At the beginning of 2020 PHX Minerals (PHX) began a massive change. The company, which prior to this date had been known as Panhandle Oil & Gas, began a wholesale transformation. This included a management overhaul and an almost entirely new business model, which is now paying dividends.
Today, PHX acquires and develops non-developed oil and gas mineral properties, with a focus on active acquisitions and developing royalties streams. Prior to 2020, the company had focused on drilling operations. As PHX puts it, they made the decision in early 2020 to move from a higher cost/lower margin business to a lower cost/higher margin business.
In their most recent earnings release, President and CEO Chad L. Stephens, summarized the progress on the reorganization, “We are pleased with this quarter’s financial results as they highlight the company’s progress. There continues to be robust drilling activity on our minerals reflecting the high-quality nature of our assets. Royalty volume growth remains on trend to increase approximately 20% year over year. Royalty volumes now represent over 90% of cash flow as the non operating working interest portion of our business has steadily become less material to our financial performance.”
But to look at the stocks valuation, it looks like the market is not exactly attuned to the new business. PHX trades at a very attractive valuation at 5.9x earnings, 3.9x projected earnings, and less than 1x book value. This as the company continues to purchase new active mineral rights properties, adding over $11 million worth of property during the quarter, and over $40 million in the past year.
And not only has PHX moved to a more profitable business model, management is also executing the strategy very well. Margins across the board are excellent, with gross margins at 71% and operating margins just a tick under 55%.
PHX has little debt, in the last quarter they actually received an increase in their borrowing facility from $45 million to $50 million. The company purchased around 1,500 acres of mineral and royalty acreage during the quarter.
PHX also upped its dividend in the recent quarter, and now has a 2.9% dividend yield, another indicator of balance sheet/cash flow strength.
The Sentiment component of our POWR Ratings is where PHX shines brightest. In that category the stock ranks above over 87% of the stocks in our database.
Don’t assume that because you haven’t checked on a business lately that nothing has changed under the hood. PHX is a great example of a company executing a U turn in its business model, and approaching its industry from a brand new perspective.
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PHX shares were unchanged in after-hours trading Wednesday. Year-to-date, PHX has declined -11.95%, versus a 20.30% rise in the benchmark S&P 500 index during the same period.
About the Author: Jay Soloff
Jay is a former professional market maker who cut his teeth trading on the floor of the CBOE. With more than 20 years of experience trading and investing, his focus is on making professional strategies accessible to everyone, which is exactly what does in his highly profitable POWR Income and POWR Stocks Under $10 investment advisory services.
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