Riley Exploration Permian, Inc. quarterly report, Q3 FY2022

Riley Exploration Permian, Inc. — Q3 2022 Form 10-Q

Business context and period. Riley Permian is an independent oil and gas producer focused primarily on the San Andres formation in the Permian Basin. This unaudited report covers the three and nine months ended September 30, 2022, compared with the same 2021 periods. The company changed its fiscal year to the calendar year beginning in 2022.

Financial and operating performance

Metric	Q3 2022	Q3 2021	Nine months 2022	Nine months 2021
Total revenue	$88.1 million	$48.6 million	$243.7 million	$128.0 million
Net income (loss)	$59.8 million	$15.7 million	$91.2 million	$(57.7) million
Operating income	$59.1 million	$26.9 million	$162.7 million	$53.2 million
Net cash from operating activities	Not stated separately	Not stated separately	$130.4 million	$70.2 million
Cash capital investment	Not stated separately	Not stated separately	$83.2 million	$51.2 million

• Q3 oil and gas sales were $87.5 million, up 82%; total net production averaged 12,717 Boe/d, up 33%. For the nine-month period, sales rose 92% and production averaged 10,903 Boe/d, up 21%.
• Q3 realized combined price before derivative settlements was $74.76/Boe; including commodity derivative settlements it was $60.20/Boe. Nine-month realized prices were $81.26/Boe before settlements and $60.69/Boe including settlements.
• Q3 income included a $17.6 million derivative gain, comprising a $34.6 million noncash gain and $17.0 million of settlement losses. The nine-month period recorded a $44.4 million derivative loss, including $61.2 million of settlement losses. These items materially affect reported earnings and period comparisons.
• Operating margin, calculated as operating income divided by total revenue, was approximately 67% in Q3 2022 versus 55% in Q3 2021. Net income also benefited from the derivative gain; nine-month income-tax expense was $25.1 million.

Financial position, liquidity and material changes

• At September 30, 2022, cash was $17.9 million, revolving-credit borrowings were $48.0 million, and shareholders’ equity was $312.7 million. Borrowings were down from $65.0 million at December 31, 2021.
• The $200 million borrowing base provided $152 million of remaining capacity at quarter-end. The company reported compliance with its credit covenants. An October 25 amendment subsequently increased the borrowing base to $225 million; post-amendment borrowing availability is not stated in this filing.
• Working capital was negative $32.7 million, essentially unchanged from the $32.8 million deficit at December 31, 2021. Current derivative liabilities were $22.5 million and were a significant component of the deficit.
• Nine-month operating cash flow increased $60.2 million year over year. Investing cash outflow increased to $83.2 million, principally reflecting greater drilling, completion and EOR spending. Financing cash outflow was $37.6 million, including a $17.0 million net debt paydown and $18.3 million of cash dividends.
• Oil and gas properties, net, increased to $431.1 million from $359.1 million at year-end 2021. Total accrued capital expenditures were $96.5 million for the nine months; this is an accrual measure, not cash capital spending.
• The company declared approximately $6.2 million of Q3 dividends. A subsequent $0.34-per-share dividend was declared in October and paid November 7, 2022.

Outlook, risks and unusual items

• No specific production, earnings or capital-spending guidance is provided. Management said available cash, operating cash flow and credit capacity were expected to meet short- and long-term liquidity needs, while noting that results and liquidity depend on production, commodity prices and capital needs.
• Management reported elevated market volatility, inflation in oilfield equipment and service costs, and rising interest rates; it expected cost pressures to continue for the foreseeable future. A recession or commodity-price decline could adversely affect results and liquidity.
• Principal risks include commodity-price volatility; drilling and EOR performance; derivative settlements and fair-value swings; borrowing-base reductions and covenant compliance; midstream access and costs; produced-water disposal restrictions and induced-seismicity rules; severe weather; and environmental, emissions, permitting and other regulatory requirements.
• Commitments include approximately $10.1 million of additional pipe purchases by Q1 2023, a CO₂ purchase agreement supporting the EOR project, and a minimum-volume commitment under an expanded gas gathering and processing arrangement for at least seven years from its in-service date.
• A proposed $80,000 settlement of the Hoactzin bankruptcy-trustee proceeding was subject to Bankruptcy Court approval. If not approved, the trustee’s claims against Riley Permian could proceed to trial. The company reported no material environmental liabilities.
• The nine-month results include $2.6 million of transaction costs related primarily to a potential business combination and financing that the company ultimately did not pursue. Results for 2021 also include discontinued-operations losses associated with the former Kansas reporting unit.

Investor facts to verify

• Whether production growth and new-well performance continue, and whether cost inflation offsets volume and price gains.
• How derivative settlements and noncash fair-value changes affect realized prices, cash flow and reported earnings.
• Actual cash capital spending versus accrued capital expenditures, including EOR investment and pipe commitments.
• Credit-facility availability after the October borrowing-base increase, and continued covenant compliance amid higher interest rates.
• Bankruptcy Court approval and completion of the proposed $80,000 settlement, plus performance of the EOR and midstream commitments.