Riley Exploration Permian (REPX) Update - Dec 15

[dan_s]

I had a long conversation with Rick D'Angelo, Riley's "Investor Relations Guy" this afternoon. Here are my notes.
I am trying to get them to host a webinar for us in January. Rick knows they can benefit from exposure to our group.
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Riley Exploration Permian (RPEX) is a “Growth” company that also pays a nice dividend. It is FCF positive and plans to fund all of their Fiscal 2022 CapEx with ~70% cash flow from operations. Based on my forecast, Riley's operating cash flow should increase from $81.8 million in fiscal 2021 to over $140 million in fiscal 2022, based on a realized oil price of just $55/bbl. < They still have lots of oil hedged in the $50s.

After being a private company (backed by Yorktown) for several years, they went public in February 2021 via merger with a public shell
• Private Equity investors wanted dividends and liquidity
• Additional $50 million equity raise 7-2-2021 by selling 1,666,667 shares at $30
• Small float and low trading volume (~33,000 shares traded per day) keeps it off the Wall Street Gang's Radar Screen. However, there were at least four analysts on the CC, so it is starting to get noticed.
• Last quarter’s dividend was $0.28/share for 5.5% annualized yield
• Dividends are variable based on FCF

Q4 production was 9,581 Boe per day, 72.4% crude oil, 15.3% natural gas and 12.3% NGLs
> Realized commodity prices reported each quarter were net of gathering & transportation costs and the cash settlements on their hedges, which is why ngas price was so low in fiscal Q4 ($1.69/mcf).

As of September 30, 2021, Riley's proved reserves were comprised of 64.1% oil, 17.6% natural gas and 18.3% NGL.
• Future net cash flows = $1,401.5 million
• PV10 value = $552.9 million
• 2021 proved reserves were estimated based on prices of $55.73 per Bbl of oil, $0.99 per Mcf of natural gas and $9.83 per Bbl of NGL. Prices used in the 2021 reserve report are based on the twelve-month unweighted arithmetic average of the first-day-of-the-month price for each month in the period October 2020 through September 2021.
• For oil and NGL volumes, the average WTI spot price of $57.64 per Bbl is adjusted for quality, transportation fees, and market differentials. The fees associated with the transportation contract are included as a deduction to oil revenue.
• For gas volumes, the average Henry Hub spot price of $2.94 per MMBtu is adjusted for energy content, transportation fees and market differentials.
• Using current strip prices of oil, gas and NGLs would more than double the PV10 value.

Majority of Riley’s leasehold is in Yoakum County, Texas in large contiguous blocks
• Northwest Shelf area / producing from the San Andres zone < This is the same zone that Ring Energy is focused on.
• San Andres has excellent permeability and porosity, which makes it a good fit for a CO2 flood. Many successful CO2 floods in the area.
• ~26,000 net acres in the Platang Field, which has been producing since the 1930s / over 2.3 billion barrel of oil produced.
Riley’s pilot CO2 flood will have six injections wells and covers less than two sections (1280 acres)
o First stage is to inject water to repressurize the zone, then add CO2 this summer
o Should know potential of the CO2 flood late in 2022
o If successful, a CO2 flood could double production and proven reserves
o Expanding the CO2 flood to all 26,000 acres will be very expensive, but has a lot of upside

CO2 flood may quality for significant income tax credits, but current value is impossible to estimate at this time since our Federal government is so screwed up and anti-oil industry. Since Riley has no near-term cash taxes, they would need to work out a deal with an intermediary that could use the credits. There is a chance the tax credit would be refundable without needing current tax liability, but the AOC crowd is fighting it and CO2 injected to increase oil production may not qualify. My rule, never invest on the "hope" that you will get a tax benefit from this government.

Production Guidance for 11% to 15% YOY growth looks very conservative considering that the Company’s production increased by 35% from fiscal Q4 2020 to fiscal Q4 (9/30) 2021 and they are now likely to complete more wells in FY 2022. IMO this is management just “under-promising to over-deliver”, which for a new public small-cap is the smart thing to do. My valuation of $28/share is based on the mid-point of their guidance.

They are not considering a stock buyback, primarily because they actually need more float.

Changing to a calendar year is something they might do.

I should know soon it they will host a webinar for us.

[dan_s]

Follow up from Rick:

"The CO2 pilot project is on a 960-acre unit, with 5 horizontal oil production wells. The vertical
CO2 injector wells (green triangles) are actually now designed for just 6, not 12 as shown here.
Deals for CO2 pipeline transportation (Cortez) and CO2 supply source tap (Kinder Morgan) have
been negotiated and signed. The 6 vertical injectors are being drilled now."

[ajootian]

Thanks so much for taking the time to type out your notes Dan, extremely helpful.

When he said that they think that a successful CO2 flood could double production & reserves, is that a doubling of production & reserves of just the 5 producers in the pilot, or a doubling of production & reserves for the entire company? I assume it's the former. Assuming that, the obvious next question would be, what is current production & reserves for those 5 producers? As you can see, what I'm trying to get at here is, what do they hope to get for the $22M they plan to invest in the EOR project?

Sorry for keeping bugging you with follow-on questions here. Hopefully they will agree to present, in which case maybe we could ask these questions then.

[dan_s]

Assuming the pilot project is successful (ramps up oil production from the producing wells in the area impacted by the six injectors), Netherland, Sewell & Associates (3rd party engineering firm) should give Riley PDP reserve additions for the impacted producers and some PUD's in the surrounding area if Riley commits to expanding the CO2 flood.

I assume that Riley will provide more details on the potential size of the EOR project. This is one reason that I want them to host a webinar for us.

[Fraser921]

Great intelligence

[dan_s]

Netherland, Sewell & Associates (Riley's 3rd party engineering firm) is one of the best in the business. They definitely know how to plan and evaluate a CO2 flood.

CO2 floods generate a respond quickly. The CO2 mixed with injected water strips more oil from the rock in formation (works best with sandstones) and allows that oil to move up the producing wells. When I was at Hess, the CO2 flood at SSAU (one of the most successful EOR projects on Earth) generated production growth within three months after we started adding CO2. SSAU is a San Andres formation flood; the same zone targeted by Riley. SSAU went from 12,000 BOPD to 64,000 BOPD within two years.