REPX - AMEX

Thank you for standing by. My name is Bailey and I will be your conference operator today. At this time, I would like to welcome everyone to the Riley Exploration Permian Inc. Second Quarter 2025 Earnings Conference Call. [Operator Instructions] I'll now turn the call over to Philip Riley, [ CEO ]. You may begin.

Good morning. Welcome to our conference call covering our second quarter 2025 results. I'm Philip Riley, CFO. Joining me today are Bobby Riley, Chairman and CEO; and Dan Doherty, SVP of Operations. Yesterday, we published a variety of materials, which can be found on our website under the Investors section. These materials in today's conference call contain certain projections and other forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements. We'll also reference certain non-GAAP measures. Reconciliations to the appropriate GAAP measures can be found in our supplemental disclosure on our website. I'll now turn the call over to Bobby.

Thank you, Philip. Good morning and welcome to our earnings call. Riley Permian demonstrated solid overall performance in the second quarter despite a less favorable oil macro backdrop and regional operating environment. We adjusted our development activity and CapEx downward in response to lower oil prices and we generated significant free cash flow for the first half of the year. Our development activity was moderated, but demonstrated good execution overall with positive momentum continuing on drilling, completion times and cost. We experienced some production impacts from infrastructure challenges common to many companies in the Permian Basin. Most notably was unreliable natural gas processing in New Mexico, which leads to shut-in wells and deferred production. As a courtesy reminder for our investors, the larger value driver at hand is not the deferred gas revenue, which is immaterial; but rather the oil revenue. New Mexico is a 0 flaring state so disruptions on gas locally or downstream can result in disruptions to oil production. While disruptions in the second quarter are frustrating, fortunately, this is a timing issue versus fundamental well performance issues. Also, these types of hurdles present opportunities that underpin several of our initiatives, including midstream and power generation projects, which we continue to advance. These projects are designed to enhance gas and oil flow assurance and support access to a stable power supply. Together, these efforts strengthen our ability to scale operations through acquisitions, providing a competitive edge to our peers in a dynamic energy environment. We closed our acquisition of Silverback Exploration in July. With this deal, we've increased our Yeso trend footprint to 30,000 net acres, 98% of which is held by production. This region today represents only 1/4 of the company's total production yet offers substantial undeveloped potential for future growth. I will now turn the call over to Dan Dougherty, who is sitting in today for John Suter, our COO, to discuss operational results for the quarter followed by Philip Reilly, our CFO, who will discuss the company's financial performance and forward-looking guidance.

Thank you, Bobby, and good morning. Riley Permian has once again shown excellence in safe operations achieving a total recordable incident rate of 0 in the second quarter. We achieved 97% safe days, a metric requiring no recordable incidents, vehicle accidents or spills over 10 barrels. This is a record number of safe days for the second quarter in a row, a testament to our commitment to safe operating. As for activity, for the second quarter of 2025; we drilled 10, completed 2 and turned in line 7 gross operated wells. 5 of those wells turned in line were completed at the end of the first quarter. We mentioned on the previous call that we picked up a rig in Q1, spudding the first well in that campaign in Texas in late March. That rig completed its 10-well program in the second quarter replenishing our DUC inventory that will carry completions into 2026. During this drilling campaign, Riley set multiple Yoakum County records in the San Andres, including longest lateral drilled at 10,375 feet as well as fastest spud to TD and fastest spud to rig release for both 1- and 2-mile wells. We did see some impact from tariffs during the campaign, most significantly in the form of higher pipe pricing. Due to the added drilling efficiencies, however, we were able to keep total costs down compared to our previous drilling efforts, reducing our total average drilling cost per lateral foot by 15% over our previous program in 2024 despite the added tariff costs. Overall, this campaign was our most efficient and cost effective to date. Net production declined marginally from 1.41 million to 1.38 million barrels of oil quarter-over-quarter in Q2, but increased 3% compared to the same quarter last year. Barrel of oil equivalent production is up 1% quarter-over-quarter and up 14% compared to same quarter last year from 1.94 million to 2.22 million barrels of oil equivalent. Our average daily net production was 15,200 barrels of oil per day and 24,400 barrels of oil equivalent per day for the second quarter of 2025. The slight decline in oil production within the quarter was due primarily to gas takeaway constraints with our current midstream partner in New Mexico. These gas takeaway constraint events resulted in us deferring oil volumes to future quarters and are the foundational reason for our investing in gathering and compression in the asset. Last quarter we announced that we had completed our first phase of this gathering and compression. Since then, this initial phase has allowed us to sell up to 15 million cubic feet in high pressure gas to our current midstream partner, mitigating some of the gathering constraints that we've experienced and allowing us to bring on new production. During the second quarter, we continued to make progress on the subsequent phases of the project as we work toward our planned 2026 in-service date for deliveries to our new midstream partner. An expansion of the initial Birdy compressor station to 55 million cubic feet a day is already underway with the additional compression scheduled to arrive in late Q4. Maintaining low operating costs remains a primary focus for our operations team. Our average upstream LOE per BOE in the first 2 quarters of 2025 is down 3.7% over our 2024 average. As power becomes an increasingly precious commodity in the Permian Basin, managing our own power production will be an integral piece to our unconstrained development. In the second quarter, we added an additional 9% to our self-generated power in Texas. The continued efficiency and reliability of this power project has led to the initial planning phases of a similar installation of our New Mexico asset. With the Silverback acquisition closing, the Riley Permian operations team has already identified numerous opportunities, synergies and cost savings that underscore the intrinsic value of the acquisition. Managing water handling costs is integral to our business and leveraging our expertise in the matter will decrease operating expenditures within the new asset. Combining water infrastructures between our legacy assets and Silverback will also drive efficiencies and opportunities as we continue to develop in New Mexico. Due to significant overlap of the legacy and Silverback acreage, we're able to increase the expected net interest of many of our development locations. This will allow us to produce more net barrels for the same amount of gas, water and power infrastructure investments. Nearly doubling the scale of our operations in the region will also give us a strategic advantage when going to quote services. We believe this could lead to savings of 5% to 15% for many regularly used services. Finally, with minimal buildouts, existing gas production in the Silverback wells can be brought to our compressor station allowing for quicker scale and improving project economics. To summarize. In the second quarter, the Riley Permian team had our most successful drilling program to date. We maintained low operating costs. Our midstream and power projects are continuing to prove their value in the form of reliability and increased optionality and we continue to find significant synergies in our recent Silverback acquisition. And all of this was done while achieving record safety metrics. Congratulations to the team on a job well done. Philip, I'll now turn the call back to you.

Thank you, Dan. Second quarter cash flow from operations was $33.6 million, lower quarter-over-quarter primarily from price and changes in working capital. Realized oil prices before hedges fell 11% quarter-over-quarter or 22% year-over-year while prices after hedges by only 7% quarter-over-quarter or 14% year-over-year demonstrating the benefit of that risk management program. We had $1 million noncash impairment on a small asset far outside either of our 2 core areas driven by lower prices, which shows up on the income statement. Combined LOE and cash G&A per BOE decreased by 5% to 7% as compared to the same period 1 and 2 years ago. Adjusted EBITDAX margin was 66%, down modestly from 71% 1 year ago in spite of the lower oil prices. We believe this demonstrates the resiliency of our business and the positive impacts of structural cost improvements. We reinvested 54% of cash flow from operations before working capital into upstream CapEx during the quarter or only 41% for the 6 months year-to-date compared to 47% for the same period in 2024. This lower reinvestment rate reflects our response to lower oil prices, which we discussed on our prior quarterly call and which corresponds with our production volumes. Also, 40% of the year-to-date CapEx spend relates to drilling 10 net wells, which we've only turned to sales 5.8 net wells highlighting an inventory build of uncompleted wells. We converted 59% of year-to-date operating cash flow before working capital to $61 million of upstream free cash flow or $54 million of total free cash flow after midstream CapEx. The quarterly increase in debt, $284 million at quarter end was driven primarily by a combination of normalized net working capital changes as well as funding the deposit for our Silverback acquisition. Subsequent to quarter-end we closed the Silverback acquisition, which we funded with our credit facility. As of August 1, we had $401 million in total debt including $246 million on the credit facility and $155 million of notes or $381 million of net debt, excluding $20 million of cash. Debt level is an increase of $131 million of net debt from the end of the first quarter consisting of $125.5 million for Silverback, which reflects a preliminary purchase price benefit of $16.5 million as well as $5 million related to some working capital needs. Now let's discuss our latest guidance. First, on the format and periods disclosed, we're providing activity, production and CapEx guidance for the third and fourth quarters. We've updated the full year figure. I'll remind our listeners that this reflects 6 months of stand-alone for the first half of the year with 6 months combined with Silverback for the second half of the year. Hence, a blended average relative to what you'll see for the third and fourth quarter levels. We provided cost guidance for the current quarter. A couple of items may drive LOE higher in the near term. First, I'll note that Silverback is a primarily undeveloped asset base with a large number of low volume vertical wells holding the acreage, but which also correspond with higher per unit costs. This will come down over time as we develop the asset. Second, we've got a modest amount of midstream OpEx flowing through this LOE category for now skewing the appearance of higher upstream cost. We might choose to break this out at a later date. To recap our capital budget guidance for the year. In March we announced a $210 million budget across upstream, midstream and power. Following the significant price declines in April, we announced on our Q1 earnings call an approximate $110 million budget or a very significant 47% cut from the original. We're now adding back a modest amount of drilling and completion activity and further midstream and power investments. We're bringing back the rig with 10 gross new drills accounting for approximately 60% of the increased spend as compared to prior guidance. We also plan on completing an additional 2.5 net wells as compared to our prior guidance accounting for the balance of the incremental spend. Overall, this should result in a smaller drawdown of drilled, but uncompleted wells or DUCs, maintaining an inventory to draw from and setting up 2026 for maximum flexibility. We also see additional growth as compared to prior guidance with fourth quarter midpoint oil production in the mid 18,000 barrels per day level for oil and over 30,000 barrels per day for total equivalent. That suggests 21% growth from second quarter to fourth quarter for oil and 27% for total equivalent. The oil growth represents a combination of organic growth and the impact of adding Silverback accounting for full year base decline of about 25% at Silverback from the beginning of year levels cited upon deal announcement. We see the total equivalent production growing faster than oil because our Texas midstream partner completed some upgrades, which leads to more processed gas and less flaring, combined with some tighter potential basis differentials. Hopefully, this leads to positive gas and NGL revenue in the second half of the year. From a broader perspective, this oil growth represents a 26% average annual growth rate from the same period in 2021 or 23% on an oil production per share basis. While encouraging, we're staying disciplined and I'll emphasize this represents a modest increase in capital allocation corresponding with an approximate 45% upstream reinvestment rate of cash flow from operations before working capital. On our New Mexico midstream project, we're bringing forward some CapEx into this year, which primarily relates to the additional compressors Dan mentioned earlier this year as well as the costs for the steel pipe. On the pipe, we had an opportunity to commit to a purchase at an attractive price and in advance of any tariff impact. On power, the increased forward investment as compared to last quarter just represents a small acceleration of some project spend and overall timing is looking like in-service dates starting in 2026. We remain cautious on the macro front and we'll watch closely during the second half of this year to see how OPEC's actual marketed supply compares to the planned unwind of cuts and for how the market absorbs such increases. So while we're positioning ambitious growth projects and acquisitions, we're also positioning our company for resilience and flexibility in the face of uncertainty. We added hedges over the past quarter primarily for the next 18 months to mitigate the impact of price swings. On debt leverage, we forecast modest paydown this fall at $65 WTI, partially contingent on the pace of our midstream buildout. If we were to look at that on a pro forma combined basis, we could have several quarters beginning being in the range of 1.3x adjusted EBITDAX or slightly higher 1.4x on a stand-alone basis. I'll turn it back to Bobby for closing. Thank you.

Thank you, Philip. Once again, we appreciate your time and interest in Riley Permian. While we're pleased with our Q2 2025 results, our focus remains firmly on the future. We are committed to building long-term value through disciplined capital allocation, strategic infrastructure investments and operational excellence. We believe these initiatives will position us for sustained growth and this long- term strategy will continue to drive shareholder value. Thank you for your continued support. Operator, you may now turn the call over for questions.

[Operator Instructions] Your first question comes from the line of Derrick Whitfield.

For my first question, I wanted to focus on your production trajectory into 2026. With your revised upstream capital plan, your 4Q exit rate is materially above 2026 consensus. While I realize you're not offering 2026 guidance today, is the second half capital run rate a reasonable place to start for 2026? And how does that run rate compare to your maintenance capital case for the pro forma company?

Derrick, this is Philip. I'll start with that. Yes, we're excited about the fourth quarter exit rate production you see there. We are increasing that capital. I think if you look at the year, we like to break out the upstream from the midstream in total, you can see we're still under $100 million at the midpoint for the year. Now compare that to some years past and we're quite a bit higher even in several years. We've got more assets now. So I think you could imagine a budget in the, maybe call it, $120 million next year if we wanted to continue at the growth that we are. On maintenance CapEx, it's a little bit of an abstract concept, but I think you can look and see what we've done over the last quarter or 2. We kept things pretty flat with very little investment. It always gets a little skewed when you're drilling and creating DUCs or possibly using them. But directionally, you can see that there. Maybe that's in the 35% to 40% reinvestment rate of cash flow in which I'll remind our listeners when we say cash flow, we mean after interest, after tax not EBITDA. So that would be an even lower percent of EBITDA. Does that answer some of your question? Anything more we can clarify there, Derrick?

I think that's great, Philip. And maybe shifting over to midstream for my follow-up. Could you speak to your latest thoughts on what's the most likely outcome for funding this development and the degree of flexibility you guys have in New Mexico to navigate the constraints given your and Silverback's collective arrangements?

Sure. So yes, I think what Derrick's alluding to, we hinted last quarter we're considering different ways to finance this. We started the year thinking we just keep this fully on the balance sheet, use the credit facility, obviously made some adjustments after the big macro events and then finding this nice acquisition. The latest is we're still working through it. We've got a few options, ideas we like. At the same time, we're controlling the pace. That's a great thing about building it yourself. We are making commitments like we've disclosed in our 10-Q and as we discussed. We've got some compressors coming. We've got that pipe we're excited about. We're doing a little work like some right of way. That's some of that spending that you'll see there, all while kind of trying to meet our in-service date of a few quarters from now. But we've got some flexibility. I'd say hang tight for a little bit longer and we've got hopefully, some more updates to give you. As for the operational aspect of the midstream, I think we've got some flexibility. There's a difference between low pressure and high pressure, but maybe I turn this to Dan. I think he could probably explain it.

Yes. Couple of things on this. One, you mentioned Silverback. I think we're pretty well positioned to incorporate Silverback into this existing midstream plan. We've already got plans to bring on between 5 million and 10 million a day over to our high pressure system from the Silverback system with our initial Birdy compressor. There's also a lot of overlap, as I mentioned, with the existing Artesia area, which will focus on our development in the 2026 time frame. Midstream is really going to be focused on servicing those initial wells that will be drilled in 2026. So a lot of synergies there, a lot of opportunity with the Silverback acquisition and everything just kind of really works well together.

Your next question comes from the line of [ Kelly Robertson ].

2025, you invested about 41% of your capital compared to [indiscernible]. Production still grew I think on oil and total production was up about 17%. Does that tell you something about the underlying performance of the assets that we could see carry into 2026 with the upcoming capital program?

Yes. I'm going to repeat what you said because I think I could hear it, maybe some people couldn't. So yes, year-over-year our total production, 7% higher for oil and 17% higher for total. Meanwhile, our reinvestment rate dropped from 47% last year to 41% here for the first half of the year. So yes, that's encouraging. Most of that was done for the period captured organically. Again, for the listeners, we hadn't done the acquisition yet for the results we've published. Last year we had the benefit of a very small acquisition; it was mostly land, few hundred barrels a day. But yes, mostly organic there. Looking ahead kind of to build on what I was talking about with Derrick, when you talk about reinvestment rate, the denominator is cash flow and of course that's impacted by your oil prices. On the trailing 12 months, we benefit from some higher prices and last year we had some higher prices. This first half of the year is kind of a blend of lower. So the 41% is really cutting it back. Looking ahead, cash flow can be a little bit lower because you can have lower oil prices and the hedges locked in for the next year won't be as high as they were for this year. I would see reinvestment rate going up a bit. I think we are leaning into the asset to try to -- we've got several asset acquisitions or even this latest was the NM city acquisition that have been more undeveloped and we want to add some production to that. We want to fill up the midstream when it's ready and demonstrate what these New Mexico assets can do.

You talked a little bit about capital spend on the midstream. Can you talk about what Riley could realize as an economic impact from the midstream project and being able to move third-party volumes?

Yes. So when we say third-party volumes, I think it's important to distinguish a couple different ways there. So as you know, we have our operated volumes that we control the molecule and for each of those molecules, there's a working interest ownership split. We very often in New Mexico will not own 100% of that just by the nature of force pooling and it's a little more chopped up than what we have in Texas. So on average, we might only have 50% working interest; 55%, 60%, which is frankly quite a bit higher than a lot of the peers you'll see out there. And so the balance though represents something from somebody else that you control, but it's somebody else's. So you're actually able to build that out and collect some effective third-party revenue there even though it's operated by us. And then in addition, you've got some royalty when it's not the feds that you can pick up some of that. There's another category that's truly third- party operated. There's potential for that. We have to weigh the trade-offs of whether we want to maintain capacity for ourselves and that's changed after Silverback. We've got a big footprint out there. We're going to want to maintain some of that. But that's part of the calculus. And then as far as this translates to cash flow, I think it will take a little while to ramp, but then we do plan to charge some market rates out there and we're optimistic that this could translate into $10 million, $20 million, $30 million of cash flow a few years down the road. On an accounting basis -- let me just say one more thing. On an accounting basis, this remains to be seen how we'll do this, but there's effectively the aspect of the gross dollars and then the netting on elimination if we were to consolidate some of that is eliminated nets out effectively if we the operator are paying ourselves, we are the midstream operator as well. So that's just kind of a preview of what could come and there's just a few ways to do it.

And then lastly, on the power projects, are there opportunities or is there a need in New Mexico for Riley to undertake any power solutions for your acreage?

Yes. I'll say a couple of things and turn it to Dan. There absolutely are. We've kind of hinted at it. We haven't formalized anything yet. But as Bobby said, it's crucial for operations out there. There's frankly a much longer wait for power in New Mexico. So it's something we're looking at real hard.

Yes. Just to tack on to that. I mean we're looking at gas compression stations and in coordination with building those, putting power very close by to support that as well as the development that we have out there. With all the locations that we have to drill, there is an abundance of power that we're going to need. And we just want to secure our future here where we're not so sure that we're going to be able to be delivered that power by the local co-ops. So we're doing our best to plan for the contingency that we're just going to have to do this all ourselves.

[Operator Instructions] Your next question comes from the line of Noel Parks.

I just have a couple of things. And one is I wonder could you maybe pivot back a little bit to talking about the water handling opportunity? Just would like to get a little more sense of the moving parts of the different systems you're putting together.

This is Dan. I'll take that, Noel. Yes. So moving water out here is pretty integral to everything that we do. Everything that we produce is produced at a pretty high water cut and being able to handle that waste product is really what drives a lot of our OpEx on the production side of things. So we do a very good job of managing a very large pipeline system that goes into numerous saltwater disposal wells as well as third-party water handlers. Silverback had a system that is somewhat similar. It is going to be tied into our existing system, offering a little bit more robust overall system that will be able to dispose of even more water. So as far as being able to control our destiny when it comes to development pace and how we want to build out this infrastructure, water is definitely an integral part of that thought process.

I'll say one more thing you're probably watching, Noel, which is take a look at Harris and you recognize the importance of -- Harris is getting bought today so you recognize the importance of it.

Right, right. And I just wondered in general as you're looking at your activity plan going forward, anything notable you're seeing on the service cost side right now?

Yes, Noel. We've already gone out to a handful of our vendors now that we've increased our scale out there in New Mexico and trying to leverage our economies of scale there. And we believe that there's definitely an opportunity now that we've got more assets and opportunities to offer service companies. We've seen anywhere between 5% and 15% reductions in cost and believe that could go even higher as we get into the competitive bidding process.

15%. Okay. And just last thing sort of just background or housekeeping thing. On the Silverback acreage, is there anything significant on the horizon to do as far as P&A work since they do have legacy vertical production stuff I just wonder if there's much cleanup you have to do out there for that.

Yes. This is Dan. I'll take that one as well. There is always going to be some reclamation and P&A work when you're working in New Mexico when you're dealing with these old vertical wells. That said, we do our very best to maintain the economic status of these vertical wells and keep them producing as long as we can. As long as you've got a producing well, there's no need to reclaim or plug anything. So I'd say our first and foremost goal is to optimize production and make sure that everything is producing economically. And then we do what we have to do as required by the BLM or the NMOCD and the other governing bodies out there.