Executive Summary / Key Takeaways

• Riley Exploration Permian is strategically evolving beyond a pure-play E&P, leveraging its core Permian Basin assets to build integrated midstream and power infrastructure, particularly in New Mexico, positioning for long-term operational control and new revenue streams.
• The recent $142 million Silverback Exploration acquisition significantly expands REPX's undeveloped inventory in the New Mexico Yeso trend, providing critical synergies for water handling, gas takeaway, and power generation, aligning with the company's strategy to acquire and preserve high-quality inventory in the current low-price environment.
• Despite reducing total 2025 investments by 50% (including a 41% cut to upstream CapEx) in response to lower commodity prices and the acquisition, REPX forecasts only a modest 4% decrease in stand-alone oil production guidance, demonstrating capital efficiency and the ability to maintain volumes by utilizing existing drilled but uncompleted wells (DUCs).
• Operational efficiencies, including reduced drilling times (down 40% vs. 2022) and lower well costs (down 20%+ vs. 2022), coupled with strategic infrastructure investments, underpin the company's ability to generate substantial free cash flow ($39 million in Q1 2025 before working capital) and reduce debt (0.9x Debt/Adjusted EBITDAX at March 31, 2025).
• While smaller than major Permian players like OXY (OXY), EOG (EOG), and DVN (DVN), REPX differentiates itself through targeted acquisitions, contiguous acreage enabling efficient development, and integrated infrastructure projects designed to mitigate regional constraints and enhance profitability, though it faces challenges related to scale and market volatility.

Setting the Scene: A Permian Player's Evolution

Riley Exploration Permian, Inc. ($REPX) operates within the dynamic and competitive landscape of the Permian Basin, one of North America's most prolific oil and natural gas producing regions. Focused on horizontal drilling in conventional, liquids-rich formations like the San Andres in its Champions field (Yoakum County, Texas) and the Yeso trend in its Red Lake field (Eddy County, New Mexico), REPX has historically prioritized capital efficiency, robust free cash flow generation, and maximizing shareholder returns.

The company's journey has seen it strategically expand its footprint, notably with a significant entry into New Mexico in 2023, followed by a targeted bolt-on acquisition in Eddy County in May 2024. These moves were not merely about adding acreage but were foundational steps in a broader strategic evolution. Recognizing the inherent challenges and opportunities within its operating areas, particularly related to infrastructure constraints and market volatility, REPX is actively transforming into a more integrated energy company. This involves leveraging its core E&P expertise to build complementary midstream and power generation assets, aiming to gain greater control over its operations, enhance profitability, and create new avenues for value creation.

In a basin dominated by supermajors and large independents like Occidental Petroleum (OXY), EOG Resources (EOG), and Devon Energy (DVN), REPX positions itself as a more agile, niche player. While it lacks the sheer scale and diversified portfolios of these giants, REPX seeks to differentiate through targeted acquisitions of high-quality, contiguous acreage that facilitates efficient development and through strategic investments in infrastructure designed to mitigate regional bottlenecks that can disproportionately impact smaller operators. This approach, coupled with a focus on operational excellence and technological application in drilling and completions, forms the core of REPX's competitive strategy.

Operational Prowess and Technological Edge

At the heart of REPX's operational strategy is a relentless focus on efficiency and cost reduction in its drilling and completion activities. The company has demonstrated significant progress in this area, translating directly into improved capital efficiency and free cash flow generation. In 2024, REPX decreased its cost per foot across its Texas and New Mexico assets by 11% year-over-year. This was achieved through optimizing drilling practices, including improved bit selection, single BHA lateral runs, and minimized steering, resulting in faster spud-to-TD times. Drilling times were down by 20% year-over-year in 2024 and a notable 40% compared to 2022 levels. The company also set records for fastest drilling in Yoakum County for both 1-mile (3.97 days) and 1.5-mile (4.78 days) laterals.

Completion techniques have also been optimized, with changes such as increasing cluster spacing and decreasing sand loading. The company is increasingly utilizing multi-well pads with zipper-style completions, which saves on rig moves and pump times. These technical improvements, combined with favorable market pricing for services (which accounted for roughly half of the savings in Q2 2024), resulted in well costs being down by more than 20% year-over-year in 2024, and over 25% compared to 2022. These quantifiable operational achievements are critical to REPX's ability to do "more with less," a key theme highlighted by management.

Beyond core E&P techniques, REPX is strategically investing in infrastructure technology to enhance its operational control and mitigate regional constraints. The New Mexico midstream project, initiated in Q4 2024, involves building a gas gathering and compression system and a high-pressure 20-inch natural gas pipeline designed to transport up to 150 MMcf per day. The first phase, the Birdie compressor station, was completed on time and budget in Q1 2025, establishing 15 MMcf/day compression capacity to an existing high-pressure system and is designed to be expandable to 100 MMcf/day. This infrastructure is vital because the Permian region, particularly the Northwest Shelf where REPX operates, suffers from a lack of gas takeaway capacity, leading to negative basis differentials that impact realized prices. By building its own system, REPX aims to ensure reliable, continuous takeaway, access multiple treating and processing plant networks, and potentially generate significant incremental revenue from third-party volumes.

The RPC Power joint venture represents another layer of technological and strategic integration. The initial phase, using produced natural gas for self-generation to power Texas operations, became fully operational in September 2024 and provided 50-60% of Texas power needs in Q1 2025. This reduces reliance on the potentially intermittent grid and provides more reliable power for operations, potentially reducing downtime and future workover costs. The expanded scope includes building new generation and storage assets to sell power and ancillary services into the ERCOT market. Management views this as a hedge against low gas prices and negative basis, leveraging low-cost feedstock gas for potentially attractive power economics. While the ERCOT project is still under development, progress is being made on siting, permitting, and equipment orders, with an expected online date potentially in late 2025 or early 2026.

These technological and infrastructure initiatives are not merely operational enhancements; they are strategic differentiators. While larger peers like OXY and EOG have vast integrated systems, REPX is building tailored solutions for its specific asset base, aiming to unlock value constrained by existing third-party infrastructure. This targeted approach, enabled by its contiguous acreage position, allows REPX to potentially achieve faster development cycles and lower per-unit operating costs in its niche areas compared to the broader operations of larger competitors.

Recent Performance and Strategic Adjustments

Riley Permian's financial performance in the first quarter of 2025 reflects a period of strategic adjustment amidst a volatile market backdrop. Total oil and natural gas sales, net, increased by 3% to $102.457 million compared to $99.424 million in Q1 2024. This was primarily driven by a 20% increase in total equivalent production volumes (24,433 Boed in Q1 2025 vs. 20,374 Boed in Q1 2024), including a 10% increase in daily oil volumes, benefiting from new wells and the 2024 New Mexico acquisition. However, this volume growth was partially offset by lower realized oil prices (down 5.13%) and negative realized prices for natural gas and NGLs due to regional basis differentials, although increased gas/NGL volumes from new third-party processing capacity helped revenue.

Operating expenses saw increases in Q1 2025 compared to Q1 2024, with Lease Operating Expenses rising by $1.6 million to $18.331 million, primarily due to the addition of acquired properties. General and administrative expenses increased by $1.8 million to $8.807 million, partly attributed to increased employee headcount and legal fees related to the midstream project. Depletion, depreciation, amortization, and accretion expense rose by $1.4 million to $19.138 million due to higher production volumes. Interest expense, net, decreased by $2.4 million to $6.661 million, reflecting lower debt balances and interest rates on the Credit Facility. The company reported a net loss on derivatives of $5.850 million in Q1 2025, including a non-cash loss of $6.965 million.

Despite these fluctuations, REPX generated $50.4 million in net cash from operating activities in Q1 2025 ($56.1 million before working capital changes). This strong operating cash flow allowed the company to fund its investing activities ($25.4 million used, including $16.150 million in additions to oil and gas properties and $6.250 million in contributions to the equity method investment) and financing activities ($29.2 million used, including $21 million in debt repayments and $8.033 million in dividend payments). The company ended Q1 2025 with $8.857 million in cash and $301.0 million of undrawn capacity under its $400.0 million Credit Facility, maintaining a healthy liquidity position and a Debt/Adjusted EBITDAX ratio of 0.9x.

The most significant recent development is the agreement to acquire Silverback Exploration II for $142 million in cash, expected to close in early Q3 2025 with a January 1, 2025 effective date. This acquisition adds approximately 47,000 net acres in the New Mexico Yeso trend, contiguous and overlapping with REPX's existing position, effectively doubling its Yeso footprint and adding over 300 gross undeveloped horizontal locations. Management views this as a strategic move to acquire and preserve high-quality inventory in the current market environment, which they characterize as favoring inventory procurement over conversion to production due to low inflation-adjusted oil prices.

In light of lower realized prices, the forward strip falling below the $70 WTI assumption, and the Silverback acquisition, REPX has modified its 2025 guidance. Total investments are reduced by 50% ($105 million), with upstream CapEx cut by 41%, midstream CapEx by 71%, and Power JV investment by 25% (reducing the equity need by $5 million). Despite the significant CapEx reduction, the impact on stand-alone upstream volumes is forecast to be modest, with midpoint oil guidance only down 4% and still showing year-over-year growth. This is achievable by utilizing the existing inventory of DUCs, completing more wells than are drilled in 2025. The combined guidance, including the Silverback assets, forecasts only modest incremental development activity from the acquired properties in 2025, reflecting the cautious approach in the current price environment. The midstream project spend is being spread into 2026 by pausing pipe orders, with potential exploration of entity-level financing.

Competitive Landscape and Positioning

REPX operates in a highly competitive environment alongside major players and numerous smaller independents. While precise market share figures are not explicitly detailed for all niche competitors, REPX's operations are concentrated in specific areas of the Permian where it competes for acreage, drilling services, and market access.

Compared to supermajors like OXY, REPX operates at a vastly different scale. OXY's Q1 2025 results show revenue of $5,975 million and a net margin of 17.71%, reflecting its diversified global operations and significant scale economies. REPX's Q1 2025 revenue of $102.457 million and estimated net margin (based on Q1 net income of $28.633M) of 27.95% (though impacted by derivative losses) highlight its smaller footprint. OXY's scale provides advantages in negotiating power, access to capital, and integrated value chains. REPX counters this by focusing on contiguous acreage blocks that enable potentially faster development cycles (15-20% faster) and lower per-well operating costs (potentially 10-15% lower per barrel in niche areas) than broader, less concentrated operations.

Against large independents like EOG and DVN, REPX faces competition across the Permian. EOG's Q1 2025 results show revenue of $6,123 million and a net margin of 29.22%, while DVN reported revenue of $3,836 million and a net margin of 23.98%. These companies possess significant financial strength, technological capabilities (EOG is known for innovation in drilling), and often more diversified asset bases or integrated midstream operations (DVN has strong midstream integration). REPX's operational efficiencies (e.g., 11% lower cost per foot in 2024) and targeted acquisition strategy allow it to compete effectively in specific plays. Its focus on acquiring undeveloped inventory, as seen with Silverback, provides potential for quicker inventory growth (potentially 20% quicker entry into new fields) compared to peers who might focus on larger, more complex deals or organic exploration. However, REPX's smaller scale and conservative investment posture in 2025 (reducing CapEx while peers like EOG maintain aggressive growth) could limit its market share growth relative to these larger players.

REPX's strategic investments in New Mexico midstream and power infrastructure are direct responses to competitive disadvantages related to infrastructure constraints. By building its own gas takeaway and power generation capabilities, REPX aims to reduce reliance on third parties, ensure reliable flow assurance (critical for maximizing oil production, as gas and water takeaway constraints can limit oil output), and potentially capture value that would otherwise go to midstream operators. This integrated approach, while requiring significant upfront capital ($130 million committed through 2026 for initial midstream projects), is intended to enhance REPX's long-term competitiveness and profitability in its core operating areas.

The competitive landscape also includes indirect competitors like renewable energy sources, which could impact long-term demand for fossil fuels. While larger peers are increasingly investing in diversification, REPX's focus remains primarily on hydrocarbons. Its Power JV, however, does represent a step towards leveraging its gas production in the evolving energy market, acting as a hedge against low gas prices by selling power into ERCOT.

Risks and Challenges

Investing in REPX involves navigating several key risks inherent to the oil and gas industry and specific to the company's strategy. Commodity price volatility remains a primary concern. Fluctuations in oil, natural gas, and NGL prices, driven by global supply-demand dynamics, geopolitical events, and macroeconomic conditions (including inflation and interest rates), can significantly impact revenues, profitability, and cash flow. While REPX uses derivative contracts (swaps and collars) to hedge a portion of its production (e.g., 70% of Q2-Q4 2025 forecasted PDP oil volumes hedged at a weighted average $67 downside price), these hedges also limit upside potential and can result in significant non-cash losses depending on forward price curves.

Execution risk on strategic initiatives is also pertinent. The successful integration of acquisitions like Silverback, the timely and on-budget completion of the New Mexico midstream project ($130 million committed through 2026), and the development of the Power JV's ERCOT project are crucial for realizing the intended benefits and unlocking long-term value. Delays, cost overruns, or failure to achieve expected operational efficiencies could negatively impact financial performance.

Regulatory changes, particularly concerning environmental regulations (e.g., greenhouse gas emissions, water use, produced water disposal, seismic activity) and permitting processes in Texas and New Mexico, could impact operations, increase costs, or limit development activity. The RRC's moratorium on new produced water well permits in parts of the Permian, for example, highlights the importance of existing water infrastructure, which the Silverback acquisition is expected to augment.

While REPX has a strong balance sheet with low leverage (0.9x Debt/Adjusted EBITDAX) and significant liquidity, the capital-intensive nature of its business and strategic investments require access to capital. Adverse conditions in capital markets could impact its ability to fund future development or acquisitions on favorable terms. The working capital deficit ($68.0 million at March 31, 2025) also requires careful management, although the Credit Facility provides flexibility.

Finally, as a company with operations concentrated in specific areas of the Permian, REPX is exposed to regional risks, including severe weather, localized infrastructure disruptions, and regional supply/demand imbalances that can impact realized prices (as seen with negative gas/NGL basis).

Conclusion

Riley Exploration Permian is executing a strategic transformation, leveraging its foundation as an efficient Permian E&P operator to build a more integrated and resilient energy company. The recent Silverback acquisition is a pivotal moment, significantly enhancing its long-term inventory in the New Mexico Yeso trend and providing crucial synergies that bolster its strategic investments in midstream and power infrastructure.

While the modified 2025 guidance reflects a pragmatic response to the current low-price environment, prioritizing inventory preservation and balancing investment with market conditions, the underlying operational efficiencies and strategic infrastructure build-out position REPX for enhanced profitability and operational control in the long term. The company's ability to generate substantial free cash flow, maintain a strong balance sheet, and return capital to shareholders through dividends underscores the quality of its assets and the effectiveness of its focused strategy.

Despite facing competition from larger, more scaled players, REPX's targeted approach, contiguous acreage advantage, and integrated infrastructure initiatives provide a competitive moat designed to mitigate regional constraints and unlock value. The success of these strategic initiatives, particularly the New Mexico midstream buildout and the Power JV expansion, will be critical indicators for investors evaluating REPX's potential for sustained growth and value creation beyond the current market volatility. The company's trajectory suggests a compelling narrative of a focused player building a more robust and integrated future in the heart of the Permian Basin.