Yahoo Finance PHX Minerals Inc. (NYSE:PHX) Q1 2024 Earnings Call Transcript
PHX Minerals Inc. (NYSE:PHX) Q1 2024 Earnings Call Transcript May 11, 2024
PHX Minerals Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and thank you for attending today's PHX Minerals' March 31, 2024, Quarter End Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Stephen Lee with FNK IR. Please go ahead, sir.
Stephen Lee: Thank you, operator. And thank you for joining us today to discuss PHX Minerals' March 31, 2024, quarterly results. Joining us on the call today are Chad Stephens, President and Chief Executive Officer; Ralph D'Amico, Executive Vice President and Chief Financial Officer; and Danielle Mezo, Vice President of Engineering. The earnings press release that was issued yesterday after the close is also posted on PHX Investor Relations website. Before I turn the call over to Chad, I would like to remind everyone that during today's call, including the Q&A session, management may make forward-looking statements regarding expected revenue, earnings, future plans, opportunities, and other expectation of the company. These estimates and other forward-looking statements involve 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 PHX Minerals' 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 call are based upon information known to PHX as of today, May 9, 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 would like to turn the call over to Chad Stephens, PHX's Chief Executive Officer. Chad?
Chad Stephens : Thanks, Stephen, and thanks to all of you on this call for participating in PHX's March 31, 2024, Quarter End Earnings Conference Call. We appreciate your interest in the company. In spite of a 40% drop in natural gas prices from a year ago, PHX reported steady, positive adjusted EBITDA and cash flow, while operators are curtailing their existing production and deferring bringing new wells to sales due to low gas prices. PHX's year-over-year and sequential quarter royalty volumes were down slightly. With prices and volumes lower, our year-over-year EBITDA was down materially. However, our EBITDA compared to the prior sequential quarter was up slightly and reflects our solid hedging program built to protect our financial plan.
This allowed us to service our dividend, reduce debt, and close on a modest amount of acquisitions, approximately $1.1 million, $2 million, and $1.5 million respectively. Ralph will discuss leverage in a moment. But I would like to point out that our banks recently reaffirmed our borrowing base at the same $50 million and extended the maturity. This does highlight the quality of our assets. As our existing production depletes our existing PDP reserve base, we backfill that bucket through our well conversions, which is our undeveloped drilling locations and includes a reserve category of probable and possible. Danielle will walk you through these conversions in a moment. Looking to the future, the significant positive macro events in play are: One, the operator activity in our core areas continues to maintain a consistent number of conversions of these undrilled locations to producing at actual PHX historical levels; and two, the natural gas supply demand macro is improving.
The U.S. domestic natural gas supply is down from a December 2023 high of approximately 102 BCF per day to current volumes of around 96 BCF per day and dropping. Also the natural gas demand narrative continues to build positive sentiment from: A, anticipated completion of U.S. domestic LNG export facilities beginning in 2025, which we have discussed on prior calls; B, new LNG export facilities under construction or nearing FID on the Pacific coast of Mexico that anticipates an additional 7 BCF of natural gas demand by 2027 and 2028; C, increase in power demand of approximately 30% by the year 2030 from AI and growing data centers that should increase natural gas demand materially; and D, Freeport LNG facility is back up and 100% in service after several months of being down.
Each of these items standalone should be adequate to balance the current oversupply macro and bring our current natural gas storage inventory number to equilibrium. Collectively, these could create an undersupply and move normalized prices up dramatically from their current lows. Under most of these projections, a more stabilized and higher price environment is needed to encourage more drilling to deliver increased volumes to serve the increased demand. Under any conservative increase in demand I lay out, the old paradigm feast or famine commodity price cycle could disappear. The need for a less volatile, more predictable price forecast will help provide for the supply necessary to meet the robust growing demand. I believe this is setting PHX up for solid increases in royalty volumes and cash flow in 2025 and beyond.
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.
Danielle Mezo : Thanks, Chad, and good morning to everyone participating on the call. For our quarter ended March 31, 2024, total corporate production decreased to 6% from the quarter ended December 31, 2023. Royalty production for the quarter decreased 5% compared to the prior sequential quarter to 1,857 Mmcfe. The volume decrease during the quarter is primarily associated with Haynesville producer's decision to delay bringing wells online due to low natural gas pricing. It is important to note that as a mineral holder, we do not control timing on well development, so there can be some volatility on a quarter-to-quarter basis, and volumes associated with our business model are better evaluated on a rolling 12-month basis. We are also aware of certain new wells in which we have a significant royalty interest that were drilled and completed in December 2023, but the operator deferred bringing to sales in January 2024 due to low gas prices.
Had the wells initiated production in January, our year-over-year royalty growth would have reported a volume increase. We believe those particular wells are now online and producing. Also as discussed in prior recent quarters, our overall corporate volumes are down year-over-year due to the sales of material working interest assets in early 2023. Royalty volumes represented 88% of total production during our March 31, 2024. 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 sustainable energy future. Oil represented 11% of production volumes and NGL represented 9%. During Q1 2024, third-party operators active on our mineral acreage converted 85 gross or 0.32 net wells in progress or WIP to producing wells, which is a significant increase compared to 46 gross or 0.098 net in the prior sequential quarter.
The majority of the new wells brought online are located outside of the Haynesville. Even though the number of conversions increased on a sequential quarter basis, these were lower rate wells compared to a typical new Haynesville well. This, along with operator curtailments and new well deferrals, as stated earlier, explains the decrease in sequential royalty production volume. Have we seen the average number of new well Haynesville conversions this quarter as we realize each of the last six quarters, we would have seen an increase in royalty production volume. We are very 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 price.
We also expect an increase of Haynesville locations converting to PDP in the second half of 2024 and full year 2025 as natural gas prices improve. At the same time, our inventory of wells in progress on our minerals, which includes DUCs, wells being drilled, and permits filed remain strong with 230 gross or 1.099 net wells. The continued track record of well conversions and replenishment of the inventory of wells in progress or WIPs reflects the high quality portfolio of assets we have assembled to provide steady sustainable future growth. In addition to our WIP, we regularly monitor third-party operator rig activities in our focus areas and observe 15 rigs present on PHX Mineral acreage as of April 23, 2024. Additionally, we had 65 rigs active within 2.5 miles of PHX ownership.
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 financial.
Ralph D'Amico : Thanks, Danielle, and thank you to everyone for being on the call today. For our first fiscal quarter ended March 31, 2024, natural gas, oil, and NGL sales revenues decreased 17% to $7.1 million compared to the prior, compared to the prior sequential quarter due primarily to a decrease in production volumes of 6% and a decrease in realized prices of 12% on an MCFE basis to $3.35 from $3.81 in Q4 2023. Realized natural gas prices average for the first quarter of '24 were $2.10 per MCF compared to $2.53 in the fourth quarter of '23. Realized oil prices averaged $76.01, down 3% from the fourth quarter of '23. And NGL prices averaged $21.51, down 10% from the fourth quarter of '23. Realized hedge gains for the quarter were $1.67 million, approximately 62% of our natural gas, 37% of our oil, and none of our NGL production volumes were hedged at averaged prices of $3.82 per MCF and $68.98 per barrel.
Most of these hedge contracts were added over the course of the last 18 months. We continue to be consistent with our hedge program and believe it is doing what it was meant to do, which is to protect our downside. Approximately 48% of our anticipated full year 2024 natural gas production at the midpoint of our guidance has downside protection at approximately $3.34 per MCF. On the oil side, approximately 37% of our anticipated production at the midpoint of our guidance has downside protection at approximately $64.94 per barrel. We structure our natural gas hedges using both swaps and costless collars, which means that we also have upside exposure on certain volumes up to the $45 range per MCF. Our current hedge position is available in our recently filed 10-Q.
Transportation, gathering, and marketing decreased 11% on a sequential quarter basis to $843,000, primarily due to lower prices and lower volumes during the quarter. Production and ad valorem taxes decreased 14% on a sequential quarter-over-quarter basis to approximately $392,000 due to lower prices and lower production volumes. LOE associated with our legacy non-operated working interest wells increased 4% on a sequential quarter-over-quarter basis to $332,000, primarily due to higher workover expenses on our liquid prone wells in Oklahoma, which also means that in the coming quarters, you should see some improved performance out of those wells. Cash G&A was flat at approximately $2.6 million compared to the prior sequential quarter. Our cash G&A is typically higher in the first and fourth calendar quarters of the year compared to the second and third calendar quarters of the year due to professional fees associated with items such as our 10-K and our shareholder meeting.
Adjusted EBITDA was up to $4.6 million in our Q1 2024 quarter as compared to $4.5 million in Q4 '23. The slight increase in EBITDA, despite lower production volumes and realized prices, is due to the high quality of our assets and the successful implementation of our hedging strategy. Net loss for the quarter was $200,000 or negative $0.01 per diluted share. We had total debt of [$30.75 million] as of March 31, down $2 million from December 31, 2023. And currently, our debt stands as of right now at about [$29.75 million], much like last year at this time when natural gas prices fell. Our acquisition program has remained very disciplined. And if the deals in the marketplace don't generate our required rates of return, we will not chase those deals.
We're happy to continue to build liquidity and pay down debt. Our debt to trailing 12-month adjusted EBITDA was 1.58x as of March 31, '24. As we announced a few weeks ago, during our regularly scheduled semiannual borrowing base redetermination, our bank group maintained our borrowing base flat at $50 million and extended the maturity of our loan from September 1, '25 through September 1, 2028. I'd like to thank our bank group for their continued support. With that, I'd like to turn the call over to Chad for some final remarks.
Chad Stephens : Thank you, Ralph. We are very pleased with our achievements despite a challenging macro environment. The dramatic collapse in natural gas prices in early 2023 and lingering at historic lows currently has had a material impact on natural gas-focused E&P's development activities, especially in Haynesville and Marcellus. As a mineral owner, we will also be impacted by this. However, our business strategy is to acquire minerals in the core of our focus area with near-term development potential. This can be seen by our continued steady well conversions that supports our expected future royalty volume growth despite the various headwinds. To recap our progress and achievements and at the risk of sounding a bit redundant from our last call, I want to emphasize that we have built a portfolio of high-quality assets with improved cash margins over the last four years, a mineral interest in a deep inventory of undeveloped drilling locations, which supply our well conversions and are categorized as probable reserves.
This conversion rate, which Danielle discussed a moment ago, is explained in our IR slide presentation and will continue to drive increasing royalty volumes and cash flow over the next few years. As I did last quarter, I direct you to Slide 7 of our newly posted IR presentation that reflect a total 2P, which is total proved and probable reserves, PV-10 reserve value at current NYMEX strip prices close to $300 million. This reserve value is validated by the independent technical work performed by our outside third-party engineering firm, Cawley, Gillespie. If natural gas prices return to a more normal mid-price cycle and driven by the catalyst which I earlier referred, that PV-10 value reflected on that Slide 7 would be dramatically higher. We also show in the appendix of our IR presentation and the timing of the new LNG export capacity from the Gulf Coast, which we continually emphasize.
Once in service, this will help bring natural gas prices into that mid-price to upper range, and with increased operator activity, increase our royalty production volumes and cash flow. Since 2020 and to date, we have spent approximately $130 million acquiring our current mineral position in the SCOOP and Haynesville. PHX's current enterprise value is roughly $145 million to $150 million of value. The reserve value I mentioned earlier of at least $300 million is in comparison. We recognize the disconnect between these facts and our current stock price. We continually work every day searching for the best way to reward our shareholders and close this conundrum by increasing shareholder value. As always, I thank our employees and Board of Directors for their hard work.
This concludes the prepared remarks portion of the call. Operator, please open up the queue for questions.
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