September 1, 2022, ST. PETERSBURG, FL – Water Tower Research (www.watertowerresearch.com) has published an Initiation of Coverage Report on Riley Exploration Permian, Inc. (NYSEAMERICAN: REPX) titled, “A Conventional Permian Growth Model”. The report can be accessed here.
Riley Exploration Permian is positioned to extend its record of consistent production, EBITDAX, and dividend growth. Management’s strategy to drive shareholder returns is to reinvest a portion of cash flow to grow production and allocate the remainder to grow the dividend, while maintaining a conservative financial posture.
The company’s assets consist of ~26,000 net acres on the Northwest Shelf portion of the Permian Basin in Yoakum County, Texas. The primary reservoir target is the prolific San Andres formation, which has been producing in the area since the 1930s. Riley is developing the San Andres on its acreage with horizontal wells, which have a shallower decline profile than most unconventional shale reservoirs. The decline profile yields a less capital-intensive production base and supports management’s goal of generating free cash flow and growing the dividend.
CO2 injection is expected to commence in an enhanced oil recovery (EOR) pilot project before year-end. Reservoir simulation studies suggest the EOR project could recover substantial incremental reserves and pull value in probable/possible reserves forward. Management expects oil production response within six to 12 months from the start of injection.
Riley is exploring opportunities to leverage the EOR project and empty pore space it controls to sequester anthropogenic CO2 for emitters in fee-for-service arrangements. Emitters would own the capture equipment at the source and Riley would standby to offtake captured CO2 in return for a fee. The Inflation Reduction Act, signed into law August 16, 2022, increased the section 45Q tax credits available for capturing and sequestering CO2 in EOR projects to $60/metric ton from $35/metric ton and for permanent underground storage (non-EOR projects) to $85/metric ton from $50/metric ton.
We developed 2023 EBITDAX estimates assuming Riley grows total production 10-15%. Our estimates suggest Riley will end 2023 with zero debt and cash on the balance sheet. Riley is trading at an EV/EBITDAX multiple of 2.1x our 2023 estimates. The current quarterly dividend (last raised in October 2021) is $0.31 per share. The current dividend yield is 4.9%.
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