Riley Exploration Permian, Inc. (REPX)

Executive Summary / Key Takeaways

• The Integrated Infrastructure Moat: Riley Permian is building a rare integrated upstream-midstream-power platform in the Permian Basin that transforms infrastructure constraints into competitive advantages, creating operational independence and cost resilience that peers cannot easily replicate.

• Free Cash Flow Resilience: Despite a 14% decline in realized oil prices, the company generated $100 million in upstream free cash flow through the first nine months of 2025, converting 73% of operating cash flow in Q3 while reinvesting just 27% back into upstream capital expenditures.

• Silverback Acquisition Synergies: The $123 million Silverback deal added 47,000 contiguous net acres and 300+ drilling locations while immediately exceeding production forecasts by over 50% through operational improvements, validating management's strategy of leveraging existing infrastructure to drive returns.

• Capital Allocation Discipline: Management's "procure and preserve inventory" approach in a low-price environment demonstrates rare patience, building a drilled-but-uncompleted well inventory for 2026 while maintaining a 5.85% dividend yield and 1.3x leverage ratio.

• Execution Hinges on Midstream Timeline: The 150 MMcf/d New Mexico gathering system and high-pressure pipeline, slated for service by mid-2026, represents the critical path to unlocking full development potential and justifies the infrastructure investment thesis.

Setting the Scene: Building a Self-Sufficient Permian Operator

Riley Exploration Permian became a public company in early 2021, emerging with a clear mission to develop conventional oil-saturated formations in the Permian Basin through horizontal drilling. Unlike many exploration and production companies that focus solely on upstream activities, management recognized early that infrastructure constraints—particularly unreliable grid power and limited gas takeaway capacity—would ultimately constrain growth. This insight led to a deliberate strategy of vertical integration that now defines the company's competitive positioning.

The Permian Basin has become America's most critical oil-producing region, yet it suffers from persistent infrastructure bottlenecks. Natural gas processing capacity lags production growth, and power reliability has deteriorated as development outpaces utility infrastructure. These challenges create a paradox: operators can drill world-class wells but cannot consistently produce them at full capacity. Riley Permian's response has been to build its own solutions, creating a three-legged stool of upstream production, midstream gathering, and on-site power generation that operates largely independent of third-party constraints.

This integrated model positions Riley Permian differently than its direct competitors—Vital Energy , HighPeak Energy , SandRidge Energy , and Ring Energy . While these peers focus primarily on drilling execution and cost control, Riley is constructing a closed-loop system where each segment reinforces the others. The midstream project ensures flow assurance for growing production, while the power generation joint venture provides reliable electricity for field operations and creates additional revenue streams by selling into the ERCOT grid. This strategy requires more upfront capital but promises superior returns through the cycle by eliminating bottlenecks that plague competitors.

Technology, Products, and Strategic Differentiation: The Infrastructure Advantage

The core of Riley Permian's differentiation lies in its "must-have" midstream infrastructure project in New Mexico. The company is constructing a comprehensive gathering and compression system anchored by a high-pressure 20-inch pipeline with capacity of up to 150 million cubic feet per day. This isn't merely a convenience—it's a strategic necessity. As John Suter, the company's COO, stated: "If you don't have gas and water takeaway, it really does constrain you. And so this puts us in a good position to be able to do things as we want when the timing is right."

The midstream project addresses a structural deficit in the region. The Yeso trend where Riley operates lacks sufficient processing capacity, forcing operators to flare gas or shut in oil production to comply with New Mexico's zero-flaring regulations. By building its own system, Riley ensures its oil wells can produce unconstrained while creating commercial opportunities to charge market rates for third-party volumes. The company's working interest in the area averages 60-65%, meaning every dollar invested in infrastructure generates revenue from both owned production and competitor volumes—a powerful economic multiplier.

Parallel to the midstream buildout, the RPC Power joint venture addresses another critical constraint: electricity reliability. Riley holds a 50% stake in this venture, which has evolved from providing behind-the-meter power for the Champions field in Texas to generating electricity for sale into the ERCOT market. The Texas project achieved 100% uptime in September 2025 while powering 20% more of the company's load than at year-end 2024. In New Mexico, permitting has begun for a 10-megawatt behind-the-meter installation, with construction expected in 2026.

This power strategy serves two purposes. First, it ensures uninterrupted operations during grid failures, which have become increasingly common as West Texas power infrastructure strains under growth. Second, it creates a natural gas-to-power arbitrage opportunity. When Permian gas basis differentials are deeply negative—as they frequently are—converting that gas into electricity and selling into ERCOT at market rates generates attractive returns. As Daniel Doherty noted: "As power becomes an an increasingly precious commodity in the Permian Basin, managing our own power production will be an integral piece to our unconstrained development."

Financial Performance & Segment Dynamics: Evidence of Execution

Riley Permian's third quarter 2025 results demonstrate the resilience of its integrated model. The company reported $106.9 million in oil and gas sales, a modest increase from $102.3 million in the prior year period, but the composition reveals the strategy's effectiveness. A $19.7 million volume increase offset a $16.9 million price decline, showing that production growth—not commodity price speculation—drives results. Net income of $16.3 million declined from $25.7 million year-over-year due to higher lease operating expenses and production taxes associated with the Silverback acquisition, yet free cash flow generation remained robust.

The upstream segment generated $39.4 million in free cash flow during Q3, representing a 73% conversion rate of operating cash flow before working capital changes. Year-to-date upstream free cash flow of $100 million was essentially flat compared to 2024 despite a 14% lower realized oil price—a remarkable demonstration of operational leverage. The company achieved this by reinvesting only 27% of operating cash flow into upstream capital expenditures, maintaining strict capital discipline while still growing production.

Production metrics underscore the operational momentum. Average daily oil volumes increased 19% year-over-year to 18,400 barrels per day, while total equivalent production grew 38% to 32,300 BOE per day. The Silverback acquisition drove much of this growth, with combined production exceeding the underwriting case by over 50% in September and October 2025. This outperformance didn't require new drilling—management achieved it through strategic workovers, returning wells to production, and artificial lift optimization on the acquired vertical wells.

Cost control remains a key focus, though the Silverback integration temporarily pressured metrics. Lease operating expenses per BOE rose to near $9 in Q3, a 6% sequential increase, driven by higher-cost vertical wells and increased workover activity. However, management has already reduced Silverback's fixed field costs by $70,000 per month through office consolidation and headcount management, with expectations for 10-20% total savings. The experience with the Pecos acquisition provides a template: LOE per barrel for that asset has fallen over 30% since its purchase two years ago.

The balance sheet provides ample flexibility for the infrastructure buildout. At quarter-end, Riley had $175 million of undrawn capacity on its $400 million credit facility and $16.5 million in cash. Total debt of $375 million represents just 1.3x pro forma adjusted EBITDAX , well within covenant limits.

The company has hedged over 60% of forecasted 2026 PDP oil volumes at a $60 floor, with 44% in collars that preserve upside optionality.

Outlook, Management Guidance, and Execution Risk

Management's guidance for 2026 reveals a company confident in its ability to grow while spending less. The company believes it can maintain Q3 2025 oil production levels of 18,400 barrels per day throughout 2026—delivering 8% year-over-year growth—while reducing upstream capital expenditures by approximately 15%. Alternatively, keeping CapEx flat with 2025 levels could drive 12-15% oil volume growth. This flexibility stems from the inventory of drilled-but-uncompleted wells built during 2025, when the company drilled 10 net wells but turned only 5.8 net wells to sales.

The midstream project timeline carries execution risk but also significant upside. Permitting for the high-pressure transmission line is underway, with secured pipe scheduled to arrive in late Q4 2025 or Q1 2026. The Birdy compressor station, commissioned in Q1 2025 with 15 MMcf/d capacity, will be upgraded in Q4 with an additional 40 MMcf/d nameplate capacity. The full system could be in service as early as late 2025, though management cautions that right-of-way approvals and regulatory clearance make mid-2026 more likely.

This timing matters because it determines when Riley can fully unleash its drilling program. As Philip Riley explained: "Even if it's late fourth quarter, I think we'll be lucky to be getting much production through there, other than as it does turn on, there'll be some immediate impact that we'll be able to turn on of existing assets. But from newly drilled completions, that's what those wells in the second half will either come on fourth quarter or probably first quarter of 2026."

The power generation timeline aligns with midstream development. The New Mexico behind-the-meter project begins construction in 2026, while the ERCOT sales project could start generating revenue in late 2025 or early 2026. Management reduced its 2025 power equity investment guidance by 25% to $13 million, reflecting both capital discipline and improved project economics.

Risks and Asymmetries: What Could Break the Thesis

The most material risk to Riley Permian's story is commodity price volatility. While the company maintains a hedging program, 40% of 2026 oil volumes remain unhedged, and the midstream and power projects are fundamentally long-natural gas. A prolonged period of sub-$55 WTI oil prices would test management's commitment to capital discipline and could force a slower development pace. Philip Riley acknowledged this threshold: "In a $55 scenario, that starts to get to the point where on a corporate level, full cycle, we're mindful of spending too much."

Infrastructure execution presents a second key risk. The midstream project's timeline depends on factors largely outside management's control, including right-of-way approvals and regulatory permitting. Delays beyond mid-2026 would push full production growth into 2027, compressing returns on the invested capital. While the company has ordered pipe ahead of potential tariff impacts, construction risks remain.

Scale disadvantages versus larger Permian operators create competitive pressure. Vital Energy and HighPeak Energy have substantially larger acreage positions and can spread fixed costs across greater production volumes. Riley's 31,352 net acres represent a fraction of the Permian's 86 million acres, limiting its ability to influence regional service costs or midstream negotiations. However, the company's contiguous blocks and operational control partially offset this disadvantage.

The Silverback integration, while initially successful, carries ongoing execution risk. The acquired vertical wells carry higher per-barrel operating costs—around $13 per barrel versus $8.50 for Riley's legacy assets. Workover activity consumed 59% of total LOE in Q3 2025, compared to 27% in Q2. While management expects to drive these costs down over time, the process requires sustained operational focus and capital investment that could divert resources from the core drilling program.

Valuation Context: Pricing for Execution

At $27.34 per share, Riley Permian trades at 6.74 times trailing earnings and 3.80 times enterprise value to EBITDA, metrics that suggest the market prices in execution risk but not significant commodity upside. The company's enterprise value of $953 million represents 2.40 times trailing revenue, a modest premium to smaller peers like Ring Energy (REI) (1.90x) and HighPeak Energy (1.87x) despite superior profitability.

The free cash flow yield appears compelling. With $116 million in trailing twelve-month free cash flow and an enterprise value of $953 million, the company generates a 12.2% cash yield before accounting for the $100 million-plus annual investment in midstream infrastructure. This compares favorably to Vital Energy's (VTLE) negative free cash flow and HighPeak's (HPK) lower margins, suggesting Riley's capital discipline is valued by the market.

Balance sheet strength supports the valuation. Net debt of $359 million (excluding $20 million cash) represents just 1.3x adjusted EBITDAX, well below the 2.0x threshold many investors view as conservative for E&P companies. The 5.85% dividend yield, supported by a 37.4% payout ratio, provides income while investors wait for the infrastructure investments to bear fruit.

Peer comparisons highlight Riley's efficiency advantage. Return on equity of 16.1% and return on assets of 8.7% exceed all direct competitors except SandRidge Energy (SD), which benefits from a debt-free balance sheet. Operating margins of 31.4% and net margins of 21.7% demonstrate superior cost control, validating the integrated infrastructure strategy.

Conclusion: A Permian Operator Built for the Cycle

Riley Exploration Permian has constructed a differentiated investment thesis around infrastructure control and capital discipline in a basin where both are increasingly scarce. The company's integrated upstream-midstream-power model addresses the fundamental constraints that limit competitor growth, while its free cash flow generation and balance sheet strength provide the financial flexibility to execute this vision through commodity cycles.

The story's success hinges on two variables: midstream project execution and oil price stability. If the 150 MMcf/d gathering system and high-pressure pipeline enter service by mid-2026 as planned, Riley will have unconstrained development capacity across its 47,000-acre Silverback position and legacy acreage. This would unlock the full inventory of 300+ drilling locations and justify the infrastructure capital spent.

Conversely, delays or a sustained oil price collapse below $55 would test the company's ability to maintain its dividend and infrastructure spending while preserving its operational momentum. The hedging program provides a floor, but 40% unhedged exposure leaves meaningful downside risk.

For investors, Riley Permian offers a compelling combination of current income (5.85% yield), operational efficiency (21.7% net margins), and optionality on both commodity prices and infrastructure completion. The market appears to price the company as a conventional E&P operator, overlooking the strategic value of its integrated model. Whether that discount persists depends on management's ability to deliver the midstream project on time and demonstrate that infrastructure control translates into superior returns through the next commodity cycle.