Evolution Petroleum Corp (EPM) Q3 2022 Earnings Call Transcript

Good day, ladies and gentlemen. And welcome to the Evolution Petroleum Third Quarter Fiscal Year 2022 Earnings Release Conference Call. It is now my pleasure to turn the floor over to your host, Ryan Stash. Sir, the floor is yours.

Thank you, and good afternoon, everyone. And welcome to our earnings call for the third quarter of fiscal year 2022. I'm Ryan Stash, Chief Financial Officer. Joining me today is Jason Brown, President and Chief Executive Officer. After I cover the forward-looking statements, Jason will review key highlights along with our operational results. I'll then return to provide a more in-depth financial review. And finally, Jason will provide some closing comments before we open it up and take your questions. 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 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. Now since detailed numbers are readily available to everyone in yesterday's earnings release, this call will primarily focus on our strategy, as well as key operational and financial results and how these affect us moving forward. Please note that this conference call is being recorded. And if you wish to listen to a replay of today’s call, it will be available by going to the company’s website or via recorded replay until August 9, 2022. With that, I’ll now turn over the call to Jason.

Thank you, Ryan. Good afternoon, everyone, and thanks for joining us for today's call. As always, we appreciate your time and effort and consideration of our company as part or potential part of your investment portfolio. Our fiscal third quarter was a bit of a watershed moment for our team. We were able to close our third acquisition, enter into definitive agreements on our fourth acquisition, return the dividend to pre-pandemic levels of $0.10 a share per quarter and upgrade our staff with a few key hires, all in a rising commodity price environment. I'm very proud of the work that our small team has been able to do and execute as they prove themselves to be capable of sourcing, valuing, transacting, and managing our interest in oil and gas properties. This allows us to pay consistent and substantive dividends to our shareholders. We were extremely pleased with our overall results from the third quarter, which were highlighted by continued free cash flow generation, and the payment of an ongoing meaningful cash dividend to our shareholders. A key highlight for the third quarter was the closing of the purchase of oil-weighted assets in the Williston Basin in North Dakota, that was on January 14th. And on April 1st, we closed the acquisition of natural gas weighted assets in the Jonah Field, located in Sublette County, Wyoming. As such, we will see a full period of operational and financial benefit from the two acquisitions in our fourth quarter, which should help to drive a solid end to fiscal '22, and places us in a great position for continued success moving into fiscal '23 and beyond. During the third quarter, we produced 5,579 net BOE per day. That was about 13% higher than the 4,957 net BOE per day that we produced in the second quarter. Our third quarter also benefited from higher overall commodity pricing. The combination of increased production and pricing, along with our continued focus on managing costs we can control, resulted in adjusted EBITDA of $12.3 million. This is about 20% higher than the second quarter. During the third quarter, we once again generated operating cash flow in excess of development capital expenditures, which supported the payment of our 34th consecutive quarterly cash dividend on March 31st. Additionally, due to the continued strength and growth of our business, we are pleased to declare our fourth quarter dividend of $0.10 per common share to be paid at the end of June. With a fourth quarter dividend, Evolution will have paid out approximately $86 million or $2.61 per share back to stockholders as cash dividends, since the inception of our dividend program on December 31, 2013. Now let’s look at our operating results in a little more detail. Net production in Delhi for the third quarter grew about 4% from the second quarter to 112,494 BOE or approximately 1,250 BOE per day. This increase is attributed to consistent run time of the NGL plant during the third quarter, following the turbine maintenance and interrupted operations in the second quarter. Oil production at Delhi continues to be impacted by the nine-month suspension of CO2 purchases during the calendar of 2020 due to repairs of the purchase supply pipeline. And as previously discussed, the result has been lower reservoir pressure that we are working diligently to restore to pre-2020 levels. Just as a reminder, Denbury operates the field in addition to owning and operating the CO2 purchase pipeline and Evolution did not incur any pipeline repair cost. Denbury has been able to increase volumes of CO2 since December of 2021 and we have seen some results of that effort in production volumes. However, we still have a long way to go in restoring reservoir pressure. We will continue to monitor and anticipate improvements over the next 18 to 24 months. Net production for the Barnett Shale assets for the third quarter grew 8% to 307,318 BOE or 3,415 BOE per day. This includes the decision to adjust the production mix in fiscal ‘22 to capture the most favorable commodity prices and maximize the overall field operating cash flow. We have been pleased with Diversified Energy's efforts since becoming an operator last October. Diversified is running one workover rig continuously throughout the calendar of 2022, and we look forward to participating with them on projects that will provide attractive ROI for our shareholders. At Hamilton Dome production was essentially flat at 37,312 net barrels. There were fewer days in the quarter so the volumes are slightly less, but it's essentially the same. Our operating partner, Merit, remains focused on maintenance projects, including continued restoration of previously shut-in wells and strategic adjustments to water injection, location, and volumes. As I mentioned earlier, we're pleased to close our acquisitions of certain Williston Basin assets in mid-January. Net production for the partial third quarter was 43,510 BOE, which was approximately 83% oil. As reported, this is 483 BOE per day. However, remember that represents a 90-day period. We ended the quarter at a daily rate around 565 BOE per day, which is a little more representative of the 77 days in the quarter that we own the asset and as well as our anticipated levels of production going forward. Technical evaluations are underway to assess and high-grade potential drilling locations in the Williston assets. We will let the geomechanical and reservoir analysis inform our economics and subsequent capital investments and development drilling plans. We anticipate those beginning sometime in fiscal 2023. With that, I'll now turn the call over to Ryan to discuss our financial highlights.

Thank you, Jason. I’ll now share some highlights from our strong results for the third quarter of fiscal 2022. As I mentioned, please refer to our press release from yesterday afternoon for additional informational details, but some of the key highlights include adjusted EBITDA increasing 20% to $12.3 million from $10.2 million in the second quarter of fiscal 2022. Third quarter adjusted EBITDA was $24.58 per BOE, which was 9% higher than the second quarter. As Jason mentioned, we once again funded all operations, development capital, and dividends out of operating cash flow, and we maintained our strong balance sheet with $13.4 million of cash on hand and $20 million of debt as of March 31st. Now supported by our solid operational cash flow outlook, as Jason mentioned, we paid a dividend of $0.10 per share in the third quarter and we'll pay one in the fourth quarter that will be payable on June 30th to shareholders of record as of June 15th. At the end of the third quarter of fiscal 2022, working capital was $15.4 million, and liquidity was $43.4 million, including the $13.4 million of cash I just mentioned and $30 million of availability. Now, as we announced in early April, we closed on our Jonah Field acquisition on April 1st and borrowed $17 million, bringing our total outstanding amount to $37 million. Since closing the acquisition, we have subsequently paid down $4.25 million. And based on the current robust commodity price outlook, we expect to be able to rapidly pay down this remaining debt. As a further result of closing the Jonah acquisition, the margin collateral value defined under a credit facility was increased to $160 million. As a reminder, the company is required to enter into hedges on a rolling 12-month basis when borrowings exceed 25% of the margin collateral value. And since we're below this minimum threshold of 25%, we’re not required to enter into any additional hedges at this time. However, on April 1st, we did enter into hedges for 25% of the expected incremental natural gas production from the Jonah acquisition through March of 2023. We utilized costless collars, which is consistent with our strategy of retaining exposure to commodity prices. Details of all of our existing hedges will be available in our 10-Q filing. Looking at the third quarter financials in a little more detail. We grew total revenue to $25.7 million, which is a 15% increase from the second quarter. Oil revenue increased to $14.9 million due to 8% higher sales volumes, primarily the result of the closing of the Williston Basin acquisition on January 14th, as well as a 30% increase in realized pricing. Natural gas revenue decreased to $6.1 million from $9.2 million in the second quarter. And as we discussed in the last earnings call, the second quarter included additional natural gas volumes in the Barnett as a result of an adjustment for prior periods to reflect ethane rejection that occurred in the field. Excluding these adjustments, revenue in the second quarter would've been approximately $8.5 million. Also contributing to the decline in revenue from the prior quarter was a 16% decline in the realized price of natural gas. NGL revenue increased to $4.7 million due to lower NGL volumes last quarter as a result of the adjustments made related to the ethane rejection in the Barnett that I just mentioned. As a reminder, the operator decides to reject ethane into the gas stream to capitalize on a more favorable natural gas pricing environment to maximize overall cash flow. Also contributing to the increase in NGL revenues was higher consistent run time at the Delhi NGL plant leading to higher NGL volumes at Delhi. Lease operating expenses increased $12.1 million in the third quarter. Contributing to this increase was $400,000 in higher CO2 costs at Delhi compared to the prior quarter, primarily due to higher volumes and an increase in the CO2 cost per MCF as the purchase price, as we mentioned before for our CO2 is based on the price of oil. There was a $1 million increase in other lease operating costs, which was primarily the result of the closing of the Williston Basin acquisition in January. Total lease operating expenses for the third quarter was $24.7 per BOE, which is just 3% higher than the prior quarter of $23.40. General and administrative expenses decreased 17% to $1.5 million from $1.8 million in the second quarter. Contributing to the overall decrease were lower consulting, legal, and compensation costs in the third quarter. Net income for the third quarter was $5.7 million or $0.17 per diluted share versus $6.8 million or $0.20 per diluted share in the second quarter. The decrease in net income was attributable to a $2.4 million unrealized loss on derivative contracts recorded in the third quarter, which was offset by increased income from operations, primarily due to higher production and commodity prices. Adjusted net income for the third quarter, excluding selected items, came in at $7.7 million or $0.23 per diluted share. Please see our press release for a reconciliation of our non-GAAP measures. For the third quarter, we invested $100,000 in capital expenditures and conformance projects. We currently expect that our operators will continue conformance projects and likely incur additional maintenance capital expenditures as oil prices remain strong. And as Jason had mentioned that the Barnett Shale, we expect to see one continuous workover rig running throughout calendar 2022. And in our newest asset, the Jonah Field, we recently received two AFEs from the operator of Jonah Energy for recompletes that are scheduled for our fiscal fourth quarter. This was a nice surprise for us as we actually didn't base any of our acquisition economics on any activity at Jonah. So it's nice to see Jonah Energy looking to do some work to take advantage of the pricing environment. At our Williston Basin properties, our operating partner foundation is planning some recompletes and development projects that are scheduled to begin in the first quarter of our fiscal 2023. Now for the remainder of our fiscal year, we anticipate total capital spending in the range of $500,000 to $1 million. Now the preliminary budget for fiscal year 2023 is set at $4 million to $6 million. And I would note that this does not include any potential drilling in the Williston Basin or really any more incremental activity at Jonah as we have not budgeted for that at this time. And with that, I'll turn the call back over to Jason for his closing remarks.

Thanks, Ryan. Over the past several months, we have made significant progress in further positioning Evolution for continued success, and providing increased visibility for meaningful return of shareholder capital through our long-term quarterly cash dividend program. Our Williston Basin and Jonah Field acquisitions have further diversified our product mix and expanded our footprint into two additional prolific producing basins in the onshore US. We also have added the optionality to invest in low-risk organic drilling and development opportunities, while maintaining and growing production with our operating partners. As we discussed today, we clearly saw the positive impact from the Williston Basin acquisition in our third quarter results, and we look forward to a full period of results during the fourth quarter. Our fourth quarter will also have the benefit of operating results from the Jonah Field acquisition. These two recent strategic transactions represent our latest success and our targeted efforts to begin in late 2019 to increase immediate and long-term cash generation for the benefit of our shareholders through the strategic expansion of our geographic footprint of assets and production mix. We have accomplished our significant growth and value creation without material shareholder dilution or onerous debt. And most importantly, we have continued to return value to our shareholders through a constant dividend over the past eight years. With $37 million of incremental debt from the two transactions, we estimate that our outstanding debt will remain well below 1 times annualized EBITDA. An increase in free cash flow generation will allow rapid debt reduction as we continue to support our dividend strategy. Our corporate goal is to keep our leverage below 1 times annualized EBITDA. And we currently are on track to pay down our outstanding debt associated with these two acquisitions well within the fiscal year. I would also note that we have strategically grown the business with minimal increases in overhead, which is expected to dramatically reduce our G&A cost per barrel metrics. With the addition of our ownership interest in the Williston Basin and Jonah Field, we have transformed the company from having ownership in a single field in 2019 to one that has now a presence in five key US oil and natural gas plays. We have also expanded our operating partner base as we are now working with five proven and respected operators that are squarely focused on ensuring the long-term sustainability of their operations and working closely with their business partners and other stakeholders. As we have discussed in the past, maintaining and ultimately growing our common stock dividend remains our top priority. With the Williston Basin and Jonah Field acquisitions, we have increased our size and scale while diversifying our asset areas and product mix. This has allowed us to enhance the visibility of our cash flow generation for the next decade to fund our dividend and consistently return value to shareholders. We will continue to look for and evaluate accretive acquisition opportunities that meet our requirements of long-life established production and disciplined growth opportunities, both of which support value creation for our shareholders. With that, we're ready to take questions. Operator, please open the line for questions.

Your first question is coming from John White at ROTH Capital.

I know you talked about it in your opening remarks. But could you give us a little bit more on Delhi in terms of what Denbury is thinking about the injection rates, and what Denbury's thinking about drilling some more wells there?

They are conducting a reassessment, and we are doing the same on our end. We are deeply analyzing our site as CO2 experts, while they are focusing on their asset team and how to further develop the field. This year, they have concentrated on conformance projects, including a significant workover involving heat exchange, which we reported about a month ago. This is important to us, and we are excited because it will improve CO2 delivery consistency. During the summer, high temperatures force us to reduce CO2 volumes, and in winter, it can freeze, so this will help with both issues. Our current priority is to deliver as much CO2 as possible. They repaired the line in October 2020, but they weren't able to increase volumes beyond what was necessary until December 2021. In the last few months, we've noticed a positive response in pressure stabilization and even a slight increase. Historically, over the past 15 years, the rock has responded well to pressure. We will monitor the situation over the next 18 to 24 months. We believe that focusing on consistent CO2 delivery to increase pressure is more beneficial than drilling additional wells at this time, and they share this perspective.

And the additional AFEs at Jonah and Williston, those are all workovers, there's no new drills?

Yes, that's correct. We're currently conducting an in-depth technical analysis in the Williston Basin. The Jonah area is highly populated and has been drilled down to 10-acre spacing, with a significant portion being a 3,000-foot reservoir. This creates numerous workover opportunities. We've submitted a couple of Authorizations for Expenditure this week, and we're very enthusiastic about any work planned there. Gas prices in that region, especially heading west, are very robust, as we've mentioned previously. We're pleased with the ongoing activities in that area. We had excellent technical discussions with our operating partner in the Williston Basin. In late March, we brought our entire team up to meet with theirs. We also reconvened in Denver with engineers to conduct geomechanical and reservoir studies. We're very satisfied with what we've observed and the cooperation we've received, which has been great so far. I don't expect any activities beyond workovers to commence there until at least the second half of our fiscal year 2023. We'll make sure to inform everyone well in advance of any developments.

Well, that's the kind of activity you like to keep the CapEx up and bring on some increased production…

That's the same thing with Barnett there that they've got a workover rig just running this. We took the whole team to meet Diversified as well. Their operating team is great, many of which have been with the asset for many years, but just didn't have the capital support. And Diversified after taking over that asset in October, it's providing the ops team with capital to do work that they probably have been wanting to do out there for years. So they're getting to it and we're appreciative of that.

Your next question is coming from John Bair with Ascend Wealth Advisors.

I’ve got a couple of questions here, I want to kind of circle back to Delhi. More specifically, I was wondering if Denbury or you all internally are looking at doing anything with regards to the phase five areas that has kind of been on the books for a while and/or the Mingo unit that you've had in some past slide decks.

We haven't talked about the Mingo units, and their capital program or budgeting process begins in August. We have initiated our reserves process, which will wrap up around the same time. We're conducting an in-depth analysis of Delhi to prepare our proposals. They've shown some willingness to cooperate, which is positive. Regarding the Mingo unit, we initially considered it in a higher price environment, and currently, we are again in a favorable price situation, so we want to revisit that option. However, there hasn't been any discussion about it at this moment. As for phase five, they are reassessing that as part of their restructuring process; many of those projects were put on hold during their restructuring and need to be re-proposed internally. This evaluation and study are occurring simultaneously on both sides, aiming to be submitted into their program by next fall.

You said fall of ‘23, is that you’re meaning…

No, this next fall for the budgeting process…

This coming fall, okay…

We had said that that probably was going to be ‘23, potentially ‘24. It basically just got pushed off a couple years. So I think we've asked them to take a harder look at it and see if we can schedule a little bit further. But they are a large company and have capital competition in all their different asset areas, and we are the non-op person, so we are doing what we can do, but it's still on the table, let's say that.

Ryan addressed my guess on your CapEx maybe for next year was $4 million to $6 million, and that would not include any new drilling proposals, I guess, rather than workovers. Is that right?

That's right. John. It's really what we expect in really workover and conformance type projects for each of our assets.

And is that including the two AFEs that you just recently got from Jonah or was that kind of estimate prior to receiving that?

It was prior to receiving that from Jonah. So obviously, if activity picks up there, we take a look at that budget every quarter. So we'll have to take another look at year-end to see if we need to update it. But obviously, we had a range there so there are certainly some things will happen, some things won't, but yes, we hadn't considered Jonah activity really when we had put that together.

And then that bump up, you said in your prepared press release, $0.5 million to $1 million in CapEx for the fourth quarter. So that's kind of, I just said, okay, time four so you get $4 million on the downside and maybe $6 million on the up. How much of that might be attributable to higher service and material costs? In other words, workover rig costs and so forth. How much is that hitting you?

We are building in about 20%, John, now. A company like Diversified, they are being pretty diligent with what they are pulling together. They have got teaming in other areas and they are doing a lot of transfer stuff. That's been pretty great and saved everyone a lot of money, but that won't last forever. So I think, in general, I think 20% the number. If we were saying on the fourth quarter of $500,000 to $1 million, I'd say we're going to be on the upper end of that now, inclusive of Jonah. But it's not different than we kind of talked about, remember a small amount of maintenance or workover CapEx in each one of these plays to sort of flatten production as best as we can.

Very good. Well, thanks for taking the questions…

We haven't seen the massive crunch, John, to answer that just a little more specifically, on tubulars and fracs and all the things that the supply chain and particularly in the Permian has jammed people up and led to some exorbitant prices. So we are anticipating building in kind of a 15% to 20%, but we are also hopeful that some of those things will get worked out over the course of the next year.

One last question about M&A. What's the M&A landscape for you right now? Given prices are up or people being real proud of their projects and not really willing to trade them off, or is there more activity offering properties to sell because of the higher prices?

Well, John, it’s kind of both. The backwardated curve is actually making it to where people can get things done still. I think there is an instability in the market that's priced in. So people just aren't quite comfortable long-term. As people get more and more comfortable in the go forward and believe the prices go forward, the back end of that curve is going to raise and everything's going to get a whole lot more expensive, probably untenable. But the point now is we still think it's within striking distance. Our appetite is not quite as aggressive as it was, so we can be a little more choosy now. We are seeing quite a few failed deals and we're seeing some private equity backed portfolio companies with assets that they're starting to get a little market therapy. And if they don't sell now, when are they going to sell? So we still feel pretty hopeful that there might be something that we can pull in over the next six months.

Your next question is coming from Jeff Robertson, Water Tower Research.

A question on Delhi, I think you said 18 to 24 months for the reservoir pressure to respond to increased CO2 injection. Do you have an opinion or a view as to how you think production will behave as the reservoir responds?

I do, but it's being informed by this deeper dive that we're doing now. I think it's probably going to be an even longer haul with that. My best guess is that at 24 months, we would hope to be back on a decline of where we were prior to it going off in the spring of 2020. So it doesn't mean that we would be back to that rate. I think it was production at the time. I think we wouldn't expect to get there. But if that was just to do its normal roll off of 8% or 9% annually in 24 months now, we'd be back to that curve. I think that's my best guess. The reserves are there and we'll get them. It's just going to take a little longer now. And like I said before, the rocks always responded to pressure. It's something that would get to a lot quicker if we could pump 120 million cubic feet per day. They're probably just not going to run that hard. So right now they've been averaging around 95 million cubic feet a day for the last couple of months and we're seeing this softening, but it's just going to take a while, Jeff.

Are they changing their approach as the injection is taking place, or are they simply attempting to reapply pressure to the areas where they know they have experienced losses?

Yes, that's also part of this kind of deep dive. We're doing a deep pattern analysis that we actually haven't done here before and that's part of our reserves process. And feel like we've got someone who's had 30 years experience doing that with CO2, so that's been a real addition for us. Hopefully, that's going to inform and help us propose to them. They're doing the same thing over there. There's generally where everything's are open and the team is constantly working on conformance projects as different zones start to gas out. So they rework those and put it in the zones that they're not gassed out. So they're constantly working the field and they have returned conformance projects and that's been very, very needed, because there were two years they didn't do anything. So that's really all I can say. We're doing a deep dive in and we're going to have we feel like a better understanding of it over the next couple of months.

Jason on Jonah, you said you all are pleasantly surprised for the two AFEs that you've gotten from Jonah Energy. Are those just opportunistic with where gas prices are, or are they trying a couple of projects that if successful, they might lead to additional workover projects in your fiscal ‘23?

We believe there will be more opportunities. The company has been focused on different areas, and the operations team has expressed excitement about having a partner willing to engage. They've provided us with plenty of information. We have brought the asset teams and operations teams together, which has been beneficial. It's essential for us to actively participate as a non-operator. This begins with a proactive relationship with our partners, and I find it somewhat surprising that while the area is fairly developed, there are still several attractive opportunities they wanted to explore previously at lower price levels that now make more sense. We did not anticipate this, so it presents unquantified upside for us. We primarily acquired it for the PDP roll-off, and we are very enthusiastic about that.

And a question, Ryan, can you shed a little light on how fiscal fourth quarter LOE might look with say different mix of assets now that you'll have a full quarter from Williston, but also a full quarter from Jonah? The LOE itself showed that Williston was nearly a full quarter, with only about 15 days remaining. We hope to see it decrease slightly, since Jonah's costs are lower, in the range of $10 to $11 per barrel. When we consider that on a performer basis, we certainly expect the LOE to decrease somewhat from the approximately $24 we experienced this quarter. That is our current expectation, Jeff.

Your next question is coming from investments.

So based on what you said about CapEx for next year, yet add the dividends and CapEx together, you've got about $5 million of commitments a quarter for cash out the door. You're obviously bringing it in the door a heck of a lot faster than that. So can you sort of describe for me what the waterfall of the uses of that excess cash is?

David, it's a good problem to have that we need to address. We have the flexibility with these locations, and I've mentioned that the M&A environment appears to be tightening, yet there are still opportunities. We're considering two or three potential deals. We're also looking at options where we might use some of our shares as part of a smaller transaction, especially if our stock and their prices both rise, making it easier to structure a deal. However, it is becoming increasingly challenging to finance acquisitions purely with cash as prices continue to climb. We're actively involved in the M&A market and I am optimistic about securing another deal while putting some of our cash to work. We expect to reduce our debt by the holiday season, which will allow us to generate more cash. Additionally, the potential drilling locations provide us with opportunities we haven't had before. If we decide to drill when oil prices exceed $100, we already have wells ready for development. We're exploring this simultaneously with any acquisition opportunities we may have. If the valuation gap is too wide, we've consistently demonstrated discipline in our approach over the years. With the options we now have, we are looking to invest capital wisely in the coming year.

How much more expensive roughly would you say the A&D market is now relative to when you did the Williston and Jonah deals?

I consider things in terms of an actual acquisition guide for flat pricing. Currently, if the market starts around $102 and decreases to around $70 over five years, I view it as a five-year average while seeking assets with longer durations of 10 to 20 years. We usually maintain the fifth year flat, so for a five-year average, it should be around $78 to $75, while a 10-year average would be approximately $72. When we acquired the Williston, the initial negotiations were around $63 to $64 flat. Over the past three, five, seven, or ten years, the average oil price has been about $57, indicating that we are currently in a higher price environment. Looking ahead, it’s possible to transact in the $67 to $70 flat range, which is likely feasible at this moment and higher than the Williston deals. Percentage-wise, it falls within the 15% range. However, this is contingent on asset quality; for instance, Hamilton Dome has been producing for a century with consistent output. Even if we pay a bit more in the short term, the longer-term production can support our dividend. Our business strategy allows for a broader perspective on such deals. Ryan, do you have anything to add?

No, I agree with that. I did want to circle back up though on your question, David, on kind of use of proceeds for cash. You know one thing that we did mention is dividends, obviously, the Board looks at dividend every quarter. And so dividend increase is certainly not off the table depending on the outlook and how the assets perform. As you look at a spectrum of things we can do, certainly, debt pay down, as Jason mentioned, we are looking at new deals and dividends and returning capital to shareholders, even above and beyond the current one is certainly on the table. But it's something the Board looks at every quarter.

And so if I could just ask one more, maybe slightly annoying question, which is, if you are finding the bid-ask spread in the M&A market to be a little wider than you are liking. How does including what is probably an under-priced stock in the transaction help to close that gap?

It has to be a group that understands that the value of the stock in conjunction with additional assets is likely to be stronger. The premium they seek from assets that the market isn't currently recognizing is a way for us to acquire those assets at what appears to be a more reasonable price. This combination not only benefits our stock but also allows them to gain, leading to an improvement for both sides. Things felt a bit more favorable a month ago, but currently, we are experiencing some volatility. I agree with your observation that the bid-ask spread we are seeing is too wide; some are merely trying to take advantage of the strip price. There are also plenty of deals available, so ensuring we find the right arrangement that works for both parties is key. While it isn't an ideal environment, we're optimistic about our position because we have a solid foundation to build on, which is an acceptable status for us at this time.

Not to beat it to death. I mean, the only thing I would add to that is just what you're not going to see us do is go buy probably a PV20 sort of PDP decline asset with potentially cash in stock. What Jason's talking about is sort of more of a strategic potential deal where you're looking at a relative value between two companies. And if the potential part would give us the value that we think our stock is worth and that the shareholders would appreciate, it's something we could potentially transact on. But we're not going to necessarily go issue stock right now for cash and go buy some more PDP assets.

I wouldn't have expected that. And then if you guys turned around and started putting some significant capital into the Williston. Would you hedge some of that early production or would you just take the risk that it's going to work?

I'd have to take a look at it at the time. We're working our revolver, so some of that depends on the bank. And the hedging we generally like to stay away from it as much as we can. We want to be a call option. We feel like we got the balance sheet to endure it. But we would look at it, I don't know…

I think we would consider it. What we would also look at is only engaging in projects that we feel confident about the returns on, even in a lower potential price environment. Another approach we would take is running pricing scenarios. Hedging is one strategy we could use to secure a return on drilling, but we also conduct sensitivity analyses to understand what the drilling economics would look like at various price levels, such as $65 flat or mid-cycle pricing. So, I believe we consider all options when evaluating those opportunities.

The other thing, David, is there's always the potential for an increased dividend, and that's being considered as well. We have many options for utilizing the cash. We prefer not to decrease the dividend because we want to support it in the long term. Therefore, all these possibilities are under consideration as we explore ways to grow and return capital to shareholders, providing value to them through a higher stock price and dividends, as well as additional assets.

Your next question is coming from John White of ROTH Capital.

Just responding to the comment about what I believe was referred to as a low price stock. According to my comparison tables, Evolution trades at some attractive multiples. Now, regarding my questions, Jonah is the last deal you closed on. Given your ownership position, have you encountered anything unexpected or any surprises related to operations or land?

With Jonah, the only surprise is that they are eager to take on some work, which we were very pleased with. They prepared a small piece, but we reported that. Other than that, we are very, very pleased with it.

No, I wasn't trying to pull negatives out of you, but I just wanted to ask. In your answer on the M&A question, you mentioned there have been some recently failed deals. Any more color on that as to why they failed or were they big, were they small?

No, some smaller ones, it's kind of the whole range. We were really focused on things kind of in that $25 to $50 million range, we would consider things a little bigger. But there's been several over the spring. And anytime prices move the way they do, it's been pretty volatile. It's kind of hard to hold deals together. So we've seen a couple things that might have a chance of coming back around, but nothing specifically. I also wanted to say on the Williston Basin, you asked me about any surprises on the Jonah. On the Williston Basin, the board and I were actually able to go up there last week, we had our board meeting offsite and we were able to travel to the Williston Field and met with our foundation, our partner up there. And wow, I was very, very impressed. We did a pretty thorough environmental due diligence where we take photographs of everything, but it was really great to see them in person. Just how well run an operation that is, we were pretty happy. I think the board was very pleased to get to meet with their HSE personnel and their production performance and the superintendents and whatnot. And it was an impressive operation, so that was a little bit of a surprise.

Glad to hear it, and it's good to go to the Williston in spring…

Your next question is coming from Zach Pancratz at DRZ.

Actually, the caller two ago kind of nailed all mine on the cash flow side. The only thing I would add is with regards to your dividend comments. Would you be considering a base plus maybe a variable dividend as an option here? The reason I ask is historically Evolution has been attractive for its strong balance sheet and it's higher than pure yield. And now you look at today, you got a lot of royalty companies, other non-op companies and even some of these smaller E&Ps that are getting more competitive from a yield standpoint. So just trying to understand maybe what that dividend methodology kind of looks like.

I mean, I think we have traditionally obviously had kind of paid kind of this $0.10 per quarter dividend historically, which has obviously had there been periods of stress, it's been loaded and then back up. I think going forward, the Board likes to be thoughtful and look out on a long spectrum. As Jason's kind of mentioned in the past, we look at things on five, 10-year basis. So we want to have at least a base dividend, if you will, if you are using that analogy, that we can support and pay for multi-years. We have had the discussions at the board level about a base plus variable. Personally, I'm not convinced that the market really pays or gives credit to companies for that yet on that kind of variable piece. It's hard to sort of look at that yield on an annualized basis to really buy a stock on a yield basis looking at that variable. So I'm not sure that we are there yet on the variable piece. But certainly we look at wanting to have a base dividend that we can support over a longer-term period. I don't know Jason what you…

It's all on the table. In general, we want to achieve recognition for our efforts. We aim for something sustainable, avoiding overly reactive measures and delivering consistently. This has been evident throughout our history. As for a variable dividend, I'm unsure if we gain market recognition for it, reflected in share price or market share. Most might say no, but we will find out. We are open to increasing the dividend.

It sounds like we are going to keep our eye on, I mean, you make a valid point. I mean, when we started paying a dividend in 2013 and even as recent as a year or two ago, there aren't a lot of E&P companies outside of which aren't really around anymore, the MLPs that really pay a consistent dividend. You are starting to see that because investors demand it. So it's something that we are certainly keeping our watch on.

We are just particularly focused on not getting on a treadmill that's not sustainable where we have to start making poor oil and gas decisions on buying things and supplying inventory to just try to meet an ever-increasing dividend yield, which is kind of the trap that some of the MLPs got into.

Well, it's a good problem to have, so appreciate it.

Thank you. Your next question is coming from Charles Finnie of EFW Partners.

As I consider the variety of significant decisions you currently face, such as paying down debt, distributing dividends, and even possibly buying back stock, which hasn't been mentioned yet, I wonder how you navigate these decisions and the trade-offs involved. I'm curious about what drives management—beyond salary—when it comes to motivations like share price, bonuses for mergers and acquisitions, or other incentives. Could you provide any insight on this?

Our compensation committee determines base salaries, which I believe are fairly modest compared to our peers. We also have a short-term incentive and a long-term incentive that are based on various metrics outlined in our proxy. Last year, a certain percentage of my base salary was tied to a bonus that could amount to one times my salary. About 25% of that was linked to the successful acquisition of a certain size, while another portion was related to free cash flow per share. There are additional factors that the board wants management to concentrate on throughout the year, such as analyst coverage, which can be quite challenging. The long-term incentive is calculated as a percentage of our base salary in shares, with one part vesting over three years—about a third of it—while the remaining two-thirds depend on our ranking against peers based on total shareholder return. This year, we need to achieve both a top quarter ranking within our peer group and a double-digit return over a specified time to hit our targets. Management collectively owns around 9% of the company, with our Chairman being the largest shareholder at approximately 5.5%. I personally own around 0.5%, with the rest held by the board and management. We all have shares that serve as motivation for us, reinforcing our ownership in the company.

I mean, I would say we're, as Jason mentioned, we're focused on total shareholder return. So that's a big driver. So share price, yes. But obviously, the dividend is one piece of shareholder return. So we look at both pieces as we comp ourselves to our peer group and as we try to perform for the shareholders.

Sir, there appear to be no further questions in the queue. Do you have any closing comments you'd like to finish with?

Once again, we appreciate everyone's time today, and look forward to speaking in September when we report our fiscal ‘22 fourth quarter and full-year earnings. On behalf of our full team and our board, I want to thank you and our shareholders for their continued support and our strong strategic long-term efforts. As always, please feel free to contact us with any other questions or comments. Have a good day.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.