PHX Minerals Inc.

Good morning, and thank you for attending today's PHX Minerals Fiscal 2022 Fourth Quarter and Year-End Earnings Conference Call. At this time, all lines will be muted during the presentation of the call with an opportunity for a Q&A session at the end. If you need operator assistance during the call, please press star zero on your telephone keypad. As a reminder, this call is being recorded. I would now like to turn the call over to Stephen Lee with FMK IR. Please go ahead, sir.

Thank you, operator, and thank you all for joining us today to discuss PHX Minerals' fiscal 2022 fourth quarter and year-end results. Joining us on the call today are Chet Stephens, President and Chief Executive Officer, Ralph D'Amico, Senior Vice President and Chief Financial Officer, and Daniel Mezzo, Vice President of Engineering. The earnings press release that was issued yesterday afternoon is also posted on PHX Investor Relations' website. 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 forward-looking statements regarding expected revenue, earnings, future plans, opportunities, and other expectation of the company. These estimates and other forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to be materially different from those expressed or implied on the call. 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 Security and Exchange Commissions. The statements made during this call are based upon information known to PHX as of today, December 14, 2022, 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. With that, I'd like to turn the call over to Chad Stephens, PHX Chief Executive Officer. Chad?

Thanks, Stephen, and thanks to all of you on this call for participating in PHX's fiscal 2022 year-end conference call. We appreciate your interest in the company. This year was a year of tangible progress for PHX, and we enter the new fiscal year 2023 poised for significant improvements in our financial results. Our strategic transition began in late 2019 under new leadership. This strategy to high grade our asset base by exiting high cost legacy assets and transition to a low fixed cost pure royalty production model is coming into sharp focus. The results reflect significant improvements in our profitability and cash generation. and we expect this trend to continue. We are executing according to our stated plan, growing our royalty reserves through our targeted mineral acquisition program. Both royalty production and royalty reserves reached all-time high levels in the fourth fiscal quarter of 2022. 2023 will prove to be the final year of this formative transition as we plan to divest a material portion of our remaining legacy non-operated working interest assets, after which royalty volumes will represent greater than 90% of total corporate volumes and working interest volumes will be virtually immaterial. Our stated strategy is to allocate capital to the acquisition of existing and near-term potential royalty production with a heavy weighting toward natural gas. This strategy is working, delivering returns ahead of our expectations. Encouragingly, our pipeline for acquisitions in our targeted regions remains robust. We operate in something of a sweet spot in the industry, with sufficient scale and operational expertise to outperform small competitors, but nimble enough to pursue acquisitions the size of which are not material enough to capture the larger competitor's interest. In addition, supply and demand for natural gas remains favorable, giving us the commodity price leverage to improve profitability and cash flow. Our plan remains the same, to utilize most of our pre-cash flow to acquire more natural gas weighted mineral and royalty assets that contain additional development drilling locations which we expect will quickly convert to increase royalty production volumes. Simultaneously, as we continue to scale and expand profitability, we will be positioned to continue to increase our cash dividend, which has risen 125% over the last six quarters. 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. Danielle?

Thanks, Jess, and good morning to everyone participating on the call. At September 30th, 2022, our approved royalty reserves increased year-over-year by 45% to 52.8 BCFE with a PV10 of $172.6 million at SEC pricing. And our near-term development probable royalty reserves increased 42% to 87.9 BCFE with a PV10 of $247.7 million. primarily due to the successful execution of our acquisition strategy and increased drilling activities in the Hainesville and the Scoop. Our total approved reserves decreased 2% to 81.1 BCFE with a PV10 of $237.9 million at SEC pricing, primarily as a result of the divestiture of our legacy non-operated working interest assets as we continue to execute our corporate strategy to exit this portion of our business. Going forward, we expect our royalty reserves to continue to increase and our working interest reserves to continue to decrease. During the fourth quarter, third-party operators active on our minerals converted 49 gross or 0.22 net wells in progress or WIP to producing wells compared to 96 gross or 0.25 net WIPs converted to PDP in the third quarter. The majority of the new wells brought online are located in the Scoop and the Haynesville. For the full fiscal year 2022, we had 318 gross 1.07 net wells convert to producing compared to 147 gross or 0.56 net wells in fiscal 2021. That is effectively a 100% year-over-year increase. At the same time, as of September 30th, 2022, our inventory of wells in progress also increased to 172 gross or 0.85 net wells compared to 155 gross or 0.79 net wells. as reported as of June 30, 2022. The continued growth of well conversions and inventory of wells in progress show the repeatability of our business strategy. In addition to well inventory, we regularly monitor third-party operator rig activities in our focus areas and observe 26 rigs present on PHX Minerals acreage as of November 28. Additionally, we had 99 rigs active within 2.5 miles of PHX ownership. The number of active rigs on our minerals acreage has stayed consistent quarter over quarter, and it is important to note that activity levels near our acreage have increased in our core areas in the Scoop and Haynesville. In summary, we continue to see heightened development on both our legacy and recently acquired mineral assets and are excited about these positive indicators for increasing our future royalty volume. Now I will turn the call back to Ralph to discuss financials.

Thanks, Danielle, and thank you to everyone for being on the call today. we had a very successful fiscal 22 from both an operational and financial standpoint. Our royalty production volumes reached an all-time high for fiscal 2022 and adjusted EBITDA increased 64.2% compared to fiscal 2021. For fiscal fourth quarter ended September 30th, 2022, natural gas, oil, and NGL sales revenues increased 12% on a sequential quarter basis to a total of $21.8 million. For fiscal 2022, fiscal year 2022, sales revenues were $69.9 million, which represents an 85% increase over fiscal 2021. Royalty production increased 15%, and total production increased 7% on a sequential quarter basis. primarily due to new royalty wells converting to production and the natural decline on working interest wells. For the full fiscal year, royalty production was up 49 percent to 6.2 BCFE, and total production was up 6 percent to 9.6 BCFE. This is above the 35 percent year-over-year royalty volume growth rate we discussed in prior calls. as operators continue to accelerate the pace of drilling in our core areas. The lower total corporate production growth is primarily attributable to the sales of legacy non-operated working interest wells. Royalty volumes represented 71% of total production during the fiscal fourth quarter and 65% during the full fiscal year. Note that these figures include production from the Fayetteville working interest wells we sold in late September 2022. Pro forma for that sale, our fiscal fourth quarter royalty volumes would represent over 75% of total corporate production volumes. 78% of our fiscal 22 production volumes were natural gas, which aligns with our long-term strategy to natural gas as the key transition fuel for a sustainable energy future. Average prices received for natural gas, oil, and NGO in the quarter were up 5% on an MCFE basis sequentially to $8.42. For the fiscal year, prices increased 75% to an average of $7.27 per MCFE. Realized hedge losses for the quarter were $7 million and $22 million for the full fiscal year. For the quarter, approximately 58% of our natural gas, 62% of our oil, and none of our NGL production volumes were hedged at an average price of $3.38 and $44.25, respectively. And for the full year, approximately 62% of natural gas, 72% of oil, and none of our NGL production volumes were hedged at average prices of $3.06 and $44.25, respectively. Recall that the majority of these hedged volumes were layered in during COVID in mid to late 2020 at the request of our lenders at the time. The remaining contracts entered into during that time will completely roll off in the next couple of months, which should lead to improved realized prices in higher cash flow assuming the same commodity prices in 2023 that we saw in 2022. Total transportation gathering and marketing increased 23% on an absolute basis to 1.75 million on a sequential quarter basis and increased 2% to 5.9 million on a full fiscal year-over-year basis. These expenses are primarily tied to movements in production volumes. but also have an inflation component which we experienced in recent quarters. Production taxes were flat on a sequential quarter over quarter basis at approximately $930,000 and increased 67% on a full fiscal year over year basis to 3.2 million. These expenses are primarily tied to movements in both production volumes and commodity prices. LOE associated with our legacy non-operated working interest wells increased 7% on a sequential quarter basis to $961,000 and decreased to $4 million on a year-over-year basis. These figures include the legacy assets in the Fayetteville that we sold at the end of September. Since we announced our strategic shift to a mineral-only company, we have sold over half of our legacy working interest wells and expect that LOE will continue to become less relevant to the overall performance of the company. Cash G&A increased 19% to $2.7 million for the sequential quarter and 27% to $9.1 million for the full year, primarily due to wage inflation, higher activity levels, and costs associated with our reincorporation to Delaware. Adjusted EBITDA was $8.4 million in our fiscal fourth quarter as compared to $7.2 million in the fiscal third quarter. For the full fiscal year 2022, adjusted EBITDA was $25.8 million compared to $15.7 million the prior year. Net income for the quarter is $9.2 million compared to $8.6 million for the prior sequential quarter. For full year 2022, net income was $20.4 million compared to a net loss of $6.2 million in 2021. We had total debt of $28.3 million as of September 30th, and our debt to trailing 12-month adjusted EBITDA remained flat at 1.1 times compared to a year ago, which continues to show our financial discipline as we execute on our growth strategy. On December 7th, we entered into an amendment to our credit facility and our borrowing base was reaffirmed at $50 million. We also welcome UMB Bank into our bank group, joining Independent Financial and MidFirst. As part of our effort to streamline our financial reporting and enhance our investor relations effort, we are going to migrate to a calendar year reporting schedule in 2023 and change the end of our fiscal year from September 30th to December 31st. This will bring us in line with the rest of the publicly traded minerals companies and make it easier for investors to evaluate our business and key performance metrics within the industry group. From an SEC reporting and earnings release standpoint, the company will file four 10-Qs and release earnings four times prior to the next annual report being filed. Our next annual report on Form 10-K will be filed in calendar year 2024 for the fiscal year ended December 31st, 2023. We plan to provide forward-looking guidance for calendar and fiscal year 2023 when we report our results for the period ended December 31st, 2022 in mid-February. Finally, we have made the determination to terminate our at-the-market offering program. The costs associated with the program no longer justify keeping the program in place, given how little we have actually used it. In addition, our liquidity position has improved significantly from when we implemented the program a little over a year ago to facilitate the execution of our growth strategy. Note that the shelf registration will remain in place until it expires, as this represents good corporate practice. With that, I'd like to turn the call over to Chad for some final remarks.

Thanks, Ralph. As you can see, our strategy is financially sound, leading to growth, profitability, and cash generation. And we are increasingly turning that cash into additional mineral assets to further expand our platform. Our pipeline for acquisitions and our core areas under active, reputable operators with line-of-sight development is robust and growing, and we have a great team that is advancing targets to further our growth. I believe fiscal 2023 will be a tremendous year for PHX, its employees, and its shareholders. As we close out our fiscal year end, I would like to thank our dedicated employees for their hard work and congratulate them on achieving outstanding results in 2022. Additionally, I would like to thank our Board of Directors for their support and insightful wisdom they provide in executing our corporate strategy. This concludes the prepared remarks portion of the call. Operator, please open up the queue for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Derek Whitfield with Stiefel. Please proceed with your questions.

Good morning, all, and congrats on your quarter and recent A&D progress.

Thanks, Jared.

With the understanding that you will provide formal 2023 guidance in February, I wanted to focus my question on your royalty production trajectory based on line-of-sight activity. Can you comment on the trajectory and any sizable well packages you're expecting over the next six months? And looking at pages 16 and 17, it certainly appears you have a wave of activity at springboard three that's expected to come on

Yeah, hey, Derek, it's Ralph. Let me start and then Danielle is going to chime in as well. I think it's important that if you look at what we converted in fiscal 22, right, we converted 1.08 net wells, right? The gross wells is 300 and change, but really the net's the important number to look at. And that grew volumes by, you know, upwards of 40%. on a year-over-year basis. As we go into 2023, we have an inventory of wells in progress. So these are wells that have already been spud and are being worked on approximately 0.08 and change. And we have permits that have been filed of another 0.22, right, which brings the total number of net wells currently being worked on in our asset base to pretty much the same number that we saw convert to PDP last year, right? So if that trend follows, right, even without any probable locations or new permits being filed, which I think is a very conservative assumption, we should see, you know, a pretty healthy double-digit year-over-year royalty volumes increase. Obviously, you're starting from a higher base than, you know, than you did last year, right? But... You know, we're pretty encouraged that as the year progresses, right, you may see even additional activity beyond what the 1.07, 1.08 that's currently being worked on in our asset base.

Yeah, and we continue to see very strong activity in the Haynesville. Lots of WIPs and DUCs well in progress out there right now. That'll really help to support our royalty growth over the course of the next year. We are also seeing an activity increase in the springboard three. We've consistently seen five, six wells a quarter being converted out there for the last six quarters or so. But in the recent months, we've seen an acceleration of permits, more drilling and completion activity, particularly from continental on the east side of the play. So we do expect that to start coming in and supporting our growth as well here in late 2023. So strong activity on both fronts.

Derek, this is Chad. Also, we can direct the investment community to our most recent IR slide deck that we're putting out on our website. And in there, you can see that really the tangible sense of our royalty volume growth starts with the number of probable, gross probable locations we have. They're approaching 2,000. That's in the scoop in the Haynesville and some of our legacy stack. And that's the source of all of this activity that Danielle and Ralph are talking about. And you can see over the last couple of years, our gross conversions, which are coming from that probable category, have been in the 200 to 300 range gross. And this time last year, it was about 0.5 net. Now it's, this year it was one time. So we've doubled the the net from last year to this year, which speaks to the interest, the core interest that we're acquiring in these Haynesville locations, the actual royalty interest. And last year at this time, we were about .5 net wells in inventory, drilling inventory, and today we're double that, or about one. So again, the real source of all this royalty volume growth is the probable locations, and those are, we have maps, We have geology. We have engineering. We have type curves. There's operators in the area drilling. They obviously want to develop their leasehold. So it's real, it's tangible, and it's going to continue to feed our overall royalty volume growth and that trend that you're inquiring about.

And I think it's important to note that when we say probables, it's a probable location per an SEC definition because we don't have something written down on paper from the operator that says they're going to drill it within the time frame that the SEC would deem it as approved and developed location. I would venture to say that a significant portion of those probable locations are actually approved and developed locations on the operator's books. So, you know, it's a little bit of semantics on the definition, but these are, you know, for oil and gas folks, these are very high quality locations. as Chad referenced.

That's a terrific color, guys. And Chad, perhaps for you or Ralph, could you speak to the A&D pipeline and the broader environment for minerals in your focus spaces in light of your pending working interest divestitures? And separately, are there material non-core mineral divestitures you could pursue as well?

Yeah, so I attempted to somewhat address that in the notes, in the notes that we just, call notes that we just went through. So we are in somewhat of a sweet spot given our, we're a small company, we need to grow and we are growing. But the deals that we look at and the deal size, there's a food chain out there and the larger companies are focusing on the larger packages, the larger mineral asset packages in the 50 to 100 million to 150 million range, and we're way down that food chain, and we're focused on and have been since we started this in late 2019, early 2020. We've been focusing on the deal size as a million to five million range, which is material to us, moves the needle, and we in 2022 closed, I think in our press release we talked about $48 million worth of total acquisitions closed in 2022. And that included over 30 different deals to accumulate that $40 million worth of acquisitions. So we're doing a lot of deals. They're all relatively small, but at the end of the day, they all move all of those acquisitions collectively, move the needle for us in terms of royalty volume growth and royalty reserve growth, which is important to us as well. And we continue to see in that range, the million to $5 million range, we continue to see a robust deal flow. We're very confident we can continue the kind of the quarterly deal closings, the money we're spending, the capital we're allocating on a quarterly basis, this steady kind of $10 to $15 million a quarter deal flow. We see it now. We're optimistic. We'll continue to see it in the areas where in which we're focused. So we're very, very excited about that. And I think the board is confident of that too, because they approved this dividend increase, most recent dividend increase, which speaks to the overall ability for us to continue to grow our royalty volumes and ultimately our EBIDON cash flow.

Yeah, the good news is we don't have to chase, we don't have to go elephant hunting, for lack of a better term, in terms of bigger deals where there is much bigger competition. You know, we've basically put together a system where, you know, we can aggregate quite a few of these smaller deals that Chad talked about, and we can very quickly and efficiently redeploy the proceeds from the sale of the working interest assets.

So we're really excited about the royalty volume growth trend, and we now have over the last, say, three or four quarters, really demonstrated that trend of that ability to grow the royalty volumes so to address your other question the non core minerals which was the the legacy the old panhandle oil and gas legacy minerals unleashed open never had any activity on them or on the margins of these basins and they're not not strategic to us they have no real value to us someday somehow they may be drilled or developed but under any current technology or commodity price environment, it's very doubtful that any of these minerals will ever turn to cash flow in the near term. So we're steadily attempting to sell all those non-core mineral assets, and there are small private companies out there who that's their business, that's their strategy, and we're continuing to have discussions with them about piecemealing off various from various areas, these non-core minerals, which today we own, Ralph, what, about 150,000 net mineral acres all over the U.S. So we're continuing to focus on turning that into, we can take those non-core mineral sales and redeploy those proceeds into these acquisitions that we're focused on and turn it into cash flow immediately. So again, just a way of as I keep referring to, high-grading the asset base, just improving the overall asset quality and asset base and the interests that are cash flowing for us.

That's great. Thanks again for the update.

Thank you. Our next question has come from the line of Donovan Schaefer with Northland Capital Markets. Please proceed with your questions.

Hi, guys. Thank you for taking the questions. I first wanted to just kind of reorient ourselves around your hedging approach and philosophy. You know, it's a great kind of reminder and commentary about the, you know, hedges you have in place today that are rolling off and looks like a much lower, you know, kind of under the current pricing environment sort of serves as a burden for next year. But it's a much lower burden versus, say, last year as it's kind of rolling off. But, you know, And that, that was driven by, um, your lenders, you know, going through COVID and, uh, commodity prices really turning downward. What's kind of your sort of more overall strategy or philosophy or view, you know, do you want to be largely exposed? Um, uh, so that you are kind of a vehicle for investors that way, who, who have a view on where commodity prices are going, or do you want to have more stability there? to just kind of help you manage cash flow and how you guys adapt? Do you want to stay above 50% hedge? Do you want to come below 50% hedge to 20% or something? What are your overall kind of thinking as they're strategically going forward?

You know, one, certainly we have covenants in our credit agreement that require us to put hedges in place, right? And just as a refresher, it's 45% each for oil and natural gas existing PDP. So it's got to be producing today in forward months 1 through 12, and then 25% in months 12 through, or months 13 through 18, right? So that's sort of the minimum, right? So, you know, for the PDP portion, you know, we tend to think, because we don't really have any capital obligations in terms of where our cash flow goes, right? You know, we like to use collars, right, which you can see, you know, after the hedges that we had to put on in 2020, which were swaps, we've been really using collars, which is a way to sort of protect the downside from any sort of abnormal drop in prices, right, but keep us exposed to the upside. So if you look at, you know, calendar 23, right, you know, we have exposure. on the existing collars all the way close to $7 per MCF, you know, generally speaking, into the summer, right? And this winter, right, I mean, we're exposed up to, you know, almost $12 on the upside, right? And we protect our downside, you know, obviously as well. So I think we're going to, from an instrument standpoint, you know, we're believers that collars, you know, provide the upside while still giving us some, you know, black swan, you know, downside protection. And because we don't have any capital obligations, right, I mean, if you have a sustainable lower commodity price environment, we can very easily, you know, pivot some of the cash flow that's being used for the acquisition program, right, and pay down, you know, debt, which right now we're one times debt to EBITDA is fairly conservative. But if anything happens, we can very quickly pivot and reduce that, you know, even further. I think that, you know, remember that the growth rate that we're showing on royalty volumes, right, all of that is, until it becomes production, it's unhedged, right? Because you cannot hedge or you should not hedge production that you don't currently have, right? So, you know, I think when all of that shakes out, you know, you may see that, you know, on a total production standpoint, you know, in the near quarters, right, you end up seeing that 50% rate. It's probably a pretty good gauge, but a much better pricing, right? And as you look into the future, as new volumes come on, we will layer on additional collars and, you know, and we'll keep investors exposed to and ourselves exposed to higher prices, you know, while protecting any, you know, any kind of black swan so that, you know, what happened in early, early to mid-2020, which Chad and I inherited, never happens again.

Okay. And just to be clear, for callers versus swaps, is it pretty much one-to-one from the Covenant standpoint? They're just as happy. It maybe changes the math on how they sort of underwrite things so they have their own sort of formulas. They have their own sort of formulas.

Yeah, I mean, it's the same requirement. I mean, we're pretty careful in how we structure our collars. They're costless collars, number one. And number two, the floors are, you know, above the price deck that the bank uses, right? So, you know, we want to be very transparent with all of our, you know, counterparties, right? And I think the bank group has been very happy with what we've done and you know, and they like our plan going forward.

Okay, the next lot of funds.

Donovan, let me add to that real quick. Just from an overall hedging strategy macro, at the minimum, the bank credit agreement, as Ralph said, requires us to, but they are our real lifeline to growth. We need to grow, and we'll continue to grow, and they've been a great partner with us as we've found some really attractive acquisitions, and they've helped us fund those acquisitions. So we want to protect our balance sheet and with that debt, even at certain sensitivities, if commodity prices, we feel pretty good about our volumes because the Haynesville is economic. The operators in the Haynesville will continue to drill and our royalty volumes will continue to grow at almost any, even Black Swan event, natural gas price scenario. They're well at economics at $2 or are pretty decent. So our royalty volumes, we think, will continue to grow. So the only thing that could hurt our balance sheet would be some sort of black swan event if gas prices drop. So we want to hedge to protect our balance sheet and protect that bank credit facility as we continue to grow. And as Ralph said, if commodity prices do drop, we're still in good shape, even at two times debt to EBITDA. And we could take advantage of it pretty easily.

It occurred to me if you wanted more commodity, if you wanted to be lower hedge, you could lower the commitment that the banks are providing for the revolver. But to your point, what you're sort of saying is it's more valuable to you as sort of a key driver for growth to say, no, no, no, we want to keep that in place so that we can be opportunistic and take action as we see appropriate. Um, and so, you know, the trade off of that, the trade off to that is a bit more hedging than like the minimum amount you could get away with, but it gives you that access and gives you that ability to be optimistic. That's the logic.

Exactly. And the callers give us good upside exposure.

Yeah. Okay. Um, I want to ask just kind of as a housekeeping question. um for what we might expect how we should think of like a runway for gna expense um you know there's a bit of a jump this quarter um with transaction activity and then you know but also the last two quarters are a bit elevated from transactions there and then i know next the current quarter you know i guess calendar your fourth quarter right now that we're in um i know you've already done a 10 million in acquisitions there so if we just if we stripped out kind of the the acquisition Again, I know you plan to do them going forward, but just as a way to get some kind of bearings around, as you could call it, normalized or just like the stripped down, what should we see as G&A without kind of, you know, ongoing legal expenses or mergers and acquisitions and things like that? And also for depreciation, you know, DD&A, just with the Fayetteville divestiture, but then, you know, That's going to move things down, but then you have the recent acquisitions. So just how to kind of think about that going forward.

Yeah, let me address it from a real macro perspective first, then I'm going to let Ralph get into the weeds a little bit. So as we moved, when I took over as CEO in 2020, and really it was a whole new management team and a whole new technical team that I brought in, we were – We were, the compensation was set at what was kind of the old panhandle regime. Um, and with the environment we were in, in 2020, um, you know, salaries and overall comp was at the bottom. We were tiny. Uh, we had to work through some issues. Um, and so we were at the kind of the bottom of the pay scale, so to speak for a company our size. And then we moved out of, out of COVID into 2021. And by the second half of 2021, we were having great success. The overall industry success was everybody was doing well. Commodity prices were moving up. And there was a lot of competition out there from private equity groups that were trying to fund their management teams and fill their positions that these private equity groups were building out management teams. So there was a natural wage inflation and just an industry competition for employees And I really liked the team we had put together, and I didn't want to lose anybody. And it can cost a company a lot more if you lose somebody than to just pay them a fair wage. So between 21 and kind of this year, 22, we were bringing our team up to kind of what was market to make sure we don't lose them and reward them for the good work that they've been doing. So that led to some of the percentage increases you're seeing in the G&A. I don't see it. going to be as dramatic. There will be some natural, but we're not adding people. We're paying the existing employees more, and they're worthy of, and I want to retain them and keep them as we have this success and build this thing over the next three, four, five, six years. I want to build a real legacy here of high-quality employees that have ownership, believe in what we're doing, have ownership in the strategy and the model and they're the ones bringing the shareholder value to you guys. So we just want to reward them, and it's market. But I don't see it year over year increasing the way it has over the last few quarters. But Ralph, continue.

Yeah, no, I agree. And I think that, you know, I would also encourage you to think about it in a slightly different way, too. I mean, think about you know, much like our debt, right? So you can actually see our debt from last year to this year has gone up, but we have maintained our leverage statistics the same. We've high graded the asset base, et cetera, et cetera. So if you look at GNA relative to operating cash flow, right, as an example, right? I mean, that metric, right? That relational metric continues to improve year over year, even into the future, right? So, you know, As Chad said, what we've put together is very scalable, you know, and, you know, but at the same time, we're susceptible, like everybody else, to the wage inflation that you've seen, you know, that everybody is suffering from, right? I mean, you know, this year, what's going to happen in the future? It's a good question, you know, but to Chad's point, right, it's, you know, losing key personnel is, you know, is possibly a worse outcome. On the DDNA, I would say that, you know, working interest DDNA is usually run on a percent depletion basis, right? Whereas minerals is run a little bit differently. It's a straight line depreciation that varies between 20 and 30 years, depending on whether it's producing or non-producing. So on a DDNA basis, you should see DDNA come down into the future as the working interest rolls off and we become a close to 100% only mineral business. And then it should hold relatively flat or grow depending on how many acquisitions we make. It may grow along with our growth rate of acquisitions relative to the total asset base of the company. But you should see it come down as we exit the that working interest side of the business.

Okay. And then it was just last question. If I can squeeze one more in, because I think the, the royalty interest versus working interest dynamic, I think is, is extremely, I find it particularly fascinating, um, because it does create, you know, it poses some unique challenges in terms of trying to understand it, trying to understand things. But I think it also provides almost a lot of kind of concealed upside in some ways where it's like, you'll get a 7% sequential growth or total growth in production, or I guess the year-over-year for the full years. But it's like there's a 49% increase in the royalty part, and there's this whole turnover underneath. And if you think about a barrel of royalty, a royalty barrel versus a working interest barrel, the value of those is so different. And then of course, you know, the way this, those technicalities on how this comes in with reserve reporting. So for the reserve, the reserve reporting part, I kind of had this thought or this idea of, I mean, I wonder, I may be able to kind of back into this by comparing past reserve reports or maybe like the Fayetteville divestiture, but I wonder as a way to approximate the difference of how PUDs get booked, would you be able to like, would the logic hold here to say, if you had 100 net PUDs that were working interest, like you had 100 net working interest PUDs on the books, would like as a thought experiment, would you be able to look at that same 100 net PUDs currently on your books? This is kind of hypothetical, but as working interest, would you be able to go back to kind of the auditor or someone or just look at that and say, well, hey, if we took these same 100 net PUDs, that we are allowed to book because they're working interest. If those exact same ones were royalty interest instead of working interest, and it was those exact same hundred PUDs, but now we sort of don't have almost like this quasi, like almost like a sort of affidavit effectively, you know, from the operator. Now that we don't have that, how does that flow through from SEC? Does that 100 drop to 20 because only 20 have had permits filed? Like,

one I guess is my logic hold there is that like how you would go through that almost thought experiment and then is it is it something you could even do or that we might be able to kind of back into from historical numbers well Donovan what what what the subject matter you're discussing is kind of an accounting a complicated accounting perspective locations in and locations out that we fortunately do not have to deal with because In January 20, when I took over as CEO, the first thing I did was mandate that we will no longer participate in the drilling of a new well as a non-op working interest owner. And we wrote off all of the PUDs, reserve PUDs that were on our reserve books. So since 20, we've had zero non-op working interest PUD locations. And all of the locations that we now have And as I mentioned earlier in Derek's questions, I directed the participants on the call here to the approaching 2,000 drilling locations that we have now on our books. We've added those since 2020 when I took over. Those are all royalty interest, mineral royalty interest locations. None are a non-op working interest. So we don't have... we don't have to deal with the accounting rules or accounting of reserve volumes, whether it's a working interest or a multi-mineral. So it's pretty simple. We dealt with that in 2020 and no longer.

It was more, that's helpful. It's a helpful reminder. I was almost thinking about it as a term of if you could come back to what that ratio is, you know, it's five to one or whatever working interest pods to what, you get allowed to book when that's more royalty, then you could use it in the opposite direction and then say, oh, well, then that means if you've got 50 wells in progress, that would approximately be 250 putts or something. I don't think that math is possible. The reality of it is because a working interest putt may be a probable putt.

am I probable in the same section may be a probable mineral reserve because I don't have the timing schedule from the operator. So you're mixing in so many variables that trying to back into that from a relational standpoint, just not, you know, I don't think it's possible.

There's a good amount of room for error, but okay. All right, I got it. Thank you. I appreciate you guys. I'll take the rest offline.

Thanks, Tom.

Thank you. Our next question has come from the line of Jeffrey Campbell with Alliance Global Partners. Please proceed with your question.

Good morning, and congratulations on the starting year. I want to kind of shift the questions to the divestment of the non-op working interest that you referenced in the press release as a major 2023 event. First, can you outline the cadence of these sell-offs? I mean, is there going to be a more of a first half, 23 front-loaded thing? Will it be sort of more pro rata over the year? Do we have any color on that?

You know, hey, Jeff, it's Ralph. I think it's going to be, so two things. One is after, at the end of the day yesterday, after we put out the press release, we actually did execute on a purchase and sale agreement for our ARCOMA working interest assets in Oklahoma, right? So We have a PSA on hand to sell those assets for proceeds. I think the deal side's 5.1 million closing on January 30th, right? So, you know, there's definitely some front end loading there. And I think there's some other pieces that we can hopefully get under PSA sooner rather than later. We've already had some discussions around valuation. And then the remainder, right, is, you know, I will personally be disappointed if we don't find a buyer at a reasonable price, you know, in the second half of 23. So it's probably evenly split, you know, with the first half happening here very quickly and then the second half happening, you know, towards the, you know, the mid part of 23.

And importantly, and it's been our good fortune in late 21 and 22 is we were selling the non-upworking interest assets that we sold back then, we were, and Ralph and I were mindful of this, we were trying to manage our volumes and cash flow quarter to quarter. And as we were selling those non-upworking interest assets, we were quickly ready to redeploy those into deals that we had signed up and we used, quickly redeployed those proceeds into actual deal closings for minerals in our core areas. And the same dynamic is in play here we're pretty optimistic that when we close late January on this ARCOMA deal that we just signed up, we're going to be able to redeploy those cash proceeds into minerals that'll flow through to our royalty volumes and cash flows. So that's been the dynamic at play. We didn't want to completely sell everything all at once. But as she goes, converting the non-upworking interests into producing minerals and cash flows. That's what's at work here and what's in play. We've been very fortunate to be able to methodically manage that dynamic.

Okay, thank you. I don't want to try to get too far ahead of guidance this upcoming, but just at a high level, if we take what the press release said at face value, which is Greater than 90% of the working interest production is going to get sold in 2023. And then we have the growth in the minerals that Ralph talked about earlier. Is it fair to think that year-over-year 2023 will be somewhat flattish relative to 2022? I mean, this is assuming – we're not assuming any more acquisitions in any acquired production or an acceleration of drilling beyond what you've revealed now. That's kind of the way it looks to me based on what we have to look at. right now, I kind of wanted to get your input.

From a total corporate production standpoint, I think that's fair, right? But keep in mind, you know, obviously keep in mind that royalties have a much higher margin than, one molecule of royalties volumes has a higher margin than working interest, right? So theoretically, right, if you have the same, even though if you have flattish corporate volumes, assuming the same commodity price environment, which is a big assumption, but if you assume the exact same commodity price environment, you would theoretically see higher cash flow come out of those same volumes because of the difference in lower cost, higher margins of minerals relative to the interest.

Yeah, well, I mean, I think that's sort of the core argument for Vanna Minerals versus an E&P to begin with, right? I mean... It has very attractive defensive characteristics. We have one of those black swan deals, and also it's higher margins. So I think that's a fair point. I wanted to ask the final one on the working interest part. The press release said that greater than 90% of the production volumes would come from royalties. It didn't. which doesn't imply that the entirety of the non-op working interests are expected to be sold in 2023. So therefore, I was wondering, are we still going to see some LOE and some AOR numbers in future financials carrying into 2024?

It's possible, right? I mean, I think it's going to be de minimis in just noise. I mean, I think our target is to be able to completely exit, right? But I can't give you 100% certainty, right? So there's some room for some noise in there, right? If we get there by the end of calendar 23 and put that in 24, that'd be great. You know, but there's some things in there that we don't control, right? So there's a little bit of wiggle room. But certainly, I hope it's zero in 24.

Yeah, and I don't want to say for you, but once we Once we get these couple of non-op working interest packages out the door, and we just signed one, as Ralph alluded to, and we're working on another one as we speak, it's 92% to 95% of our volumes will be royalties. So the other... ...be derogatory, but they're just material to the source... our financial performance, it just won't matter. It's a noble story.

Okay, that's fine. I just want to ask one last question. In the fourth quarter and afterward in the subsequent events, you showed continued net loyalty acreage acquisitions. And I'm assuming that they were in the scoop and in the Hainesville. I think that was articulated in the press release. Can you comment on the percentage split between the scoop and the Hainesville that you're acquiring these days? And will these percentages be similar in the 2023 acquisitions to come?

So I would say that THIRDS TO PROBABLY CLOSER TO THREE-QUARTERS OF THE ACQUISITIONS ARE INTO HAINESVILLE, AND THE REMAINDER IS IN, YOU KNOW, BY NUMBER OF ACRES OR DIO VALLEY, RIGHT, AND THE REST IS IN THE SPRINGBOARD AREA OF THE SCOOP. BUT, YOU KNOW, THE SPRINGBOARD IS A MUCH SMALLER GEOGRAPHIC AREA, RIGHT, AND WITH ALL OF THE ACTIVITY THAT CONTINENTAL IS DOING IN THERE, RIGHT, IT BECOMES you know, it's not as, we're still finding very good value proposition there, but it's not the same as it was a year ago, right? So the Hainesville, it's got a much bigger footprint, right? And, you know, it gives us more opportunity in there. So I would say, yeah, about three quarters would be Hainesville.

And about that, just to talk quickly about springboard three. So there's two Clearly, Continental has the largest leasehold position in our area of interest. We have a kind of a boundary or an outline in which we've been acquiring minerals. And there were two things in play there. One, Harold Hamm was trying to take his company private, which he just successfully did here recently. And so he didn't want to advertise too much of what what he was doing there or drive his share price up too much by announcing good wells, good results in that area. And then secondly, they've been doing a bit of kind of well analysis, the best way to drill the wells and the best angles and the best, and there's two different zones there and they're testing both zones. And once they finish some of this glance, They'll get into what we call a mow-the-grass scenario where they've got five or six rigs, and they're just marching down the line drilling and developing these wells. And that probably still comes to a year away, but that's what they've done before. That's the way they always develop these areas. They did it in Springboard 1 asset. You can see what they did up in Grady County, Springboard 1. So they'll do the same thing as Springboard 3, and we're excited about that. minerals in this area, we've run up against Continental, who's got Franco Nevada, who funds them and buys minerals underneath the wells that they drill. So we're fortunate to have gotten the position we have in the springboard three ahead of Continental. Got it.

Okay, that's very helpful. I appreciate it. Thank you.

Thank you. Our next question has come from the line of Nicholas Pope with Seaport Research. Please proceed with your questions.

Hey, good morning, everyone. Real quick, just looking at the recent quarter, you all switched to being a cash tax payer. I was curious what the thoughts are kind of over the near term, what that looks what that kind of income tax rate looks like, how much you'll expect to be deferred now that kind of we're in that regime?

Yeah, it is, you know, it's a high-quality problem, right? I mean, as we're not drilling wells and not generating any IDCs, much like every other mineral company out there, where we've now become a cash taxpayer, right? And our estimate is that You know, it's roughly, you know, in the low teens is what your cash tax rate is, right? You know, the tax rate itself is a bit higher, but you can defer some of it. So our estimate is going to be in the low teens.

Got it. It's been a long call. That's all I had. I think everything else has been asked, guys. Thanks, Ralph.

Thank you. We have reached the end of our question and answer session. I would now like to hand the call back over to Chad Stevens for any closing comments.

Thank you, operator. Again, I'd like to thank our employees and shareholders for their continued support. I'd also like to note that Ralph and I will be expanding our investor marketing activities over the coming weeks and months through a series of non-deal roadshows and conference presentations aimed at expanding investor awareness. If you would be interested in meeting, please don't hesitate to reach out to myself, Ralph, or the folks at FNKIR. We look forward to hosting our next quarterly call in mid-February. Thank you and have a good day.

Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.