Riley Exploration Permian, Inc. (REPX) Earnings Call Transcript & Summary

That is correct.

Okay. When would you expect to see oil production from San Andres response from the CO2 injection?

We are still on target to start injecting CO2 next month in November. And we anticipate, hopefully, to start seeing some results in the first half of 2023. These results will come incrementally as we vary our injection between our current injectors. We line out the facility and we determined the correct scenario for lag to maximize the response in the reservoir.

Between the existing CO2 floods and some of the projects that companies like Oxy have talked about in the Permian Basin, the Permian is clearly recognized as a big CO2 sync for carbon capture and sequestration. Riley has talked about the CCS and CCUS opportunities on its asset base. How can you leverage your Champions acreage and the assets that will be put in place for an EOR project to pursue the CCS business opportunities?

I can take that. Yes, it's exciting. We see the EOR business as being very synergistic with the CCS business. Using industrial CO2 as a feedstock for EOR has the potential to really lower our feedstock cost. And then over time, an EOR project begins to recycle existing CO2, taking less and less new CO2. So any fixed volume offtake of industrial CO2 could in theory be rerouted for permanent storage earning the higher 45Q fee. As for the infrastructure, as Kevin described, the most concentrated area of CO2 pipes in the U.S. comes together right where we're located. We don't own the pipe, but we don't have to. We can pay a transport fee and we have a cap to offtake the CO2. So we can, in turn, partner with any number of emitters in the wider region as long as they're relatively close to one of the many pipes, and then we can take delivery on our property.

Philip, in the context of CCS or CCUS, can you talk about what kind of business arrangement that might look like for Riley to participate in a project?

Yes, it could be a number of things. For a larger deal that requires, say, $100 million capital outlay for the capture equipment, we're likely to pursue a fee-for-service arrangement, whereby a third-party which might be a large financial group spends the bulk of the capital and in turn, takes the pro rata share of the 45Q credit. We would offtake the CO2 and be responsible for storage with the balance of the credit then. This may correspond with modest returns on an absolute dollar basis, but it really depends on the scale. And at the same time, we do see attractive rates of return. We're also looking at smaller scale opportunities that we could do ourselves and then capture the full value chain. So smaller dollars, but capturing more of the pie there.

These are very complex projects with a lot of moving parts and potentially a lot of different partners. Do you have an idea of what the time line might look like to mature a project?

Yes, that's fair. These are complex deals with many counter parties involved in any one deal. We're actively working on commercial arrangements with a few different counter parties. We're also working with advisers on optimizing our storage capabilities, siding, scale, et cetera. You've also got government approvals for permits needed, and that's a bit of a wildcard historically, it's taken several years. So we're optimistic that with the new push with this IRA bill and such that, that's accelerated. We're looking forward to sharing more details in the coming quarters. We're spending a lot of time on it.

So let's stick on the balance sheet for a minute. You talked about the reinvestment philosophy. But can you just talk a little bit about the -- what you all believe the optimal leverage levels to run the balance sheet and execute the strategy?

Sure. So we're going to weigh the trade-offs of using equity currency versus debt for any particular situation. equity can be justified as it's an inherently safer in a volatile environment. It can, of course, be dilutive, but we also see benefits to increasing the market size and flow of our shares. Debt carries more risk and has become more expensive this year. Currently, we're at 12% debt to cap, very modest, with 70% or $140 million of our credit line undrawn and available. Cash flowing acquisitions will have some debt capacity which when combined with our existing liquidity allows for some pretty sizable deals. It feels like the market is most comfortable with E&P stand below maybe 30% debt to cap or 1x leverage on an EBITDA basis, at least on a longer-term basis. So I see us potentially using some fluctuating a bit, but probably being on the more conservative end there.

You mentioned acquisitions. In the context of Riley's skill set and strategy, can you talk about the characteristics of an asset that might be attractive, whether it's development inventory or cash flow or a company?

Yes. For the most part, I think we're going to -- we try to be value buyers. For the most part, we're going to probably be interested in those that have that development inventory. We see the most value in the drill bit, and we also see the disconnect with the market where they're -- generally, the market is not applying that much value to undeveloped acreage. So if we can take that, convert it, manifest the value, we see potential there. We're always going to be intrigued by cash flowing assets. You just have to pay for them. So those can be interesting, but it's just going to be a function of value and the cost of capital.

In August, Riley put out an 8-K saying the Board has decided to shift the -- into the fiscal year from September 30 to December 31, beginning with this -- the year ending December 31 of '22. Can you talk about the rationale for the change, moving from September to December in the fiscal year end?

Sure. So the rationale is simply to align better with other E&Ps for reporting and analytical comparisons for both investors and analysts like yourself. We found the prior fiscal year confusing for some and it led to materially different end-period dates for key metrics like reserve values, which, as you know, really fluctuate materially with prices. We're now -- we've completed the fiscal year change, as we announced in the recent 8-K. So our next reporting period will be in mid-November when we report third quarter results for the 3-month period ending September 30, like most other companies. And then we'll report full year 2022 results in mid-March, again -- mid-March of 2023, again, like most companies.

We published our initiation report on September 1. And if anyone is interested in seeing that it can be accessed on Water Tower's website. We included an earnings and cash flow model for 2023, which was essentially based on a range of outcomes since the company has not provided any -- or not provided guidance for calendar '23. Our model, we just assumed a 10% to 15% year-on-year production growth rate. And in that, we -- it suggested that the company could generate pretty substantial free cash flow to reduce borrowings and ultimately fund the dividend and fund acquisition or development opportunities. But can you just talk about what the priorities are in terms of how you think about free cash flow? I know we spoke earlier about the reinvestment rates that between the mix of outcomes, how do you all think about picking the one that will drive the best value for Riley?

Yes, sure. It's a good question and one we wrestle with all the time. Free cash flow generation is simply a trade-off with growth and reinvestment. So in any one year, we can choose to grow more, which has some impact on that first year EBITDA, but on the whole results in lower free cash flow from the reinvestment or we could choose to grow less and generate higher free cash flow. Most E&Ps today are doing the latter being under pressure from investors to return capital. We've received encouragement from our Board and our investors about growing more given the value creating potential for drilling wells at these prices and just given our smaller size. We hope to strike a balance of the continued top line growth while still achieving some free cash flow with the combination of those 2 elements, then really demonstrating the asset quality. We're hoping the market recognizes that trade-off when applying corresponding EBITDA multiples or free cash flow multiples. But going forward, we'll monitor the market and investor sentiment and always be in a position to pivot as needed. As for your specific forecast, as you mentioned, we haven't yet finalized our guidance and release that. We haven't finalized our budget internally, we're always looking at different scenarios. The growth ranges you put out there seem reasonable at least compared to what we've done over the past few years. The spending required for that level of growth is yet to be determined. One note I'd make is the absence of cash income taxes in your forecast or, said differently, the deferment of 100% of taxes. It's more likely than not that we'll be a cash taxpayer for most of our taxable income at these higher oil prices, including the $90 oil scenario that you had in your forecast. And in a scenario where that income is materially higher than the CapEx, right? So that will have some impact on the free cash flow at least.

Kevin, let's kind of circle back to the value. If you think about the value proposition for Riley, how do you think investors ought to consider it in terms of what you all can offer for the -- in your total shareholder return?

Think about Riley as a private company and then even post merger with Tengasco and public since 2021. Riley has a multiyear track record of organic growth in production, cash flow and reserves across all commodity cycles. We operate in a premier oil-based conventional asset that has low declines that enables us to have to spend less capital to not only maintain but grow production. Our operating and financial performance metrics compete with top E&Ps, both large and small. We also have a track record of being a consistent dividend payer and growing that dividend annually. And lastly, I think besides for our primary oil and gas exploration and operations, we're excited about the potential upside that we see through the EOR and our CCS, CCUS initiatives.

I think -- I guess when we put out our initiation report, we highlighted the kind of the growth trifecta between production, EBITDA and dividend. The announcement on Monday increasing the dividend to $0.34 -- quarterly dividend to $0.34 from $0.31 further exemplifies that, and it appears the company is well positioned to continue growing on all 3 of those levels into 2023. I think with the upcoming CCS project and third quarter results in November, we'll have an opportunity to reconnect and host another fireside chat and talk about some of the things that you want to lay out for 2023. So Kevin and Philip, I'd like to -- we'll end it there for today. I would like to thank you very much for your time and thank all of those who have joined us. We appreciate it.

Thank you.

Thank you. Appreciate your time today.