Good day everyone and welcome to PHX Minerals' Fiscal Third 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 third quarter results. With me on the call today for prepared remarks are; Chad Stephens, President and Chief Executive Officer; and Danielle Mezo, Director of Engineering. 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 each of you for participating in PHX’s 2021 fiscal third quarter conference call. We appreciate your interest in the company. We're very pleased with our reported fiscal third quarter results.

Since third quarter reported adjusted EBITDA of [Technical difficulty] increase over the sequential product and a 292% increase compared to the year over year quarter. This was driven by an increase in volumes and commodity prices. Ralph will provide more detail behind these numbers in a moment.

I would like to point out that this is the fourth straight sequential quarter of an increasing volumes and EBITDA for the company. Over the last year and a half, we have allocated a majority of our free cash flow to reducing debt with the remainder going to the payment of our dividends.

During the third quarter, we reduced our debt to $19.9 million at quarter end, which represents a 15% reduction to sequential prior quarter and a 34% reduction compared to the year over year quarter. This current debt balance equates to an approximate 1.5 debt to adjusted EBITDA based on a trailing 12 month.

We anticipate that we will achieve a 1.2 debt ratio at fiscal fourth quarter ending September 30, 2021. This will signal a significant inflection point for the company allowing us to allocate a material portion of our free cash flow to acquiring minerals in our areas of focus, which will drive volume and cash flow growth in the future.

We are demonstrating consistent success on the execution of our mineral acquisition strategy with completion of three separate transactions in the third quarter located in Haynesville and SCOOP for $13.25 million in total consideration. This brings our total consideration year to date for minerals acquired to $21.2 million.

As you will hear in a moment, the increased levels of operator activity on our minerals is very encouraging to see and we believe will support volume and cash flow growth in the coming quarters. At this point, I'd like to turn the call over to Danielle to provide a quick operational overview, and then throughout to discuss the financials..

Thanks, Chad, and good afternoon to everyone participating on the call. During the third quarter ending June 30, 2021, third-party operators active on our minerals converted 37 gross or 0.18 net wells in progress, or WIP to producing. This is nearly equal to the number of wells converted to producing reported in the second quarter.

The majority of the new wells brought online are located in the SCOOP and Haynesville plays. We are encouraged to see this quarter-over-quarter consistency and operators converting wells GDP.

The inventory of wells in progress increased to 97 gross or 0.48 net wells at the end of the third quarter, up from 80 gross or 0.44 wells as reported in our prior second quarter earnings call. The majority of the wells in progress at the end of the third quarter are located in the Scoop, STACK and Haynesville.

Again, it is very encouraging to see quarter-over-quarter consistency in both gross and net wells in progress.

In addition to well inventory, we regularly monitor third-party operator rig activity in our focus areas and observe 13 rigs present on PHX Minerals in the third quarter, which is an increase of eight rigs from the five reported at the end of the second quarter.

Additionally, we had 46 rigs active within 2.5 miles of PHX ownership, which is an increase of 19 rigs from the 27 rigs within 2.5 miles of PHX ownership that we reported in the second quarter earnings call. It is important to note that the number of active rooms on our mineral has more than doubled during the third quarter.

Also of note, our activity levels in relation to our April 2021 SCOOP acquisition, which is primarily located in Continental SpringBoard III AOI. The conservative development pace which we underwrote the acquisition assumed five new gross wells will be turned on to sales and one additional well permitted by the third quarter.

In actuality, there have been six gross wells turned sales, nine gross wells said and two additional well permitted. We are excited by the heightened conductivity in the area and we'll continue to monitor these wells for initial production results. In summary, activity levels have remained incredibly consistent from Q2 to Q3.

We have seen continued growth in our PDP well count, our inventory of wells in progress and rig activity on PHX ownership, all of which are direct indicators for potential increased volumes in the upcoming quarters. Now I will turn the call back to Ralph to discuss financial..

Thanks, Danielle. For fiscal third quarter ended June 30, natural gas, oil and NGL revenues increased 31% on a sequential quarter basis to a total of 10.9 million.

Total hydrocarbon production increased 9% on a sequential quarter basis, as working interest volumes have benefited from workovers performed during the prior quarter and new royalty wells came online, while royalty volumes are relatively flat on a sequential quarter basis. They are up approximately 50% from the year ago period.

As Chad mentioned, this is an indication of our acquisition strategy succeeding about 28% of the royalty volumes produced during this quarter are associated with acquisitions we have completed since October of 2020.

Average prices received for natural gas, oil and NGLs in the quarter were up 20% on an Mcfe basis from the prior sequential quarter to $4.37. Please note that these prices reflect the higher natural gas price realized by some operators in February that we received payment for in this quarter.

As a mineral owner, there is a lag in the payment we received from operators. And we do not expect these higher price realizations to continue in the upcoming quarters. We had a $5.5 million loss on our derivative contracts in the fiscal third quarter compared to a $2.3 million loss in the prior sequential quarter.

It is important to note that on a cash basis, we realize the loss of $1 million compared to a loss of $297,000 in the last quarter. The loss is 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 $259,000, primarily from activity in Dawson County, Texas, which is part of the Midland basin. We continue to actively look for opportunities to lease open acres to operators and certainly had more success this quarter compared to the last few.

The company's LOE increased approximately $34,000 or 3% in the current quarter compared to the prior sequential quarter. On a per Mcfe basis for working interest volumes only, LOE decreased from $0.97 to $0.83. Transportation, gathering and marketing expenses increased 17% on an absolute basis, a 9% on a per Mcfe basis as volumes increase.

The increase is primarily associated with higher treating and processing expenses associated with the increased natural gas production we had. Production taxes increased 35% on a sequential quarter-over-quarter basis as a result of both higher production and realized prices.

Total G&A increased 11% to $2.3 million and cash G&A increased 5% to $1.9 million on a sequential quarter-over-quarter basis. The increase is primarily due to higher legal costs associated with our increased activity levels.

Adjusted EBITDA was $4.7 million in our fiscal third quarter compared to $3.4 million in the fiscal second quarter or an increase of 38%. Pre-tax loss for this quarter was $2.2 million compared to a $716,000 loss during the prior sequential quarter.

It is important to note that absent of $4.5 million unrealized mark-to-market loss on the hedges, we would have generated positive pre-tax income of approximately $2.3 million, which we think demonstrates the earnings -- the earning power of PHX. Finally, let me also touch on debt. We had total debt of $19.9 million as of June 30.

As Chad mentioned, a 15% reduction from the prior sequential quarter, our debt trailing 12-month EBITDA decreased to 1.47 from 2.34 on March 31 of 2021. And again, as Chad mentioned, we were very pleased with how we have strengthened our corporate balance sheet over the prior 18 months despite COVID and the associated energy market downturn.

We feel very good about our current leverage metrics, and going forward, the majority of our free cash flow to now go forwards acquisitions of minerals work corporate strategy instead of predominantly for debt repayment. With that, I like to turn the call back over to Chad for some final remarks..

Thanks, Ralph. Let's quickly summarize our excellent third quarter results. Debt was reduced further we projected achieving a 1.2 debt ratio by fiscal year, September 30 2021. For the quarter, completed 13.2 million in acquisitions and year-to-date roughly $21 million in total, reported a 9% increase in prior quarter volumes.

And significantly, we booked a material year-over-year increase in royalty volumes, which underscores the impact our acquisitions are having for PHX. Adjusted EBITDA of $4.7 million, a 38% and 292% increase compared to prior quarter and yea-over-year quarter respectively.

And lastly, we are encouraged to see the increasing operator activity on in proximity to PHX Minerals, with a clean balance sheet and the ability to use our increasing free cash flow for our mineral acquisition strategy. We have set the foundation for a material growth driving shareholder value. Thank you.

This concludes the prepared remarks portion of the call. Operator, let's please open up the queue for questions..

Hello, and good afternoon all and congrats on a very strong quarter..

Thanks, Derrick..

With my first question, I wanted to start at a high level with your free cash flow priorities for yourself or Ralph.

Now that you've reached your leverage target, could you share some thoughts on how you envision balancing your return? Really, balancing your growth versus return of capital priorities over the next few quarters and years?.

Yeah. So you know long term, we're going to continue to tiptoe into more dividends to our shareholders. But that's going to be a process, not an event. And Ralph and I are discussing with the Board, just in the coming quarters what that looks like in long-term. But we are focused on that.

But for the most part, a disproportionate amount of a free cash flow is going to go to mineral acquisitions, we see a really strong deal flow, lots of deals out there.

Our -- prior o most recent and the prior equity offerings we done in April and September last year, we really got into the mainstream of deal flow where we're a little bit more relative in the marketplace. We have a lot more credibility. So people are bringing us deals. So we can we can really pick and choose, which deals we want to look at.

And I think the smaller the deals are for us is $1 million, $2 million, $3 million, $4 million deals we're really making good rates of return on those deals. The larger the deals get, they're a little bit more competitive, returns are not quite as strong.

So we're going to continue to focus on our main strategy, which is to grow the company through mineral acquisitions. But we are focused on continuing to grow the dividend along the way as well..

Great. And then with my follow-up, I wanted to shift over to project SpringBoard as you guys likely noticed during Continental earnings call, their management team was quite excited about what they're seeing in project Springboard III and IV.

From your perspective, could you offer a color on how do those low results compare versus the assumptions you guys use to underwrite the acquisition? And then Danielle, perhaps if you can build a bit more, just on the pace of activity versus how you guys underwrote the deal?.

Yes, absolutely. As far as performance, Continental has been very clear. And we've been in the public data that's available to us. But their performance is completely repeatable when compared to Springboard I and II. So we are very heartened by those results.

We believe that these wells perform to the degree that we predicted in our underwriting of the acquisition, and the results are in line with what we thought we would see at the time of acquisition. As far as the development pace, we're very excited to see the progress. We are a couple quarters ahead of what we thought we would see by this time.

We expected very little well movement by July of this year, not really being picked up until early next year in 2022. So the key movement with six PDP versus the five we predicted, nine wells that we didn't see coming. That's all very good news...

Perfect. Maybe I'll just sneak in one more question.

Shifting over to hedges, could you guys speak to your appetite to further hedge your 2020 production more than what your store program would suggest, given the strength and the curves?.

Yes, I mean, I think clearly, we are one of those companies that as we went through the bank redetermination processes last year, we were asked to hedge a meaningful portion of our PDP reserves.

Right, I think, I think that the macro, not only has the macro factors around that change, but also the strength of our balance sheet is significantly improved compared to a year ago. So it's something that we are in discussions with the bank, we certainly want more flexibility in terms of how we utilize hedges.

Our view on hedges is that, you know, they're there to protect a minimal level of return and still leave enough upside exposure for our investors, and you can see even, even with what Chad and I have done over the past few quarters, really utilizing collars as opposed to swaps to try to maintain that upside exposure.

So the answer is we're working on it. And we certainly think that the current market dynamics in our balance sheet dictate that the hedging requirements be changed..

Very helpful. Congrats again on the quarter..

Thank you..

Thanks, Derrick..

Our next question is from Nick Pope [ph], shareholder. Please state your question..

Good afternoon, everybody..

Hey, Nick. Good afternoon..

I was hoping you can talk a little bit on the balance between working interest to the royalty interest reduction. As I was expecting and I think you've talked about it the royal royalty interest component. You know, I think your target was to move that up.

Seemed like it kind of came back a little bit towards the working interest side, just hoping you guys can talk a little bit about why guess what the goals are there.

Maybe what kind of drove that, that balance between the working interest and the royalties from a quarter-to-quarter standpoint?.

Sure. Hey, Nick, it's Ralph. So a couple things to keep in mind. We just talked about the royalty interests first. So remember that when these operators bring on wells these days, right, they tend to bring on an entire pad at the same time.

And so last quarter, we had a 16 well pad from Aethon that was brought on to production, right, where we received first money on that. So that was a very meaningful, lumpy production add, right. This quarter we a really good number of first money wells come online, but we didn't have that massive pad being brought online.

So, I think the fact that we mitigated the decline from that, first quarter of production from that pad is pretty -- we're pretty happy with that. And I think as we go forward, we expect as new wells go online. We're predicting that that royalty volume is going to increase. But at some point, you may see some more lumpiness.

We’re in one quarter, it goes up more, and then it stays flat just because of the way that operators bring their wells online. On the working interest, if you remember last quarter, we had a drop in working interest volumes that were beyond the natural decline anticipated in those wells.

And what we found out is that, the operators are actually taking the wells down to work them over. And specifically, there were about three or four wells, where we have a higher than average interest in that we’re taken down and they were worked over. And they were also put back onto production this quarter.

So, you actually had those workovers being done successfully, and we had higher production as a result of it. I think our expectation is, barring any workovers on the existing working interest, right, that's going to continue on a natural decline..

That's very detailed, very helpful.

And the acquisitions between the mid-Continent and the middle part of the quarter and the Haynesville more recent, is that all royalties or do you all take working interest in some of those, in some of that acreage, if you have the opportunity?.

Yeah, no, Nick. So that's the difference between kind of legacy corporate strategy and our new corporate strategy. Prior to my becoming CEO, over the decades managers met them, the senior management would, they would not proactively lease their minerals, they would wait for operators to come and propose wells.

They would study the economics of that well and either decide to participate as a non-op working interest or lease the minerals and take a royalty interest. Thus, we have all these wellbores where we have non-op working interest. When I became CEO, we completely changed the strategy.

We no longer participate and have not participated in any working interest wells since I became CEO. We're purely -- we're moving purely into a mineral only strategy. We're slowly selling off our non-op working wellbores. And it's just purely mineral.

So the stuff we've acquired over the last year and a half, the redstone stuff in SCOOP-STACK and Haynesville and these are the Haynesville deals, all minerals, all royalty..

If there's a working interest component, we'll strip it out of the deal, or we'll just pass. It's just not. We have zero interest in bringing on any additional working interest wellbores..

Got it. That’s all very helpful. That's all I need. Thanks..

[Operator Instructions] Our next question is from Richard Howard of Boiling Point Resources. Please state your question..

Hi. Yes, my question was 90% answered, Chad.

Well, but on the hedges, we were powered at $3.2, am I correct on that?.

The ceiling on the natural gas collars, I think, average -- I think it's like $3.12 somewhere around there..

Okay. That far. Currently gas prices are about $4.

So, shouldn't -- should we expect that the -- assuming gas prices stay the same, the cost of the hedges in the recently completed quarter would not increase that much, am I correct or am I -- if I missed something on that?.

Yes. So, I mean, the mark-to-market on the unrealized, right, I mean, it should not--.

Should not change, right?.

It should not change that drastically. Just remember that the difference is that those -- the -- you're really looking forward months, right, and every hedge contract settles on a monthly basis, right, and so you're looking at the comparable month on the forward curve.

So, spot prices sometimes are and sometimes are not an indicator of what hydrocarbons will sell for, as an example, three months from that, right. So, it's not -- I don't want to unequivocally say that you can hold it to spot prices, because the curve makes a difference as well..

Yes. This is Chad. The current front month spot prices for 12, I think it is. But the curve going out is backwards and that price drops dramatically back down for the low 3s..

Got it. But again, I guess that the worst is passed.

I don't want to put words in your mouth, but guess? And the follow-up to this is, do you -- would you expect that the bank redetermination would allow you to have a lower level of hedges after you get to the 1.2 million, that's the EBITDA number at year end?.

Yeah, I mean -- look, I mean I think that two things have changed as I stated in the prepared remarks, right, I mean one the macro environment significantly different from a year ago, one that hedge requirement was asked of us, right, by the bank. So, so that's one. And then two, right, I mean, our leverage position is also significantly different.

I mean, if you think back to a year ago, I think we were at about three times debt to EBITDA, where we are now at 1.45 times somewhere around there in and through a combination of further debt reduction and increase in EBITDA, as Chad said, we'll get to 1.2.

I mean, I think a reasonable person would expect that that hedge requirement should be changed..

That's music to my ears. Thank you for answering my questions..

Sounds good..

Thanks Rich..

We have reached the end of the question-and-answer session. I will now turn the call back over to Chad Stephens for closing remarks..

Again, we want to thank everybody for being on the call. I did indicate we've got a lot of deal flow, very active on some other things. So, we're going to have a lot of news coming out in the -- in this next quarter for our fourth quarter and year end reporting. So, we look forward to talking to you all at that point. Have a nice day. Thanks..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..