8-K: PHX Minerals Reports Mixed Results for Fiscal Year 2023, Announces Dividend and Provides 2024 Outlook

PHX Minerals reported a net income of $13.9 million for fiscal year 2023, alongside a 23% increase in royalty production volumes, while also announcing a $0.03 per share quarterly dividend.

Summary

• PHX Minerals reported a net income of $2.5 million, or $0.07 per diluted share, for the fourth quarter of 2023, and $13.9 million, or $0.39 per diluted share, for the full fiscal year.
• Adjusted EBITDA was $4.5 million for the quarter and $22.7 million for the year.
• Royalty production volumes decreased by 6% in the fourth quarter but increased by 23% for the full year, reaching 8,123 Mmcfe.
• Total production volumes decreased by 4% in the fourth quarter and 3% for the full year, totaling 9,379 Mmcfe.
• Net proved royalty interest reserves increased by 9% to 57.8 Bcfe.
• The company converted 46 gross wells to producing status in the fourth quarter and 314 for the full year.
• Total debt was $32.8 million with a debt to adjusted EBITDA ratio of 1.45x.
• A $0.03 per share quarterly dividend was announced, payable on March 29, 2024.
• The company deployed over $30 million to acquire almost 2,400 net royalty acres in the Haynesville and SCOOP plays.
• The company expects mineral and royalty production between 8,100 and 8,800 Mmcfe for 2024.

Sentiment

Score: 6

Explanation: The sentiment is moderately positive due to the increase in royalty production and reserves, along with the dividend announcement. However, the decrease in net income and total production, along with the challenging commodity price environment, temper the overall outlook.

Positives

• Royalty production volumes saw a significant increase of 23% for the full year.
• Net proved royalty interest reserves increased by 9%, indicating a growth in asset value.
• The company successfully converted 314 gross wells to producing status during the year.
• A quarterly dividend of $0.03 per share was announced, demonstrating a return to shareholders.
• Strategic acquisitions of nearly 2,400 net royalty acres were made in key areas.
• The company maintains a strong balance sheet with a debt to adjusted EBITDA ratio of 1.45x.
• The company is optimistic about future commodity prices due to reduced drilling activity and increased LNG export facilities.

Negatives

• Net income decreased from $17.1 million in 2022 to $13.9 million in 2023.
• Adjusted EBITDA decreased from $26.7 million in 2022 to $22.7 million in 2023.
• Total production volumes decreased by 3% for the full year.
• Natural gas, oil, and NGL sales decreased by 49% for the year due to lower prices and volumes.
• Total proved reserves decreased by 11% to 71.2 Bcfe.

Risks

• The company is exposed to the volatility of natural gas and oil prices.
• Decreased drilling activity could impact future production volumes.
• The company's financial performance is dependent on the success of its acquisition strategy.
• Changes in legislation or regulatory requirements could affect operations.
• The company faces risks related to general economic and industry conditions.

Future Outlook

PHX anticipates mineral and royalty production between 8,100 and 8,800 Mmcfe for 2024, with total production between 9,100 and 10,000 Mmcfe. The company is optimistic about improved commodity prices due to reduced drilling activity and increased LNG export facilities.

Management Comments

• In 2023, PHX delivered year-over-year royalty volume growth of 23%, expanding 2P royalty reserves by 12%, generating significant operating cash flow and net income.
• These results enabled us to raise our quarterly dividend by 33% despite another challenging year in the natural gas pricing environment.
• Our strong balance sheet and strategy of modest leverage enabled us to deliver consistent results despite a historic drop in gas prices and rising interest rates validating our business strategy, which positions us for success in both up and down markets.
• Looking forward, we are optimistic that reduced drilling activity, announced production curtailments, and the expansion of LNG export facilities should balance the market and improve commodity prices.
• The acquisition of these high-quality minerals will further drive our royalty volumes, margin expansion and cash flow over the course of the next two to three years.
• With our strong financial position and a highly focused acquisition strategy we are poised to unlock value for our shareholders as the commodity pricing environment improves.

Industry Context

The announcement comes amid a challenging period for natural gas prices, with PHX highlighting the impact of price declines on revenue. The company's focus on royalty interests and strategic acquisitions aligns with a broader industry trend of seeking stable, long-term cash flows. The anticipation of increased LNG export capacity reflects a positive outlook for future natural gas demand.

Comparison to Industry Standards

• PHX's royalty-focused strategy is similar to companies like Viper Energy Partners (VNOM) and Kimbell Royalty Partners (KRP), which also focus on mineral and royalty ownership rather than direct operations.
• The 23% increase in royalty production volumes is a strong result compared to some peers, though direct comparisons are difficult without specific peer data for the same period.
• The debt to adjusted EBITDA ratio of 1.45x is within a reasonable range for the industry, indicating a moderate level of leverage.
• The company's focus on the Haynesville and SCOOP plays is consistent with industry trends, as these are considered high-quality resource areas.
• The company's acquisition strategy of smaller deals in targeted areas is a common approach for smaller mineral companies to maximize returns.

Stakeholder Impact

• Shareholders will benefit from the announced dividend and potential future growth.
• Employees may be impacted by the company's strategic shifts and operational changes.
• Customers and suppliers will be affected by the company's production and acquisition activities.
• Creditors will be interested in the company's debt levels and ability to meet obligations.

Next Steps

• The company will host a conference call on March 13, 2024, to discuss the results.
• The company will continue to execute its acquisition strategy in the Haynesville and SCOOP plays.
• The company will focus on converting its inventory of undeveloped locations to producing wells.

Key Dates

Keywords

Royalty, Production, Reserves, EBITDA, Dividend, Acquisition, Natural Gas, Oil, Haynesville, SCOOP