Panhandle Oil and Gas Inc. Reports First Quarter 2019 Results

OKLAHOMA CITY – PANHANDLE OIL AND GAS INC., the “Company,” (NYSE: PHX), today reported financial and operating results for the first quarter ended Dec. 31, 2018.  

Paul F. Blanchard Jr., President and CEO commented, “The fiscal 2019 first quarter results demonstrate the Company’s focus on the execution of the corporate strategy of optimizing its mineral portfolio, maintaining a strong financial position and generating optimal cash flow. The Company generated cash from operations of $4.0 million during the first quarter of 2019 and including the proceeds from the sale of 206 net mineral acres from our 260,000 net mineral acre portfolio, Panhandle generated $13.1 million cash in the first quarter. The majority of our cash flow was used to reduce our bank debt by $9.5 million to $41.5 million. We also returned some of the cash generated to our shareholders through dividend payments of $0.7 million and stock re-purchased at an average price of $15.30 per share for $1.1 million. The Company invested $1.4 million in drilling new wells, primarily in the oil-rich Eagle Ford located in South Texas and the SCOOP and STACK plays located in western Oklahoma, and we invested an additional $0.4 million to acquire mineral acreage in the core of the STACK play. We are confident in our ability to generate significant cash flow moving forward and given the flexibility that we have within our portfolio of assets, we will continue to be very diligent in our investment of this cash with the focus of achieving the maximum value for our shareholders.”

HIGHLIGHTS FOR THE QUARTER ENDED DEC. 31, 2018

• Net income was $12.7 million or $0.75 per share in fiscal year 2019, as compared to $13.8 million or $0.81 per share in fiscal year 2018.
• Adjusted pre-tax net income(1) increased 424% to $10.1 million or $0.60 per share in fiscal 2019, as compared to $1.9 million or $0.11 per share in 2018.
• Adjusted EBITDA(1) grew 89% to $14.5 million in 2019, as compared to 2018. A $9.1 million gain on asset sales is included in the adjusted EBITDA in the 2019 quarter.
• Total production was 2.76 Bcfe in 2019, as compared to 3.42 Bcfe in 2018. Oil, NGL and natural gas production decreased 9%, 14% and 22%, respectively.
• Average sales price per Mcfe in 2019 increased 17% to $4.42 per Mcfe, while the total cost per Mcfe (LOE, production taxes, DD&A, G&A and interest expense) in 2019 increased 6% to $3.62 per Mcfe, as compared to 2018.
• Dec. 31, 2018, debt was $41.5 million. Debt to enterprise value and debt to adjusted EBITDA (TTM) were 13.83% and 1.27, respectively, at Dec. 31, 2018.
• Twenty rigs are currently drilling on Panhandle acreage, with 135 additional rigs currently drilling within 2.5 miles of Panhandle acreage.

          (1) This is a Non-GAAP measure. Refer to the Non-GAAP Reconciliation section.

OPERATING HIGHLIGHTS

FINANCIAL HIGHLIGHTS

          (1) This is a Non-GAAP measure. Refer to the Non-GAAP Reconciliation section.

 FIRST QUARTER 2019 REVIEW

Total production decreased 19% in the 2019 period, as compared to the 2018 period. Total production has decreased due to the natural decline of the production base and, to a lesser extent, the result of marginal property divestitures. This was partially offset by the production from new royalty and working interest wells. The oil production decrease is primarily from the Eagle Ford Shale properties, a result of naturally declining production, as well as downtime related to workovers and lateral cleanouts in the first quarter of 2019. This decrease was somewhat offset by the mineral acquisition of Bakken producing properties in August 2018 and new well drilling on our Permian Basin mineral acreage. The NGL production decrease is attributed to the natural decline in the liquid-rich production from the prior year’s drilling program in the Anadarko Basin Woodford Shale. This decrease was partially offset by new well drilling in the Arkoma Woodford and STACK in Oklahoma and the Permian Basin in New Mexico. Decreased gas production was due to naturally declining production in the Anadarko Woodford and Arkoma Woodford Shales, well workovers in the Arkoma Woodford Shale and, to a lesser extent, marginal property divestitures. These decreases were partially offset by new drilling in the STACK play in western Oklahoma.

Total production in the first quarter of 2018 saw significant increases due to our substantial 2017 drilling program in the Arkoma Woodford (8 wells), Anadarko Woodford (6 wells) and Eagle Ford (10 wells) shales, which began production just before or during the quarter. All of these wells had significantly higher than average NRI’s and were near their peak highs during this time. Since the first quarter of 2018, the production from these wells has come down from their peak rates, as these wells have fairly steep initial decline curves. The Company’s total production had remained basically flat from the second quarter of 2018 through the end of fiscal 2018. The total production decline in the first quarter of 2019 is only around 6% when compared to the last three quarters of 2018. We believe that this is important to note, as it reflects the strength of the new royalty production on our mineral acreage during this period of significantly less capital expenditures to drill and complete wells as compared to our fiscal 2017 program.

Oil, NGL and natural gas revenue decreased 5% quarter-over-quarter in 2019 as production decreased 19% and product prices increased 17% relative to the 2018 quarter. Lease bonus revenue increased to $0.5 million in 2019 from $0.1 million in 2018 as leasing of the Company’s mineral acreage surrounding core resource plays increased.

In the 2019 quarter, the Company sold mineral acreage in Lea and Eddy Counties, New Mexico, for a gain of $9,096,938. In the 2018 quarter, the Company sold its working interest in several marginal properties in Oklahoma for a loss of $272,236.

The 6% increase in total cost per MCFE in the 2019 quarter relative to the 2018 quarter was primarily driven by lower production as noted above. In the 2018 quarter there were significant increases in production from lower cost wells (wells that have very high royalty interest in relation to their working interest). These wells had large initial production rates that drove the per Mcfe rate down across most expense categories. As expected, in the 2019 quarter, the production on these wells has declined from their initial high rates. Interest expense and production taxes were also influenced, respectively, by higher bank interest rates and production tax rate increases in Oklahoma during the 2019 quarter. The DD&A per Mcfe rate decrease was due to production decline in the Eagle Ford Shale properties, which have higher per Mcfe finding costs.

The Company’s net income decreased $1.0 million in the 2019 quarter, as compared to the 2018 quarter. The 2018 quarter was materially impacted by the Tax Cuts and Jobs Act enacted in December 2017, and the 2019 quarter was materially impacted by the gain on sale of assets and the mark-to-market gain on Panhandle’s derivatives. Adjusted pre-tax net income (1) was $10.1 million in the 2019 quarter, as compared to $1.9 million in the 2018 quarter.

The Company generated excess free cash flow, enabling us to return $1.8 million to shareholders through dividend payments and stock repurchases, while also using proceeds from asset sales to pay down $9.5 million of debt.

          (1) This is a Non-GAAP measure. Refer to the Non-GAAP Reconciliation section.

OPERATIONS UPDATE

Eagle Ford

Due to the material drop in oil prices during the first quarter, the operator of the Company’s Eagle Ford acreage block released the drilling rig after the completion of drilling on the seven-well pad in January 2019. The seven-well pad is currently being completed, and production is projected to begin in April 2019. The Company’s average working interest in this group of wells is 10.8% (8% net revenue), as the wells are located partially on the Company’s 16% working interest (12% net revenue) acreage and partially on acreage Panhandle does not own. Additional drilling on the Company’s Eagle Ford acreage is dependent on the oil pricing environment.

Oklahoma

Drilling activity on the Company’s Oklahoma mineral acreage continues to be strong, with 18 rigs currently active on royalty interest wells. The majority of the activity is in SCOOP and STACK with 10 royalty interest wells drilling.

Bakken

There are two rigs drilling royalty interest wells on our mineral holdings in the Bakken in North Dakota. All 20 drilled but uncompleted wells associated with our August 2018 acquisition have been completed and are now producing.

Leasing Activity

The Company leased out 756 mineral acres at approximately $700/acre in the quarter at an average royalty of 20%.

ACQUISITION AND DIVESTITURE UPDATE

Panhandle acquired 45 mineral acres in the core of the STACK play in western Oklahoma in the first quarter of 2019 for $423,000 or $9,400/acre. This acreage is in an area of current drilling for both the Meramec and Woodford in Blaine County, Okla.

The Company closed on the first notable mineral acreage sale in its history on Nov. 30, 2018, with the sale of 206 net mineral acres in Lea and Eddy Counties, N.M., for $9.1 million or $44,160/acre (after closing adjustments). This sale is consistent with Panhandle’s strategy to divest of mineral rights when the amount negotiated exceeds the Company’s projected total present value. This sale represented only 0.08% of the Company’s total net mineral acreage position. Panhandle had owned these minerals for many years and therefore they had no remaining cost basis. However, the transaction was structured as a like-kind-exchange offsetting recent mineral purchases and as a result income tax from the sale was deferred with no current cash tax payable.

The Company intends to continue the process of optimizing its mineral portfolio through strategic sales and purchases. Panhandle is unique in the industry, in that the net book value of our entire 260,000-acre mineral portfolio is only $71 per acre. This affords the Company the opportunity to generate material net income and EBITDA on lease bonuses and the sale of minerals. We intend to utilize the like-kind exchange strategy to defer payment of associated income tax on future sales when appropriate.

Paul F. Blanchard Jr. commented, “Panhandle’s primary goal is to manage its portfolio of mineral and leasehold acreage and use its financial flexibility to maximize shareholder value on a per share basis over the long term while minimizing risks. Assets include perpetual ownership of 260,000 net mineral acres held principally in Oklahoma, New Mexico, Texas, North Dakota and Arkansas, as well as leasehold rights held primarily in the Eagle Ford and Oklahoma. Going forward, each quarter we intend to report on our progress relative to this strategy.”

FINANCIALS

Statements of Operations

Balance Sheets

Condensed Statements of Cash Flows

Hedge Position as of Feb. 6, 2019

Non-GAAP Reconciliation

This news release includes certain “non-GAAP financial measures” under the rules of the Securities and Exchange Commission, including Regulation G. These non-GAAP measures are calculated using GAAP amounts in our financial statements.

Adjusted EBITDA Reconciliation

Adjusted EBITDA is defined as net income (loss) plus interest expense, provision for impairment, depreciation, depletion and amortization of properties and equipment (which includes amortization of other assets), provision (benefit) for income taxes and unrealized (gains) losses on derivative contracts. We recognize that certain investors consider adjusted EBITDA a useful means of measuring our ability to meet our debt service obligations and evaluating our financial performance. Adjusted EBITDA has limitations and should not be considered in isolation or as a substitute for net income, operating income, cash flow from operations or other consolidated income or cash flow data prepared in accordance with GAAP. Because not all companies use identical calculations, this presentation of adjusted EBITDA may not be comparable to a similarly titled measure of other companies. The following table provides a reconciliation of net income (loss) to adjusted EBITDA for the periods indicated.

Adjusted Pre-Tax Net Income Reconciliation

Adjusted pre-tax net income is defined as net income (loss) plus provision (benefit) for income taxes and unrealized (gains) losses on derivative contracts. We recognize that certain investors consider adjusted pre-tax net income a useful means of evaluating our financial performance. Adjusted pre-tax net income has limitations and should not be considered in isolation or as a substitute for net income, operating income, cash flow from operations or other consolidated income or cash flow data prepared in accordance with GAAP. Because not all companies use identical calculations, this presentation of adjusted pre-tax net income may not be comparable to a similarly titled measure of other companies. The following table provides a reconciliation of net income (loss) to adjusted pre-tax net income for the periods indicated.

Enterprise Value Calculation  

Panhandle Oil and Gas Inc. (NYSE: PHX) Oklahoma City-based, Panhandle Oil and Gas Inc. is an oil and natural gas mineral and leasehold acreage-focused capital allocator seeking the highest per share returns while maintaining a conservative net leverage ratio to ensure survivability and prosperity in all business and mineral commodity price cycles. The capital allocation tools include: (i) selective participation in working interest wells on its existing holdings in the highest quality, low-risk projects that are projected to exceed our corporate return threshold; (ii) aggressive leasing of its mineral holdings outside of areas of potential working interest participation; (iii) acquisition of mineral acreage, in the cores of resource plays, with substantial undeveloped opportunities that meet or exceed our corporate return threshold; (iv) divestiture of minerals with limited optionality and mineral rights when the amount negotiated exceeds our projected total value; (v) payment of quarterly dividends, with optionality for special dividends when available capital exceeds operational requirements and has no other higher shareholder return option for an extended time period; and (vi) repurchase of common shares when the share price trades at a material discount to the Company's estimated intrinsic value.