PHX Minerals Inc.

Greetings and welcome to the PHX Minerals, Inc. Third Quarter Earnings Conference call and webcast. At this time all participants are in listen-only mode. If anyone should require operator assistance, please press star zero on your telephone keypad. A question and answer session will follow the formal presentation. You may be placed into question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Stephen Lee, in best relations for PHX Minerals. Please go ahead, Stephen.

Thank you, operator. And thank you, everyone, for joining us today to discuss PHX Minerals September 30th, 2024 quality results. Joining us on the call today are Chad Stevens, President and Chief Executive Officer, Ralph D'Amico, Executive Vice President and Chief Financial Officer, and Danielle Mezzo, Vice President of Engineering. The earnings press release that was issued yesterday after close 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 a Q&A session, management may make four looking statements regarding expected revenue, earnings, future plans, opportunities, and other expectations of the company. These estimates and four looking statements involve known and unknown risks and uncertainties that may cause actual results to material 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, it may be amended or supplemented by subsequent quality reports on Form 10-Q or other reports filed with the Securities and Exchange Commission. The statements made during this call are based upon information known to PHX as of today, November 7, 2024, and the company does not intend to update these four looking statements whether as a result of new information, future events, or otherwise unless required by law. With that, I'll turn the call over to Chad Stevens, PHX Chief Executive Officer. Chad?

Thanks, Stephen, and thanks to all of you on this call for participating in PHX's September 30, 2024 quarter end earnings call. We appreciate your interest. A continuing theme which we have highlighted over the last several quarters is the challenging macro environment in which we operate. This quarter is no different. We are largely a natural gas focused company. The weather adjusted natural gas supply demand macro during the quarter remained bearish. As a result, realized natural gas prices were down. This impacted cash flows and overall industry activity. The natural gas macro over the past 24 months has produced various headwinds with most recent weather a disappointment, second warmest October and November since 1950. This removed about 150 to 200 BCF of total natural gas demand since the end of September. The silver lining to this is the 78 BCF of storage injection reported this past week suggests a 2 to 3 BCF under supplied domestic natural gas market. Also, total year to date storage injection is at the low end of the five year average and has reduced the large natural gas inventory surplus from a high of almost 700 BCF seen in March of this year to approximately 325 BCF surplus currently versus the five year average. Thus, we remain optimistic for the outlook for natural gas prices as new LNG export facilities begin service. It is projected that US LNG export volume should double to almost 25 BCF per day by 2028 with the of seven new facilities currently in various stages of construction. This is an incremental increase of roughly 13 BCF a day from current. Additionally, base case estimates of increased power demand to meet the growing needs of AI and data centers creates a critical call for gas of about 7 BCF per day by 2030. That is a total increase in natural gas demand from both LNG and of around 20 BCF per day over the next five years. This doesn't even include the need to replace the annual average natural gas decline rate of US gas production of around 15% or 15 BCF per day annually. When you look at the current natural gas forward strip price, we don't believe it reflects these bullish macro dynamics that will begin to lift forward prices over the next 12 to 24 months. Also, the recent election results should introduce a positive catalyst to US GDP growth, government deregulation, a favorable federal tax regime, and reduced market volatility. This should have a positive influence on demand for commodities and the energy sector at large. With this backdrop, and in spite of reduced pace of development in natural gas basins due to the suppressed prices, we are pleased with our quarterly results and would like to highlight a few notable items. One, the current quarter's royalty volumes represents the second highest in the history of the company, despite the negative natural gas macro I just mentioned. Sequential quarter volumes were down 20%, and we indicated to you last quarter this was coming and is due to the positive impact in the last quarter of reporting several new high interest wells in the Hainesville. Over the past 12 months, we're excited about what we're witnessing as dramatic increase in drilling in the Springboard 3 area of Oklahoma, mainly by continental. This time last year there in the Springboard, there were around 20 gross wells in some phase of permitting, drilling, or turning to sales, and today we see that number double to around 40 gross wells in some stage of progress. Also since the same period last year, there have been 30 gross wells converted to producing in the Springboard 3. This increased activity is a big counter to the industry narrative I just laid out because the production in Springboard 3 is two-thirds liquids and one-third gas by volume. Additionally, and as Danielle will discuss in a moment, we see an steady pace of well development on our minerals. This highlights the quality of our mineral assets. Danielle will detail our steady historical volume growth in a moment. While reducing debt by 5 million -to-date or 15%, we have also acquired approximately 6.5 million of minerals as well as focusing on return of capital to our shareholders through the 4 cent per share quarterly dividend. This all speaks to the strong financial position of PHX and our resilient sustainable business model throughout the commodity cycles. Our conservative focus on leverage and proactive hedging programs helps support our financial strength. Additionally, we reaffirm the borrowing base under our existing bank credit facility at 50 million, a direct reflection of the quality of asset base and maintaining modest leverage. And we continue to see steady deal flow in our focus areas which emphasizes the sustainability of our strategy. At this point, I'd like to turn the call over to Danielle to provide a quick operational overview and then to route to discuss the financials.

Thanks, Chad, and good morning to everyone participating on the call. For our quarter ended September 30, 2024, total corporate production decreased 20% from the quarter ended June 30, 2024 to 2379 MMCFE. Royalty production for the quarter decreased 23% to 2098 MMCFE compared to the prior sequential quarter, resulting in the second highest quarterly royalty production record for PHX. It's important to note that as a mineral holder, we do not control timing on well development so there can be some volatility both up and down on a quarter to quarter basis and volumes associated with our business model are better evaluated on a rolling 12-month basis. Our last 12 months royalty production is up .3% to 8.6 BCFE from the prior 12 months. Total corporate production, including working interest, is up .8% to 9.7 BCFE. Royalty volumes represented 88% of total production during our September 30, 2024 quarter. 80% of our quarter's production volumes were natural gas which aligns with our long-term position that natural gas is the key transition fuel for a energy future. Oil represented 11% of production volumes and NGL represented 9%. During third quarter 2024, third party operators active on our mineral acreage converted 46 growths or .18 net wells in progress or WIPs to producing wells compared to 55 growths or .4 net in the prior sequential quarter. We are pleased with our well conversion rates particularly given the challenging natural gas macro environment which includes some operators deferring bringing completed wells online until there is an improvement in natural gas prices. At the same time, our inventory of wells in progress on our minerals which includes ducts, wells being drilled and permits filed remain strong with 278 growths or .93 net wells compared to 241 growths or .93 net at the end of June 30, 2024. The continued track record of well conversions and replenishment of the inventory of wells in progress or WIPs reflects the high quality portfolio of assets we have assembled to provide steady sustainable future growth. In addition to our WIPs, we regularly monitor third party operator rig activities in our focus areas and observed 18 rigs present on PHX mineral acreage as of September 30, 2024. Additionally, we had 70 rigs active within 2.5 miles of PHX ownership. In summary, we continue to see steady development in both our legacy and recently acquired mineral assets which should lead to annually increasing royalty volumes. Now I will turn the call to Ralph to discuss financials.

Thanks, Danielle, and thanks to everyone for being on the call today. For the third fiscal quarter ended September 30, 2024, natural gas, oil and NGL sales revenues decreased 20% to 7.9 million compared to the prior sequential quarter due primarily to a decrease in production volumes of about 20% which, as Danielle mentioned, is a result of fewer new wells being brought online primarily in the Hainesville as natural gas prices remain under pressure and the normal lumpiness we see in volumes on a quarter over quarter basis. Realized natural gas prices for Q3-24 averaged $2 per MCF compared to $2.05 in Q2-24. Realized oil prices averaged $74.83, down 3% from Q2-24, and NGL prices averaged $19.60 a barrel, down 18% from Q2-2024. Realized hedge gains for the quarter were $932,000, approximately 48% of our natural gas, 31% of our oil, and none of our NGL production volumes were hedged at average prices of $3.28 per MCF and $63 per barrel. Most of these hedge contracts were added over the course of the last 24 months. We continue to be consistent with our hedge program and are structuring our natural gas hedges using both swaps and costless collars, which means that we also have upside exposure on certain volumes. Our current hedge position is available in our most recently filed 10Q. Total transportation gathering and marketing decreased 28% on a sequential quarter basis to $1.1 million, primarily due to the lower volumes during the quarter, mainly on the Louisiana side of the Hainesville. Production and ad valorem taxes decreased 28% on a sequential quarter over quarter basis to approximately $429,000 due to slightly lower prices and lower production volumes, again, primarily in Louisiana, where taxes are based on volumes and not as a percentage of revenue. LOE associated with our legacy non-operated working interest wells was flat on a sequential quarterly basis at about $295,000. Cash G&A increased 6% to $2.17 million compared to the prior quarter. Adjusted EBITDA was down to $4.9 million in Q3-24 compared to $6.4 million in Q2-24. The decrease, again, is due primarily to lower volumes offset by also lower transportation gathering, marketing, and production tax expenses. Net income for the quarter was $1.1 million or $0.03 per share compared to $1.3 million or $0.04 per share in the prior sequential quarter. We had total debt of ,750,000 as of Q3-24. As Chad mentioned, that's down $5 million from the Q3-24. Our debt to trailing 12-month adjusted EBITDA was 1.36 times as of September 30, 2024. We also just finished a regularly scheduled fall redetermination of our borrowing base, which remained flat at $50 million. I'd like to thank our bank group for their continued support of the PHS. We deployed about $3 million on accretive mineral acquisitions during Q3-24. However, as I've mentioned over the several prior quarters, our acquisition program remains disciplined. And if the deals in the marketplace don't generate our required return profile, we are not chasing them. It is also important to note that we have an almost seven-year inventory of high-quality drilling locations, which means that we can continue to perform without chasing acquisitions that do not meet our underwriting criteria. We are happy to build liquidity, pay down debt, and return capital to our shareholders through our quarterly dividend. With that, I'd like to turn the call over to Chad for some final remarks.

Thanks, Ralph. And just to recap, highlight the quarter's results. One, we reported our second highest royalty volumes in PHX history. This is supported by consistent pace of development activity on our minerals of over 300 well conversions to producing annually, about which Daniel just discussed. I'd like to emphasize that the annual well conversion, which drive our annual volume growth, comes from PHX's approximately 2,000 gross undeveloped well location inventory, which we lay out clearly in our slide deck and which Ralph just talked about. Two, we reduced our debt by five million or approximately 15% each year in 23 and reaffirmed our bank credit facility, emphasizing our financial strength. Three, board approved the quarterly 4 cent per share dividend. I'd like to recall that the board increased the dividend in our last quarter from 12 cents per share annually to 16 cents per share annually, which represented a 33% increase. This reflects competence in our ability to grow our asset base. And again, I'd like to point out it corresponds with our stated intention over the last several years of increasing the dividend when we feel it's appropriate. And we're excited. We've been talking about it for several quarters and are excited about the activity we're seeing on our springboard three asset with the gross whips in play. And with LNG power demand driving a bullish natural gas macro in the next 12 to 24 months and this abundant well activity on springboard three, we look forward to reporting financial results to our shareholders over the coming quarters. We're extremely optimistic about the broad well activity across our minerals, especially springboard three, which should positively impact our future financial performance. With this and the bullish macro LNG demand and power demand already discussed, we see real upside for PHX. As always, I thank both our employees and prepared remarks portion of the call. Operator, please open up the queue for questions.

Certainly. When I'm conducting a question and answer session, if you'd like to be placed in the question queue, please press star one under telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. One moment please while we poll for questions. Our first question is coming from Jeff from Alliance Global. Your line is now live.

Hey, guys. Thank you for the time. Ralph, wanted to start on the scoop and all that development going on. Looking at the breakout in your WIPs, it looks like it's probably like half, maybe a little over half of your net WIPs now. So just kind of thinking out loud, like how should we expect the commodity mix for the company to develop over the next couple of quarters, given that the scoop tends to be a little bit more backwards rich than your corporate mix as it stands today?

Well, so we've got quite a bit of activity in the Hainesville as well. And the Hainesville wells, any single, the initial production rate from any given Hainesville well is extremely robust, 20 to 30 million a day versus a single well initial production rate of a springboard through well isn't quite as robust, let's say. So we don't see a dramatic change in the overall production mix over the next year or two.

Yeah, I think the other thing to keep in mind also is that in the mid-continent, there are several operators, including some of the larger operators on our minerals in springboard three that pay us, that pay for the NGLs as part of rich gas. So said differently, you're going to see a positive impact. You're not going to be reporting NGL volumes. You're going to be reporting a higher realized natural gas price to account for the fact that that gas is being sold at 1400 BTU, right? So that includes pricing, but it keeps part of the volume down because you're not counting the NGLs, if that makes sense.

Got it. No, that's really helpful. Thank you guys. And then another question on just kind of, I know you guys don't guide quarter to quarter, but just with the results to date and the Q4 guide that you guys maintain, it looks like volumes need to stay, at least on a royalty side, volumes probably need to stay relatively steady just to kind of keep within the guidance range that you guys have. I'm wondering, do you guys have the conviction to kind of call Q3 potentially kind of a trough level for production? I know you ultimately are not the operator and control things, but to the extent you guys, do we have conviction that we're at a trough level or is that still potentially not quite the area just given the potential timing and work in process you guys have? Thanks.

I mean, I think that's a tough question because I don't know what gas prices are going to do in the future, right? I mean, we think that there's more upside to downside given the macro dynamic points that Chad discussed earlier on the call. I think your assumption on Q4, the fact that we didn't change the guidance, right? I think that kind of answers the question, but in terms of what any particular quarter is going to look like, I think that's a, you know, we tend to stay away from quarterly guidance. You know, I think as Danielle said, the right way to look at it, in our opinion, is that rolling 12 months, and I think if you look at any rolling 12 month period, you see continued growth, right? And I think that's really what we are looking for.

Got it. That's helpful commentary. Thank you,

guys. Thank you. Next question is coming from Charles Mead from the Johnson Rice. Or is that live?

It's good morning, Chad, Danielle, and Ralph. Thanks for the time. Chad, I want to go back to a quote in the press release where you said that you're seeing a growing pipeline of attractive M&A opportunities. And, you know, I look at what you guys are, or where you were buying in 3Q, it looks like, you know, it was, you know, 80, 90 percent in the Haynesville. And so I'm wondering, is that uptick in the Haynesville an early indication of where that attractive M&A opportunity is, or is there more going on there?

We continue to use both, or focus on the springboard, or kind of what I consider the scoop stack fairway of Oklahoma as well as the Haynesville. We see probably the Haynesville consists of the state of Louisiana as well as across the state line in Texas. And we're actually seeing some more or an increase in deal flow on the Texas side than we were on the Louisiana side. So that, I wouldn't say it's growing, but just kind of a steady, what I consider what was and still is a steady deal flow because they increase in activity we're seeing on the Texas side. But also we've expanded, given the activity up in Oklahoma in that fairway, the scoop stack fairway, we're expanding our focus and looking for more opportunities outside the springboard three and some other areas that are very interesting just as attractive as the springboard three. So I wouldn't say that we're going all in on just the Haynesville. We still see a lot of attractive stuff in the springboard, I mean, in the whole scoop stack.

Yeah, there's going to be some variability, Charles, quarter over quarter between Haynesville and the Anadarko Basin. Again, it's just when we're closing deals and you know, how they come in, but I wouldn't read too much into it in terms of, you know, a higher component in one quarter being in one area or the other. I think the important thing is that, you know, across everywhere that we look, every deal competes against every other deal for capital. And, you know, we on any given quarter, you know, we're deploying our capital where we see the highest potential rate of return, right, whether that be in the Anadarko or the Haynesville. I do think that in the Haynesville, I do think that there is, you know, enough time has sort of bled off since commodity prices came or natural gas pricing came down, where you're seeing a little bit more rationalization, let's put it that way, by folks that are on the sell side, right, in terms of, you know, realizing that at lower commodity, lower natural gas prices, you're going to have to sell at a lower price your minerals, right. And so, you know, there's a little bit of that going on as well.

That's good color on that, Ralph. Thank you. And then, Chad, I really appreciate your natural gas macro comments. It's always, it's interesting to hear your perspective. I think broadly, we kind of agree with you, but I want to ask if you could share with us the benefit of something else. When I think about you guys, you know, I know that you guys have exposure to a lot of different operators in the Haynesville, and you also, you know, making your business to understand even, you know, what your operators are doing, you know, around you. So what are you seeing in the way of any early indications of any kind of, you know, uptick in activity in 25? Or are you seeing any?

Well, we watch the public records and the public statements made by our operators, probably just like you do. And we, in our Invest Relations slide deck, lay out who the more active operators in and around our minerals are. So, Chesapeake and Athon, not so much, not as much Comstock. And Chesapeake obviously has moderated their rig activity and shut in or deferred some production in both the Haynesville and the Appalachian Marcellus because of gas prices. And their statements are saying they're waiting to see where gas prices are going in the next few quarters before they start completing their ducks and wrapping up their production. So it's hard to really read the impact of their slowing activity on our minerals. We watch the rig counts on our minerals, directly on our minerals and around, and that hadn't changed. So to answer your question, we think, and I guess kind of along Jeff's questions too, we feel comfortable with decent quarter to quarter production. And as Ralph alluded to, it's more like watching it annually, year over year, royalty volume growth. But it's a hard to determine what the operators are going to do. But given the rig activity on and around our minerals, we're not concerned about where volumes are headed.

We're also hearing from some of the smaller guys that at least as of recently, they had plans of turning on wells into Haynesville in December. And that shouldn't come as a shock as everybody sort of plans for higher winter pricing. Whether that happens or not remains to be seen. But I think all the, what you normally see from a seasonality standpoint in terms of people expecting higher gas prices in the winter, I think that's playing out again this year. We just have to wait and see.

Well, I tell you, it's really hot for November down where I am in New Orleans. So thanks for the added detail. Appreciate it. Thanks, Charles.

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.

Again, I'd like to thank our employees and shareholders for continued support. I'd also like to note that Ralph and I will continue to expand our investor marketing activities and outreach over the coming weeks and months. If you'd be interested in meeting with us, please don't hesitate to reach out to myself, Ralph, or the folks at FINK IR. We look forward to hosting our next call in March of 2025 to discuss our fourth quarter and full year 24 results. Thank you. Have a good day.

Thank you. That does conclude today's teleconference and webcast. You may just connect your line after this time and have a wonderful day. We thank you for your participation today.