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Panhandle Oil & Gas First Quarter 2020 Results

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   |    Thursday,May 07,2020

Panhandle Oil & Gas Inc. reported its Q1 2020 results.

Chad L. Stephens, President and CEO, commented, "Panhandle joins the chorus in thanking our remarkable health care workers, hospital staff and front-line responders in essential jobs that are helping the world through this unprecedented time. Risking their health to save ours is immensely appreciated. I am happy to report that our royalty interest production volumes have increased by 41% as compared to the prior quarter. This is due to the effect of a full quarter of our STACK mineral acquisition that closed last December and additional well activity on our Bakken and SCOOP minerals. The increase more than offset our decrease in working interest production volumes during the same period to generate an overall company production volume growth for the quarter of 10% as compared to the prior quarter. These results allowed us to reduce our debt by another $3.0 million (roughly 8%) since our last quarter. The royalty interest volume growth was not enough to mitigate a continued drop in commodity prices which caused our quarter over quarter adjusted EBITDA and operating cash flow to decline. The economic downturn associated with COVID-19 caused commodity prices to decline further and reduced new drilling activity across the energy patch, including on our minerals.

"Despite these challenging times, we will maintain our long-term focus on NAV-accretive growth through the acquisition of producing minerals and royalty interests. We recognize that the near-term uncertainty and market volatility make it difficult to transact. As such, in the short term we will focus on the important issues we can control, such as the safety and health of our employees, lowering our G&A costs, reducing our debt, and continually improving our internal systems and processes, in order to be more efficient and effective in pursuing our long term goals when the economy opens up again. As part of our debt reduction effort, the Board voted at the recent May meeting to reduce our quarterly dividend to $0.01. This will allow the Company to apply an additional $2.0 million toward debt reduction and help in maintaining adequate liquidity to operate our business. I remain confident that, by applying these prudent steps of judicious capital allocation and cash management, Panhandle will successfully navigate through the current market uncertainties and emerge as a leaner more efficient company."

Highlights

• Royalty interest volumes sold increased in the second quarter of 2020 to 1.11 Bcfe from 0.79 Bcfe in the first quarter of 2020 primarily due to having a full quarter of production related to the STACK acquisition completed in December 2019 and additional mineral interest wells coming online.
• As a result of lower commodity prices, we recorded a non-cash impairment of $29.5 million in the second quarter of 2020.
• Net loss in the first half of fiscal 2020 was $18.1 million or $1.09 per share (net income of $11.5 million or $0.69 per share excluding the non-cash impairment associated primarily with our assets in the Fayetteville and Eagle Ford shales), as compared to net income of $10.8 million or $0.64 per share in the fiscal 2019 period.
• Net loss in the second quarter of 2020 was $20.0 million or $1.21 per share (net income of $9.6 million or $0.58 per share excluding the non-cash impairment), as compared to net loss of $1.9 million or $0.11 per share in the same period of 2019.
• Adjusted EBITDA⁽¹⁾ in the first half of fiscal 2020 was $10.3 million, as compared to $18.5 million in the fiscal 2019 period, including $3.3 million and $9.1 million gains on asset sales in the adjusted EBITDA for the 2020 and 2019 periods, respectively.
• Adjusted EBITDA⁽¹⁾ for the second quarter of 2020 was $3.1 million, as compared to $4.0 million in the same period in 2019.
• Reduced debt from $35.4 million, as of Sept. 30, 2019, to $32.0 million, as of March 31, 2020. Net debt has been further reduced to approximately $29.3 million as of May 1, 2020.
• Debt to adjusted EBITDA (TTM) ratio was 1.12x at March 31, 2020.
• Subsequent to March 31, 2020, the Company implemented a G&A reduction plan which we expect, when fully implemented, to reduce G&A by between $1 to $2 million annually.
• At its meeting on May 5, 2020, the Company's Board of Directors approved a payment of a one cent per share quarterly dividend. The dividend will be payable on June 5, 2020, to stockholders of record on May 21, 2020.

Results - Financials & Production

Oil, NGL and natural gas revenue decreased 13% in the 2020 quarter as production increased 4% and product prices decreased 17% relative to the 2019 quarter. The 2020 quarter revenue included a $4.1 million gain on derivative contracts as compared to a $1.8 million loss for the 2019 quarter.

Total production increased 4% in the 2020 quarter, as compared to the 2019 quarter. Total production increased due to including a full quarter of results associated with the STACK acquisition, which closed in December 2019, and additional royalty oil wells coming online primarily in the Bakken. This increase was partially offset by the natural decline of the production base. The oil production increase of 39% is attributable to producing property royalty acquisitions in the Bakken in North Dakota and Anadarko STACK in Oklahoma, as well as new well drilling on legacy Panhandle mineral acreage in the SCOOP and STACK in Oklahoma. The natural gas production decrease of 5% is the result of naturally declining production in the STACK, Arkoma Stack and Fayetteville Shale, partially offset by royalty acquisition volumes in the STACK and Bakken and volumes identified in new royalty wells in the SCOOP and Bakken. The NGL production remained relatively flat as naturally declining production in liquid-rich gas areas of the Anadarko Basin and Arkoma Stack are offset by additional production related to royalty acquisition volumes in the STACK and Bakken, new royalty wells in the SCOOP and Bakken, and operators removing more NGL from the natural gas stream.

The 8% decrease in total cost per Mcfe in the 2020 quarter relative to the 2019 quarter was primarily driven by higher royalty volumes and an increased proportion of oil compared to NGL and natural gas.

The DD&A rate decrease was mainly due to the impairment taken on the Eagle Ford at the end of fiscal 2019, which lowered the basis of the assets. This rate decrease was partially offset by lower oil, NGL and natural gas prices utilized in the reserve calculations during the 2020 quarter, as compared to the 2019 quarter, shortening the economic life of wells. This resulted in lower projected remaining reserves on a significant number of wells causing increased units of production DD&A.

The interest expense decrease was mainly attributable to lower average outstanding debt balance during the 2020 quarter as compared to the 2019 quarter.

The decrease in production tax rate was primarily due to lower product prices during the 2020 quarter.

The Company's net income decreased from net loss of $1.9 million in the 2019 quarter to net loss of $20.0 million in the 2020 quarter. The majority of the decrease was due to a non-cash impairment associated primarily with the Fayetteville and the Eagle Ford shales.

Six Months 2020 Results

Oil, NGL and natural gas revenue decreased 27% in the 2020 period as production decreased 8% and product prices decreased 21% relative to the 2019 period. The 2020 period revenue included a $3.3 million gain on derivative contracts as compared to a $2.7 million gain for the 2019 period.

Total production decreased 8% in the 2020 period, as compared to the 2019 period. This decrease for the 2020 six-month period, was the result of Panhandle electing not to participate with a working interest on 16 wells proposed on its mineral and leasehold acreage, partially offset by the factors discussed above.

The 3% decrease in total cost per MCFE in the 2020 period relative to the 2019 period was primarily driven by lower production as noted above. Interest expense and production taxes were also influenced by lower debt balances outstanding and lower production tax associated with lower commodity prices, respectively.

The Company's net income decreased from net income of $10.8 million in the 2019 period to net loss of $18.1 million in the 2020 period. The majority of the decrease was due to a non-cash impairment associated primarily with the Fayetteville and the Eagle Ford shales.

Ops Update

During the quarter ended March 31, 2020, we converted 25 gross/0.06 net wells in progress to producing wells. Our inventory of wells in progress decreased to 118 gross wells but increased on a net well basis to 0.50 wells, as new drilling occurred on acreage where we have a higher ownership stake. Permits outstanding increased as new permits were filed, but this increase was offset by fewer permits being converted to wells in progress.

Leasing Activity

During the second quarter of fiscal 2020, Panhandle leased 36 net mineral acres for an average bonus payment of $603 per net mineral acre and an average royalty of 22%.

Reserves

As of March 31, 2020, mid-year proved reserves were 74.6 Bcfe, as calculated by DeGolyer and MacNaughton, the Company's independent consulting petroleum engineering firm. This was a 30% decrease, compared to the 106.4 Bcfe of proved reserves at Sept. 30, 2019, and is primarily attributable to revisions associated with lower natural gas prices. SEC prices used for the March 31, 2020, report averaged $1.90 per Mcf for natural gas, $53.10 per barrel for oil and $15.31 per barrel for NGL, compared to $2.48 per Mcf for natural gas, $54.40 per barrel for oil and $19.30 per barrel for NGL at the Sept. 30, 2019, report. These prices reflect net prices received at the wellhead. Total proved developed reserves decreased 19% to 72.8 Bcfe, as compared to Sept. 30, 2019, reserve volumes. Total proved undeveloped reserves decreased 15.3 Bcfe principally due to reclassifying locations from proven undeveloped to probable undeveloped related to significant reduction in drilling activity in the STACK, SCOOP, Arkoma Stack and Bakken. As per reserve reporting rules, wells that are no longer scheduled to be drilled within five years must be reclassified from proven undeveloped to probable undeveloped.