Riley Exploration 2024 fundamentals

[Petroleum economist]

Riley Exploration is one of my favorite shares. It ranks 3rd in my ranking of 72 oil and gas companies, just behind Ring Energy and Vital Energy.

Reserves
2023 proven reserves (107.7 M BoE) are equivalent to 13.8 years of 2024 production. This is well above industry average of 9.5-10.0 years
Riley is adding more reserves, as demonstrated by its high RRR in 2023 (1.59) and the announced upcoming 12,500 net acre acquisition in the Eddy County. Details are yet to be revealed.
Riley has strong growth potential.

Production
With its strong reserves, production can grow with 5% per year or more.
I expect that 2024 production will grow with 15.4% from 18.5 K BoE/d (2023) to 21.4 K BoE/d (2024). The 2024 outlook is 21.0-22.5 K BoE/d.
Riley produces mostly liquids (70% oil, 15% NGL and 15% gas) and thus is not exposed to low gas prices.

Balance sheet
The balance sheet is Riley’s current weak point. Due to the $ 330 M Pecos acquisition (executed without any new shares), the solvency in 2023 dropped from an excellent 64.7% (2022) to a mediocre 46.5% (2023). The 2023 debt/EBITDA ratio is highish at 1.4.
For the upcoming 2024 Eddy County acquisition, Riley issued 0.7-0.8 M shares, albeit at the surprising low share price of $ 27.00. Consequently, the share price on the day of announcement dropped by -17.5% from $ 33 to $ 27. Since than the share price has recovered a bit to $ 29.50-30.00.
Riley needs $ 100 M or so for improvement of its balance sheet. The current oil prices are helping Riley to improve its financial position in a short time. With WTI at $ 80-85/bbl, I expect a 2024 free cash flow of $ 100-110 M. The dividend requires $ 30 M per year. Thus, the balance sheet can be restored by mid-2025.
The balance sheet limits return of funds to shareholders.

Profitability
Riley is very profitable.
2024 unit costs are below industry average at $ 32.50/BoE. The unit costs are inclusive depreciation, interest, and general and administration.
The low unit costs make Riley robust under low oil prices.
Riley has hedged 59% of the oil production, thus partially profiting from the higher oil price in 2024. In view of its balance sheet the hedging is logical.
Hedging for 2025-2026 is currently limited to 15-25%.
With oil at $ 80-85/bbl, I expect a 2024 net profit of $ 145-155 M (eps = $ 7.10-7.70). With the current share price, Riley has a very low PE of 3.8-4.1.

Shareholder returns
Riley in 2024 pays a $ 0.46 quarterly dividend. It does not buy back shares.
Shareholder returns are a lowish 3.6%.
Once the balance sheet is restored in mid-2025, returns can be increased, provided that no further acquisitions are made.

Market value
Riley is a small company. Market values is only $ 600 M.
Typically, 150-200 K shares per day are traded.
This prevents investments from major funds and banks.

Conclusion
Riley is one of my most attractive investments with its strong reserves, high production growth and good profitability. The balance sheet needs careful management. Shareholder returns in 2024 are limited, but can be increased H2 2025.

[aja57]

Thanks for your analysis, PE.

[dan_s]

I have highlighted REPX in my April 13th podcast, which will be posted to the EPG website soon.
My valuation is $50. If you download the forecast from the EPG website, you will see that my valuation multiple is conservative.
REPX is profitable, generating steady free cash flow, pays a nice dividend and now has a lot of high-quality Running Room in West Texas and SE New Mexico.