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Panhandle Oil and Gas Inc (NYSE:PHX)
Q4 2019 Earnings Call
Dec 12, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day everyone and welcome to Panhandle Oil and Gas Incorporated 2019 Fiscal Year End Earnings Conference Call. [Operator Instructions]

I would like to now turn the call over to Ralph D'Amico, Panhandle's Vice President, Investor Relations. Please go ahead.

Ralph D'Amico -- Vice President-Business Development and Investor Relations

Thank you for joining us today to discuss Panhandle's Fiscal Fourth Quarter and year-end 2019 Results.

With me on the call today for prepared remarks are Chad Stephens, Chief Executive Officer; Robb Winfield, Chief Financial Officer and myself. 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, Vice President of Operations. Please note that we are also webcasting this call on our Investor Relations website at panhandleoilandgas.com. The earnings press release that was issued earlier today is also posted on the Investor Relations website.

Before I turn the call over to Chad, I'd like to remind everyone that during today's call including the Q&A session, we may have, 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 the actual results to differ from materially -- materially from those expected or implied on the 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 of this call. Panhandle assumes no obligation to update the information presented in the call -- in today's call.

With that, I'd like to turn the call over to Chad Stephens, Panhandle's Chief Executive Officer.

Chad L. Stephens -- Interim Chief Executive Officer

Thanks, Ralph and thanks to everyone on the line for participating in Panhandle's 2019 fiscal year-end conference call. We sincerely appreciate your time and your continued interest in the Company. First, I would like to address Panhandle's change in strategic direction in the Board of Directors decision in September to change the leadership of Panhandle to implement this new strategy.

Panhandle's long-standing history was to harvest value for its shareholders from its deep and broad existing inventory of minerals across the U.S.

As I will talk in more detail later, Panhandle is shifting to a pure play minerals and royalty strategy. This strategy includes proactively participating in the consolidation of the mineral sector to grow the Company on an NAV accretive basis. Prior to assuming my current role here at Panhandle, I was a member of the Panhandle Board of Directors for the immediately preceding two years. Surrendering my title as lead Independent Director to assume the Interim CEO position. At year-end 2018, I retired from Range Resources as Senior VP of Corporate Development, having been there for 30 years, serving in various corporate and leadership positions.

From day one here, the whole Panhandle team has been engaged in support of this change and of our new strategy. I look forward to continuing to work with them to create shareholder value for you. I'm very pleased with Panhandle's 2019 fiscal year performance. We've generated significant cash flow by executing our strategy of actively managing our mineral portfolio. Our proactive leasing effort continues to yield meaningful organic royalty production growth, biased toward oil production, which is supplemented by the lease bonuses we receive on the minerals.

In absolute terms, royalty volumes have increased a little over 13% over the last four years. We believe we are also generating material shareholder value through our targeted divestitures of mineral acreage in the largely tax deferred redeployment of those proceeds into mineral acreage we deemed to have lower risk from both the geologic and a development timing perspective.

In addition, we have materially paid down our debt. Our total return to shareholders for fiscal 2019 was $25.7 million through stock repurchases, dividends and debt reduction. This equates to an effective annualized yield of 11.3% for that period. As we look to maximize the value of our portfolio moving forward, we have shifted away from working interest participation and move back toward being a pure play mineral and royalty company, as we see the minerals sector continuing to be a shining light in the energy space with active deal making opportunities.

Our strategy shift 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, be it by monetizing at the right time or producing out. 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. At this time Panhandle does not anticipate investing its own capital in working interest participation. As a result of the strategy shift, total year-over-year 2019 volumes decreased due to new 2018 wells with high working interest coming online and subsequently lowering natural hyperbolic declines off of initial flush production. We have also incurred a non-cash impairment associated with our decision not to participate in working interest wells which Robb will discuss later.

Going forward, we will focus on growing royalty volumes and expect working interest volumes to continue to decline. Further, we will continue to strive to build a balanced portfolio that can generate value across various pricing environments. This means internally applying rigorous technical science to areas with high quality rock underneath, well funded low cost operators and bringing our hydrocarbon mix closer to 50-50 oil and gas mix over time. Based on the opportunity set, we see currently in the marketplace, we are confident this can be achieved.

At this point, I would like to turn the call over to Ralph to provide a quick operational overview.

Ralph D'Amico -- Vice President-Business Development and Investor Relations

Thanks, Chad. I'd like to start by saying that over the prior few quarters, we have made an effort to provide a more granular review of activity on our acreage position. As we shift to a mineral and royalty focus only, our goal is to continue to improve on how we provide this information to the market.

Panhandle continues to see strong activity on its mineral position. As of September 30, 2019 we had 120 gross wells in progress on our acreage, with an additional 72 permits filed. The majority of the activity continues to be focused in the SCOOP/STACK and the Bakken regions. As of November 20, 2019, we had 20 rigs present on Panhandle's acreage and 50 within 2.5 miles, again predominantly focused on SCOOP/STACK and the Bakken.

We continue to actively lease our open minerals, including minerals that had previously been held back for working interest participation. During fiscal 2019, we leased 1,785 net acres for an average bonus of $855 and an average royalty of 21%. I'd like to also highlight that the SCOOP/STACK region, we have seen leases with bonus in excess of $1,500 an acre and royalty rate up to 25%. On the acquisition and divestiture fronts, we had a very active fiscal 2019. We sold 890 mineral acres in the Permian at an average price of over $21,000 per net acre. Since the end of this fiscal year, we have also sold an additional 530 net mineral acres in Eddy County, New Mexico for $3.4 million.

Consistent with our strategy, these acres were predominantly undeveloped and had more development timing risk associated with them. On the buy side, we purchased 408 net mineral acres for an average of $9,400 per net acre in the Bakken and 382 net mineral acres for an average of $4,958 in the SCOOP/STACK. Since the end of this fiscal year, we have also signed a PSA to purchase an additional 704 net mineral acres in the core of the STACK for $9.65 million. Here again, I would like to highlight that the minerals we are purchasing have existing cash flow and more visible line of sight for development. Opportunities relative to the minerals that we have divested. Our deal pipeline continues to be strong. And as Chad mentioned, we believe that Panhandle is well positioned to participate in the mineral sector consolidation.

We continue to see opportunities in the Bakken and the SCOOP/STACK for growth. And we plan on focusing on sections with active permitting and drilling activity, as those provide the best risk adjusted returns in our opinion.

With that, I'd like to turn the call over to Robb, who will provide a review of the financials.

Robb P. Winfield -- Vice President, Chief Financial Officer and Controller

Thanks, Ralph. First I want to thank everyone for being on the call today. Before I get into the details, I'd like to share that the Company had a very good fiscal year and fourth quarter of 2019, especially in light of the tough pricing environment noted in the industry over the past year. Outside of the non-cash impairment in the fourth quarter of 2019, that Chad alluded to earlier, the Company had a very good year in regards to adjusted pre-tax net income and adjusted EBITDA, as noted in our press release. I will now share with some more details regarding our financial results for the fiscal year ended September 30, 2019.

In 2019, Panhandle generated $66 million in revenues, this was a 47% increase compared to the $45 million from 2018. This was primarily due to the sale of predominantly undeveloped minerals in the Permian Basin in New Mexico and Texas for a $19 million gain during 2019. Oil, NGL and natural gas revenues were down $9 million in 2019, primarily due to natural production decline on the significant working interest properties from our 2017 drilling program, that came on line during the early parts of 2018. Production from these properties has experienced a natural hyperbolic decline, which we expected from their high initial rates.

The Company also had a gain on derivatives of $6.1 million in 2019 versus a loss on derivative contracts of $4.9 million in 2018. Total expenses before the non-cash impairment in 2019 increased 0.7% to $43.4 million from $43.1 million in the prior year. The Company recorded a non-cash impairment of $76.8 million in the fourth quarter of 2019 which related predominantly to our Eagle Ford shale assets. The impairment on the Eagle Ford assets was caused by the Company's strategic decision to cease participating with a working interest on the mineral and leasehold acreage going forward and therefore removing all of the working interest proved undeveloped reserves in the reserve reports.

The removal of the PUDs also eliminated approximately $85 million of capital expense obligations, net to Panhandle's working interest ownership. The removal of the proved undeveloped reserves also cause the assets to fail the step one test for impairment as its un-discounted cash flows were not high enough to cover the book basis of the assets. These assets were written down to their fair market value as required by GAAP at 9/30/2013. No impairment was recorded during 2018.

Our DD&A was also negatively impacted in the fourth quarter of 2019 due to the Company's strategic decision, I noted just a moment ago. The Company's DD&A rate in the fourth quarter of 2019 temporarily spike to $2.50 per Mcfe versus $1.45 per Mcfe in 2018 fourth quarter. Based on the Company's strategic decision to focus on mineral ownership, the Company removed all working interest proved undeveloped reserves from the year-end 2019 reserve report, which caused the DD&A rate to increase, as those volumes could no longer be used in the calculation of DD&A on our leasehold positions. This impact was predominantly noted on our Eagle Ford assets, the approximate increase from the previous quarters DD&A was $1.5 million.

Considering the impairment on the Eagle Ford noted before, we expect our DD&A rate going forward to be significantly lower. The Company saw a 20% increase in total cost per Mcfe excluding DD&A and impairment, in 2019 relative to 2018. The increase was primarily driven by lower working interest production as noted previously. Interest expense and production taxes were also influenced respectively, by higher bank interest rates and production tax rate increase in Oklahoma, that was effective beginning the last quarter of 2018.

Our G&A expense also increased primarily due to a one-time severance of 670,000 upon the resignation of the Company's former CEO, as well as non-recurring restricted stock and other compensation expense increases due to retirements and changes in personnel. Approximately 800,000 of the increased G&A expenses are attributable to non-recurring expenses. Our adjusted pre-tax net income increased to 186% to $16.7 million in 2019 from $5.8 million in 2018.

Our adjusted EBITDA was $37.6 million in 2019, which was a 45% increase compared to the $26 million in 2018. For 2019 both the adjusted pre-tax net income and the adjusted EBITDA included a $19 million gain on the sale of assets. The Company generated excess free cash flow, enabling us to return $25.7 million to shareholders through dividend payments, stock repurchases and debt reduction.

We continue to deploy an active commodity hedging program, which extends out through 2020 and into early 2021. Currently, we have 120,000 barrels of oil hedged at a price of approximately $60 per barrel for calendar 2020. We also have 1.4 Bcf of natural gas hedged at a price of $2.75 per Mcf for calendar 2020, which is meaningfully above the current natural gas price. 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 multiple ways.

Now I will turn the call back to Chad to conclude.

Chad L. Stephens -- Interim Chief Executive Officer

Thank you, Robb. I would like to reiterate how pleased we are with our 2019 results, and would like to take this opportunity to thank all of the Panhandle employees, for their tireless efforts in contributing to this success. I'm excited about the new strategic direction we have set for the Company and look forward to keeping you apprised of our progress in the coming year.

This concludes the prepared remarks portion of the call. Operator, let's please open up the queue for questions.

Questions and Answers:

Operator

Thank you. The floor is now open for questions. [Operator Instructions] And our first question comes from John White with Roth Capital. Please go ahead.

John White -- Roth Capital Partners -- Analyst

Good afternoon, everyone.

Chad L. Stephens -- Interim Chief Executive Officer

Hey, John.

Robb P. Winfield -- Vice President, Chief Financial Officer and Controller

Hey, John.

John White -- Roth Capital Partners -- Analyst

So I understand the impairment related to the change in strategic direction. On the actual writedown of the reserve volumes, I understand that. But just to clarify, you will be -- will you be seeking, will you be undertaking a marketing effort to sell the -- to sell the PUDs associated with your working interest properties?

Chad L. Stephens -- Interim Chief Executive Officer

Yes, John. We are currently working on a couple of different opportunities. We found one company that's particularly interested in non-op working interest development opportunities. So yes, we are -- we're working on that.

John White -- Roth Capital Partners -- Analyst

Yeah. So, that money could come back in?

Chad L. Stephens -- Interim Chief Executive Officer

Well...

John White -- Roth Capital Partners -- Analyst

A portion of that money could come back in.

Chad L. Stephens -- Interim Chief Executive Officer

A small portion. The market is not really robustly valuing drilling locations, so we have to just take what we can get. It's not a real robust market, but we will try to get as much cash flows we can from the drilling locations.

Ralph D'Amico -- Vice President-Business Development and Investor Relations

Yeah, and John it's Ralph. I mean, I think, I think it's not, it's not binary whether we just sell it or don't sell it, right. I think there is other options like trading it for an override or getting a spud fee from somebody to take over an AFE. There is a variety, we're exploring lots of different options that they could create value from those undeveloped locations.

John White -- Roth Capital Partners -- Analyst

Okay. Well, congratulations on all the work you've done, on the transition. And I'm sure you have more to do. But look forward to staying -- staying on top of the story.

Chad L. Stephens -- Interim Chief Executive Officer

Thank you, John.

Robb P. Winfield -- Vice President, Chief Financial Officer and Controller

Thank you, John.

Operator

And our next question comes from Rich Howard with Boiling Point Resources. Please go ahead.

Richard Howard -- Boiling Point Resources -- Analyst

Good afternoon.

Chad L. Stephens -- Interim Chief Executive Officer

Hey Rich.

Richard Howard -- Boiling Point Resources -- Analyst

I would wonder, has there been, is there a tax realization effect with the impairment charge? Or do we need other transactions? And I have a couple of follow-ups on that as well.

Yeah, there is going to be a realization over time with our cost depletion. So we are going to get some tax advantage if there would have been a sale, and that would have been a loss, that would have all been available right away. But since there was no sale, that impairment it will just get cost depleted over time, but there will be a tax benefit of it.

And have we gone non-consent on any wells or is that not a option?

Chad L. Stephens -- Interim Chief Executive Officer

Yes. The operator of the Eagle Ford assets, which is the major impact of the impairment has sent recently AFEs associated with drilling more wells on the asset and we have gone non-consent. And while we're working on, looking for someone to take on those drilling obligations.

Richard Howard -- Boiling Point Resources -- Analyst

And what are the -- what are the considerations on non-consent? I mean, if that well pays out say 150%, would it not then become valuable to us?

Chad L. Stephens -- Interim Chief Executive Officer

The non-consent penalty is 400%.

Richard Howard -- Boiling Point Resources -- Analyst

That was 400%? Not 150%?

Chad L. Stephens -- Interim Chief Executive Officer

Yes. Virtually, it would never come back in.

Richard Howard -- Boiling Point Resources -- Analyst

Yeah. We would hope it would. But now, OK, that sounds very reasonable. One more question, Chad. So if we continue to generate $20 million of EBITDA, when would we -- I guess this is for Robb too. When would we begin to feel the impact of current taxes?

Robb P. Winfield -- Vice President, Chief Financial Officer and Controller

I would tell you, that it's going to be with our cost depletion, and with our AMT carry forward. It's going to be probably three or four years before we pay a cash tax. That's a rough estimate, Rich. But realistically unless commodity prices up --come up significantly, it's going to be a little bit of time before we have to pay a cash tax.

Chad L. Stephens -- Interim Chief Executive Officer

And Rich, that's a good question because we did realize as we cease participating in working interest wells that will lose the tax benefit of the IDCs.

Richard Howard -- Boiling Point Resources -- Analyst

Exactly.

Chad L. Stephens -- Interim Chief Executive Officer

At the end of the day, we still think we can create more NAV going this direction.

Richard Howard -- Boiling Point Resources -- Analyst

Yeah, OK. Now I'm happy with it. Thank you very much.

Chad L. Stephens -- Interim Chief Executive Officer

Yeah.

Operator

[Operator Instructions] And there appear to be no further questions from the floor. I'll turn it back over to management for any closing remarks.

Ralph D'Amico -- Vice President-Business Development and Investor Relations

We appreciate everyone participating on the call. And like I said before, look forward to keeping you up to-date, as we move through the year. Thanks again.

Operator

[Operator Closing Remarks]

Duration: 23 minutes

Call participants:

Ralph D'Amico -- Vice President-Business Development and Investor Relations

Chad L. Stephens -- Interim Chief Executive Officer

Robb P. Winfield -- Vice President, Chief Financial Officer and Controller

John White -- Roth Capital Partners -- Analyst

Richard Howard -- Boiling Point Resources -- Analyst

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