Greetings and welcome to the Panhandle Oil and Gas Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr.

Stephen Hooser, Investor Relations, Three Part Advisors. Please go ahead..

Thank you for joining us today to discuss our third quarter fiscal year 2019 financial results. With me on the call today for prepared remarks are Paul Blanchard, Chief Executive Officer, Robb Winfield, Chief Financial Officer. After prepared remarks, we will open up the call to a Q&A session.

During the Q&A session, we will also be joined by Freda Webb, VP of Operations, and Ralph D'Amico, VP of Business Development and Investor Relations. Please note that we are also webcasting this call on our investor relations website at panhandleoilandgas.com.

The earnings press release that was issued earlier is also posted on the investor relations website.

Before I turn the call over to management, I'd like to remind everyone that during today's call, including the Q&A session, we may make forward-looking statements regarding expected revenue earnings, future plans, opportunities, and other expectations of the company.

These estimates and plans and other forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied on this call.

These risks are detailed in our most recent annual report on Form 10-K and as such may be amended or supplemented by subsequent quarterly reports on Form 10-Q or other reports filed with the Securities and Exchange Commission.

The statements made during this conference call are based upon information known to Panhandle as of the date and time of this call. Panhandle assumes no obligation to update information presented in today's call. With that, I'd like to turn the call over to Paul Blanchard, Panhandle's President and Chief Executive Officer.

Paul?.

Thanks, Stephen and thanks to everyone on the line for participating in Panhandle's third quarter 2019 conference call. We sincerely appreciate your time and your continued interest in the company. 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, bias 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 a largely tax-deferred redeployment of those proceeds into mineral acreage we deemed to have lower risk from both a geologic and a development timing perspective.

In addition, we've materially paid down our debt and have improved our already ample liquidity while repurchasing $6.5 million of our stock year-to-date. We own 259,000 net mineral acres in ten states and eight different resource plays.

Of the 259,000 acres, 60,000 acres are producing, 14,000 are leased out but not yet producing, and 185,000 acres are open. Our strategy is to manage our assets as a portfolio with multiple levers to generate revenue and create value for our shareholders.

In order to fully understand our company, it's important to understand our portfolio management strategy.

There are five primary levers we have to manage and optimize our portfolio -- number one, generating royalty revenue from our producing mineral acreage, number two, generating lease bonus revenue from our unleased mineral leverage, number three, bringing forward cash by selling mineral acreage we believe is priced above its risked present value, number four, buying additional mineral rights we believe are priced below their risked present value, and number five, participating as a non-operating working interest owner.

As we look to maximize the value of our portfolio moving forward, we are strategically shifting away from working interest participation and moving back toward the original risks of the company as a pure playing mineral and royalty company.

This process will take some time as we currently own material, working interest production, and non-mineral related working interest participation rights, and we intend to maximize the value of those assets.

However, our focus moving forward is to create value through generating royalty revenue, extracting maximum lease bonuses, and optimizing our mineral holdings through thoughtful acquisitions and divestitures.

We've made significant progress to date on this strategy shift as our mix of royalty revenue relative to working interest revenue is the highest it has been since 2011 and we expect this trend to continue. At this point, I would like to provide a quick operational overview and then I'll turn the call over to Rob to assess the financials.

It's important to understand that since we are a non-operator and do not control the timing of drilling on our properties, it's difficult to model our business on a quarter-by-quarter basis. Average daily production for the third quarter of 2019 increased 7% when compared to the second quarter of 2019.

The majority of this increase is oil from the seven new Eagle Ford wells that began producing at the end of the second quarter. The production from these wells continues to be in line with our pre-drilling expectations.

There are ten rigs currently drilling royalty interest wells on our mineral acreage with six in SCOOP and STACK, two others in Oklahoma, and two in the Bakken. There are 71 additional wells drilling within two and one half miles of Panhandle acreage.

Also, we've not elected to participate in any working interest wells in the first three quarters of 2019. Our royalty sales revenues increased 12% during that nine-month period as compared to the year ago period.

This increase does not fully reflect the impact of our recent Bakken acquisition and our working interest revenues decreased 24% during that nine-month period versus the year ago period. With that, I'll turn the call over to Robb to go over the financials and then I'll close the prepared remarks with comments on our strategy, progress, and outlook..

Thanks, Paul. First, I want to thank everyone for being on our call today. I will share with you some more details regarding our financial results for the third quarter ended June 30th, 2019. Then I'll turn the call back over to Paul to make some final comments on the progress of our strategic plan.

For our third quarter ended June 30th, 2019, total revenues were $16.3 million, which is a 114% increase from the $7.6 million in the second quarter of 2019.

The change was caused by the following -- one, the company sold mineral assets in the third quarter of 2019 for a gain on sale of $4 million and we did not have any asset sales in the second quarter of 2019.

Two, we had $2.3 million of gain on our derivative contracts in the third quarter of 2019 and that turned from a loss of $1.8 million that we experienced in the second quarter of 2019.

Three, oil, NGL, and natural gas revenues increased 0.6 million during the third quarter of 2019 due to production increases from all our products, possibly offset by a slight decrease on the product prices in the third quarter.

Total expenses increased $746,000 in the third quarter of 2019 compared to the second quarter of 2019, most of which was driven by higher production, partially offset by decreased G&A as second quarter had some non-recurring compensation expenses.

Adjusted EBITDA was $8.9 million in the third quarter of 2019 as compared to $4 million in the second quarter of 2019. Given the nature of our business and our ability to generate significant revenues through leasing and strategic asset sales, we can experience large changes in our statement of operation when comparing quarterly information.

Therefore, we believe that year-to-date comparisons can be more useful when assessing the company's performance during any given year. Year to date 2019, Panhandle generated $50 million in revenue. This is a 50% increase compared to the $33 million from the prior year-to- date in 2018.

This was primarily due to the sale of minerals in Lea and Eddy Counties in New Mexico and minerals in Martin County, Texas for a $13.1 million gain during 2019.

Royal NGL and natural gas revenues were down $5.1 million in 2019 year-to-date, mainly due to natural gas production declines on significant working interest properties from our 2017 drilling program that came online during the early parts of 2018. Production from these properties has since fallen from their high initial production rates.

The company also had a gain on derivative contracts of $5 million in year-to-date 2019 versus a loss on derivative contracts of $4 million in 2018. Total expenses year-to-date decreased 6.8% to $30.1 million from $32.3 million in the prior year. The company saw an 11% increase in the total cost per MCFE in year-to-date 2019 relative to 2018.

This increase was primarily driven by lower working interest production as noted previously. Interest expense and production taxes were also influenced, respectively, by higher bank interest rates and the production tax rate increase in Oklahoma during the 2019 period.

G&A expenses also increased mainly due to non-recurring restricted stock and other compensation expenses. Adjusted pre-tax net income increased 183% to $14 million in year-to-date 2019 from $5 million in 2018. Our adjusted EBITDA was $27.4 million year-to-date in 2019, which was an increase compared to $28.4 million in 2018.

For 2019, both the adjusted pre-tax net income and the adjusted EBITDA include a $13.1 million gain on the sale of assets. The company generated excess free cash flow, enabling us to return $8.5 million to shareholders through dividend payment and stock repurchases, while also paying down $9.5 million of debt from our 2018 year end.

Subsequent to June 30th, 2019, the company sold an additional 383 net mineral and royalty acres in the Permian for $5 million. Our debt net of cash at June 30th, 2019 was approximately $40 million and currently, our debt net of cash is approximately $31.5 million.

We continue to deploy an active commodity hedging program which extends out through calendar 2020. Currently, we have 100,000 barrels of oil hedged to the price of approximately $60 per barrel for calendar 2019 and $120,000 barrels of oil at a price of approximately $60 per barrel for calendar 2020.

We had two bcf of natural gas hedge at a price of $2.98 per MCF for calendar 2019 and $1.3 bcf of natural gas hedged at a price of $2.81 per MCF for calendar 2020, which I may note is meaningful above current natural gas prices.

We are pleased that we continue to generate good sustainable cash flow given our ability to strategically produce revenue in various ways. With that, I will turn it back to Paul..

Thank you, Robb. As I discussed earlier, there are five primary leverage we have to manage and optimize our portfolio. I would like to provide an update on our execution of each of these areas for the first three quarters of 2019. Number one, we generated $11 million in royalty revenue, a 12% increase from the same period in 2018.

Number two, we generated $967,000 in lease bonus proceeds versus $1.1 million in the prior year period. We are actively leasing our unleased minerals in STACK and SCOOP. The result of this effort will be reflected in upcoming quarters.

Number three, we generated $13.1 million from the sale of 372 net mineral acres in the Permian Basin at an average of $35,000 per acre. Since the end of the third quarter, we have sold an additional 383 net mineral and royalty acres in the Permian Basin for $5 million.

Number four, we purchased 687 net mineral acres in the cores of the Bakken play in North Dakota and the STACK play in Oklahoma for $5.1 million or an average of $7,500 per acre.

And number five, we invested $3.3 million in working interest participation, principally for the seven Eagle Ford wells, which began drilling last year and started producing at the end of March.

Our unique mineral holdings, including large positions of both least and open minerals in key areas provide us with the opportunity to continue to generate significant cash flow moving forward.

Current initiatives include the marketing of additional high value but largely undeveloped Permian Basin minerals and a proactive marketing process to lease out Panhandle's remaining unleased mineral acreage in the STACK and SCOOP plays.

This leasing effort is expected to generate immediate cash flow from bonus payments and future cash flows 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 oil play in Texas. With that, let me open the call to questions.

Operator, please instruct our listeners on how to queue up..

Thank you. [Operator Instructions] Your first question comes from Joe Allman with Baird. Please go ahead..

Thank you. Good afternoon, everybody..

Good afternoon, Joe..

Paul, I think you said there are 71, I think you said wells within 2.5 miles of your royalty acreage.

So I just want to clarify -- was that wells or was that rigs? Then my question really is what is your visibility on getting operators to actually move over into your acreage?.

So, it is 71 rigs, Joe. Of course, being a royalty owner, the visibility of operators moving directly to our locations is somewhat limited. We have certainly indications of what operators are doing in specific areas.

But precisely moving the entire locations is generally going to be within a few months in advance of the rigs actually moving in through whatever regulatory processes they're going through prior to moving the rigs to our locations..

Okay.

In your press release, when you talk about marketing efforts, are there any marketing efforts at Panhandle to try to get those operators who kind of to be aware that you've got acreage a mile away or half-mile away and you're welcome to drill on our acreage? Is there anything going on internally that you do to market your acreage?.

Well, like in the STACK and SCOOP, for instance, we've taken our unleased mineral acreage out to in excess of 30 different operators and players in the area to lease that acreage from us. So, certainly, the active operators are looking at that.

In fact, we'd gotten offers and are negotiating with some active operators in STACK and SCOOP to lease that acreage with the intent in doing it..

Okay. That's helpful.

And then, in terms of the recent acquisitions you made, could you just talk about your analysis you do internally to make sure that those acquisitions are accretive to value?.

Sure. We're looking at a detailed engineering, geologic and land analysis on all of those, but we're looking at rate of return analysis that would be accretive to the properties – to our existing properties and bidding based on rate of return analysis for the developed plus the undeveloped properties.

And obviously, at the times that we're successful, we feel very comfortable that these are accretive. We're fairly conservative in those analyses and take a very disciplined approach to it..

Got you. And I guess, within your analysis there has to be some assumption about when the operator is going to drill on that royalty acreage.

And so, what assumptions do you make and what visibility do you have on that honing?.

I think depending on where you're acquiring -- and we're acquiring in places that I don't think have a lot of geologic risk associated with them. So, the primary risks that we're taking, I think, are the product pricing risk and the drilling timing risk.

And so, we'll look at the operator activity, permits, their history of drilling relative to their permits, any other activity in terms of buildout of any other infrastructure suggesting drilling timing.

Of course, we're looking at all of the presentations from the operators in terms of their projected activity and making our estimates of drilling timing based on that and frankly, trying to apply some conservativism to that scheduling process to help ensure that we deliver those rates of return that we're projecting..

That's very helpful.

And then, lastly, similar question, but on the sell side -- when you sell royalty acreage, what kind of analysis do you do internally to make the decision that it's better to sell than hold on to it?.

We're doing the same analysis.

Really, for us, whether it's participating in a working interest in a well, which like we said, we haven't done that at all in fiscal 2019 or whether it's leasing out our minerals or divestitures or acquisitions, we're going through pretty much the exact same economic analyses and risk analysis along with the geologic analysis of the area to evaluate all those various risks and determine whether the action to sell would be appropriate..

Okay. That's great. That's all very helpful. Thank you, guys..

Okay..

Thank you. [Operator Instructions] Your next question comes from John White with Roth Capital. Please go ahead..

Good afternoon and congratulations on a nice quarter..

Thanks, John..

The sequential production growth looks real good, the Eagle Ford wells, we've been waiting a while and they finally came through.

I on page six, referring again to the rig activity table, can you go over the difference between wells in progress and rigs present?.

So, John, wells in progress would be wells that began drilling within the last two years but are not yet producing. The rigs in progress or the rigs present on PHX acreage are exactly that. They're rigs that are current drilling. The actual drilling rig is on location right now..

Okay. So we've got some drills but aren't completed in the wells in progress..

That's right. Yes. Actually, a fairly substantial list there of wells that have at least begun drilling but have not produced yet..

Nice news on the stock buybacks during the quarter and the first six months. And you reference sale of minerals on page five and on page seven.

That's the same bunch of minerals in Martin County for $24,000 an acre?.

I'm trying to figure out exactly where you are, John. But yes, we've sold the minerals in Martin County this quarter and had some subsequent sale of Martin County minerals after the end of the quarter.

So that's the two references we make are the Martin County that we sold during the quarter and since the quarter, its Reagan and Upton, Ward, and Reeves. So, Martin was closed during the quarter and those are the county since..

Okay. Thanks. It looks like you're selling acreage on a per acre basis for a lot more than you're buying on a per acre basis, so, good news..

Yes..

All right. Thanks. I'll turn it back to you..

Thank you. Your next question comes from John Dasho from Pinnacle Capital Management. Please go ahead..

Hi, just a quick question to make sure I understand -- the gains or losses on derivative contracts, are those realized or unrealized or both?.

They're both..

Okay.

Where is it broken out as to what is realized versus unrealized?.

So, in the queue, let me find the page real quick, right around the section where we detail out all our derivative questions..

Okay..

So, page 12 of the Q tells the company's fair value and then it says net cash paid related to derivative contracts settled during the nine-month period. So right now, we've paid out $1,990,402. And then it has a comparison to last year. So right now, we're in a net sell position of $1 million out the door, $1 million lost.

And so, your unrealized is going to be on the other side of that. That takes it to that two point – I think its $2.8 million number..

Okay. I don't have the Q in front of me, but its detailed in the Q..

Yes. It is. Page 12 of the Q..

John, I'll just mention. This is Paul. That the bulk of that loss that we've already paid out was in December 2018 when gas prices jumped extraordinarily that month, so that's the bulk of the loss. We've been net receipts for the last few months and of course, have that big unrealized gain out there also..

Thanks. That's helpful..

Thank you. That's all the time we have for questions today. I would like to turn the call back over to Mr. Paul Blanchard for closing remarks..

Thank you very much. I would just like to thank everybody for attending Panhandle's third quarter conference call and look forward to your attendance at our next conference call. Thank you very much. Good bye..