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Panhandle Oil and Gas, Inc. (NYSE:PHX)
Q2 2019 Earnings Call
May 9, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to inaugural Panhandle Oil and Gas Incorporated second quarter year ending 2019 earnings conference call. Today's conference is being recorded. I would now like to turn the call over to Stephen Heuser, Panhandle's investors relation representative. Please go ahead.

Stephen Heuser -- Investor Relations Representative

Thank you for joining us today to discuss our second quarter fiscal year 2019 financial results. With me on the call today for prepared remarks are Paul Blanchard, Chief Executive Officer and Rob Winfield, Chief Financial Officer. After prepared remarks, we will open up the call to a Q&A session. During the Q&A session, we will also be joined by Freda Webb, VP of Operations and Ralph D'Amico, VP of Business Development and Investor Relations. Please note that we are also webcasting this call on our Investor Relations website, panhandleoilandgas.com.

The earnings press release was issued earlier and is also posted on the investor relations website. Before I turn the call over to management, I'd like to remind everyone that during today's call, including the Q&A session, we may make forward-looking statements regarding expected revenue, earnings, future plans, opportunities, and other expectations of the company. These estimates and plans and other forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied on this call.

These risks are detailed in our most recent annual report on Form 10-K, as such may be amended or supplemented by subsequent quarterly reports on Form 10-Q or other reports filed with the Securities and Exchange Commission. The statements made during this conference call are based upon information known to Panhandle as of the date and time of this call. Panhandle assumes no obligation to update the information presented in today's call. With that, I'd now like to turn the call over to Paul Blanchard, Panhandle's president and chief executive officer. Paul?

Paul Blanchard -- Chief Executive Officer

Thanks, Stephen. And a special thanks to everyone on the line for participating in Panhandle's first ever conference call. We sincerely appreciate your time and your continued interest in the company. We are excited to be hosting our first ever earnings call. We plan to host these calls each quarter moving forward in a concerted effort to expand investor awareness and to provide more opportunity for access to management. Given that this is our first call, I would like to give a quick overview of Panhandle and our unique business model. The company was founded in 1926 as a royalty cooperative in Oklahoma and became a public company in 1979. For most of the company's history, we were a mineral royalty company. In the early 2000s, with the advent of horizontal resource play drilling, we started participating with non-operated working interest in a material way primarily through our mineral ownership. Today, Panhandle owns 259,100 net mineral acres in 10 states and eight different resource plays.

Of the 259,100 acres, 60,900 acres are producing, 13,700 acres are leased out but not yet producing, and 184,500 acres are open. Our strategy is to manage our assets as a portfolio with multiple levers to generate revenue and create value for our shareholders. In order to fully understand our company, it is important to understand both our portfolio of assets and the strategy to manage those assets. There are five primary drivers we have to manage and optimize our portfolio. First, generating royalty revenue from our producing mineral acres; second, generating least bonus revenue from our unleashed mineral acreage; third, bringing cash forward by selling mineral acreage we believe is priced above its risk-present value; 4) buying additional mineral rights that we believe are priced below their risk-present value; and 5) participating as a non-operated working interest owner.

As we look to maximize the value of our portfolio moving forward, we are strategically shifting away from working interest participation and moving back toward the original roots of the company as a pure play mineral and royalty company. This process will take some time as we currently own material working interest production and non-mineral related working interest participation rights, and we intend to maximize the value of those assets. However, our focus moving forward is to create value through generating royalty revenue, extracting maximum lease bonuses, and optimizing our mineral holdings through thoughtful acquisitions and divestitures because we believe those are the four areas that will drive the greatest return for our shareholders. At this point, I would like to provide an operational overview. And then I will turn the call over to Robb to discuss the financials.

It is important to understand that since we are a non-operator and do not control the timing of drilling on our properties, it is difficult to model our business on a quarter-over-quarter basis. Additionally, as we are strategically transitioning away from working interest participation, that part of our business will naturally experience declining production. However, we plan to mitigate the impact of that production decline using the four levers I previously discussed. Average daily production for the second quarter of 2019 decreased 10% when compared to the first quarter of 2019. This higher than normal quarter-to-quarter decline was principally due to three unusual events. First, operators of high-working interest wells in the stack play elected to remove less NGLs from the natural gas stream due to the lower NGL prices. Second, the sale of our Lea and Eddy County, New Mexico minerals in the first quarter for $9.1 million and the loss of associated production.

Third, an adjustment of estimated production in prior quarters. Being a non-operator, we receive production data from operators two to three months after the actual month of production. As a result, we are required to estimate production each quarter and true it up in subsequent quarters. This process is normally very accurate. However, multiple high-working interest wells in the Arkoma Woodford experienced lower than projected production in the first quarter. Therefore, a larger than typical second quarter adjustment was required. As our production on wells with high-working interest declines, these adjustments should be minimized. Seven new Eagle Ford wells began producing right at the end of the second quarter. The 30 day average production from these wells was in line with our pre-drilling expectations at 860 boe per day gross or 69 boe per day net to Panhandle. We have an average net revenue interest of 8% in these seven wells.

There are 18 drilling rigs currently drilling royalty interest wells on our mineral acreage with 13 in SCOOP and STACK, two others in Oklahoma, two in the Permian, and one in the Bakken. Two other significant items to note is that we have not elected to participate in any working interest wells in the first half of 2019, and our royalty sales revenue increased 22.2% during that period as compared with a year-ago period. Thirty-seven percent of our production is now from royalty as compared to 28% in 2018. This is the highest percentage of royalty production for Panhandle since before 2004. With that, I'll turn the call over to Robb to go over the financials. And then I'll close the prepared remarks with comments on our strategy, progress and outlook.

Robb Winfield -- Chief Financial Officer

Thanks, Paul. Let me first reiterate Paul's comments thanking everyone for being on the call today. I will share and review some more details regarding our financial results for the second quarter ended March 31, 2019 and then turn the call back over to Paul to make some final comments on the progress of our strategic plan. For our second quarter ended March 31, 2019, total revenues were $7.6 million which is a 71% decrease from the $26.3 million in the first quarter of '19. The change was caused by the following. 1) The company sold mineral assets in the first quarter of '19 for a gain on sale of $9.1 million. And we did not have any assets sales in the second quarter of '19. 2) We had a $4.5 million gain on our derivative contracts in the first quarter of 2019.

And that turned in the second quarter of '19 to a loss of $1.8 million. 3) Oil, NGL, and natural gas revenues decreased $3 million from the first quarter of 2019 due to the production declines that Paul discussed earlier as well as a 14% decrease in the average price received per MCFE during the second quarter. Total expenses decreased 325,000 in the second quarter of 2019 when compared to the first quarter of '19, most of which was driven by lower production, partially offset by increased G&A for non-recurring compensation costs. Adjusted EBITDA was $4 million in the second quarter of '19 as compared to $14.5 million in the first quarter of '19. Given the nature of our business and our ability to generate significant revenues through leasing and strategic assets sales, we can experience large changes in our statement of operations when comparing quarterly information. Therefore, we believe that year-to-date comparisons can be more useful when assessing the company's performance during any given year.

Year-to-date 2019, Panhandle generated $34 million in revenues. This is a 42% increase compared to the $24 million from the prior year-to-date '18. This was primarily due to the sale of minerals in Lea and Eddy County in New Mexico for a $9.1 million gain during 2019. Oil, NGL, and natural gas revenues were down $3.7 million in 2019 year-to-date mainly due to natural production decline on significant properties from our 2017 drilling program that came online during the early parts of 2018. These properties' production has since fallen from high initial production rates. The company had a gain on derivative contracts of $2.7 million in the year-to-date 2019 versus a loss on derivative contracts of $1.8 million in 2018. The total expenses year-to-date decreased 9.5% to $19.7 million from $21.8 million in the prior year. The company saw a 10% increase in total cost per MCFE in year-to-date 2019 relative to 2018. This increase was primarily driven by lower production, as noted above.

Interest expense and production taxes were also influenced respectively by higher bank interest rates and production tax rate increases in Oklahoma during the 2019 period. G&A expenses also increased mainly due to non-recurring restricted stock and other compensation expenses. The adjusted pre-tax net income increased 117% to $10 million in the year-to-date 2019 from $4.6 million in 2018. Our adjusted EBITDA was $18.5 million for year-to-date 2019 which was an increase compared to the $15 million in 2018. For 2019, both the adjusted pre-tax net income and the adjusted EBITDA include a $9.1 million gain on the sale of assets. The company generated excess cash flow, enabling us to return 5.3 million to shareholders through dividend payments, and stock repurchases while also paying down $6.9 million of debt from the 2018 year end. We continue to deploy an active commodity hedging program which extends out two years.

We have 160,000 barrels of oil hedge set at a price of $60 per barrel for calendar 2019 and 120,000 barrels of oil at a price of $60 per barrel for calendar 2020. We have 3.4 Bcf of natural gas hedged at the price of $2.99 per Mcf for calendar 2019 and 1.3 Bcf of natural gas hedged at a price of $2.81 per Mcf for calendar 2020, which is meaningfully above the current natural gas prices. We have continually been able to lock in favorable returns for our shareholders through this hedging program and plan to continue. We are pleased that we continue to generate good sustainable cash flow given our ability to strategically produce revenue in various ways. I will now turn the call back over to Paul.

Paul Blanchard

Thanks, Robb. As I discussed earlier, there are five primary levers we have to manage and optimize our portfolio. I would like to provide an update on our execution in each of these areas for the first half of 2019. No. 1, we generated $7.9 million in royalty revenue, a 22% increase from the same period in 2018. No. 2, we generated $723,000 in lease bonus, a 21% increase. More importantly, we are preparing to take a material package of STACK and SCOOP minerals to market for leasing this summer. We generated $9.1 million from the sale of 206 net mineral acres in Lea and Eddy County, New Mexico at $44,200 per acre. And we are currently marketing additional premium value mineral acreage in the Permian Basin. We purchased 374 net mineral acres in the core of STACK in Blaine and Caddo Counties, Oklahoma, for $1.8 million, or $4,800.00 per acre. We invested $4.2 million in working interest participation, principally for the seven Eagle Ford wells which began drilling last year and started producing at the end of March.

However, we did not elect to participate in any new working interest wells during the first half of 2019. Also, on May 6, 2019 Panhandle entered into a definitive agreement to acquire 319 net mineral acres in the core of the Bakken/Three Forks play principally in McKenzie and Dunn Counties, North Dakota for $3.5 million. There are 324 Bakken and Three Forks wells with net royalty production of approximately 52 barrels of oil equivalent per day and an additional 130 Bakken and Three Forks undeveloped locations identified on the mineral acreage. Cash flow for May 2019 is estimated at $52,300. The transaction is expected to close by the end of May 2019 and will be funded utilizing the company's bank credit facility. I am pleased with the execution of our long term strategic plan and look forward to future execution of our strategy to drive long term shareholder results.

As Robb discussed earlier, I'm also pleased that we were able to repurchase $4 million of our stock, pay out $1.3 million in dividends, and pay down $6.9 million in debt during the first half of 2019. With that, let me open the call to questions. Operator, please instruct our listeners on how to queue up.

Questions and Answers:

Operator

Yes. Thank you. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up the handset before pressing the * keys. Our first question is from Tyler Olson with Karlin Asset Management. Please proceed.

Tyler Olson -- Karlin Asset Management -- Analyst

Hi, Paul. Thanks for taking my question. You guys have a lot going for you it seems like with the low leverage Permian sales and relatively low payout ratio to continue to redeploy capital. Can you just give us some color on where and how you plan to redeploy that? And how the acquisitions compete with buybacks? Thanks.

Paul Blanchard -- Chief Executive Officer

Yeah, Tyler. Thanks for the question. We're concentrating the redeployment, obviously, into the mineral position and, particularly right now, into areas in the STACK and SCOOP and also the Bakken. We think those are areas that have value today where the pricing is such and the competition is such that it's attractive pricing for us. So, that's where we're currently focusing that activity. And in terms of the relationship of that to stock buybacks, we're looking at valuation models of the company using several different metrics. And we'll just use the capital that we have available for the best use. And we believe right now that the stock buyback is a very good use. And as we see particularly attractive acquisitions in these areas, we'll also use capital for that.

Tyler Olson -- Karlin Asset Management -- Analyst

Got it. Thanks. And then also on the lease bonuses and trying to lease some of the acreage that some minerals that aren't leased right now, can you give us some color on how you're going about that and how active you're gonna be in the future?

Paul Blanchard -- Chief Executive Officer

Sure. We're always looking to lease out all the minerals that we can. We started a few years ago with a much more active program of taking big packages out to the market for leasing. And this package that I mentioned in the STACK and SCOOP is going to be a fairly substantial package of unleased minerals in some key areas of STACK and SCOOP that we think will attract a number of buyers. And we're marketing that internally at this time. We're not hiring any third-party marketing firm for that. But we're in the final stages of preparing to take that out to market right now. Should have the results of that this summer.

Tyler Olson -- Karlin Asset Management -- Analyst

Great. Thank you very much. And great to see that you're holding calls now.

Operator

Our next question is from David Spier with Nitor Capital Management. Please proceed.

David Spier -- Nitor Capital Management -- Analyst

Hey, guys. Thanks for putting the call together. So, I appreciate the shift from working interest to then going back to the roots of more of a pure play royalty company. I'm just curious what your take is or view is in terms of an appropriate level of G&A as you transition to more of a pure play royalty company?

Paul Blanchard -- Chief Executive Officer

Well, David, the transition is gonna take some time, as I mentioned. We've still got a lot of working interest assets. But with the acquisition effort that we have, the staffing level is going to remain basically the same as it is as we're redeploying that cash flow into more mineral position as opposed to the staff spending time evaluating the working interest participation. So, the staffing level will remain roughly the same and the G&A will remain roughly the same as we go through that transition.

David Spier -- Nitor Capital Management -- Analyst

Understood. But in terms of a normalized level, especially compared to other companies that exist in this space, would you say it's something that's on the on the table, something the company is looking at and considering? I think you guys are running at 25% G&A versus operating versus cash margin. Is it something that you're gonna be considering in the future? I'm just trying to get an idea of a normalized rate to factor in.

Paul Blanchard -- Chief Executive Officer

David, I think the change will be as the company grows, as we acquire more mineral position and grow the company through the acquiring of mineral position. I think we have a lot of -- we have systems in place and capacity to add substantial mineral holdings without adding personnel. And so, it's going to be more from a reduction in G&A. It's gonna be more of an increase in the cash flow of the company is the --

[Crosstalk]

David Spier -- Nitor Capital Management -- Analyst

So, you believe you can scale. So, basically, you can scale the company with the current staff?

Paul Blanchard -- Chief Executive Officer

Yes.

David Spier -- Nitor Capital Management -- Analyst

Got it. Okay. Understood. I appreciate it, guys

Operator

As a reminder, it's *1 on your telephone keypad if you would like to ask a question. Our next question is from John White with Roth Capital. Please proceed.

John White -- Roth Capital -- Analyst

Good afternoon, guys.

Paul Blanchard -- Chief Executive Officer

Hey, John. How are you doing?

John White -- Roth Capital -- Analyst

Good. I'd like to tell you I am also pleased to be participating on the inaugural conference call for Panhandle Oil and Gas. I've been talking to you guys for several years. And you've been following through on your proactive mineral leasing campaigns. And I like the recent stock buybacks and the debt reduction you faced with fewer opportunities than you may have wanted. And so, you returned the money to the balance sheet and the shareholders. Glad to see the Eagle Ford come online. Looking through the press release, what really caught my eye very favorably was the Bakken/Three Forks. That looks like a nice package you got.

Paul Blanchard -- Chief Executive Officer

Yeah. There's almost 50 wells that are in progress right now in that package. And so, we're anticipating cash flow for 2020 to be roughly $800,000.00 on that package. And so, we're very pleased to add that into the portfolio.

John White -- Roth Capital -- Analyst

Yeah. Looks like a real nice acquisition there. And it's a good addition to your portfolio. And thanks for taking my question.

Operator

Our next question is from Richard Howard with Boiling Point Resources. Please proceed.

Richard Howard -- Boiling Point Resources -- Analyst

Good afternoon. I heard the word 'premium package' on your Permian Basin. If this package or packages is sold, will there be a 401 exchange with the new Bakken properties? What's the shot clock on that?

Paul Blanchard -- Chief Executive Officer

Rich, thanks for the question. And we certainly intend to do that to the extent that we possibly can.

Richard Howard -- Boiling Point Resources -- Analyst

So, would one of these packages pay the whole price of the Bakken?

Paul Blanchard -- Chief Executive Officer

That's certainly within the realm of reasonable to expect that one of the packages could offset the Bakken purchase. Yes.

Richard Howard -- Boiling Point Resources -- Analyst

And as we go forward, do we feel that most of the cash generation will remain untaxed?

Paul Blanchard -- Chief Executive Officer

So, obviously, to the extent we can continue to do these tax-free exchanges with our very low cost basis minerals, that would remain deferred. We have the AMT credit. And I'll let Robb talk a little bit about the AMT credit that will defer or offset some taxes also.

Robb Winfield -- Chief Financial Officer

Yeah. Hi, Rich. So, we've got a $2.9 million carry-over from last year of AMT credits. So, that'll shield most of the income that comes in up to whatever 21% of that is. Or if you blow that up by 21%. And we also have some nice NOL loss carry forward on Oklahoma production and income. So, that'll shield us somewhat on our earnings in the state of Oklahoma as well.

Richard Howard -- Boiling Point Resources -- Analyst

Right. And I'm taking too much time. But if you were to think about it on a tax efficiency basis, can we think of the money that comes in from the actual oil and gas production on working interest wells? Can that go pretty consistently to share repurchase and debt reduction without eating into our tax position?

Robb Winfield -- Chief Financial Officer

Can you repeat that?

Richard Howard -- Boiling Point Resources -- Analyst

That was a complicated question. So, the working interest production, as it declines but throws off a lot of cash, can that money go into share repurchase and debt reduction without concern to eventually causing income taxes? I understand that selling the low value and the low cost basis mineral acreage is eventually gonna cause a problem if we can't recycle it into Bakken properties. But the other income, other cash generation.

Paul Blanchard -- Chief Executive Officer

So, Rich, the AMT credit shelters roughly $13.8 million of federal income tax, taxable income. And that's what would be sheltered through that. After that, we would basically -- without participating materially and working interest wells moving forward and not having the --

Robb Winfield -- Chief Financial Officer

We get a deferral on our IDC.

Paul Blanchard -- Chief Executive Officer

Yeah. So, without the IDC credit, then after this $13.8 million, we would become a federal tax payer. We still get some credit from the depletion --

Robb Winfield -- Chief Financial Officer

Yes, percentage depletion in excess of cost basis. That's a permanent difference. So, that doesn't go away.

Paul Blanchard -- Chief Executive Officer

Basically, I think the lower tax or the tax advantage we have right now, since we're not participating and we don't get the IDC credit is gonna be this shelter, this credit for $13.8 million of federal taxable income moving forward.

Richard Howard -- Boiling Point Resources -- Analyst

Got it. Thanks. Thank you very much. Great quarter. Thank you.

Operator

And that will conclude our question and answer session. I would like to turn the call back over to Stephen Heuser for closing remarks.

Stephen Heuser -- Investor Relations Representative

Thank you. Thanks again for everyone for joining us on today's call. We look forward to talking to you at the conclusion of the current quarter and hope to have you on our future earning calls. Have a great evening and please feel free to reach out to Ralph or myself if you have any additional questions. Thank you.

Duration: 31 minutes

Call participants:

Stephen Heuser -- Investor Relations Representative

Paul Blanchard -- Chief Executive Officer

Robb Winfield -- Chief Financial Officer

Tyler Olson -- Karlin Asset Management -- Analyst

David Spier -- Nitor Capital Management -- Analyst

John White -- Roth Capital -- Analyst

Richard Howard -- Boiling Point Resources -- Analyst

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