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Panhandle Oil & Gas (NYSE:PHX)
Q4 2020 Earnings Call
Dec 10, 2020, 4:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Ralph DAmico

Thank you for joining us today to discuss our fiscal 2020 results. With me on the call today for prepared remarks are Chad Stephens, president and chief executive officer; and Freda Webb, vice president of mineral operations. After the prepared remarks, we will open the call up for a Q&A session. The earnings press release that was issued earlier today is also posted on our investor relations website.

Before we 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 be materially different from those expressed 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 were based upon information known to PHX as of the date and time of this call. PHX 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, PHX's chief executive officer.

Chad Stephens -- Chief Executive Officer

Thanks, Ralph. And thanks to everyone on the line for participating in PHX's 2020 fiscal year-end conference call. We sincerely appreciate your time and your continued interest in the company. The environment PHX weathered in 2020 was one of the most difficult I've ever experienced in my 40 years in the industry.

The COVID-19 pandemic and the subsequent collapse of oil and natural gas prices created a detrimental tsunami of bankruptcies layoffs and cuts and capital outlay throughout the year. During fourth fiscal quarter, however, we started to see crude oil prices stabilizing and natural gas searching for equilibrium as macro supply demand fundamentals appears to be improving. Rig counts, after reaching lows not seen since the benchmark was introduced, are showing signs of a moderate recovery. Most importantly, with promising test results, it appears a vaccine for the COVID-19 is on the horizon.

This will hopefully allow the economy to return to some level of normalcy in 2021. In our most recent quarter which Ralph will discuss in more detail in a minute, we are happy to see our sequential quarterly financial performance improve materially. For the full year, the company maintained an earnest focus on continuing to reduce debt down $6.7 million, or 19% during the fiscal year, which has strengthened our financial position. Control costs down $4 million, or 19%, helping bolster operating cash flow and generating promising mineral deal opportunities.

$16 million closed during the last two fiscal years, which helps hydrate our asset base.Over the course of fiscal 2021, we will continue to dedicate a majority of our free cash flow to pay down debt and further strengthen our financial position. When using current strict pricing, we estimate fully eliminating our debt through free cash flow in just over three years. As we continue to strengthen our financial position, we will be able to allocate more of our cash flow to our core acquisition strategy. Since the September 30, 2020 fiscal year-end, we closed on the previously announced mineral acquisition in Grady County, Oklahoma, and Harrison, Panola, and Nacogdoches Counties, Texas for $5.75 million.

In addition, we closed on the purchase of 134 net mineral acres in San Augustine County, Texas for $750,000, which is in East Texas, and have signed a PSA to purchase additional minerals overlapping the same well pad in San Augustine County, Texas for $1 million, which we expect to close in fiscal Q1 2021. This 16-well pad in San Augustine County operated by Aethon is currently in various stages of completion. All of these acquisitions were funded, using proceeds from our equity offering, which we completed in September. The offering not only allowed us to complete these transactions but has also expanded our sphere of influence evidenced by a material increase in deal flow.

We are excited about the opportunity set of deals in front of us, which fit well with our growth strategy. Lastly, in concert with our change in strategy, we changed the company's name to PHX Minerals Inc. in October of 2020. This new name honors the rich history of the company by retaining its New York Stock Exchange ticker symbol while highlighting the focus strategy on minerals.

The name change includes a new corporate logo that symbolizes the proactive sense of urgency by which we work every day. We look forward to keeping you update of progress over the next year. At this point, I'd like to turn the call over to Freda Webb to provide quick operational overview and then to Ralph to discuss the financials.

Freda Webb -- Vice President of Mineral Operations

Thank you, Chad, and hello to everyone on the line. During the quarter ended September 30, we had 76 gross, 0.18 net wells convert from wells and progress to producing as compared to 48 gross, 0.22 net wells during the quarter ended June 30. At the end of the quarter, we had an additional 115 gross, 0.51 net wells in progress up from 85 gross, 0.44 net from the prior quarter. Also, as of the quarter-end, we had four rigs present on PHX acreage and 32 within 2.5 miles compared to no rigs on our acreage and 15 within 2.5 miles at June 30.

Leasing on our open minerals is slightly up for fourth quarter as operators continue to find efficiencies to reduce drilling costs and look to resume drilling and completion activity. During the fourth fiscal quarter of 2020, we leased 205 net acres for $118,000 as compared to 120 net acres for $23,000 the prior quarter. I will turn the call over to Ralph for review the financials.

Ralph DAmico

Thanks, Freda. Firstly, I'd like to thank everyone for being on the call today. I'll be discussing the results for both the fourth quarter of 2020 and the full fiscal-year 2020 results. Before I start, please know that the SCOOP and Haynesville acquisitions we announced in August were closed on October 6, 2020.

And that such our fourth-quarter results do not include any contribution from these acquisitions. For our fourth quarter ended September 30, 2020, total revenues were $4.4 million which is a 62% increase from $2.7 million in the third quarter of 2020. The quarter-over-quarter changes were caused by the following. One, natural gas, oil, and NGL revenues increased to $5 million, or 43% on a sequential-quarter basis.

Our total natural gas and oil production increased 7% as curtailed volumes started being brought back online. And new wells were put in production particularly in the STACK region. Volumes were derived 38% from royalty interests and 62% from working interests during the quarter. Higher average prices received for natural gas oil and NGL in the quarter were 34% on Mcfe basis also had a large impact on sales.

Average Mcfe price realized was $2.47 versus $1.85 the prior quarter; two, we had a $1.5 million loss on our derivative contracts in the fourth quarter, compared to $840,000 loss the prior quarter. Note that on a cash basis, we realize the gain of $880,000 this quarter, compared to $1.7 million gain the prior quarter. Three, lease bonus revenues were up on a quarter-over-quarter basis to $118,000, which is still lower than any quarter in 2019. But moving in the right direction as operators restart leasing programs.

Total expenses were $6.9 million for the fourth quarter, compared to $7.1 million in the prior quarter, a 4% decline. The company's LOE decreased $178,000 or 16% in the fourth quarter, compared to the third quarter. This is partially due to lower working interest volumes and lower service costs. On a per Mcfe basis, LOE decreased about 20% to $0.48 per M.

Transportation, gathering, and marketing increased 17%, and production taxes 40% on a quarter-over-quarter basis as a result of higher production and realized prices. G&A decreased to $190,000 or 10% in the fourth quarter, compared to the third quarter. This is the third straight quarter in which G&A has decreased. For the full-year 2020, G&A was $8 million, compared to $8.6 million in 2019.

We expect the fiscal-year 2021 G&A will be lower than 2020 as we benefit from four quarters of our newly implemented cost control measures. Adjusted EBITDA excluding gains on sales was $2 million in the fourth quarter of 2020 as compared to $1.2 million in the third quarter. For the full fiscal-year 2020, adjusted EBITDA, excluding gains on sales was $9.5 million, compared to $18.6 million in 2019 primarily as a result of the previously discussed negative macro conditions the industry experienced this year. We continue to deploy an active commodity hedging program, which extends out through the end of calendar 2022.

Generally, we have locked in costless collars on natural gas between $2.30 and $3.15 and on oil between approximately $36.75 and $45.75. You can see a detailed up to date schedule on the press release and the 10-K. Let me also touch on debt. We had total debt of $28.75 million as of September 30, which as Chad mentioned, was a 19% reduction from the prior year.

As of December 1, we had further reduced debt to $27.25 million. Also, as of December 1, we had $2.3 million in cash on the balance sheet after giving effect to the transactions that closed in October and November. Note that $1.5 million of the $2.3 million remaining in cash is from the equity offering proceeds. The pending acquisition Chad mentioned earlier will be paid for with cash from the equity raise.

On December 4, we entered into an amended credit agreement with our lending group led by DOK, which reiterated our $30 million borrowing base and reduce their required quarterly amortization from $1 million a quarter to $600,000 a quarter. Going forward, as Chad mentioned, we will continue to focus on reducing debt as part of our strategy. With that, I'd like to turn the call over to Chad for some final remarks.

Chad Stephens -- Chief Executive Officer

PHX had definitely navigated through unparalleled economic and industry turmoil in 2020. We believe 2021 will prove to be a tipping point for the mineral space as deal flow and mineral consolidation increases. PHX is in the right position with the right strategy to participate in that consolidation and create shareholder value. This concludes the prepared remarks portion of the call.

Please open up the queue for questions.

Questions & Answers:


Operator

Thank you. The floor is now open for questions. [Operator instructions] We go to our first question from Derek Whitfield with Stifel. Please go ahead.

Derek Whitfield -- Stifel Financial Corp. -- Analyst

Thanks. Good afternoon all and also thanks for the updated disclosures in your PowerPoint. For my first question, I wanted to focus on M&A perhaps for Chad or Ralph. Could you offer some additional color on the degree of deal flow you're seeing at present and seller expectations now that the commodity has drifted a little bit higher?

Chad Stephens -- Chief Executive Officer

Yeah. Derek, this is Chad. I think given we've seen the worst of the COVID. The economy seems to be at kind of bottom coming off.

Seller expectations have been reset that at least asset values. And we are given as we indicated given that the offering that we did that kind of put us into the mainstream of deal flow. And we're getting a lot of unsolicited inbound offerings. The deals we've done to date, it seems that the sellers, their expectations were reasonable.

And we were able to do deal. But I do want to stress that the deals we do that we're looking at and the deals we do, we will be very disciplined. And we'll let the facts and the numbers speak for themselves. And we're not going to just chase deals, but we do see a definite material increase in inbound deal flow with asset values, more reasonable expectations for asset values.

Derek Whitfield -- Stifel Financial Corp. -- Analyst

Great. And staying with you, Chad, perhaps bigger picture, could you speak to the business implications from the record levels of M&A activity we're seeing across the sector? And that will likely continue for the next few years. But really, what does that mean to your business from an activity perspective?

Chad Stephens -- Chief Executive Officer

Well, we're focused on just a couple of basins. Material amount of our minerals are in the mid-continent now and East Texas, we're going to focus on a couple of other basins as well. But right now, mid-continent and a good deal of our minerals in the core of the SCOOP/STACK, as such, meet very low breakeven points. We compare well economics from the Permian Basin to the mineral where the footprint of our minerals in the SCOOP/STACK they compete.

So you see continent like we have Bakken, they're coming back down to the SCOOP/STACK. And I've got several rigs running. They've announced recently, some really excellent wells and bought in several zones. They're exploiting three different zones.

And they've announced some really excellent completions in there. So the implications for us, one, I wouldn't mind a consolidation. I think the industry overall needs consolidation. I think that stronger balance sheets have better implications for capital allocation.With the fragmented industry that we have, it's kind of difficult to capital allocate between basins in between plays, but we think the SCOOP/STACK and where we are focused in the SCOOP/STACK can compete for capital allocation.

Derek Whitfield -- Stifel Financial Corp. -- Analyst

Great. Thanks, Chad. And as my final question perhaps, Ralph or Freda. With the improvement you're reporting in both wells and progress and permits, could you offer any color on expectations for the completions of your well in progress -- wells or really thinking about the likely production profile that you guys could see in the first half of 2021?

Freda Webb -- Vice President of Mineral Operations

Yes. So what we are seeing is that some of the DUCs that we're setting out there, early 2020, and then instead of being completed, the companies took the completion rigs off and shut down. We're now seeing the sudden wells come back online, as well as completion rigs starting to come back. So we expect the first half of 2021 to see some of those DUCs completed, which would then show up on our production profile.

Derek Whitfield -- Stifel Financial Corp. -- Analyst

That's very helpful. Thanks for your time, guys.

Freda Webb -- Vice President of Mineral Operations

Thanks very much.

Operator

Next, we go to the line of Jeff Grampp with Northland. Please go ahead.

Jeff Grampp -- Northland Securities -- Analyst

Good afternoon, guys. Appreciate the time. Can you guys kind of touch on what you're seeing activity-wise you see four rigs in the SCOOP? The other census, the sustainability of those rigs, or where else we might see rigs popping up based on, where you guys are seeing your acreage and conversations with operators.

Chad Stephens -- Chief Executive Officer

Yeah. Jeff, just to follow up what I was talking about earlier, Continental has really gone all-in on the SCOOP/STACK for 2021. And they've stated so and they make really great rates of return at current strip prices. They advertise in their investor relations slide deck, where Woodford wells and their Sycamore wells are in excess of 50% rates of return and they make it some really excellent wells were their first.

And I think one of the important metrics that you look at on these wells is the first 100 days of production. And they've had several recent wells online, where they're advertising in excess of 100,000 barrels a day for the first 100 days. That's good wells, and those are excellent wells. You see in the core of the STACK and the SCOOP, the main players are Devon, Cimarex, Ovintiv, Continental, Marathon's got a huge footprint there.

And they've got to come back there at some point, I think, because they have some really excellent, right in the course, that really excellent rock quality underneath of their acreage position. So those five, at some point, anything above $40 oil, they're making really good rates of return. And I see them all coming back at some point in 2021. Once you kind of get a sense, or a feel that the gas prices really aren't going to recover, obviously, all weather-dependent, but there seems to be a little impetus for gas prices improving, and especially Continental saying they're going to be drilling more gas wells in the SCOOP than they are oil wells.

So we're optimistic and Panhandle has an excellent mineral position throughout the core of the SCOOP/STACK. So we're excited about the opportunity to see our volumes and cash flow improve with all that capital coming into the play.

Jeff Grampp -- Northland Securities -- Analyst

All right. Great. That's helpful. And bigger-picture question for you.

I appreciate the comment that you guys can organically pay down all debt over the next few years. That sounds great. So when we kind of think about the return of capital strategy, I know you guys have been able to maintain the dividend through the downturn here, what do you guys kind of need to see to look at maybe reevaluating, bringing that back up? Whether that's I imagine trying to balance capital for acquisitions versus return to capital is probably a bit of a debate internally, but bigger picture, how do you guys view or evaluate increasing the dividends going forward?

Chad Stephens -- Chief Executive Officer

Ralph could contribute to this question. but I will say that it's important to me to get our debt to EBITDA down to one or so. I think the market has kind of dictated that. And I think it's just in terms of surviving through the commodity price cycles, you need to be conservative with your balance sheet.

So I want us to get down to that area that ZIP code before we start increasing our dividend, but it's going to be important to me to show the shareholders that we're going to be willing to return a good percent of our free cash flow back to our shareholders once our debt is at a manageable place. Ralph?

Ralph DAmico

Yeah. No. And I would also say look, I mean, I think from a standpoint, right, we have set up the company where we can manage a significantly larger asset footprint, right. And so we think the rates of return that we can generate for the company via acquisitions and in the scalability of what we set up the company to be right.

Next to paying down debt, right, growing the production base is also an important part of the strategy. So I think we've stated this before that in the long run, right, and whether that is two, three, however many years down the road, right, whatever amount of time it is, right? We're looking at doing something where it's you're returning 50% of the capital to shareholders and redeploying 50% of the capital into the ground. Right, but I don't have anything more specific to you on timing as it pertains to that right, I think as Chad said, that's number one. Growing the production base is number two.

And once we get that figured out then we'll start looking at increasing the return of capital to shareholders.

Jeff Grampp -- Northland Securities -- Analyst

That makes perfect sense. That's it for me. Thanks, guys.

Operator

Next, we go to the line of Ric Howard with Boiling Point Resources. Please go ahead.

Ric Howard -- Boiling Point Resources, Co-Manager

To expand on that last question, it sounded like the bank credit agreement was improved, and that you are only going to be paying down $600,000 a quarter, which is far less than you can pay on based on a three-year, three-plus-year to eliminate the debt. So first of all, was this an improvement in the bank credit agreement? And secondly, what are you thinking, Chad?

Ralph DAmico

Yeah. I mean, look, I think they reiterated our borrowing base and reduced the amortization that they wanted to see. So from my standpoint, right, what they're basically saying is that they think that we're in better creditworthiness position relative to six months ago. So to me, that's an improvement, right? I mean, I do think that, as Chad said and we talked about, as we talked about leverage, our intent isn't to pay down the minimum required by the bank.

We think that the appropriate long-term leverage ratio for the business right is given everything that's happening in the macro environment really closer to 1 times rather than 2 times, where we are today. So if anything, we're going to repay more of that debt. And as we grow the production base and cash flow, right, that's good. That's going to reach that one times debt to EBITDA and then we're going to reevaluate how we allocate capital internally.

We have obviously, we have some ideas, but we're not ready to share that with the market just yet.

Ric Howard -- Boiling Point Resources, Co-Manager

That's great. Thank you very much. I was very pleased with the call.

Chad Stephens -- Chief Executive Officer

Thanks, Ric.

Ralph DAmico

Thanks, Ric.

Operator

This does conclude our question-and-answer portion. We return to Chad Stephens for closing remarks.

Chad Stephens -- Chief Executive Officer

We appreciate you being on the call with us today. And I want to reiterate what I said in my prepared remarks that we believe that we are in the right position to participate in 2021 and what we think is going to be a real tipping point for mineral consolidation where we see some really attractive opportunities right now. We think we will see more. So we look forward to keeping you all up to date as the quarters progress.

Thanks very much. Have a great day.

Operator

[Operator signoff]

Duration: 27 minutes

Call participants:

Ralph DAmico

Chad Stephens -- Chief Executive Officer

Freda Webb -- Vice President of Mineral Operations

Derek Whitfield -- Stifel Financial Corp. -- Analyst

Jeff Grampp -- Northland Securities -- Analyst

Ric Howard -- Boiling Point Resources, Co-Manager

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