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WTR Insights Conference Takeaways: Building Long-Term Value in a Turbulent Oil Market · WTR Small-Cap Spotlight

• 0:00
  SPEAKER_00: Today I'm joined by my Watertower Research colleague Jeff Robertson, Managing Director of Natural Resources.
• 0:05
  SPEAKER_00: On September 22nd and 23rd, Water Tower Research hosted the WTR Insights Conference, and Jeff hosted nine companies from his coverage universe, seven ENP companies to include Evolution Petroleum, High Peak Energy, Marin Energy, Prairie Operating, Riley Exploration, Ring Energy, and Valco Energy, plus two oil field service companies, Forum Energy and Oil States International.
• 0:30
  SPEAKER_00: The conference came against a volatile commodity backdrop with crude trading above$100 a barrel at points this year, while natural gas is held above or near$3.
• 0:40
  SPEAKER_00: Today we can walk through what management team said about capital discipline, balance sheets, shareholder returns and growth, and what Jeff sees as the key takeaways for investors.
• 0:50
  SPEAKER_00: All nine presentations, by the way, are available on demand at www.watertowerresearch.com.
• 0:57
  SPEAKER_00: Thanks for joining, Jeff.
• 1:00
  SPEAKER_00: Welcome to today's podcast, Jeff.
• 1:03
  SPEAKER_01: Thanks, Tim.
• 1:04
  SPEAKER_01: Good to be here.
• 1:05
  SPEAKER_00: Jeff, let's start with the big picture.
• 1:07
  SPEAKER_00: Nine companies over two days with oil prices swinging sharply this year.
• 1:12
  SPEAKER_00: What was the overarching message you heard from the management teams?
• 1:15
  SPEAKER_01: Well, I think as you mentioned in your opening, that oil prices were above$100.
• 1:20
  SPEAKER_01: And if you go back to the beginning of the year, oil prices and the outlook were for prices, or prices were probably in the low to mid-60s, and the prevailing thought was they could drop into the low 50s by the end of 2026.
• 1:33
  SPEAKER_01: So since the Persian Gulf War started in late February, prices have bounced up to 100 back to, I think, the around 80 or 75, back to 100, and continue to be volatile just based on what the headlines are coming out of the Middle East.
• 1:48
  SPEAKER_01: I think underneath that, or with that current, with that backdrop, I think that most of the companies are optimistic that they can manage their business effectively through the commodity price volatility to ultimately be able to drive value in their business, which hopefully gets reflected in their in the company share prices.
• 2:08
  SPEAKER_00: Great.
• 2:08
  SPEAKER_00: So moving on, Jeff, several companies built their 2026 plans and budgets around$60 to$75 oil.
• 2:14
  SPEAKER_00: And Hype said, in fact, that at$100 per barrel, every incremental free cash flow dollar goes to debt reduction rather than more drilling.
• 2:23
  SPEAKER_00: Why aren't producers chasing higher prices with more rigs?
• 2:26
  SPEAKER_00: And what does that discipline mean for investors?
• 2:28
  SPEAKER_01: I think the uncertainty in the oil price outlook, especially, is causing companies to be cautious with their spending outlooks.
• 2:37
  SPEAKER_01: I think having said that, the rig count is up from where it was in February.
• 2:43
  SPEAKER_01: The companies have taken undertaken activities to enhance production in existing wells, things like workovers and recompletions to try to maximize the vault the barrels that they're recovering.
• 2:54
  SPEAKER_01: But you have to keep in mind that the 12-month strip today is$83 a barrel, and I think the 24-month strip earlier today was$78 a barrel.
• 3:02
  SPEAKER_01: So the shape of the curve reflects that uncertainty.
• 3:05
  SPEAKER_01: And if you were to pick up a rig today, you're probably not going to start cashing checks for six months.
• 3:10
  SPEAKER_01: And sometimes, if it's a pad, maybe longer.
• 3:12
  SPEAKER_01: So you can't invest on$100 today because you might find out that you're spending in an elevated cost scenario, and then your revenue is lower, and then you can end up spending the money you thought you were going to get and end up with debt instead of cash flow.
• 3:29
  SPEAKER_00: High Peak spent more than$1 billion a year two years ago.
• 3:32
  SPEAKER_00: In 2026, it will spend well under$300 million for roughly the same production.
• 3:36
  SPEAKER_00: Management also put eight to nine dollars per share of value in the debt column that could shift to equity through a refinancing.
• 3:43
  SPEAKER_00: Can you walk us through that story?
• 3:45
  SPEAKER_01: Hype Peak's original plan was to be a growth company in the Permian Basin.
• 3:49
  SPEAKER_01: And as a result, they outspent cash flow early on because they had a large anchorage base that they wanted to de-risk and they needed to build infrastructure to set the assets up for full field development.
• 4:01
  SPEAKER_01: So that took place as and then commodity prices weakened.
• 4:05
  SPEAKER_01: The company ended up levered, kind of to what I said uh a minute ago.
• 4:10
  SPEAKER_01: They ended up with a more levered balance sheet than they than they would like to have on a go forward forward basis.
• 4:16
  SPEAKER_01: So about a year ago, middle part of 2025, they shifted their gears toward to focus on longer-term uh value optimization by pulling in spending.
• 4:27
  SPEAKER_01: Essentially, a lot of the infrastructure spend that they had spent was behind them.
• 4:30
  SPEAKER_01: So that burden fell away.
• 4:33
  SPEAKER_01: And now they're managing a production profile with essentially one rig and one frack crew geared toward maintaining production in the 42,000 to 45,000 to 44,000 BOE a day type range.
• 4:46
  SPEAKER_01: It's been above that in the first half of the year, and that may be from some timing issues of when wells were completed and brought online.
• 4:53
  SPEAKER_01: But the goal is to take advantage of the higher commodity prices that they currently have and take whatever incremental cash flow that brings and pay down debt with the because they have a term loan that will mature in 2028, and they're trying to uh restructure the or reposition the balance sheet to eliminate the term loan and have a more conventional debt structure.
• 5:18
  SPEAKER_00: Thank you for that.
• 5:19
  SPEAKER_00: So Evolution Petroleum has closed 39 million of royalty deals since August of 2025, and minerals and royalties are now 20% of pro forma cash flow.
• 5:28
  SPEAKER_00: How does that change the business model and how secure is the dividend?
• 5:33
  SPEAKER_01: Evolution's business model was built on owning non-operated working interests in a diverse mix of oil and gas assets.
• 5:39
  SPEAKER_01: So they own properties in many different basins in the U.S.
• 5:43
  SPEAKER_01: Over the last couple of years, they have they are really going back to August of 2025, I think when they closed their first mineral deal, they have focused more on royalty and mineral interests, which add essentially cash flow without the burden of operating expenses.
• 6:00
  SPEAKER_01: And they're not billed for their share of wells because a royalty doesn't pay the capital cost to drill new wells.
• 6:05
  SPEAKER_01: So it's really high margin cash flow.
• 6:08
  SPEAKER_01: And the assets that they have targeted in the Haynesville-Shale area in the mid-continent, and what's called the scoop stack, where they already had an asset base.
• 6:17
  SPEAKER_01: And most recently in August, they closed a$16 million deal in the Midland Basin in West Texas, are all in areas where there's active development.
• 6:27
  SPEAKER_01: So they include household name operators like Exxon, Conoco, Double Eagle, some of the big well-capitalized EMPs.
• 6:35
  SPEAKER_01: And essentially that exposes them to no cost or no cost organic growth.
• 6:40
  SPEAKER_01: That over time, as that builds, I think it on a pro-forma basis, it was about 20% of cash flow for the first nine months of their fiscal 2026, which ended on June 30.
• 6:53
  SPEAKER_01: As that slice of cash flow grows, it gives greater support to the dividend and helps improve the dividend outlook.
• 6:59
  SPEAKER_01: I think they've paid a dividend now consistently for uh 52 or 53 quarters in a row.
• 7:06
  SPEAKER_00: Moving on to prairie operating, they showed present value approved reserves of nearly 1.5 billion against a materially smaller enterprise value right now of roughly$550 million.
• 7:17
  SPEAKER_00: What has to happen to close that gap and why is simplifying the capital structure the top priority at the moment?
• 7:24
  SPEAKER_01: Prairie's current situation really dates back to March of 2025 when they closed the an acquisition of DJ Basin assets from Bayswater for around$600 million.
• 7:37
  SPEAKER_01: That acquisition was funded with bank debt, uh preferred stock and equity, common equity.
• 7:43
  SPEAKER_01: They have a Series F preferred stock, which at the time the acquisition closed had a liquidation preference of about 150 million.
• 7:50
  SPEAKER_01: Today it's about 78 million.
• 7:52
  SPEAKER_01: But it has some dilute, has some conversion and warrants uh attached to it that make the calculation of what the fully diluted shares very difficult to come up with.
• 8:04
  SPEAKER_01: So there's a lot of moving parts in that.
• 8:05
  SPEAKER_01: So there's a as a result, there's a big gap between the roughly 1.5 billion and the 550 million of enterprise value.
• 8:13
  SPEAKER_01: And that enterprise value is based on the liquidation of the of the preferred.
• 8:17
  SPEAKER_01: But with investors not really having a clean line of sight on what the ultimate share count is, it makes it difficult to come up with the denominator for uh for the valuation.
• 8:27
  SPEAKER_01: So you have a big asset value.
• 8:29
  SPEAKER_01: If they can simplify the capital structure, people might shift more of their attention on the asset base and the cash flow profile of the business once they know what the denominator should be used in the share counts.
• 8:41
  SPEAKER_01: Okay.
• 8:41
  SPEAKER_00: Ring Energy and Riley Exploration Permian are both working conventional Permian rock with modern techniques.
• 8:48
  SPEAKER_00: Ring is re-rating its central basin platform inventory with horizontal co-development, and Riley describes its assets as a slower treadmill with less production to replace each year.
• 8:57
  SPEAKER_00: Why is the conventional Permian an overlooked story?
• 9:01
  SPEAKER_01: I don't know if it's overlooked so much as it's overshadowed by all the emphasis on unconventional drilling over the last 25 years now, since the Barnett Shale in North Texas was commercialized.
• 9:25
  SPEAKER_01: Where there was a large land grab, then there has been a massive consolidation phase over the last uh five or 10 years.
• 9:33
  SPEAKER_01: And I think as a result, that really drew most investors' attention to the opportunity in unconventional.
• 9:40
  SPEAKER_01: I think many in the industry never lost sight that there's opportunity in conventional reservoirs because those are areas where you know there's oil and gas.
• 9:47
  SPEAKER_01: Just like in the unconventional areas, the industry knew there was oil and gas in the uh Wolf Camp Formation.
• 9:54
  SPEAKER_01: They just didn't really know how to get it out very well.
• 9:57
  SPEAKER_01: So I think what Riley has done in its champions area and now in the Red Lake area is take modern horizontal drilling technology and apply it to conventional assets, and they've had a very good growth profile on their asset base for 2025, or I'm sorry, 2026, and they're seem to be well positioned for 2027 as well.
• 10:18
  SPEAKER_01: Ring is on an area in this uh in the Permian Basin called the Central Basin Platform, which was began, it was began being developed, I think, in the 1920s.
• 10:28
  SPEAKER_01: It was drilled and developed vertically, and I think for them it's maybe going back into some of those vertical horizons with the expectation at a horizontal well where you spend more of the more of the well's capital on the part of the well that's in contact with the with the reservoir, as opposed to the vertical section, can improve the economics of the overall well board.
• 10:49
  SPEAKER_01: I think you'll start to see them focus on that, or they are focusing on it this year, but it'll be more part of their 2027 plan, where their initial growth outlook, I think, was above 10% for year-on-year volumes.
• 11:01
  SPEAKER_00: Okay, if we move on to ring, I know they disclosed 136 million of realized hedge losses over the past five years and currently has about 60% of the forecast production unhedged.
• 11:11
  SPEAKER_00: How are management teams thinking about hedging at the moment, given the prices?
• 11:16
  SPEAKER_01: I think hedges in many cases are a necessary evil, if you will.
• 11:20
  SPEAKER_01: When you hedge and prices fall, you look really smart.
• 11:22
  SPEAKER_01: When you hedge and prices rise, you don't look nearly as smart.
• 11:27
  SPEAKER_01: But it's a it's a way for a company to plan, it's have some base level of cash flow to be able to form their capital budgets, think about leverage, and plan the business over the long term.
• 11:40
  SPEAKER_01: What's important is nearly all reserve-based credit facilities, which is a value facility against the collateral value of the proved reserves, have requirements that force the borrower to hedge a certain amount of its proved developed production for a certain period of time.
• 11:56
  SPEAKER_01: Usually that time is based on the percent of PDP or the percent of the RBL that's being utilized and other factors like that, and leverage ratios.
• 12:08
  SPEAKER_01: I think what you what you've seen with ring and the hedge losses is a lot of company, a lot of those hedges that people are lose were losing money on in 2026 were put in place in late 25 and early 26 when there was a much different commodity outlook than what's prevailed since the end of February.
• 12:24
  SPEAKER_01: So that triggers losses.
• 12:27
  SPEAKER_01: Um I think as you as we look forward into 2027 and new hedge positions, I think more companies are talking about putting in costless collars, which put a floor and a ceiling, as opposed to a fixed price swap where you set the price and then your losses based on where oil is when that hedge is settled.
• 12:45
  SPEAKER_01: So I think this may be a shift in what what we'll see in hedge brooks is more of an emphasis on collars than swaps.
• 12:51
  SPEAKER_01: And so we start to get updates with the uh when third-quarter results are reported.
• 12:56
  SPEAKER_00: So if we turn our attention to international markets, I know Marin is restarting drilling in Nigeria after an 18-month hiatus with Proway and Venus's large growth projects, while Valco has laid out a path toward 50,000 barrels per day by 2030.
• 13:10
  SPEAKER_00: What should investors understand about the risk and reward in these international portfolios?
• 13:15
  SPEAKER_01: I think for both of those companies, the first thing is that the fiscal risk is pretty low.
• 13:19
  SPEAKER_01: Um, there's been oil and gas activity off of offshore West Africa for a long, long time.
• 13:24
  SPEAKER_01: Nigeria has been a member of OPEC for a long time.
• 13:28
  SPEAKER_01: So it's in the interest of the local economy to support natural resource development.
• 13:36
  SPEAKER_01: So the governments and the host con or the host governments and the contractors are really incented to come up with a fiscal structure that gives the investor the incentive to put capital in and in turn gives the host government a share of the production to that they can use for their own purposes.
• 13:57
  SPEAKER_01: So I think it's it's really, even though it's West Africa and you there's been some political turmoil, the actual fish fiscal terms are stable and they support capital investment.
• 14:08
  SPEAKER_01: I think in terms of the portfolios of both companies, they both combine a mix of exploration and development opportunities.
• 14:14
  SPEAKER_01: Um, as you mentioned, Marin's the two, the operators of Marin's Deepwater Fields Offshore Nigeria, where they own interests.
• 14:21
  SPEAKER_01: Uh, one is Chevron, one is Total or Total Energies.
• 14:24
  SPEAKER_01: They're both bringing rigs into the field after an almost two-year hiatus as they reinterpreted some new seismic data.
• 14:31
  SPEAKER_01: I think what you'll see in both areas is a mix of low-cost uh projects that are basically aimed to maintain production, along with testing some ideas where there either have been shows or there is appraisal needed to basically take lower risk exploration uh opportunities, drill them, and then appraise them and see what can happen on those over the next several years.
• 14:54
  SPEAKER_01: The Venus discovery that you mentioned is a deep water offshore Nigeria, I'm sorry, Namibia.
• 14:59
  SPEAKER_01: And that's really a world-class discovery that was made a couple of years back.
• 15:02
  SPEAKER_01: It's operated by Total Energies as well.
• 15:05
  SPEAKER_01: And they have a big position in Namibia now, and that field or that complex is thought to be a centerpiece of Namibia's goal to establish itself as a world-class hydrocarbon producer.
• 15:16
  SPEAKER_01: So I think as that plays out, Total expects to get to an FID hopefully around late 2027.
• 15:22
  SPEAKER_01: That could then set in motion a development plan and where production could start after 2030.
• 15:28
  SPEAKER_01: In Valco's case, they are they wrapped up a program in Gabon this year where they've operated for over 30 years.
• 15:36
  SPEAKER_01: Uh 2027 will be a much bigger focus on the Ivory Coast on assets that they acquired uh in an acquisition uh in 2024.
• 15:48
  SPEAKER_01: That basically they have a staged portfolio, including the field called Baobob, some other assets in uh in the Côte d'Ivoire that set them up for long-term production growth.
• 16:01
  SPEAKER_01: They laid out a scenario at a capital markets day in May of 2025 that could show production going north of 50,000 barrels a day by 2030.
• 16:10
  SPEAKER_01: And the portfolio is in place over the next, over this year, 2027, 2028, you'll see events that help de-risk the potential, build more uh confidence in the in the portfolio, and show that both of those companies actually are are opportunity rich in an area that is favorable for capital.
• 16:32
  SPEAKER_00: So capital return frameworks came up repeatedly.
• 16:34
  SPEAKER_00: Merin ranks the balance sheet first and MA last.
• 16:38
  SPEAKER_00: Valco budgets its dividend first and has returned more than 130 million since 2021, why while Riley rather uses buybacks as its flexible lever.
• 16:48
  SPEAKER_00: Is there a common playbook emerging among small cap ENPs?
• 16:53
  SPEAKER_01: I think the the playbook is really to that plan to return cash to shareholders reflects capital discipline.
• 17:01
  SPEAKER_01: It probably dates back to 2015 through 2018.
• 17:06
  SPEAKER_01: When the industry when the industry had gone through several cycles of kind of basic boom and bust, where they, as I said earlier, outspent cash flow in a growth mode and then got head over heels if commodity prices fell and their balance sheet was in a bad situation.
• 17:19
  SPEAKER_01: So I think bigger companies started putting more emphasis on, well, we'll just return cash to shareholders.
• 17:24
  SPEAKER_01: I think shareholders demanded that.
• 17:26
  SPEAKER_01: And that has trickled down into the small cap uh universe.
• 17:30
  SPEAKER_01: So I think it basically shows that returning cash to shareholders instills some capital discipline on how they think about allocating capital between investing in the ground, managing the balance sheet, and returning some cash to shareholders.
• 17:44
  SPEAKER_01: It's a strategy of a consistent dividend versus a share repurchase.
• 17:48
  SPEAKER_01: Companies are married to their dividends and they can date their repurchase agreements in the time so they can be opportunistic on a repurchase agreement, and it's must much easier to turn on and off opportunistically based on where the balance sheet is than a dividend.
• 18:04
  SPEAKER_01: So I think you see the desire for a consistent dividend as part of the total shareholder return package that they can offer investors.
• 18:12
  SPEAKER_00: On the oil field services side, Forum Energy Technologies is targeting a doubling of revenue in Forex EWIT Dow by 2030, and it booked its first order for data center cooling.
• 18:22
  SPEAKER_00: How real is the data center opportunity?
• 18:24
  SPEAKER_00: And why does management think the stock trades at roughly half its peer valuation?
• 18:29
  SPEAKER_01: I think the data opportunity opportunity is an intriguing market for FET.
• 18:35
  SPEAKER_01: They basically have cooler uh cooling units that they developed for applications in the on for fracture simulation equipment, essentially radiators that initially were mobile.
• 18:46
  SPEAKER_01: They've they've adapted that to be a stationary cooling unit that can be put on an engine.
• 18:52
  SPEAKER_01: If the data center build out gathers steam and momentum and that continues, it's an interesting market opportunity for them.
• 19:01
  SPEAKER_01: I don't think it should overshadow, though, the success they've had in their leadership, in what they call leadership markets of maintaining and gaining share and in growth markets, which essentially are taking products that are established, say in West Texas for unconventional resource development and exporting those known technologies to other areas internationally that are just now getting more involved in unconventional resource development.
• 19:27
  SPEAKER_01: So I think I wouldn't want the data center opportunity, while it's interesting to overshadow just the success they're having in some of those other areas, which is really what's driving the goals they put out for their FET 2030 objectives.
• 19:40
  SPEAKER_00: So Oil States has shifted its revenue mix from 50-50 US land versus international and offshore to roughly a 2575 split with its offshore manufactured products backlog at a decade high and a net cash balance sheet.
• 19:54
  SPEAKER_00: Is Oil States positioned for a deep water upcycle?
• 19:57
  SPEAKER_00: And what explains this valuation discount relative to peers?
• 20:00
  SPEAKER_01: I think they are because they supply highly engineered specialized products that are used in deep water or in offshore and deep water uh oil and gas development.
• 20:13
  SPEAKER_01: So things for to put on platforms and wellheads and subseed.
• 20:18
  SPEAKER_01: Which, if I think the industry is looking long term at needing to invest capital to grow global oil and gas supply to meet growing energy demand.
• 20:29
  SPEAKER_01: And I think that cycle will include deep water offshore, where there are massive or can be massive discoveries made and developed within a five-year timeframe.
• 20:39
  SPEAKER_01: Think of ExxonMobil's Guyana discovery, and uh what it's made Guyana one of the bigger new or emerging oil producers.
• 20:47
  SPEAKER_01: So I think that trend will continue.
• 20:49
  SPEAKER_01: I think some of the conflict in the Middle East has might put more emphasis over time on security of supply and have companies looking at uh many basins around the world that might offer exploration potential.
• 21:02
  SPEAKER_01: So that's a that's a long game, and oil states is very well positioned, I think, to participate in that.
• 21:07
  SPEAKER_01: They also supply products to for military applications.
• 21:11
  SPEAKER_01: They have some products that can be used in deep sea mining, they have some products that are used in uh renewable offshore energy.
• 21:19
  SPEAKER_01: So those are all potentially positive long-term growth areas, and they are positioned to capitalize because, like FET, some of the markets they compete in are ones that are fairly specialized where there's not a uh not a lot of competition.
• 21:32
  SPEAKER_01: I think on all on oil fuel services valuation, people may remember back when it was a call-out or vitamin perceived as a call out service business.
• 21:42
  SPEAKER_01: So if you have a problem with the well, you call the oil-filled service contractor, they come out, fix the problem, and they go back.
• 21:48
  SPEAKER_01: And that's a more cyclic type of business.
• 21:51
  SPEAKER_01: I think what FET and oil states are both essentially manufacturing companies that sell products that are needed over the life cycle of a well.
• 22:00
  SPEAKER_01: In FET's case, it's more onshore.
• 22:02
  SPEAKER_01: In oil states' case, it's more offshore.
• 22:04
  SPEAKER_01: But those products, the demand for those products, excuse me, is expected to continue to grow with the capital spending of uh of the industry.
• 22:15
  SPEAKER_01: So maybe investors think about it more short-term cycle and don't think about a longer-term macro cycle for energy, where the level of investment may fluctuate, but there's going to be investment in developing long-term supply.
• 22:31
  SPEAKER_00: So to wrap things up, Jeff, across these nine companies, which milestones will you be watching over the next six to 12 months?
• 22:37
  SPEAKER_00: And what is the one key takeaway you want investors to leave with?
• 22:41
  SPEAKER_01: I think the key thing to remember is probably despite some of the macro confusion which is being created by commodity prices and inflation and global economic uncertainty, is that the energy company management teams have to plan for the long term.
• 22:56
  SPEAKER_01: So, in essence, kind of back to where we started with how are they reacting to high oil prices, I think basically they come, they develop a long-term plan, which today is probably based on 60 to 65.
• 23:09
  SPEAKER_01: If they start to budget for 2027, it might inch up into the high 60s, but it's it's not going to be anywhere near 80 or 90 because they have to be able to withstand down cycles and maybe participate in the upcycles, but have a company that's positioned to create some value or at least build a business over a long period of time.
• 23:29
  SPEAKER_01: That includes that that's predicated on capital discipline, balance sheet management, kind of back to what we talked about earlier, returning cash to shareholders, I think, is one indication to investors that they are paying attention to some of those constraints.
• 23:44
  SPEAKER_01: So I think what you what you see is that this again, despite the confusion, management teams are are really thinking about how do we build long term value instead of reacting to near-turn market forces.
• 23:56
  SPEAKER_00: Well, thanks for joining me today, Jeff, and sharing with investors your thoughts.
• 23:59
  SPEAKER_00: Much appreciated.
• 24:00
  SPEAKER_01: Thanks, Tim.
• 24:01
  SPEAKER_00: Good to be here.