2023-09-30 00:44:44 ET
Summary
- Riley Exploration Permian is projected to generate $54 million in free cash flow in 2H 2023.
- It has strong operational performance in 1H 2023 and has reduced its capex budget to help generate more free cash flow.
- Riley took on a significant amount of additional debt with its earlier $330 million New Mexico acquisition.
- I believe it is currently fairly priced for a long-term $75 WTI oil scenario.
Riley Exploration Permian ( REPX ) is similar to Ring Energy ( REI ) in its focus on conventional assets in the Permian Basin. In Riley's case it has Northwest Shelf assets. Riley's current net debt level is similar to Ring's, while it has slightly more production and slightly higher margins per BOE.
At around $32 per share, I believe that Riley is fairly priced for a long-term $75 WTI oil scenario. It took on a fair amount of extra debt with its New Mexico acquisition earlier in 2023, but should also be able to generate $54 million in free cash flow in the second half of 2023 at current strip prices.
Notes On Assets
Riley's focus is on the horizontal development of conventional reservoirs in the Northwest Shelf. At the end of 2022, Riley had around 30,470 net acres and 100 net producing wells, mostly in Yoakum County, Texas. It then made a $330 million acquisition of assets in Eddy County, New Mexico (11,700 net acres) which closed near the beginning of Q2 2023.
Ring Energy has assets in the Northwest Shelf and the Central Basin Platform. Both companies focus on conventional assets in areas of the Permian Basin that are not as highly-sought after for development as the unconventional plays in the Midland and Delaware Basins.
Comparison With Ring Energy
Ring Energy makes a good comparison for Riley Exploration Permian due to their similar focus on conventional Permian assets as well as their similar size and net debt levels.
Riley's total production is around 4% to 5% higher than Ring's production (based on my 2H 2023 estimates), while Riley's oil percentage is slightly higher.
The slightly higher oil percentage contributes to Riley's unhedged realized price per BOE also being slightly higher than Ring's. Riley realized $51.38 per BOE for Q2 2023 compared to $50.49 for Ring during the same period, both without hedges.
Riley's lease operating expenses are also slightly lower at $9.06 per BOE in Q2 2023 compared to $10.14 per BOE for Ring during the same period, leading to unhedged margins that were a couple dollars higher per BOE.
Thus I expect Riley's unhedged 2H 2023 EBITDA to be around 8% to 9% higher than Ring's unhedged 2H 2023 EBITDA at current strip prices.
2H 2023 Outlook
I am currently modelling Riley's 2H 2023 production at approximately 19,600 BOEPD, including 13,600 barrels per day in oil production. Riley expects production to decline from Q2 2023 levels as it has trimmed its capex budget to improve its free cash flow generation after its production exceeded expectations earlier in the year.
The current strip for 2H 2023 has improved to $86 to $87 WTI oil, and at those prices Riley may be able to generate $202 million in revenues including hedges.
Riley's 2H 2023 hedges have negative $15 million in estimated value, mainly due it having oil swaps covering 33% of its projected 2H 2023 oil production at an average swap price of slightly over $68 per barrel.
Barrels/Mcf | $ Per Barrel/Mcf (Realized) | $ Million | |
Oil | 2,502,400 | $84.00 | $210 |
NGLs | 525,714 | $7.00 | $4 |
Natural Gas | 3,469,714 | $0.75 | $3 |
Hedge Value | -$15 | ||
Total Revenue | $202 |
Riley is now projected to end up with around $54 million in free cash flow during the second half of 2023. Riley reduced its full-year capex guidance, so its capex budget is more heavily weighted (55%) to the first half of 2023 now.
$ Million | |
Production Expenses | $32 |
Production and Ad Valorem Taxes | $15 |
Cash G&A | $11 |
Capital Expenditures | $65 |
Cash Interest Expense | $19 |
Cash Income Taxes | $6 |
Total Cash Expenditures | $148 |
Riley had $403 million in net debt at the end of Q2 2023 and its 2H 2023 free cash flow may reduce its net debt to around $363 million by the end of the year. It will pay out around $14 million in 2H 2023 dividends at its current quarterly dividend of $0.34 per share.
Estimated Value
I've previously valued Ring Energy at an enterprise value of approximately $920 million in a long-term $75 WTI oil scenario. Riley Exploration Permian has slightly higher production and slightly larger margins per BOE compared to Ring Energy, so I believe an enterprise value of approximately $1 billion would be reasonable for Riley.
This would result in a market capitalization of around $637 million for Riley if it ends 2023 with $363 million in net debt. With approximately 20.177 million shares outstanding at last report, Riley would then be worth around $31.57 per share. This is very close to Riley's current price, indicating that it appears roughly fairly priced for a long-term $75 WTI oil scenario. Riley also offers a $0.34 per share quarterly dividend.
A $5 change in long-term oil prices would affect Riley's estimated value by approximately $9 to $10 per share. A $5 change in unhedged oil prices would also change Riley's projected pre-tax free cash flow by approximately $1.15 per share if there is no change to Riley's capex budget.
Conclusion
Riley Exploration Permian took on a significant amount of net debt with its New Mexico acquisition, but should be able to generate $54 million in free cash flow during the second half of the year to help it deleverage.
It is fairly similar to Ring Energy in its focus and size, although its production is slightly higher and its per BOE margins are also slightly larger than Ring's. Overall I believe Riley is fairly priced for a long-term ($75 WTI oil scenario currently).
For further details see:
Riley Exploration Permian: Currently Appears Fairly Priced For A Long-Term $75 WTI Oil Scenario