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Panhandle Oil & Gas Talks 3Q / Nine Month 2019 Results

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   |    Thursday,August 08,2019

Panhandle Oil & Gas reported financial and operating results for the third quarter and nine months ended June 30, 2019.

Paul F. Blanchard Jr., President and CEO, commented, "I am very pleased with Panhandle's third quarter and year-to-date 2019 performance. We've generated significant cash flow and net income by executing our strategy of actively managing our mineral portfolio. Our proactive leasing effort continues to yield meaningful royalty production growth, biased toward oil production, which is supplemented by the lease bonuses we receive. We believe we are also generating material shareholder value through our targeted divestitures of mineral acreage and the largely tax-deferred redeployment of those proceeds into mineral acreage we deem to have lower risk from both a geologic and development timing perspective. In addition, we have materially paid down our debt and have improved our already ample liquidity, while repurchasing $6.5 million of our stock."

Highlights:

  • Net income in the first nine months of 2019 grew to $15.4 million or $0.92 per share, as compared to $14.1 million or $0.83 per share in the same period of 2018. Adjusted pre-tax net income(1) increased 183% in the first nine months of 2019 to $14.0 million or $0.83 per share, as compared to $5.0 million or $0.29 per share in the first nine months of 2018.
  • Net income in the 2019 quarter grew to $4.6 million or $0.28 per share, as compared to $0.8 million net loss or $(0.05) per share in the 2018 quarter. Adjusted pre-tax net income(1) for the 2019 third quarter was $4.0 million, as compared to $0.3 million the 2018 third quarter.
  • Adjusted EBITDA(1) grew 34% in the first nine months of 2019 to $27.4 million, as compared to $20.4 millionin 2018, including a $13.1 million gain on asset sales in the adjusted EBITDA for the 2019 period. Adjusted EBITDA for the 2019 third quarter was $8.9 million, as compared to $5.4 million the 2018 third quarter.
  • Royalty interest oil, NGL and natural gas sales increased 12.2% to $11.0 million in the first nine months of 2019, as compared to $9.9 million for the same period last year.
  • The Company repurchased $6.5 million of stock during the first nine months of 2019 at an average price of $14.95 per share, of which, $2.5 million was purchased in the third quarter.
  • Reduced debt from $51.0 million, as of Sept. 30, 2018, to $41.5 million, as of June 30, 2019, which has declined further to $38.0 million, with $6.5 million of cash on hand, as of Aug. 8, 2019.
  • Debt to enterprise value and debt to adjusted EBITDA (TTM) were 16.26% and 1.26x, respectively, at June 30, 2019.
  • The total return to shareholders in the first nine months of 2019 was $18.0 million through stock repurchases, dividends and debt reduction. This equates to an effective annualized yield of approximately 11.2% for that period.

(1)

This is a Non-GAAP measure. Refer to the Non-GAAP Reconciliation section.

Mr. Blanchard continued, "The results of the third quarter and nine months ended June 30, 2019, demonstrate Panhandle's sustained commitment to generate long-term shareholder value through execution of its corporate strategy. We are focused on three primary strategic objectives: 1) managing our mineral ownership as a portfolio of assets to maximize value and generate optimal free cash flow, 2) maintaining a strong and flexible financial position and 3) rewarding our shareholders."

Panhandle's efforts to maximize value through managing its mineral portfolio in the third quarter include the sale of 166 net mineral acres in the Permian Basin in Texas for $4,018,031 or approximately $24,000 per net mineral acre and the acquisition of 313 net mineral acres in the Bakken play in North Dakota and the STACK play in Blaine County, Okla., for $3,310,691 or approximately $10,600 per net mineral acre.

For the first nine months the Company sold 372 net mineral acres in the Permian Basin in Texas and New Mexico for $13,114,969 or approximately $35,000 per net mineral acre and acquired 687 net mineral acres in the Bakken play in North Dakota and the STACK play in Oklahoma for $5,120,466 or approximately $7,500 per net mineral acre.

Since the end of the third quarter, Panhandle also sold an additional 383 net mineral and royalty acres in the Permian Basin for $5.0 million.

Our unique mineral holdings, including large positions of both leased and open minerals in key areas, provide us with several levers to continue to generate significant cash flow moving forward. Current initiatives include the marketing of additional high-value, but largely undeveloped, Permian Basin minerals for sale and a proactive marketing process to lease out Panhandle's remaining unleased mineral acreage in the STACK and SCOOP plays. Much of this STACK and SCOOP acreage was previously held by the Company as unleased to allow for potential working interest participation. The leasing effort is expected to generate immediate cash flow from bonus payments and future cash flow from royalties. We are also continuing to pursue the acquisition of mineral acreage in the Bakken in North Dakota, the STACK and SCOOP plays in Oklahoma and the Eagle Ford play in Texas.

We believe that our active management of our mineral portfolio will create long-term shareholder value.

In regard to maintaining a strong and flexible financial position during the third quarter, the Company reduced its debt by $2.6 million to $41.5 million and increased its cash position by $1.0 million in the third quarter, representing debt net of cash of $40.0 million. For the nine months, debt was reduced $9.5 million to $41.5 million and our cash position increased by $1.0 million. Today, our debt stands at $38.0 million and our cash position is $6.5 million or debt net of cash of $31.5 million. This is a $19 million or 38% decrease of debt net of cash for the nine months of fiscal 2019. In our most recent semi-annual borrowing base redetermination, our bank group has elected to adjust our borrowing base to $70 million, effective Aug. 6, 2019. This is largely a reflection of their lowered outlook for natural gas prices. However, with the significant progress we have made in reducing our debt and increasing our cash holdings, our liquidity is currently greater than at the beginning of our fiscal year.

Lastly, during the third quarter, the Company repurchased approximately $2.5 million of its stock and for the nine months ended June 30, 2019, the Company repurchased approximately $6.5 million of its stock. Total return to shareholders for the nine months of 2019 was $18.0 million through stock repurchases, dividends and debt reduction. This equates to an effective annualized yield of 11.2% for that period.

OPERATING HIGHLIGHTS

 
   

Third Quarter Ended

   

Third Quarter Ended

   

Nine Months Ended

   

Nine Months Ended

 
   

June 30, 2019

   

June 30, 2018

   

June 30, 2019

   

June 30, 2018

 

Mcfe Sold

   

2,618,369

     

2,967,340

     

7,804,424

     

9,331,427

 

Average Sales Price per Mcfe

 

$

3.74

   

$

3.78

   

$

4.00

   

$

3.90

 

Oil Barrels Sold

   

96,065

     

80,298

     

253,265

     

253,447

 

Average Sales Price per Barrel

 

$

57.50

   

$

66.15

   

$

55.01

   

$

60.77

 

Gas Mcf Sold

   

1,718,561

     

2,082,700

     

5,300,594

     

6,633,005

 

Average Sales Price per Mcf

 

$

2.00

   

$

2.21

   

$

2.68

   

$

2.48

 

NGL Barrels Sold

   

53,903

     

67,142

     

164,040

     

196,290

 

Average Sales Price per Barrel

 

$

15.33

   

$

19.20

   

$

18.88

   

$

23.02

 
 
 

FINANCIAL HIGHLIGHTS

 
   

Third Quarter Ended

   

Third Quarter Ended

   

Nine Months Ended

   

Nine Months Ended

 
   

June 30, 2019

   

June 30, 2018

   

June 30, 2019

   

June 30, 2018

 

Working Interest Sales

 

$

6,659,237

   

$

7,837,612

   

$

20,164,713

   

$

26,505,701

 

Royalty Interest Sales

 

$

3,123,100

   

$

3,365,068

   

$

11,049,662

   

$

9,850,434

 

Oil, NGL and Natural Gas Sales

 

$

9,782,337

   

$

11,202,680

   

$

31,214,375

   

$

36,356,135

 
                                 

Lease Bonuses and Rental Income

 

$

229,075

   

$

484,298

   

$

952,378

   

$

1,080,455

 

Total Revenue

 

$

16,342,394

   

$

9,557,937

   

$

50,307,601

   

$

33,469,721

 
                                 

LOE per Mcfe

 

$

1.20

   

$

1.09

   

$

1.18

   

$

1.08

 

Production Tax per Mcfe

 

$

0.19

   

$

0.16

   

$

0.20

   

$

0.16

 

DD&A per Mcfe

 

$

1.67

   

$

1.56

   

$

1.51

   

$

1.51

 

G&A Expense per Mcfe

 

$

0.69

   

$

0.54

   

$

0.75

   

$

0.56

 

Interest Expense per Mcfe

 

$

0.20

   

$

0.14

   

$

0.20

   

$

0.14

 

Total Expense per Mcfe

 

$

3.95

   

$

3.49

   

$

3.84

   

$

3.45

 
                                 

Net Income

 

$

4,604,236

   

$

(775,093)

   

$

15,408,842

   

$

14,080,022

 

Adj. Pre-Tax Net Income (Loss) (1)

 

$

4,024,933

   

$

349,028

   

$

14,039,317

   

$

4,956,661

 

Adjusted EBITDA (1)

 

$

8,934,653

   

$

5,389,433

   

$

27,411,853

   

$

20,381,498

 
                                 

Cash Flow from Operations

 

$

5,271,897

   

$

6,297,920

   

$

14,332,951

   

$

21,657,902

 

CapEx - Drilling & Equipping

 

$

(810,043)

   

$

1,198,616

   

$

3,349,640

   

$

7,743,097

 

CapEx - Acquisitions

 

$

3,310,691

   

$

966,279

   

$

5,120,466

   

$

966,279

 
                                 

Borrowing Base

                 

$

80,000,000

   

$

80,000,000

 

Debt

                 

$

41,500,000

   

$

40,400,000

 

Debt/Adjusted EBITDA (TTM) (1)

                   

1.26

     

1.41

 

Debt to Enterprise Value (1)

                   

16.26

%

   

11.20

%

   

(1)

This is a Non-GAAP measure. Refer to the Non-GAAP Reconciliation section.

Q3 2019 Results

Total production decreased 12% in the 2019 quarter, as compared to the 2018 quarter. Total production has decreased due to the natural decline of the production base and, to a lesser extent, the result of marginal property divestitures in 2018. This was partially offset by the production from new royalty and working interest wells. The oil production increase is primarily production from the new seven-well program in the Eagle Ford that came on line in March and the mineral acquisitions of Bakken oil-producing properties. The NGL production decrease is attributed to both natural production decline and operators electing to remove less NGL from the natural gas stream due to lower NGL prices. These decreases in the liquid-rich production from the prior year's drilling program in the Anadarko Basin Woodford Shale and Eagle Ford Shale were partially offset by mineral acquisitions of producing properties in the Bakken. Decreased gas production was due to naturally declining production in the Anadarko Woodford, Arkoma Woodford and Fayetteville shales. These decreases were partially offset by production from mineral acquisitions in the Bakken.

The total production in the third quarter of 2018 was significantly higher due to our substantial 2017 drilling program in the Arkoma Woodford (8 wells), Anadarko Woodford (6 wells) and Eagle Ford (10 wells) shales, all of which began production in early 2018. Also, these wells had significantly higher than average NRI's and were producing at high rates during that time. As with virtually all horizontal wells, production from these wells experienced significant declines during their first year. This decline, along with materially lower capital expenditures during fiscal 2018 and fiscal 2019, accounted for a material portion of the Company's production decline experienced in the 2019 comparable periods.

Average daily production in the third quarter of 2019 increased 7% when compared to the second quarter of 2019. A material portion of the increase was due to new wells coming on line in the Eagle Ford and new production from our acquisitions in the Bakken.

Oil, NGL and natural gas revenue decreased 13% in the 2019 quarter as production decreased 12% and product prices decreased relative to the 2018 quarter. The 2019 quarter included a $2.3 million gain on derivative contracts as compared to a $2.1 million loss for the 2018 quarter.

In the third quarter of 2019, the Company sold mineral acreage in Martin County, Texas, for a gain of $4,017,787. In the 2018 quarter, the Company sold its working interest in several marginal properties in Oklahoma and Kansas for a loss of $195,076.

The 13% increase in total cost per MCFE in the 2019 quarter relative to the 2018 quarter was primarily driven by lower production as noted above. In the 2018 quarter there was significant production from lower cost wells (i.e. wells that have very high royalty interest in relation to their working interest). These wells had high initial production rates that drove the per Mcfe rate down across most expense categories. As expected, production on these wells has declined in the 2019 quarter from their previous high rates. Interest expense and production taxes were also influenced, respectively, by higher bank interest and production tax rates. G&A expense also increased due to compensation expenses tied to retirement clauses and other employee changes.

The Company's net income (loss) changed from net loss of $0.8 million in the 2018 quarter to a net income of $4.6 million in the 2019 quarter. The majority of the increase was due to gains on assets sales and derivative contracts. Adjusted pre-tax net income (loss)(1) was $4.0 million in the 2019 quarter, as compared to $0.3 million in the 2018 quarter.

(1)

This is a Non-GAAP measure. Refer to the Non-GAAP Reconciliation section.

Nine Months 2019 Results

Total production decreased 16% in the 2019 period, as compared to the 2018 period. This decrease for the 2019 nine-month period, was due to factors consistent with those discussed above. Panhandle also elected not to participate with a working interest on 44 wells proposed on its mineral acreage.

Oil, NGL and natural gas revenue decreased 14% in the 2019 period as production decreased 16% and product prices increased only slightly, relative to the 2018 period. The 2019 period included a $5.0 million gain on derivative contracts as compared to a $4.0 million loss for the 2018 period.

In the 2019 period, the Company sold mineral acreage in Lea and Eddy Counties, N.M., and Martin County, Texas, for a gain of $13,114,725. These sales represented 0.14% of the Company's total net mineral acreage position. Panhandle had owned these minerals for many years and they had minimal remaining cost basis and therefore, most of the proceeds were recorded as gains. However, these transactions were structured as like-kind exchanges offsetting mineral purchases and, as a result, most of income tax from the sales was deferred. In the 2018 period, the Company sold its working interest in several marginal properties in Oklahoma and Kansas for a loss of $660,597.

The 11% increase in total cost per MCFE in the 2019 period relative to the 2018 period was primarily driven by lower overall production as noted above. In the 2018 period, there were significant increases in production from lower cost wells (i.e. wells that have very high royalty interest in relation to their working interest). These wells had large initial production rates that drove the cost per Mcfe down across most expense categories. As expected, in the 2019 period the production on these wells has declined from their initial high rates. Interest expense and production taxes were also influenced, respectively, by higher bank interest rates and a production tax rate increase in Oklahoma during the 2019 period. G&A expense also increased due to non-recurring restricted stock and other compensation expenses tied to retirement clauses and other employee changes.

The Company's net income increased $1.3 million in the 2019 period, as compared to the 2018 period. The 2018 period was materially impacted by the Tax Cuts and Jobs Act enacted in December 2017, and the 2019 period was materially impacted by the gain on asset sales and the mark-to-market gain on Panhandle's derivatives. Adjusted pre-tax net income (1) was $14.0 million in the 2019 period, as compared to $5.0 million in the 2018 period.

The Company generated excess free cash flow, enabling a return of $8.5 million to shareholders through dividend payments and stock repurchases, while also paying down $9.5 million of debt.

(1)

This is a Non-GAAP measure. Refer to the Non-GAAP Reconciliation section.

Borrowing Base

On Aug. 6, 2019, Panhandle's line-of-credit borrowing base was redetermined by the banks and reduced from $80 million to $70 million due to their lowered outlook for natural gas prices. The current outstanding balance is $38.0 million. Current availability under the line is $32.0 million and combined with approximately $6.5 million in cash, the total liquidity is $38.5 million. This level is expected to provide ample liquidity for the Company to continue to execute its normal operating strategies.

OPERATIONS UPDATE

 

Rig Activity

 
   

Wells in Progress

 

Rigs Present

 

Rigs Within

 

Permits on PHX

   

on

 

on

 

2.5 miles of

 

Acreage Trailing

   

PHX Acreage

 

PHX Acreage

 

PHX Acreage

 

Twelve Months

SCOOP / STACK

 

107

 

6

 

60

 

337

Arkoma

 

18

 

2

 

3

 

79

Bakken

 

59

 

2

 

12

 

30

Permian

 

6

 

0

 

2

 

57

Fayetteville

 

0

 

0

 

0

 

2

Other

 

24

 

0

 

4

 

109

Total

 

214

 

10

 

81

 

614

Leasing Activity

The Company leased out 152 net mineral acres at approximately $1,508 per acre in the quarter at an average royalty rate of 19.3%. Current initiatives include a proactive marketing process to lease out Panhandle's remaining unleased mineral acreage in the STACK and SCOOP plays. Since the end of the quarter, Panhandle has leased a total of 83 acres for a total bonus of $221,310 at an average royalty rate of 25.0%.

Eagle Ford Activity

Seven Eagle Ford Shale wells began production at the end of the second quarter. The Company's average working interest in this group of wells is 10.8% (8% net revenue), as the wells are located partially on the Company's 16% working interest (12% net revenue) acreage and partially on acreage Panhandle does not own. Third quarter production for the seven wells was 28,257 Boe net to Panhandle. Production continues to be in line with projections for the seven-well program.

A&D Update

During the third quarter Panhandle acquired 313 net mineral acres in the core of the Bakken play in North Dakota and the STACK play in Blaine County, Okla., for $3,310,691 or approximately $10,600 per acre. Since the end of the third quarter, the Company has closed on the purchase of an additional 31 net mineral acres also in the core of the Bakken for $194,000.

The Company sold 166 net mineral acres (predominately undeveloped) located in the Permian Basin in Texas in the third quarter to several private buyers for total net consideration of $4,018,031, or $24,000 per acre. Since the end of the third quarter, Panhandle also sold an additional 383 net mineral and royalty acres in the Permian Basin for $5.0 million.

The Company intends to continue to optimize its mineral portfolio through strategic sales and purchases. Panhandle is unique in the industry, in that the net book value of our entire 259,000-acre mineral portfolio is only $71 per acre. This affords the Company the opportunity to generate material net income and EBITDA on lease bonuses and the strategic sale of minerals.


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