Riley Exploration Permian, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited results; comparisons are with the same 2022 periods. The company explores and produces oil, natural gas and NGLs, primarily in the Permian Basin. Results include the New Mexico assets acquired on April 3, 2023.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $108.3 million | $88.1 million | $275.2 million | $243.7 million |
| Income from operations | $58.2 million | $59.1 million | $139.3 million | $162.7 million |
| Net income | $8.6 million | $59.8 million | $73.6 million | $91.2 million |
| Diluted earnings per share | $0.43 | $3.05 | $3.68 | $4.65 |
| Operating margin | 53.8% | 67.1% | 50.6% | 66.8% |
| Net margin | 8.0% | 67.9% | 26.7% | 37.4% |
Q3 production averaged 19,949 Boe/d, up 57%; nine-month production averaged 18,143 Boe/d, up 66%. The company reported realized prices before derivative settlements of $58.69/Boe in Q3 and $55.20/Boe for nine months, below $74.76 and $81.26, respectively, in 2022. Oil drove the revenue increase through higher volumes, while lower realized oil, gas and NGL prices weighed on results.
Derivative losses were $35.3 million in Q3 versus a $17.6 million gain a year earlier, including a $29.1 million non-cash mark-to-market loss and $6.3 million of settlement losses. Nine-month derivative losses were $20.9 million versus $44.4 million in 2022. Q3 interest expense was $10.3 million versus $0.6 million, mainly reflecting acquisition-related debt and higher borrowing rates.
For the nine months, operating cash flow was $141.4 million, compared with $130.4 million. Investing cash outflow was $448.5 million, including the New Mexico acquisition and capital spending; financing provided $304.2 million. Cash was $10.4 million at September 30.
Balance sheet, acquisition and capital
Total debt carrying value was $385.1 million, comprising $210 million drawn on the revolving facility and $175.1 million carrying value of Senior Notes. The notes had $190 million principal outstanding; thus face-value borrowings totaled $400 million. The revolving facility had a $325 million borrowing base and $115 million available. The company reported compliance with debt covenants. Cash less carrying-value debt was approximately negative $374.7 million.
Current assets of $67.2 million and current liabilities of $107.3 million resulted in a $40.1 million working-capital deficit. The company said it uses its credit facility and cash to manage short-term funding needs and expects available capital sources to meet liquidity needs.
The approximately $330 million New Mexico acquisition added about 10,600 net acres, 18 net horizontal wells and 250 net vertical wells. It was funded with credit-facility borrowings and $200 million of 10.50% Senior Notes, issued at a discount and maturing in April 2028. The notes require $5 million quarterly principal payments and carry a reported effective interest rate of 13.38%. The acquisition contributed $25.1 million of revenue and $15.7 million of earnings in Q3, and $49.5 million and $31.3 million, respectively, since closing.
The company declared approximately $20.4 million of dividends for the first nine months. After quarter-end, it declared a $0.36-per-share dividend payable November 9, 2023. A $50 million ATM equity program was established; $0.3 million net proceeds had been raised by September 30, leaving $49.7 million of capacity.
Changes, outlook and risks
- Revenue rose 23% in Q3 and 13% for nine months, primarily reflecting higher production and the acquired assets; lower commodity prices offset some volume gains.
- Operating income fell despite revenue growth as lease operating costs, depletion and interest expense increased. Net income was also sharply lower in Q3, principally reflecting the derivative loss compared with the prior-year gain.
- Management said a third-party processing disruption led to temporary New Mexico field shut-ins in July and August to avoid flaring. Operations returned to normal in August; management estimated the shut-ins had not materially affected results and anticipated maintaining full-year average production, while noting future disruption impacts cannot be forecast.
- The company’s outlook is exposed to volatile commodity prices, production and drilling results, inflation and interest rates, debt and covenant requirements, and access to capital. It also relies on third-party gathering, transportation and processing infrastructure; the filing highlights the risk of curtailments, bottlenecks and shut-ins. The company’s operations are geographically concentrated, and its EOR project, water availability and regulatory changes present additional risks.
- Commitments include providing fuel gas to the power-generation joint venture through 2028 and approximately $13.1 million of pipe purchases by December 2024. The company reported no material legal or environmental liabilities and no material adverse legal matter was identified.
Important facts for investors to verify
- Whether acquired production, development spending and operating costs deliver expected returns, and how the preliminary acquisition accounting may change.
- Debt repayment capacity, borrowing-base availability, covenant headroom and the cost of the 10.50% notes and revolving borrowings.
- Commodity price exposure and the effect of the derivative portfolio, including settlement cash flows and mark-to-market volatility.
- Whether third-party processing and transportation capacity remains reliable, and whether production disruptions affect the company’s stated production outlook.
- Actual capital needs and cash generation relative to dividends, joint-venture commitments and planned pipe purchases; any future ATM share issuance and dilution.