REPX - Riley Exploration Permian Inc. (REPX) CEO Bobby Riley on Q3 2022 Results - Earnings Call Transcript
Riley Exploration Permian, Inc. (REPX)
Q3 2022 Earnings Conference Call
August 11, 2022 11:00 AM ET
Company Participants
Philip Riley - EVP of Strategy and CFO
Bobby Riley - Chairman & CEO
Kevin Riley - President
Conference Call Participants
Bertrand Donnes - Truist Securities
Noel Parks - Tuohy Brothers
Jeff Robertson - Water Tower Research
Sandra VandenBrink - Tokay Capital Corp
Richard Dearnley - Longport Partners
Presentation
Operator
Good morning. My name is Emma and I will be your conference operator today. At this time, I would like to welcome everyone to the Riley Permian's Fiscal Third Quarter 2022 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
Philip Riley, you may begin your conference.
Philip Riley
Thank you, and good morning to everyone. Welcome to our fiscal third quarter 2022 conference call covering the three month period ending June 30, 2022. Participating on the call today are Bobby Riley Chairman and CEO; Kevin Riley, President; and myself Philip Riley; CFO and EVP of Strategy.
Today's conference call contains certain projections and other forward-looking statements within the meaning of the Federal Securities Laws. These statements are subject to risks and uncertainties that may cause actual results to differ materially from those expressed or implied in these statements. We will also reference certain non-GAAP measures. The reconciliations to the appropriate, GAAP measures can be found in our earnings release issued yesterday afternoon.
I'll now turn the call over to Bobby.
Bobby Riley
Thank you, Philip and thank you everyone for joining the call this morning. Yesterday, after the close of the market, we announced results of our fiscal third quarter. Driven by continued organic growth paired with significantly higher realized oil and natural gas prices, we had record setting production, net sales and adjusted EBITDAX. In fact, year-over-year for the three months ended and the nine months ended June 30, 2022, our revenue growth was 111% and 110% respectively. We have generated $106 million in adjusted EBITDAX for the nine months ended June 30, 2022 compared to $65 million for the same period last year. This represents a 63% year-over-year increase and is 18% higher than we generated for the entire 2021 fiscal year.
To highlight a few items for fiscal third quarter, we averaged oil production of 8.4,000 barrels per day, which exceeded our high-end of guidance and represents an increase of 24% as compared to fiscal third quarter 2021, and 12% as compared to the fiscal second quarter 2022. We generated $45 million of adjusted EBITDAX and $44 million of operating cash flow representing an increase of 29% and 47% respectively over the prior quarter. We paid dividends of $0.31 per share for a total of $6 million, representing 14 consecutive quarters of dividends with $68 million of cumulative distribution since inception.
We reported total proved reserves of 79 MMBoe, which is 64% oil, with a PV-10 value of total proved and total proved developed reserves of $1,098 million and $807 million respectively as of June 30, 2022 based on NYMEX strip pricing. As we progress through the last quarter of our fiscal year, we continued to have operating and financial results exceeding both guidance and consensus expectations. With a healthy balance sheet, we remain focused on corporate opportunities including potential acquisitions that will help to advance our strategic growth objectives on all fronts.
I will now turn the call over to Kevin to discuss in detail some of the operational results.
Kevin Riley
Thank you, Bobby, and good morning to everyone. As Bobby, mentioned we had a great quarter, not only influenced by higher realized oil and natural gas prices, but also by our continued organic growth. Riley Permian averaged daily oil sales of 8,363 barrels for the quarter which represents a 12% quarter-over-quarter growth or 24% year-over-year growth as compared to the fiscal third quarter of 2021. The company averaged total equivalent sales at 10,176 barrels of oil equivalent per day for the same period which represents a 4% quarter-over-quarter growth or 12% year-over-year growth as compared to the same period of 2021.
As we have previously disclosed, the gas and NGLs sales during February to June were impacted from an ongoing expansion underway at our midstream partners facilities. As of July 12, the plan expansion has been completed and is providing additional takeaway capacity to our operations. In addition, the company continued efforts on its fiscal year 2022 development activity, during the three months and nine months ended June 30, 2022, we brought online five gross, five net and 12 gross, 10.8 net horizontal wells.
The activity above corresponds with accrual basis, capital expenditures of $34.4 million and $80.5 million for the three months and nine months ended June 30, 2022. Of this, it includes $3.6 million and $11.4 million for the three months and nine months ended June 30, spent on our ongoing EOR pilot. Regarding the EOR pilot project, subsequent to the end of the quarter, all vertical injection wells have now been completed and we're injecting the water into the reservoir.
Regarding inflationary pressures on capital, we estimate drilling and completion costs for recently completed wells are averaging 26% higher than equivalent well designed from a year ago, owing to some inflationary pressure but partially offset for some efficiencies, we are seeing. Lease operating costs were $8.1 million or $8.71 per Boe for the three months ended June 30. This came in at the low end of our guidance though with an 18% increase quarter-over-quarter. As a result of the delayed remedial work from the second quarter due to limited workover rig availability.
At this point, I will now turn the call over to Philip Riley, to review our financial results.
Philip Riley
Thank you, Kevin. After a brief overview of our financial results, I will focus on highlighting metrics not found explicitly in the financial statements or earnings release to provide more color and transparency for you. We're reporting net income for the quarter of $39 million driven by $62 million of operating income, partially offset by a $12 million loss on derivatives and $11 million of income tax expense. Our quarterly EBITDAX of $45 million implies over a 70% margin when compared to revenue adjusted down for realized hedges.
Operating cash flow closely mimicked EBITDAX, which was $44 million for the quarter or $97 million for the nine month period. To summarize, here are a few quarter-over-quarter variance metrics, revenue net of hedges increased by 28%, cash costs increased by 25% or only 15% excluding production taxes which closely resembles oil production growth of 12% and cash flow from operations increased by 47%.
Year-over-year is obviously more dramatic, revenue net of hedges increased by 83%, cash costs increased by 46% or only 21% excluding production taxes, which is even less than oil production growth of 24% and cash flow from operations increased by 113%, that is the pattern you want to see. Cost increases commensurate with volume growth and bottom line cash flow increasing disproportionately more than costs and a reminder that this is all organic growth, no acquisitions, the absolute metrics are relevant for comparison.
Next, I'll offer some color on price realizations and revenues. Quarter-over-quarter, our realized oil price improved 17% and our net realized oil price after derivatives improved to similar 16%. Our absolute volume of hedged barrels did not change quarter-over-quarter while the percentage of hedge barrels effectively decreased from 64% in the March quarter to 57% this June quarter on account of increased production.
The weighted average hedge price was unchanged. We've made no changes to our hedge position since last quarter other than the roll-off. Our hedging strategy remains unchanged from the prior quarter with objectives to maximize upside exposure, to maintain flexibility, to react to changing market environments and to manage risk for very low prices.
Slide 15 in our investor presentation is updated for increased forecasted production guidance in the coming quarter showing that we're approximately 50% hedged at midpoint guidance with a similar level for the subsequent quarter, then following just under 30% down to high-teens for 2023. One small detail on the upcoming quarter, the difference from prior quarters and that's the 27,000 barrels or about 7% of hedge volumes this quarter, some wider collars, floor is a $45 per barrel and ceiling of $115 per barrel, which may not potentially correspond to any realized losses, at least at current spot prices whereas prior quarters had either out of the money swaps or collars. So if you exclude those collars, then we were 47% hedged. At some point, we may add a second half 2023 hedges, likely via some wider collars and not until the quarters are a bit closer.
Moving on to natural gas, our net realized price increased by 90% quarter-over-quarter, basis differential is about negative $0.63, about a $0.10 higher deduct in the prior quarter. Our competition for gas based on long-haul pipes is not so much Waha (ph) as it is markets to the West California, hitting traffic in New Mexico, or Utah or it's the North Oklahoma. Our processing fees were just below $1.90 leading to a net of about $5 before derivatives and $1.29 after derivatives.
Nat gas revenue was up 59% quarter-over-quarter on account of this price improvement, but still a bit disappointing given the curtailment. Nat gas derivatives in turn had a disproportionately large impact given the combination of the curtailment and high settlement prices. Going forward, at least as of today, we're unlikely to hedge natural gas. Ignoring any macro fundamental view on future gas prices, the fact is that oil comprises the vast majority of our revenue and we're not making decisions to drill wells based on gas price realizations.
The silver lining here is the gas revenue net of hedges for the upcoming September quarter has the potential to double or triple given improved processing rates and where prices are currently. So while the absolute value is relatively small compared to oil revenue, the extra $1.5 million to $2 million here it's helpful. For NGL's, the market price of our composite barrel garnered $50 this quarter, about $650 more than the prior quarter. Relative to WTI, this quarter is 46% matched last quarter. Our overall revenue mix was skewed high towards oil, given the high prices in the Nat gas dynamics.
The casual observer to look at where oil prices are today, relative to peaks a few months ago or even the prior quarter average as well as our mostly flat production guidance and then naturally come to the conclusion that surely will have lower revenue this September quarter. Here's an interesting illustration to consider. If WTI averages about $86 for the remaining seven weeks of this quarter, which would be more than $17 per barrel or 16% below last quarter and we could generate revenue, net of hedges on the same level as last quarter.
Here's the quick bridge, at our midpoint production guidance in Nat price, you lose about $12.5 million in oil revenue, then we make an incremental $2.7 million gas in NGLs sales, mostly driven by increased capacity. So net-net revenue before hedges would be down by a bit less than $10 million. When you look at hedges, you see volumes drop off and at $86 price, our oil fixed price settlements were dropped by over 40% or more than $10 million.
Oil basis and Nat gas hedge settlements could increase by $0.5 million. So overall, revenue net of hedges, net is out to just under $62 million even with last quarter. Looking further out, you can appreciate our earning potential with the anticipated continued volume growth and significantly reduce negative hedge settlements even with some backwardation.
Moving on to cash flow and cash flow allocation, cash CapEx was $37 million or 7% higher than accrual basis CapEx. This is reasonable in light of the prior quarter cash CapEx corresponding to only 40% of accrual. The components of the $10 million of financing cash flow includes $6 million for dividends, a $2 million credit facility paydown, a bit under $2 million of expenses to tie to the refinancing of our credit facility. Quarter in credit facility balance was $61 million.
Looking ahead near-term, we may pay that down by roughly $5 million over the coming four weeks to six weeks. On capital allocation generally, our current mindset is to continue to seek higher organic growth, growing through the drill-bit, does require a higher reinvestment rate and this leads to lower free cash flow conversion rate compared to lower growth companies such as many of the large caps, keeping production flat. We recognize there is a trade-off, and then a much used valuation metric for a lot of the investment community as a free cash flow base yield though we do see our free cash flow growing in the year ahead.
Year-to-date, we've allocated about 78% of cash flow from operations before working capital to cash CapEx. Roughly 15% of that CapEx can be associated with our EOR project, excluding EOR then, we're at about 66% reinvestment rate tied to traditional E&P investment. So you can compare the 66% reinvestment rate versus the 24% year-over-year oil production growth and that's pretty good.
If you exclude year-to-date hedge settlements of $60 million, you get cash flow before working capital of $159 million and a corresponding 41% reinvestment rate. So then consider that 41% rate to the 24% growth and compare those two metrics to some other companies that are less hedged. Year-to-date, we have distributed 83% of free cash flow in the form of dividends.
A few final thoughts here on the macro environment and ESG. Oil and gas continued to be the number one primary energy source globally by a long shot. With oil alone. Riley Permian is just a small participant in a $3.5 trillion per year global market. We've witnessed a structural downward shift in investment in oil and gas over the past few years partly in response to shareholder priorities for mostly domestic companies but more broadly in response to growing ESG mandates and shifting of capital allocation globally.
We are believers in the many positive aspects that ESG can bring the corporate governance and stewardship. We balance our objectives to producing low cost energy, with our commitment to looking after the environment, our employees and our shareholders, but we're also seeing a refreshed welcome dialogue this year re-examining ESG based on perspective and context. In the last three years, we've experienced foreign supply chain breakdowns leading to rethinking of offshoring, manufacturing in labor as well as dramatically heightened, geopolitical tensions and global energy crisis across continents. In this context, providing basic energy needs from responsible sources should be valued.
At Riley Permian, we are a U.S. company with a 100% domestic operations, 100% domestic staff, responsibly producing 100% domestic natural resources that are among the highest demanded products in the world, and which help cloth, feed, shelter, warm, cool and transport our global population.
Thank you, and I'll turn it back to Kevin now.
Kevin Riley
Thank you, Philip. I will now give guidance for the company's activity for our fiscal fourth quarter and the full fiscal year 2022. For the fiscal fourth quarter, we forecast accrual basis capital expenditures of $28 million to $34 million. Associated with those forecasted costs, the company estimates drilling 4 gross in 3.2 net (ph), completing 7 gross 4 net and turning to production 7 gross, 4 net horizontal wells. Along with other customary capital project expenditures, including prep work for our fiscal 2023 development program along with $4 million to $6 million for EOR pilot project.
We forecast fiscal fourth quarter 2022 oil production to average 8,200 to 8,600 barrels per day and total equivalent production to average 11,100 to 11,600 barrels of oil equivalent per day. We anticipate fiscal fourth quarter LOE of approximately $8 million to $10 million with the low end corresponding to actual fiscal third quarter results and the high end accounting for costs associated with the increased production volumes and continued inflationary pressures.
In addition, we are forecasting cash G&A expenses of approximately $4.1 million to $4.7 million. We have modest upward revisions for our full year fiscal 2022 accrual basis capital expenditures of $109 million to $115 million, up from previously provided estimates of $102 million to $111 million.
For full year fiscal 2022, we are forecasting an annual total wells completed and brought online of 19 gross 15 net wells. We anticipate full year accrual basis EOR related capital expenditures to total approximately $16 million to $18 million, approximately $4 million of what was previously estimated accrual basis capital expenditures for our EOR program are now anticipated to incur in fiscal 2023.
The company plans to begin CO2 injection during calendar fourth quarter 2022. Based on our current estimates, we forecast full year fiscal 2022 oil production to average 7,800 barrels to 7,900 barrels per day representing a 22% to 24% growth from fiscal year 2021 average oil production. In addition, we forecast full year fiscal 2022 total equivalent production to average 10,300 barrels to 10,400 barrels of oil equivalent per day.
And with that, I will now turn the call over to Bobby for closing remarks.
Bobby Riley
Thank you, Kevin. And again thank you to everyone for joining us today for our third fiscal quarter call. As we look forward, our team is taking several steps to navigate through inflationary pressure for services and products including securing materials and services well ahead of scheduled activity plans. We remain focused on a disciplined model of low leverage, production growth and return of capital through dividends to our shareholders.
Thank you again for your support. Operator, you may now open it up for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Your first question comes from the line of Bertrand Donnes with Truist Securities. Your line is now open.
Bertrand Donnes
Good morning, guys. You kind of touched on it in your prepared remarks, but I was just looking for a little more color on the shareholder return front. You're at about 5% with the base dividend, is the plan to just grow that as cash flows grow or are you thinking about layering in other options or are you maybe of the other trying to follow up where maybe some additional organic growth or external growth? Is really the best use of cash?
Philip Riley
Yeah. Thank you, Bertrand. It's Philip. It's a fair question. For now, I think we're focused on the dividend. We've talked about different measures. It's our goal to grow the dividend annually. We can't speak exactly as to what will happen until the Board approves something, but if we want to approve something annually at this point, we just paid our fourth dividend at the same level. So we're hopeful we can raise that in the future. General goal is to raise that high-single digits close to 10% or so.
In addition to that, at the moment we see benefit of paying down debt, building liquidity a bit, it gives us more optionality for pursuing acquisitions and such if we should see something attractive just given capital availability in the market and such we're mindful of using too much debt for something and so it's nice to have the full availability even though our current leverage is so low.
We have talked about different types of different return programs, obviously we watch the market, we see others do buybacks. For example, we've discussed that with our Board and understand some of the trade-offs, benefits and drawbacks there. One noted that we do have a relatively lower float and we're working to improve that, but at the same time, we can recognize the potential benefits of supporting a stock price during times of volatility. So we'll keep looking at it.
And a final thing I'd say is that the free cash flow was somewhat suppressed this year with a bit higher spending with the EOR projects, the hedge settlements. Going forward we should have more based on what we're seeing in our forecasts and even with some backwardation and so, so that should give us some more options.
Bertrand Donnes
And that the high -- the note on high single-digit growth. Is that based on maybe the company's outlook on where the markets are going on a macro sense or is that more about where you think next year Riley cash flows are?
Philip Riley
I think it supports our long-term vision of what we can achieve and have as a sustainable dividend. We haven't disclosed or even formalized even internally at 2023 budget, but it's fair to say that we want to continue the type of growth that we've achieved to date even with the overlay of some of the backwardation per my little illustration there, the trade-off with the roll-off of the hedges can still be a net positive. So we do see cash flow and such growing quite a bit more than high-single digits, overall EBITDA such growing quite a bit more than that and yet on the dividend, we want to have something that we can support long-term through some volatility.
Bertrand Donnes
That's perfect. And then my next question was just kind of on that topic, the hedging slide, you assume just for the percentage just for the presentation 15% growth year-over-year. I just wanted to understand, is that just for simplicity math or is that to kind of give a baseline growth and does that have some assumed commodity strip pricing?
Philip Riley
Probably both on the first part of your question, just to clarify that first column there was 50%, does tie to our guidance, there 0% or very small amount of growth there, and then the subsequent quarters do assume a 15% year-over-year growth there. It's indicative of where we want to grow, if not more, just to put that in the context of thinking about volumes, I think it's a fair amount, it doesn't have an overlay with the commodity prices, it's just a pure volume exercise there.
Bertrand Donnes
That's fine. That makes sense. I'll hop back in the queue. Thanks, guys.
Operator
Your next question comes from the line of Noel Parks with Tuohy Brothers. Your line is now open.
Noel Parks
Hi. Good morning.
Bobby Riley
Good morning.
Philip Riley
Good morning.
Noel Parks
I just have couple of basic ones. Just thoughts at this point about what you might be looking at for rig rates going forward and just curious for the rigs that you -- the class of rigs that you use. Are you seeing the vendors sort of avoiding locking in a long contract out of the hopes that they are seeing sort of upside for spot pricing or instead are they looking into a longer commitment these days?
Bobby Riley
For us, we've done well and being able to secure rigs for our -- good part of our fiscal 2023 program so far. That puts us through, probably the spring of 2023, I know we see the availability or the option to extend and add-on, with the vendors that we've chosen to use so far. So I think that a lot of the guys in our area are just trying to look at utilization and consistency versus the volatility that comes with the spot price.
Noel Parks
Got you. Okay. Great. Anything on the materials front, you could talk about?
Bobby Riley
Materials are still tight. We are fortunate to have locked up a lot of the raw materials that we need for our program, steel, sand, the rigs and some of the service crews and continuing to look to add to that list but it is a very tight market and to be able to accelerate quickly, it would be very challenging right now without plans well ahead securing the items that are in tight spot (ph).
Noel Parks
Sure. Pretty consistent with what we're hearing across basins I'd say. And yeah, I guess, just as you look at longer-term investments, for example, EOR project and how that might extend over time, for example in the carbon capture? Has the interest rate environment given any major change sort of your scenarios that you're modeling for just in terms of looking at your cost of capital and then rates of return?
Philip Riley
It’s a fair question, I think given where our leverage is, it's such a small component of our overall enterprise value that we focus primarily on cost of equity capital, we consider that to be quite a bit higher than debt. Debt has gone up a bit. We are fortunate, we've got some interest rate hedges in place that are in the money and helping us out there, a bit embedded there that you don't see too often. Going forward though with the growth price and free cash flow profile that we see -- we frankly see leverage continuing to decline on an absolute basis. So it's just a pretty small number overall.
It can influence our thinking on, say a debt finance acquisition, but the type of growth that we're looking at is primarily driven by cash flow. We don't see needing to dip into debt to do that materially. On the carbon capture front, very briefly, most of what we're looking at is more of the partnership model where we might do a fee for service and Riley Permian is not using its balance sheet to say buy the capture equipment that might have a return that is lower than what we consider our cost of capital to be, but rather just take a fees for taking in, using or storing the CO2.
Noel Parks
Got it. Great. Thanks a lot.
Philip Riley
Thank you.
Operator
Your next question comes from the line of Jeff Robertson with Water Tower Research. Your line is now open.
Jeff Robertson
Thank you. Good morning. Kevin, as you think about 2020 -- fiscal 2023 activity levels, would you expect at this point given where costs are, where our commodity prices are, to carry on the activity levels that you have forecasted for the fourth quarter of '22?
Kevin Riley
Yeah. I would expect to continue to operate at a pace very similar to the year that we're in, especially as Philip alluded to hedges continuing to roll-off, we'll have more cash flow, we want to continue to grow at a pace that we've grown over the last four years or five years. In overall, I mean DNC (Ph) cost had gone up around 26% when oil prices are nearly doubled, so it's not one-to-one or still increase in our returns and growing the company, so I don't see us slowing down at this point, we have a good return on the asset we have.
Jeff Robertson
Kevin, do you have a feel yet for what 2023 costs might look like as you procure some of that equipment that you'll need for the fiscal '23 capital program and start compared to the 26% increase you're seeing now?
Kevin Riley
I think that we've probably seen a lot of the increases already, realized in the last quarter or two. As we go forward, we hope to either be able to arrest further inflation or possibly lower the cost through some of the efficiencies we're continuing to gain and for instance, sand, we're starting to self-source sands, that will be a saving and just becoming more efficient in our operations and making sure there's everything is done to the right degree versus over fracking or over drilling a well so. Hopefully, we are at the peak of that, I can't say that with certainty, but we hope that's the case.
Jeff Robertson
And on the gas processing capacity, how much of an impact is that -- does that have on your fourth quarter production estimate of 11.1 to 11.6 MBoe a day? In other words, if you didn't have constraints, do you have a feel for what that number might be, what the production number range might be?
Kevin Riley
For fourth quarter, I think we have baked in that we're going to produce or sell, most of which we produce as stated we started selling at our NDQ (ph) level or higher in July and the plant expansion was completed on July 12, formally announced completed. So I think that we aren't on target to meet our production range or guidance, if not beat it. We're still just trying to make sure we don't have any surprises with the new plant but so far everything is working smoothly and we're excited to see the results.
Jeff Robertson
Okay. Thank you very much.
Operator
Your next question comes from Sandra VandenBrink with Tokay Capital Corp. Your line is now open.
Sandra VandenBrink
Thank you. Good morning, gentlemen. First, I'd like to congratulate you on the successful quarter and thank you for your continued hard work and focus. My question, could you speak to where you are with the CO2 flooding for enhanced oil recovery?
Bobby Riley
Good morning, Sandy, this is Bobby.
Sandra VandenBrink
Good morning. Hi Bobby.
Bobby Riley
Yeah. As we kind of said in there, all six of our initial plants injection wells are now online, we are injecting water at a slightly higher rate than we actually originally modeled which makes (ph) not so good thing for us. We are just starting to see some communication, not breakthrough or anything like that, but communication between a few of the wells. So things are on schedule there. We planned to start injecting CO2 in the fourth calendar quarter which we would expect to see some response relatively soon but it's still too early to make an exact prediction but things are online, I chatted with the tech team (ph) this morning and they're very happy with the response that we're saying and the way the operation is going.
Sandra VandenBrink
Great. Look forward to hearing some more results.
Operator
Your next question comes from the line of Richard Dearnley with Longport Partners. Your line is now open.
Richard Dearnley
Good morning. To follow that last question, does the new tax credits which seemed to be quite, a large increase -- has that meaningfully changed the dialogue on CO2?
Philip Riley
I can take that. This is Philip. We're pleased overall to see that go through. It is -- as you say it's a meaningful increase for EOR stored. It's about $25 incremental for Permian and it's $35, both correspond about a 70% increase. This industry for equipment is not insulated from inflation just like the rest of the world they're suffering from that. So costs for equipment have gone up as well maybe 40%, so we're hopeful that just like our financial performance that the revenue is still outpacing the cost increase, but there is some trade-off there. If there are other aspects of it that are helpful, we've got a five years of direct pay and you've also got a reduction in the minimum size threshold from, say, 100,000 tons down to -- way down, down to 12,000 or so.
For the groups that we're talking to, we're processing all of this. We've got potentially a tax appetite in the future. We've talked to groups that are more financial types that could help us monetize that tax credit but some of this does make it more interesting and what I can say is, we're working hard on it and we're excited about it. The EOR, especially the credit, what that could represent for something for us, would be really meaningful, we've got this fully permitted project, it's ready to go, it doesn't have timing delays like a classics well might have for the permanent storage. So we see exciting opportunity to potentially start with something there and then later in its life, potentially shift the permanent.
Richard Dearnley
Good. Thank you very much.
Operator
[Operator Instructions] Your next question comes from the line of Jeff Robertson with Water Tower Research. Your line is now open.
Jeff Robertson
Thanks, Philip. A follow-up on the EOR, as you start to inject CO2 in the fourth quarter of calendar '22, while you're injecting even before you get response, will the EOR costs or the CO2 costs rather be capitalized as a capital expense and then it reverts to an operating expense when you start producing or is it going to be an operating expense while you're injecting?
Philip Riley
No. Yeah. You're right. The former is how we're thinking about it, it's capitalized towards the beginning and then at some point, we make a determination and we shifted to operating.
Jeff Robertson
Okay. So...
Kevin Riley
We will start to be clear with that going forward. Yeah. That's right and so as we start talking next year, we'll try to give some clear guidance, as that can be a little bit confusing.
Jeff Robertson
Thank you.
Operator
There are no further questions at this time. This concludes today's Q&A and today's conference call. Thank you so much for attending. You may now disconnect.
For further details see:
Riley Exploration Permian, Inc. (REPX) CEO Bobby Riley on Q3 2022 Results - Earnings Call Transcript