Business Overview and History
PHX Minerals Inc. (PHX) is a natural gas and oil mineral company with a strategic focus on expanding its mineral position in its core operating areas. Incorporated in 1926 and headquartered in Fort Worth, Texas, PHX has a longstanding history of navigating the complexities of the energy industry while prioritizing sustainable growth and shareholder value.
PHX's primary business is the maximization of its existing mineral and royalty assets through active management, as well as the strategic acquisition of additional mineral and royalty interests. The company owns perpetual natural gas and oil mineral interests in resource plays across the United States, with a particular emphasis on the SCOOP and Haynesville regions. PHX does not operate any of its natural gas and oil properties, instead relying on third-party exploration and production companies to conduct exploration and development activities on its mineral and leasehold acreage.
The company's history can be traced back to its inception in 1926 when it was founded as Panhandle Royalty Company. Initially, PHX focused on acquiring and managing mineral and royalty interests in Oklahoma and Texas. During the 1950s and 1960s, the company expanded its geographic reach, acquiring mineral and royalty interests in other major oil and gas producing regions of the United States, including the Permian Basin, Anadarko Basin, and Ark-La-Tex region. This geographic diversification strategy helped PHX weather fluctuations in commodity prices and regional economic conditions.
In the 1970s and 1980s, PHX Minerals underwent a significant shift in its operating model. The company became more actively involved in the development and production of its mineral and royalty interests, participating as a non-operating working interest owner in the drilling and completion of wells on its acreage. This strategic move allowed PHX to capture a larger share of the value chain.
The 1990s and 2000s brought challenges for PHX Minerals, including a downturn in commodity prices, increased competition for mineral and leasehold acquisitions, and rising operating costs. In response, the company streamlined its operations, divested non-core assets, and focused on its most productive mineral and royalty interests. Despite these challenges, PHX Minerals maintained its position as a leading mineral and royalty company and continued its long track record of dividend payments.
In the early 2010s, PHX evolved its business model once again, transitioning away from active working interest participation and towards a focus on mineral and royalty ownership. This strategic shift has allowed the company to capitalize on the growth of unconventional resource plays while mitigating the risks and capital-intensive nature of direct operation.
Financial Performance and Liquidity
PHX's financial performance has been marked by both resilience and volatility, reflecting the inherent challenges of the natural gas and oil industry. In the fiscal year ended December 31, 2023, the company reported annual revenue of $44.46 million, net income of $13.92 million, operating cash flow of $24.17 million, and free cash flow of -$5.89 million. However, the company's financial results have been impacted by fluctuations in commodity prices and production volumes.
For the most recent quarter ended September 30, 2024 (Q3 2024), PHX reported revenue of $8.12 million, net income of $1.10 million, operating cash flow of $3.36 million, and free cash flow of -$994,889. The decrease in revenue, net income, operating cash flow, and free cash flow compared to the prior quarter was primarily due to a 20% decrease in production volumes, which was partially offset by higher realized commodity prices.
Despite these headwinds, PHX has maintained a strong financial position, with a current ratio of 5.05 as of September 30, 2024, indicating a robust ability to meet its short-term obligations. The company's debt levels have also been well-managed, with a debt-to-equity ratio of 0.27 as of the same date. PHX's conservative approach to leverage and its proactive hedging program have helped to support its financial resilience throughout commodity price cycles.
PHX's liquidity position remains solid, with $2.60 million in cash and $22.25 million available under its $50 million credit facility, which has a maturity date of September 1, 2028. The company's quick ratio stands at 5.05, further underscoring its strong short-term liquidity position.
Operational Highlights and Asset Portfolio
PHX's mineral and royalty asset portfolio is a key driver of its operational performance. As of September 30, 2024, the company's total proved reserves stood at 153.52 million barrels of oil equivalent, with natural gas comprising approximately 80% of the total. The company's royalty production volumes have demonstrated steady growth, increasing by 10.3% on a rolling 12-month basis as of the end of the third quarter of 2024.
One particularly notable operational highlight for PHX has been the continued development activity on its SpringBoard III mineral acreage in Oklahoma. The company has observed a doubling of gross wells in some stage of permitting, drilling, or production on this asset over the past 12 months, with 30 gross wells converted to producing status during this period. This increased drilling activity, which is counter to the broader industry narrative of muted natural gas development, underscores the quality and potential of PHX's mineral portfolio.
PHX's primary revenue streams come from natural gas, oil, and NGL sales, which accounted for $24.80 million in revenue for the nine months ended September 30, 2024, down 11% compared to the same period in 2023. The company also generates additional revenue from lease bonuses and rental income, which totaled $445,210 for the same period, representing a 57% decrease year-over-year. PHX utilizes commodity derivative financial instruments to manage price risk, resulting in a net gain of $1.30 million for the nine months ended September 30, 2024, a 64% decrease compared to the prior year period.
Risks and Challenges
Like other participants in the natural gas and oil industry, PHX faces a range of risks and challenges that could impact its financial and operational performance. Foremost among these is the volatility of commodity prices, which can significantly affect the company's revenues and profitability. PHX's reliance on third-party operators also introduces operational risks, as the timing and pace of development activities on its mineral acreage are ultimately outside of the company's direct control.
The company's mineral-focused business model also exposes it to risks related to the longevity and productivity of its underlying assets. While PHX's extensive mineral inventory and the high-quality nature of its assets help to mitigate these risks, the company remains subject to the potential for production declines, reservoir depletion, and other operational challenges that could impact its long-term performance.
Outlook and Conclusion
As PHX Minerals looks ahead, the company is cautiously optimistic about the future, with a focus on continued growth and shareholder value creation. The company's recent acquisition activity, focused on high-quality mineral assets in its core operating areas, underscores its commitment to strategic expansion. Additionally, the strengthening natural gas demand outlook, driven by the anticipated expansion of LNG export capacity and increased power sector consumption, suggests a potentially favorable macro environment for PHX's business in the coming years.
The company's performance in recent quarters, including achieving its second-highest quarterly royalty production record despite challenging market conditions, demonstrates the resilience of its business model. PHX's management has highlighted the dramatic increase in drilling activity in the SpringBoard III area of Oklahoma, with the number of gross wells in various stages of development doubling from around 20 to 40 over the past 12 months.
PHX's strong asset base is reflected in the reaffirmation of its $50 million borrowing base under its existing bank credit facility. Furthermore, the company's nearly seven-year inventory of high-quality drilling locations provides a solid foundation for future growth and development opportunities.
However, the company's success will ultimately depend on its ability to navigate the inherent volatility of the natural gas and oil industry, maintain its financial discipline, and capitalize on the unique strengths of its mineral-focused business model. With a proven track record of resilience and a carefully curated asset portfolio, PHX Minerals appears well-positioned to continue delivering value to its shareholders in the years ahead.