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Riley Exploration Permian Second Quarter 2022 Results; Ups 2022 Capex

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   |    Wednesday,August 10,2022

Riley Exploration Permian, Inc. reported financial and operating results for the fiscal third quarter ended June 30, 2022.

Highlights:

• Averaged oil production of 8.4 MBbls per day, which exceeds the high end of guidance and represents an increase of 24% as compared year-over-year to the fiscal third quarter 2021 and 12% as compared quarter-over-quarter to the fiscal second quarter 2022
• Reported net income of $39 million, which includes $13 million of non-cash gain on derivative contracts and income from operations of $63 million
• Generated $45 million of Adjusted EBITDAX⁽¹⁾ and $44 million of operating cash flow, representing an increase of 29% and 47%, respectively, over the prior quarter
• Incurred total accrual (activity-based) capital expenditures of $34 million and total cash capital expenditures of $37 million
• Paid dividends of $0.31 per share for a total of $6 million
• Reported proved reserves of 79 MMBoe (64% oil) with a standardized measure of future discounted cash flows of $1,046 million
• PV-10 value⁽¹⁾ of total proved reserves and total proved developed reserves of $1,098 million and $807 million, respectively, as of June 30, 2022 based on NYMEX strip pricing

Bobby Riley, CEO, commented: "In the fiscal third quarter, we generated record oil production, revenue and operating cash flow. Our cash flow benefited from a decreased impact of financial hedges this past quarter, and we see a continuation of that trend for the quarters and year ahead. We are experiencing increased costs like many other companies in our industry, but we are proud of our team's efforts to control costs where we can. Based on the strength of our fiscal third quarter production, and given modest increased activity plans, we are increasing previously released midpoint guidance for oil production for the fiscal fourth quarter by 6% and for the fiscal year by 4%. Related, we are increasing our midpoint guidance for fiscal year capital expenditures by approximately 5%, driven by increased activity and cost increases. We continue to return a substantial portion of our cash flow to shareholders in the form of dividends, and we see opportunity to pay down our debt in the coming quarters, further strengthening our balance sheet."

2022 Outlook

Incorporating actual, accrual basis capital expenditures to date for the fiscal year, and combined with revised fiscal fourth quarter guidance above, the Company forecasts full-year fiscal 2022 accrual basis capital expenditures to total approximately $109 million to $115 million, with modest upward revisions from previously provided estimates of $102 million to $111 million.

This total includes estimates of $93 million to $97 million for drilling and completions, which compares to previous guidance of $84 million to $89 million. We are forecasting an annual total of 19 gross (15.0 net) wells drilled, completed and brought online during fiscal year 2022. The forecasted capital expenditures include $16 million to $18 million for our EOR program, down from $18 million to $22 million forecasted previously.

We forecast full-year fiscal 2022 oil production to average 7.8 MBbls per day to 7.9 MBbls per day (corresponding to approximately 2.9 MMBbls), representing 22% to 24% growth from fiscal year 2021 average oil production and corresponding with upward revisions from previously provided growth estimates of 17% to 22% during the prior quarter. Further, we forecast that full-year fiscal 2022 total equivalent production could average 10.3 MBoe per day to 10.4 MBoe per day.

Ops & Development Activity Update

Riley Permian averaged oil production of 8.4 MBbls per day for the three months ended June 30, 2022, representing an increase of 24% as compared year-over-year to the fiscal third quarter 2021 and 12% as compared quarter-over-quarter to the fiscal second quarter 2022. The Company averaged total equivalent production of 10.2 MBoe per day for the three months ended June 30, 2022, an increase of 12% as compared to the same period in 2021 and 4% as compared to the prior quarter.

Oil production represented 82% of the total equivalent production for the fiscal third quarter of 2022, which compares to 77% of the total in the fiscal second quarter of 2022 and 74% in the fiscal third quarter of 2021. Such changes are not indicative of changing reservoir properties but rather reflect the impact of curtailed natural gas production. Beginning in February 2022 and continuing through the fiscal third quarter, 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. While the processing plant project was expected, the duration of the curtailment lasted longer than originally anticipated, which negatively 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.

The Company's development activity during the fiscal third quarter included drilling 5 gross (3.0 net) horizontal wells (scheduled for completion in fiscal fourth quarter 2022), turning to sales 5 gross (5.0 net) horizontal wells, drilling and completing 1 gross (1.0 net) saltwater disposal well and preparatory activity for 1 gross (1.0 net) horizontal well to be drilled and completed during the fiscal fourth quarter. This activity corresponds with previously provided guidance, with the exception that 1 gross (1.0 net) well previously planned for completion during the fiscal third quarter was officially completed and brought online during the fiscal fourth quarter, while capital expenditures were incurred for the well completion during the third quarter. Such activity corresponds with $30.8 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 third quarter, completing an additional three of the remaining five injection wells. Such activity corresponded with $3.6 million of accrual basis capital expenditures for the quarter. Subsequent to quarter end, in July 2022, the Company completed the remaining two injection wells with water injection initiated on all six injection wells.

The Company incurred $34 million in total accrued capital expenditures for the three months ended June 30, 2022, which compares to the Company's previously released guidance of $28 million to $33 million. Overages on accrued capital expenditures compared to the Company's previously released guidance are primarily related to the accelerated timing of the saltwater disposal well drilled during the quarter, in addition to higher costs being realized. During the quarter, the average completed lateral length on the 5.0 horizontal wells turned to sales was approximately 7,100 feet, with drilling and completion costs of approximately $800 per completed lateral foot. The current costs per completed lateral length on similar wells has increased approximately 26% since the start of this fiscal year, with the largest increase being associated with completion costs. On a cash basis, the Company had total capital expenditures of $37 million for the three months ended June 30, 2022.

Financial Results

For the three months ended June 30, 2022, the Company reported net income of $39 million and operating income of $63 million. The Company generated Adjusted EBITDAX⁽¹⁾ of $45 million, operating cash flow from continuing operations of $44 million and Free Cash Flow⁽¹⁾ of $7 million.

For the nine months ended June 30, 2022 (fiscal year to date), the Company reported net income of $53 million and operating income of $137 million. The Company generated Adjusted EBITDAX⁽¹⁾ of $106 million, operating cash flow from continuing operations of $97 million (inclusive of negative changes in working capital of $2 million) and Free Cash Flow⁽¹⁾ of $22 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 third quarter 2022 average realized prices, before derivative settlements were $108.41 per barrel of oil, $4.98 per Mcf of natural gas and $34.71 per barrel of natural gas liquids, resulting in a total equivalent price, before derivative settlements, of $94.80 per Boe. The Company benefited from a favorable $1.65 per barrel positive differential to the WTI index for the quarter. Adjusted for derivative settlements, total equivalent price was $66.97 per Boe, corresponding to realized derivative settlement losses of $27.83 per Boe or $25.8 million. The Company reported a $12.4 million loss on derivatives, which includes the $25.8 million loss on settlements and a $13.4 million non-cash gain due to changes in the fair value of derivatives. Total oil and natural gas sales revenue was $88 million for the fiscal third quarter 2022 with $62 million of oil and natural gas sales revenue net of derivative settlements, representing quarter-over-quarter increases of 32% and 28%, respectively, and year-over-year increases of 111% and 83%, respectively. For the quarter, oil revenue represented 94% of total revenue.

Riley Permian's total Cash Costs⁽¹⁾ for the fiscal third quarter of 2022 were $18.2 million, representing an increase of 25% compared to the fiscal second quarter of 2022. Lease operating expense ("LOE") was $8.1 million, corresponding to the low end of guidance and an 18% increase quarter-over-quarter. Workover activity was unusually high during the fiscal third quarter of 2022 with workover expense (a component of LOE) approximately $1.4 million higher than the average of the prior three quarters. Excluding workover expense, LOE was lower than the prior two quarters, despite materially increasing production. Cash G&A expense⁽¹⁾ was $3.9 million, which was at the low end of guidance. Interest expense was $0.7 million, essentially flat with interest expense for the fiscal second quarter of 2022. Production and ad valorem taxes increased 58% quarter-over-quarter as a result of higher commodity prices and an increase in our estimated property values, which increased our ad valorem tax estimate. Accordingly, increases in production and ad valorem taxes accounted for 55% of the total increase in Cash Costs quarter-over-quarter. Excluding production and ad valorem taxes, Cash Costs⁽¹⁾ increased 15% quarter-over-quarter, which is consistent with the 13% quarter-over-quarter increase in oil production.

Riley Permian increased margins significantly for the fiscal third quarter of 2022, as compared to prior periods. Higher production volumes and realized commodity prices more than offset the impacts from the natural gas curtailment, loss on settlements of derivatives and increased Cash Costs⁽¹⁾. Adjusted EBITDAX⁽¹⁾ increased 29% quarter-over-quarter while operating cash flow from continuing operations increased 47% quarter-over-quarter. Compared to the fiscal third quarter of 2021, Adjusted EBITDAX⁽¹⁾ increased by 98% and operating cash flow from continuing operations increased by 113%.

During the fiscal third quarter 2022, the Company paid common dividends of $0.31 per share or $6 million. Subsequent to the quarter end, the Company paid common dividends of $0.31 per share in August 2022.

The Company completed an amendment to its credit facility during the quarter which extended the maturity to April 2026 and increased the borrowing base to $200 million. As of August 8, 2022, we had $61 million drawn and $139 million, or approximately 70%, of availability on the credit facility.

Revised Guidance and 2022 Outlook

Based on current market conditions, the Company forecasts drilling 4 gross (3.2 net), completing 7 gross (4.2 net) and turning to production 7 gross (4.2 net) horizontal wells during the fiscal fourth quarter 2022. Additional scheduled activity includes capital workovers and midstream infrastructure. Management forecasts accrual basis capital expenditures related to such development activity of approximately $24 million to $28 million, which also includes estimates for anticipated non-operated drilling and completions, capital workovers, infrastructure, preparatory work for the fiscal 2023 development program and minor additions to land and existing working interests.

The Company forecasts fiscal fourth quarter 2022 oil production to average 8.2 MBbls per day to 8.6 MBbls per day, with the midpoint average representing 21% year-over-year growth. The midstream gas gathering and processing expansion project has been fully commissioned. Following completion of the expansion project in mid July, the Company has realized a larger volume of contractual, firm capacity, which has led to increased sales for natural gas and NGLs and reduced flaring. However, despite the physical and contractual increases in processing capacity, the Company is currently producing natural gas in excess of our contractual minimum processing capacity, which will lead to continued, partial curtailment. Based on estimates of available gas processing capacity, we forecast total equivalent production to average 11.1 MBoe per day to 11.6 MBoe per day for the fiscal fourth quarter.

The Company forecasts fiscal fourth quarter 2022 LOE of approximately $8.0 million to $10.0 million, with the low end corresponding to fiscal third quarter actual results and the high end accounting for costs associated with increased production volumes and inflationary pressures. We forecast Cash G&A expenses⁽¹⁾ for the fiscal fourth quarter of approximately $4.1 million to $4.7 million.

For its EOR pilot project, management forecasts spending approximately $4 million to $6 million of accrual basis capital expenditures in the fiscal fourth quarter related to completion of the remaining injection wells and the CO₂ tap installation. Based on anticipated delivery timing of compressors needed for CO₂ injection, the Company forecasts beginning CO₂ injection during late 2022 (calendar fourth quarter 2022). Approximately $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.

In total, management forecasts total accrual basis capital expenditures of $28 million to $34 million for the fiscal fourth quarter 2022.