

This is due to the fact that we have a quarterly principal payment of $5 million as noted on our prior call. We like this feature as it offers a regular paydown mechanism without the customary premium or make whole.

I'll now pass it back to Bobby for closing.

Thank you and again, we value your time and interest in our company as always we are focused on creating value for our shareholders and look forward to updating on our progress in the next quarter and beyond.

Operator you.

You may open the call up for questions.

Thank you if you have a question. Please press star one on your telephone keypad, if you wish to remove yourself from the queue simply press Star One again one moment. Please for your first question.

Your first question comes from the line of Neal Dingmann of Trish Securities. Please go ahead good.

Good morning, all.

My first question is on capital efficiency, I would say specifically Christy if the updated guide it would be able to limit even more so now spending they'll maintain that stable production and ultimately resulted in what appears at least in our model as well as increased free cash flow I'm, just wondering could you remind me.

Through on how your D&C is approved.

Along with maybe the base decline or what are some of the other drivers maybe Bobby for you or Kevin on what.

Or are you can fill up on what's sort of driving this.

Okay.

So for our last quarter.

Our results were driven largely by the acquisition of the Red Lake asset.

Our Peco's in addition to organic growth. If you if you disaggregate them and break them down I would say the legacy asset did grow substantially.

Quarter over quarter to the tune of about 10% and that was due to the completions that we brought online late in Q1 and Q2.

As far as drilling efficiencies or capital cost, we're continuing to see.

Rice decreases, particularly on steel products and some services like completions.

Unfortunately, we're still working off.

The inventory that we had acquired in late 2022 to procure development opportunities for 2023, so we're not able to fully realize that benefit yet, but we do anticipate later in this year and into 'twenty 'twenty four starting to see the benefits of those price reductions.

Yes, I look forward to that Kevin that the great details and then my second question, just maybe an overall infrastructure.

I know there is always sort of ebb and flows I didn't touch are there different proactive steps you all can take going forward to.

To help mitigate any downtime.

We then need to vendors or is it just sort of how the field place maybe just anything you can say just on.

Generally specific I'm, sorry, generally around just sort of infrastructure in Texas, New Mexico et cetera.

In Texas, we have worked with our midstream partner out there and they are currently doing a <unk>.

Second or maybe a third expansion to the midstream facilities to further facilitate additional flow, which we anticipate that coming online.

Let's say early to mid 2024.

In addition to that you know we have announced and are working on the onsite power generation, which provides for usage of our gas in the event, there's no capacity and we hope to expand that same thought process or initiative over into new Mexico.

New Mexico, we've had a few disruptions, which we've mentioned <unk>.

Largely there was a fire in Q2 or no I think it was October of 2022.

D C P. It announced that Theyre, Christina booster station, which they had done some maintenance for repairs for that and that's been sensitive then put back online. So they're working in the right direction to provide more stability in the new Mexico, and Texas as far as midstream gas.

It's great to hear thank you so much.

Your next question comes from the line of Noel Parks of.

Twitchy brothers. Please go ahead.

Hi, good morning.

Good morning.

Hi, I just had a couple of things.

Yeah.

Was wondering on the on the cost side.

The.

Bits of.

Sure Hope, we see on the horizon.

Inflation.

Maybe even going back the other way.

I'm just curious.

As far as what you can tell the driver of that might be happening in your region.

Is it mainly just the service companies.

During a little bit less confident about.

The rig count going forward.

Concerned about utilization.

Sure.

Or.

Any other factors you see that seem to be helping.

I think I think there's probably a combination of that break costs have softened a little bit, but if you think about our wells, we drill them intend to 11 days.

So you change from 15000 to 14000, a day, it's not a substantial savings, but it is savings where we've seen the most is our completions.

And on tubular tubular in some cases.

And various sizes, all differ due to availability and demand, but and <unk> and some pipe that we use a lot of I've seen prices drop as much as 50%, which that makes a difference in the well cost.

Great. Thanks, and then actually that brings to mind a question.

Tween.

Some of the vertical drilling you're going to have on the plate.

Yeah.

The horizontal from your.

Your legacy, Texas CAGR.

A lot of it.

The proportion of our completed well costs that that works out between the drilling part and.

Completion part.

Can you just give me a feel for what that breakout looks like these days.

So we are not currently doing any vertical development as far as producer SKU, we have drilled some injection wells and.

For C O two and for our water that are vertical, but on a completion well or a horizontal well.

I would say the current breakout is.

Approximately 35%, which would truly be drilling cost and then.

Post drilling for completion completion tubular facilities now the balance about 65%.

Okay Gotcha.

And.

And one other thing just talking about back typically putting.

In your part of the basin.

If.

Had this uptick in oil and I was just wondering has anyone out there among your peers that you know.

We're just plowing ahead with our drilling program.

Whether you know whether there was a six handle on oil or an eight handle on oil or have you seen.

Most of the.

Most of the peers being sort of opportunistic like us are looking at.

Hedging possibilities.

What their activity levels.

After my if I might look like et cetera.

I don't think that our areas, particularly we have seen a lot of activity.

Activity.

Driven.

At a high pace and not slowing down regardless, our our areas are mostly H b P in Texas and new Mexico. So it provides a lot of flexibility.

And unless.

One of our peers as <unk>.

Preparing for some sort of divestiture or theyre, not necessarily just out drilling to drill.

Thank you. Your next question comes from the line of Jeff Robertson of Water Tower Research. Please go ahead.

Thank you this might be one of those questions. It's just way too early to ask but.

Kevin or fill up when you think about putting together a program in 2024 can you just talk about the benefit of owning two assets.

And maybe being able to deploy capital over a steadier operating plan as you as you think about setting up your program next year.

Yes sure Jeff.

That's exactly right that was one of the initial attractions to having a diverse set of assets.

No similar in style, but diverse in geography, we can smooth that out she has seen the bitter concentrated spending we had this quarter.

That's absolutely the plan.

We do drill these wells very quickly as Kevin was just describing.

So that's that's a positive but as for spreading things out when you get a rig.

It's most efficient than you would you achieve the most cost savings on an absolute basis.

If you do those all back to back.

So one possibility is spreading activity over a quarter and a starting it towards the beginning or end and straddle a quarter like that we can also spread out drilling and completions just a bit.

But in general we're pretty excited about 2024. It is early as you say, but.

We're already getting to a materially better place with effective margins. If you think about where we were for the.

A lot of the second quarter, we had low seventy's pricing.

$67 pricing for a while.

And the well costs, we're still stubbornly high debt.

The industry was experiencing grade as Kevin was describing you had some holdover from commitments made.

During that peak pandemic.

Supply chain tightness and sets high high pre pricing.

Since then <unk> seen those come down as Kevin described we've seen the steel come down dramatically.

From China.

And then at the same time, we've got a roughly $10 increase in the oil price and so that makes a dramatic difference so.

Like I said, it's early but we're excited about 2024 and that we can.

Get some attractive margins and.

Overall free cash flow.

Thanks, Phil.

Just one other question on the four wells that you all have planned to drill in Texas in the third quarter.

Would those be expected to be completed and producing in the fourth quarter of 2003.

We currently plan to have three of those wells producing in Q4, and we have commenced those drilling operations on the first well.

But our current intention is to potentially.

Gary a duck over into two.

<unk> 2024.

Okay. Thank you.

Okay.

There are no further questions at this time and with that this concludes today's conference call you may now disconnect.

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Right.

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Okay.