PHX Minerals Q3 2024 Earnings Call Transcript

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November 7, 2024

There are 7 speakers on the call.

Operator

As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Stephen Lee, Investor Relations for PHX Minerals. Please go ahead, Stephen.

Speaker 1

Thank you, operator, and thank you everyone for joining us today to discuss PHX Minerals' September 30, 2024, quarterly results. Joining us on the call today are Chad Stevens, President and Chief Executive Officer Ralph D'Amico, Executive Vice President and Chief Financial Officer and Daniel Mezzo, Vice President of Engineering. The earnings press release that was issued yesterday after close is also posted on PHX's 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 and A session, management may make forward looking statements regarding expected revenue, earnings, future plans, opportunities and other expectations of the company. These estimates and other forward looking statements involve known and unknown risks and uncertainties that may cause actual results to materially differ from those expressed or implied on the call.

Speaker 1

These risks are detailed in PHX Minerals' most recent Annual Report on Form 10 ks, 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 call are based upon information known to PHX as of today, November 7, 2024, and the company does not intend to update these forward looking statements whether as a result of new information, future events or otherwise unless required by law. With that, I'd like to turn the call over to Chad Stephens, PHX's Chief Executive Officer. Chad?

Speaker 2

Thanks, Stephen, and thanks to all of you on this call for participating in PHX's September 30, 2024 quarter end earnings call. We appreciate your interest. A continuing theme which we have highlighted over the last several quarters is the challenging macro environment in which we operate. This quarter is no different. We are largely a natural gas focused company.

Speaker 2

The weather adjusted natural gas supply demand macro during the quarter remained bearish. As a result, realized natural gas prices were down. This impacted cash flows and overall industry activity. The natural gas macro over the past 24 months has produced various headwinds with most recent weather a disappointment, 2nd warmest October November since 1950. This removed about 150 to 200 Bcf of total natural gas demand since the end of September.

Speaker 2

The silver lining to this is the 78 Bcf of storage injection reported this past week suggests a 2 to 3 Bcf undersupplied domestic natural gas market. Also total year to date storage injection is at the low end of the 5 year average and has reduced the large natural gas inventory surplus from a high of almost 700 Bcf seen in March of this year to approximately 3.25 Bcf surplus currently versus the 5 year average. Thus, we remain optimistic for the outlook for natural gas prices as new LNG export facilities begin service. It is projected that U. S.

Speaker 2

LNG export volumes should double to almost 25 Bcf per day by 2028 with the advent of 7 new facilities currently in various stages of construction. This is an incremental increase of roughly 13 Bcf a day from current. Additionally, base case estimates of increased power demand to meet the growing needs of AI and data centers creates a critical call for gas of about 7 Bcf per day by 2,030. That is a total increase in natural gas demand from both LNG and power of around 20 Bcf per day over the next 5 years. This doesn't even include the need to replace the annual average natural gas decline rate of U.

Speaker 2

S. Gas production of around 15% or 15 Bcf per day annually. When you look at the current natural gas forward strip price, we don't believe it reflects these bullish macro dynamics that will begin to lift forward prices over the next 12 to 24 months. Also the recent election results should introduce a positive catalyst to U. S.

Speaker 2

GDP growth, government deregulation, a favorable federal tax regime and reduced market volatility. This should have a positive influence on demand for commodities and the energy sector at large. With this backdrop and in spite of reduced pace of development in natural gas basins due to the suppressed prices, we are pleased with our quarterly results and would like to highlight a few notable items. 1, the current quarter's royalty volumes represents the 2nd highest in the history of the company despite the negative natural gas macro I just mentioned. Sequential quarter volumes were down 20% and we indicated to you last quarter this was coming and is due to the positive impact in the last quarter of reporting several new high interest wells in the Haynesville.

Speaker 2

Over the past 12 months, we're excited about what we're witnessing as dramatic increase in drilling in the SpringBoard 3 area of Oklahoma mainly by Continental. This time last year there in the SpringBoard there were around 20 gross wells in some phase of permitting, drilling or turning to sales and today we see that number double to around 40 gross wells in some stage of progress. Also since the same period last year, there have been 30 gross wells converted to producing in the SpringBoard 3. This increased activity is a big counter to the industry narrative I just laid out because the production in SpringBoard 3 is 2 thirds liquids and 1 third gas by volume. Additionally, and as Danielle will discuss in a moment, we see an overall steady pace of well development on our minerals.

Speaker 2

This highlights the quality of our mineral assets. Danielle will detail our steady historical volume growth in a moment. While reducing debt by $5,000,000 year to date or 15%, we have also acquired approximately $6,500,000 of minerals as well as focusing on return of capital to our shareholders through the $0.04 per share quarterly dividend. This all speaks to the strong financial position of PHX and our resilient sustainable business model throughout the commodity cycles. Our conservative focus on leverage and proactive hedging programs help support our financial strength.

Speaker 2

Additionally, we reaffirmed the borrowing base under our existing bank credit facility at $50,000,000 a direct reflection of the quality of our asset base and maintaining modest leverage. And we continue to see steady deal flow in our focus areas which emphasizes the sustainability of our strategy. 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.

Speaker 3

Thanks, Chad, and good morning to everyone participating on the call. For our quarter ended September 30, 2024, total corporate production decreased 20% from the quarter ended June 30, 2024 to 2,300 and 79 millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters Cfe compared to the prior sequential quarter, resulting in the 2nd highest quarterly royalty production record for PHX. It's important to note that as a mineral holder, we do not control timing on well development. So there can be some volatility both up and down on a quarter to quarter basis and volumes associated with our business model are better evaluated on a rolling 12 month basis. Our last 12 months royalty production is up 10.3 percent to 8.6 Bcfe from the prior 12 months.

Speaker 3

Total corporate production, including working interest, is up 3.8 percent to 9.7 Bcfe. Royalty volumes represented 88% of total production during our September 30, 2024 quarter. 80% of our quarter's production volumes were natural gas, which aligns with our long term position that natural gas is the key transition fuel for a sustainable energy future. Oil represented 11% of production volumes and NGL represented 9%. During Q3 2024, 3rd party operators active on our mineral acreage converted 46 gross or 0.18 net wells in progress or WIP to producing wells compared to 55 gross or 0.4 net in the prior sequential quarter.

Speaker 3

We are pleased with our well conversion rates, particularly given the challenging natural gas macro environment, which includes some operators deferring bringing completed wells online until there is an improvement in natural gas prices. At the same time, our inventory of wells in progress on our minerals, which includes DUCs, wells being drilled and permit filed, remains strong with 278 gross or 0.93 net wells compared to 241 gross or 0.93 net at the end of June 30, 2024. The continued track record of well conversions and replenishment of the inventory of wells in progress or WIP reflects the high quality portfolio of assets we have assembled to provide steady sustainable future growth. In addition to our WIP, we regularly monitor 3rd party operator rig activities in our focus areas and observed 18 rigs present on PHX Mineral Acreage as of September 30, 2024. Additionally, we had 70 rigs active within 2.5 miles of PHX ownership.

Speaker 3

In summary, we continue to see steady development in both our legacy and recently acquired mineral assets, which should lead to annually increasing royalty volume. Now I will turn the call to Ralph to discuss financials.

Speaker 4

Thanks, Danielle, and thanks to everyone for being on the call today. For the 3rd fiscal quarter ended September 30, 2024, natural gas, oil and NGL sales revenues decreased 20% to $7,900,000 compared to the prior sequential quarter, due primarily to a decrease in production volumes of about 20%, which as Daniel mentioned, is a result of fewer new wells being brought online primarily in the Haynesville as natural gas prices remain under pressure and the normal lumpiness we see in volumes on a quarter over quarter basis. Realized natural gas prices for Q3 'twenty four averaged $2 per Mcf compared to $2.05 in Q2 'twenty four. Realized oil prices averaged $74.83 down 3% from Q2 2024 and NGL prices averaged $19.60 a barrel down 18% from Q2 2024. Realized hedge gains for the quarter were $932,000 Approximately 48% of our natural gas, 31% of our oil and none of our NGL production volumes were hedged at average prices of $3.28 per Mcf $0.63 per barrel.

Speaker 4

Most of these hedge contracts were added over the course of the last 24 months. We continue to be consistent with our hedge program and are structuring our natural gas hedges using both swaps and costless collars, which means that we also have upside exposure on certain volumes. Our current hedge position is available in our most recently filed 10 Q. Total transportation gathering and marketing decreased 28% on a sequential quarter basis to 1,100,000 due to the lower volumes during the quarter, mainly on the Louisiana side of the Haynesville. Production and ad valorem taxes decreased 28% on a sequential quarter over quarter basis to approximately $429,000 due to slightly lower prices and lower production volumes, again primarily in Louisiana, where taxes are based on volumes and not as a percentage of revenue.

Speaker 4

LOE associated with our legacy non operated working interest wells was flat on a sequential quarterly basis at about $295,000 Cash G and A increased 6% to $2,170,000 compared to the prior quarter. Adjusted EBITDA was down to $4,900,000 in Q3 'twenty four compared to $6,400,000 in Q2 'twenty four. The decrease again is due primarily to lower volumes offset by also lower transportation gathering, marketing and production tax expenses. Net income for the quarter was $1,100,000 or $0.03 per share compared to $1,300,000 or $0.04 per share in the prior sequential quarter. We had total debt of $27,750,000 as of Q3 'twenty four.

Speaker 4

As Chad mentioned, that's down $5,000,000 from the $32,750,000 as of year end 2023. Our debt to trailing 12 month adjusted EBITDA was 1.36 times as of September 30, 'twenty 4. We also just finished a regularly scheduled of our borrowing base, which remained flat at $50,000,000 I'd like to thank our bank group for their continued support of PHX. We deployed about $3,000,000 on accretive mineral acquisitions during Q3 2024. However, as I've mentioned over the several prior quarters, our acquisition program remains disciplined.

Speaker 4

And if the deals in the marketplace don't generate our required return profile, we are not chasing them. It is also important to note that we have an almost 7 year inventory of high quality drilling locations, which means that we can continue to perform without chasing acquisitions that do not meet our underwriting criteria. We are happy to build liquidity, pay down debt and return capital to our shareholders through our quarterly dividend. With that, I'd like to turn the call over to Chad for some final remarks.

Speaker 2

Thanks, Ralph. And just to recap, highlight the quarter's results. One, we reported our 2nd highest royalty volumes in PHX history. This is supported by a consistent pace of development activity on our minerals of over 300 well conversions to producing annually about what Staniel just discussed. I'd like to emphasize that the annual well conversion which drive our annual volume growth comes from PHX's approximately 2,000 gross undeveloped well location inventory which we lay out clearly in our IR slide deck and which Ralph just talked about.

Speaker 2

2, we reduced our debt by $5,000,000 or approximately 15% since year in 2023 and reaffirmed our bank credit facility emphasizing our financial strength. 3, Board approved a quarterly $0.04 per share dividend. I'd like to recall that the Board increased the dividend our last quarter from $0.12 per share annually to $0.16 per share annually, which represented a 33% increase. This reflects confidence in our ability to grow our asset base. And again, I'd like to point out it corresponds with our stated intention over the last several years of increasing the dividend when we feel it's appropriate.

Speaker 2

And we're excited. We've been talking about it for several quarters and are excited about the activity we're seeing on our SpringBoard III asset with the gross whips in play. And with LNG power demand driving a bullish natural gas macro in the next 12 months to 24 months and this abundant well activity on SpringBoard 3, we look forward to reporting our financial results to our shareholders over the coming quarters. We're extremely optimistic about the broad well activity across our minerals especially SpringBoard III which should positively impact our future financial performance. With this and the bullish macro LNG demand and power demand already discussed, we see real upside for PHX.

Speaker 2

As always, I thank both our employees and Board of Directors for their dedication and hard work. This concludes the prepared remarks portion of the call. Operator, please open up the queue for questions.

Operator

Certainly. We'll now be conducting a question and answer session. Our first question is coming from Jeff Grampp from Alliance Global. Your line is now live.

Speaker 5

Hey, guys. Thank you for the time. Ralph, wanted to start on the SCOOP and all that development going on. Looking at the breakout in your like it's probably like half, maybe a little over half of your net whips now. So just kind of thinking out loud, like how should we expect the commodity mix for the company to develop over the next couple of quarters, given that the scoop tends to be a little bit more liquids rich than kind of your corporate mix as it stands today?

Speaker 2

Well, so we've got quite a bit of activity in the Haynesville as well. And the Haynesville wells, any single the initial production rate from any given Haynesville well is extremely robust $20,000,000 to $30,000,000 a day versus a single well initial production rate of a SpringBoard through well isn't quite as robust let's say. So we don't see a dramatic change in the overall production mix over the next year or 2.

Speaker 4

Yes. I think the other thing to keep in mind also is that in the Mid Continent, there are several operators, including the some of the larger some of the larger operators on our minerals in SpringBoard 3 that pay us, that pay for the NGLs as part of your as part of rich gas. So said differently, you're going to see a positive impact. You're not going to be reporting NGL volumes. You're going to be reporting a higher realized natural gas price to account for the fact that that gas is being sold at 1400 Btu, right.

Speaker 4

So that improves pricing, but it keeps part of the volumes down because you're not counting the NGLs, if that makes sense.

Speaker 5

Got it. No, that's really helpful. Thank you, guys. And then another question on just kind of I know you guys don't guide quarter to quarter, but just with the results to date and the Q4 guide that you guys maintained, it looks like volumes need to stay at least on a royalty side, volumes probably need to stay relatively steady just to kind of keep within the guidance range that you guys have. I'm wondering do you guys have the conviction to kind of call Q3 potentially kind

Speaker 4

of a trough level for production?

Speaker 5

I know you ultimately are not the operator and can't control things, but to the extent you guys do we have conviction that we're at a trough level or is that still potentially not quite there yet just given the potential timing and work in process you guys have? Thanks.

Speaker 4

I mean, I think that's a tough question because I don't know what gas prices are going to do in the future, right? I mean, we think that there's more upside to downside given the macro dynamic points that Chad discussed earlier on the call. I think your assumption on Q4, the fact that we didn't change the guidance, right, I think kind of that kind of answers the question. But in terms of what any particular quarter is going to look like, I think that's a we tend to stay away from quarterly guidance. I think as Danielle said, the right way to look at it, in our opinion, is that rolling 12 months.

Speaker 4

And I think if you look at any rolling 12 month period, you see continued growth, right? And I think that's really what we aim for.

Speaker 5

Got it. That's helpful commentary. Thank you, guys.

Operator

Thank you. Next question is coming from Charles Meade from Johnson Rice. Your line is now live.

Speaker 6

Good morning, Chad, Danielle and Ralph. Thanks for the time. Chad, I want to go back to a quote in the press release where you said that you're seeing a growing pipeline of attractive M and A opportunities. And I look at what you guys are aware you are buying in 3Q, it looks like it was 80%, 90% in the Haynesville. And so I'm wondering, is that uptick in the Haynesville an early indication of that of where that attractive M and A opportunity is or is there more going on there?

Speaker 2

We continue to use both our focus both on the SpringBoard or kind of what I consider the SCOOPSTACK fairway of Oklahoma as well as the Haynesville. We see probably the Haynesville is consists of the state of Louisiana as well as across the state line in Texas. And we're actually seeing some more or an increase in deal flow on the Texas side than we were on the Louisiana side. So that it's I wouldn't say it's growing, but just kind of a steady what I consider what was and still is a steady deal flow because they increase in activity we're seeing on the Texas side. But also we've expanded given the activity up in Oklahoma in that fairway, the Scoop Stack fairway, we're expanding our focus and looking for more opportunities outside the SpringBoard 3 and some other areas that are very interesting and just as attractive as the SpringBoard 3.

Speaker 2

So I wouldn't say that we're going all in on just the Haynesville. We still see a lot of attractive stuff in the SpringBoard, I mean in the whole SCOOPSTACK.

Speaker 4

Yes. There is going to be some variability, Charles, quarter over quarter between Haynesville and the Anadarko Basin. Again, it's just when we're closing deals and where how they come in. But I wouldn't read too much into it in terms of a higher component in 1 quarter being in one area or the other. I think the important thing is that across everywhere that we look, every deal competes against every other deal for capital.

Speaker 4

And we on any given quarter, we're deploying the capital our capital where we see the highest potential rate of return, right, whether that be in the Anadarko or the Haynesville. I do think that in the Haynesville, I do think that there is enough time has sort of bled off since commodity prices came or natural gas pricing came down. Where you're seeing a little bit more rationalization, let's put it that way, by folks that are on the let's put it that way by folks that are

Speaker 2

on the sell side, right, in

Speaker 4

terms of realizing that a lower price a lower commodity lower natural gas prices, you're going to have to sell at a lower price your minerals, right. And so there's a little bit of that going on as well.

Speaker 6

Got it. That's good color on that Ralph. Thank you. And then Chad, I really appreciate your natural gas macro comments. It's always it's interesting to hear your perspective.

Speaker 6

And I think broadly, we kind of agree with you. But I want to ask if you could share with us the benefit of something else. And when I think about you guys, I know that you guys have exposure to a lot of different operators in Haynesville and you also make it your business to understand even what your operators are doing around you. So what are you seeing in the way of any early indications of any kind of uptick in activity in 2025? Or are you seeing any?

Speaker 2

Well, we watch the public records and the public statements made by our operators, probably just like you do. And we in our Investor Relations slide deck lay out who the more active operators in and around our minerals are. So Chesapeake and Aethon not so much not as much Comstock. And Chesapeake obviously has moderated their rig activity and shut in or deferred some production in that both the Haynesville and the Appalachian Marcellus because of gas prices. And their statements are saying they're waiting to see where gas prices are going in the next few quarters before they start completing their DUCs and ramping up their production.

Speaker 2

So it's hard to really read the impact of their slowing activity on our minerals. We watch the rig counts on our minerals directly on our minerals and around and that hadn't changed. So to answer your question, we think and I guess kind of along Jeff's questions too, we feel comfortable with decent quarter to quarter production. And as Ralph alluded to, it's more like watching it annually year over year royalty volume growth. But it's a, hard to determine what the operators are going to do.

Speaker 2

But given the rig activity on and around our minerals, we're not concerned about where volumes are headed.

Speaker 4

Yes. We're also hearing from some of the smaller guys, right, that at least as of recently they had plans of turning on wells in the Haynesville in December, right? And that shouldn't come as a shock as everybody sort of plans for higher winter pricing. Whether that happens or not remains to be seen, but I think all the what you normally see from a seasonality standpoint in terms of people expecting higher gas prices in the winter, I think that's playing out again this year. We just have to wait and see.

Speaker 6

Well, I tell you, it's really hot for November now where I am in New Orleans. Yes. But anyway, thanks for the added detail. I appreciate it.

Speaker 4

Thanks, Charles. Thanks, Charles.

Operator

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments.

Speaker 2

Again, I'd like to thank our employees and shareholders for continued support. I'd also like to note that Ralph and I will continue to expand our investor marketing activities and outreach over the coming weeks months. If you'd be interested in meeting with us, please don't hesitate to reach out to myself, Ralph or the folks at Fink IR. We look forward to hosting our next call in March of 2025 to discuss our Q4 and full year 'twenty four results. Thank you.

Speaker 2

Have a good day.

Operator

Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

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