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Riley Exploration Permian First Quarter 2022 Results

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   |    Friday,May 13,2022

Riley Exploration Permian, Inc. reported its first quarter 2022 results.

Highlights:

• Averaged oil production of 7.5 MBbls per day, which is at the high end of guidance and represents an increase of 24% as compared year-over-year to the fiscal second quarter 2021
• Reported a net loss of $7 million, which includes $31 million of non-cash loss on derivative contracts, Adjusted Net Income⁽¹⁾ of $19 million and income from operations of $41 million
• Generated $34 million of Adjusted EBITDAX⁽¹⁾ and $30 million of operating cash flow
• Incurred activity-based total capital expenditures of $25 million and cash capital expenditures of $10 million
• Paid dividends of $0.31 per share for a total of $6 million
• Proved reserves of 73 MMBoe (64% oil) with a standardized measure of future discounted cash flows of $863 million
• PV-10 value⁽¹⁾ of total proved reserves and total proved developed reserves of $1,090 million and $790 million, respectively, as of March 31, 2022 based on NYMEX strip pricing
• Subsequent to quarter-end, amended our credit facility to extend the maturity to April 2026, increase the borrowing base by 14% to $200 million, and relax minimum hedging requirements to allow for more discretionary hedging decisions when the Company is less levered
• Increasing guidance for fiscal third quarter and fiscal year 2022 production volumes

Mr. Bobby D. Riley, Chairman of the Board and Chief Executive Officer, commented, "We are very pleased with our fiscal second quarter results. Based on the execution by our operations team and the results of wells brought on line, we had oil production at the high end of guidance. We have also achieved drilling and completion efficiencies further advancing our development and growth objectives. The Company continues to make progress on its EOR pilot project and has started water injection in one well and expects to commence water injection in additional wells in fiscal third quarter.

Our financial metrics demonstrate that our capital discipline and strategy generated free cash flow and a strong balance sheet enabling us to return capital to shareholders in the form of quarterly dividends. The Company declared and paid a dividend of $0.31 a share, which is the thirteenth consecutive quarter Riley Permian has returned capital to our shareholders.

The Company amended its credit facility by increasing the borrowing base, extending maturity to April 2026, rebalanced allocations among the six lenders in the syndicate, and most importantly relaxed minimum hedging requirements."

Mr. Riley further noted that "As we look forward, our team is taking several steps to navigate through inflationary pressure for services and products. Additionally, we continue to focus on executing a disciplined model of low leverage, production growth and return of capital through dividends to our shareholders."

Revised 2022 Guidance

Based on current market conditions, the Company has elected to modestly increase planned development activity during the second half of fiscal 2022, following consideration of alternatives and with support from many of its shareholders. We have added 3 gross (3.0 net) horizontal wells to our fiscal year 2022 development program, with drilling scheduled to begin in fiscal third quarter 2022 and completions scheduled to occur in August or September 2022. Therefore, we anticipate incurring capital expenditures for the additional wells during fiscal year 2022 while production from these wells captured within fiscal year 2022 may be modest.

Inclusive of 3 gross operated wells scheduled to come online during the fiscal fourth quarter 2022, we forecast an annual total of 15 gross (14.7 net) operated wells drilled, completed and brought online during fiscal year 2022. The Company has secured drilling rigs and casing for 100% of its fiscal year 2022 development activity and up to 14 wells for fiscal year 2023. Correspondingly, and based on current market conditions, the Company forecasts full-year fiscal 2022 accrued capital expenditures to total approximately $102 million to $111 million. This total includes estimates of (i) $84 million to $89 million for drilling and completions (operated and anticipated non-operated), capital workovers, infrastructure, minor additions to land and (ii) $18 million to $22 million for our EOR program. Approximately $2 million of $4 million of anticipated, accrual basis capital expenditures for our EOR program, previously estimated to be incurred during fiscal 2022, are now anticipated to be incurred in fiscal 2023.

Based on current estimates, and availability, we forecast that full-year fiscal 2022 oil production could average 7.5 MBbls per day to 7.8 MBbls per day, representing 17% to 22% growth from fiscal year 2021 average oil production. Based on historical averages for oil contribution, and estimates for new gas processing capacity, we forecast that full-year fiscal 2022 total equivalent production could average 10.0 MBoe per day to 10.4 MBoe per day.

Operations & Activity Update

Riley Permian averaged oil production of 7.5 MBbls per day for the three months ended March 31, 2022, representing an increase of 24% as compared year-over-year to the fiscal second quarter 2021. The Company averaged total equivalent production of 9.8 MBoe per day for the three months ended March 31, 2022, an increase of 18% as compared to the same period in 2021. Beginning in February 2022 and continuing through the quarter end, the Company's primary midstream gas gathering and processing counterparty underwent a temporary curtailment and shutdown of their primary plant as part of an overall capacity expansion project, which impacted sales of natural gas and NGLs during this period and led to lower growth in natural gas and NGL sales volumes as compared to oil sales volumes. For the six months ended March 31, 2022, the Company averaged total equivalent production of 9.9 MBoe per day, an increase of 24% compared to the same period in 2021.

The Company conducted extensive development activity during the fiscal second quarter, including drilling and completing 3 gross (3.0 net) horizontal wells (currently in early stages of flowing back), turning to production 2 gross (1.7 net) horizontal wells and preparatory activity for 3 gross (3.0 net) horizontal wells to be drilled and/or completed during the fiscal third quarter. Such activity corresponds with $23.8 million in accrual basis drilling, completions and facility capital expenditures, which also includes capitalized workovers, midstream infrastructure and minor additions to land and working interests.

The Company advanced its EOR pilot project in Yoakum County, Texas during the fiscal second quarter, completing one of the six newly drilled injection wells, and laying the high-pressure injection lines for both water and CO₂ during the quarter. Such activity corresponded with $1.5 million of accrual basis capital expenditures for the quarter. Previously, the Company anticipated incurring additional capital expenditures for certain equipment and the completion of additional injection wells during the fiscal second quarter. Subsequent to quarter end, the Company began water injection on the EOR pilot program in early April 2022.

Capital Expenditure

The Company incurred $25.3 million in total accrued capital expenditures for the three months ended March 31, 2022, which compares to the Company's previously released guidance of $26 million to $32 million. On a cash basis, the Company had total capital expenditures of $10.2 million for the three months ended March 31, 2022. The notable variance between cash and accrual based capital expenditures is driven by the majority of development activity occurring late in the quarter with the related cash capital expenditures expected to occur during the fiscal third quarter.

Financial Results

For the three months ended March 31, 2022, the Company reported a net loss of $7.2 million and operating income of $41.0 million. The Company generated Adjusted EBITDAX⁽¹⁾ of $34.4 million, operating cash flow from continuing operations of $30.0 million and Free Cash Flow⁽¹⁾ of $20.3 million.

For the six months ended March 31, 2022 (fiscal year to date), the Company reported net income of $14.2 million and operating income of $74.4 million. The Company generated Adjusted EBITDAX⁽¹⁾ of $61.5 million, operating cash flow from continuing operations of $51.7 million (inclusive of negative changes in working capital of $3.8 million) and Free Cash Flow⁽¹⁾ of $16.2 million. The pattern of the Company's development activity affects cash capital expenditures and may continue to cause fluctuations in Free Cash Flow⁽¹⁾ from quarter to quarter with longer periods more representative of Free Cash Flow⁽¹⁾ generation potential than an individual quarter.

Fiscal second quarter 2022 average realized prices, before derivative settlements were $92.44 per barrel of oil, $2.62 per Mcf of natural gas and $26.71 per barrel of natural gas liquids, resulting in a total equivalent price, before derivative settlements, of $75.63 per Boe. Adjusted for derivative settlements, total equivalent price was $54.78 per Boe, corresponding to realized derivative settlement losses of $20.85 per Boe or $18.4 million. The Company reported a $49.6 million loss on derivatives, which includes the $18.4 million loss on settlements and a $31.2 million non-cash loss due to changes in the fair value of derivatives.

Riley Permian's total Cash Costs⁽¹⁾ for the fiscal second quarter of 2022 were $16.46 per Boe, representing an increase of 4% compared to the fiscal first quarter of 2022 and an increase of only 2% compared to the fiscal second quarter 2021. Lease operating expense ("LOE") was $6.8 million, which was at the low end of guidance. On a per unit basis, LOE decreased by 4% as compared to the fiscal first quarter 2022 and 3% for the fiscal second quarter 2021. Production and ad valorem taxes increased 17% and 27% compared to fiscal first quarter 2022 and fiscal second quarter 2021 as a result of higher commodity prices. Cash G&A expense⁽¹⁾ was $3.5 million, which was at the low end of guidance, or $3.97 per Boe. Interest expense was $0.7 million, a decrease of 24% compared to fiscal first quarter 2022, primarily driven by capitalizing a portion of interest on the Company's EOR project. The decrease of 42% in interest expense as compared to fiscal second quarter 2021 is due to a lower average balance on our outstanding balance on our revolving credit facility as well as the capitalization of interest on the EOR project.

The Company realized a fiscal second quarter 2022 Cash Margin⁽¹⁾ of $59.17 per Boe before derivative settlements, representing an increase of 28% quarter-over-quarter or 80% year-over-year. After derivative settlements, the Cash Margin⁽¹⁾ increased to $38.32 per Boe, an increase of 34% quarter-over-quarter and 30% year-over-year.

During the fiscal second quarter 2022, the Company paid common dividends of $0.31 per share or $6.1 million. Subsequent to the quarter end, the Company paid common dividends of $0.31 per share in May 2022.

Subsequent to the quarter end, the Company completed an amendment to its credit facility which extended the maturity to April 2026 and increased the borrowing base to $200 million. As of May 9, 2022, we had $63 million drawn and $137 million, or approximately 68%, of availability on the facility.

Outlook

Based on current market conditions, the Company forecasts drilling 5 gross (5 net), completing 4 gross (4 net) and putting on production 6 gross (6 net) horizontal wells during the fiscal third quarter 2022. Additional scheduled activity includes capital workovers, and modest spending for non-operated new wells and midstream infrastructure. Management forecasts accrual basis capital expenditures related to such development activity to total approximately $25 million to $28 million, which also includes estimates for anticipated non-operated drilling and completions, capital workovers, infrastructure, minor additions to land and existing working interests.

Riley Permian forecasts fiscal third quarter 2022 oil production to average 7.6 MBbls per day to 8.1 MBbls per day, with the midpoint average representing 5% quarter-over-quarter growth from the fiscal second quarter. The midstream gas gathering and processing expansion project is expected to be fully commissioned in early June; however, the associated capacity constraint that began in February and will continue into June 2022 will impact sales of natural gas and NGLs during the fiscal third quarter. Following completion of the expansion project, the Company will enjoy a larger volume of contractual, firm capacity, which should lead to increased sales for natural gas and NGLs and reduced flaring. Based on historical averages and adjusting for some curtailment of natural gas and NGL sales volumes during the period, oil production could represent approximately 75% to 76% of total equivalent production, corresponding to an average of 10.0 MBoe per day to 10.8 MBoe per day for the fiscal third quarter.

The Company forecasts third fiscal quarter of 2022 LOE of approximately $8.0 million to $10.0 million. Management forecasts higher LOE than the second quarter due to a combination of increased workover activity (from which we are seeing corresponding production increases) as well as from inflationary forces. We forecast cash G&A expenses⁽¹⁾ for the fiscal third quarter of approximately $3.7 million to $4.7 million (excluding share-based and unit-based compensation expense, shown after the effect of gross profit from contract services derived from management services agreements).

The Company will continue to advance its EOR pilot project in the fiscal third quarter, with plans to complete 5 of 6 remaining injection wells and progress on the CO₂ tap installation. Management forecasts approximately $3 million to $5 million of accrual basis capital expenditures for its EOR program during the fiscal third quarter. Based on anticipated delivery timing of compressors needed for CO₂ injection, the Company forecasts beginning CO₂ injection during late 2022 (calendar fourth quarter 2022).

Management forecasts total accrual basis expenditures of $28 million to $33 million for the fiscal third quarter 2022.