PHX Minerals Inc. (NYSE: PHX) is a natural gas and oil mineral company with a strategic focus on proactively growing its mineral position in core resource plays across the United States. The company's principal business is maximizing the value of its existing mineral and royalty assets through active management and expanding its asset base through acquisitions of additional mineral and royalty interests.

Financials

For the fiscal year ended December 31, 2023, PHX reported annual net income of $13,920,800, annual revenue of $35,722,570, annual operating cash flow of $24,171,139, and annual free cash flow of -$5,890,360. The company's results were impacted by the volatility in natural gas and oil prices, with natural gas prices declining significantly in early 2023 and lingering at historic lows.

In the first quarter of 2024, PHX reported a net loss of $183,615, or $0.01 per diluted share, compared to net income of $9,553,244, or $0.27 per diluted share, in the same period of the prior year. The decrease in net income was primarily due to a 40% decline in natural gas, oil, and NGL sales revenues, which fell to $7.1 million from $11.9 million in the prior-year quarter. The revenue decline was driven by decreases in natural gas and NGL prices of 41% and 15%, respectively, as well as decreases in natural gas, oil, and NGL volumes of 13%, 31%, and 3%, respectively.

Business Resilience

Despite the challenging commodity price environment, PHX's business model and hedging program provided resilience. The company's royalty production, which represented 88% of total production in the first quarter of 2024, helped to mitigate the impact of the decline in working interest volumes. Additionally, PHX's hedging program, which had approximately 48% of its anticipated full-year 2024 natural gas production and 37% of its anticipated oil production hedged at favorable prices, contributed to the company's positive adjusted EBITDA of $4.6 million in the first quarter of 2024, up slightly from $4.5 million in the prior sequential quarter.

Outlook

Looking ahead, PHX's management team remains cautiously optimistic about the company's prospects, citing several positive macroeconomic factors that could drive improved natural gas prices and increased royalty volumes in the coming years. These include the anticipated completion of new U.S. domestic LNG export facilities, the construction of additional LNG export capacity in Mexico, and the growing demand for natural gas from the expansion of data centers and AI-driven power generation.

In the company's first-quarter 2024 earnings call, CEO Chad Stephens highlighted PHX's significant inventory of undeveloped drilling locations, which are categorized as probable reserves and continue to provide a steady stream of well conversions to support the company's expected future royalty volume growth. Stephens noted that PHX's total 2P (proved and probable) reserves had a PV-10 value of close to $300 million at current NYMEX strip prices, a figure that could increase dramatically if natural gas prices return to a more normalized mid-cycle range.

Acquisition Strategy

The company's acquisition strategy remains disciplined, with management focused on identifying high-quality mineral assets in its core operating areas of the SCOOP and Haynesville plays. While the current bid-ask spread in the Haynesville has made larger acquisitions challenging, PHX continues to pursue smaller, accretive deals in the $200,000 to $500,000 range. The company is also exploring the potential use of its equity to facilitate larger transactions that could improve the company's trading liquidity and float.

Liquidity

PHX's balance sheet and liquidity position remain strong, with $19.3 million in available borrowing capacity under its $100 million credit facility as of March 31, 2024. The company's debt-to-trailing-12-month adjusted EBITDA ratio stood at 1.58x at the end of the first quarter, providing ample financial flexibility to fund future acquisitions and capital expenditures.

Operational Performance

In terms of operational performance, PHX's royalty production volumes decreased 5% sequentially in the first quarter of 2024, primarily due to Haynesville producers' decisions to delay bringing new wells online amid the low natural gas price environment. However, the company's overall well conversion rates remained steady, with third-party operators converting 85 gross (0.32 net) wells in progress to producing status during the quarter, a significant increase compared to the prior sequential quarter.

PHX's management team continues to closely monitor the company's well inventory and development activity across its mineral acreage. As of March 31, 2024, the company had 230 gross (1.099 net) wells in progress, including drilled-but-uncompleted (DUC) wells, wells being drilled, and permitted wells. This robust well inventory, combined with the 15 rigs currently active on PHX's mineral acreage and an additional 65 rigs within 2.5 miles of the company's ownership, provides a solid foundation for future royalty volume growth.

Conclusion

In conclusion, PHX Minerals' diversified mineral and royalty asset base, disciplined acquisition strategy, and effective hedging program have enabled the company to navigate the challenging natural gas price environment. While the near-term outlook remains uncertain, the company's management team is cautiously optimistic about the long-term prospects for the business, citing several positive macroeconomic factors that could drive improved natural gas prices and increased royalty volumes in the coming years. With a strong balance sheet, ample liquidity, and a deep inventory of high-quality undeveloped drilling locations, PHX appears well-positioned to continue creating value for its shareholders.