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

Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Riley Permian public announcement of an acquisition. [Operator Instructions] Thank you. Bobby Riley, Chairman and CEO, you may begin.

Thank you, everyone, for joining the call. We're excited to discuss the acquisition that we announced this morning and how we think it's going to enhance our operations and our opportunities. So I'm not going to spend a lot of time on talking about anything that you've already read about, but we've got our team here for Q&A. And like I say, we plan to close this within the first couple of days of the second quarter. We're finalizing our due diligence and getting ready to move on with it. So we're very excited about it. We think it enhances our drilling inventory, which is a big factor that we were looking at, and adds to most all of our metrics across the board. So with that, let's get into it if any of you guys have any questions that we can discuss.

[Operator Instructions] The first question is from John White with ROTH Capital.

Congratulations on the transaction, guys.

Thank you, John.

You guys have been real patient on pulling the trigger, and it looks like you waited for a real good one here. So on the $200 million of notes, has the coupon been agreed to?

Yes, that will be 10.5%.

Okay. And are there some offset operators that you could tell us about?

Yes. I think it's a mix of groups. It's a lot of private guys out there. A larger one is Spur, and it's a private equity-backed one. You've got a family-backed one that's larger. You've got some of the legacy kind of big majors that have got some positions out there that don't show up in their public filings, but it's the big guys that you might be familiar with. I think those are the primary unless anybody else has something to add.

Okay. And with the January 1 effective date, we can anticipate the $330 million will be adjusted downwards somewhat at closing?

That's exactly right, John. So you'll take the first quarter's cash flow and use that to reduce the purchase price. And then when we give final results for the year and also guidance that we'll be giving you in about a week when we report earnings, that's going to be for 3 of the 4 quarters for the year. I think you're going to get about 98% contribution here in the second quarter from the target. And so starting then, you'll be getting it. So yes, that's what you have to look forward to, a pretty -- a nice purchase price reduction there in that -- from the purchase price.

[Operator Instructions] The next question is from Jeff Robertson with Water Tower Research.

I got on a minute or so late, so I'm sorry if you've already covered this. But can you talk about the production profile on the acquired assets in terms of the natural decline that they have in 2023?

Thanks for joining. Yes, I think it's -- this is a mix so that this asset's -- it's a mix of some newer wells and some older. The production has been coming up. And looking forward, I think it's probably about a 30% decline. So it's not a steep shale decline, but it's not the super mature decline that you might see from the larger, I guess, stack of wells. We consider this an underdeveloped asset. And so that's really the right type of asset we were looking for where you're not paying for a whole lot of PDP but rather have a lot of this undeveloped inventory. And so it's got that nice kind of 4,000 barrel a day level of production. Several -- a good portion of that was kind of 2022 production that was coming on. And so I think 30% is probably a fair base decline to that.

Okay. Will your capital program in '23 be designed to keep it flat or grow on the acquired assets? Or will you update all that next week?

Yes, the answer to both probably. We'll give you full guidance next week after we release earnings. But I can just tell you, based on kind of the metrics that are embedded there in that press release, that's based on a maintenance program. I think we did that for a couple of reasons. Some is just the practical aspect in that we'll be taking this asset over -- ownership officially just in April there. And as you know, it takes a little while to get it fully developed and to be drilling wells and such that you won't have it there for kind of the second half of the year. And so I think keeping it flat is a nice goal there. And then we see an ability to do that pretty well.

Can you talk a little bit about -- I guess, on the senior unsecured notes that you're going to issue?

Yes. So we're thrilled to partner with these guys, EOC Partners, great guys that we've known for a while. These will take the form of senior unsecured notes, I think, got a 5-year maturity, about a 10.5% coupon. They will have some maintenance covenants, ones that we're quite comfortable with. I'll tell you another feature they have that we really like is they've got scheduled amortization, which is a little bit different. Those typically have a bullet maturity. But the scheduled amortization is nice in that you're paying them down without the premium. And so that, combined with just -- I guess, about half of our debt will just be from our credit facility. And so we see just deleveraging with this kind of cash flow profile quarter-over-quarter sequentially, and it's just a nice way to get that leverage back down.

Will that be a quarterly amortization or semiannual?

Yes, quarterly. Yes. It's about 10% a year.

Okay. And then one other question, are there other working interests in the assets you're acquiring that might be available? Or is this an area that you would hope to find other bolt-on-type acquisitions?

Again, I would say both to your -- to both of your questions, I'd say yes. There are opportunities to pick up additional interests as we go out and propose a well through various means, whether it be pooling, which we had the benefit of in New Mexico or doing some sort of farmout or lease agreement with other adjoining operators or leasehold owners. Additionally, as we talked about earlier in the call, there are a variety of other operators that are active, with some with big interest, some with large. So we do think there is future opportunity for continued consolidation.

Next question is from John White with ROTH Capital.

When you answered Jeff's question, I take it there's going to be -- you're going to drill some new wells on this asset in 2023.

Yes, that's right. We do plan to drill several. I think that will be for the back half of the year primarily. We'll see if we end up splitting that into 2 different programs. But yes, we'll drill some wells. We'll spend some capital. Why that EBITDA and free cash flow metric that we embed in there is a little bit different, we've got some implied CapEx spending. And we would do that then to keep the production flat for the year, kind of in an exit rate.

And then how long did you -- was the process to evaluate and negotiate?

It was actually quite a bit. This was something that the market saw last summer. It was a markedly different asset at the time in that the production was a little less than half of where it was now. And so we spent some of last summer looking at it. It went away for a bit, and then we've been reengaged for the last couple of months as the profile has changed and some of the dynamics changed. But it's an area that we've looked at for a long time. As Bobby said, we like this area, and as we stated in a press release, geologically, it's very consistent with what we've got now on that Northwest Shelf geology in that geologic setting. Same type of wells, so we're familiar with that. And that gives us confidence and execution for our engineering and subsurface teams on managing the assets. So it's something that we've looked at. Given our area, it's got a defined set of players and an admittedly smaller set of players over in Yoakum County where we are currently. And this is an area that had some recognition maybe for longer and maybe better well-known by others.

The next question is from Stephen Dernick, a shareholder.

Congratulations, guys. I've got one quick question for you. You talked about these notes and the 5-year maturity. You're going to have a scheduled amortization. And also see you've reported there's a real positive impact on free cash flow and on earnings. Will any of this impact future dividends?

Thanks for calling in, Steve. We're not making any scheduled plans with dividends. The official statement is that to change dividends, yes. Dividends are always up to the Board on how to declare those. But as you note, this is a positive benefit to our cash flow profile. We're not increasing any shares. And so we certainly see the ability to have some excess cash flow. I think that the near-term plan is to manage some of the debt and pay down some of the debt. But going forward, we've got optionality for what we want to do.

Okay. So -- because before, that was part of the attractiveness of the stock because of the dividend yield. So that's an important strategy there. So I wasn't asking if you're going to -- I just wanted to -- wasn't going to have an adverse impact on that.

We have no plans for any adverse impact.

Okay. Well, congratulations again.

[Operator Instructions] The next question is from David Dernick with Dernick Company.

Congratulations on the acquisition. I had some questions as to the particulars of the properties. Can you speak towards what drilling looks like out there, what the depth is, what the cost per well, what you're expecting in terms of ultimate reserves per well, maybe some finding costs and operating costs, things like that?

Kevin is going to take that call.

Sorry, I was speaking on mute. A lot of questions, so a loaded question there. Depth-wise, this is about 3,500 to 4,000 feet TVD, drilling 1 mile to 1.5 miles lateral. So you're looking at wells, total measured depth just under 10,000 feet. This is a little different than our Champions asset over in Yoakum County in that it does require a more [ intensive ] frac. So costs per well are a little higher, somewhere in the $5 million to $6 million. We do anticipate the combination of this asset with our Champions asset to drive synergies that we can create some economies of scale and hopefully drive costs down across the company. Reserve-wise, I'd say this project falls very well in line with what we have currently. That's why we've been so slow to acquire something because we were looking at something that competed with what we already have. And I think we have finally found something that will compete well for capital and be a very accretive asset as we go forward to be able to have predictable results.

Okay. And could you -- now I'm assuming that we're talking about conventional reservoir here, not shale, more of a tight sandstone...

Yes, you're correct.

Type of reservoir. So -- and then you spoke towards having water handling facilities. Do you still have a significant amount of water associated with this production like you do at Champions?

Yes, there is. It's very similar to Champions, I'd say, as far as production profile. But as you alluded to, we have 70 miles of gathering line that's already in place, 6 disposal wells that are active, one that's coming online. So we have available plenty capacity for the near-term future to handle our operations and planned activity.

Okay. Great. And then one maybe just a little -- earlier on, you said we're talking towards a 30% decline. I'm assuming that you're [ paying ] an initial decline there, but that's just hyperbolic or...

I think that the current decline -- there's a combination of vertical and horizontal wells within this asset. All the horizontal wells, which is currently 15 producing, are fairly new, 6 of which came on the last quarter of 2022. So you're just now kind of reaching the peak production of those. Like we said, we don't take over operations or acquire and close until very near the 1st of April. And at that time, we do anticipate trying to commence operations within the first 30 to 45 days to begin our first drilling campaign, which we put new additional barrels online hopefully by early to midsummer.

Okay. And then one last question, in terms of reserves per well, are you still -- I guess, similar to Champions where you're looking at 0.75 million barrels to 1 million barrels per well or in that area or something different?

I think it's very similar to Champions. We have 3 different benches within the target that we are developing. Some vary a little bit. But I think generally speaking, the reserves are in line with what you mentioned.

Okay. Very good. Congratulations.

[Operator Instructions] And it appears that we have no further questions. That will conclude today's conference call. Thank you for participating. Everyone may now disconnect.