Good day, everyone and welcome to the PHX Minerals 2022 First Quarter First Fiscal Quarter Earnings Conference Call. The question-and-answer session will follow today's presentation. As a reminder, 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..

Thank you for joining us today to discuss our 2022 first fiscal quarter results. With me on the call today for prepared remarks, are 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 yesterday 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 SEC. 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 2022 first fiscal quarter conference call. We appreciate your interest in the company. In my Annual Shareholder letter included in PHX's 2021 Annual Report recently issued to our shareholders, I laid out all of the material accomplishments we achieved in fiscal year 2021.

The inflection point in the company's strategic direction, these material '21 accomplishments represent and the successful completion of the company's financial transition as of fiscal year end 2021. I believe these accomplishments represent a very solid foundation from which we have and will continue to create shareholder value.

We are proud of these achievements, but recognize we have much work remaining and will continue to proactively execute the defined strategy, which I will talk about in a minute.

As we move into PHX's fiscal year 2022, you will note our first quarter '22 results clearly demonstrate the traction we continue to gain from our mineral acquisition strategy with royalty volumes increasing and working interest volumes declining.

This is a direct result of our previously announced Mineral Acquisitions and the sale of legacy working interest properties on which we closed last October and November.

This is a methodical process that involves divesting mature non-operated working interest properties and redeploying the cash proceeds into acquiring minerals in our core basins the scoop and Hayesville with high rock quality attributes and active drilling under reputable and credit worthy operators.

These mineral acquisitions provide immediate loyalty volumes and cash flow along with an inventory of drilling locations that as these locations are developed in the near future will contribute additional growing loyalty volumes and cash flow.

I would also like to point out that the non-producing locations we have purchased over the last two years are being converted to producing wells at a faster pace than we forecasted during our underwriting process, which validates our strategy.

This volume high grading process generates a dynamic of declining working interest volumes with no capital allocated to the working interest assets to increase production and slowly divesting of lower value mature working interest properties while materially growing our royalty volumes through the acquisition process.

This dynamic is dramatically highlighted when we consider year over year royalty volumes have grown by over 60% and non-operated working interest volumes have declined year over year by 33%.

We project that royalty volumes will present more than 75% of overall corporate volumes by the end of fiscal year 2024, as our inventory of unreal locations are developed. This timeline may be accelerated as we find good opportunities to divest additional working interest well bores.

This will drive better operating margins, decrease lease operating expense, grow cash flow and generate an attractive return on capital employed. You see this materializing in the first quarter 2022 with impressive reported net income and earnings per share. You will see our financial results only approved from here.

Our low value hedges, which were put in place as a defensive measure in the depths of COVID in 2020 will fully roll off in the next several quarters.

Thereafter, our hedges had been placed from a more opportunistic posture taking advantage of the improved commodity price macro and our increasing royalty volumes, which provide us with increasing cashflow in the very near future.

We have a great partner in Independent Bank who understands our strategy and has demonstrated their willingness to grow with us. We have a strong balance sheet and more than ample deal flow in which to allocate our free cash flow.

We are confident that the almost 50 million of mineral acquisitions we have closed over the last two years will begin to bear fruit in the coming quarters, which will help achieve our ultimate goal of building shareholder value.

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

Thanks, Chad and good morning to everyone participating on the call.

During the first quarter, third party operators active on our minerals converted 68 growths or 0.19 net wells in progress or width to producing compared to 67 growth or 0.17 net converted to PDP in the fourth quarter, with the majority of the new wells located in the Scoop and Haynesville plays.

It is encouraging to see activity levels remain elevated on our acreage and consistent conversions to PDP quarter over quarter. Our inventory of wells in progress included 65 gross or 0.42 net wells to 86 gross or 0.46 net wells as reported in our prior fourth quarter earnings call.

The majority of the wells are located in the Scoop and the Haynesville plays. Over the past four quarters, we have been able to replace all the net wells converted to producing with new wells in progress. Also note that the ratio of net to gross for our current width inventory is more than double the net to growth for our converted PDP this quarter.

And although our growth inventory of width is down quarter over quarter, the net inventory is relatively consistent.

The continuing improvement of this ratio is a direct result of successfully executing on our mineral acquisition strategy, focusing on highly concentrated minerals with impactful net revenue interest per well and near term development visibility.

In addition to well inventory, we regularly monitor third party operator rig activity in our focus areas and observe 20 rigs present on PHX minerals as of January 31, which is an increase of 30% over the 15 reported in the fourth quarter earnings calls.

Additionally, we had 92 rigs active within 2.5 miles of PHX ownership, which is an increase of 25% from the 70 rigs within 2.5 miles that we reported in the fourth quarter.

Overall, the heightened rig activity on our legacy and acquired mineral acres paired with a strong inventory of high quality widths are positive indicators for future growth in production volumes. Now I'll turn the call back to Ralph to discuss financials..

Thanks, Danielle, and thanks to everyone for being on the call today. For the first fiscal quarter ended December 31, 2021, total hydrocarbon volumes decreased 4% on a sequential quarter basis.

This was comprised of a 23% increase in royalty volumes, primarily attributable to newly drilled and completed Wells on recently acquired minerals and at 26% decline in our working interest volumes, primarily due to the sale of noncore working interest well bores, which had an effective date of October 1, 2021 did divestitures accounted for about two thirds of the working interest production volume decline.

Also to note natural gas represented about 74% of our total production volumes. Natural gas, oil and NGL sales volumes increased 13% on a sequential quarter basis to a total of $13.7 million. Average prices received for natural gas, oil and NGLs in the quarter were up 18% on an MCFE basis from the prior sequential quarter to $6.43.

Company's LOE increased 11% to $1.25 million or a $1.39 per MCFE based on working interest volumes only. The increase is primarily attributable to three things. First, higher workover activity in our Eagle Ford leasehold wells. Second, higher service price inflation, which we are seeing across the industry.

Third, prior period charges related to the working interest well boards we sold at the end of 2021. We are very disappointed with the LOE results and are in the process of reaching out to our main working interest operators to inquire about the abnormal amounts and timing of these charges.

Going forward, we do expect that our LOE costs will decrease to range of between 800,000 per quarter per quarter and 900,000 per quarter, based on the current working interest well bores in our portfolio that that may change depending on future sales of additional working interest well bores.

Total transportation gathering and marketing decreased 26% on an absolute basis to $1.2 million on a sequential quarter basis, primarily due to the divestiture of working into well bores that had high transportation expenses in the Fayetteville shale area and an increase in the Haynesville production, which has relatively lower associated transportation expenses.

Production taxes increased 9% on a sequential quarter bases due to higher realized commodity prices G&A and cash G&A were relatively flat on a quarter over quarter bases at $2.1 million and $1.8 million respectively. Adjusted EBITDA was $4.4 million in our 2022 first fiscal quarter, as compared to $4.2 million in the 2021 fiscal fourth quarter.

The increase was primarily associated with higher royalty production, higher realized prices and lower overall cash expenses partially offset by lower working interest production. Pre-tax income for the quarter was $7.4 million compared to a loss of $3.3 million during the prior sequential quarter.

The net income during this quarter included a net loss on sale of assets of $2.1 million and a $4.5 million unreal mark to market gain on our hedge book. Backing out these items, we would have generated $5.1 million of pretext net income.

As I have stated in prior quarter, PHX continues to demonstrate its true earning power, once you strip out these non-cash items. Our total debt increased to $20 million as of December 31, 2011 from $17.5 million. The increase is associated with the previously announced acquisition of drilled uncompleted wells in the Haysville.

Please note that these wells are already online and producing. However, they're not reflected and none of those volumes are reflected in our December 31 quarterly results. Our death of trailing 12 month EBITDA stands at about 1.2 times.

Lastly, just on the hedges, as Chad mentioned, the legacy hedges that be okay, as just to put in place in the middle of COVID.

Those volumes are going to continue to decline over the next several quarters and should drop by December time should drop by about a third and by about two thirds by the end of the calendar year and we, as Chad mentioned, we have opportunistically layered on additional hedges on gas every time that we've seen a spike in prices and as the volumes that were hedged at $2.90 from COVID roll off, the new hedges are coming in at a price between $3.50 and $4 per MCF, which should drastically change the cash generating position of the company as we work through or calendar 2022.

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

Thanks Ralph. The positive macro supply demand fundamental outlook has drastically increased the industry rig count with the Haynesville up 20% year over year from 53 rigs this time last year to 64 and the Scoop up a 100% from 10 rigs to 20 rigs.

This supply demand outlook along with global geopolitical disputes has kept commodity prices rising with oil up roughly 30% and natural gas up almost 20% in the last six months.

We are confident that this increased activity in our areas of focus will translate into increasing royalty volumes and associated cash flow in the coming quarters and will be part of that driving the shareholder value I referred to earlier. We look forward to keeping you updated on our progress in the coming quarters.

Thanks again for joining us today. This concludes our prepared remarks. Operator, let's please open up the queue for questions..

Thank you. We will now be conducting a question-and-answer session. [Operator instructions] Our first question is coming from the line of Derrick Whitfield with Stifel. Please proceed with your questions..

Good morning, Alan. Congrats on your update..

Thanks Derek.

With my first question I wanted to focus on the acquisitions you've made to date and ask you to elaborate on a comment made during your prepared remarks.

Specifically as you guys perform look backs on the acquisitions you've made, how are the royalty volumes and activity trending relative to your deal expectations?.

Yeah, so just to get into -- dive into a little bit more detail, when we look at any opportunity, and Ralph has talked about this in the past, the overall profile of an acquisition or after we've done two or three, we like to typically make it shape, create a shape of a third PDP, a third ducks and whips or wells in progress and a third undrilled locations that will be drilled out in the near future.

So especially those pods are reservoir engineer looks at the rig activity in the area and sets out a very conservative pace on when those undrilled locations will be developed because that cash flow stream obviously drives value for the overall acquisition. So she follows that on a regular basis.

And when we do a forecast or a budget and show the board that we have all of these drilling locations that we've acquired slotted in or timed over the next 12 to 24 to 36 months, and we compare that on a quarterly basis, what we underwrote in terms of pace of development, and what's actually going on and it's easy to do so because you can go out into the public records and see permits, see where rigs are and just follow the operators and where the wells are being spotted being frack, being completed and put online.

And to date on all these acquisitions we've done, we're ahead of schedule in terms of how many wells we said we were going to have drilled by now and the actual number of wells that have been drilled and completed.

So we're ahead of the game and that ultimately drives since those volumes are online sooner and we're getting cash flow from those well sooner obviously with the accelerated value of that new earlier volumes coming online just helps the overall rate of return and it's helping our volumes and cash upfront near term.

Does that make sense?.

It does Chad? That's great.

And then maybe just stand on royalty volumes, you're certainly outperforming our model at the moment, while not holding you to an absolute number, could you maybe share some visibility for the royalty production profile over the next six to 12 months?.

I'm going to let Ralph talk about. We have acquired some properties that are not reflected as he said, are not reflected in our financials at this point, and I'm going to let Ralph, so I don't get in trouble. I'm going to get Ralph talk about that..

Yeah, I think, you asked a similar question on the last earnings call Derrick get, and the answer I gave was that on a fiscal 2021 or fiscal 2022, compared to fiscal 2021, we expected our royalty volumes to increase in the 30% to 35% range on a year-over-year basis. We still stand by that number. What we're seeing is consistent with that.

So I think that's a pretty good pretty good, pretty good guide as we sit here today. Clearly you're going to see some quarterly, a little bit of quarterly volatility right. But when you compare it in a year-over-year basis, I feel pretty good about those numbers.

So remember like next quarter as we talked about the acquisition that we made in the Haysville, which included six wells, eight wells -- six will -- which included six gross wells and we have a high NRI on those, right. We know that those are already online and producing because we can see the public data on it. They came on in December.

So you should have some nice flush production coming through on the 3/31 quarter. And then, obviously depending on what first production looks like on other wells and in the following quarters, you may have a little bit of up and down, but for the full year, again, 30% to 35%, I think is a pretty good number to use..

Great.

And as my follow up, perhaps for yourself Ralph or Chad, however you guys would like to tackle it, but could you speak to the A&D environment or minerals in your focus base and separately speak to the potential of your working interest volumes and non-core mineral positions to serve as a source of capital? We were certainly positively surprised by the $2.1 million net mineral divestiture announced this quarter..

Yeah. So on acquisitions, we see a very robust deal flow and are very excited about a couple of deals.

We actually have our arms around and should be probably closing in the next what next week and our -- this one acquisition we're closing next week is a relatively for us is a sizeable deal and will bring with us -- bring to us producing wells with some drilling locations in the future as well.

So, we're very excited about the opportunity set before us. We're evaluating some other larger deals. So we see over the next couple of years, especially with commodity prices where they are owners of minerals willing to kind of test the market to sell their minerals. So we're pretty encouraged by what we're seeing.

In terms of divestitures again, when you go back two years ago, when I first took on the, this role, commodity prices were extremely low and it was the overall environment, the macro environment was very negative, and it was very difficult for us to even into discussions with any potential buyers operators of these properties.

These non-op working interest properties are just overall the market was really non-existent. And as commodity prices have improved, we've moved through the worst of COVID and the market has come back. There's a lot more liquidity in the divestiture market and we're confident that if we wanted to, we could sell a lot more today.

We're trying to manage our overall cash flow, because as you can see this particular quarter, our royalty volumes were way up, but our working interest volume through the, just the natural decline and the divestiture were working interest, our overall quarter over quarter volumes were a little bit down.

So we wanna manage that, be methodical and manage the overall divestiture process.

So as we don't overall damage our cashflow profile, but we will at, at the right time and in the right opportunities continue to sell the non-op working interest to where in the near future, over the next 18 months to 24 months, the working interest assets will really not be material to the company..

And, and Derrick, just to touch on -- you picked up on the open mineral sales, right. I think that's another source of capital that's very important to us.

If we can if there are non-core minerals that are not in our focus area and they're non-producing don't have any activity on them today, if we can monetize and redeploy it into assets in the Haynesville or the springboard areas of the scoop that have more near term activity, like the acquisitions that we've done today.

We think that's right in line with the hydrating of the asset base that we've talked about and frankly it's probably, it's also easier it from a management standpoint, right because it's a lot easier to manage an asset that has where we own, let's call it 2% -- where we have a 2% NRI versus a 0.0005 NRI right.

So if we can, again, continue to high in that fashion, we think that creates value in the long run and just on the acquisition that Chad mentioned, I don't think we announced, we put out a press release on that, but yeah, we have a, we have a PSA on this acquisition that closes next week.

It's also in the Haysville and it's very similar to the deal that we announced in December. It's actually just a few sections away from it directly offsetting it and we're going to finance it the exact same way. Cash on hand, little bit of debt will hedge the production, pay down the debt and, and look at these divestitures as a way to fund it.

So it's going to be a creative on a cashflow flow basis and it doesn't really change the overall picture from a balance sheet standpoint. So we're pretty positive that we can continue repeating that throughout the rest of the year..

Great.

And then as my final question for you guys, kind of looking at the space longer term, could you share your views on the industry consolidation that has taken place in the E&P sector, particularly in the Hayesville and speak to the expected implications on your business?.

I do think you'll continue to see upstream E&P consolidation. It's just got to happen. The lack of capital overall sources of capital the markets have really moved away from given the E&P, upstream E&P companies access to capital.

So you're going to see a lot of con consolidation cost cutting, cost saving, especially G&A, but where we're focused, especially in the Haysville, both the Southern Scoop and Haysville the economics of those wells, the wellhead economics really can compete for capital.

So whether there is consolidation or not where we are acquiring minerals, we think that they will be developed at the pace at which we're projecting them to be because of that compelling wellhead economics that are realized. So we're not that worried about. It's kind of the inference if there's consolidation, will that slow down pace of development.

I think that there will be, especially in the Permian some of that, but the Hayesville is really the marginal Mcf of gas that's meeting the demand, the overall demand and meeting that some supply demand fundamental.

So that's why we like the Hayesville, the economics, the fact that the Hayesville is really that marginal Mcf that is required to meet the market demand for natural gas. So we like where we are and what we're -- what we're consolidating here and we think we'll continue to see that consolidation both in the scoop and the Haynesville.

I'd love to get into the Marcellus again, natural gas. We haven't been able to find the right opportunity there yet. So we're just going to continue to keep our head down and do what we're doing in the Scoop and the Hayesville..

Yeah. Chad and it's possible with the diversified acquiring the Hayesville directionally. that could be a positive for the basin in the sense that you might get outsized production growth out of the Hayesville. That's kind of where I thought things might be headed, particularly with what's occurred to date.

Would you agree with that?.

Yeah. And yes. And you're going to see some. I would not necessarily call it consolidation, but you're going to see some of these private equity companies who have been the early developers in the Hayesville, they're going to be selling their assets, their private equity partners are going to want a liquidity event.

And so you're going to see some of these assets trade hands, and those who acquire those assets are going to be not forced, but they're going to be acquiring at such a level of value that they're going to need to develop those assets. They can't acquire them and then just slow down the pace of development.

So we see that happening in the Hayesville and there's rumors out there of several different large potential asset sales or assets changing hands from one private equity group to a, maybe a larger public company. So that I, I think that would help us.

Agree. That makes sense and very helpful and certainly congrats when you're update again..

Thanks..

Thank you. Our next question is coming from the line of John Evans with SG Capital. Please proceed with your questions..

Can you just talk a little bit about, with the strip elevated above as far as you can go out into '23 into Feb '23, has that changed anything for you guys relative to the competitiveness of doing deals in the gas markets, since you're pretty gassy,.

You know, John, over the last year to year and a half as gas prices have moved up, the overall price at which we are acquiring these minerals has not -- there's not been a direct correlation or increase in what we're paying.

We've paying a little bit more, but that's probably more reflection of the overall competition and the amount of dollars that have moved into acquired minerals in the Haynesville than a direct correlation to natural gas price increase. So we're not seeing a direct correlation and we're not paying that much more as natural gas prices have moved up.

That being said, especially on PDP volumes that we acquiring, we immediately hedge out 12 to 18 months to help lock in our return..

Yeah, this is Ralph.

The, one other thing I would add to that also is that, we're short of focused to that $1 million to $5 million acquisition size, which to us can have a material impact in that size range there is actually less competition and we really have partnered with some great folks on what I call what we call a ground game, right, where we're buying on the door as, knocking on doors and going to the courthouse and looking for minerals that way.

So they're not necessarily marketed packages that are bigger and are going to have way more competition, right? So it's a bit of a niche that we focused on and it's been working. It's been working for us thus far and not increasing the price for which we pay for those minerals..

Got it. And then just a follow up, you've obviously done a nice job, but you've used a majority part of, the money that you have on the line. And I guess what I'm curious is you kind of alluded to that you have another bigger acquisition that it sounds like it may close, etcetera.

When will you be able to go back and get a redetermination with the bank to potentially up the line, etcetera?.

So, one that the acquisition that we're -- that we have under PSA that's closing is again similar to the one that we did in December. So around $5 million size right, which is a nice bite size for us right and that's, we're going to use a combination of open mineral sales proceeds, cash on hand and some leverage to go fund that right.

So I don't think it changes really much of anything from a credit profile standpoint. Our next scheduled borrowing based redetermination is early June. So, look based upon where prices are today, the acquisitions that we've done and just a conversion of locations to production, right, I suspect a reasonable person would see an increase in that line.

I can't speak for the bank and it's still a few months out, but I think it's reasonable to expect that that line should increase when we have the next read to termination.

And certainly if there is an opportunity that require us to, look at going back to the bank, right, we have a good relationship with them and, frankly, whenever we look at an acquisition we have a conversation with them to get their offs on how we're financing and making sure that everybody is in agreement with what the balance sheet looks like and so far so good.

So I don't expect it to be an issue..

John, this Chad. We have a very open dialogue with the bank. It's a great relationship and from our perspective, and in discussions with them, there will be an increase. We just don't know what that is. Once we know what it is, we're still going to keep our debt to EBITDA between 1 and 1.2.

And once we have an increase in the bar base, we can use up 2, but want to stay around up 50% to 60% draw on that borrowing base amount. We want to keep our balance sheet strong..

Got it. And the last question that I have for you is I know your strategy is different relative to your payout ratio, because you're really trying to grow this thing. And you think there's a, a lot of opportunity in re recycling that capital.

What I'm curious to ask you is obviously you've had a lot more success in growing minerals than you anticipated and obviously pricing is better.

Do you -- will the dividend announcements that you make, is that more of a quarterly issue where you actually reevaluated on a quarter or do we just look at this, like you announce 1.5 and then that's kind of for the next three quarters, and you're going to recycle all that capital, or what's just kind of the strategy.

And I know you can't make an announcement about dividends right now. I'm just trying to understand the strategy..

John, we talk about this at the board level, every board meeting. As it stands right now, we're going to have a methodical, measured pace in terms of increasing the dividend. We like the success we have in using our free cash flow to acquire minerals. We need to get bigger or too small. We need to grow we're doing so in a disciplined methodic way.

We don't think we're overpaying for the minerals, but we need to try to grow and pedal as hard as we can, as fast as we can to grow this thing.

So we want to continue and especially at the rates of return, the economics at which we're acquiring these minerals, we want to continue to redeploy our free cash flow into acquiring these minerals so that we can grow. That being said, we will, and the board discusses it.

We will try to tiptoe into overtime what larger dividends increasing the dividend..

Okay, great. Hey, thank you for your time. I appreciate you taking my questions..

Thanks, John..

Thank you. There are no further questions at this time. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day..