Thank you for joining us for this session of the WTR Insights Conference featuring Riley Exploration Permian. I am Jeff Robertson, Managing Director for Natural Resources here at Water Tower Research. We are pleased to be joined today by Chief Financial Officer, Philip Riley, and Vice President of Strategy and Investor Relations, Ben McQueen. Welcome, Philip and Ben, and thank you for taking the time to join us today.
Thank you.
Before we begin, please note that Riley's Safe Harbor statements can be found under the Investor Relations tab of the company's corporate website, along with its latest investor presentation. Also, this fireside chat may not be reproduced, nor may a written transcript be distributed without the express written consent of Water Tower Research. We will aim to address investor questions submitted during today's conversation in follow-up emails or in the Management Series report we will follow. Please enter your questions in the chat. Investors interested in scheduling a meeting with Riley can indicate that interest within the conference portal. With that housekeeping out of the way, let's jump into the discussion.
By way of introduction, Riley Permian is an exploration and production company whose current asset base is concentrated in oil-saturated, liquids-rich, conventional reservoirs in the Champions area of Yoakum County, Texas, and in the Red Lake Field area of Eddy County, New Mexico. Management's primary goal is to generate sustainable free cash flow to fund growth in the underlying asset base and to return cash to shareholders through its common stock dividend and share repurchase program. Oil production averaged about 20,100 barrels per day during the fourth quarter of 2023 and 17,300 barrels a day for the full year of 2023. Oil accounts for nearly 60% of Riley's total production, and the company generated about $261 million of adjusted EBITDA during 2023. In October, Riley increased its annual dividend by 5% to $1.60 a share or $0.40 a quarter.
In recent years, Riley's delivered an attractive growth profile from a combination of organic growth and acquisitions while also generating free cash flow with modest drilling and completion spending. For 2026, management's guided to a D&C CapEx range of $165 million-$185 million, and total CapEx midpoint of $200 million. I'm curious just to start with CapEx. Given the growth track record, how does Riley think about the CapEx guide for 2026 compared to prior years and how that will deliver value to shareholders?
Yeah, sure. I can start. Thanks, Jeff. I'd say the uptick in the drilling and completion spending in 2026, it's really coming about a year later than what we had really intended for last year. In March of 2023, we originally set our total investment guidance at the midpoint at about $210 million, with $120 million allocated to upstream. In May of 2023, we ended up scaling back our total investment spend by about 50%, primarily for two reasons. One, we announced the purchase of Silverback asset for $120 million. Two, after uncertain in the sustained lower price environment, we would prioritize that acquisition and the preservation of high-quality inventory over the conversion of the inventory into production. Now heading into 2026, we're relatively hedged.
We had lower leverage and no longer had the midstream capital commitments, so we felt comfortable leaning into the 2026 upstream capital spend. Those decisions had really already been made before the oil price uptick that we've seen recently with the conflict in the Middle East. I guess last point, 2026 was originally set to be a year of volume and EBITDA growth, with possibly lower free cash flow and with significant free cash flow for 2027. With the really strong commodity price backdrop, if that holds even in the low $70s, which is where it is by the end of the year, then free cash flow in 2026 and 2027 are likely to surpass our initial expectations when we set the guidance in March.
One follow-up. You mentioned inventory that was added in a Silverback acquisition. Are there different parts of the cycle where you think it makes sense to add inventory versus fund growth?
Yeah. Look, as a depletion business, we're always thinking about it and always wanting to manage it. It's an objective to try to add it every year. There's some times when it's easier done than not. It's opportunistic. We can't necessarily control that. Sometimes we'll do that, like on a lease basis, sometimes more on an acquisition. Acquisitions are pretty lumpy, right? They come along every few years sometimes, opportunities, and we react to when those present themselves.
Can you help investors understand the characteristics of Riley's asset base that allow the company to sustain an attractive growth rate while investing less than 100% of free cash flow?
Yeah. We're fortunate to have assets that are relatively lower cost to drill and complete and have relatively high production rates and relatively shallower decline profiles compared to other unconventional Permian assets. That all translates to higher cash-on-cash returns. In our investor presentation, we have a good slide we like that characterizes our assets' production profile. It's there. You'll see on the right-hand side of that, we've got a page that shows the discounted return on investment, DROI, of our ±300 net undeveloped drilling locations. The majority of those have a DROI of 2-3 times. That basically means even with the discounting future cash flows at a 10% discount rate, our wells return 2-3 times their initial investment. That slide and the analysis was done at the strip, 12/31/2023 strip, by the way, which was around $60.
It looks quite a bit better since then.
Returning cash to shareholders has been a hallmark of Riley's strategy since the company came public. As I mentioned earlier, the fourth quarter 2023 dividend grew by 5.3% on an annual basis.
Mm-hmm.
How do you think about, or how does the Board think about sustaining dividend growth over time with the asset base that Riley has?
Yeah. The dividend's important to company leadership and the Board. That's been our primary mechanism for direct return to shareholders. We have a track record of growing the dividend every year, and we hope to continue to grow it going forward, ideally surpassing inflation. We also want to ensure that the dividend's durable through all commodity price cycles and operating environments, and that the free cash flow comfortably covers the dividend.
Can you talk a little bit about the share repurchase program that was put in place in December? I think the Board authorized a $100 million repurchase authorization. How does that tool fit into your calculus with respect to returning cash to shareholders?
Yeah. First, it was important to us that we establish another capital allocation option for shareholder returns. Share buybacks, as you know, have some fundamental advantages over dividends, such as tax advantages from the investor perspective, and then the ability to manage per share performance metrics from the company perspective. Second, and specifically heading into 2026, we're in a significantly weaker oil macro environment than we are in now, and our share price reflected that while we had conviction in the long-term value of the company. In January, we repurchased about $4 million in shares at a weighted average price of $26.54. Fast-forward to today, in the current environment, we're primarily allocating capital to drilling and completing wells. As we discussed earlier, we increased our CapEx budget pretty significantly, and we're excited to see that conversion to cash flow.
Philip, you mentioned Silverback a little bit ago. That was the latest acquisition of, I think, three that have closed in recent years that built a substantial core area in the Red Lake Field area in New Mexico, targeting the Blinebry and Paddock formations in what's called the Yeso Trend. That asset really adds a second core area to your legacy Champions asset over in Yoakum County. How does the Red Lake area really position Riley for growth in 2026 and beyond?
Yeah, I can take that question. Currently, the New Mexico asset holds about 40% of our company's total production, and we certainly expect that percentage to grow. Approximately 2/3 of Riley's undeveloped inventory is in New Mexico. The economics between Texas and New Mexico are relatively similar, so they'll both receive capital in the near term. In 2026, we're going to place online more wells in Texas than New Mexico, but we expect that to flip in subsequent years.
Riley. I'm sorry.
Go ahead.
Riley received $123 million of cash proceeds in December from the sale of a New Mexico midstream project. Philip, really two questions. Can you talk a little bit about the origins and motivation for putting that project in place? How does the sale of that project to Targa facilitate development of your inventory?
I'll let Ben do that one.
Yeah, I can take that as well. The original objective of the project was to provide flow assurance for our New Mexico assets. Historically, we experienced some unexpected downtime with our current midstream provider, so we wanted some element of control to reliably deliver the molecules to Targa's network of processing facilities. With the sale, we still accomplished that goal. We still have the egress out of New Mexico to the processing plants with Targa. Now, we no longer have some of the construction cost liabilities that we would have had to have in 2026. We would have had a pretty high CapEx spend for midstream in 2026. We no longer have that. We're able to now use that capital and put it in the ground and develop more wells.
With flow assurance, it sounds like, Ben or Philip, that gives you essentially the flexibility to develop the asset on the pace that you choose?
That's right.
The agreements with Targa also allow Riley to receive up to $60 million of earn-out payments over the next five years based on certain volume thresholds. How do those payments factor into your capital allocation plans and development in the Red Lake area?
Yeah. There's three volumetric thresholds. The first threshold is for a $30 million payment, the second for a $20 million payment, and the third for a $10 million payment. Basically, under our current plan, we kind of anticipate hitting those thresholds over the next three or four years. We certainly could accelerate that a little bit if we needed to, but under our current plan, we anticipate hitting those.
You touched on inventory a minute ago. Riley's inventory of undeveloped locations exceeds 300. The midpoint of 2026 oil production guidance implies about 25% year-on-year growth and 7% growth from the fourth quarter of 2023. Philip, back to your point about positioning the company for organic growth with cash flow, can you just share your thought process around organic capital in the kind of oil market that we've seen in the first four months of the year?
Yeah. As I mentioned earlier, we made the decision to ramp production in 2026 prior to the current conflict in the Middle East, signaling that we were comfortable with our allocation of drilling capital at much lower prices than where we are today. Our balance sheet was clean with low leverage, gave us flexibility and comfort with our plan for 2026. Now, with these currently high prices, converting undeveloped inventory to production is highly economic, even accounting for the backwardation in the forward NYMEX strip. The volatility from the past month really hasn't changed our development plans so far, though we are looking to be opportunistic and bring on quick to market barrels such as workovers. Yeah, I'd say that.
With respect to workovers, are there material opportunities to go back into wells and maybe swap out plumbing or enhance plumbing to add volumes?
Yeah. We've talked about that on a couple of the last earnings calls. With the Silverback asset, that's an example of one that it'd been neglected a bit, and so that's a good hunting ground for things like workovers, where you can find opportunities, and it's great returns. It's very quick payback. Now, the overall size of the prize is smaller. You're dealing with relatively low volumes in proportion to the overall company.
I think you highlighted maybe on the third quarter call that some of those activities had helped those assets outperform your original expectations by bringing on volumes that had been shut in previously.
Yeah, that's right. The Silverback asset, in particular, was just a low amount of current production, a relatively large amount of undeveloped locations. Now, really all that we've done with that asset so far are those workovers and some cleanup. The locations are slightly southwest of where we're focusing activity at the moment. We've got all those nice locations. They're held by the production and represent the nice future inventory option.
We touched briefly on acquisitions, and we mentioned that the Red Lake area has been grown by three acquisitions over the last couple of years. Back to the whole discussion about business cycles, do you think about balancing the organic reinvestment rate in the underlying asset base with opportunities that arise in the acquisition market and maybe go one way or the other, depending on where you think the best returns are and the best opportunity to set the company up with an even stronger foundation for the future?
Yeah, I think that's fair. Fundamentally, we prioritize what's within our control versus out of our control. We're fortunate to have a solid backlog of quality inventory for organic development now, partially following the completion of several acquisitions in prior years. The assets we've got now are from those acquisitions, which were primarily undeveloped, and we're now focusing on developing those. Of course, last year we had a plan, and then we pivoted when an acquisition presented itself, right? Those things can happen. As for future new assets, we're always looking for new opportunities. This begins with our technical team identifying interesting areas of focus that might lead then to a leasing program, or it might manifest in an acquisition if you've got an agreeable counterparty. Given the elevated prices, it's possible we see more assets come to market faster than would otherwise be expected.
Whether buyer and seller can come to terms on that can be challenging with volatility, but we'll see. Yeah. I think that's fair.
It sounds like one thing that's implied in that, Philip, is it's good to have a strong balance sheet that gives you the flexibility to pivot one way or the other, depending on circumstances?
Yeah, strong balance sheet, supportive capital markets, we've got both of those right now. It feels good to be in this place.
One last question that maybe, Ben, in New Mexico, following the sale of the midstream asset and the expected completion of that project later this year, are there any significant midstream or infrastructure assets that constrain development in Red Lake?
Yeah, I don't think so. We don't see any material infrastructure constraints. It doesn't mean our team doesn't stay busy, always trying to manage the challenges of gas, water, power infrastructure. We've got solutions in place to manage and to help allow us to develop those more rapidly going forward.
I guess to bring us to a close, Philip, can you summarize how Riley's ability to transform into a multi-core area company with a deep drilling inventory over the last couple of years really supports all your objectives to deliver a company that can sustain growth and deliver value in the years ahead?
Definitely. Having assets that are similar but in distinct operating regions provides greater flexibility to adapt to changing dynamics, like we've been discussing. We've got two great assets, each with inventory depth to drive future growth. Our base cash flow and clean balance sheet really support the capital needed to deliver that growth, and we're excited about it. We're excited about our positioning in the years ahead.
Philip, Ben, thank you for taking the time to join us for this session of the WTR Insights Conference.
Appreciate it.
I'd also like to thank the participants. Additional content on Riley Exploration can be found at our website, www.watertowerresearch.com. As a reminder, for those with further questions or for investors wishing to meet with Management after this event, please reflect your interest through the conference portal so that we can address questions and work to coordinate meetings. We'd like to invite you to stay with us for the next session, which will begin shortly.
Thank you.