Good day everyone and welcome to PHX Minerals’ Fiscal 2021 Year-End 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 and Chief Financial Officer. Please go ahead..

Chad Stephens, President and Chief Executive Officer; and Danielle Mezo, Vice President 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 both, 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 are based upon information known to PHX as of the date and time of this 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 all of you on this call for participating in PHX’s fiscal 2021 year-end conference call. We appreciate your interest in the Company. As we close out our fiscal year 2021, I would like to pause and reflect on the progress we have realized over the last two fiscal years.

When I assumed my role as CEO of PHX in January of 2020, we embarked on a new mineral-only strategy. Since then, we have transitioned the complexion of the Company by changing the Company name to PHX Minerals, completely rebuilt the management and technical team, and bolstered our Board with two new highly qualified members.

Over this two-year period, we have reduced debt by 50% to approximately $17.5 million today, established a new bank credit facility in just last week, announced a borrowing base increase of 16%, dramatically improved liquidity and collateral profile, closed mineral acquisitions totaling approximately $40 million with another closing next week of $5.8 million, divested of legacy non-op working interest wells, realizing almost $5 million in proceeds.

This high grade of our asset portfolio will provide improved cash margins, reflected in our future financials. DD&A per Mcfe has decreased by 35%, which at current strip prices will begin driving profitability and increasing return on capital employed over the next few years.

We are proud of these accomplishments, especially during COVID in a very difficult energy market, and are a testament to the high caliber team at PHX, with whom I am proud to work with every day.

In summary, PHX is a much stronger company in every aspect from two years ago, with an improving asset base and high quality prospects to continue this dramatic company transformation. At this point, I’d like to turn the call over to Danielle to provide a quick operational overview and then to Ralph to discuss the financials..

Thanks, Chad, and good afternoon to everyone participating on the call. During the fourth quarter ending September 30, 2021, third-party operators active on our minerals converted 67 gross or 0.17 net wells in progress, or WIP to producing wells, compared to 37 gross or 0.18 net WIP converted to PDP in the third quarter.

The majority of the new wells brought on line are located in the SCOOP play. We are encouraged to see this level of quarter-over-quarter activity growth for operators, bringing recently drilled wells on line, as well as their inventory of drilled but uncompleted wells or DUCs that had been delayed due to COVID and economic conditions in 2020.

The inventory of wells in progress included 86 gross or 0.46 net wells at the end of the fourth quarter compared to 97 gross or 0.48 net wells as reported in our prior third quarter earnings call. The majority of the wells in progress at the end of the fourth quarter are located in the SCOOP and the Haynesville plays.

Notice, the gross to net ratio on wells in progress is virtually double compared to the wells converted to PDP this quarter. We are focused on continuing to improve this ratio as we execute on our mineral acquisition strategy.

While our legacy minerals are widespread and may contain just a few acres per section, our acquisitions have focused on highly concentrated minerals and our focused areas with impactful net revenue interest per well. This will help to grow our quarterly reported volumes and smooth out volatility.

In addition to well inventory, we regularly monitor third-party operator rig activity in our focus areas and observed 14 rigs present on PHX Minerals in the fourth quarter, which is an increase of 1 rig from the 13 reported at the end of the third quarter.

Additionally, we had 70 rigs active within 2.5 miles of PHX ownership, which is an increase of 24 rigs from the 46 within 2.5 miles of PHX ownership that we reported in the third quarter call. The number of active rigs on our minerals has stayed consistent quarter-over-quarter.

And it is important to note that activity levels near our acreage have significantly increased in our core areas, particularly the SCOOP, STACK and Haynesville. In summary, overall activity levels have remained elevated from third quarter 2021 to fourth quarter 2021.

We continue to see heightened development on both our legacy and recently acquired minerals and are excited about the positive indicators for future volumes. We also recently completed our annual year-end reserve report for fiscal year 2021 that is prepared by DeGolyer and MacNaughton.

Of note in this report is a year-over-year proved reserve increase of 25 Bcfe. This positive revision can be attributed to improved pricing and economic conditions during the 2021 fiscal year and mineral acquisitions.

With regard to mineral acquisitions in particular, we have added 8.6 Bcfe, with over half as proved undeveloped or PUD reserves, which we require to be at least a permit or a well in progress in order to qualify as proved.

Additionally, our acquisitions have added over 750 probables, bringing our year-end probable counts to over 1,500 viable locations. All 1,500 of these locations have been individually chosen with geologic and reserve engineering scrutiny applied to arrive at a PV10 value for each location.

The only material risk associated with each of the probable locations is timing of the development, which is a mineral owner we have no control over. We categorize and schedule these as probables to allow for this timing risk.

Ultimately, at strip pricing, our proved PV10 inclusive of post year-end acquisitions and divestitures through November 2021 is $118 million. And our total 3P PV10 or total proved, probable and possible reserve value, which includes the 1,500 probable and an additional 500 possible locations is $226 million.

Our diligent focus on acquisitions and our highly active core areas, such as the Haynesville and SCOOP has resulted in meaningful value growth for the Company and an increasing inventory of high-quality locations under quality operators to bolster our future growth. Now I will turn the call back to Ralph to discuss financials..

Thanks, Danielle. First, I want to thank everyone for being on our call today. I will be discussing the results for both the fiscal fourth quarter of 2021 and the full fiscal year 2021 results.

For our fiscal fourth quarter ended September 30th, natural gas, oil and NGL sales revenues increased 11% on a sequential quarter basis to a total of $12.1 million. For fiscal year 2021, sales revenues were $37.7 million, which represents a 62% increase over fiscal year 2020.

Total hydrocarbon production decreased 11% on a sequential quarter basis, primarily due to the high decline rate of new wells that came on line in the second and third quarters of fiscal year 2021 and fewer high-interest wells coming on line this quarter.

Given that mineral owners do not control the timing of wells, we expect to see some lumpiness from quarter-to-quarter for the production. For the full fiscal year, production was up 6% to 9 Bcfe.

Royalty production was actually up 25% on a year-over-year basis, due to increased drilling activity and our acquisition activity, while working interest production was down 6% due to the natural decline of the wells and PHX no longer participating in any new working interest wells, since late 2019.

Royalty volumes accounted for 46% of total production in fiscal 2021, compared to 39% in fiscal 2020.

We expect royalty revenues to be significantly over 50% of total production in 2022, given the previously announced legacy working interest divestitures over the last two months, along with those net proceeds being reinvested into royalty production and new royalty wells coming on line.

74% of our fiscal 2021 production volumes were natural gas, which aligns with our long-term strategy, the natural gas is the key fuel for a sustainable and clean energy future. Average prices received for natural gas, oil and NGL in the quarter were up 25% on an Mcfe basis from the prior sequential quarter to $5.46.

For the fiscal year, prices increased 53% to an average of $4.16 per Mcfe. As explained in more detail in our 10-K, when we moved our bank loan to independent bank, we terminated the existing book of hedges with our prior lender and initiated a similar new set of hedges with BP, secured through Independent Bank.

In our fourth fiscal quarter, we recorded a loss on derivative contracts of $8.1 million, compared to a $5.5 million loss in the prior sequential quarter. Note that on a cash basis, inclusive of the unwinding of the BOK hedges and rehabbing with BP, we realized a loss of $2.4 million compared to a loss of $1 million sequentially.

For the full fiscal year 2021, we had a $16.2 million loss compared to a gain of $900,000 in fiscal year 2020. On a cash basis, we had a $3.1 million loss, compared to a $4.1 million gain year-over-year. These losses are primarily attributable to hedges we put in place at the height of COVID in the summer of 2020 at the request of our prior lender.

The Company’s LOE increased approximately $66,000 or 6% in the current quarter as compared to the prior sequential quarter. For the full fiscal year 2021 LOE decreased $611,000 or approximately 13%. We expect LOE to decrease in fiscal 2022 as a result of our previously announced legacy working interest wellbore divestitures.

On a per Mcfe basis for working interest volumes only, LOE decreased from $0.92 to $0.86 per Mcfe on a full year-over-year basis. Total transportation, gathering and marketing increased 6% on an absolute basis to $1.6 million on a sequential quarter basis and increased 20% to $5.8 million on a full fiscal year-over-year basis.

These expenses are primarily tied to movements in production volumes. Production taxes increased 4% on a sequential quarter-over-quarter basis and increased 89% on a full fiscal year-over-year basis. These expenses are primarily tied to movements in both, production volumes and commodity prices.

Total G&A decreased 6% to $2.1 million and cash G&A decreased 7% to $1.8 million on a sequential quarter-over-quarter basis. On a full fiscal year-over-year basis, total G&A increased 2% to $8.2 million and cash G&A increased 2% to $7.2 million.

Adjusted EBITDA was $4.1 million in our fiscal fourth quarter, compared to $4.7 million in the fiscal third quarter. The decrease is primarily associated with lower sequential quarter-over-quarter production volumes, as explained earlier. For the full fiscal year 2021 adjusted EBITDA was $15 million, compared to $13.5 million the prior year.

Pre-tax loss for this quarter was $3.3 million, compared to a loss of $2.2 million during the prior sequential quarter. For the full fiscal year 2021, pre-tax loss was $6.9 million, compared to a pre-tax loss of $32.2 million, which includes a $29 million in non-cash impairment in 2020.

I would also like to point out that absent that $5.7 million, unrealized mark-to-market loss on the hedges during the quarter and the $13 million loss for the full year. Recall our hedges were put in place in the middle of COVID in 2020.

We would have generated positive pre-tax income of approximately $2.4 million for the quarter and $6.2 million for the full year, which demonstrates the earnings power of PHX. We anticipate this earnings power would translate into profitable quarters in the near-term.

We had total debt of $17.5 million as of September 30th, a 12% reduction from the prior sequential quarter. Our debt to trailing 12-month EBITDA decreased to 1.17 times.

On December 7th, we entered into an amendment to our credit facility with Independent Financial and MidFirst Bank to increase our borrowing base to $32 million, which improves our liquidity. This is a positive reflection on the strategy to high grade our asset base, and also gives us additional bandwidth to continue to grow the business over time.

Pro forma the latest predominantly PDP Haynesville acquisition, which we announced last week, our total debt outstanding will be approximately $20 million, post closing. Once closed, we will hedge the majority of the estimated PDP production in order to lock in returns and apply the cash flow to maintain our stated leveraged targets.

As Chad mentioned, we were very pleased with achieving our goal of strengthening the corporate balance sheet over the past two years, despite COVID and the associated energy market downturn. Since the first fiscal quarter of 2019 100% of our free cash flow has been dedicated to paying down debt.

Now that we have attained our targeted leveraged metrics, we will allocate a majority of our free cash flow towards acquisitions of minerals per our corporate strategy, instead of solely debt repayment. Finally, the audit process related to the audit for the fiscal year.

Management together with the Company’s independent auditor, identified a material weakness in the Company’s internal controls related to the review of the annual income tax provision prepared by a third-party firm.

Specifically, the Company’s review of the annual tax provision did not include a process to sufficiently evaluate deferred tax assets to determine if a valuation allowance was necessary. It is important to note that this event does not cause any restatement in current or prior financial statements.

Looking forward, this issue will not have any material impact on future cash flows of the Company. With that, I would like to turn the call over to Chad for some final remarks..

Thanks, Ralph.

To summarize our fiscal year 2021 results, we reduced debt by 40% and achieve our debt to EBITDA target; improved liquidity by increasing our bank borrowing base by 16%, reflecting an improving collateral profile; closed on $30 million in mineral acquisitions in our core areas of focus; since year-end September 30, 2021, we have closed on additional $10 million in mineral purchases with $5.8 million to close later this month; divested of legacy non-op working interest wells, realizing $5 million in proceeds and eliminating $700,000 of ARO from our balance sheet.

This high-grading process of acquiring minerals and divesting of non-op working interest is driving improved cash margins. We are excited about the momentum we have built to-date in fiscal year first quarter 2022 with our announced acquisitions, and are confident of our prospects to continue to build shareholder value the remaining of this year.

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

Thank you. [Operator Instructions] Our first question is from Derrick Whitfield of Stifel. Please proceed with your questions..

Good afternoon all, and congrats on your distribution increase and high-grading transactions over the last several weeks..

Thanks, Derrick..

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

For yourself, Chad or Ralph, now that you have reached leverage targets, as you noted, could you share some thoughts on how you envision balancing your gross versus return of capital priorities over the next few quarters? And when or at what scale, I should say, would you envision becoming a pure returning scale source, return of capital story?.

Yes. Derrick, we are pedaling as fast as we can. We are extremely small company and we want to grow into a larger company and be relevant and competitive in larger deals. So, we think we can get better rates of return, allocating as much capital as possible to these acquisitions.

And it’s kind of -- as I’ve said before to some of our investors, it’s kind of a good news, bad news.

We are small, but the good news is we’re small and we can look at these and close on smaller acquisitions, these $2 million to $4 million to $6 million acquisitions, making great rates of return, and it’s relatively -- it’s not that competitive, these sized deals, but it’s material to us.

So we can grow pretty quickly doing -- using all of our cash flow allocating as much as we can of our capital or cash flow to these smaller deals, getting great rates of return in a relatively non-competitive arena..

Great. That makes perfect sense.

And then, with my follow-up, based on your recent acquisitions, could you share some visibility on your production for the next 6 to 12 months, as best as you guys can see today?.

Hey, Derrick, it’s Ralph. I would say, obviously, we don’t necessarily provide forward-looking guidance at this point.

I think what you would expect to see on the working interest side is a continuing, absent us selling any additional working interest, which we’re always looking at, right, I think you can look at a decline rate on the base working interest production in the low-teens.

I think, it’s a pretty decent approximation, right? And then, if you think about on the royalty interest side, on the base production -- the base PDP that we have today, decline rate’s probably in the sort of high-teens is what I would say.

And that’s just from a function of these higher interest NRI wells that we’ve acquired that have come on production, right? But, I think as you see, the PUDs, the wells in progress, and then also quite frankly, the probables coming on line over the next 12 months, I think on the royalty side, achieving a growth rate that is year-over-year pretty similar to what we achieved from last year to today, right, which I think was 25%, right? It’s certainly achievable.

Obviously, we don’t control timing of wells, right? But, I think if we can repeat or even improve upon what we did on a year-over-year basis on the royalty volumes, I think that’s -- we would expect to have something similar to what we saw this year..

That’s great, Ralph. Very helpful and congrats again on the distribution increase in your high-grading transactions..

Yes. Derek, hey, this is Chad. Let me, just add a little bit to the -- I think I left you hanging on your answer -- I mean, on your question. We did announce in our press release, you will see that we announced an increase in our dividend, relatively modest increase on a percentage basis, quite a bit, but on a dollar basis, pretty small.

But, we just wanted to let the shareholders know that we’re mindful of the dividend, and when and where we can, we will continue to tiptoe into greater dividends, return on capital type dividend increases..

That’s great. Thanks, Chad..

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, as I said in our call, we are excited about the momentum we’ve created, and we look forward to updating our shareholders on the next quarterly call very soon. Thank you all for joining us today..

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