10-Q: Riley Permian Q3: Production Rises, Net Income Dips Amid Acquisitions

Riley Exploration Permian reports increased production volumes and strategic acquisitions in Q3 2025, but net income and revenues declined due to lower commodity prices and higher operating costs.

Summary

• Net income for the nine months ended September 30, 2025, was $75.4 million, a decrease from $78.0 million in the prior year period.
• Total revenues for the nine months ended September 30, 2025, were $294.7 million, down from $307.5 million in the same period of 2024.
• Daily combined production volumes increased by 24.7% to 27,073 Boe/d for the nine months ended September 30, 2025, compared to 21,712 Boe/d in 2024.
• The Silverback Acquisition, completed on July 1, 2025, for approximately $123 million, added 47,000 net acres and contributed $14.8 million in total revenues and $8.3 million in earnings for the three and nine months ended September 30, 2025.
• The company is committed to a midstream buildout plan in New Mexico, with approximately $130 million in capital expenditures planned through 2026, having incurred $26.5 million to date.
• Cash provided by operating activities decreased to $147.7 million for the nine months ended September 30, 2025, from $179.9 million in the prior year.
• Long-term debt increased to $347.0 million as of September 30, 2025, from $249.5 million at December 31, 2024, primarily due to increased borrowings under the Credit Facility to fund acquisitions.
• The One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, resulted in a $4.9 million reduction in current income tax expense for the three and nine months ended September 30, 2025.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While production volumes increased significantly due to strategic acquisitions and the company is investing in future growth (midstream, RPC Power), this growth came at the cost of lower net income, reduced operating cash flow, and increased debt. Lower realized commodity prices negatively impacted revenues, and operating expenses rose. The tax benefits from OBBBA and derivative gains provided some offset, but overall profitability and cash generation from operations declined relative to the prior year.

Positives

• Daily combined production volumes increased significantly by 24.7% to 27,073 Boe/d for the nine months ended September 30, 2025, driven by increased wells turned to sales and the Silverback Acquisition.
• The Silverback Acquisition added approximately 47,000 net acres adjacent to existing core acreage, enhancing the company's footprint in the Permian Basin.
• The company maintains a strong hedging program with open derivative positions for oil, natural gas, and interest rates, helping to mitigate commodity price and interest rate volatility.
• The enactment of the One Big Beautiful Bill Act (OBBBA) reduced current income tax expense by $4.9 million for the three and nine months ended September 30, 2025.
• Working capital deficit improved to $47.9 million as of September 30, 2025, from $54.6 million at December 31, 2024.
• The company was in compliance with all covenants contained in its Credit Agreement and Note Purchase Agreement as of September 30, 2025.

Negatives

• Net income decreased to $75.4 million for the nine months ended September 30, 2025, from $78.0 million in the prior year period.
• Total revenues decreased to $294.7 million for the nine months ended September 30, 2025, from $307.5 million in the prior year, primarily due to lower realized oil prices.
• Average realized oil prices decreased by $10.79/Bbl to $65.33/Bbl for the nine months ended September 30, 2025, compared to $76.12/Bbl in 2024.
• Cash provided by operating activities decreased to $147.7 million for the nine months ended September 30, 2025, from $179.9 million in the prior year.
• Cash used in investing activities significantly increased to $212.8 million for the nine months ended September 30, 2025, from $113.3 million in 2024, largely due to acquisitions and midstream investments.
• Lease operating expenses (LOE) increased by $12.3 million to $64.1 million for the nine months ended September 30, 2025, due to Silverback production and higher production in the Red Lake field.
• General and administrative (G&A) expenses increased by $5.7 million to $30.3 million for the nine months ended September 30, 2025, due to Silverback integration costs, increased headcount, and professional services.
• An impairment loss of $1.2 million on proved oil and natural gas properties was recognized during the nine months ended September 30, 2025.

Risks

• Volatility of oil, natural gas, and NGL prices can significantly impact results of operations and cash flows.
• Regional supply and demand factors, production delays, curtailments, or governmental orders imposing production limits could adversely affect the company.
• Cost and availability of gathering, pipeline, refining, transportation, power, and other midstream and downstream activities may lead to prolonged well shut-ins, affecting reserves and financial condition.
• Severe weather and other risks could lead to a lack of available markets for production.
• The ability to successfully complete and integrate mergers, acquisitions, or divestitures, and realize anticipated benefits from joint ventures, is uncertain.
• Potential delays in the development, construction, or start-up of planned projects, including the midstream buildout and RPC Power ERCOT facilities.
• 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 as a result.
• The impact of the derivative strategy and results of future settlements.
• Ability to comply with financial covenants contained 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 to fund exploration, development, and midstream projects on favorable terms or at all.
• 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.
• Restrictions on the use of water, including limits on produced water and a moratorium on new produced water well permits by the RRC in the Permian Basin.
• 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 current political environment.
• 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 involves identifying and capturing attractive development opportunities, optimizing assets, and pursuing complementary growth opportunities. The company expects to continue its midstream buildout plan in New Mexico through 2026 and anticipates the RPC Power ERCOT project to have in-service dates throughout 2026. However, the company notes that geopolitical and economic conditions, including military conflicts, global economic growth, tariffs, OPEC+ actions, and changes in the political environment, could prolong market volatility and cause commodity prices to decline, impacting future results. Inflationary pressures may also cause capital expenditures and operating costs to increase, and rising interest rates could raise 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.
• The Company cannot estimate the length or gravity of the future impact these events will have on the Company's results of operations, financial position, liquidity and the value of oil and natural gas reserves.
• Management believes it is remote that the impact of legal matters will have a materially adverse effect on the Company's financial position, results of operations, or cash flows.

Industry Context

The oil and natural gas industry continues to face significant volatility in commodity prices, influenced by geopolitical events, supply-demand imbalances, and global economic conditions. Riley Permian's increased production volumes, despite lower realized prices, reflect a broader industry trend of companies leveraging strategic acquisitions and development to maintain or grow output. The company's focus on the Permian Basin, a key liquids-rich region, aligns with industry trends towards high-return conventional and unconventional plays. The investment in midstream infrastructure and power generation (RPC Power) indicates a move towards greater operational control and efficiency, a common strategy among producers to mitigate third-party costs and market access risks. The mention of the RRC's moratorium on new produced water well permits highlights increasing regulatory scrutiny and environmental challenges within the Permian Basin, which could impact operational costs and development timelines for all operators in the region.

Corporate Governance

Legal Proceedings

• The company may be involved in various legal proceedings and claims in the ordinary course of business, but management believes the ultimate outcome will not have a material adverse effect on financial position, results of operations, or cash flows.

Related Party Transactions

• RPC Power LLC (50% owned joint venture): Incurred lease operating expenses of approximately $2.0 million for the three months and $5.7 million for the nine months ended September 30, 2025. Accrued $0.6 million for RPC Power as of September 30, 2025. Agreements include a 10-year Tolling Agreement, a 10-year Asset Optimization Agreement, and a 10-year Supply Agreement with RPC Merchant LLC.
• di Santo Law PLLC (law firm owned by Board member Beth di Santo): Incurred legal fees of approximately $0.6 million for the three months and $1.3 million for the nine months ended September 30, 2025. Accrued $1.0 million for di Santo Law as of September 30, 2025.

Stakeholder Impact

• Shareholders: Experienced a decrease in diluted net income per share ($3.56 vs. $3.76) but continued to receive quarterly dividends ($0.40/share declared for Q4 2025). The introduction of performance-based restricted stock awards aims to align executive incentives with shareholder returns.
• Employees: Increased headcount contributed to higher general and administrative expenses, suggesting growth in the workforce, particularly with the Silverback integration.
• Creditors: Long-term debt increased due to acquisitions, but the company remains in compliance with all debt covenants, indicating sound financial management of its obligations.
• Customers (Midstream Counterparties): The company has significant contractual commitments with midstream counterparties, including a long-term gas gathering agreement in Texas and a new 15-year gas purchase agreement in New Mexico, ensuring long-term relationships and infrastructure utilization.

Next Steps

• Continue the midstream buildout plan in New Mexico, with approximately $103.5 million in capital expenditures remaining through 2026.
• Advance the RPC Power ERCOT project, with planned in-service dates throughout 2026.
• Manage the remaining $13.0 million capital commitment to the RPC Power joint venture.
• Monitor and manage commodity price exposure through derivative contracts.
• Continue quarterly principal payments of $5 million on Senior Notes.
• Pay a cash dividend of $0.40 per share on November 6, 2025, to shareholders of record on October 21, 2025.

Key Dates

Recommendation

Riley Permian's Q3 2025 results present a mixed picture. While the company achieved significant production growth through strategic acquisitions like Silverback and is investing heavily in future midstream infrastructure, this expansion has led to increased debt and higher operating costs. The decline in net income and operating cash flow, primarily driven by lower realized commodity prices, raises concerns about immediate profitability. However, the company's robust hedging strategy, compliance with debt covenants, and long-term growth initiatives in the Permian Basin provide a foundation for future performance. The current environment of volatile commodity prices and increased capital deployment suggests a 'hold' recommendation, as the long-term benefits of the strategic investments need time to materialize and offset the near-term financial pressures.

Keywords

Permian Basin, oil and gas, exploration and production, SEC filing, 10-Q, Silverback Acquisition, midstream, hedging, commodity prices, capital expenditures, debt, New Mexico, Texas, RPC Power, EOR project