Good day everyone and welcome to Panhandle Oil and Gas Incorporated 2019 Fiscal Year End Earnings Call. Today's conference is being recorded. I would like to now turn the call over to Ralph D'Amico, Panhandle's Vice President, Investor Relations. Please go ahead..

Thank you for joining us today to discuss Panhandle's fiscal fourth quarter and year end 2019 results. With me on the call today for prepared remarks are Chad Stephens, Chief Executive Officer; Robb Winfield, Chief Financial Officer; and myself. 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, Vice President of Operations. 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 today is also posted on the Investor Relations website.

Before I turn the call over to Chad, 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 the actual results to differ materially from those expressed or implied on the call.

These risks are detailed in our most recent annual report on Form 10-K 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 of this call.

Panhandle assumes no obligation to update the information presented in today's call. With that, I'd like to turn the call over to Chad Stephens, Panhandle's Chief Executive Officer..

Thanks, Ralph, and thanks to everyone on the line for participating in Panhandle's 2019 fiscal year end conference call. We sincerely appreciate your time and your continued interest in the company.

First, I'd like to address Panhandle's change in strategic direction and the Board of Directors decision in September to change the leadership of Panhandle to implement this new strategy. Panhandle's longstanding history was to harvest value for its shareholders from its deep and broad existing inventory of minerals across the U.S.

As I will talk in more detail later, Panhandle is shifting to a pure play minerals and royalty strategy. This strategy includes proactively participating in the consolidation of the mineral sector to grow the company on a NAV accretive basis.

Prior to assuming my current role here at Panhandle, I was a Member of the Panhandle Board of Directors for the immediately preceding two years, surrendering my title as Lead Independent Director to assume the Interim CEO position.

At year-end 2018, I retired from Range Resources as Senior VP of Corporate Development, having been there for 30 years serving in various corporate and leadership positions. From day one here, the whole Panhandle team has been engaged and supportive of this change and of our new strategy.

I look forward to continuing to work with them to create shareholder value for you. I am very pleased with Panhandle's 2019 fiscal year performance. We've generated significant cash flow by executing our strategy of actively managing our mineral portfolio.

Our proactive leasing effort continues to yield meaningful organic royalty production growth biased toward oil production, which is supplemented by the lease bonuses we receive on the minerals. In absolute terms, royalty volumes have increased a little over 13% over the last four years.

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 deem to have lower risk from both a geologic and a development timing perspective. In addition, we have materially paid down our debt.

Our total return to shareholders for fiscal 2019 was $25.7 million through stock repurchases, dividends and debt reduction. This equates to an effective annualized yield of 11.3% for that period.

As we look to maximize the value of our portfolio moving forward, we have shifted away from working interest participation and moved back towards being a pure play mineral and royalty company as we see the mineral sector continuing to be a shining light in the energy space with active deal making opportunities.

Our strategy shift 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, be it by monetizing at the right time or producing out.

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. At this time, Panhandle does not anticipate investing its own capital in working interest participation.

As a result of the strategy shift, total year-over-year 2019 volumes decreased due to new 2018 wells with high working interest coming online in subsequently incurring natural hyperbolic declines off of initial flush production.

We have also incurred a non-cash impairment associated with our decision not to participate in working interest wells, which Robb will discuss later. Going forward, we will focus on growing royalty volumes and expect working interest volumes to continue to decline.

Further, we will continue to strive to build a balanced portfolio that can generate value across various pricing environments. This means internally applying rigorous, technical science to areas with high quality rock underneath, well-funded low-cost operators and bringing our hydrocarbon mix closer to 50-50 oil, gas mix over time.

Based on the opportunity set we see currently in the marketplace, we are confident this can be achieved. At this point, I would like to turn the call over to Ralph to provide quick operational overview..

Thanks, Chad. I'd like to start by saying that over the prior few quarters, we have made an effort to provide a more granular review of activity on our acreage position. As we shift to a mineral and royalty focused only, our goal is to continue to improve on how we provide this information to the market.

Panhandle continues to see strong activity on its mineral position. As of September 30, 2019, we had 120 gross wells in progress on our acreage with an additional 72 permits filed. A majority of the activity continues to be focused on the SCOOP/STACK, and the Bakken regions.

As of November 20, 2019, we had 20 rigs present on Panhandle’s acreage and 50 within 2.5 miles, again predominantly focused on SCOOP/STACK and the Bakken. We continue to actively lease our open minerals including minerals that had previously been held back for working interest participation.

During fiscal 2019, we leased 1,785 net acres for an average bonus of $855 and an average royalty of 21%. I’d like to also highlight that the SCOOP/STACK region, we have seen leases with bonus in excess of $1,500 an acre and royalty rate up to 25%. On the acquisition and divestiture fronts, we had a very active fiscal 2019.

We sold 890 mineral acres into Permian at an average price of over $21,000 per net acre. Since the end of the fiscal year, we have also sold an additional 530 net mineral acres in Eddy County, New Mexico for $3.4 million. Consistent with our strategy, these acres were predominantly undeveloped and had more development timing risk associated with them.

On the buy side, we purchased 408 net mineral acres for an average of $9,400 per net acre in the Bakken and 382 net mineral acres for an average of $4,958 in the SCOOP/STACK. Since the end of the fiscal year, we have also signed a PSA to purchase an additional 704 net mineral acres in the core of the STACK for $9.65 million.

Here again, I'd like to highlight that the minerals we are purchasing have existing cash flow and more visible line of sight for development, opportunities relative to the minerals that we have divested. Our deal pipeline continues to be strong.

And as Chad mentioned, we believe that Panhandle is well positioned to participate in the mineral sector consolidation. We continue to see opportunities in the Bakken and the SCOOP/STACK for growth and we plan on focusing on sections with active permitting and drilling activity, as those provide the best risk adjusted returns in our opinion.

With that, I'd like to turn the call over to Rob, who will provide a review of the financials..

Thanks, Ralph. First, I want to thank everyone for being on the call today. Before I get into the details, I'd like to share that company had a very good fiscal year and fourth quarter of 2019, especially in light of the tough pricing environment noted in the industry over the past year.

Outside of the non-cash impairment in the fourth quarter of 2019 that Chad alluded to earlier, the company had a very good year in regards to adjusted pre-tax net income and adjusted EBITDA as noted in our press release. I will now share with you some more detail regarding our financial results for the fiscal year ended September 30, 2019.

In 2019, Panhandle generated $66 million in revenues, this was a 47% increase compared to the $45 million from 2018. This was primarily due to the sale of predominantly undeveloped minerals in the Permian Basin in New Mexico and Texas for a $19 million gain during 2019.

Oil, NGL and natural gas revenues were down $9 million in 2019 primarily due to natural production decline on the significant working interest properties from our 2017 drilling program that came online during the early parts of 2018.

Production from these properties has experienced a natural hyperbolic decline, which we expected from their high initial rates. The company also had a gain on derivatives of $6.1 million in 2019 versus a loss on derivative contracts of $4.9 million in 2018.

Total expenses before the non-cash experiment in 2019 increased point 0.7% to $43.4 million from $43.1 million in the prior year. The company recorded a non-cash impairment of $76.8 million in the fourth quarter of 2019, which related predominantly to our Eagle Ford Shale assets.

The impairment on the Eagle Ford assets was caused by the company's strategic decision to cease participating with a working interest on the mineral and leasehold acreage going forward, and therefore, removing all of the working interest proved undeveloped reserves from the reserve reports.

The removal of the PUDs also eliminated approximately $85 million of capital expense obligations, net to Panhandle’s working interest ownership. The removal of the proved undeveloped reserves also caused the assets to fail the step one test for impairment as its undiscounted cash flows were not high enough to cover the book basis of the assets.

These assets were written down to their fair market value as required by GAAP at 9/30/2013. No impairment was recorded during 2018. Our DD&A was also negatively impacted in the fourth quarter of 2019 due to the company's strategic decision I noted just a moment ago.

The company's DD&A rate in the fourth quarter of 2019 temporarily spiked to $2.50 per Mcfe versus $1.45 per Mcfe in 2018 fourth quarter.

Based on the company’s strategic decision to focus on mineral ownership, the company removed all working interest proved undeveloped reserves from the year end 2019 reserve report, which caused the DD&A rate to increase, as those volumes could no longer be used in the calculation of DD&A on our leasehold positions.

This impact was predominantly noted on our Eagle Ford assets, the approximate increase from the previous quarter's DD&A was $1.5 million. Considering the impairment on Eagle Ford, noted before, we expect our DD&A going forward to be significantly lower.

The company saw a 20% increase in total cost per Mcfe excluding DD&A and impairment in 2019 relative to 2018. The 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 production tax rate increase in Oklahoma that was effective beginning the last quarter of 2018.

Our G&A expense also increased primarily due to a one-time severance of $670,000 upon the resignation of the company's former CEO, as well as non-recurring restricted stock and other compensation expense increases due to retirements and changes in personnel.

Approximately $800,000 of the increased G&A expenses are attributable to non-recurring expenses. Our adjusted pre-tax net income increased 186% to $16.7 million in 2019 from $5.8 million in 2018. Our adjusted EBITDA was $37.6 million in 2019, which was a 45% increase compared to the $26 million in 2018.

For 2019, both the adjusted pre-tax net income and the adjusted EBITDA included a $19 million gain on the sale of assets. The company generated excess free cash flow, enabling us to return $25.7 million to shareholders through dividend payments, stock repurchases and debt reduction.

We continue to deploy an active commodity hedging program, which extends out through 2020 and into early 2021. Currently, we have 120,000 barrels of oil hedged at a price of approximately $60 per barrel for calendar 2020.

We also have 1.4 Bcf of natural gas hedge at a price of $2.75 per Mcf for calendar 2020, which is meaningfully above the current natural gas price. We have continually been able to lock in favorable returns for our shareholders through this hedging program and plan to continue.

We are pleased that we continue to generate good sustainable cash flow given our ability to strategically produce revenue in multiple ways. Now, I will turn the call back to Chad to conclude. .

Thank you, Robb. I would like to reiterate how pleased we are with our 2019 results and would like to take this opportunity to thank all of the Panhandle employees for their tireless efforts in contributing to this success.

I'm excited about the new strategic direction we have set for the company and look forward to keeping you apprised of our progress in the coming year. This concludes the prepared remarks portion of the call. Operator, let's please open up the queue for questions..

[Operator Instructions]. And our first question comes from John White with ROTH Capital. Please go ahead..

So I understand the impairment related to the change in strategic direction on the actual write-down of the reserve volumes. I understand that.

But just to clarify, you will be -- will you be seeking -- will you be undertaking the marketing effort to sell the PUDs associated with your working interest properties?.

Yes, John. We are currently working on a couple of different opportunities. We’ve found one company that's particularly interested in non-op working interest development opportunities. So yes, we're working on that..

Yes, so that money could come back in..

Well..

A portion of that money could come back in..

A small portion. The market is not really robustly valuing drilling locations. So we have to just take what we can get. It's not a real robust market but we will try to get as much cash flow as we can from the drilling locations. .

Yes. And John, it's Ralph. I mean I think it's not binary whether we just sell it or don't sell it, right? I mean I think there's other options like creating it for an override or getting a spud fee from somebody to take over an AFE.

There's a variety -- we're exploring lots of different options that, that could create value from those undeveloped locations..

Well, congratulations on all the work you've done on the transition. I'm sure you have more to do. But look forward to staying on top of the story..

And our next question comes from Rich Howard with Boiling Point Resources. .

I wonder, has there been -- is there a tax realization effect with the impairment charge? Or do we need other transactions? And I have a couple of follow ups on that as well..

Yes, there's going to be a realization over time with our cost depletion. So we are going to get some tax advantage. If there would have been a sale and that would have been a loss, that would have all been available right away. But since there was no sale, that impairment, it'll just get cost depleted over time. But there will be a tax benefit of it..

And have we gone non-consent on any wells or is that not a option?.

Yes. The operator of the Eagle Ford assets, which is the major impact of the impairment has sent recently AFEs associated with drilling more wells on the asset and we have gone non-consent, and while we're working on looking for someone to take on those drilling obligations..

And what are the considerations on non-consent? I mean if that will pays out say 150%, would it not then become valuable to us?.

The non-consent penalty is 400%. .

That was 400%, not 150%..

Yes. Virtually, it would never come back in. .

Yes, well. We would hope it would but no. Okay. That sounds very reasonable. One more question, Chad.

So if we continue to generate $20 million of EBITDA, when would we -- I guess this is for Robb too, when would we begin to feel the impact of current taxes?.

I would say that it's going to be with our cost depletion and with our AMT carry forward. It's going to be probably three or four years before we pay a cash tax. That's a rough estimate Rich. But realistically unless commodity prices come up significantly, it's going to be a little bit of time before we have to pay a cash tax. .

And Rich that’s a good question because we did realize as we cease participating in working interest wells that we will lose the tax benefit of the IDCs. At the end of the day, we still think we can create more NAV going this direction. .

[Operator Instructions] And there appear to be no further questions from the phones. I'll turn it back over to management for any closing remarks..

We appreciate everyone participating on the call. And like I said before, look forward to keeping you up-to-date as we move through the year. Thanks again..

And that does conclude today's teleconference. We appreciate your participation. You may disconnect your lines and have a great day..