PHX Minerals Inc., a name that might not ring a bell for many investors, is quietly executing a transformative strategy. Amidst a tumultuous natural gas market marked by plunging prices and operator curtailments, PHX is not only surviving but positioning itself for potentially explosive growth. Their secret weapon? A 4,000 net royalty acre jewel called SpringBoard III, nestled in the heart of Oklahoma's prolific SCOOP play. While Wall Street remains fixated on the Haynesville and Permian, PHX might be sitting on a gold mine that's flying under the radar.

PHX's recent earnings calls [Q1 2024, Full-Year 2023] reveal a company laser-focused on transitioning from a working interest-heavy model to a royalty-dominated portfolio. This strategic shift is designed to create a more predictable, high-margin business with a long-term growth trajectory. The company's 2023 performance underscores this strategy's efficacy: a remarkable 23% year-over-year increase in royalty volumes despite a 47% plunge in realized commodity prices.

While PHX acknowledges the impact of the current gas market on their near-term performance, they are confident in their ability to deliver sustained royalty volume growth. They anticipate a 4% increase in royalty volume in 2024, driven by the ongoing development of their existing mineral inventory, which includes a staggering 263 gross (1.295 net) wells in progress. This inventory is fueled by a consistent stream of well conversions, highlighting the high-quality of their acreage and the underlying rock quality.

But here's what most analysts seem to be missing: the massive potential of SpringBoard III. This strategically assembled 4,000 net royalty acre position in the SCOOP play is poised to become a cash flow gusher in the coming years. Notably, SpringBoard III boasts a balanced production mix: roughly one-third oil, one-third NGLs, and one-third natural gas. This balanced mix provides PHX with a natural hedge against gas price volatility and positions them to benefit from a potential upswing in oil and NGL prices.

The current undervaluation of PHX is staggering. Since 2020, the company has invested approximately $130 million in acquiring their current mineral position, primarily in the SCOOP and Haynesville. Yet, PHX's current enterprise value hovers around $145 million, a paltry sum compared to their independently validated 2P PV-10 reserve value of nearly $300 million at current NYMEX strip prices.

Imagine the upside potential if gas prices rebound to a mid-cycle level, driven by the surge in LNG export capacity slated for 2025. This scenario could unlock a substantial increase in PHX's reserve value and translate into an equally significant stock price appreciation.

Potential Upside Scenario

Let's assume a conservative mid-cycle gas price of $4.50 per MCF and a corresponding increase in PHX's 2P PV-10 reserve value to $500 million. Applying a modest EV/Reserve multiple of 0.5x, a common metric in the mineral space, PHX's enterprise value could surge to $250 million. This implies a potential doubling of their current enterprise value, presenting a compelling investment opportunity for those willing to look beyond the current market noise.

Projected Haynesville Production Increase (2025-2027)

Based on PHX's analysis, the Haynesville region is poised for significant production growth in the coming years, driven by anticipated improvements in natural gas prices. This growth is expected to be fueled by existing DUCs (Drilled Uncompleted Wells) and an increase in drilling activity.

PHX's management recognizes this disconnect and is actively exploring strategies to unlock shareholder value. They are pursuing acquisitions, focusing on smaller, high-return opportunities in the current market. But they also haven't ruled out larger deals, potentially involving equity, to acquire high-quality mineral assets and increase their trading liquidity.

"Fun Fact: PHX Minerals' roots trace back to 1926, giving the company almost a century of experience in the energy sector."

PHX Minerals, with its strategic focus on royalties, a robust inventory of undeveloped drilling locations, and the SpringBoard III wildcard, presents a compelling investment thesis. While Wall Street sleeps on this hidden gem, astute investors might be wise to take notice. The potential for outsized returns, fueled by a balanced production mix and a looming surge in natural gas demand, could make PHX Minerals a stock to watch in the coming years.