Evolution Petroleum Corp Q1 FY2021 Earnings Call

Good day, everyone, and welcome to the Evolution Petroleum First Quarter Fiscal 2021 Earnings Release Conference Call. At this time, I am pleased to hand it over to your host, David Joe, Chief Financial Officer of Evolution Petroleum. Please go ahead, David.

Thank you, and good afternoon, everyone, and welcome to Evolution Petroleum's earnings call for our fiscal first quarter of 2021. We will discuss operating and financial results for the quarter. I am David Joe, CFO for the company, and joining me on the call today is Jason Brown, President and Chief Executive Officer. A little bit of housekeeping: if you wish to listen to today's call, a replay will be available shortly on the company's website and available until December 6, 2020. Please note that any statements and information provided today are time-sensitive and may not be accurate at a later date. Our discussion today will contain forward-looking statements 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. The call will primarily focus on key results, the continued volatility in oil prices and the impairment write-down we had this quarter, along with an update on operations and plans for fiscal '21, including capital spending. I would like to welcome and turn the call over to Jason Brown.

Thank you, David. Good afternoon, everyone, and thanks for joining us today on Evolution's First Quarter Fiscal 2021 Earnings Call. The first quarter of fiscal '21 has continued to be challenging. Although we at Evolution have found ourselves quite effective in the remote working arrangement, I know we're all getting a bit fatigued and look forward to better days ahead. It continues to be a particularly difficult time in the oil and gas sector, as the global COVID-19 pandemic continues to disrupt the balance of oil supply and demand. We have been monitoring COVID-19 and making decisions to best protect our employees' health. In order to ensure our financial security, we have continued focusing our efforts on implementing additional cost-cutting measures to protect our investors. We remain well positioned to take advantage of potential opportunities that arise and are focused on our ongoing strategy to create long-term shareholder returns, as evidenced by a long-standing dividend program. I am pleased to announce our 28th consecutive quarter issuing a cash dividend. For our first fiscal quarter of 2021, we recorded revenues of $5.6 million, a 67% increase from the prior quarter. We ended the quarter with $19.8 million in cash and remain debt-free with an undrawn bank revolver that we recently redetermined to $23 million and extended for an additional three years. We will continue concentrating our focus on cash flow and total shareholder return. We provide an attractive cash return to shareholders and with our 28th consecutive dividend payment, we have now returned more than $71 million in cash dividends since the inception of the dividend program in December 2013. In July 2020, Denbury Resources, the operator of our interest at Delhi Field, announced that it entered into a restructuring support agreement under Chapter 11 of the Bankruptcy Code in Texas. On the last quarter's call, we mentioned that we believed this would ultimately be positive for EPM, as it would speed up the process for them to put capital to work in our field, which we need. On September 18, Denbury announced that it had emerged from Chapter 11 bankruptcy and completed its financial restructuring. This is another meaningful step towards freeing up capital for projects at Delhi that will increase production. We are encouraged by our continued conversations with Denbury and believe the Delhi Phase V expansion will begin later in our fiscal 2021. We also expect the resumption of historically beneficial conformance expenditures to arrest the decline in current production and improve the CO2 flood performance. It is important to note that during Denbury's Chapter 11 filing, EPM was not affected in terms of continuity of payments to Evolution or operations at Delhi Field. Before turning the call back over to David, I would like to comment on David Joe's upcoming retirement, as previously announced on Wednesday, and congratulate him on over 15 years of dedicated service to Evolution Petroleum. David has served in multiple roles during his tenure at Evolution and has been an integral part of our continued successes. David will remain on the Board until the end of the year to help transition our investors, our business processes, and our core institutional knowledge so that there is little to no disruption for our business. Our Board, our team, and I'm sure our investors, join me in thanking you, David, for your time, your dedication to this company, and for your friendship. We have enjoyed having you as a colleague. We wish you all the best as you move to pursue other adventures in retirement. With that, I'll now turn the call over to David to run through our financial highlights, and then I'll finish up by speaking briefly about our strategy, outlook, and the M&A landscape. David?

Thanks, Jason. It's been a real pleasure and an honor to work for Bob Herlin, the Board of Directors, and dedicated employees, both current and past, and to serve the company's shareholders for quite a few years now. I remain confident in the asset portfolio and the strategy of the company moving forward. I plan to remain an interested shareholder for many years to come. I would now like to share some more details regarding our financial results for the first quarter ended September 30. Please refer to our press release for full details on the quarter. As Jason mentioned, we had revenues of $5.6 million this quarter, which was largely attributable to increased oil prices, which averaged about $37 per barrel. Average daily net production was down about 4% this quarter to 1,841 barrels of oil equivalent per day, due to continued suspension of CO2 purchases at Delhi, along with NGL plant downtime and maintenance and some unplanned power outages. Although production was down, we are encouraged to see increasing realized commodity prices for both oil and NGLs quarter-over-quarter. It should be noted that LLS pricing has been volatile this year, and the historically stable premium to WTI at Delhi is currently a deduction, as Delhi's realized oil price is approximately $2.20 per barrel below WTI in the quarter ended September 30. Unfortunately, until the global macro environment for oil demand improves, I expect this trend to continue in the near term. Due to the low oil price environment we experienced from March 2020 through May 2020, the company's ceiling test for the book value of our producing properties was adversely affected. For the first time in the company's history, Evolution recorded a significant non-cash impairment charge in the amount of $9.6 million pretax. Per the prescribed rules of the full cost method of accounting, a quarterly ceiling test is performed and calculated using the trailing 12 months' first day of month average oil prices. Based on this test, our ceiling was less than our net book cost, hence the required impairment. This result reflected a lower average benchmark WTI oil price in the current quarter, which was about $41 a barrel compared to a higher price a year ago of about $56 per barrel, which no longer impacts the 12-month trailing average oil price computation used to derive the estimated discounted future net revenues from production of proved reserves. Impairments can take various forms in our industry. For example, some peers have taken impairments for changes in their current development plans for proved undeveloped locations, or impairments related to expiring lease expirations, or impairments for reserve performance revisions based on well results. Evolution is not likely to have any of those issues, largely due to our proved developed producing dominant reserves and the high percentage of those proved reserves being produced. The non-cash impairment this quarter is largely attributable to lower oil prices. Barring a substantial oil price increase, we will likely need to record impairments in the coming quarters as the higher average oil price from fiscal Q2 of 2020 rolls off. While this accounting measure has affected our book value in the near term, we remain confident in the long-term value of our long-life, low-decline asset base. Because of the impairment write-down, the company will benefit from a lower DD&A rate going forward. Lease operating expenses in the current quarter increased about 4.9% to $2.4 million, primarily due to increased activity at both Hamilton Dome field and Delhi field as prices have increased and stabilized. We expect LOEs to increase at Delhi in the coming quarters now that CO2 purchases have been restored at Delhi following the pipeline repair completed on October 26. Our G&A expenses, inclusive of non-cash expenses, increased about $260,000 to $1.3 million for the current quarter, which is about the normal recurring G&A rate. The increase in G&A is primarily attributable to the prior quarter's reduction of compensation incentives accrued earlier in the fiscal year 2020. On the income statement, you will see an income tax benefit increase of $1.8 million compared to the prior quarter, primarily due to a higher current quarter pretax loss driven by the impairment. At September 30, the company continues to carry a receivable for income tax refunds of approximately $3.1 million for previously reported enhanced oil recovery tax credits. Net loss for the quarter was $7.1 million or $0.22 per diluted share compared to a net loss of $2.3 million or $0.07 per diluted share in the prior quarter. The company incurred about $189,000 on capital projects in the first quarter, primarily at Delhi for re-entry, capital maintenance, and plugging projects. We do anticipate productivity to pick up slightly with conformance workovers and maintenance projects. All projected capital expenditures for the remainder of fiscal 2021 are expected to be funded by operating cash flows and existing working capital. During the three months ended September 30, the company funded operations, capital expenditures, and cash dividends with cash generated from operations. Working capital increased $0.5 million to $21.5 million at quarter end. The company was able to preserve its balance sheet and generate positive cash flows through a combination of increased total revenues, previously announced reductions in dividends paid out, and various cost-cutting initiatives, partially offset by a $1.2 million realized loss on our derivative contracts. Our liquidity position remains strong with $19.8 million in cash and an undrawn credit facility, which was recently extended for an additional three years to April 2024 and redetermined at $23 million, subject to financial covenants. Despite the challenging calendar year, we continue to maintain a clean balance sheet and remain in an excellent financial position. This concludes our review of financial results and operations for our fiscal first quarter ended September 30. I would like to turn the call back over to Jason for some final remarks.

Thank you, David. As announced earlier this week, in conjunction with David's upcoming retirement, the Board has appointed a new CFO to be his successor, effective November 18. Although I won't go into all the details of his background, I will say that we're very excited about Ryan Stash coming on board. He comes to Evolution from Harvest Oil & Gas Corporation, where he served as Vice President and CFO since October 2018. Prior to joining Harvest, Mr. Stash spent 11 years in the Energy Investment Banking Group for Wells Fargo Securities here in Houston and several years prior to that as an auditor at Ernst & Young. He's a rare combination of investment banker and CPA with public company CFO experience. He earned his MBA, Masters in Professional Accounting, and his Bachelor's in Business, all at McCombs School of Business and the University of Texas. We're excited to find such a thoughtful and experienced financial executive as Ryan to carry on the torch that David has carried so well for Evolution in the next chapter. We look forward to integrating a skill set and experience into our team as we aim to grow our asset base and our dividend. In addition to David's retirement, as announced last week, our Board member and Audit Committee Chair, Marran Ogilvie, has elected not to stand for reelection. We wish her the best in her future endeavors and thank her for her years of service on Evolution's Board of Directors. Details of these changes can be seen in our recently filed Form 8-K report. It's a priority for us, as we've said before, to invest in the working relationship we have with our operators. I continue to be pleased with the relationship and dialogue we've been able to have with both Denbury and Merit regarding our assets and cost optimization initiatives. We are very happy to see purchased CO2 volumes start to flow into Delhi once again. This will bring much-needed pressure support and help bring some of that oil production back. Although it may take a few months, we should start seeing the benefits of new CO2 volumes as they help to restore reservoir pressures to previous levels. As you recall, historically, we've averaged 80 million to 85 million cubic feet a day of purchased volumes. Denbury will ease those volumes back up over the next six months and may even be able to increase those to as high as 100 million cubic feet a day for a period in order to make up for lost volumes, all subject to prudent operational integrity of their pipeline. At Hamilton Dome, we still have about 20% of production shut in, accounting for about 30 wells. We do not expect those to become economic enough to reactivate at prices below about $45 for WTI sustained. The differentials there are not as competitive as Delhi, and the operational costs are higher per barrel as well. That said, we're pleased with the operational team at Merit, who are using this opportunity to maximize cost-cutting processes and operations in the field, much of which we believe will be permanently captured. They have brought on two wells in September and exceeded production expectations, which is great news. Looking at the future of our current assets, based on recent discussions, we expect that the emergence of Denbury from the restructuring process will bring about the resumption of conformance workover projects, which are very helpful. We expect expenditures related to conformance to run approximately $600,000 to $800,000 for the remainder of our fiscal year. Last quarter, we reported that we had budgeted about $750,000 to $1 million. We spent a couple of hundred thousand in the first quarter, so we do not anticipate significant changes and are on target for the remainder of fiscal '21. In addition, the company has planned expenditures of approximately $1.9 million net to EPM in fiscal '21 to begin the development of Phase V at Delhi. We expect to find out more at our annual working interest owner meeting with Denbury in January. As we understand it, Denbury's plan is to commence this program in the spring of 2021, which is our fiscal fourth quarter. Phase V development costs are expected to total $8.6 million net to us overall, with $3.7 million to be incurred in fiscal 2022 and the remainder over the following two years. These projects focus on extending the life of our reserves and have been successful in the past few years in arresting the natural decline. Although we are pleased about the forecast for much-needed additional capital investment in our current assets, we continue to look for opportunities where we can leverage our financial position to add additional assets that will further grow and diversify the company. We are seeking low production decline, long-lived reserves to add to our portfolio that will contribute to our dividend for many years. We are observing some price stabilization which encourages us, although the landscape has been a bit in flux. This has led us to several new deals, and we have started to see a number of recent transactions. We are confident in our acquisition strategy moving forward and the financial stability of our company to take advantage of these opportunities. We are in a great position, and I look forward to the future of Evolution Petroleum. With that, I think we're ready to take some questions. Operator, please open up the line for questions.

Our first question comes from Jeff Grampp with Northland.

Congrats, David, on the retirement. I hope you enjoy some well-deserved time for yourself.

Thanks, Jeff.

Jason, as for the acquisition front, can you discuss the deal flow? Particularly curious about asset characteristics. Are you seeing more interesting options like Hamilton Dome? Or in the past, you had mentioned gas could be interesting in certain circumstances, and that pricing has firmed up.

Sure. I appreciate that. Well, we've been working continuously on various strategies. We're interested in both oil and gas. We like assets like Hamilton Dome and Delhi because they're long-life oil assets. Even though oil prices are down right now, if we can get a purchase, it could be a good time for profits over the next couple of decades because we're bullish in the long term on oil. Right now, the landscape with oil and those types of assets remains challenging. However, price stabilization has prompted discussions about transactions. In the private space, there remains a view of the asset value, creating a disparity in the market. We're seeing some deals come back for second rounds, which is positive. We are also interested in gas, particularly in the East Texas and North Louisiana regions, focusing on areas that connect to Sabine Pass. We have identified interesting opportunities for gas that is less competitive with the ongoing drilling out West and offers lower lifting costs compared to oil.

Great, that's helpful. Lastly, to put David on the spot, it seems you have historically moved to a cash taxpayer status, but it's been a bit choppier lately. What should we expect in terms of the split between deferred versus current taxes going forward?

That's a good question, Jeff. Given the outlook for oil prices, it seems that Evolution won't be making profits based on strip prices. As you've noted, we've been a cash payer unlike many E&P registrants. It's hard to project forward. We're off to a rough start this first quarter, but I would expect that we will not be a cash payer in this fiscal year, at least from what I see today.

If oil prices were to rise significantly to where you guys are GAAP profitable, should we expect cash taxes to return then? Is it that simple?

Yes, I believe so.

Our next question comes from Rob Howard with Boiling Point.

Yes, you almost answered my question earlier. Nice quarter. I see the current asset of the taxes. Do you anticipate that this cash will actually come in?

Are you referring to the income tax receivable?

Yes, I am, about the balance sheet.

Yes, we expect to receive the income tax refund from the federal taxpayer, and there may even be a state refund involved, but the majority is from the federal income tax return from enhanced oil recovery tax credits taken in the previous two years.

What is your tax basis of a barrel of oil production? Can you give me just a rough ballpark on that?

I can't provide that number off the top of my head, Richard. I'm not sure if that's a number I could disclose publicly.

Our next question comes from Andrew Bond with AGP.

Great color on the M&A. So that question was already asked, but just wanted to know, are you able to provide the gross production volumes like you have in quarters past? Or can we expect to see that in the filing when it comes? I know you all don't really report a detailed breakout of production by field, but I'm trying to get a better sense of production and prices net to EPM between Delhi and Hamilton Dome?

Yes, Andrew, that information is in the 10-Q. We hope to be filing that today or, if not today, Monday.

Our next question comes from John White with ROTH Capital.

No question from me. I just wanted to tell David Joe, congratulations, and I have really enjoyed working with you. Thanks for all your help with some of my silly questions over the years.

John, thank you for that. Let's have lunch when time permits. I've enjoyed working with you as well.

It looks like that was our final question.

Okay. We appreciate you all joining us for our Q1 fiscal 2021 call, and we look forward to updating you in early February with our Q2 results.

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.