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PHX Minerals Fiscal Q4 2021 Results

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   |    Wednesday,December 15,2021

PHX Minerals Inc. reported financial and operating results for the fourth quarter and fiscal year ended Sept. 30, 2021.

Highlights for Fiscal Q4:

• Total production volumes for the full fiscal year 2021 increased 6% to 9,076 Mmcfe from 8,593 Mmcfe in the full fiscal year 2020.
• Royalty production volumes for the full fiscal year 2021 increased 25% to 4,178 Mmcfe from 3,348 Mmcfe in the full fiscal year 2020.
• Total production volumes for the fourth fiscal quarter of 2021 decreased 11% to 2,212 Mmcfe from 2,493 Mmcfe in the third fiscal quarter of 2021.
• Royalty production volumes for the fourth fiscal quarter of 2021 decreased 17% to 998 Mmcfe from 1,205 Mmcfe in the third fiscal quarter of 2021.
• Announced the quarterly dividend increased to 1.5 cents per share, a 50% increase, payable on March 3, 2022, to shareholders of record on February 17, 2022.
• Recorded a net loss in fiscal 2021 of $(6.2) million, or $(0.24) per share, as compared to net loss of $(24.0) million, or $(1.41) per share, in fiscal 2020.
• Recorded a net loss in the fourth quarter 2021 of $(3.8) million, or $(0.14) per share, as compared to a net loss of $(1.4) million, or $(0.05) per share, in the third fiscal quarter of 2021.
• Adjusted EBITDA⁽¹⁾ increased in the full fiscal year 2021 to $15.0 million from $13.5 million in the full fiscal year 2020.
• Adjusted EBITDA⁽¹⁾ decreased in the fourth fiscal quarter of 2021 to $4.1 million from $4.7 million in the third fiscal quarter of 2021 and increased from $2.7 million in the fourth fiscal quarter of 2020.
• Reduced debt 39% from $28.8 million as of Sept. 30, 2020, to $17.5 million, as of Sept. 30, 2021.
• Total debt to adjusted EBITDA⁽¹⁾ ratio was 1.17x at Sept. 30, 2021.
• Increased the borrowing base to $32.0 million from $27.5 million.
• Completed approximately $30.0 million of mineral and royalty interest acquisitions in fiscal 2021 and an additional approximately $10.0 million in fiscal 2022.
• Completed the divestiture of 708 legacy non operated working interest wellbores for net proceeds of $4.6 million and the removal of approximately $0.7 million of asset retirement obligation from the balance sheet since Sept. 30, 2021.

Chad L. Stephens, President and CEO, commented, "Throughout the last several quarters, we have repeatedly expressed our stated strategy to focus on growing our asset base through the acquisition of minerals in core areas with active development under reputable operators, high grade the asset base by divesting of lower margin working interest wells and strengthen the balance sheet. As we close out an excellent fiscal year 2021, we can proudly report that we have achieved stellar results at the high end of expectations in all of these areas.

"An important barometer of the success of our strategy is produced royalty volumes, which increased year over year almost 25%, while our non-operated working interest volumes continue to decline and become a lower percent of our total company volumes. Also, our adjusted EBITDA for the full fiscal year 2021 increased 11% year over year, we reduced our debt by 39% year over year and, since our fiscal year-end 2021, increased our bank borrowing base by 16%, which improves our liquidity. This increase is a direct reflection of high grading the asset base and our improving collateral profile. Most importantly, while paying down our debt by $11.3 million, we closed on the acquisition of minerals totaling approximately $30.0 million in fiscal year 2021. Since fiscal year-end, we have announced the close of an additional $10.0 million of mineral acquisitions with $5.8 million more to close mid-December. Given these significant accomplishments and our confidence in continuing to execute our strategy, we are increasing our quarterly dividend by 50% to $.015 per share.

"With a stronger balance sheet, improved liquidity and allocating 100% of our free cash flow to our mineral acquisition strategy, we are excited about PHX's ability to build shareholder value."

4Q 2021 vs. 4Q 2020

Natural gas, oil and NGL revenue increased 140% in the 2021 quarter as total production increased 9% and product prices increased 121%, relative to the 2020 quarter. Royalty revenue increased 186% in the 2021 quarter as total production increased 29% and product prices increased 122%, relative to the 2020 quarter. Total production increased due to the recent mineral and royalty interest acquisitions in the Haynesville play, in Texas and Louisiana, and SCOOP. These increases were offset by naturally declining production in the Eagle Ford and Arkoma Stack.

The 2% decrease in total cost per Mcfe in the 2021 quarter, relative to the 2020 quarter, was primarily driven by a decrease in DD&A. DD&A decreased $950,365, or 38%, in the 2021 quarter to $0.71 per Mcfe, as compared to $1.24 per Mcfe in the 2020 quarter. Of the decrease, $1,165,857 was a result of a $0.53 decrease in the DD&A rate per Mcfe, partially offset by an increase of $215,492 resulting from total production increasing 9% in the 2021 quarter. The rate decrease was partially due to higher natural gas, oil and NGL prices utilized in the reserve calculations during the 2021 period, as compared to 2020 period, lengthening the economic life of wells. This resulted in higher projected remaining reserves on a significant number of wells causing decreased units of production DD&A, despite the increase in projection.

No material impairment charge was recorded during the 2021 and 2020 quarters.

No significant divestitures of minerals occurred in the fourth quarter of 2021. In the fourth quarter of 2020, the Company sold open and non-producing net mineral acres in northwest Oklahoma for a gain of $717,640.

On Sept. 2, 2021, the Company settled all of its derivative contracts with Bank of Oklahoma ("BOKF") by paying $8.8 million. On Sept. 3, 2021, the Company entered into new derivative contracts with BP Energy Company ("BP") that had similar terms to the contracts settled with BOK and received a payment of $8.8 million from BP. The new derivative contracts consisted of all fixed swap contracts and are secured under the Company's credit facility with Independent Bank. The $8.8 million paid to BOK to settle the derivatives is included as a loss on derivatives. The $8.8 million received from BP was considered a cash flow from financing activities and had no effect on the statement of operations. The derivative activity was associated with entering into a new credit agreement with Independent Bank and ending the relationship with BOKF. The 2021 quarter included an $8.1 million loss on derivative contracts as compared to a $1.5 million loss for the 2020 quarter.

The Company's net income (loss) changed from net loss of $(1.8) million in the 2020 quarter to a net loss of $(3.8) million in the 2021 quarter. The change was primarily due to the increase in loss on derivative contracts (as noted above) in 2021, partially offset by an increase in natural gas, oil and NGL revenue.

2021 vs. 2020

Natural gas, oil and NGL revenue increased 62% in 2021 as production increased 6% and product prices increased 53%, relative to 2020. Royalty revenue increased 76% in 2021 as total production increased 25% and product prices increased 41%, relative to 2020. Total production increased due to an increase in natural gas production from the recent mineral and royalty acquisitions in the Haynesville play of Texas and Louisiana, and slightly offset by naturally declining production in the Fayetteville, SCOOP and Arkoma STACK. The decrease in oil production was a result of naturally declining production in working interest wells in the Eagle Ford play and royalty wells in the Bakken play, due to the company strategy of no longer participating with working interest in new drilling in the Eagle Ford, and reduced drilling activity in the Bakken. These decreases were partially offset by new drilling in the STACK. The increase in NGL production is primarily attributable to high interest wells coming back online after being shut-in for part of fiscal year 2020, as well as new wells being brought online in the STACK. This was partially offset by naturally declining production in the SCOOP.

Given our strategic decision to cease participating with working interests, we plan to offset the natural decline of our existing production base by the development of our current inventory of mineral acreage and through acquisitions of additional mineral interests.

Expenses decreased in 2021, primarily the result of a decrease in the provision for impairment, DD&A, LOE and interest expense, offset by an increase in transportation, gathering and marketing expenses, production taxes and loss on debt extinguishment. The reduction in DD&A expense is discussed above and the reduction in interest expense is due to the Company paying down $11.3 million of debt in 2021. The increase in transportation, gathering and marketing expense and production taxes is due to the increase in production and related revenue.

An impairment expense of $50,475 was recorded during 2021 compared to $29,904,528 in 2020. In 2020, an impairment of expense of $19.3 million and $7.3 million was recorded on the Fayetteville Shale and Eagle Ford fields, respectively. The remaining $2.7 million of impairment was taken on other producing assets.

In 2021, the Company sold 2,857 net mineral acres in the Central Basin Platform, TX, for a gain on sales of $0.2 million. In 2020, the Company sold 530 net mineral acres in Eddy County, N.M., for a gain on sales of $3.3 million and 5,925 open and non-producing net mineral acres in northwest Oklahoma for a net gain on sales of $0.7 million.

The Company's net income (loss) changed from a net loss of $(24.0) million in 2020 to a net loss of $(6.2) million in 2021. The change in net (loss) was due to the increase in revenue mentioned above and decrease in expenses, partially offset by an increase in loss on derivative contracts and a decrease on net gain on sale of assets. Fiscal 2021 total revenues included a $16.2 million loss on derivative contracts, as compared to a $0.9 million gain on derivative contracts for 2020.

Operations Update

At Nov. 15, 2021, the Company had a total of 86 gross wells (0.46 net wells) in progress across its mineral positions and 33 gross active permitted wells. As of Nov. 15, 2021, there were 15 rigs operating on the Company's acreage and 73 rigs operating within 2.5 miles of its acreage.

Reserves

At Sept. 30, 2021, proved reserves were 83.0 Bcfe, as calculated by DeGolyer and MacNaughton, the Company's independent consulting petroleum engineering firm. This was a 44% increase, compared to the 57.7 Bcfe of proved reserves at Sept. 30, 2020. Total proved developed reserves increased 42% to 77.7 Bcfe, as compared to Sept. 30, 2020 reserve volumes, mainly due to 2021 pricing revisions, partially offset by production and performance revisions. The pricing revisions were due to well economic limits extending later than was projected in 2020 as a result of higher gas and oil prices. The performance revisions were principally due to lower performance of high-interest Mississippian and Woodford wells in the STACK play in Oklahoma that were brought online in 2021. Total proved undeveloped reserves increased 2.2 Bcfe, principally due to mineral interest acquisitions in the Haynesville Shale in Texas and Louisiana and Meramec and Woodford SCOOP play in Oklahoma. SEC prices used for the Sept. 30, 2021, report averaged $2.79 per Mcf for natural gas, $56.51 per barrel for oil and $20.58 per barrel for NGL, compared to $1.62 per Mcf for natural gas, $40.18 per barrel for oil and $9.95 per barrel for NGL for the Sept. 30, 2020, report. These prices reflect net prices received at the wellhead.

Borrowing Base

On Sept. 1, 2021, the Company entered into a new four-year $100 million senior secured credit facility with an initial Borrowing Base of $27.5 million and a maturity date of Sept. 1, 2025 (the "New Credit Facility"). The New Credit Facility is led by Independent Bank and replaced the Company's prior credit facility. On Dec. 6, 2021,cr the borrowing base was increased to $32.0 million.