Good day everyone and welcome to PHX Minerals' Second 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 second quarter results. With me on the call today for prepared remarks are Chad Stephens, President and Chief Executive Officer; and Carl Vandervoort, Director of Geology. After 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 filed on Form 10-Q, or other reports filed with the Securities and Exchange Commission. The statements made during the call are based upon information known to PHX as of the date and time of the call. PHX 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, PHX's Chief Executive Officer..

Thanks Ralph and thanks to everyone on the line for participating in our PHX's 2021 fiscal second quarter call. We sincerely appreciate your time and your continued interest in the company.

When you consider the most important aspects of our business, PHX had a very successful fiscal second quarter, which included a modest increase in total production volume, a material increase in EBITDA and operating cash flow, and the continued progress on our strategy execution with the completion of another significant mineral acquisition after quarter close.

Also, the company's financial strength and credit profile has clearly improved over the last four quarters with a further reduction in debt.

For the first – for the fiscal second quarter of 2021, I am pleased to report adjusted EBITDA, excluding gains on sale increased 26% to 3.4 million compared to the prior sequential quarter, and operating cash flow before changes in working capital totaled 3.2 million or 23% improvement over the prior sequential quarter.

Both EBITDA and cash flow have improved year-over-year by over two and a half times. Ralph will provide more detail behind the following numbers in a few moments.

However, I also would like to emphasize that for the first time in 10 years, the company's royalty volumes exceeded our working interest volumes, which highlights the progress we are making in our mineral growth strategy.

We continue to focus on reducing our debt, which we paid down by 3.5 million during the quarter, and an additional 1.75 million since the quarter end. This brings our total debt outstanding as of April 30, to 21.75 million and represents a 28% reduction over the last year.

We now project that our trailing 12-month debt to EBITDA will be approximately one times by calendar year end 2021. Having this near-term line of sight to a cleaner capital structure will provide us the financial flexibility to allocate an increasing amount of our future free cash flow to our mineral growth strategy and driving shareholder value.

On this past Friday, April 30, PHX closed on the previously announced acquisition of minerals in the Southern SCOOP located primarily in Stephens and Carter counties, Oklahoma, and underneath Continental's self-designated SpringBoard III asset.

The company completed the acquisition for an aggregate adjusted purchase price of approximately 10.9 million comprised of approximately 8.5 million in cash and 1.2 million shares of the company's common stock paid to the seller.

The cash portion of this closing amount was funded with proceeds raised from our recent common equity offering, which closed week before last.

With commodity prices improving and rig activity modestly increasing in our areas of focus our improving balance sheet and free cash flow provides the company a broader platform with which to execute its mineral acquisition strategy and grow shareholder value.

Year-to-date, oil prices improved by 50% to a recent high of 65, natural gas is also beginning to show improved strength on macro supply and demand fundamentals. Year-over-year, the rig activity in two of our core focus areas improved with the rig count in Oklahoma, increasing by 50% and in the Haynesville by 100%.

We believe all of this positive news is setting up 2021 to be a positive inflection point for PHX, as we continue to gain momentum on executing on our strategy. At this point, I would like to turn the call over to Carl to provide quick operational overview and then to Ralph to discuss the financials..

Thanks Chad and good afternoon to everybody participating on the call. Looking at the gross rig counts in our priority basins from the end of Q1 to the end of Q2, we've seen a 29% increase from 14 to 18 in the Anadarko basin and a 7% increase from 30 to 32 in the Haynesville.

Seeing that our last few acquisitions have been in those basins, we feel very optimistic about those numbers indicating that one, operators are achieving strong and repeatable results in excess of their economic hurdles and two, they're going to continue to allocate capital to those basins.

In addition to the increase in active rigs within our priority basins, the number of gross permits approved has also increased from 170 in the first quarter 2021 to 189 approved in the second quarter of 2021.

Shifting our focus towards activity on PHX ownership and updated well counts by reserve categories for the second quarter ending March 31, 2021. We converted 37 gross and 0.16 net wells in progress to producing wells.

In contrast to the first quarter, where we only converted seven gross and 0.02 net wells to producing well ResCaps, that's an impactful increase in net whips converted to producers relative to the first quarter. The majority of the new wells brought online are located in the STACK with 19, followed by the Haynesville with 12.

As far as wells in progress at the end of the second quarter, we had an additional 80 gross and 0.4 for net wells in progress, which is down from 120 gross 0.6 to net as reported on our prior earnings call.

The majority of the wells in progress at the end of the second quarter are located in the SCOOP with 42, followed by the Haynesville and the STACK with 13 each.

The number of wells in progress will naturally ebb and flow quarter-over-quarter, as most of our wells are – as most of our wells in progress are within densities drilling and spacing units, meaning that the time to convert four to six wells from drilling to completing to PDP will span multiple quarters.

Looking at overall second quarter rig activity, we had five rigs presence on PHX acreage, which is an increase of two rigs from the three we reported in the first quarter.

Meanwhile, we had 27 rigs within two and a half miles of PHX ownership in the second quarter, which is three less than the 30 rigs within two and a half miles of our ownership that we reported in the first quarter earnings of 2021. So thus far in 2021, rig activity on PHX assets has nearly doubled quarter-over-quarter.

And we've maintained a meaningful inventory of wells in progress with higher net ownership interests, which is obviously encouraging for volumes in the upcoming quarters. In closing, I would like to comment on the messaging that we're seeing from the active operators that control the pace of development on PHX ownership within our core areas.

One, Devon has returned to active drilling in the STACK for the first time since 2019. Currently, they're drilling the first four wells on PHX ownership. Two, for the remainder of 2021, Continental will drill 85% of the remaining wells in Oklahoma within the condensate weighted areas of their SpringBoard project areas.

And three, the operational efficiencies and the resulting well performance that we're seeing in the East Texas, Haynesville are promising. That's where we stand operationally at the end of the second quarter and with that, I will hand off to Ralph for a review of the financials..

Thanks Carl. For fiscal second quarter ended March 31, natural gas, oil and NGL revenues increased 30% on a sequential quarter basis to a total of 8.3 million. Total hydrocarbon production increased 11% on a sequential quarter basis, as royalty volumes benefited from new wells being brought online.

New well volumes associated with our royalty acquisitions at the end of calendar 2020 accounted for approximately 35% of royalty production and 20% of total production this quarter, which we believe validates our acquisition and hydrating strategy.

Recall last quarter, I mentioned that we were still in the process of integrating the wells from our 2020 acquisitions. I am happy to report that we have completed the integration for the East Texas Haynesville assets, which are included in this quarter's results.

Since the end of the quarter, we have also been notified by most of the operators of wells in our 2020 Grady county acquisition that we should be in full pay status effective this month. Average prices received for natural gas, oil and NGLs in the quarter were up 17% on an Mcfe basis compared to the prior sequential quarter to $3.6 per Mcfe.

Please note that these prices do not reflect the higher natural gas prices realized by some operators in the February time. As a mineral owner, there is a lag in the payment we receive from operators. We expect that any increased price realization will be reflected in the next quarter ended June 30.

We had a $2.3 million loss on derivatives contracts for the second quarter ended March 31 compared to a loss of $254,000 the prior sequential quarter. Note that on a cash basis we realized the loss of 297,000 compared to a gain of 613,000.

The loss primarily attributable to crude oil hedges we put in place last summer during COVID as part of the credit facility redetermination process. Lease bonus and rental revenues were up on a sequential quarter basis to $58,000.

We continue to actively look for opportunities to lease open acres to operators and we certainly had more success this quarter compared to the prior. Total expenses were down 1% on a sequential quarter-over-quarter basis to approximately 6.8 million.

The company's LOE increased approximately $26,000 or 3% in the current quarter compared to the prior sequential quarter. On a per Mcfe basis for working interest only volumes, LOE increased from $0.75 to $0.96 per Mcfe as wells were taken offline for workovers during the quarter.

Total transportation, gathering and marketing increased 3% as volumes increased, but on a per Mcfe basis it actually decreased 8% to $0.57 per Mcfe. Production taxes increased 61% on a sequential quarter-over-quarter bases is a result of higher production and realized prices.

Also note that the realized tax rate as a percentage of sales increased from 4.3% to 5.3% as a higher component of total sales came from Texas, which has a higher tax rate. Total G&A increased 19% to 2 million and cash G&A increased 18% to 1.8 million on a sequential quarter-over-quarter basis.

The increase is primarily due to higher costs associated with our annual shareholder meeting, and onetime costs associated with the retirement of one employee. Next quarter, we will not have either of those costs.

Adjusted EBITDA, excluding gains on sale, was 3.4 million in fiscal second quarter as compared to 2.7 million in the fiscal first quarter, an increase of 26% as Chad mentioned. We have continued to deploy an active commodity hedging program utilizing both swaps and costless collars, which extends out through early calendar 2023.

You can see a detailed up to date schedule in the press release and the 10-Q. Finally, let me also touch on our debt. We had total debt of 23.5 million as of March 31, a 13% reduction from the prior sequential quarter. As of April 30, we have further reduced debt to 21.75 million.

Also, as of April 30, we had 4.8 million in cash on the balance sheet, after giving effect to the acquisitions closed since the quarter end. Note that 3.2 million of that total was raised in the equity offering since the quarter end, and will be used to help fund future acquisitions.

Our debt the trailing 12-month EBITDA decreased to 2.34 times from 2.99 times on December 31, 2020. As Chad mentioned, we expect this metric to decrease substantially in the next quarter as the June 30, 2020 quarter at the height of COVID drops off the calculations. And we continue to reduce our total debt.

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

Thanks Ralph. Our positive second quarter results reflect a few important highlights. One, improving volumes, EBITDA from operating cash flow increased substantially as we mentioned earlier, and debt continues to be reduced.

We are now in a clear path to allocating our future free cash flow towards our stated growth strategy and returning capital to our shareholders. We look forward to keeping you updated on our progress. Thank you. This concludes the prepared remarks portion of the call. Operator, let's please open up the queue for questions..

Thank you. Ladies and gentlemen, the floor is now open for questions. [Operator Instructions] Our first question today is coming from Derek Whitfield. Please note your affiliation then pose your question..

Good afternoon all and congrats on your strong quarter and update. Derrick Whitfield with Stifel.

With my first question, I wanted to start actually where you just ended Chad, and specifically for yourself or Ralph, I wanted to focus on your long-term return of capital vision, and ask how you guys envision balancing your growth versus return of capital priorities over the next few years?.

That's probably a two-pronged answer. I'm going to answer part of it and let Ralph, answer the other part of it. As we've improved our balance sheet, paid down our debt, we're clearly on path to being able to allocate most, if not all of our free cash flow to our main strategy growing the company through mineral acquisitions.

And so we're being able to expand to kind of the full broad foundation of the strategy, which is a three-legged stool. We're going to be able to implement a ground game with some of this free cash flow, which we have not been able to hence, since we're allocating all of our capital paying down our debt.

So we'll have free cash flow to implement a ground game. We're going to continue to look for these mid-tier sized deals similar to what we've closed on recently $10 million to $20 million type deals. I think that's our bread and butter. There's not right now – we don't see a whole lot of competition. We're able to negotiate one on one with the sellers.

They're not competitive bid processes. So both those – right now where we are, those mid-tier size deals are really going to have success. And then we are going to look for a larger, more transformative deal making sure that any larger deal would definitely be NAV accretive, but that it would be transformative.

And those deals are more competitive, harder to complete, more issues, governance issues, that sort of thing. But we're constantly scouring landscape for a deal like that.

But as we do have success in our cash flow bills on these specialties, mid-tier size deals, we're going to have more free cash flow either to continue to apply – allocate that capital to deals or I'm going to let Ralph kind of speak to what else we might do with the free cash flow..

Yeah. Derek, we've talked before about – on prior earnings calls about returning additional capital to shareholders, and obviously that subject to the board approving it, right. But – and we've said that it's a process, not an event, right. Our plan is to over time increase dividend distributions to shareholders.

In terms of when and how much again, that's up to the board. But certainly, it's something that we think about every day, in terms of how to optimize given – growing the business is number one priority, right, but realizing that we also have the ability to increase the dividend over time.

So I think the answer is stay tuned and over the coming quarters, right. We'll continue to have these discussions internally. And we'll put out some additional information as we make these decisions..

Great, that makes sense. And then for my follow up, I wanted to ask a question on your working interest volumes. With the improvement we've experienced in both the commodity and capital markets over the last few months, there appears to be an increasing interest in PDP, heavy assets and the A&D market.

A, is that a fair assessment and B, does this environment in your recent success in mineral acquisitions, open up working interest volumes as a divestiture opportunity for you?.

Yeah, so that's a very – it's a good question. Even Ralph and I talk about that a lot. So really, at the highest level, when you think about that future of the company is not in our existing asset base.

And so that – our current asset base, excluding the minerals that we've acquired recently, the existing asset base is going to be a tool that will use one of the many tools we have, they will use to redeploy proceeds as we divest of wells, working interest wells, especially redeploy those proceeds into acquiring minerals.

So that – when we talk about hydrating the asset base, that's exactly what we're going to do, but it's most likely where we are today. It's not going to be an event. It's going to be a process where we sell five wells here. 10 wells there, 20 wells. They're scattered.

They're over – across the entire state of Oklahoma, for the most part, those are legacy wells. And it'll be more of a process where we peel off a few wells at a time. But we are going to work on that. And it's a project I'm actually internally working on as we speak.

So if you think about – when you look at our IR slide deck, we talked about 7000 wells, half of those are working interest wellbores as 3500 wellbores, that we need to figure out what to do with, try to try to maximize the value and redeploy as we sell them, redeploy those proceeds. So it's an – it's going to be an ongoing process.

Maybe someday, when we grow up and get real big, we might be able to do an event and sell a whole bunch of them at once. But I envision just doing more of a process and peeling off a few at a time..

Yeah, and a good opportunity for this Derek is as operators propose – send us AFPs for workovers, right, we take the opportunity to basically sell that working interest wellbore back to the operator and we've had some pretty good success with that. Again, it's a few wells at a time and they're not material numbers, right.

But over time, we think they will – it will add up and it will become – you'll see a drastic change..

Great detail. Thanks for your time and response, guys..

Thanks..

Thanks Derek..

Our next question today is coming from Subash Chandra. Please note your affiliation then pose your question..

Yeah, thanks, guys. Northland. So the 10 to – it is the sweet spot there $10 million to $20 million acquisitions.

Will you be mainly sort of motivated by that number? Be open minded with where those packages are? Or will you first prioritize regionally and then look for dollar amounts in that sweet spot?.

Yeah, you can certainly get distracted if you look at every deal that comes along. So there at the end you really stay at the – the real genesis of any acquisition we do is to be in the three areas of focus that we've kind of defined for ourselves.

One is in the SCOOP STACK area, we know the rock, we know the geology, we know the operators, East Texas, Haynesville. We've already done several deals there. We're going to – we're looking at several more right now. We'll do more deals in East Texas. And we're actually trying to get our arms around a couple of deals in the Marcellus right now.

As you know my background, 30 years of range resources in the Marcellus, I know it well. And I'd love to try to get some deals and get some kind of a nucleus core of assets up there and start expanding our presence up there. So it's those three areas that we would focus on.

And then in the deal size, I just – the perfect size for us is that 10 to 20, just in terms of our cash flow, our balance sheet, kind of what we can afford. And as we grow and we get more cash flow, that 10 to 20 will expand to 15 to 30 or 20 to 40. So it'll expand.

And then the larger deals, as I said, are a little bit more competitive, you're seeing some of these larger firms doing $100 million plus deals that are going to be looking for those type packages in these same areas. So they're going to be a little bit more competitive.

But we'll always keep our ear to the ground and look for that right deal in the right moment to strike on a bigger deal..

Got it. And then I guess your exposure, can you just remind us to Marathon I think it's not imminent, but it will be in the next several quarters. They'll bring activity back to STACK I suppose.

Do you have a lot of exposure there to them?.

Well, so Marathon they have somewhere around 300,000 net leasehold acres across the STACK going south and east through the SCOOP where we just announced our most recent acquisition.

So they have some leasehold down in – right in the area where we just acquired the stronghold assets and it's our understanding there's a few permits floating around out there that Marathon has filed at the Corporation Commission. They're moving back up into Grady County, where we closed on some minerals here last fall.

They have a big core position there and they actually have a JV with Continental developing – Continental's developing the Woodford shale and Marathon's developing the Sycamore, which is just above the Woodford. So they're underneath the same sections, Continental developing one zone, Marathon developing the other zone. So it's a focus for them.

And I think, obviously with some of the limitations coming in the Bakken especially if dapples shut in, Marathon's got to figure out where they're going to allocate their capital, where they're going to grow. So this is – given the right to return the well costs and the well performance, we see marathon coming back.

How meaningful I don't know, but we see them coming back in this area in the Mid-Continental..

Thanks guys and congrats..

Thanks..

Thank you. We have no further questions in queue at this time.

Do you have any closing comments you'd like to finish with?.

I do not. Again, we were pleased with our quarter and we look forward to keeping you updated in the quarters to come. Thanks for your attention. Have a good day..

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation. Transcript Provided by.