Riley Exploration Permian, Inc.

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 speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. Philip Riley, CFO, you may begin your conference.

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 and 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.

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 19.9 thousand 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.

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 production 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 10Q, 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 re-established 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 one 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 $850 to $950 per BOE for the third quarter. We've continued to incur additional expenses from the newly acquired properties along with increased work over 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 costs. However, the company adapted to the changing environment and has since been able to secure certain services and tangible items for the remainder of 2023 and most of 2024 at favorable cost. With new well costs averaging 15 to 20 percent 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 Phillip to discuss our financial results.

Thank you, Kevin. Third quarter, 2023, operating cash flow before changes in working capital increased by 22% quarter over quarter to $63 million. At $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 58 cents from the very low 2 cents 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. The differently 71% of price increases were realized. Operating costs per BOE were flat quarter over quarter. LOE increased following some downtime and 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 than 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 to 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 versus 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.

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.

Thank you. To ask a question, please press star 1 on your telephone keypad. Your first question is from Bert Dons of Tourist. Please go ahead. Your line is open.

Hey, good morning, guys. On the first question, I just wanted to touch on M&A. You seem to be pleased with the results you've seen in the New Mexico side of things. So I'm just trying to understand, are you seeing more opportunities to add assets on the Texas side or New Mexico?

We're seeing more opportunities in New Mexico right now. as the Texas side that joins our acreage is mostly PDP, but remain opportunistic in both areas.

Would you characterize it as similar sizes, or is there any difference in the last year?

There's multiple sizes. There was recently a large package, but we see also several smaller bite-size assets.

I appreciate that. And then on the dividend increase, it sounds like you guys are, you know, shifting towards the balance sheet for the near term. But by, you know, consensus and our estimates, you know, there is a significant jump in free cash flow next year. So I just wasn't sure is that strategy, you know, maybe going to carry into 24? Or do you think you'd reevaluate and maybe pivot to more dividend or share repurchases even next year?

Yeah, sure. Thanks, Bert. This is Philip. I would say that We want to get the dividend in line with overall allocation. I think we have one of the highest allocation rates for a base dividend, frankly, in the industry, especially among small caps. We put out some materials. You'll see in our presentation, allocations suggest, and this has been more than 50% year-to-date. I think that'll decline for the full year as we get additional free cash flow and allocate more to debt pay down. I think next year you shouldn't be surprised if that decreases a bit. We're still increasing on an absolute basis, but we're just talking about percentage allocation. We want to remain flexible. We recognize that paying down debt accretes equity value to shareholders indirectly. You can forecast what we're going to be doing for free cash flow. We'll be paying Roughly $27 to $30 million in a dividend is something that's approved next year. You've got the balance of the debts.

That's worth, you know, $2 to $3 to $4 there by itself. Very helpful. Thank you.

Your next question is from Noel Parks of Toomey Brothers. Please go ahead. Your line is open.

Hi, good morning.

Good morning.

So just a couple. You know, I was just interested in your thoughts on the hedging environment right now. We certainly have been having some volatility on the oil side and have seen people maybe getting a little more opportunistic overall in laying hedges. So I guess as you look ahead out to the curve, are you sort of more – more concerned with protecting downside or more about sort of preserving upside?

Yeah, sure, Noel. It's a bit of both. And to be honest, we've got a pretty systematic hedging process where we're not trying to be too speculative. We've put on new volumes in the spring at the time of closing the acquisition and taking on the financing. That was a mix of callers, and swaps. What I'd say generally is that as cash flows development gets near term, we're going to want to protect those a bit more with some swaps for certainty of the cash flow and given commitments, rigs, pipe, so forth. As you go out, and especially with a backward-headed curve, we're using more collars. That has been helpful to us even this past quarter. It gives you a range so you know you're not settling there. necessarily for cash. We had quite a bit of cashless settles even this past quarter. And so I think we'll continue that strategy. We're in a good place right now. We want to have a program that protects that downside and then retain some of the upside as well. We're certainly not giving away the upside. I think that can be a misconception. We did use leverage for this asset. And so when you've got a small change in the price of oil, yes, you've got some negative settlements, but the asset value and the cash flow more than offsets any of those settlements. And especially on a levered basis, you can recognize that a small increase in asset value when you're 35% levered or so has a disproportionately large impact on equity value.

Sure, absolutely. And then just thinking about the infrastructure, gas infrastructure, third-party issues that cropped up, I guess as you look ahead, any changes in your thoughts as far as what sort of spending you might be doing looking to, I don't know, head more towards trying to either shift vendors or... you'll consider contributing some capital of your own towards improving infrastructure. Any changes in your thinking on that recently?

Our view on that is somewhat state consistent, as we've always been looking for opportunities to better optimize the field and production and long-term takeaway in both assets, both the legacy and the new. We do see opportunity to continue and invest alongside current midstream providers in addition to opportunities that we'll take on on our own. But I don't think that that will materially sway capital allocation or the amounts of capital we spend going forward relative to what we had in the past.

Sure. And I mean, in a perfect world, I guess for Riley and then the other producers that offset you, in a perfect world, would it just be sort of you know, just unlimited capital to get out and fix and upgrade a bunch of different, you know, facilities or pipelines? Or is it just one of those things that there's only so much you can do, you know, so fast just given, you know, trying to keep your current infrastructure up and running and, you know, sort of making changes incrementally?

I think there's a combination of both. Both assets are challenged with different midstream constraints or issues. New Mexico is more of a legacy system, so older pipe, looking to help build and put some more integrity into that system for sustainable gathering, in addition to plant capacity expansions, both of which are currently ongoing in New Mexico and Texas. line of sight into 2024 for some more capacity in addition to that we have our own internal projects such as the on-site power generation which as i mentioned that will be coming online shortly which will utilize some infield gas along with other initiatives we were working on great yeah one more thing though um you know we do see that we do see this as an opportunity

for capital investment. Some of it might be remediation, but some of it is absolutely an opportunity for investment. This goes back to Bertrand's question on capital allocation, ensuring we have liquidity to capitalize on these opportunities. So what's interesting about this, it can be capital intensive, but we're finding smaller, more modular type of opportunities. An example is the power Kevin mentioned and other things that could be analogous to that. What's interesting for that when you mix it with an E&P is the type of decline profile that has, which is typically flat or even an incline. So these are things that we're excited about. We're working on now, and we're earmarking some capital potentially for next year. Okay.

Great. Thanks a lot.

Your next question is from David Durnick of the Durnick Companies. Please go ahead. Your line is open.

Good morning, gentlemen. My question for you today is more operational. Can you give us any insights into the ongoing repressurization CO2 water flood that you have going on on the Texas side? And are there any plans to expand that? And then secondly, Are there any updates on any movement for the potential sequestering of the CO2 project?

David, this is Bobby. I'll start that. We are continuing the pilot program on what we call our brush abilities. We have what we believe has obtained miscibility pressure over the last 30 to 45 days. And We're at the point now where, as we're injecting gas, we see production response. As we shut the gas off, the production drops. So we do know that we are in a miscible state. So it's still a long-term project, though, for us to evaluate what the ultimate impact could be in a field-wide application. But so far, we're encouraged with what we're seeing in the field. I don't know exactly how to discuss the carbon sequestration. You know, we continually look for opportunities out there because that would obviously have a tremendous impact on the viability of a wide, wider spread tertiary project using CO2. But, you know, at the current time, you know, we're what we're seeing out there doesn't really compete for capital. And it's a little early for us to take on tremendous volumes of CO2, but, you know, it's on our radar, David, and we're looking for that opportunity as they evolve.

Okay. Thank you, Kevin.

There are no further questions at this time. This concludes today's conference call. Thank you for your participation. You may now disconnect.