Q3 2019 Earnings Call
Greetings and welcome to the Panhandle oil and gas third quarter earnings call.
At this time all participants.
Our analysts that are only married.
A brief question and answer session will follow the presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your heart.
Steven Hooser <unk> Investor Relations website at <unk>. Please go ahead.
Thank you for joining us today to discuss our third quarter fiscal year 2019 financial results.
With me on the call today for prepared remarks are Paul Blanchard, Chief Executive Officer.
When Phil Chief Financial Officer.
After prepared remarks, we will open up the call to it she went to <unk> session.
During the Q and a session. We will also be joined by freedom wet VP of operations and Ralph the Niko VP of business development and Investor Relations.
Please note that we are also webcasting this call on our Investor Relations website at Panhandle oil and gas Dot com.
The earnings press release that was issued earlier is also posted on the Investor Relations website.
Before I turn the call over to management My Tremain, everyone that during today's call, including the Q and a session. We may make forward looking statements regarding expected revenue earnings future plans opportunities and other expectations of the company.
These estimates and plans and other forward looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied on this call.
These risks are detailed in our most recent annual report on Form 10-K .
As such maybe amended or supplemented by subsequent quarterly reports on Form 10-Q , or other reports filed with the Securities and Exchange Commission.
The statements made during this conference call are based upon information known to Panhandle.
As of the date and time of this call.
Panhandle assumes no obligation to update information presented in todays call with that I'd like to turn the call over to Paul Blanchard get handled President and Chief Executive Officer Paul.
Thanks, Steven and thanks to everyone on the line for participating and Panhandle's third quarter 2019 conference call.
We sincerely appreciate your time and your continued interest in the company.
I am very pleased with Panhandle's third quarter and year to date 2019 performance, we generated significant cash flow and net income by executing our strategy of actively managing our mineral portfolio.
Our proactive leasing effort continues to yield meaningful royalty production growth.
Bias towards oil production, which is supplemented by the lease bonuses we receive.
We believe we're also generating material shareholder value through our targeted divestitures of mineral acreage and they largely tax deferred redeployment of those proceeds.
It's a mineral acreage we deemed to have lower risk from both a geologic and develop from timing perspective.
In addition, we have materially paid down our debt and have improved our already ample liquidity, while repurchasing $6.5 million of our stock year to date.
We own 259000 net mineral acres in 10 states and eight different resource plays of the 259000 acres 60000 acres are producing 14000 or leased out, but not yet producing and 185000 acres are open.
Our strategy is to manage our assets as a portfolio with multiple levers to generate revenue and create value for our shareholders.
In order to fully understand our company, it's important to understand our for our portfolio management strategy.
There are five primary levers, we have to manage and optimize our portfolio.
Number one generating royalty revenue from our producing mineral acreage.
Number two generating lease bonus revenue from our unleashed mineral acreage number three bringing for cash by selling mineral acreage. We believe is priced above its risk present value number for buying additional mineral rights. We believe are priced below their risk present value.
And number five participating as a non operated working interest owner.
As we look to maximize the value of our portfolio moving forward, we are strategically shifting away from working interest participation and moving back towards the original roots of the company as a pure play mineral and royalty company. This process will take some time as we currently own material working interest production and non mineral related working interest participation rights and we intend to maximize the value of those assets.
However, our focus moving forward is to create value through generating royalty revenue extracting maximum lease bonuses.
And optimizing our mineral holdings through thoughtful acquisitions and divestitures.
We've made significant progress to date on the strategy shift as our mix of royalty revenue related.
Relative to working interest revenue is the highest it has been since 2011 and we expect this trend to continue.
At this point I would like to provide a quick operational overview and then I'll turn the call over to Rob to discuss the financials.
It's important to understand that since we are a mono operator and do not control the timing of drilling on our properties, it's difficult to model our business on a quarter by quarter basis.
Average daily production for the first quarter of 2019 increased 7% when compared to the second quarter of 2019. The majority of this increase is oil from the seven new Eagle Ford Wells that began producing at the end of the second quarter.
The production from these wells continues to be in line with our pre drilling expectations.
There are 10 rigs currently drilling royalty interest wells on our mineral acreage was six in scoop and stack to others in Oklahoma and two in the Bakken.
There are 71.
Additional wells drilling them within two and one half miles.
Panhandle acreage.
Also we have not elected to participate in any working interest wells in the first three quarters of 2019.
Our royalty sales revenues increased 12% during that nine month period as compared to the year ago period.
This increase does not fully reflect the impact of recent of our recent Bakken acquisition.
And our working interest revenues decreased 24% during that nine month period.
Versus the year ago period.
With that I'll turn the call over to Rob to go over the financials and then I'll close the prepared remarks with comments on our strategy progress and outlook.
Thanks, Paul.
First I want to thank everyone for being on our call today.
I will share with you some more details regarding our financial results for the third quarter ended June 32019, and then I will turn the call back over to Paul to make some final comments on the progress of our strategic plan.
For our third quarter ended June Thirtyth 2019, total revenues were $16.3 million.
Which is a 114% increase from the $7.6 million in the second quarter of 19.
The change was caused by the following.
One the company sold mineral assets in the third quarter of 19 for a gain on sale of $4 million and we did not have any asset sales in the second quarter of 19.
Two.
We had $2.3 million of gain on our derivative contracts in the third quarter of 2019 and that turned from a loss of 1.8 million that we experienced in the second quarter of 19.
Three oil NGL and natural gas revenues increased $2.6 million during the third quarter.
19, due to production increases from all our products, partially offset by a slight decrease in the product prices in the third quarter.
Total expenses increased 746000 in the third quarter of 19, when compared to the second quarter of 19, most of which was driven by higher production.
Partially offset by decreased DNA.
As the second quarter had some nonrecurring compensation expenses.
Adjusted EBITDA was $8.9 million in the third COVID-19, as compared to $4 million in the second quarter of 19.
Given the nature of our business and our ability to generate significant revenues through leasing and strategic asset sales. We can experience large changes in our statement of operations when comparing quarterly information.
Therefore, we believe that year to date comparisons can be more useful when assessing the company's performance during any given year.
Year to date 19 Panhandle generated 50 million in revenues.
This is a 50% increase compared to the 33 million from the prior year to date and 18.
This was primarily due to the sale of minerals and Lea and Eddy counties in New Mexico, and minerals in Martin County, Texas for $13.1 million gain during 2019.
Oil NGL and natural gas revenues were down 5.1 million in 2019 year to date, mainly due to natural gas production decline on a significant working interest properties from our 2017 drilling program that came online during the early parts of 2018.
Production from these properties has since fallen from their high initial production rates.
The company also had a gain on derivative contracts of 5 million.
And year to date 2019 versus a loss on derivative contracts of $4 million in 2018.
Total expenses year to date decreased 6.8% to $30 million.
30.1 million from $32.3 million in the prior year.
The company saw an 11% increase in the total cost per Mcf being in year to date 2019 relative to 2018.
This increase was primarily driven by lower working interest production as noted previously.
Interest expense and production taxes were also influenced respectively.
By higher bank interest rates and the production tax rate increase in Oklahoma during the 2019 period.
DNA expenses also increased mainly due to nonrecurring restricted stock and other compensation expenses.
Adjusted pre tax net income increased 183% to $14 million and year to date 2019 from 5 million in 2018.
Our adjusted EBITDA was $27.4 million year to date in 2019, which was an increase compared to 20.4 million in 2018.
For 2019, both the adjusted pre tax net income and the adjusted EBITDA, including $13.1 million gain on the sale of assets.
The company generated excess free cash flow, enabling us to return 8.5 million to shareholders through dividend payments and stock repurchases.
While also paying down 9.5 million.
Debt from our 2018 year end.
Subsequent to June 32019, the company sold an additional 383 net mineral and royalty acres in the Permian for $5 million.
Our debt net of cash at June 32019, with approximately $40 million and currently our debt net of cash is approximately $31.5 million.
We continue to deploy an active commodity hedging program, which extends out through our talent or through calendar 2020.
Currently we have 100000 barrels of oil hedged at a price of approximately $60 per barrel for calendar 2019.
And 120000 barrels.
Of oil at a price of approximately $60 per barrel for calendar 2020.
We have two bcf of natural gas hedged at a price of $2 to 98 cents per Mcf for calendar 2019.
And 1.3 Bcf of natural gas hedged at a price of $2.81 per Mcf for calendar 2020.
Which I may know is meaningfully above the current natural gas prices.
We are pleased that we continue to generate good sustainable cash flow given our ability to strategically produce revenue in various ways with that I will turn it back to Paul.
Thank you Rob.
As I discussed earlier, there are five primary levers, we have to manage and optimize our portfolio I would like to provide an update on our execution of each of these areas for the first three quarters of 2019.
Number one we generated $11 million and royalty revenue a 12% increase from the same period in 2018.
Number two we generated $967000 and lease bonus proceeds versus $1.1 million in the prior year period.
We are actively leasing our unleased minerals in stack and scoop. The results of this effort will be reflected in upcoming quarters.
Number three we generated $13.1 million from the sale of 300.
72, net mineral acres in the Permian basin at an average of $35000 per acre.
Since the end of the third quarter, we have sold an additional 383 net mineral and royalty acres in the Permian basin for $5 million.
Number four.
We purchased 687 net mineral acres in the course of the Bakken play in North Dakota, and the stack play in Oklahoma for $5.1 million or an average of $7500 per acre.
And number five we invested $3.3 million in working interest participation.
Principally for the seven Eagle Ford Wells, which began drilling last year and started producing at the end of March.
Our unique mineral holdings, including large positions with both leased and open minerals in key areas.
Provide us with the opportunity to continue to generate significant cash flow moving forward.
Current initiatives include the marketing of additional high value, but largely undeveloped Permian basin minerals, and a proactive marketing process.
To lease out.
Panhandle's remaining unleashed mineral acreage in the stack and Scoop plays.
This leasing effort is expected to generate immediate cash flow from bonus payments and future cash flows from royalty.
We are also continuing to pursue the acquisition of mineral acreage in the Bakken in North Dakota, the stack and Scoop plays in Oklahoma and the Eagle Ford oil play in Texas.
With that let me open the call to questions.
Operator, please instruct our listeners on how to queue up.
Thank you.
We will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad, a confirmation triangle indicate your line is in the question Keith.
You May Prescott chair, if you would like to remove your question from the Q.
The participants using speaker equipment, it may be necessary to pick up your handset before passing the stock can you.
One moment, please while we poll for questions.
Your first question comes from Joe Allman with Baird. Please go ahead.
Thank you good afternoon everybody.
Good afternoon, Joe.
Hey, Paul I think you said that.
There are 71, I think is of wells within 2.5 miles of your royalty acreage and so much I want to clarify was that wells or is that rigs and then.
My question really is what is your visibility on getting operators to actually move over under your acreage.
So it is 71 rigs Jo Ann and of course, being a a royalty owner or the visibility.
Of of operators moving directly to our locations is somewhat limited.
We have certainly.
Indications of what operators are doing in specific areas.
But precisely the moving on to our locations is generally going to be.
Just within a few months in advance of of the rigs actually moving in through.
Whatever regulatory processes that are going through prior to moving the rigs to our locations.
Okay and your in your press release, I mean, you're talking about marketing efforts are there any marketing efforts.
At Panhandle to try to get those operators are going to be aware that hey, you know you've got you've got acreage it.
A mile away or half mile away and.
You're welcome to drill on our acreage is there anything going on internally that you do to market your acreage.
Well like in the stack and Scoop for instance, you know weve taken a R.R. unleashed mineral acreage out too.
In excess of 30 different.
Operators and players in the area to lease that acreage from us and so certainly.
The active operators are are looking at that and in fact, we've gotten offers and are negotiating with some active operators in stack and scoop.
To lease that acreage with the intent and drilling it.
Okay. That's very helpful. And then in terms of the recent acquisitions you made.
Could you just talk about your analysis that you do internally to make sure that those acquisitions are accretive to value.
Sure we're looking at.
Hi, Matt.
A detailed engineering geologic inland analysis on all of those but where were looking at rate of return analysis that would be accretive.
To the properties to our existing properties and bidding.
Based on a rate of return analysis for the the developed plus the undeveloped properties.
And.
Obviously at the at the times that were successful.
We feel very comfortable that these are accretive we're fairly conservative in those analyses and and.
Take a very disciplined approach to it.
Yes, I guess in terms within your analysis, there has to be some assumption about when the operator is actually going to drill on that royalty acreage and so.
What assumptions you make.
And what kind of visibility do you have on that happening.
Yes, I think thats.
We have.
Depending on where you're acquiring and we're acquiring and places that I don't think have a lot of geologic.
Our risk associated with them. So the primary risk that we're taking I think are the the product pricing risk and the and the drilling timing risk and so we'll look at.
The operator activity permits.
Their history of.
Drilling relative to their their permits.
Any other activity in terms of build out of any other kind of intra infrastructure, suggesting.
Drilling timing of course, we're looking at there all of the presentations from the operators in terms of their their projected activity and.
And making our.
Our estimates of drilling timing based on that and try and frankly trying to apply some some conservatism to that scheduling process too.
To help ensure that we deliver those rates of return that were.
That we're projecting.
That's very helpful. And then lastly, similar question, but on the sell side. So when you sell.
Royalty acreage.
What kind of analysis doing internally to to to make the decision that yes, it's actually better to sell them to hold onto it.
Yeah, we're doing the exact same analysis.
Really for us whether it's whether it's participating in a working interest in a well, which obviously like we said we havent.
Haven't done that.
At all in fiscal 2019, or whether its leasing out our minerals or.
Our divestitures or acquisitions were going through pretty much the exact same.
Economic analyses and risk analysis, along with the geologic analysis of the of the area to to evaluate all those various risks and determine whether.
The action to sell.
Would be would be appropriate.
Okay. That's great. That's all very helpful. Thank you guys.
Okay.
Thank you once again, if you wish to ask a question. Please press star one on your telephone and wait for your name to the amount.
Your next question comes from John White with Roth capital.
Please go ahead.
Good afternoon, and congratulations on a nice quarter.
Thanks, John .
The sequential production growth looks real good does.
Eagle Ford Wells, we've been waiting a while and they finally came through.
Hi on page six referring again to the rig activity table.
Can you go over the difference between wells in progress and rig spreads.
So John Wells in progress would be wells that have.
Ups began drilling within the last two years, but are not yet producing.
The.
Rigs in progress are the.
Ricks President on PHX acreage are exactly that their rigs that are currently drilling the actual drilling rig is on location right now.
Okay. So we've got some drilled but uncompleted in the wells in progress.
That's right yes.
Actually fairly substantial list there of of wells that have.
Look on drill at least begun drilling but have not produced yet.
Nice news on the stock buybacks during the quarter and the first six months.
And.
You reference a sale of minerals on page five and on page seven that's the same bunch of minerals in Martin County for 24000, an acre.
I'm trying to figure out exactly where you are John but yeah. We.
What weve sold the minerals in Martin County.
This quarter and had some subsequent sale of Martin County minerals after the end of the quarter.
So that's the two references we make our.
The Martin County that we sold during the quarter and just to it's the same thing since the quarter its Reagan and Upton.
Reagan and Upton Ward and re so Martin you closed during the quarter during the quarter and those other counties sense.
Okay. Thanks, it looks like you're selling acreage on a per acre basis for a lot more than you're buying acreage on a per acre basis, though.
Good news.
Yeah.
Thanks, all right.
Thanks, I will turn it back to you.
Thank you.
Your next question comes from John Day shelf from Pinnacle capital management.
Please go ahead.
Hi, just a quick question to make sure I understand the gains.
Or losses on derivative contracts.
Are those realized or unrealized or both.
They're both.
Okay, Where's it broken out somewhere in the queue or somewhere else as to what is realized versus unrealized.
So in the Q.
Let me find the page real quick right around the section, where we detail out all our derivative contracts okay.
So page 12 of the Q.
Tells the company's fair value and then it says net net cash paid related derivative contract settled during the nine month period, So right now weve paid out.
A million 99 for two.
And then weve.
And then it has a comparison to last year.
So right now were in a net settled position of a million out the door million loss.
And so your unrealized it's going to be on the other side of that.
That takes it to that two point I think it's $2.8 million number.
Okay I don't have the queue in front of me, but its detailed into Q. Yes. It is page 12 of the Q and John I'll. Just mentioned this is Paul I'll just mention that the.
The bulk of that loss that we've already paid out was in December 2018, when when gas prices.
Jumped extraordinarily that month. So that's that's the bulk of the loss we've been.
Net receipts for the last few months and of course have the big unrealized gain out there also.
Got it okay. Thanks, that's helpful.
Thank you.
That's all the time, we have for questions today, I would like to turn the floor back over to Mr., Paul Black shot for closing remarks.
Thank you very much I would just like to thank everybody for attending.
Panhandle's third quarter conference call and look forward to your attendance at our next conference call. Thank you very much goodbye.
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