Good day everyone and welcome to PHX Minerals' First Fiscal Quarter 2021 Earnings Conference Call. Today's conference is being recorded. I would now like to turn the call over to Ralph D'Amico, PHX's Vice President, Chief Financial Officer. Please go ahead..

Thank you for joining us today to discuss our 2021 fiscal first quarter results. With me on the call today for prepared remarks are Chad Stephens, President and Chief Executive Officer; and Freda Webb, Vice President of Mineral Operations. After the prepared remarks, we will open up the call to a Q&A session.

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 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 conference call were based upon information known to PHX as of the date and time of this call.

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

Thanks Ralph and thanks to everyone on the line for participating in PHX's 2021 first fiscal quarter conference call. We sincerely appreciate your time and your continued interest in the company. I was very pleased with our performance during our first fiscal quarter of 2021.

Adjusted EBITDA excluding gains on sale was up by 37% relative to the prior quarter ended 9/30/2020 due to a combination of higher sales volumes and higher realized commodity prices, particularly in natural gas as the energy markets recover from the impact of COVID. Ralph and Freda will provide more detail on that later on the call.

We also continue to focus on reducing our debt in order to delever the company and increase our financial flexibility as we paid down $1.75 million of debt during the quarter and an additional $1 million since the quarter end to bring our total debt outstanding as of February 1 to $26 million.

As we stated in our last earnings call, when using NYMEX strip pricing, we estimate we would be able to repay our debt through operating free cash flow in just over three years.

As previously announced, we closed on the mineral acquisitions in Grady County, Oklahoma under Continental Springboard one asset and in Harrison, Panola and Nacogdoches Counties, Texas focusing on the Haynesville for a total of $5.5 million.

We also closed on two additional mineral acquisitions in San Augustine County, Texas that target Haynesville where Aethon owns the drilling lights and operates for a combined $1.75 million, bringing our total mineral acquisitions closed during the quarter to $7.25 million.

The mineral assets acquired include existing production, wells in the process of being brought to production and additional drilling locations. These acquisitions were funded with proceeds from our September 2020 equity offering.

As we move further into calendar year 2021, we continue to see improving commodity price and rig activity, which are leading to a steady increase in mineral acquisition opportunities. As I stated on our last earnings call, we will continue to focus on growing shareholder value by being a proactive consolidator in the mineral space.

I believe the work we've completed over the last year to streamline our operations, reduce G&A, reduce our overall debt and leverage profile and reposition our minerals portfolio has strategically positioned us to succeed going forward.

Lastly, I would like to announce that our longstanding Vice President of Mineral Operations, Freda Webb, will be retiring effective April 1. Freda has managed all aspects of the company's reservoir engineering, land, acquisition and divestiture evaluations during her 9.5 years at the company.

The board of directors, senior management and employees at PHX thank Freda for her dedication and hard work on behalf of the shareholders and wish her all the best. With Freda's retirement, we are fortunate to have two highly qualified individuals assume her duties and responsibilities.

Danielle Mezo has become a new Director of Engineering while Kenna Clapp has become our new Director of Land. Both Danielle and Kenna have extensive industry experience, and we are lucky to have them join the PHX team.

At this point, I'd 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. As Chad just mentioned, commodity prices have had a nice rebound since the lows of last summer. This has helped certain plays, including SCOOP and STACK exceed their economic threshold, which is allowing operators to allocate development capital to these plays.

In Oklahoma, the rig count is still down 50% compared to this time last year, but we have seen a recent upward trend with three rigs added over the last month and showing over a 100% increase in September 2020. During the quarter ended December 31, we had seven gross, 0.02 net wells convert from wells in progress to producing.

This compares to 76 gross, 0.18 net wells, during the quarter ended September 30. The majority of the wells brought online are in SCOOP region. At the end of the quarter, we had an additional 120 gross, 0.62 net wells in progress, up from 115 gross, 0.51 net, as reported at our prior earnings call.

The majority of the wells in progress are in SCOOP, STACK and Haynesville regions. Also, as of the quarter end, we had three rigs present on PHX acreage and 30 within 2.5 miles, compared to four rigs on our acreage and 32 within 2.5 miles reported last call.

Even though rig activity in and around PHX is slightly down on a quarter-over-quarter basis, we have seen an increase in our inventory of wells in progress, which is encouraging for volumes in the upcoming quarters.

Before I turn the call to Ralph, I'd like to say that I've enjoyed the oil and gas industry over 40 years, starting in 1977 with Cities Services Oil and Gas as a summer intern field roustabout. It has been a long, exciting, often very challenging career, it’s been filled with wonderful people and exceptional learning opportunities.

I greatly appreciate the opportunity at PHX to serve as Vice President of Mineral Operations and work with some of the finest, most professional people I have met. With that, I will turn the call to Ralph for a review of the financials..

natural gas, oil and NGL revenues increased to $6.4 million, or 28% on a sequential quarter basis. Total hydrocarbon production increased 2% as curtail volumes continue being brought back online and new wells were put on production, particularly in the SCOOP and the STACK regions.

Note that while working interest volumes increased by 5%, royalty volumes decreased by 4%. The decrease in royalty volume is primarily due to the acquisitions made during the quarter, not being fully incorporated into our results. We are diligently working to integrate the producing wells from the acquisitions we just completed.

Higher average prices received for natural gas, oil, and NGL in the quarter also had a large impact on sales. On an average Mcfe basis, prices increased by 26% from $2.47 to $3.10 this quarter. Also, we had a $254,000 loss in our derivative contracts in the first fiscal quarter, compared to a $1.5 million loss in the prior quarter.

Note that on a cash basis, we realized the gain of $613,000 this quarter, compared to a gain of $880,000 in the prior quarter. Lease bonus and rental revenues were down on a quarter-over-quarter basis to $1,400.

While we are disappointed with leasing activity on our open minerals, we continue to actively look for opportunities to lease these minerals to operators. It may be some time before leasing returns to normal, as operators focus on drilling acres they already have under lease.

Total expenses were flat on a quarter-over-quarter basis at approximately $6.9 million. The company's LOE increased approximately $35,000 or 4% in the current quarter as compared to the prior quarter. This is primarily due to higher working interest volumes. On a per Mcfe basis, LOE remained flat at $0.48.

Transportation, gathering and marketing increased 15% and production taxes increased 47% on a quarter-over-quarter basis, as a result of higher production and realized prices. G&A remained flat on a quarter-over-quarter basis at approximately $1.7 million.

It is important to note that our first fiscal quarter includes higher G&A expenses compared to other quarters as we work on various year-end items and prepare for our annual meeting. We continue to expect that fiscal 2021 G&A will be lower than 2020 G&A as we benefit from four full quarters of the cost control measures we have implemented.

Adjusted EBITDA, excluding gains on sales, was $2.8 million in the first fiscal quarter of 2021, compared to $2 million in the fourth quarter of 2020. We have continued to deploy an active commodity hedging program utilizing both swaps and costless collars, which extend out through the end of calendar 2022.

You can see a detailed up-to-date schedule in both the press release and the 10-Q. Finally, let me also touch on debt. We had total debt of $27 million as of December 31. That's a 6% reduction from the prior quarter. And also it's important to note that none of the debt was classified as short-term debt on our balance sheet.

As of February 1, debt has further been reduced to $26 million. Also as of February 1, we had $1.1 million in cash from the balance sheet after giving effect to acquisitions that closed during the quarter. Our debt to trailing 12-month EBITDA increased to 2.99 times from 2.14 times on September 30, 2020.

This increase occurred due to the last pre-COVID quarter, rolling off the calculation. Going forward, we will continue to focus on reducing debt as part of our strategy and expect that these leverage metrics will decrease in the coming quarters as debt is reduced and EBITDA normalizes to a post-COVID environment.

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

Thanks Ralph. We have done a good job of implementing a purposeful repositioning of the company, in this rather disrupted market to take advantage of the modest recovery in the energy sector. We are excited about the opportunities before us to drive shareholder value and we'll strive every day to build shareholder confidence.

We look forward to keeping apprise of our progress. This concludes the prepared remarks portion of the call. Operator, let's open up the queue for questions..

Certainly. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] And the first question is coming from Derrick Whitfield [Stifel]. Derrick, your line is live, please announce your affiliation and pose your question..

Good afternoon. Derrick Whitfield with Stifel, and congrats on your retirement, Freda, well-earned..

Thank you..

Regarding the acquisitions that were closed during the quarter, could you comment on how activity is progressing across those assets and how production would look on a fully consolidated basis at present?.

Yes, hey, Derrick, it's Ralph. Production, we're very excited about the production coming from those assets. We think based on the data that we're seeing on the wells that are online, they're doing well. They're exceeding in many cases, exceeding our projections.

I think this is – the booking to volumes is just a matter of doing your diligence and making sure that what we book is correct. And that usually takes a couple of months for us to do that. Make sure it's correct.

I think if you – we estimate that if you actually included all the volumes from the acquisitions that we think we are or we know we’re receiving, the royalty volumes instead of being down 4% probably would have been up in the magnitude of the low to mid single-digits..

Really Derrick, this is Chad to add to that. Once you close on these acquisitions, you have to get the transfer documents, the assignments, the mineral deeds to the operator.

And typically the operator takes, their land department can take anywhere from four to six weeks to incorporate the changes into their records, division orders, getting their pay decks changed.

And you try to push them as hard as you can, but obviously, everybody's cut back on staff and it takes a little while to get the interest changed over to a new pay status..

Understood, great color guys. Appreciate that.

And as a housekeeping oriented follow-up, we noticed a rather sizable income tax refund in the current asset on your balance sheet, could you speak to the nature of the tax refund and the expected timing?.

Sure. So we filed for a tax refund in June of last year, and that was AMT acceleration from the CARES Act that totaled $1.4 million. In terms of timing that’s – unfortunately, that's up to the government. We know they have their return and we're expecting that to come in at some point.

Also related to the CARES Act, we have a $2.2 million tax receivable from a – with the carry back that's allowed from 2020 for our net operating losses. So we think that at some point, there should be $3.6 million of tax refunds coming in from the federal government.

In terms of timing, that's a little bit of an unknown, but that's the best estimate I can give you..

That's very helpful guys and supportive of your debt reduction objectives as well. Thanks for your time..

Thanks..

Thanks Derrick..

Thank you. Once again, ladies and gentlemen, the floor remains open for questions. [Operator Instructions] And there were no other questions in queue at this time..

Okay, operator, thank you. We appreciate everybody being on the call and we look forward to our next quarterly call. Have a good day. Thank you..

Thank you, ladies and gentlemen, this does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation..