Before we begin, I would like to note that Riley safe harbor disclosures regarding forward-looking statements can be found under the Investors tab of the company's homepage. Investors can submit questions through the conference portal, and we will seek to address those questions in the follow-up management series report. Also, indications of interest in meeting with management can be submitted through the portal, and our teams will work to coordinate those. Riley is a growth-oriented exploration and production company whose asset base is concentrated in the Permian Basin. The company's two core areas are referred to as Champions in Yoakum County, Texas, and Red Lake in Eddy County, New Mexico. The company's production profile is essentially conventional oil-weighted assets, which has allowed Riley to grow while generating excess cash flow that can be used to strengthen the balance sheet, return cash to shareholders, and invest in growing the company.
I'd now like to welcome Philip and Ben. Thanks for joining us today.
Thank you.
Thank you.
As I mentioned, Riley's asset base is comprised of conventional oil-weighted producing formations. Philip, why has Riley preferred conventional assets before the unconventional play or in favor of the unconventional plays, which have become the prevalent and dominated the industry in the last couple of decades?
Yeah, sure. First, thanks for having us today. It's always good to speak with you. I'd say it's kind of a combination. We've got a conventional rock that we're developing in the unconventional modern way. The reason we like the conventional rock are several. The rock properties have good permeability, porosity, and oil saturation. Really allows for good oil in place and great production profiles. The shallower nature of our intervals are quite a bit shallower than, say, where the Wolfcamp is, and that in turn allows for less expensive drilling cost. Because of those rock properties I described, you can use a less intensive frack, and so that also makes it less expensive. Once the thing is producing, it generally has shallower declines than a shale well, just given the porosity and such.
You add all that together and it leads to just really good well returns.
Is it basically that the treadmill doesn't spin quite as fast with the type of reservoirs that Riley's targeted versus Wolfcamp A and B in the Midland and Delaware Basins?
Yes, that's exactly right. We're not very good at the treadmill, and so we prefer a slower one.
You talked a little about or alluded to the asset intensity with shallower depths and less intense completions needed. How does all of that support your goals of delivering value to shareholders?
Yeah. It's really an extension of that treadmill analogy in that we're in the depletion business. You're always replacing the production that's declining. The shallower declines we have, the less we have to replace of that, and it allows more cash than for discretionary allocation. Now, we may choose to grow. We could choose to give that back to shareholders or some combination thereof. Most recently this year, we've been growing a lot, and so we like that flexibility.
Philip, when we talk about shareholder value, I know you've talked about it on quarterly conference calls, but how do you measure the company's ability to deliver shareholder value?
Lots of different ways. If I had to kind of boil it down, I think ultimately some version of free cash flow or even free cash flow per share is always a good one. People allocate sometimes different ways to expenses versus capital, but really what's left over after you've spent your money. Can you reinvest only a portion of your cash flow and still grow? I think that's a good measure that you're probably creating some value there. On a multi-year basis, are you increasing your kind of free cash flow per share with the dilution that you may be incurring from, say, an acquisition or your stock-based comp or so forth. We haven't issued any stock, directly in an acquisition, but many companies do, and I think that's usually a good tool to be looking at across companies.
Since before Riley became a public company, returning cash to shareholders has been a key pillar of management's philosophy. Can you talk a little bit about how the Board evaluates capital allocation decisions between funding growth on the existing asset base, maybe looking at acquisition opportunities, and how those compete with other capital uses? Lastly, managing the balance sheet and ultimately keeping the company in a position to have a consistent cash return framework.
Sure. Yeah. On overall capital allocation choices, you kind of teed it up there. You got some organic and you got the inorganic. The organic is going to be within your control typically, and the A&D inorganic is usually outside your control. You can run hard at certain deals, but you got to be disciplined as you're underwriting them, and you also can't control initially what comes towards you and what's available and how a counterparty will react. We've been developing our company and our assets for about 10 years now. We had an original asset that we got through Effectively ended a certain farm-in approximately 11 years ago. We've done a few bolt or new entry, acquisitions into New Mexico three years ago, two years ago, and one year ago.
Really it's about, like you said, trying to create shareholder value in the best way we see that. Once we've got an asset, we have to think about how we're going to develop that. We've had some constraints in the New Mexico area with some infrastructure that we've talked about on different conference calls and in our written materials over the last couple of years. We're excited because we're really going to be in a good place going forward with some of those constraints going away. But you asked how the Board and we look at underwriting that. It's really that risk-adjusted return, managing inventory duration, overall tenor. One could look at a spreadsheet and say, "Hey, we're just going to drill this all up," but then, what do you have after that? What are you going to be doing?
And then the acquisitions, trying to find a good balance of sometimes a little bit of cash flow, which implies that there's production and the wells actually work, but we really like a largely undeveloped asset. That's what we've done the last several years, which can lead to really great returns there. We don't need to be buying too much PDP. You asked a couple other things. How do we want to guard that balance sheet? We've been pretty prudent. We've used debt in the past to do an acquisition, but we've paid it down, so we demonstrate that track record of discipline. At this point, we've got very low leverage. Then overall allocation with regard to shareholders, we've got this base dividend. You alluded to it. We've been paying a dividend to shareholders since 2018, far before we were public.
Since we've been public, we've raised it every year. Last few years, it's been a 5% growth. I think our philosophy there is to ensure we have something that's really sustainable. We don't control the price of the product we sell, of course. So we want to be trying to grow that free cash flow, ideally, even a little faster than the dividend growth so you get a growing wedge of cushion there. Then that allows for that much more discretion between buying something new, for example, buying back shares, or doing something different with the dividend.
The dividend has grown, I think, at a compounded annual growth rate of about 7% since 2021, and I think between 5% and 5.5% over the last several years. Can you share any thoughts on what you think an appropriate dividend growth rate is for a company of Riley's size and some of the capital commitments that you see?
Yeah. Just to continue what I was saying there, we try to find a sweet spot. I think it's good. You want a growing dividend to keep up with some of the general inflation we're seeing. We're mindful of where a treasury rate is, which frankly is about 5% these days, while not trying to directly compete with it. If you can have a growing dividend, that's yet another measure of value creation, as long as you're paying it out of true excess free cash flow, that's not funded even just by an acquisition each year, right? We want some of that cushion I was describing between. We want plenty of coverage on the dividend. I think we've always been believers in just that base dividend, versus a variable or flexible. I think it's our philosophy. It's harder to capitalize those.
I think investors sometimes scratch their heads on how they might capitalize that. It's nice to get the money when it's high, but it can go away. I don't think it gets properly capitalized into a price. You take a year, like this year, we've got great production. Obviously, oil prices are very high. We've got more room, but I think we'll want to stay conservative and consistent with how we've done things. We can always keep paying down debt and do other things with excess free cash flow.
You mentioned base and variable dividends. It kind of has seemed to me that a base dividend is something you're more married to. A variable dividend is something you can get divorced from.
Yes.
Or you're just taking from time- to- time.
Yeah. That's a good way to say it. If anything, the buybacks are where you can do the more fluctuating activity, I think, is probably how we think about that.
On the buyback, Philip, you all authorized a $100 million share repurchase plan in December last year. Obviously, rising oil prices and rising stock prices make a trade-off there in how attractive executing the buyback is at any given time with this current kind of volatility. Was that really just put in place as an extra tool in the toolkit for periods when management and the board thought there was a dislocation between the share price and what you thought reality was?
Yeah. I wouldn't say it quite that way, in that it was put in opportunistically. We see value in the stock price at various prices. At the time we did it, our price was in the 20s. Granted, oil was also in the high- 50s, I think. We'll try to be smart about it. We run NAV models and have a point of view on value. At the same time, we don't deny that stock prices are guided by oil prices, and oil prices are high, stock prices are high. If stock prices should go higher or lower, the stock price will likely follow all else equal and absent any changes in the business. I think we'll be smart about it. We've got, I think the last quarter, $270 million or so of debt.
It's not a large amount relative to our EBITDA and cash flow levels, but it's something that we can pay down while stock prices are high.
A lot's changed in the world since the company put together its initial 2026 capital program. Oil prices have been to 100, been back into the 70s, and now have touched 100 again. How have you all dealt with the volatility that you've seen in 2026, and how does the potential or the uncertainty of what could happen with oil prices in the coming months play into how you're thinking about 2027 on a preliminary basis?
Yeah. When we came out with our original program in March, we really were making those decisions earlier than that when the price was in that $60- $65 price range. We felt good about our activity levels back then, so surely we feel even better about them right now. A lot of the things we had to think about, though, were not just growth, but how we're going to maximize long-term value for shareholders, infrastructure availability. A lot of that considerations went into that plan. As far as how we're thinking about 2027, it's still early. But I think you could expect something relatively similar to what you've seen so far this year.
Has the volatility affected at all how you all think about constructing the hedge portfolio? I know the RBLs typically include some sort of minimal hedge requirements. How does that play into your thinking as you look at the-- Obviously, hedges are in place for 2026, but as you look at outer periods.
Yeah. You hit it. It's the outer periods. A lot of the time with our company, the hedges we have in place today are a result of hedging decisions made 18 - 24 months ago. Some of this is just to be compliant with our debt covenants, and some of it is then some risk management. That's what guides our hedging philosophy. We're not trying to speculate on prices and lock in what may be a perceived good price or bad price at the time. The world can change, as you noted. Sometimes what we do is we've got that further out hedging that we do for the debt needs, which may be changing here as our debt goes down. Then as time gets closer, maybe we want to lock in certain prices for certainty. But I tell you, this year is, I think, admittedly different.
Sitting here today on Monday, September 14th, we've got $30 of backwardation in 12 months. We're at 102 on the prompt, and we're at 72, 12 months later. It's amazing. I think people think, "Oh, wow, $100 oil. Lock that in. Let's hedge that." Well, you can hedge October, right? October 2026, and that's about it. If you want to hedge October 2027 or October 2028, that's going to be 70, right? That still might be an okay price, but it's still 70, it's not 100. I think we're in a structurally tight market right now. You're going to continue to see each month rolling. Obviously, we can go up and down, but often it rolls up to the prompt and we're going to just manage where we are. We'll manage risk.
With a declining debt profile, we have less of that risk to manage. We'll be in a safe spot under lots of different planning scenarios and price scenarios. We can adjust activity as needed, but ultimately, we don't deny that we're price takers in this business.
Well, I think to Ben's point earlier about where you started the year, it seemed like if you re-round the clock, you'd show a company with very good growth prospects for oil or total production and oil production, and still with a strong balance sheet or improving balance sheet and very solid dividend coverage. I think it seems as though if you position for 2027 at maybe a little bit higher floor price than what you thought for 2026, then a lot of those factors would only be enhanced.
Correct.
As I mentioned at the outset, the company has two core areas, Champions in Yoakum County, Texas, and Red Lake in New Mexico. The Red Lake position was acquired in a series of strategic acquisitions over the last several years. Inventory depth has been something that Riley has talked a lot about in recent conference calls and slide decks. Philip, can you or Ben, can you talk about the depth of inventory in each area and how that plays into how you think about development?
Yeah. We're fortunate to have our assets in areas that have been producing oil for a long time, so we have a really good understanding of the reservoir and the characteristics in those assets that drive value. Altogether in the portfolio, we have over 300 locations. Probably 1/3 of those are in Champions and about 2/3 of those are at Red Lake.
Can you talk a little bit about or can you compare or contrast the return opportunity in both areas?
Yeah, sure. They both compete for capital, and they both have strong returns. Historically, Champions has probably had some of the strongest returns in the portfolio. But like I said earlier, most of the inventory is in Red Lake, which really provides a nice balance between having really strong returns in Champions and then having Red Lake, which also has very competitive returns that will drive the company's growth going forward.
The 2026 capital program includes, I believe, just over 50 net new horizontal wells. Can you talk a little bit about how you all address inventory replacement with either through a ground game type leasing approach or trying to do bolt-on acquisitions?
Yeah, I'd say the first feather in our cap is using kind of a ground game approach, increasing our working interest with partners or neighbors nearby through trades or smaller acquisitions. We certainly evaluate larger transactions, but we're careful and methodical about that. We also are kind of evaluating potential resource expansion within our plays.
In the past, Riley did a different commodity price environment, but Riley made an acquisition and reduced development capital. Are those some of the levers that you think about when you see expansion opportunities through the A&D market and how that balances with your capital program?
Yeah, I can hit on that. I think what you're referencing is April of 2025 when we had just passed Liberation Day and at the same time got a hold of an asset that was really attractive to us in that Red Lake area of New Mexico, largely undeveloped. So it was a very volatile time in the world and oil prices to negotiate a transaction, but it's something that we wanted to do. Ancillary to that, our stock price was down, like a lot of E&Ps, so we were reluctant to issue equity or to try to issue equity into that market and into a transaction. So we tightened our belt and held our breath and decided to do it with debt. It was only $120 million size by the time it was closed, so not a huge amount.
But in any event, it was a scary time, when the world was volatile, like I said. We did that, we cut back in other places, and now we feel great about it. I like to remind some people, we got some hedges as part of that to manage risk. Some of the hedges today that we're paying negative settlements on, well, as part of that, we got this great asset and we're making revenue on the other side of that hedge, so we're thrilled to have it.
One of the things or one of the hallmarks that Riley has demonstrated is the ability to add value to the assets that you operate. You mentioned Red Lake, Philip, and I want to touch on the midstream project that you all initiated in 2025. Ultimately, that was sold to Targa. Can you talk about what that project meant to Riley and when it was originally devised, and what it will mean to Riley as you shift development dollars to the Red Lake asset?
Yeah, the main objective of the midstream project was to provide flow assurance. We ended up selling it to Targa, but that objective remains intact. We're expected to come online soon, in the next month or so. We're excited about that. Last quarter, we saw some downtime in New Mexico, which really highlights the importance of this project coming online. The objective was really to have that flow assurance. It wasn't as so much economic reasons or to improve differentials or anything like that. It was for the most part, to provide that flow assurance to ensure that we can move those molecules and produce the oil.
Am I right, Ben, that the flow assurance essentially allows you to move gas in an area where flaring is prohibited? By doing that, you can then produce the oil, which is the real economic prize?
Exactly.
That's just one of the projects. I think you all have done some power upgrades in Champions and invested in some other power assets in Texas. Is all of that a part of the strategy, Philip, with maybe with midstream might have been different, but to allocate some capital to try to improve the on the ground operations by, in Champions, having a more reliable electric grid?
Yeah, I think it was a few things. Originally, it started off as that to enhance our operations there with the behind the meter project that's been powering most of our Texas operations. Then it evolved a bit into kind of an opportunistic investment. Think of it as a venture arm of trying some new things, and if you like them, you can expand it. We've got this merchant project, creating some power for ERCOT, selling it into the grid, not for our own consumption, but for the market. That really stemmed from just that really weak gas market, that WAHA gas market that we've experienced for several years now, trying to improve the realization we get for our sold gas there. So an extension of that is to try to play the spark spread. You've got inherent energy within that gas molecule.
Can you sell it then for a better price? Can you sell an electron for a better price than, say, - $2 of gas? You've got some cushion there to play with. So we've got that. It's small relative to our overall business, but we like that option and we've seen how the market has evolved around it with the whole data center AI build-out and, seems like some good optionality.
We've touched on oil price volatility. Philip, what would you want an investor to take away who may not be familiar with Riley given the strong growth trajectory you have in 2026 and how that could carry over into 2027, all the while having a strong balance sheet and ample dividend coverage.
Yeah. I think Ben hit it initially in that I think it'll be probably similar or could be similar to 2026. I think we've got some flexibility. Again, we're staring at a $100 prompt. There's certainly opportunity currently to just manifest value through continued development and CapEx reinvestment. So I think we're interested in that. If we kept it even steady spending, I think you're going to see, and oil price dependent, you'd see cash flow and free cash flow be really attractive, just given you've even got some of the residual catch-up effect from all the spending and investment we've done this year. Next year, I think you'll see more shift to New Mexico as we've got some project, the infrastructure projects coming online that we were talking about earlier. And so it, hopefully, will be a little bit more of a balanced regional allocation between.
But overall, we remain flexible. We'll see what happens, November elections and wars and so forth. We can always pivot and react as needed.
Well, it's good to have the financial flexibility that a solid balance sheet provides, so you can be opportunistic whichever way the market goes.
Yeah, that's right. That's what we try to ensure.
Philip, Ben, I want to thank you so much for taking the time to join us today. I'd also like to remind our participants that questions and meeting requests can be entered to the portal, and we will work toward coordinating responses and meetings. Our next session will begin shortly. Once again, Philip, Ben, thanks so much for joining us.
All right. Thank you.