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Panhandle Oil and Gas Inc (NYSE:PHX)
Q1 2020 Earnings Call
Feb 5, 2020, 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 Inc. First Quarter 2020 Earnings Conference Call. Today's conference is being recorded.

I would like to now turn the conference 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 our 2020 first quarter 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, who is the VP 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 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 the call. The 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 like to turn the call over to Chad Stephens, Panhandle's Chief Executive Officer.

Chad L. Stephens -- Chief Executive Officer

Thanks Ralph and thanks to everyone on the line for participating in Panhandle's 2020 fiscal first quarter conference call. We sincerely appreciate your time and your continued interest in the company.

The first quarter of 2020 reflected increasing momentum despite continued commodity price headwinds and executing the strategy we originally announced in 2019. As previously discussed, we are moving away from working interest participation to implement a disciplined focus on proactively growing our mineral royalty holdings in areas with good rock quality, clear line of sight development under well-established operators, on an NAV accretive basis. Over time, we are confident this strategy should provide meaningful free cash flow that we can return to our shareholders. In the first quarter, we closed on our previously announced acquisition of 700 net mineral acres in a core of the STACK under acreage largely operated by Devon, Aventine, and Marathon. We are currently actively evaluating other interesting opportunities, mainly in the STACK/SCOOP and Bakken.

Rob will provide detailed color around the first quarter results in a moment. Interestingly, quarter-over-quarter, we saw a decline in the operating cash flow of approximately $1.3 million or 42%, but this decline is all due to a material swing in derivative contracts. We booked a $1.1 million derivatives gain in fourth quarter 2019 and an $800,000 loss in first quarter '20, a $1.9 million negative variance. Otherwise, our operating cash flow would have been virtually flat. I would also emphasize that our capital expenditures for the quarter have dropped to an insignificant amount, just over $100,000. We are seeing the natural decline and our working interest PDP volumes continue, abstain from participating with working interest in new wells.

As we transition to the mineral-only strategy, we should be able to mitigate this decline through the organic development of our minerals and by acquiring minerals that include existing production and line of sight development similar to the STACK deal we announced in December. This acquisition only contributed 14 days of production to the first quarter '20 numbers. Beginning in quarter, we will realize the full impact to our financials. We have an active mineral package deal flow and are optimistic at our chances of closing more acquisitions in the future. We look forward to keeping you updated with our progress.

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

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

Thanks Chad. Panhandle continues to see strong activity on its mineral position. During the quarter ended December 31st, we had 97 gross, 0.32 net wells converted from wells in progress to producing wells. The majority of this activity continues to be focused in the SCOOP/STACK and Bakken regions. At the end of the quarter, we had 125 gross, 0.49 net wells in progress, which is basically a 1:1 replacement ratio of the prior quarter's well in progress that were placed on production. This shows the resiliency and organic growth potential of the Panhandle asset base. Also as of the quarter end, we had nine rigs present on PHX acreage and 55 within 2.5 miles, again, predominantly focused on SCOOP/STACK and Bakken. We continue to actively lease our open minerals including minerals that had been previously held for working interest participation. During the first fiscal quarter, we leased 754 net acres for about $528,000, which works out to an average bonus of $668 per acre and a royalty of 21%.

On the acquisition and divestiture front, we closed on the sale of 530 predominantly undeveloped mineral acres in Northwest Eddy County, New Mexico at an average price of $4,800 per acre. We also close on the purchase of 700 net mineral acres in the core of the STACK as Chad previously mentioned. These two deals bookend our philosophy of treating our minerals like a portfolio and high-grading our assets to maximize cash flow and reduce risk. Our deal pipeline continues to be strong and we're currently evaluating several opportunities.

With that, I'll turn the call over to Rob, who will provide a review of the financials.

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

Thanks Ralph. First, I want to thank everyone for being on our call today. I will share with you some more details regarding our financial results for the first quarter ended 12/31/2019 and then turn the call back over to Chad to make some final comments.

For our first quarter ended December 31, 2019, our total revenues were $10.6 million, which is a 33% decrease from the $15.7 million in the fourth quarter of 2019. This change was caused by the following; one, the company sold minerals in the fourth quarter of '19 for a gain on sale of $5.9 million and the company sold mineral assets in the first quarter of '20 for a gain on sale of $3.3 million, a decrease of $2.6 million in revenues. Two, as Chad mentioned earlier, we had a $1.1 million gain on our derivative contracts in the fourth quarter of 2019 and that turned to a loss of $0.8 million in the first quarter of 2020, a $1.9 million decrease in revenues. Three, oil, NGL, and natural gas revenues decreased $0.6 million or 7.3% during the first quarter of '20 compared to the fourth quarter of '19 due to production decreases from all our products in the Eagle Ford and Arkoma and that was partially offset by higher natural gas and NGL prices in the first quarter of '20.

Our total expenses excluding impairment previously discussed in our 2019 10-K decreased $4.9 million or 37% in the first quarter of '20 when compared to the fourth quarter of '19. The majority of the decrease was due to the reduction in DD&A of $3.4 million or 54%. The company's DD&A rate in the first quarter of 2020 was $1.30 per Mcfe as compared to $2.50 per Mcfe in the fourth quarter of 2019. The company's LOE decreased $682,000 or 21% in the first quarter of '20 as compared to the fourth quarter of '19. This was primarily due to lower expenses in the Eagle Ford as well as lower work over expenses overall and lower production.

G&A decreased approximately $461,000 or 17% in the first quarter of '20 as compared to the fourth quarter of '19. That was mainly due to the one-time severance paid to the former CEO in the fourth quarter of '19, partially offset by higher legal and technical consulting expenses in the first quarter of '20.

Our adjusted EBITDA was $7.2 million in the first quarter of '20 as compared to $10.1 million in the fourth quarter of '19. Adjusted pre-tax net income was $3.9 million or $0.23 per share in the first quarter of '20 as compared to $2.7 million or $0.16 per share in the fourth quarter of '19. Both the adjusted pre-tax net income and adjusted EBITDA include gain on sale of asset.

We continue to deploy an active commodity hedging program which extends out into early calendar 2021. Currently, we have 156,000 barrels of oil hedged at the price of approximately $59 per barrel for calendar 2020. We also have 1.4 Bcf of natural gas hedge at a price of approximately $2.75 per Mcf for calendar 2020. We have been able to lock-in favorable returns for our shareholders through this hedging program and we plan to continue.

With that, I'd like to turn the call over to Chad for some final remarks.

Chad L. Stephens -- Chief Executive Officer

Thank you, Rob. I would like to reiterate how excited I am about the new strategic direction we have set for the company and look forward to keeping you apprised of our progress in the coming quarters.

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 lines are now open for questions. [Operator Instructions] Question comes from Richard Howard with Boiling Point Resources. Please go ahead.

Richard Howard -- Boiling Point Resources -- Analyst

Good afternoon.

Chad L. Stephens -- Chief Executive Officer

Good afternoon.

Richard Howard -- Boiling Point Resources -- Analyst

Two questions. First of all, have we continued to see the ability to make sales in the Permian?

Chad L. Stephens -- Chief Executive Officer

Are you referring to --

Richard Howard -- Boiling Point Resources -- Analyst

The Eddy County -- was the Eddy County sale the last one we have done and are there still opportunities to sell or is that all the way down?

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

Hey Rich, it's Ralph. No. The last one that we did was the Eddy County sale, that's the last one that closed. We continue to have discussions and think about opportunities, but right now, there's nothing that's on the front burner.

Richard Howard -- Boiling Point Resources -- Analyst

Okay. And if we have purchases, will we typically use the money from those sales and in the exchange -- [Indecipherable] exchanges or are we going to dip-in to the cash that's generated by our activities?

Chad L. Stephens -- Chief Executive Officer

Yeah. Richard, this is Chad. So, to fund our purchases, if we were able to sell more minerals, we would do similar like kind exchange 1031 [Phonetic] structured type deals for tax deferred advantage. But to the extent we do not sell minerals, we would source the funds to acquire minerals from cash on hand, debt, and potentially equity.

Richard Howard -- Boiling Point Resources -- Analyst

Got it. Do you foresee not making share repurchases then with the [Technical Issues]?

Chad L. Stephens -- Chief Executive Officer

No. We don't think at this point that that's the best use or the best allocation of our capital going forward. So, you probably will not see for the foreseeable future an active share repurchase.

Richard Howard -- Boiling Point Resources -- Analyst

Okay. My second question, although I thoroughly extended the first part of it. My second question [Technical Issues] could you give us a feel for how much of that relates to royalty production and how much relates to our working interest production? There is about one or two-thirds --

Chad L. Stephens -- Chief Executive Officer

The first part of your question, you broke up. Can you quickly repeat? I'm sorry.

Richard Howard -- Boiling Point Resources -- Analyst

Sure. The $70 million that we have in the borrowing base, should I look at that as being two-thirds working interest and one-third royalty and say it's the approximate relationship of our sales right now?

Chad L. Stephens -- Chief Executive Officer

Well, as laid out in the most recent Q, the borrowing base has been reduced to $45 million.

Richard Howard -- Boiling Point Resources -- Analyst

Okay.

Chad L. Stephens -- Chief Executive Officer

And that's -- well, it was reduced because if you'll recall, at the end of the year, we announced the impairment because we eliminated all of the PUD drilling locations on the Eagle Ford, which triggered the impairment. But we also eliminated $85 million of future capex associated with those PUDs. So it reduced the borrowing base. So at this point, our borrowing base is virtually associated with the PDP.

Freda, if you have a sense of how much is associated from a reverse standpoint is associated with working interest, you might be able to answer that question.

Freda R. Webb -- Vice President, Operations

Yeah. I think it's probably in line with our production. So, two-third is working interest, one-third royalty.

Richard Howard -- Boiling Point Resources -- Analyst

Thank you very much.

Chad L. Stephens -- Chief Executive Officer

Thank you.

Operator

[Operator Instructions] And I apologize ladies and gentlemen, it looks like we are out of time.

I will turn it back to Ralph D'Amico for any closing comments.

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

Thank you, Christy. Thanks everybody for joining us. We look forward to updating you guys at the end of the next quarter. Thanks again for participating and your interest in Panhandle.

Operator

[Operator Closing Remarks]

Duration: 17 minutes

Call participants:

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

Chad L. Stephens -- Chief Executive Officer

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

Freda R. Webb -- Vice President, Operations

Richard Howard -- Boiling Point Resources -- Analyst

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