Riley Q1 results - a pleasant surpise

[Petroleum economist]

Riley reported excellent Q1 results. The recent 25% drop in share price is without any basis. Production was near the top of the outlook and growing. The balance sheet is recovering fast. The profitability is sound and costs are under control. Shareholder returns are reasonable and will increase. Riley closed the previous announced Eddy County acquisition.

Production
• Q1 production (20.4 K BoE/d) was near the top the outlook (19.5-20.5 K BoE/d). Production was 2% above Q4 (19.9 K BoE/d).
• Riley sees the production growing. Q2 outlook is 20.3-21.3 K BoE/d.
• The 2024 outlook (21.0-22.5 K BoE/d) is 16-18% above 2023 production (18.6 K BoE/d)
• Riley has proven reserves of 108 M BoE. Reserves are equivalent to 13.8 years of 2024 production. This is well above industry average = 9.5-10 years. The reserves combined with a high RRR (1.5-2.5) allow Riley to grow with 5-7% per year to a level of 28-30 K BoE/d.
• Fluid composition was 69% oil, 16% NGL and 15% gas, indicating a focus on liquids and a limited exposure to sustained low gas prices.
• Q1 composition (69/16/15) is not in line with reserves (62/19/19), meaning that production over time will become a bit gassier.

Balance sheet
• Riley’s balance sheet is its weakest point.
• Due to the $ 330 M Pecos acquisition in 2023, solvency dropped from an excellent 64.7% (2022) to a mediocre 44.6% (late 2023). 2023 debt/EBITDA was a highish 1.4
• In Q1 solvency improved from 44.6% to 45.4%. Late 2024, with 70% of the free cash flow routed towards the balance sheet, I expect solvency to recover to a good 52%.
• Long term debt reduced in Q1 from $ 336 to $ 322 M. At the end of 2024 expect a long-term debt of $ 250-260 M. The debt/EBITDA ratio can reduce to an acceptable 1.00-1.05.
• Riley spends in 2024 only 30% of its free cash flow on shareholder returns. In 2025 this can be increased.

Profitability
• Q1 costs were line with expectations and contained no surprises.
• Riley has hedged 58% of its 2024 oil production, leaving it with limited exposure to oil price variations.
• Unit costs in 2024 are a medium low $ 31.50/BoE, making Riley robust under low oil prices.
• Q1 net profit was $ 18.8 M (eps $ 0.94). The net profit included -$ 17 M non-cash hedging losses. I exclude these, as I take them in as cash hedging results in the rest of 2024, 2025 and 2026.
• The adjusted eps ($ 1.61) was above the analysts’ average expectation ($ 1.50).
• For 2024 (WTI = $ 80-85/bbl) I expect a net profit (excluding non-cash hedging losses) of $ 147-158 M (eps = $ 7.20-7.75). The PE is a very low 3.3-3.5.
• With higher production, the eps in 2025/2026 can increase to $ 8.50-9.70 (PE =2.7-3.1).

Shareholder returns
• Riley pays a quarterly dividend of $ 0.36 ($ 1.44 per year). This equivalent to an annual yield of 5.5%
• With the improved balance sheet late 2024, shareholder returns can increase in 2025. With 40-50% of the free cash flow routed to shareholders, returns can be $ 2.60-3.30 per share, equivalent to a yield of 10-13%.

Conclusion
Riley is an excellent investment with a low PE, an improving balance sheet, good profitably and increasing shareholder returns.

In my project ranking of seventy-two companies - with the Q1 results implemented - Riley retains the top spot (1st). The recent 25% drop in share price in one month is without any basis. Riley Energy has lots of upside.