Riley Exploration Permian, Inc.'s Third Quarter 2026 Earnings Conference Call - RILEY EXPLORATION PERMIAN INC

Explicit Guidance:

• 2027 Production Growth: Management forecasts oil and total production growth of 30% to 40% year-over-year for 2027.
• 2027 Guidance Timeline: Formal 2027 financial and operational guidance is scheduled to be provided in March 2027.
• 4Q 2026 & Early 2027 Capital/Activity: Planned activity includes adding a second rig in Q4 2026 (operating two rigs for a portion of the quarter) and running two rigs consistently throughout 2027.
• 4Q 2027 Production Impact: Added volume from the Q4 2026 activity is expected to materialize meaningfully in Q1 and Q2 2027, with some incremental production expected in Q4 2026.
• Well Count: The 2027 plan involves approximately 90 net wells across the company's portfolio.
• Hedging: Hedging coverage is under 60% for the remainder of the year, approximately 50% (+/- 5%) for Q1 2027, and expected to decline further throughout 2027.

Business-Segment Outlook:

• Red Lake (New Mexico):
  • New Formation: Expansion into the San Andreas formation beginning Q2 2027 (initial drilling) with initial production expected later in 2027.
  • Inventory: Approximately 90 net new development locations identified on existing acreage (currently planned for 6 wells in 2027).
  • Co-Development: Will develop San Andreas alongside Paddock and Blind Bree formations on multi-well pads to maximize efficiency and containment.
  • DUC Inventory: Planning to complete approximately 24 DUCs in New Mexico over the next two quarters; first 10 fracked, with flowback/production expected starting early January 2027.
  • Rig Allocation: One rig will move to New Mexico in late Q1 2027 to focus on completing DUCs.
• Champions (Texas):
  • Growth Driver: Expected to continue developing remaining high-quality inventory; Q4 2026 production expected to be 15% higher due to targeted chemical treatments on existing wells.
  • Rig Allocation: One rig will remain focused on Champions to handle large multi-well pads before shifting focus to New Mexico in late Q1 2027.
• Production Mix: Overall corporate mix may become slightly oilier as new wells replace legacy verticals, though Red Lake remains an oil-driven play; gas output may be slightly higher in the short term.

Market and Competitive Outlook:

• Infrastructure Constraints: Midstream constraints (water disposal and gas takeaway) in New Mexico are resolved; Water Bridge (September) and Targa (October) capacity additions allow for increased development pace.
• Cost Structure: Water disposal via Water Bridge carries higher unit costs than company-operated systems, but is viewed as a favorable trade-off for capacity/flexibility; net inflation impact on costs modeled at zero (offset by synergies).
• Inflation Assumptions: Conservative modeling assumes ~10% inflation on tangible inputs (casing, diesel, chemicals), but management expects synergies to offset this entirely.
• Commodity Price Scenarios:
  • $90/barrel scenario: Supports the full 30–40% YoY growth trajectory through 2027.
  • $70/barrel scenario: Supports meaningful growth through Q2 2027, followed by moderate activity moderation.
  • Flexibility: Approximately 25% of planned 2027 well count and 10% of completions are contracted; remaining activity is flexible based on market conditions.

Macro / Industry Outlook:

• Commodity Volatility: Management notes ongoing volatility in gas prices and potential weakness in summer gas markets, but observes backwardation over a 3–5 year period.
• NGL Yields: New midstream infrastructure (Targa, Water Bridge) is expected to improve NGL yields and value capture compared to previous arrangements.
• Balance Sheet Health: Current debt level of $245 million (down 35% YoY) and $205 million undrawn liquidity provide flexibility to sustain development even in lower commodity environments.
• Cost Hedging: Strategy to avoid over-hedging revenue while matching capital/costs to price taker reality; hedging reduced as balance sheet strength allows.

Strategic Initiatives:

• San Andreas Expansion: Shifting focus to horizontal development in the San Andreas formation on existing acreage to unlock ~90 net locations without M&A.
• Infrastructure Build-out: Continued investment in company-operated water infrastructure (saltwater disposal, gathering lines, automation) combined with third-party Water Bridge usage.
  2027 Activity Plan:
• Rig Expansion: Transition from 1 rig (historical) to 2 rigs in Q4 2026 through 2027.
• DUC Conversion: Aggressive conversion of ~24 New Mexico DUCs starting late 2026 through Q1 2027.
• Well Pad Optimization: Utilization of large multi-well pads (6–8 wells) to minimize rig move costs (~$150k per move) and improve fracture containment.
• Financial Restructuring: Completed credit facility amendment (borrowing base/commitments upsized to $450 million, maturity extended to October 2030); retirement of 10.5% senior notes via revolver draw (zero net debt change) saving $5 million annually in interest.

Risks and Headwinds to Outlook:

• Commodity Prices: Lower prices (e.g., $70/barrel) could necessitate moderation of activity post-Q2 2027, though growth is supported through mid-next year.
• Execution/Technical: San Andreas EURs and completion efficiency are unproven in this specific location; reservoir differences from Champions exist, requiring learning curves.
• DUC Completion Timing: Production from DUCs may come on stream in "waves" depending on flowback periods and completion sequencing.
• Cost Inflation: While currently modeled at zero net impact, inflation on inputs (casing, diesel) remains a risk if synergies fail to offset.
• Operational Risks: Technical difficulties or delays in securing third-party frac crews or rig availability could impact the 2027 timeline.

Management Tone on the Future:

• Confidence: High confidence in asset quality and execution capabilities, citing the ability to grow production 30–40% despite wells turning in below guidance previously.
• Flexibility: Strong emphasis on maintaining flexibility to adjust capex based on commodity prices while not abandoning growth already underway.
• Capital Discipline: View growth and financial discipline as compatible; focus on funding development from cash flow while reducing dilution (share count growth <1% YoY).
• Cautious Optimism on San Andreas: Excited about the upside but prudent, starting with conservative spacing (4 wells/section) and relying on their own data rather than public industry results.

Miscellaneous:

• Safety: Reported 0 recordable incidents and 95% safe days in Q3 2026.
• Capital Allocation: Dividends paid ($8.4M in Q3); zero buybacks in Q3; debt reduced by $28M in Q3.
• Inventory Evaluation: "No proved reserves" currently attributed to new San Andreas drilling locations; estimates based on internal technical work.