Riley Exploration Permian, Inc. (NYSE:REPX) Q3 2022 Earnings Conference Call November 15, 2022 11:00 AM ET
Company Participants
Philip Riley – Chief Financial Officer and Executive Vice President, Strategy
Bobby Riley – Chairman and Chief Executive Officer
Kevin Riley – President
Conference Call Participants
Neal Dingmann – Truist Securities
John White – ROTH Capital
Noel Parks – Tuohy Brothers
Richard Dearnley – Longport Partners
Operator
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 Riley Exploration Permian Incorporated Fiscal Third Quarter 2022 Earnings Release and Conference Call. [Operator Instructions]
I would now like to turn the conference over to Philip Riley, Chief Financial Officer and Executive Vice President of Strategy. Please go ahead.
Philip Riley
Thank you, and good morning, everyone. Welcome to our third quarter 2022 conference call. The company recently changes fiscal year from September 30 to December 31. To we will be covering today results for the 3 and 9-month periods ending September 30. We will report for year 2022 results in March of 2023. Yesterday, the company published four items which can be found on our website and under the investors section in earnings release a 10-Q and two presentations. One presentation provides an update for third quarter results. The goal here was to provide simple and transparent drivers of performance to be used in conjunction with our other public filings. We may reference a few slides from this on the call today. The second presentation provides an overview of the company’s story with minor updates from previously released versions.
Participating on the call today are Bobby Riley, Chairman and CEO; Kevin Riley, President; and myself, Philip Riley, 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. The 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. The reconciliations to appropriate GAAP measures can be found in our earnings release for presentations issued yesterday.
I’ll now turn the call over to Bobby.
Bobby Riley
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 results of our third quarter. This is the first quarter for Riley reporting since we completed our change in fiscal year end from September 30 to December 31. Our rationale behind the change was simply to align better with other EMPs for reporting and analytical comparisons for both investors and analysts. Riley delivered very strong financial and operating results in the third quarter, again being driven by continued organic growth. To highlight a few items for the third quarter, we averaged all production of 9,413 barrels per day, which exceeded our high end of guidance and represents an increase of 36% as compared to year-over-year to the third quarter of 2021 and an increase of 13% as compared quarter-over-quarter to the second quarter of 2022.
We began full scale water injection on our EOR pilot during the third quarter and commenced CO2-injection on November the 1. We generated $51 million of adjusted EBITDAX and $55 million of operating cash flow representing an increase of 14% and 25% respectively over the prior quarter. We paid dividends of $0.31 per share during the third quarter and have [indiscernible] announced and paid an increased dividend of $0.34 per share during the fourth quarter, representing a 10% increase on new declaration. Riley strong financial position provides us with the flexibility needed to navigate through both product price volatility and periods of economic uncertainty. This also allows us to patiently seek attractive opportunities to enhance the per share value of the company.
I will now turn the call over to Kevin to discuss operational results.
Kevin Riley
Thank you, Bobby, and good morning to everyone. As Bobby mentioned we had a great quarter as a result of our low decline production base. In addition to the outperformance of a number of development wells recently brought online. Riley Permian’s average daily oil sales of 9,413 barrels per day for the quarter, which is a 13% quarter-over-quarter growth or 36% year-over-year growth as compared to the third quarter of 2021. The company average total equivalent sales of 12,717 barrels of oil equivalent per day for the same period, which is a 25% quarter-over-quarter increase, or 33% year-over-year growth as compared to the third quarter of 2021. The natural gas and NGL volumes increased quarter-over-quarter at a higher rate than oil volumes due to the additions in plant processing capacity by our midstream counterparty. The company also continued its efforts on its development activity during the 3 and 9 months ended September 30, 2022. We brought online 7 gross 4.2 net and 14 gross 10.8 net horizontal wells respectively.
Regarding the EOR pilot project in Yoakum County, Texas, as Bobby had previously mentioned, we began full scale water injection in August, and I’ve since commenced CO2-injection on November 1. Early indications as a result of the water injection appear to have slowed and/or rested production decline for the three horizontal producers within the EOR pilot. We anticipate a production response from the CO2-injection within 6 to 9 months. So sometime near late spring or the summer of 2023.
During the quarter our average completed lateral length on operated horizontal wells turn to sales was approximately 7,800 feet was the 10% increase in average completed lateral length per well, quarter-over-quarter, with drilling and completion costs remaining relatively flat as compared to the previous quarter. For similar well designs, our lease operating expenses were $8.8 million, or $7.53 per BOE for the 3 months ended September 30. This came in at the midpoint of guidance but was a 9% increase quarter-over-quarter, while lower than our quarter-over-quarter growth, production growth, both on an oil and oil equivalent basis.
I’ll now turn the call over to Philip Riley to review our financial results.
Philip Riley
Thank you, Kevin. Total revenue was $88 million for the third quarter 2022 consistent with the level in the second quarter, driven by higher production volumes but offset by lower pricing. Third quarter 2022 derivative settlement losses were approximately $9 million less at 34% lower than settlement losses in the second quarter. Combining those two-revenue net of settled hedges was 13% higher quarter-over-quarter. These factors in turn drove a 16% quarter-over-quarter increase in cash flow from operations before changes in working capital from $44 million to $50 million, which you can see visually in the chart on Slide 4four of our third quarter results presentation.
If you look at the 9-month period year-to-date, our cash flow from operations before working capital is increased 94% year-over-year, from $64 million to $124 million. About 40% of the increase has been due to production volume growth, with the balance due to net price that is priced net of hedge settlements. The company was approximately 50% hedge during 2022 with legacy hedges bought during 2020 and 2021. Looking the next year, we’re about 20% hedged at lower prices.
Now offer some comments and capital allocation referencing Slide 5 in that same presentation. First, we’ve been able to grow volumes materially more than last year while reinvesting a lower amount of cash flow. This is driven by a few factors, including some really strong production from new development wells, and a materially improved operating cash flow. The slower reinvestment rate and turn has allowed us to reallocate more to dividends in the balance sheet with a third of cash flow from operations before working capital year-to-date, versus 19% last year.
Total dividends paid for the 9-month period, were are up 25% versus last year, and we’ve paid the debt down by 25% year-to-date. And while investment is up year-over-year, operating cash flow is still outpacing the CapEx increases for a net benefit. This leads to the higher free cash flow for the year about $41 million year-to-date. We acknowledge our company may be producing less free cash flow than some other companies on a relative basis. But as many of you realize this is mostly a function of the higher reinvestment for growth. As many other companies choosing zero growth and which of course requires significantly less reinvestment.
Looking ahead to next year, while we won’t be giving detailed 2023 guidance today, we believe that we can generate low double digit oil production growth with a lower reinvestment rate than 2022. This could be driven from combination of the tailwind of very strong 2022 growth, improved net price realizations as a result of further hedge roll off as well as lower AOR send. I’ll caveat this is conditioned upon roughly $70 or better oil prices, only modest increases from here on DNC costs and absent additional new venture spending.
Final quick comment on the credit facility, we recently completed a regular semiannual borrowing base redetermination and elected to increase the base by $25 million to $225 million total. While we’re largely undrawn, we believe the increased liquidity and a volatile market just by the small incremental undrawn fees.
Thank you. And I’ll turn it back to Kevin now.
Kevin Riley
Thank you, Philip. I’ll now give guidance for the company’s activity for the fourth quarter. We forecast accrual basis capital expenditures of between $34 million and $41 million, which excludes amounts for corporate and our land acquisitions or other opportunistic investments. We forecast fourth quarter of 2022 oil production to average between 9,400 and 9,900 barrels per day, and totally equivalent production to average between 12,600 and 13,200 barrels of oil equivalent per day based on estimates of available gas processing capacity. We anticipate fourth quarter LOE, of approximately $9 million to $10.5 million in cash G&A expenses of approximately $4.7 million to $5.2 million. The company additionally anticipates cash income taxes of approximately $3 million to $5 million to be paid during the fourth quarter.
I’ll now turn the call over to Bobby for closing remarks.
Bobby Riley
Thank you, Kevin. And again, thank you to everyone for joining us today for our third quarter call. We remain focused on a discipline model of low leverage moderate production, growth and return of capital through dividends to our shareholders. Thank you again for your support.
Operator, you may now open it up for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question will come from the line of Neal Dingmann of Truist Securities. Please go ahead.
Neal Dingmann
Good morning, all. Thanks for the time. My first question is on capital allocation specifically. Could you all speak to – I’m just wondering, Bobby, Kevin, really [indiscernible] guys how you all are thinking about per share growth going forward. And really what I’m focused on here is wondering if BOE would consider boosting production more next year, that obviously can be done by just boosting the pure share volumes or even buying shares back to either those to boost share growth, or we will focus remain more on the maintenance capital and shareholder return. You obviously to me seem to have opportunities to do both. And I’m just wondering how you all are looking at that.
Philip Riley
Yes, Neil, this is Philip, I can take that. We certainly look at per share metrics. We haven’t finalized a budget for next year, we do plan to grow. The question is how much. We believe our level of growth differentiates us very few ENPs are growing at our pace. Based on the midpoint oil production guidance that Kevin just gave for fourth quarter, frankly, we can hold that flat next year for each of the quarters, and that would imply 10% year-over-year growth. We could grow more there’s crosscurrents for oil price. We’re watching the economic indicators trying to understand how impactful a U.S. and global recession could be and what impact that may have an oil price. As a positive contributor to price we see the lower and reinvestment levels by many of the multinationals and even U.S. EMPs. I made the comments on the lower reinvestment rate and my comments just before, we can grow and yet still have a lowered and reinvestment rate. And so in turn that correspond with more capital available for discretionary allocations such as shareholder return. So I guess a few more notes on that, we’re going to continue to pay a dividend. We plan to raise that once annually, most likely in that fourth quarter like we just did, absent some transformational event. We like the steadier pattern there versus the variable methodology used by some companies. We saw how that can flip on them, such as this quarter and the downward impact there. There’s a potential for continued debt paid down, though, admittedly, at certain low levels, we could decide to keep it flat. We are also considering other investments outside of traditional D&C such as carbon capture activities. But then you got the question of what’s leftover, depending on the price environment. And I think there, you do have some potential for shareholder buyback. That of course have to be approved by the Board. But it’s a topic we have discussed. What we are trying to do there is balance multiple objectives, increasing the float, on the one hand managing private equity overhang potential for future distributions, offsetting annual increases due to customary stock-based compensation. But in any event, those all factor into that per share metric growth that you are talking about. And so it’s something that’s important to us and the Board.
Neal Dingmann
[indiscernible] looking at all of that. And then secondly, just maybe on development activity, kind of things you have talked about, Philip, I know specifically, there has been more focus. It seems like the last quarter or so on co-development, and maybe what I would call other large development strategies. And so I am just wondering, if you all could discuss maybe your approach going forward, and really how to get the max efficiencies out of again, you all and others, obviously, are operating a bit of a smaller program. It does seem like, you are still getting some pretty nice efficiency. So, I am just wondering, if you could kind of maybe talk about your development strategy?
Philip Riley
Development strategies, pretty much remained the same, Neal, since we have started. I mean we have got a nice foothold, for holding through development. We are operating through cash flow. We are trying to maximize our efficiencies and utilization of our infrastructure that’s in place, while holding the field and creating an HBP asset. I don’t know that we are going to be drilling too many parent-child wells, or co-development, in that sense in the coming year. But we continue to look at every opportunity and to optimize what we are doing and to be efficient. And you can see that even through our growth, and completed lateral quarter-to-quarter of a 10%. That does help to drive down costs as you are getting more reservoir for the same well. So, you are effectively draining more rock. So, we are looking at every option as we continue. Nothing is set in stone, but we are trying to be as efficient as we can in this volatile world.
Neal Dingmann
Yes. Great. And then sort of back on with infrastructure. If anything, it seems like you are in better shape now. Anything that prevents that development strategy, infrastructure wise, are you meaning anything you will need to build out or anything on that regard?
Philip Riley
We continue to build out small pieces to include within our infrastructure. We initially in 2015, when we started, we invested heavily in infrastructure to get kind of what we consider to be our base. But as we continue to branch out and hold more acreage, we have small lines to lay, whether it would be a water gathering, oil, gas or power distribution. We are looking at opportunistic ways to continue to be more efficient there and to be sustainable and sufficient and self sufficient in some ways. We are excited to be able to talk more about that in the coming quarter.
Neal Dingmann
Look forward to it. Thanks guys.
Operator
Your next question will come from the line of John White with ROTH Capital. Please go ahead.
John White
Good morning. Thank you, operator. Very nice results. Congratulations to you and your team. The significant increase in the production guidance for the fourth quarter, is that primarily due to the increased CapEx in the third quarter and the increase in CapEx guidance for the fourth quarter, or does your drilling longer – slightly longer laterals? Does that play a part in it, or have you found a better portion of the reservoir? Can you talk about that?
Philip Riley
Yes. I think overall, if you look at the last several quarters and year-to-date, our PDP has hung in and outperformed our expectations and what was forecasted through our third-party reservoir engineers. In addition to the development wells that we brought on, outperforming factor. So, it’s a combination of both. Wealth coming online faster than previously anticipated, but from a timing perspective, we are generally completing wells as we planned. I think last quarter we were right on and bringing online that same amount of wells that we had guided to. And we seem to be online going forward in this current quarter.
John White
Okay. Thank you. And your gas processing, the main upgrades to that, or expansions of that processing facility, is that finished or are there some more expansions and upgrades to come?
Philip Riley
That phase of the expansion upgrade is complete and operational. We have since along with other producers in the area agreed to an additional expansion, which is 14 months to 16 months out to bring on additional capacity for future growth. But for the time being with what we have, and what we are looking to do operationally, I believe that we have sufficient capacity for our continued growth.
John White
Thank you for that detail and congratulations again. I will pass it back to the operator.
Operator
Your next question will come from the line of Noel Parks with Tuohy Brothers. Please go ahead.
Noel Parks
Good morning.
Bobby Riley
Good morning.
Philip Riley
Good morning.
Noel Parks
Just a couple of things. Just maybe thoughts on costs, I am wondering if you have any sense of whether we started to hit the peak of service costs inflation, is that level leveling off at all, just as you are modeling the next year? How much are you looking at?
Philip Riley
From what we have seen, that has come in quarter-over-quarter and year-to-date. Looking back, it appears is if we have kind of reached the peak and flattened out a little bit quarter-over-quarter, our per unit costs generally were about the same for similar type wells. We have also tried to be proactive in doing some bulk buying and procurement for next year to help to lower the costs so or even lower or arrest further inflation. So, from what I have seen, I would say yes, we have peaked out I hope. But to be determined.
Noel Parks
Great. Thanks. And I am just wondering, is there anything meaningful going on with the exploration of other horizons beyond the San Andres in your vicinity, either working or looking at yourself or your competitors in the area that you are aware of?
Bobby Riley
This is Bobby. We always continue. We have a great exploration team led by some really qualified geoscientists. So, we are looking for footprint expansion in the existing area, obviously, around San Andres. And then we also have drilled a few wells in South Texas and Eagle Ford, Austin Chalk area, still early appraisement, so nothing really to announce here. But we are very encouraged by what we are seeing in that area. And there is a great opportunity for us there.
Noel Parks
Okay. Great. Thanks a lot.
Operator
Your next question will come from the line of Richard Dearnley with Longport Partners. Please go ahead.
Richard Dearnley
Good morning. In the fourth quarter guidance discussion, it seems like you were calling that gas processing capacity is a limiting factor and your – could you provide some color in light of the expansion 1.5 year or so out, as to where you are, how much capacity you have there?
Philip Riley
So, I guess the last quarter we just completed and our reporting on two-thirds of the quarter was operational with the current plant capacity that was finished in July. So, there are still some guesses and estimates as to how everything lines out in the facility. So, that’s why we just kind of caveat that to allow for a little bit of cushion. Gas and NGL volumes in sales are a very small percentage of our revenue. Though we do understand that they influence our per Boe metrics. So, we tried to talk in some sense on an absolute basis when we are speaking of ROE, or G&A figures, because if you look at them on a per Boe basis that’s driven by our processing capacity. So, bear with us as we get through another quarter or two quarters. And we continue to optimize our gas and NGL sales and the utilization of those products. And I think we will be able to give clear guidance as to what those numbers should level out to be.
Richard Dearnley
Okay. And the Eagle Ford is a well known basin, your 10 seems to give spinoff companies little bits of interest in diversified basins. There are some large packages available, some of which look like they might get split up into smaller pieces. Could that be a potential interest to you?
Philip Riley
Well, as you know, most of our production is all organic. And we have not relied on making acquisitions of existing PDP. We are developing our area. We are developing organic leasing opportunities, specific target that we are looking at. We have got some experience in the Eagle Ford for going back to the mid-2009-2010 period. I don’t see us at this point, biting off one of those acquisitions. We are more focused on the quality of rock that we are wanting to target. And we just need to keep that lined up. So, I think dollar-for-dollar, our rate of return is much better on organic development.
Richard Dearnley
Alright. Okay. Thank you.
Operator
[Operator Instructions] Our next question will come from the line of Rick Mouser [ph] with investor. Please go ahead.
Unidentified Analyst
Hi. Thank you, guys. Great quarter. I did have a question regarding the releases of the earnings and that the mention of earnings per share? I guess the lack of mentioning it. I know it’s maybe not the most accurate measure of your guys performance. But it is a metric that pretty much every investor looks for. And I really don’t – I am not invested in any other companies that really don’t release their earnings per share. And I didn’t know if that’s something you could add to your reports coming up.
Philip Riley
Yes. Happy to Rick, we understand. We tried to find a balance of citing those more traditional metrics like that. The caveat, we do have certain factors that influence the bottom line net income, such as our unrealized hedge gains and losses. We had nice looking net income this quarter. Partially, as a result of that $34 million mark-to-market gain that you will find in our 10-Q, that drives a higher net income and hence earnings per share. With prices where they are now higher than when we closed the quarter, that will in turn result – if they stay where they are for the remainder of the six weeks for the quarter, that would flip then to a loss. And so it just causes a little bit of the focusing on net income and earnings per share. But we heard the comment and I will certainly take it into consideration.
Unidentified Analyst
Okay. I appreciate that. Thank you.
Operator
We have no further questions at this time. Ladies and gentlemen, that will conclude today’s call. Thank you all for joining. You may now disconnect.
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