Evolution Petroleum Corp Q1 FY2025 Earnings Call

Hello, and welcome to the Evolution Petroleum Fiscal First Quarter 2025 Earnings Conference Call. All participants will be in listen-only mode. As a reminder, this conference is being recorded. I would now like to hand the call to Brandi Hudson, the company's Investor Relations Manager. Ma'am, please go ahead.

Thank you. Welcome to Evolution Petroleum's fiscal first quarter 2025 earnings call. I'm joined today by Kelly Loyd, President and Chief Executive Officer; Mark Bunch, Chief Operating Officer; and Ryan Stash, Senior Vice President, Chief Financial Officer and Treasurer. We released our fiscal first quarter 2025 financial results after the market closed yesterday. Please refer to our earnings press release for additional information containing these results. You can access our earnings release in the Investors section of our website. Please note that any statements and information provided in today's call speak only as of today's date, November 13, 2024, and any time-sensitive information 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, assumptions and uncertainties as described in our SEC filings. Actual results may differ materially from those expected. We undertake no obligation to update any forward-looking statements. During today's call, we may discuss certain non-GAAP financial measures, including adjusted EBITDA. Reconciliations of these measures to the closest comparable GAAP measures can be found in our earnings release. Kelly will begin today's call with opening comments. Mark will provide an update on our properties and plans as they relate to our ongoing strategy of maximizing shareholder returns, and Ryan will provide a brief overview of our fiscal first quarter highlights. After our prepared remarks, the management team will be available to answer any questions. As a reminder, this conference call is being recorded. If you wish to listen to a webcast replay of today's call, it will be available on the Investors section of our website. With that, I will turn the call over to Kelly.

Thank you, Brandi, and good morning, everyone. I'm pleased to report that our team has carried the momentum established in fiscal 2024 into the first quarter of fiscal 2025. Our strong financial results this quarter underscore the effectiveness of our strategy to diversify our portfolio and mitigate exposure to commodity price volatility. As we all know, the current energy market environment presents both challenges and opportunities. Despite volatile natural gas prices, we've benefited from strong oil and natural gas liquids revenues as a result of our diversification efforts in fiscal 2024. Our strategy is to focus on assets with steady, predictable returns that allow us to thrive even amid fluctuations in commodity prices. This adaptability is key to our approach, enabling us to prioritize growth areas while managing risks, all with the aim of maximizing value for our shareholders. Now, I'd like to highlight some key operational achievements for fiscal Q1. Our total production increased by 16% year-over-year, reaching 7,478 net barrels of oil equivalent per day, driven by the positive contributions from our SCOOP/STACK acquisitions as well as wells drilled and completed, both there and at Chaveroo. This led to a 6% increase in revenue for the quarter, supported by record oil production. At SCOOP/STACK, many of the wells are performing well above our initial expectations, generating both higher returns and stronger production than our original type curves predicted. Similarly, in Chaveroo, production from the three horizontal San Andres wells is meeting our expectations. These wells are a testament to our strategic focus on efficient, high-return growth opportunities. As a result, we remain confident that liquids production will be strong in fiscal year 2025, enhancing our cash flow for years to come and building on our multiyear track record of executing strategic investments for the benefit of our shareholders. At Delhi, we are proceeding as planned with ExxonMobil on the development of Test Site V with the first of three initial wells on track to be drilled by calendar year-end. Operations are on schedule with CO2 purchases having been resumed last month which we expect will yield a positive impact on oil production and revenue, partially offset by the CO2 purchase cost. These initiatives will continue to strengthen and further diversify our organic growth portfolio. One of Evolution Petroleum's proudest achievements is our long-standing commitment to returning value to shareholders through a consistent dividend program. This quarter marks our 44th consecutive dividend payment. And as you would have seen in our press release, we announced our 45th consecutive dividend payment to be made on 12/31 for $0.12 per share. This is a testament to our dedication to delivering stable returns through varying market conditions. Supported by a diversified portfolio of low-decline, high-quality assets that require minimal CapEx and generate steady cash flows, our dividend strategy remains a cornerstone of our approach to shareholder return. Additions like SCOOP/STACK and Chaveroo further enhance our capacity to sustain and grow these returns, reinforcing our confidence in the strength of our dividend program. Looking ahead, we remain focused on creating long-term value for shareholders by maximizing total returns through disciplined capital management and strategic deployment. For our current asset base, we remain steadfast in our straightforward approach, expanding in high-return regions, maintaining strict cost controls and ensuring that every decision supports our dividend program. We are well-positioned with our balanced portfolio of oil and natural gas assets to continue to thrive under a variety of market conditions. We will also continue to evaluate accretive M&A opportunities and invest in our existing assets to drive further organic growth. Our track record shows that we can execute effectively on both fronts, and we continue to pursue what's best for our shareholders. With that, I'll turn the call over to our COO, Mark Bunch, to review our operations in more detail.

Thank you, Kelly, and good morning, everyone. I will focus my remarks on key operational highlights from the quarter and encourage listeners to review our earnings press release and filings for additional details across our asset base. During fiscal Q1 2025, the company's operators brought seven wells online in SCOOP/STACK with three additional gross wells coming online after the quarter ended. Additionally, Evolution has agreed to participate in five gross horizontal wells across the acreage. Since the effective date of the acquisitions, 32 gross wells have been brought online. In the Chaveroo oilfield, Evolution plans to participate for its full 50% working interest in four horizontal wells in Drilling Block 2 for fiscal 2025. These operations are expected to begin early fiscal Q3 2025. The company has preliminarily agreed to six additional horizontal wells in Drilling Block 3 that are expected to begin in early fiscal 2026. At Delhi, production was up quarter-over-quarter due to the replacement of one of the CO2 recycle compressors that limited the CO2 injection in fiscal Q4 2024. Production was also affected by the CO2 purchase pipeline being down for preventive maintenance for about eight months from the end of February 2024 through October 2024. We're happy to announce that the CO2 purchases resumed in October. In the Williston Basin, fiscal Q1 production was impacted by a few high-volume wells going down. Production for these wells were quickly restored during Q1. After the successful electrification project in the prior quarter, we participated in another electrification project that will further improve our lifting costs going forward. Production operations are on track quarter-over-quarter at Jonah and Hamilton Dome fields. With that, I will turn the call over to our CFO, Ryan Stash, to review our financials in more detail.

Thanks, Mark, and good morning, everyone. As Brandi mentioned earlier, we released our earnings yesterday, which contains more information on our results. Now, I'd like to go through our fiscal first quarter financial highlights. In fiscal Q1, we had total revenues of $21.9 million, up 6% year-over-year. The increase in revenues was primarily due to an increase in production volumes as a result of the SCOOP/STACK acquisition and new drills there as well as production from the first three Chaveroo wells drilled, partially offset by the decrease in our average realized price per BOE. Net income for the first quarter increased 40% to $2.1 million compared to the prior year period, and adjusted EBITDA increased 21% to $8.1 million primarily due to increased revenue and reduced operating costs from the year-ago period. Cash flow from operations also increased materially to $7.6 million for the quarter compared to $4.3 million in the prior year period. As Kelly mentioned, our financial results highlight the strength and adaptability of our diverse asset base. In calendar 2024, we faced the lowest natural gas pricing environment since the COVID-19 pandemic. However, we continue to generate another quarter of positive cash flow while maintaining our multiyear quarterly dividend. In fiscal Q1, we continued to add hedges to meet the terms of our credit facility, which benefited GAAP net income and EPS for the quarter. Our ongoing goal for the hedging program is to reduce downside commodity price risk while preserving the maximum potential upside. Accordingly, we will continue to monitor the market, and if presented with strategic opportunities, we may add additional hedges. We ended the quarter with $6.9 million in cash on hand and borrowings of $39.5 million outstanding under our revolving credit facility, which was used to fund the acquisitions of our SCOOP/STACK assets, and total liquidity of $17.4 million, including cash and cash equivalents. In fiscal Q1, Evolution paid $4 million in common stock dividends and $2.7 million in capital expenditures, primarily related to the development in the SCOOP/STACK and Chaveroo fields. With respect to shareholder return, on November 11, 2024, the Board of Directors declared a quarterly cash dividend of $0.12 per share of common stock to shareholders of record on December 13, 2024, and payable on December 31, 2024. This will mark the 45th consecutive quarterly cash dividend and the tenth consecutive dividend at the current price level. To date, Evolution has returned approximately $122.5 million or $3.69 per share back to shareholders in common stock dividends. I'll now hand it back over to Kelly for closing comments.

Thanks, Ryan. To sum it up, fiscal Q1 was a strong start to the year, marked by our commitment to strategic growth and disciplined portfolio management. While we continue to navigate a dynamic market environment, particularly in natural gas pricing, our diversified asset base has allowed us to drive consistent production and revenue growth. Our recent investments in high-quality, low-decline assets are proving valuable, positioning us well for sustainable results in the quarters ahead. I also want to take a moment to thank the entire Evolution Petroleum team for all their hard work and dedication this quarter as well as our shareholders for their continued support and trust. Your commitment is crucial to our success and we remain focused on delivering the value you deserve. With that, I'll turn it over to the operator to begin the Q&A session. Thank you.

Thank you very much. Today's first question comes from Bobby Brooks with Northland Capital Markets. Please go ahead.

Hey, good morning guys. Thank you for taking my question. So, the seven gross SCOOP/STACK wells brought online in the quarter, you mentioned how those exceeded expectations and the plan is to bring on an additional 13 gross wells through fiscal '25 with three having already gone online since the quarter-end. So, I was just curious on, one, are your expectations now higher for the next batch of wells given the results? And two, could you maybe discuss the cadence you expect in bringing on these last 10 wells online?

Yeah. So, the wells that we drilled came in about what our type curve projected. And so, we expect the same results drilling-wise from the new round of wells. We'll drill here starting sometime in January, the first four wells.

He's talking about SCOOP/STACK.

Are you referring to a different question?

Yeah. SCOOP/STACK.

I'm sorry.

So Bobby, to answer your question, on the wells we have information on, which is 10 wells so far, we have more than three months of data, on average, they have come in approximately 65% above our acquisition type curve. So, we're very pleased with that. In the SCOOP/STACK, the 13 number was company-wide. So, SCOOP/STACK, what we know of today, and look, we expect more to come in. We just don't have them all today. We have the three wells already drilled, and we have five more that we've already been notified about. And those are going to occur timing-wise. Well, again, the three are done, right? But the next five sort of spread out throughout the fiscal year.

Yes.

Like I said, we do expect to pick up more. We just typically do, but that's all we've been notified of so far. The other ones that make up the 13 would be the one well in Delhi and the four wells in Chaveroo.

Thank you for that clarity. Please go ahead.

No, go ahead. Thanks, Bobby.

Sure, could you provide any insights or thoughts on why you are performing over 65% better than the acquisition type curve? This is quite impressive. I assume some of this might be attributed to conservative underwriting, but are there any specific techniques or methods being used to drill these wells and bring them online that are contributing to this exceptional production? Is there anything in particular driving this strong performance compared to your acquisition type curve?

No, I don't think there's any significant difference in their performance. The challenge with type curves in SCOOP/STACK is that the geology tends to change more frequently compared to the Delaware. This makes developing type curves a bit more challenging. We did attempt to create reasonable type curve assessments during the acquisition and were careful not to be overly aggressive with those estimates.

But for instance, Gulfport advertises 2 Bcf per 1,000 lateral foot, right? And that was kind of when we're evaluating this we hope that they got there, but it looks like some of their wells are getting there. They've been successful. So, yeah, we were a little conservative as we all want to be.

In fact, the Gulfport wells do not have a lot of available data yet, but the little data we do have suggests that they may perform better than we initially expected. However, the challenge is that we do not have much information about where the Gulfport wells are located.

Got it.

Those are in that number.

That's correct.

Got it. As a follow-up, you mentioned in the press release and prepared remarks that you would participate in five and another five gross new horizontal wells on that SCOOP/STACK acreage. I want to clarify that these are included in the 13 gross well number that you expect to come online, right?

Yeah, that's correct, Bobby.

I was curious about what we should expect for the production uplift on those 50% working interest wells in Chaveroo. Could you also provide some insight into the CapEx expectations for that project?

The CapEx expectations for the drilling are about $3.5 million, with four wells expected to yield roughly 220 barrels per day gross per well.

Oil.

A very little gas or NGLs.

Yeah. And then, so net to use about 110 barrels a day of oil?

Yeah, that would be net to our working interest and the nets are usually about 80% out there.

Got it. And just one last question for me. Your LOE cost was significantly higher than my model predicted. Is this mainly due to the CO2 pipeline shutdown?

Yeah.

Is there any operational efficiency gained that has contributed to driving that down, or is it mostly related to the CO2?

Not that substantial. The big change would have been on the CO2 purchases, which is the reason for a significant miss.

Yes. I would just like to add that as production increases from SCOOP/STACK and Chaveroo, these areas will contribute more significantly to our company. They typically have lower lifting costs. For example, Delhi and Hamilton Dome, being secondary or tertiary, usually have lifting costs in the high $30s per barrel, while the shale wells are much lower, around $10 to $15 per barrel. Over time, this could potentially reduce our lifting costs.

Got it. That makes sense. I'll return back to the queue, and congrats on the solid quarter. Thanks, guys.

Thank you.

Thank you. The next question comes from John White with ROTH Capital. Please go ahead.

Hey, congratulations on a solid quarter. Nice going, guys.

Thanks, John.

Thanks, John.

I know you don't give official guidance, but can you give us a ballpark figure on what CapEx might look like for the remainder of the fiscal year?

We are still guiding for a range of $12 million to $14.5 million for the full fiscal year, and we believe that’s a solid estimate. I don’t have the exact numbers handy, but the rest of the year should bring us to about that $12 million to $14 million total CapEx for the year.

Okay. I appreciate that reiteration, and I'll pass it back to the operator.

Thank you. The next question comes from Jeff Grampp with Alliance Global Partners. Please go ahead.

Good morning, guys. Thanks for the time.

Good morning, Jeff.

I was curious to dig into the kind of cadence or expectations, if you will, with respect to Delhi and resuming those CO2 purchases. I know in the past, there's been some pauses or operational curtailments that have curtailed CO2 injections in the past. So, wondering just kind of looking back empirically, once you accelerate injections, what's kind of the typical timeline for the field to make a production response? Does that take a quarter or two? Or what should we kind of think about the Delhi production trajectory looking like?

In the past, when we've experienced this, production has typically been affected fairly quickly, often within about a month as injection rates begin to return. We have already noticed an increase in production due to the recycling efforts being resumed, so this will add to that upward trend. We anticipate that our rates will increase, but the overall outcome will be a more gradual decline.

Got it. That's helpful. Thanks.

There were really two issues that affected CO2 during the timeframe we're discussing. The compressor was down.

The recycle was down for a while, which significantly impacted the reinjection volume, leading to reduced volumes. Additionally, the Delta line was down for eight months, so we did not purchase CO2.

Yeah. So, at the end of July, the recycle came back. And so, we saw a fairly immediate response there. And then, now, with the Delta line, the purchase line being back on, we do expect to see a positive production response over time with that.

Great. So, would you say it's not particularly aggressive to expect the next fiscal quarter to see some of that manifest, at least a portion of that?

I think you should start to see some of it in this fiscal quarter.

Great. Perfect. And then, for my follow-up, just kind of a general M&A question for you guys. It would be great to get kind of the latest and greatest there in terms of what you guys are seeing, both in terms of deal flow as well as prospective seller appetite with respect to bid-ask spreads. Thanks.

Sure. I actually think right now we're seeing a lot of potential deals coming up. We've spoken to people who seem open to discussions. I believe it's a good time to be exploring options. We're excited. While I won't claim we have anything finalized, we're evaluating many opportunities as we always do. It's business as usual for us. I find it an exciting time to be looking for acquisitions.

Yeah. I mean I would say, Jeff, we have seen what you would expect typically sellers try to get out ahead of year-end. So, there have been some processes launched and still some ones going on. So, I think that activity has been encouraging. And our discussions with brokers, it does seem like folks are looking to get assets out in the market. I mean, obviously, you've seen a lot of transactions occur. We saw a big one announced, right, from Coterra and you have seen Exxon and Hilcorp. So, I mean I think there's still going to be a lot of that selling down of the large mergers that's going to come out over some time.

Great. We'll look forward to it. Thank you, guys. Go ahead.

Thanks, Jeff. As always, we will ensure that any deal we pursue is highly beneficial before we proceed. As you can see from our acquisition trends on SCOOP/STACK, we tend to take a conservative approach, but we are actively looking as we always do.

Yeah, absolutely. All right. Best of luck. Thank you, guys.

Thank you.

Thank you. The next question is from Jeff Robertson with Water Tower Research. Please go ahead.

Good morning. Thank you. Mark, regarding the upcoming horizontal wells at Chaveroo, will you approach the drilling and completion differently based on your experience with the initial wells?

Yeah. We're going to be drilling with produced water this time because it will save substantially on the cost for drilling fluid, especially if we have an issue where we have fluid loss. And that's probably the main change that we're doing. And that just kind of helps us control our cost to the upside if we have issues.

And in the SCOOP/STACK, I know Oklahoma generally is a pretty fragmented area, do you all have opportunities to add incremental working interest in wells that are proposed, or is that mainly controlled by the operator?

We frequently receive offers to acquire additional acreage in units scheduled for drilling. Additionally, we are regularly approached by individuals wanting to buy small interests in wells that we own or where we have working interests with operators. This reflects the active nature of the marketplace.

And lastly, on the field, if my spreadsheet is right, production in the Barnett went up a little bit in the quarter after having declined for a while. And costs, I think, in the Barnett on a unit basis went down. Was there anything different going on in the Barnett Shale during the quarter than what you've experienced in prior quarters?

No. Mainly, the improvement was due to better run times. Additionally, the operator has been very proactive in reducing costs since product prices are currently low in the Barnett. They are focusing on maintaining efficiency. I believe one of the significant factors is that EnLink has addressed many of their issues, which has notably enhanced our run times as they serve as the gatherer for the Barnett system.

Lastly, Ryan, when considering the commodity weighting for the remainder of this fiscal year, with production increasing in SCOOP/STACK and the upcoming completion of new wells in the Delaware Basin, will the oil mix change significantly from what you observed in the first quarter of 2025, or will those two areas balance each other out, keeping the commodity mix similar to what it was in the first quarter?

I mean I think over time, you're going to see a little bit. So, whereas we're maybe around 54% gas right now, we might see that go down a little bit and oil go up, but we're talking like 1% or 2% change here over time. And until you start getting more and more of the Chaveroo wells online, we're not going to see a meaningful change to that, right? And keep in mind on the SCOOP/STACK, we've seen obviously some more oil-weighted areas being drilled here given the commodity prices, but if gas continues to move and if we can see prices over $3 this winter and even higher, I wouldn't be surprised to see some more gas wells come online, right, which could affect it.

Okay. Thank you.

Exactly. Overall, SCOOP/STACK honestly was just about reflective of our entire company portfolio about 54%, 55% gas, 30% oil, the rest NGLs.

Okay. Thank you.

Thank you, Jeff.

Thank you. This concludes our question-and-answer session. I would now like to turn the call back over to Mr. Loyd for closing remarks.

We just want to thank everybody for taking the time, and we really do appreciate your continued support and a happy belated Veterans Day to all of our veterans out there on Monday. So, thanks, again, everybody.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.