Evolution Petroleum Corp Q2 FY2020 Earnings Call

Ladies and gentlemen, hello and thank you for joining today's Evolution Petroleum Fiscal Second Quarter 2020 Conference Call. All participants are in a listen-only mode but you'll be given an opportunity to ask questions after today's prepared remarks. And with that, I'm pleased to turn the floor over to Evolution CFO, Mr. David Joe. Welcome David.

Thank you. Good morning, and welcome to Evolution Petroleum's earnings call for our fiscal second quarter ended December 31, 2019. We will discuss operating and financial results for the quarter. I am, as you said, David Joe, Chief Financial Officer of Evolution. And joining me on the call today is Jason Brown, President and Chief Executive Officer. A couple of quick housekeeping notes. If you wish to listen to a replay of today's call, it will be available shortly by going to the company's website and will be stored for the next month. Please note that any statements and information provided there are time-sensitive and may not be accurate at a later date. Our discussion today will contain forward-looking statements of management's beliefs and assumptions based on currently available information. These forward-looking statements are subject to risks and uncertainties that are listed and described in our filings with the SEC. Actual results may differ materially from those expected. Since numbers are readily available to everyone in yesterday's news release, this call will primarily focus on key results, operations, and an update on our capital spending and the plans for the remainder of our fiscal 2020. I would now like to welcome and turn the call over to our President and Chief Executive Officer, Jason Brown.

Thank you, David, and good morning, everyone, and thanks again for joining us today on Evolution's second quarter fiscal 2020 earnings call. I'm pleased to announce that Evolution has once again delivered earnings and positive cash flow for its shareholders for the 17th consecutive quarter. We continue to generate consistent positive financial results and improve the sustainability of our dividend despite the continued low commodity price and low capital spending environment throughout the industry. I'm delighted that we have announced our 26 consecutive quarterly cash dividend and perhaps more importantly, our ninth dividend in a row at $0.10 per share. There have been tremendous swings in commodity price over those 26 quarters, even brief periods of oil price below $30 a barrel. But Evolution has consistently delivered and we feel very proud of this accomplishment in the ability to generate long-term stability for our shareholders. During the quarter, we were able to successfully close the acquisition of an interest in the Hamilton Dome field in Hot Springs, Wyoming, operated by Marriott Energy. It's worth noting that although Evolution has not closed any recent acquisitions we were able to not only get this closed but also integrated into our operations seamlessly without adding any material overhead. This was an important first step in demonstrating that the Evolution board and our management team have both the will and the ability to transact on oil and gas asset opportunities that fit within our strategy. Although this quarter only reflects two months' worth of production, we're pleased with the performance of Hamilton Dome as that is meeting our expectations on production, price realization, and cash flow. Similar to other oil and gas producers, our overall performance during the quarter was impacted by lower price realizations. During the quarter, Evolution was further impacted by the short-term repair to the oil sales pipeline from Delhi which more than offset the increased volumes. This is a good example of why we're pleased with the Hamilton Dome acquisition and as a second source of cash flow. We are committed to further acquisitions that will support our dividend. With that, I'll now turn the call back over to David to run through financial highlights and then I'll wrap up the call briefly speaking about strategy and the outlook on the M&A landscape.

Thanks, Jason. I will share and reiterate highlights of our financial results of our fiscal second quarter. Please refer to our press release from yesterday afternoon for additional information and details and be on the lookout for our Form 10-Q to be filed shortly. So the biggest highlight, as previously mentioned, we acquired oil producing assets in the Hamilton Dome field in Wyoming on November 1 for $9.5 million of cash. However, based on the effective date of October 1, 2019, we received and recorded a cash payment from the seller for approximately $0.2 million, thereby reducing the purchase price from $9.5 million to $9.3 million. As you review and digest our quarterly financial results, it should be clarified that Hamilton Dome results are for only two months in the current quarter and include production revenues, LOEs, DD&A, cash flow. Other highlights in the quarter include continuing our returning cash to the shareholders with our lengthy history of consecutive quarterly dividends supported by our oil assets; this yield is in excess of 7%. We generated total revenues of $9.4 million in the quarter, up 2.5% from the prior quarter despite lower realized oil pricing and despite the temporary additional trucking costs incurred to Delhi which has now been resolved. We reported net income of $1.7 million for the quarter marking the 17th consecutive quarter of positive net income. If you go back further, it's more like 26 out of the last 28 quarters, with just a couple quarters of losses back in 2014 and 2016. We ended the quarter with about $21 million in cash and we still have a $40 million undrawn credit facility. Going into the quarter in a little bit more detail, gross production averaged approximately 8,500 barrels of oil equivalent per day during the quarter, a 16% increase from the prior quarter and a 9% increase from the year-ago quarter. Production improved primarily due to the acquisition of the Hamilton Dome Field albeit for only two months as previously noted. At Delhi, total gross barrels of oil equivalent per day averaged approximately 7,000 barrels of oil equivalent per day, a 4% decrease from the prior quarter and about a 10% decrease from the year-ago quarter. As we all know, we have been and still are experiencing a low and volatile commodity price environment. At the Delhi field, the current quarter's lower average realized oil price was further impacted by trucking costs due to a planned repair to a section of the oil sales pipeline. We estimate the erosion of value to be approximately $0.4 million. This eliminated the LLS premium in the quarter, shifting from a positive basis to a small deduction. This pipeline repair project commenced in November and was completed at the end of January, about a month ahead of schedule thankfully. As of February 1, all the trucking oil has ceased and oil sales are back on to pipeline. Total production costs were $4.2 million for the quarter, an increase of 37% from the prior quarter. Delhi's portion of this increase is primarily due to higher CO2 costs, directly resulting from a 20% increase in purchase CO2 volumes. Production costs attributable to Hamilton Dome was approximately $900,000 representing two months of cost based on the November 1st closing date. In December, there were a few atypical AFE expense workovers in the field to address well repairs. Our composite DD&A rate per BOE at period-end declined 10% to $7.26 per BOE compared to the prior quarter of $8.07 per BOE. This is largely due to the accretive Hamilton Dome Field acquisition, which only has a two month impact in the quarter. As we go forward, the expected consolidated DD&A rate per BOE is estimated to be between $6.80 and $6.90 per BOE. In the current quarter, we reported slightly higher G&A expenses for costs typically associated with our second fiscal quarter ended December 31. This includes proxy statement and related costs, 10-K printing and related Annual Meeting costs. We continue to be mindful and manage our cash G&A expenses. It's worth noting that non-cash G&A makes up approximately 15% to 20% of our total G&A reported. Net income for the quarter was $1.8 million, or $0.05 per diluted share compared to $2.8 million and $0.08 per diluted share in the previous quarter. The lower than expected EPS was disappointing, but we understand why and we've been working to manage these components. During the quarter, we incurred $10.7 million of capital primarily attributable to the acquisition of Hamilton Dome and a small amount spent at Delhi Field. Our current expectations for net capital spending for the remainder of our fiscal 2020 is pretty modest, with about $0.5 million to $0.75 million earmarked for capital workovers at Delhi and a very small de minimis amount of capital allocated to Hamilton Dome Field. It's worth noting that the Delhi operator recently reported to us that the capital has been deferred for the Phase 5 project until calendar 2021. They currently have a modest capital development plan for Delhi subject to increased oil prices. Our total working capital of the company decreased by $10 million compared to the prior quarter, largely attributable to the $9.3 million we spent acquiring the Hamilton Dome Field and for the payment of our common stock dividend in the quarter. As I mentioned, we ended the quarter with $21 million in cash on hand, have liquidity with our $40 million reserve base credit facility, and the company continues to be well-positioned to fund future development of its producing assets through our current fiscal year and our next fiscal year. Just would like to take the opportunity to reiterate a few key attributes of our assets. We now have two large oil fields, our Legacy Delhi field and the recently acquired Hamilton Dome Field; both fields are very similar in that they have non-operating working interest to us, 100% liquids production, long-life with expected low decline profiles. They support our company's dividend strategy and our future development workover and in-fill opportunities in these fields. Just a reminder that in our Delhi field, we have a 7.2% override which bears no operating expense for capital burdens. The Delhi oil is priced on LLS oil pricing, which typically is a premium to WTI prices for the past few years. This is a very high net operating margin property with revenues in the $50 per barrel range, operating costs around the $20 per barrel range, with net operating margins of $30 a barrel. Hamilton Dome Field is a 100% oil producing field, with long-life reserves; a premier field that has produced for over 100 years, operated by a top tier operator Merit Energy. We anticipate low double-digit operating margins in this field. This concludes our review of financial results and operations for our fiscal second quarter. In summary, we remain focused on delivering sustainable dividend yield to our shareholders while seeking opportunities to maintain and grow production. I will now turn the call back over to Jason for final remarks.

Thanks, David. The company continues to be positioned to fund further profitable development of its producing assets while retaining sufficient financial resources to capitalize on new growth opportunities and funding for the current dividend strategy. Evolution continues to focus on cash flow, stability, and overall shareholder return. Although Evolution is excited to add another long-life producing asset to our reserves that will provide diversity and support to our dividend, we will continue to evaluate acquisition opportunities to further grow the company. The company is uniquely positioned to pursue growth and we'll look to take advantage where we can in the market. The current weakness in oil and gas prices presents an opportunity to acquire long-life production with upside at a very attractive price per BOE. I think it also validates Evolution's prudent decisions over the recent years to retain substantial liquidity with no debt. As previously mentioned, Evolution is seeking long-life producing reserves, much like the recent acquisition that will provide diversity, long-term sustainability, and support to grow our dividend. With that, I think we're ready to take questions. Operator, please open the lines.

Gentlemen, thank you for your comments this morning. We will first hear from Jeff Grampp at Northland Capital. Please go ahead.

Jason, I was wondering first now you guys have had Hamilton Dome under your belt for a few months here now, I was wondering as you guys are kind of looking at that asset or trying to I guess, characterize how we should be thinking about it going forward? Are you guys seeing any kind of upside opportunities there in conversations with the operator, your own assessment? And just any I guess capital that could go to work there over the next couple years or so? Or should we more think about that as just kind of a terminal decline asset with some good cash flow?

I think it's fair to look at it as the latter. I think that's why we bought it; it's been producing for over 100 years. So it's not going to be a high growth asset, but it's very, very stable, very predictable. That being said, Merit is, this is right in the middle of their fairway of what they do, and they're just one of the best at controlling costs and looking out for as much value as possible. So, in this situation, I've never been part of any non-op deal that I closed on that I didn't get hit with a few AFEs as soon as we close. And this is no different. So I think we saw a few workovers here in the first couple months, P&A on a couple of wells and then also a couple of workovers that they've been waiting to do. But in that I think we've got a pretty predictable go-forward P&A schedule, maybe a couple of wells a year, which is pretty reasonable. Those are not expensive. And the workovers, one of which the reason I'm bringing it up is it's kind of an innovative new ESP, and so it's all about trying to save costs up there. So that's almost the PD&P in a field like Hamilton Dome. We know the reservoir, we understand the production. And they've put in a new SP that we feel pretty happy is going to save a tremendous amount of electricity costs. And so as we move forward, when pumps go down and that sort of thing, that's the plan is to replace them with these new pumps that both deliver a higher volume at lower costs. So I think that's the best way to answer that.

Got it. No, that's great detail. I appreciate that. And as we look at Delhi and I think David noted, production was down a few percent sequentially. Was that kind of in line with your expectations? Or was any of that related to that pipeline repair? I know you guys obviously highlighted the trucking cost, but was there actually any production impact from that repair? Or was production basically kind of where you guys thought it would shake out?

We had a bit of disappointment regarding production, but I can't attribute it solely to the repair, which was necessary for pipeline integrity. There were some minor issues, such as on blending projects where an upgrade in pricing forced us to reduce the amount we could process, resulting in slightly less lost revenue. Additionally, we didn’t ramp up some wells that had to be shut down due to high CO2 levels in September as quickly as we anticipated. This situation likely made us less aggressive. Each increase in costs from trucking affects us more significantly. Overall, while we don't have precise numbers, we were somewhat disappointed and anticipate improvement in January.

Got it. So just to dig on that a little deeper from here and you're right, it sounds like from your perspective that you're thinking that maybe the operator was a little bit, I guess cautious in terms of ramping up production just given the pricing discount that you guys were observing during this period? And maybe with that now kind of in the rear view that there's some opportunities for them to I guess not be as conservative in producing some of the wells?

I think that's a bit speculative. There are several factors at play. We noticed they didn't perform workovers in the past few months, which is more typical at Conformis, likely due to some budget constraints. Now that we're in a new budget year, we've approved three workovers, and they are starting those projects. It seems to be a mix of timing and various issues. Overall, I believe this is a reasonable conclusion, and we feel quite positive about it.

Next we'll hear from Bhakti Pavani at Alliance Global Partners. Please go ahead. Your line is open.

Just wanted to touch base upon the oil price realization. I know you mentioned that they were kind of lower this quarter. So how do we just wanted to get a better understanding on what factors are driving those realizations lower and do you expect them to kind of remain at this level going forward?

The primary factor affecting us was in Delhi, along with the usual fluctuations in WTI prices. We've noticed a decrease in the LLS premium, which averaged $4 last year, and is now around $3.70. Although it is gradually increasing, we lost the premium because we had to pay $54.60 per barrel for trucking during November and December. This negatively impacted our premium. We had expected the situation to last until March, but we were pleased to find out during our recent operations meeting with Denbury that the pipeline was completed earlier than anticipated. As a result, we saw an increase in pressure over the weekend, and we are currently using the pipeline, which means the trucking costs have ended.

Perfect. So for the $0.4 million that was accounted or expensed in Q2 will be only cost; you don't expect anything to be accounted in Q3 at this point, is that correct?

Just to be clear, Bhakti, this is David. That $0.4 million estimate of erosion costs is not recorded in the book as an expense. It's lost value in a reduction of price as a result of trucking fees and the lower realized price we received. So we're just trying to quantify what could have been if there were no trucking, but it was a necessity and that's a reality we have to live with. And that will also flow to the January number in the next quarter as well.

Got it.

To give it, I think we got back online February 1 or 2nd flowing. Yes, so yes, I would expect that in January's numbers Bhakti.

We'll hear next from Bruce Brown with Brown Capital.

Good morning, gentlemen. The question I have is at what point do you consider repurchasing stock a better investment than expanding production?

That's a great question, and it's one that we often discuss internally, with the board, and with investors, as there are varying opinions on it. Currently, our approach has been somewhat defensive. We have an approved stock buyback program with a remaining balance of a couple million. This program has different tiers and tickers and mainly serves as a defense strategy to stabilize prices during market fluctuations. Historically, it hasn't taken many purchased shares to address declining prices, which aligns with our goal of supporting and protecting our shareholders. The question of when this strategy shifts to a more offensive one, where we might consider acquisitions, is certainly valid. We believe our stock is undervalued, and buying back shares at an almost 8% yield is beneficial for us. However, we feel confident in our current position and anticipate significant deal flow in the next six to eight months, which we believe is more crucial than short-term gains. We're also thinking long-term, like in 2030, when we need to support our dividend. The reserves we have now, though often undervalued by others, are very important for our future. We think this is the right time to leverage our financial strength to build a robust inventory of reserves that can ensure our success over the next several years. Overall, we're quite optimistic about the opportunities ahead.

And gentlemen, I do not see any signals from our phones. I will turn it back to you Mr. Brown for any additional or closing remarks.

All right. Well thank you and thanks everyone for your participation on today's call. Please feel free to contact us with any questions. I look forward to providing you with an update in May.

Ladies and gentlemen, this does conclude today’s telephone conference. We thank you all for your participation and you may now disconnect your lines.