Q3 2024 PHX Minerals Inc Earnings Call
Speaker Change: Greetings and welcome to the PHX Minerals Inc. third quarter earnings conference call and webcast. At this time all participants are a listen-only mode. If anyone should require operator assistance please press star zero on your telephone keypad.
Our question and answer session will follow the formal presentation.
Speaker Change: You may be placed into question queue at any time by pressing star 1 on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Stephen Lee, Investor Relations for PHX Minerals. Please go ahead, Stephen.
Stephen Lee: Thank You operator and thank you everyone for joining us today to discuss PHH Minerals September 30th 2024 quality results.
Speaker Change: Joining us on the call today are Chad Stephens, President and Chief Executive Officer, Rob D'Amico, Executive Vice President and Chief Financial Officer, and Danielle Mezo, Vice President of Engineering.
Speaker Change: The Earnings Press release that was issued yesterday after close is also posted on PHX Investor Relations website.
Speaker Change: Before I turn the call over to Chad, I'd like to remind everyone that during today's call, including the Q&A session, management may make four looking statements regarding expected revenue, earnings, future plans, opportunities, and other expectations of the company.
Speaker Change: These estimates and other forelooking statements involve known and unknown risks and uncertainties that may cause actual results to maturely different from those expressed or implied on the call.
Speaker Change: These risks are detailed in PHX Minerals' most recent annual report on Form 10-K, as such may be amended or supplemented by subsequent quality reports on Form 10-Q or other reports filed with the Securities and Exchange Commission.
Speaker Change: The statements made during this call are based upon information known to PHA as of today, November 7, 2024, and the company does not intend to update these forelooking statements, whether as a result of new information, future events, or otherwise, unless required by law.
Speaker Change: With that, I'm going to turn the call over to Chad Stephens, THX Chief Executive Officer. Chad?
Chad Stephens: Thanks, Stephen, and thanks to all of you on this call for participating in PHX's September 30, 2024 Quarter End Earnings Call. We appreciate your interest.
Speaker Change: A continuing theme which we have highlighted over the last several quarters is the challenging macro environment in which we operate. This quarter is no different. We are largely a natural gas-focused company. The weather-adjusted natural gas supply-demand macro during the quarter remained bearish. As a result, realized natural gas prices were down.
Speaker Change: This impacted cash flows and overall industry activity. The natural gas macro over the past 24 months has produced various headwinds.
Speaker Change: With most recent weather a disappointment, second warmest October-November since 1950. This removed about 150 to 200 BCF of total natural gas demand since the end of September.
The silver lining to this
Speaker Change: suggests a 2 to 3 BCF undersupplied domestic natural gas market.
Speaker Change: Also, total year-to-date storage injection is at the low end of the five-year average and has reduced the large natural gas inventory surplus from a high of almost 700 BCF seen in March of this year to approximately 325 BCF surplus currently versus the five-year average.
Speaker Change: Thus, we remain optimistic for the outlook for natural gas prices as new LNG export facilities begin service.
Speaker Change: It is projected that U.S. LNG export volumes should double to almost 25 BCF per day by 2028 with the advent of seven new facilities currently in various stages of construction.
Speaker Change: This is an incremental increase of roughly 13 BCF a day from current.
Speaker Change: Additionally, base case estimates of increased power demand to meet the growing needs of AI and data centers creates a critical call for gas of about 7 BCF per day by 2030. That is a total increase in natural gas demand from both LNG and power of around 20 BCF per day over the next five years.
Speaker Change: This doesn't even include the need to replace the annual average natural gas decline rate of U.S. gas production of around 15% or 15 BCF per day annually.
Speaker Change: When you look at the current natural gas forward strip price, we don't believe it reflects these bullish Macrodynamics that will begin to lift forward prices over the next 12 to 24 months
Speaker Change: Also, the recent election results should introduce a positive catalyst to U.S. GDP growth, government deregulation, a favorable federal tax regime, and reduced market volatility.
Speaker Change: This should have a positive influence on demand for commodities and the energy sector at large.
Speaker Change: With this backdrop, and in spite of reduced pace of development in natural gas basins due to the suppressed prices, we are pleased with our quarterly results and would like to highlight a few notable items.
Speaker Change: One, the current quarter's royalty volumes represents the second highest in the history of the company, despite the negative natural gas macro I just mentioned.
Speaker Change: Sequential quarter volumes were down 20% and we indicated to you last quarter this was coming and is due to the positive impact in the last quarter of reporting several new high-interest wells in the Haynesville.
Speaker Change: Over the past 12 months, we're excited about what we're witnessing as dramatic increase in drilling in the Springboard III area of Oklahoma, mainly biocontinental.
Speaker Change: This time last year there in the springboard, there were around 20 gross wells in some phase of permitting, drilling, or turning to sales. And today we see that number double to around 40 gross wells in some stage of progress.
Speaker Change: Also, since the same period last year, there have been 30 gross wells converted to producing in the Springboard III. This increased activity is a bit counter to the industry narrative I just laid out because the production in Springboard III is two-thirds liquids and one-third gas by volume.
Speaker Change: Additionally, and as Danielle will discuss in a moment, we see an overall steady pace of well development on our minerals. This highlights the quality of our mineral assets. Danielle will detail our steady historical volume growth in a moment.
Speaker Change: While reducing debt by 5 million year-to-date, or 15%, we have also acquired approximately 6.5 million of minerals, as well as focusing on return of capital to our shareholders through the 4-cent-per-share quarterly dividend. This all speaks...
Speaker Change: to the strong financial position of PHX and our resilient, sustainable business model throughout the commodity cycles. Our conservative focus on leverage and proactive hedging programs help support our financial strength.
Speaker Change: Additionally, we reaffirmed the borrowing base under our existing bank credit facility at $50 million, a direct reflection of the quality of our asset base and maintaining modest leverage.
Speaker Change: and we continue to see steady deal flow in our focus areas which emphasizes the sustainability of our strategy. At this point I'd like to turn the call over to Danielle to provide a quick operational overview and then to Ralph to discuss the financials.
Speaker Change: Thanks, Chad, and good morning to everyone participating on the call.
Speaker Change: For our quarter ended September 30th, 2024, total corporate production decreased 20% from the quarter ended June 30th, 2024, to 2,379 MMCFE.
Speaker Change: Royalty production for the quarter decreased 23% to 2,098 MMCFE compared to the prior sequential quarter, resulting in the second highest quarterly royalty production record for PHX.
Speaker Change: It's important to note that as a mineral holder, we do not control timing on well development, so there can be some volatility both up and down on a quarter-to-quarter basis, and volumes associated with our business model are better evaluated on a rolling 12-month basis.
Speaker Change: Our last 12 months' royalty production is up 10.3% to 8.6 BCFE from the prior 12 months. Total corporate production, including working interest, is up 3.8% to 9.7 BCFE.
Speaker Change: Royalty volumes represented 88% of total production during our September 30, 2024 quarter. 80% of our quarter's 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.
Oil represented 11% of production volumes and NGL represented 9%.
Speaker Change: During third quarter 2024, third-party operators active on our mineral acreage converted 46 gross or 0.18 net wells in progress or WIPs to producing wells compared to 55 gross or 0.4 net in the prior sequential quarter.
Speaker Change: We are pleased with our well conversion rates, particularly given the challenging natural gas macro environment, which includes some operators deferring bringing completed wells online until there is an improvement in natural gas prices.
Speaker Change: At the same time, our inventory of wells-in-progress on our minerals, which includes ducts, wells being drilled, and permits filed, remains strong with 278 gross or 0.93 net wells compared to 241 gross or 0.93 net at the end of June 30, 2024.
Speaker Change: The continued track record of well conversions and replenishment of the Inventory of Wells in Progress, or WIP, reflects the high-quality portfolio of assets we have assembled to provide steady, sustainable future growth.
Speaker Change: In addition to our WIPs, we regularly monitor third-party operator rig activities in our focus areas and observed 18 rigs present on PHX Mineral Acreage as of September 30, 2024. Additionally, we had 70 rigs active within 2.5 miles of PHX ownership.
Speaker Change: In summary, we continue to see steady development in both our legacy and recently acquired mineral assets, which should lead to annually increasing royalty volumes. Now I will turn the call to Ralph to discuss financials.
to $7.9 million compared to the prior sequential quarter.
Speaker Change: due primarily to a decrease in production volumes of about 20%, which, as Danielle mentioned, is a result of fewer new wells being brought online, primarily into Haynesville, as natural gas prices remain under pressure and the normal lumpiness we see in volumes on a quarter-over-quarter basis.
Speaker Change: Realized natural gas prices for Q3-24 averaged $2.00 per MCF compared to $2.05 in Q2-24. Realized oil prices averaged $74.83.
Speaker Change: down 3% from Q2 2024 and NGL prices averaged $19.60 a barrel down 18% from Q2 2024
realized hedge gains for the quarter were $932,000.
Speaker Change: approximately 48% of our natural gas, 31% of our oil, and none of our NGL production volumes were hedged at average prices of $3.28 per MCF and $63 per barrel.
Speaker Change: Most of these hedge contracts were added over the course of the last 24 months. We continue to be consistent with our hedge program and are structuring our natural gas hedges using both swaps and costless collars, which means that we also have upside exposure on certain volumes.
Speaker Change: Our current hedge position is available in our most recently filed 10-Q.
Speaker Change: Total transportation gathering and marketing decreased 28% on a sequential quarter basis to 1.1 million, primarily due to the lower volumes during the quarter, mainly on the Louisiana side of the Hainesville.
Speaker Change: Production and ad valorem taxes decreased 28% on a sequential quarter-over-quarter basis to approximately
Speaker Change: $429,000 due to slightly lower prices and lower production volumes again primarily in Louisiana where taxes are based on volumes and not as a percentage of revenue.
Speaker Change: LOE associated with our legacy non-operated working interest wells was flat on a sequential quarterly basis at about $295,000. Cash G&A increased 6% to $2.17 million compared to the prior quarter.
Speaker Change: Adjusted EBITDA was down to $4.9 million in Q3-24 compared to $6.4 million.
Speaker Change: and Q2-24. The decrease again is due primarily to lower volumes offset by also lower transportation gathering, marketing and production tax expenses.
Speaker Change: Net income for the quarter was $1.1 million or $0.03 per share compared to $1.3 million or $0.04 per share in the prior sequential quarter.
Speaker Change: as of year-end 2023. Our debt-to-trailing 12-month adjusted EBITDA was 1.36 times as of September 30th, 2024.
Speaker Change: We also just finished a regularly scheduled for redetermination of our borrowing base, which remained flat at $50 million. I'd like to thank our bank group for their continued support of PHX. We deployed about $3 million on accretive mineral acquisitions during Q3 2024.
Speaker Change: However, as I've mentioned over the several prior quarters, our acquisition
Speaker Change: program remains disciplined. And if the deals in the marketplace don't generate a required return profile, we are not chasing them. It is also important to note that we have an almost seven-year inventory of high-quality drilling locations, which means that we can continue to perform without chasing acquisitions that do not meet our underwriting criteria.
Speaker Change: We are happy to build liquidity, pay down debt, and return capital to our shareholders through our quarterly dividend. With that, I'd like to turn the call over to Chad for some final remarks.
Thanks, Ralph. And just to recap, highlight the quarter's results.
Chad Stephens: One, we reported our second highest royalty volumes in PHX history. This is supported by a consistent pace of development activity on our minerals of over 300 well conversions to producing annually, about which Danielle just discussed.
Speaker Change: I'd like to emphasize that the annual well conversion which drive our annual volume growth comes from PHX's approximately 2,000 gross undeveloped well location inventory which we lay out clearly in our IR slide deck and which Ralph just talked about.
Speaker Change: Two, we reduced our debt by $5 million, or approximately 15% since year in 23, and reaffirmed our bank credit facility, emphasizing our financial strength.
Speaker Change: 3. Board approved the quarterly $0.04 per share dividend. I'd like to recall that the board increased the dividend in our last quarter from $0.12 per share annually to $0.16 per share annually, which represented a 33% increase.
Speaker Change: This reflects competence in our ability to grow our asset base, and again, I'd like to point out it corresponds with our stated intention over the last several years of increasing the dividend when we feel it's appropriate.
Speaker Change: and we're excited. We've been talking about it for several quarters and are excited about the activity we're seeing on our Springboard 3 asset with the gross whips in play.
Speaker Change: And with LNG power demand driving a bullish natural gas macro in the next 12 to 24 months and this abundant well activity on Springboard III, we look forward to reporting our financial results to our shareholders over the coming quarters.
Speaker Change: We're extremely optimistic about the broad well activity across our minerals, especially Springboard III, which should positively impact our future financial performance. With this and the bullish macro LNG demand and power demand already discussed, we see real upside for PHX.
Speaker Change: As always, I thank both our employees and Board of Directors for their dedication and hard work. This concludes the prepared remarks portion of the call. Operator, please open up the queue for questions.
Speaker Change: Certainly. We're now going to conduct a question and answer session. If you'd like to be placed in the question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue.
One moment please while we poll for questions.
Speaker Change: Our first question is coming from Jeff Grant from Alliance Global. Your line is now live.
Hey guys, thank you for the time.
Speaker Change: Rob, I wanted to start on the scoop and all that development going on. Looking at the breakout in your WIPs, it looks like it's probably like half, maybe a little over half of your net WIPs now. So, just kind of thinking out loud, like how should we...
Speaker Change: Expect the the commodity mix for the company to develop over the next couple of quarters given that the scoop tends to be a little Bit more liquids rich than kind of your corporate mix as it stands today
Well, I...
Speaker Change: So, we've got quite a bit of activity in the Haynesville as well, and the Haynesville wells, any single in the initial production rate from any given the Haynesville well is extremely robust 30 20 to 30 million a day versus a single well initial production rate
of the Springboard-Thruwell isn't quite as robust, let's say.
Speaker Change: So, we don't see a dramatic change in the overall production mix over the next year or two? Yeah, I think the other thing to keep in mind also is that in the mid-continent there are several operators, including some of the larger operators on our minerals.
Speaker Change: in Springboard 3 that pay for the NGLs as part of Rich Gas.
Speaker Change: the fact that that gas is being sold at 1,400 BTU, right? So that includes pricing, but it keeps part of the volumes down because you're not counting the NGLs, if that makes sense.
Got it. No, that's really helpful. Thank you guys.
Speaker Change: It looks like volumes need to stay, at least on a royalty side, volumes probably need to stay relatively steady.
Speaker Change: just to kind of keep within the guidance range that you guys have. I'm wondering, do you guys have the conviction to kind of call Q3 potentially kind of a trough level for production? I know you ultimately are not the operator and can't control things, but to the extent you guys
Speaker Change: Do we have conviction that we're at a trough level, or is that still potentially not quite there yet, just given the potential timing and work in process you guys have? Thanks.
Speaker Change: I mean, I think that's a tough question because I don't know what gas prices are going to do in the future. Right. I mean, we we think that, you know, there's more upside to downside given the macro dynamic.
Speaker Change: points that Chad discussed earlier on the call. I think your assumption on Q4, the fact that we didn't change the guidance, right, I think kind of...
Speaker Change: That kind of answers the question, but in terms of what any particular quarter is going to look like, I think that's a, you know, we tend to stay away from quarterly guidance.
Speaker Change: you know I think that as Danielle said that the right way to look at us in our opinion is that rolling 12 months and I think if you look at any rolling 12 month period you see continued growth right and I think that's that's really what we aim for
Got it. That's helpful commentary. Thank you guys.
Speaker Change: Thank you. Next question is coming from Charles Meade from Johnson Rice, Irvine, is now live.
Charles Meade: You know I look at what you guys are where you were buying in 3Q It looks like you know it was it was you know 80-90% in the Hainesville, so I'm wondering is that
Speaker Change: Is that uptick in the Haynesville an early indication of where that attractive M&A opportunity is or is there more going on there?
Speaker Change: We continue to use both or focus both on the springboard or kind of what I consider the scoop stack fairway.
Speaker Change: of Oklahoma, as well as the Haynesville, we see probably that the Haynesville is
Speaker Change: consists of the state of Louisiana as well as across the state line in Texas and we're actually seeing some some more or an increase in deal flow on the Texas side than we were on the Louisiana side so that
Speaker Change: I wouldn't say to growing, but just kind of a steady, what I consider what was and still is a steady.
Speaker Change: deal flow because they increase in activity we're seeing on the Texas side. But also, we've expanded, given the activity up in Oklahoma in that fairway, the Scoopstack Fairway, we're expanding our focus.
Speaker Change: and looking for more opportunities outside the Springboard 3 and some other areas that are very interesting and just as attractive as the Springboard 3. So I wouldn't say that we're going all in on just the Hainesville. We still see a lot of attractive stuff.
Speaker Change: in the springboard, I mean, in the whole scoop stack. Yeah, there's gonna be some variability, Charles, quarter over quarter between Haynesville and the Anadarko Basin, again, it just.
Speaker Change: you know, a higher component in one quarter being in one area or the other. I think the important thing is that...
Speaker Change: across everywhere that we look, every deal competes against every other deal for capital. And we, on any given quarter.
Speaker Change: You know, we're deploying the capital, our capital, where we see the highest potential rate of return.
whether that be in the Anadarko or the Hainesville.
Speaker Change: You know, enough time has sort of bled off since commodity prices came, or natural gas pricing came down.
where you're seeing a little bit more.
rationalization, let's put it that way.
Speaker Change: you're going to have to sell at a lower price your minerals, right? And so, you know, there's a little bit of that going on as well.
That's good, good color on that, Ralph. Thank you.
Speaker Change: Chad, I really appreciate your natural gas macro comments, it's always, it's interesting to hear your perspective, and I think broadly we kind of agree with you, but I want to ask if you could share with us the benefit of something else, when I think about you guys.
You know, I know that
You guys have exposure to a lot of different operators.
Speaker Change: in in Haynesville and and you also make it your business to understand even you know what what your operators are doing
Speaker Change: So what are you seeing in the way of any early indications of any kind of uptick in activity in 25? Or are you seeing any?
but we we watch the public
Speaker Change: records and the public statements made by our operators probably just like you do and we in our investor relations slide deck lay out who the more active operators in and around our minerals are so you know Chesapeake and
Speaker Change: Athon, not so much, not as much Comstock and Chesapeake obviously has moderated
Speaker Change: Their rig activity and shut in or deferred some production in that both the Haynesville and the Appalachian Marcellus because of gas prices in their
Their statements are saying they're waiting.
Speaker Change: to see where gas prices are going in the next few quarters before they start completing their ducts and wrapping up their production, so it's hard to
Speaker Change: It's hard to really read the impact of their slowing activity on our minerals. We watch the rig counts on our minerals directly on our minerals and around and that hadn't changed. So to answer your question, we think and I guess
Count them all along, Jeffs.
Speaker Change: quarter-to-quarter production and as Ralph alluded to it's more like watching it annually year-over-year royalty volume growth but it's a hard to determine what the operators are going to do but given the rig activity on and around our minerals
we're not we're not concerned about where volumes are headed.
Speaker Change: Yeah, we're also hearing from some of the smaller guys, right, that, you know, at least as of recently, they had plans of turning on, you know, turning on wells into Haynesville in December, right, and that shouldn't come as a shock as everybody sort of plans for higher winter pricing.
Speaker Change: Whether that happens or not, you know, remains to be seen, but...
Speaker Change: but I think all the what you normally see from a seasonality standpoint in terms of people expecting higher gas prices in the winter you know I think that's playing out again this year you know just we just have to wait and see.
Speaker Change: Well, I tell you, it's really hot for November down where I am in New Orleans. Yeah. But anyway, thanks for the added detail. I appreciate it.
Thanks, Charles.
Speaker Change: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.
Speaker Change: Again, I'd like to thank our employees and shareholders for continued support. I'd also like to note that Ralph and I will continue to expand our investor marketing activities and outreach over the coming weeks and months. If you'd be interested in meeting with us,
Speaker Change: Please don't hesitate to reach out to myself, Ralph, or the folks at Fink IR. We look forward to hosting our next call in March of 2025 to discuss our fourth quarter and full year 24 results. Thank you. Have a good day.
Speaker Change: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.