Good day, everyone and welcome to Panhandle Oil and Gas, Inc. Second Quarter 2020 Earnings Conference Call. Today's conference is being recorded. I would now like to turn the call over to Ralph D'Amico, Panhandle's Vice President and Chief Financial Officer. Please go ahead..

Thank you for joining us today to discuss our 2020 second quarter results. With me on the call today for prepared remarks are Chad Stephens, President and Chief Executive Officer; Freda Webb, VP of mineral operations. After the prepared remarks, we will open up the call for Q&A session.

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 be materially different 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 call are based upon information known to Panhandle.

As of the date and time 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 President and Chief Executive Officer..

Thanks, Ralph. And thanks to everyone on the line for participating in Panhandle's 2020 fiscal second quarter conference call. We sincerely appreciate your time and your continued interest in the Company.

Panhandle's Board of Directors, senior officers and employees would like to thank all the remarkable hardworking doctors, nurses and all frontline workers, who risk their lives every day to help us all during this unprecedented time.

The second quarter of 2020 reflected rewarding momentum despite continued commodity price headwinds in the execution of our mineral and royalty growth strategy.

Our royalty volumes increased by 41% quarter-over-quarter, as we fully integrated our STACK minerals acquisition closed in December of 2019 and saw increased new well activity on our minerals in the Bakken and the SCOOP. We also further reduced our debt outstanding by $3 million, roughly 8% during the second quarter.

As a result of lower commodity prices, the quarter does include the recording of a $29 million non-cash impairment charge.

This was associated with our dry gas Fayetteville Shale assets and our crude oil Eagle Ford assets, and was triggered by low commodity prices, basically $47 a barrel and $2.44 per MMBTU over the life of the asset, thus reducing their future discounted value compared to the carrying value on our books.

The commodity prices used reflected a $1.10 per Mcfe of drop in average Mcfe price from fiscal first quarter to second quarter. Two major disruptive events are impacting our industry.

One, the onset of the coronavirus pandemic and its resulting stay-at-home regulatory mandate established by policy heads around the world that has caused unprecedented commodity demand destruction for oil, gas and NGLs since late March and correlated GDP destruction to economies globally.

Second, the slow response and subsequent benign oil production cuts by OPEC Plus, which includes Russia, in April to attempt to mitigate the large supply demand disparity associated with the corona stay-at-home demand destruction that began in early March. The current macro crude oil dynamics have created a huge global oversupply.

This large oversupply of oil around the world has created a storage problem globally. As a result, we have seen recent announcements by numerous domestic U.S. operators of significant cuts in their production by up to as much as 20%.

These curtailments will be short-lived and production will return as the oversupply in storage is absorbed by the market. The demand destruction and oversupply have caused crude price just to drop by 70% since late February, though we have seen a recent modest price rebound. This drop in WTI has forced domestic U.S.

operators to cut 2020 CapEx budgets and to date, announced cuts have totaled $47 billion, thus a reduce in rig activity. Year-over-year rig count has dropped 645 or 60%. A majority of the drop in rigs is related to oil basins such as Permian, Eagle Ford and Bakken, as well as Mid-Continent.

With this demonstrable drop in new wells being permitted and or drilled, oil production will begin to exhibit a noticeable decline. Most wells in these named basins have a hyperbolic decline of approximately 40% and the associated gas along with it.

As such, we have a constructive view that natural gas supply demand fundamentals will reach equilibrium by year-end '20, which should support an improving gas price forward curve into 2021. We have seen an increase in gas prices recently with the front not up as much as 60% in calendar 2021, up approximately 20%.

The Black Swan events discussed above have caused a predictable flight to safety market reaction. Markets have virtually closed up, liquidity within the energy space is very tight, and the ability to transact has temporarily paused.

In response to this, our short-term focus will be on things we can control, reducing G&A, we recently had a headcount reduction of 20%, managing the balance sheet and utilizing free cash flow to continue to pay down debt, review and improve internal processes to be even more efficient and effective to achieve our goals.

As part of judicious cash management, the Board has voted at our recent May board meeting to reduce our quarterly dividend from $0.04 per share to $0.01 per share. This move will save approximately $2 million of cash annually and will be used toward repayment of debt.

I remain confident that Panhandle will successfully navigate this market downturn taking proactive steps, a prudent capital allocation that reflect market conditions and remain committed to our long-term strategy of NAV accretive growth via acquisitions.

At this point, I would like to turn the call over to Freda to provide quick operational overview and then to Ralph to discuss the financials..

Thank you, Chad, and hello to everyone on the line. Thank you for joining our call today. During the quarter ended March 31, we had 25 gross or 0.06 net wells convert from wells in progress to producing wells. This compares to 97 gross or 0.32 net wells during the quarter ended December 31, 2019.

At the end of the quarter, we had an additional 118 gross or 0.5 net wells in progress, essentially flat from the prior quarter. Also as of quarter end, we had 10 rigs present on Panhandle acreage and 41 within 2.5 miles compared to nine rigs on our acreage and 55 within 2.5 miles at December 31, 2019.

We anticipate a slowing of activity on our minerals, as the economy deals with COVID-19 and lower commodity prices. Leasing on our open minerals, including minerals that had previously been held back for working interest participation, slowed during the quarter as operators recalibrated their capital programs.

During the second fiscal quarter of 2020, we leased 36 net acres for 22,000 as compared to 754 net acres for 527,000 the prior quarter. As of March 31, 2020, mid-year proved reserves were 74.6 Bcfe as calculated by DeGolyer & MacNaughton, the Company's independent consulting petroleum engineering firm.

This was a 30% decrease compared to the 106.4 Bcfe of total proved reserves at September 30, 2019. Total proved developed reserves decreased 19% to 72.8 Bcfe as compared to September 30, 2019. This decrease is mostly attributable to low oil and gas prices rather than well performance.

Total proved undeveloped reserves decreased 15.3 Bcfe, principally due to reclassifying locations from proven undeveloped to probable undeveloped. This transfer is related to significant reduction in drilling activity in STACK, SCOOP, Arkoma Stack, and Bakken.

These locations are no longer scheduled to be drilled within the five years of when they were classified as proven and developed. This reclassification is not related to negative well performance nor incremental risk. With that, I'd like to turn the call over to Ralph, who will provide a review of the financials..

One, oil, NGL and natural gas revenues increased by $0.4 million or 5.1% during the second quarter of 2020 as compared to the first quarter of 2020. To further break that down, royalty production increased by about 41% as a result of our STACK acquisition in December of 2019 and new royalty wells coming online in our Bakken and SCOOP minerals.

Also, please note that about a third of that production increase that I just mentioned was a reversal of an under accrual from prior quarters. This production increase was offset by lower oil, natural gas and NGL prices of about 4.5% on an Mcfe basis during the quarter.

Two, we had a $4.1 million gain on our derivative contracts in the second quarter compared to $1.8 million loss in the prior quarter. Note that the realized portion of this gain was $0.6 million compared to [$1.9 million] gain the prior quarter.

As Freda mentioned, lease bonus revenue decreased by about $0.5 million to $22,000 in the second quarter as a result of operators resetting their capital budgets because of the current market. Four, we did not book a gain on sales in the second quarter, while we did book a $3.3 million gain during the first quarter.

Total expenses excluding impairment increased by $0.8 million or 9.9% in the second quarter of 2020 when compared to the first quarter. The Company's LOE increased by about $360,000 or 30% in the second quarter compared to the first. This was primarily due to higher one-time gas balancing charges.

Transportation, gathering and marketing expenses were generally flat on an absolute dollar basis, but lower by 10% on a per unit of production basis as the production increase we saw was generally associated with royalties, which carry lower of these fees. G&A decreased by approximately $48,000 or 2.2% in the second quarter compared to the first.

As Chad mentioned, we have implemented a G&A reduction effort, which included a headcount reduction in April in a renegotiation of most of our material contracts. We expect G&A to show a significant decrease in the coming quarters and could possibly achieve about $2 million in annual savings.

We also had a $29.5 million non-cash impairment, which again is primarily associated with lower commodity prices affecting producing properties in the Fayetteville and the Eagle Ford.

Adjusted EBITDA was $3.1 million in the second quarter of 2020 as compared to $7.2 million in the first quarter, again the prior quarter included a $3.3 million gain on sale. Adjusted pre-tax net loss was $634,000 in the second quarter of 2020 compared to a gain of $3.9 million in the first quarter, again which includes gain on sale.

We continue to deploy an active commodity hedging program, which extends into early calendar 2022 and you could see that schedule both in the press release and in the 10-Q Form which were filed today. Lastly, let me touch on debt. We had net debt of $31.5 million as of March 31, and as of May 4, that has further been reduced to $28.87 million.

With that, I'd like to turn the call over to Chad for some final remarks..

Thank you, Ralph. I would like to emphasize how committed we are to taking proactive and prudent actions given the current difficult market conditions, focusing on the balance sheet that includes hedging, reducing G&A, reducing the dividend, and allocating all free cash flow to reducing net debt.

These prudent allocations of capital and cash management processes will assist in maneuvering Panhandle through this downturn. We will also keep an eye on the landscape for growth opportunities and look forward to keeping you apprised of our progress in the coming quarters. This concludes the prepared remarks portion of the call.

Operator, let's please open up the queue for questions..

Operator:.

This concludes our call today. We certainly appreciate everybody joining us, and as I said earlier, we look forward to keeping all apprised of our progress in the coming quarters. Thank you..

And that does conclude today's teleconference. You may now disconnect your lines at this time and have a great day..