Business context and reporting period
Riley Exploration Permian, Inc. (NYSE American: REPX) is an independent oil and natural gas producer focused primarily on the San Andres formation in the Permian Basin. This unaudited Form 10-Q covers the three and six months ended March 31, 2022; the company’s fiscal year ends September 30. Unless noted, financial amounts below are in millions of dollars.
Financial and operating performance
| Metric | Three months ended March 31, 2022 | Prior-year comparable | Six months ended March 31, 2022 | Prior-year comparable |
|---|---|---|---|---|
| Total revenue | $67.2 | $37.3 | $124.5 | $60.3 |
| Operating income | $41.0 | $7.0 | $74.4 | $13.7 |
| Net income (loss) | $(7.2) | $(51.9) | $14.2 | $(59.8) |
| Net cash from continuing operations | Not presented for quarter | Not presented for quarter | $51.7 | $38.1 |
| Capital additions to oil and gas properties | Accrued capex $25.3 | Not stated here | Cash additions $39.2 | $17.1 |
- Quarterly oil and gas sales, excluding related-party service revenue, were $66.6 million. Average production was 9,791 Boe/d, up 18%; realized price before derivative settlements was $75.63/Boe, including $92.44/Bbl for oil.
- Six-month average production was 9,867 Boe/d, up 24%. Realized price before derivative settlements was $68.64/Boe, versus $40.89/Boe in 2021.
- Operating margin was approximately 61% for the quarter and 60% for the six-month period, compared with approximately 19% and 23% in the respective prior-year periods.
- Derivative losses were $49.6 million for the quarter and $54.8 million for six months, including settlement losses of $18.4 million and $34.4 million, respectively. Rising commodity prices drove significant non-cash mark-to-market losses.
- At March 31, cash was $19.6 million; current assets were $51.3 million and current liabilities $113.9 million, including $58.3 million of current derivative liabilities. Reported working-capital deficit was $62.6 million, or $5.1 million excluding derivative assets and liabilities.
- Revolving-credit borrowings were $63.0 million, with $112 million of borrowing-base capacity available. Total liabilities were $208.0 million.
Material changes versus prior comparable periods
- Revenue increased 82% for the quarter and 109% for six months, reflecting higher oil prices and production growth. Oil sales volumes rose 24% and 23%, respectively; oil realized prices rose 63% and 73%.
- Natural gas revenue declined 60% for the quarter as realized prices fell 65%, despite higher volumes. The prior-year comparison benefited from the February 2021 Winter Storm Uri price spike. Midstream capacity constraints also curtailed gas and NGL volumes.
- Quarterly net loss improved from $51.9 million to $7.2 million; the prior-year period included an $18.6 million discontinued-operations loss. Six-month net income improved to $14.2 million from a $59.8 million loss.
- Six-month operating cash flow increased 36% to $51.7 million. Investing outflow rose to $39.3 million, primarily due to increased drilling, completion and EOR spending.
- Cash dividends paid on common shares were $6.1 million in the quarter. The company declared a $0.31-per-share dividend after quarter-end, paid May 5, 2022.
Outlook, risks and unusual items
- The filing provides no formal production, revenue or earnings guidance. Management expects the company’s cash, operating cash flow and revolving facility, together with other potential financing sources, to meet short- and long-term liquidity needs.
- Management anticipated midstream gathering and processing capacity curtailments affecting natural gas and NGL sales during April 2022, but could not estimate the full financial impact. The plant expansion is expected to add capacity over time.
- On April 29, 2022, the credit agreement was amended: borrowing base increased from $175 million to $200 million, maturity extended to April 2026, LIBOR replaced with SOFR, and hedging requirements revised. At March 31, the company reported compliance with its credit covenants.
- Commodity-price volatility, rising inflation and supply-chain disruption associated with Russia’s invasion of Ukraine were identified as uncertainties. Other risks include drilling performance, derivative exposure, borrowing-base reductions, produced-water disposal restrictions, regulation, weather and midstream availability.
- Open derivative positions include oil and gas swaps and collars; the company said derivatives limit downside exposure but also limit benefit from favorable price movements. Fair-value liabilities totaled $71.4 million at March 31.
- Commitments include EOR supplies and equipment of approximately $4.7 million, a five-year minimum well-or-volume commitment to its primary gas processor (with potential penalties for shortfalls), and approximately $10.6 million of pipe purchases for the fiscal 2023 drilling program. The pipe purchase was entered into after quarter-end.
- A bankruptcy-trustee lawsuit alleges fraudulent transfers relating to Kansas working interests. The company denies the allegations, is defending the action, and had recorded no material liability. Management did not expect known litigation to materially affect financial position, results or liquidity.
- Transaction costs included $2.6 million for the quarter and $3.9 million for six months, primarily for a potential business combination and related financing that the company abandoned due to changing market conditions.
Important facts for investors to verify
- How much of reported earnings and cash flow is affected by derivative settlements versus non-cash fair-value movements, and how the hedge portfolio changes as contracts expire.
- Whether the April midstream curtailment was limited to the expected month and whether processing capacity expansion improves sales volumes.
- Capital spending and EOR execution against available liquidity, contractual commitments, and the company’s dividend policy and credit-agreement restrictions.
- Borrowing-base availability, covenant headroom and the effect of the April 2022 credit amendment and SOFR transition.
- Developments in the Kansas litigation and any change in management’s assessment of potential exposure.