Riley Exploration Permian, Inc. (AMEX:REPX) Q3 2023 Earnings Call Transcript

Riley Exploration Permian, Inc. (AMEX:REPX) Q3 2023 Earnings Call Transcript November 11, 2023

Operator: Thank you for standing by. At this time, I would like to welcome everyone to the Riley Permian Third Quarter 2023 Earnings Release and Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Philip Riley, CFO, you may begin your conference.

Philip Riley: Good morning. Welcome to our conference call covering the third quarter 2023 results. I'm Philip Riley, CFO. Joining me today are Bobby Riley, Chairman and CEO; and Kevin Riley, President. Yesterday, we published a variety of materials, which can be found on our website under the Investors section. These materials in today's conference call contain 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'll also reference certain non-GAAP measures. The reconciliations to the appropriate GAAP measures can be found in our supplemental disclosure on our website. I'll now turn the call over to Bobby.

Bobby Riley: Thank you, Philip. Good morning, and welcome to our Q3 2023 earnings call. We are pleased with our performance in the third quarter in which we met or exceeded plans across all metrics. Here are some of the accomplishments in the past quarter. Average oil production of 14,000 barrels of oil per day are 19,900 barrels of oil equivalent per day, generated $72 million of adjusted EBITDAX, $53 million of operating cash flow and $31 million of free cash flow. We reduced debt by $10 million quarter-over-quarter. We paid dividends of $0.34 per share in the third quarter, totaling approximately $6.8 million. Also, after the end of the quarter, the Company declared a cash dividend payable on November 9, 2023, of $0.36 per share, which represents a 6% increase in the dividend amount.

We planned for modestly lower production in the third quarter and also experienced some unplanned third-party gas midstream disruptions that caused us to curtail production. We see other producers impacted by midstream constraints in similar ways. Optimizing infrastructure will remain a core focus for us into 2024. We remain focused on strategic growth, operational efficiency and returning capital to our shareholders while reducing the debt we took on to acquire the New Mexico properties. We look forward to sharing more details about our performance during this call. I will now turn the call over to Kevin to discuss operational results for the quarter.

Kevin Riley: Good morning, and thank you, Bobby. I will now discuss the operating results for Q3. Riley Permian achieved production at the high end of guidance, with capital spending below the low end of guidance for the quarter. We sold 19,939 barrels of oil equivalent and 14,043 barrels of oil per day. The production results represent a combination of planned and unplanned reduction dating back to May of 2023 and is a decrease of approximately 6% from the previous quarter. We remain focused on year-over-year production growth instead of quarter-over-quarter, as we emphasize the value of free cash flow but look to better smooth production growth out in 2024. As previously disclosed in our second quarter 10-Q, the unplanned portion of the decrease in production is attributed to the unexpected maintenance issue at a third-party processing facility servicing our Red Lake assets in New Mexico.

Upon receipt of the notice in mid-July from the midstream provider, the Company began voluntary shut-in procedures on its impacted wells to forego the flaring of natural gas until the volumes could be processed again. As of early August, substantially all of the impacted production had been reestablished and the Company resumed operating at or near production levels before the disruption. The Company continues to work with third-party midstream providers along with evaluating alternative options to optimize and secure long-term sustainable midstream capacity. Along those lines, we are in the final phases of commissioning Phase 1 of our on-site power generation and hope to have the first generator set operational within the coming weeks. Lease operating expenses were $9.21 per BOE within the Company's previously announced guidance of $8.50 to $9.50 per BOE for the third quarter.

We've continued to incur additional expenses from the newly acquired properties, along with increased workover activity associated with optimizing production. The Company incurred $30 million in total accrued capital expenditures during the third quarter, lower than the Company previously released guidance for primarily due to the timing of certain infrastructure projects. During the third quarter, the Company drilled three net operated horizontal wells, completed 4.7 net operated wells and turned to sales 5.7 net operated wells, some of which did not come online until the latter half of the quarter. The Company had previously decided to slow down in the fourth quarter while being faced with declining commodity prices and rising service cost.

Aerial view of an oil and gas field, with tanker trucks in the foreground.

However, the Company adapted to the changing environment and has since been able to secure certain services, intangible items for the remainder of 2023 and most of 2024 at favorable cost. With new well costs averaging 15% to 20% less than similar type wells drilled and completed in late 2022. While substantial production contributions for the current year are not anticipated, we have commenced the drilling program in the last few days that anticipates drilling four net, completing three net and turning to sales one net operated well during the fourth quarter. I will now turn the call over to Philip to discuss our financial results.

Philip Riley: Thank you, Kevin. Third quarter 2023 operating cash flow before changes in working capital increased by 22% quarter-over-quarter to $63 million as $10 higher oil prices more than offset 1,000 barrel per day production decline. Quarter-over-quarter, realized oil prices were up 13%, realized natural gas prices were up to $0.58 from a very low $0.02 last quarter and realized NGL prices were up $3 or nearly 60%. Improved pricing benefited from improved basis differentials. I'll caution that some of those improvements have already reversed in October. Increased negative hedge settlements offset 29% of price increases. So differently, 71% of price increases were realized. Operating costs per BOE were flat quarter-over-quarter.

LOE increased following some downtime in workovers, which was offset by lower G&A. CapEx declined by 24% on an accrual basis and by 35% on a cash basis, driven primarily by our planned slowdown in activity following the very active first half of 2023. Reinvestment rate, defined as cash CapEx over cash flow from operations before changes in working capital was 50% for the quarter and 76% for the nine months through September. We're forecasting that the reinvestment rate could fall below 70% level for the full year. We're also hopeful that this level of third quarter spending could be more indicative of quarterly run rate levels and the higher spending level in the second quarter of this year. Looking to the fourth quarter CapEx and beyond, we're quite encouraged by what we're seeing.

We're procuring services and inventory at improved rates, as Kevin discussed. We're realizing operational synergies, including sharing rigs or other services across both assets. And we're generally making efforts to smooth our development pace, which ideally corresponds with smoother quarterly spending cadence. The combination of higher operating cash flow and significantly reduced CapEx led to $31 million of free cash flow for the quarter. The allocation of this quarter's free cash flow was $10 million for debt pay down, $7 million for the dividend, with the balance working capital. Year-to-date, the allocation has been 55% to dividends and 45% to the balance sheet. Currently, we're forecasting good free cash flow in the fourth quarter despite modestly lower production and lower prices.

The majority of fourth quarter free cash flow will be used for debt reduction. We're hoping to reduce the total balance by an additional $25 million by year-end, which is somewhat oil price dependent. This would lead to an increase in the full year allocation percentage to delevering first dividends, maybe closer to 60% delevering and 40% to dividends. On our capital base, we ended the quarter with $400 million of principal value of debt, including $190 million principal value on the unsecured notes. Shares outstanding as of the beginning of November, including unvested amounts totaled 20.4 million, an increase of approximately 1% year-over-year. I'll now pass it back to Bobby for closing.

Bobby Riley: Thank you. And again, we value your time and interest in our company. We are pleased with our performance in the third quarter and are confident that our strategic focus and operational excellence will continue to drive growth and profitability to our shareholders. Operator, you may now open the call up for questions.

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