10-Q: Riley Permian Q2 Sees Production Gains, Strategic Acquisitions

Riley Exploration Permian, Inc. reported increased production volumes and strategic acquisitions in Q2 2025, despite lower realized oil prices, with net income impacted by a non-cash impairment and higher transaction costs.

Summary

• Net income for the three months ended June 30, 2025, was $30.47 million, down from $33.55 million in the prior year period.
• Net income for the six months ended June 30, 2025, was $59.10 million, up from $52.31 million in the prior year period.
• Total revenues for Q2 2025 decreased to $85.39 million from $105.40 million in Q2 2024, primarily due to lower realized oil prices.
• Total revenues for the six months ended June 30, 2025, decreased to $187.85 million from $205.15 million in the prior year period.
• Daily combined production volumes increased by 14.2% to 24,352 Boe/d in Q2 2025 from 21,319 Boe/d in Q2 2024.
• Daily combined production volumes increased by 17.0% to 24,392 Boe/d for the six months ended June 30, 2025, from 20,846 Boe/d in the prior year period.
• Average realized oil price decreased to $62.17 per Bbl in Q2 2025 from $79.25 per Bbl in Q2 2024.
• The company recognized a non-cash impairment of $1.21 million on certain oil and natural gas properties in New Mexico during Q2 2025.
• A significant non-cash gain on derivatives of $13.57 million was recorded in Q2 2025, compared to a $1.47 million gain in Q2 2024.
• The Silverback Acquisition, adding approximately 47,000 net acres in Eddy County, New Mexico, closed on July 1, 2025, for $142 million, plus potential earnout payments.
• The company acquired approximately 140 contiguous net acres in its Red Lake field in New Mexico for $2.1 million in April 2025.
• A midstream buildout plan in New Mexico is underway, with commitments of approximately $130 million in capital expenditures through 2026, and $22 million incurred to date.
• The company's Credit Facility borrowing base was reaffirmed at $400 million, with $271 million available capacity as of June 30, 2025.
• The company declared quarterly cash dividends of $0.38 per share for Q2 2025, totaling $8.35 million.

Sentiment

Score: 6

Explanation: The company demonstrates strong operational growth with increased production and strategic acquisitions that expand its asset base. While Q2 revenues and net income were impacted by lower commodity prices and a non-cash impairment, the significant non-cash derivative gains for the six-month period and effective debt management are positive. The substantial capital commitments for midstream infrastructure indicate a long-term growth strategy, but also represent significant future spending. The overall sentiment is cautiously positive, reflecting growth potential balanced against commodity price volatility and capital intensity.

Positives

• Increased daily combined production volumes by 14.2% in Q2 2025 and 17.0% for the six months ended June 30, 2025, driven by new wells.
• Realized a significant non-cash gain on derivatives of $13.57 million in Q2 2025, contributing positively to net income.
• Successfully closed the Silverback Acquisition on July 1, 2025, adding approximately 47,000 net acres adjacent to existing core acreage, enhancing scale and strategic objectives.
• Acquired additional 140 contiguous net acres in the Red Lake field, strengthening existing asset base.
• Reduced interest expense by $1.7 million in Q2 2025 and $4.1 million for the six months ended June 30, 2025, primarily due to higher debt balances in the prior year.
• Maintained a strong and flexible balance sheet with $271 million of undrawn capacity under the Credit Facility as of June 30, 2025.
• Improved working capital deficit to $37.8 million as of June 30, 2025, from $54.6 million as of December 31, 2024.
• Successfully complied with all covenants under the Credit Facility and Senior Notes.

Negatives

• Total revenues decreased by $19.9 million in Q2 2025 compared to Q2 2024, primarily due to a $17.08 per Bbl decrease in average realized oil prices.
• Net income for Q2 2025 decreased by $3.08 million compared to Q2 2024.
• Recognized a non-cash impairment loss of $1.21 million on certain oil and natural gas properties in New Mexico.
• Lease operating expenses increased by $2.4 million in Q2 2025 and $4.0 million for the six months ended June 30, 2025, due to higher production volumes.
• Transaction costs increased to $1.93 million in Q2 2025, primarily related to the Silverback Acquisition.
• The company continues to operate with a working capital deficit of $37.8 million as of June 30, 2025.

Risks

• Volatility of oil, natural gas, and NGL prices.
• Regional supply and demand factors, and potential delays, curtailments, or interruptions of production.
• Cost and availability of gathering, pipeline, refining, transportation, power, and other midstream and downstream activities, which could lead to prolonged well shut-ins.
• Severe weather and other risks that may lead to a lack of available markets.
• Ability to successfully complete mergers, acquisitions, or divestitures, and integrate acquired assets.
• Potential delays in the development, construction, or start-up of planned projects, including the midstream buildout.
• Failure to realize anticipated benefits from joint ventures or other equity investments, such as RPC Power LLC.
• Operational risks, including development drilling and testing results, and performance of acquired properties and newly drilled wells.
• Inability to prove up undeveloped acreage and maintain production on leases.
• Any reduction in the borrowing base on the Credit Facility and the ability to repay excess borrowings.
• The impact of the derivative strategy and results of future settlements.
• Ability to comply with financial covenants in the Credit Facility and Senior Notes.
• Changes in general economic, business, or industry conditions, including inflation rates, interest rates, and foreign currency exchange rates.
• Conditions in the capital, financial, and credit markets, and the ability to obtain capital needed for exploration, development, and midstream projects.
• Loss of certain tax deductions due to legislative changes.
• Risks associated with executing the business strategy, including any changes in strategy.
• Risks associated with concentration of operations in one major geographic area (Permian Basin).
• Legislative or regulatory changes, including initiatives related to hydraulic fracturing, greenhouse gases, water conservation, seismic activity, weatherization, or protection of certain species of wildlife or sensitive environmental areas.
• Ability to receive drilling and other permits or approvals and rights-of-way in a timely manner (or at all), potentially restricted by governmental regulation.
• Restrictions on the use of water, including limits on produced water and a moratorium on new produced water well permits by the RRC.
• Changes in government environmental policies and other environmental risks.
• Availability of drilling equipment and the timing of production.
• Tax consequences of business transactions.
• Public health crises, such as pandemics and epidemics, and their effects on the oil and natural gas industry, pricing, demand, and supply chain logistics.
• General domestic and international economic, market, and political conditions, including military conflicts, global economic growth, unpredictability of new tariffs, actions of OPEC+ countries, and changes to the political environment.
• Risks related to litigation.
• Cybersecurity threats, technology system failures, and data security issues.

Future Outlook

The company's strategic business objectives include enhancing the rate of return on invested capital, generating sustainable free cash flow, maintaining a strong and flexible balance sheet, and maximizing returns to shareholders. This strategy is implemented through identifying and capturing attractive development opportunities, optimizing assets, and pursuing complementary growth opportunities. The business of exploring for, developing, and producing oil and natural gas is capital intensive, requiring ongoing investments to sustain and grow production. The company expects its cash on hand, cash flow from operations, borrowings under its Credit Facility, and potential future debt or equity issuances to be adequate to meet short and long-term liquidity needs. Commodity prices are expected to remain volatile, influenced by market conditions, geopolitical events, supply-demand imbalances, and regulatory changes. Inflationary pressures may continue to increase capital expenditures and operating costs, and rising interest rates could increase the cost of capital and depress economic growth.

Management Comments

• Our strategic business objectives include enhancing the rate of return on our invested capital, generating sustainable free cash flow, maintaining a strong and flexible balance sheet and maximizing returns to shareholders.
• We implement this strategy primarily through identification and capture of attractive development opportunities, optimization of our assets and pursuing complementary growth opportunities that increase our scale and meet our strategic and financial objectives.

Industry Context

The company operates in the Permian Basin, a key U.S. oil and natural gas producing region. The industry continues to face significant volatility in commodity prices due to global economic conditions, geopolitical events (including military conflicts and OPEC+ actions), and supply-demand dynamics. Inflationary pressures are impacting capital expenditures and operating costs across the sector, while rising interest rates could further constrain capital access and economic growth. Regulatory changes, particularly concerning environmental factors like hydraulic fracturing, greenhouse gas emissions, and water usage, pose ongoing challenges and potential restrictions on operations. The company's focus on horizontal drilling in oil-saturated and liquids-rich formations aligns with broader industry trends towards efficient resource extraction in established basins.

Comparison to Industry Standards

• The filing does not provide specific comparable company data or global benchmarks to assess the results against industry standards. Comparisons would require external data on peer performance in the Permian Basin regarding production growth rates, capital efficiency, and financial leverage ratios.
• The increase in daily combined volumes by 14.2% (Q2) and 17.0% (6M) suggests strong operational growth, which would need to be benchmarked against Permian pure-play E&P companies of similar size and asset maturity to determine if it's above, below, or in line with industry averages.
• The average realized oil price of $62.17/Bbl in Q2 2025 reflects the broader market downturn in oil prices compared to Q2 2024, consistent with general industry trends, but specific differentials to WTI would be needed for a precise comparison.
• The significant non-cash gain on derivatives indicates effective hedging strategies in a volatile market, which is a common practice among E&P companies to stabilize cash flows, but the magnitude of the gain would need to be compared to peer hedging performance.

Management Changes

Corporate Governance

Legal Proceedings

• The company may be involved in various legal proceedings and claims in the ordinary course of business, but management believes it is remote that the impact of such matters will have a materially adverse effect on the company's financial position, results of operations, or cash flows. No material liability for legal matters was recognized as of June 30, 2025, or December 31, 2024.

Related Party Transactions

• RPC Power LLC: The company has a 10-year Tolling Agreement for natural gas conversion to electricity for its operations, and an Asset Optimization Agreement for a monthly fee of $20,000. A 10-year Supply Agreement with RPC Merchant LLC (a subsidiary of RPC Power) is in place to supply natural gas for the Merchant Deal, contingent on project start-up. The company incurred $2.1 million in lease operating expenses from RPC Power in Q2 2025 and $3.7 million for the six months ended June 30, 2025.
• Combo Resources, LLC: A Contract Services Agreement was terminated on January 31, 2024, and a participation agreement was terminated as of December 31, 2023. No revenues or costs from this related party in Q2 2025.
• Riley Exploration Group, LLC (REG): A services agreement was terminated effective May 31, 2024. No revenues or costs from this related party in Q2 2025.
• di Santo Law PLLC: A law firm owned by a Board of Directors member, Beth di Santo, provides legal services. The company incurred approximately $0.3 million in legal fees in Q2 2025 and $0.7 million for the six months ended June 30, 2025.

Stakeholder Impact

• Shareholders: Impacted by quarterly dividends ($0.38/share declared), share-based compensation plans, and potential dilution from the ATM equity program. The Silverback acquisition and midstream investments aim to enhance long-term value.
• Employees: Benefit from share-based compensation plans, which were updated to include performance-based awards.
• Customers: Benefit from continued and increased oil and natural gas production, ensuring supply.
• Suppliers: Benefit from increased capital expenditures for midstream buildout (e.g., compressor and pipe purchase agreements) and ongoing operational needs.
• Creditors: The company's compliance with debt covenants and management of its Credit Facility and Senior Notes ensures stability for lenders. The extension of the Credit Facility maturity provides longer-term financial flexibility.

Next Steps

• Integrate the acquired Silverback assets into operations and development activities.
• Continue construction and development of the midstream project in New Mexico, with approximately $108 million in capital expenditures remaining through 2026.
• Fund the remaining $21.5 million capital commitment to the RPC Power joint venture.
• Begin natural gas supply to RPC Merchant LLC under the Supply Agreement, contingent on project start-up expected before the end of 2026.
• Continue quarterly principal payments of $5 million on the Senior Notes until maturity in April 2028.
• Continue to evaluate and manage exposure to commodity price and interest rate fluctuations through derivative contracts.

Key Dates

Recommendation

Riley Exploration Permian, Inc. exhibits strong operational performance with significant production growth and strategic acquisitions that expand its asset base in the Permian. The company is actively investing in midstream infrastructure, which could enhance future profitability and operational efficiency. However, the company faces ongoing challenges from volatile commodity prices, as evidenced by the revenue decline in Q2 despite higher production, and incurred a non-cash impairment. While derivative gains provided a boost to net income for the six-month period, these are subject to market fluctuations. The substantial capital commitments for future projects, while strategic, also represent significant cash outflows. Given the mixed financial results, the capital-intensive nature of the business, and exposure to commodity price volatility, a 'hold' recommendation is appropriate. Investors should monitor the integration of new assets, progress on midstream projects, and the impact of commodity prices on future profitability.

Keywords

Oil and Gas, Permian Basin, Exploration, Production, Energy, New Mexico, Texas, Midstream, Acquisitions, Derivatives, SEC Filing, 10-Q, REPX