Riley Exploration Permian, Inc. — Q2 FY2022 Form 10-Q
Business context and reporting period. The unaudited quarter ended June 30, 2022 was the company’s fiscal third quarter; the filing also reports results for the nine months ended June 30. Riley is an independent oil and gas producer focused primarily on the San Andres formation in the Permian Basin. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial and operating results
| Metric | Three months ended June 30, 2022 | Prior-year quarter | Nine months ended June 30, 2022 | Prior-year nine months |
|---|---|---|---|---|
| Total revenue | $88.4 | $42.1 | $212.9 | $102.4 |
| Operating income | $62.5 | $19.3 | $136.9 | $33.0 |
| Net income (loss) | $38.6 | $(21.5) | $52.8 | $(81.3) |
| Net income (loss) per diluted share | $1.96 | $(1.20) | $2.69 | $(5.57) |
| Loss on derivatives | $12.4 | $35.4 | $67.2 | $74.2 |
- Quarterly oil and gas sales were $87.8 million, up 111% year over year. Average production was 10,176 Boe/d, up 12%; average realized price before derivative settlements was $94.80/Boe, versus $50.18/Boe.
- For the quarter, oil production averaged 8,363 Bbl/d and realized $108.41/Bbl before derivative settlements. After commodity derivative settlements, combined realized price was $66.97/Boe.
- For the nine months, production averaged 9,969 Boe/d, up 20% year over year; combined realized price before derivative settlements was $77.55/Boe.
- Cash provided by continuing operating activities was $97.0 million for the nine months, compared with $58.8 million a year earlier. Investing used $77.2 million, principally for drilling, completions and the EOR project; financing used $20.1 million.
- Capital expenditures accrued were $34.4 million in the quarter and $80.5 million for the nine months. The filing does not provide quarterly cash-flow totals.
Financial position and liquidity
- At June 30, cash was $16.8 million and revolving-credit borrowings were $61.0 million. The $200 million borrowing base left $139 million available. The company reported compliance with all credit covenants.
- Working capital was negative $55.6 million, compared with negative $46.9 million at September 30, 2021. The deficit included $50.3 million of current derivative liabilities; the filing says these mark-to-market amounts settle over time as production is sold.
- Total assets were $465.8 million and shareholders’ equity was $258.2 million. The company declared approximately $6.2 million of common dividends during the quarter.
- In April 2022, the credit agreement amendment raised the borrowing base from $175 million to $200 million, extended maturity to April 2026 and replaced LIBOR with SOFR. The weighted-average borrowing rate was 4.52% at June 30, versus 2.83% at September 30, 2021.
Changes, outlook and items to monitor
- Higher commodity prices and increased oil volumes drove the revenue and earnings improvement. Production growth reflected new wells and workovers; five gross horizontal wells came online in the quarter.
- Commodity hedges reduced realized prices relative to unhedged prices. Quarter settlements produced a $25.8 million loss, partially offset by a $13.4 million non-cash derivative gain. Derivative results are volatile and recognized in earnings rather than hedge accounting.
- Natural gas and NGL sales volumes were curtailed during the quarter because the primary midstream counterparty was expanding processing capacity. The expansion was commissioned in July; management expected increased capacity afterward but cautioned that periodic curtailments could continue.
- The company described significant inflation in oilfield services and equipment, rising interest rates, geopolitical and recession uncertainty, and continued commodity-price volatility. Management said it could not estimate the duration or severity of these effects. No specific production, revenue or earnings guidance is provided in the filing.
- The company has an EOR project, with approximately $2.0 million of remaining equipment commitments, and committed to approximately $10.6 million of pipe purchases for its fiscal 2023 drilling program. A five-year midstream arrangement imposes minimum well or delivery targets and possible financial penalties if unmet.
- A potential business combination and related financing were abandoned amid changing market conditions; related costs contributed $3.9 million of transaction expense in the nine-month period.
- A bankruptcy trustee’s lawsuit alleges that certain Kansas working interests were transferred for less than reasonable value. The company denies the allegations and is defending the case; it recorded no material liability. Management did not expect known litigation or claims to materially affect financial position, results or liquidity.
- Other material operating risks include produced-water disposal restrictions and seismicity-related regulation in the Permian, possible weatherization requirements, environmental and emissions rules, midstream access, and execution and performance of the EOR project.
Important facts for investors to verify
- Whether post-June gas-processing capacity improved realized volumes, and whether further curtailments occurred.
- Current hedge coverage, settlement exposure and expected effects of commodity prices on realized revenue and cash flow.
- Capital spending, EOR progress and costs, and ability to meet midstream drilling or delivery commitments.
- Borrowing-base redeterminations, interest costs, covenant headroom and the implications of the working-capital deficit.
- Dividend affordability and restrictions under the credit agreement, including the subsequent $0.31-per-share dividend declared in July.
- Developments in the Kansas litigation and any changes to the company’s assessment of potential liability.