Riley Exploration Permian, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Financial statements are unaudited. Unless otherwise noted, amounts are in U.S. dollars.
Business context
Riley Permian explores for and produces oil, natural gas and NGLs, primarily in the Northwest Shelf of the Permian Basin. On April 3, 2023, it completed a roughly $330 million acquisition of assets in Eddy County, New Mexico, adding approximately 10,600 net acres and producing wells. The acquisition was funded with revolving-credit borrowings and a $200 million senior-notes issuance.
Key financial and operating metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $99.9 million | $88.4 million | $166.9 million | $155.6 million |
| Operating income | $45.0 million | $62.5 million | $81.0 million | $103.6 million |
| Net income | $33.1 million | $38.6 million | $64.9 million | $31.4 million |
| Diluted EPS | $1.65 | $1.96 | $3.25 | $1.60 |
| Net cash from operating activities | — | — | $88.7 million | $75.5 million |
| Net cash used in investing activities | — | — | $417.4 million | $48.5 million |
| Net cash from (used in) financing activities | — | — | $322.1 million | $(18.5) million |
Q2 operating margin was approximately 45% of revenue, compared with approximately 71% a year earlier; the filing does not present these margins as reported metrics. Production averaged 21,236 Boe/d in Q2, up 109%, and 17,225 Boe/d for the first half, up 73%. Realized combined price before derivative settlements was $51.38/Boe in Q2 versus $94.80/Boe; including derivative settlements, it was $50.19/Boe versus $66.97/Boe.
At June 30, cash was $6.7 million, total debt carrying value was $394.3 million, and working capital was negative $33.7 million. The credit facility had $215 million drawn and $110 million available under its $325 million borrowing base. Six-month accrued capital expenditures before acquisitions were $80.9 million. The company declared approximately $13.7 million in first-half dividends and announced a $0.34-per-share dividend payable August 3, 2023.
Material changes versus comparable periods
- Q2 revenue increased 13%, principally because production volumes more than doubled following the acquisition and new-well activity; lower commodity prices partly offset volume growth. Q2 net income declined about 14%, while operating income fell about 28%.
- For the first half, revenue rose 7% and net income more than doubled. Results included a $14.4 million derivative gain versus a $62.0 million derivative loss in the prior-year period; derivative fair-value changes can materially affect reported earnings.
- Q2 lease operating expense rose to $17.5 million from $8.1 million, and depletion, depreciation, amortization and accretion rose to $18.6 million from $7.2 million. Interest expense increased to $10.2 million from $0.7 million, reflecting higher debt following the acquisition.
- First-half investing outflows rose sharply, primarily due to the $325.1 million net cash consideration for the New Mexico acquisition and increased capital spending.
Outlook, risks and unusual items
- No formal numerical production or financial guidance is provided. Management said it currently anticipates maintaining full-year average production despite third-party processing disruptions that began in Q3. The company temporarily shut in its New Mexico field to avoid flaring; some wells remained shut in as of August 7, 2023. Management said shut-ins to date had not materially affected results, but could not forecast the impact or duration of future disruptions.
- Management identified commodity-price volatility, inflation and interest rates, midstream capacity and operating interruptions, acquisition integration, drilling results, and regulatory and environmental matters as risks. The company also cited produced-water restrictions and possible permitting delays in the Permian Basin.
- The 10.50% unsecured Senior Notes have a final maturity in April 2028 and require quarterly $5 million principal payments. Their effective interest rate was 13.40% during the first half. The company reported compliance with debt covenants at June 30, 2023; the notes require leverage and asset-coverage tests and minimum hedging.
- Commodity derivative contracts limit exposure to price declines but also limit benefit from price increases. First-half derivative settlements were cash outflows of $7.4 million; the reported derivative gain also included non-cash fair-value gains.
- The company reported a 30% investment in a power-generation joint venture; the facility was expected to enter service in late Q3 or Q4 2023. It also committed to supply the facility with natural gas through 2028. The acquisition purchase-price allocation remained preliminary.
- Management reported no material legal or environmental liabilities and no material change in previously disclosed risk factors. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Verify post-acquisition production, operating costs and realized prices, including the effect of New Mexico shut-ins and third-party processing capacity.
- Track debt balances, scheduled Senior Notes repayments, borrowing-base availability, covenant headroom and interest costs.
- Separate cash derivative settlements from non-cash mark-to-market gains when assessing earnings and cash generation; review hedge volumes, prices and coverage.
- Monitor capital spending, acquisition integration and the final purchase-price allocation, as well as the power joint venture’s construction, costs and expected start-up.
- Assess liquidity in light of the working-capital deficit, low cash balance, dividend payments and continuing capital requirements.