Evolution Petroleum Corp Q4 FY2025 Earnings Call

Good morning, and welcome to the Evolution Petroleum Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. Please note that today's event is being recorded. I would now like to turn the conference over to Brandi Hudson, Investor Relations Manager. Please go ahead.

Thank you. Welcome to Evolution Petroleum's Fiscal Q4 2025 Earnings Call. I'm joined 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 fourth quarter and full year 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, September 17, 2025, 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 and adjusted net income. 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 financial 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. We demonstrated another solid quarter of execution in fiscal Q4. Evolution reported a material improvement in net income of $3.4 million and adjusted EBITDA of $8.6 million, underpinned by a balanced commodity mix and prudent cost controls. Average production was 7,198 BOE per day, and our revenue mix was 61% oil with natural gas and NGLs providing a meaningful offset in a volatile oil backdrop. We also declared a $0.12 per share dividend for fiscal Q1 '26, extending our record of dependable cash returns for shareholders. We have now consistently issued a dividend every quarter since 2013. We continued to upgrade the portfolio in ways that improve durability and capital efficiency. During the fiscal fourth quarter, we closed our highly accretive $9 million TexMex acquisition, which included non-operated oil and natural gas assets across New Mexico, Texas and Louisiana. This acquisition adds roughly 440 net BOE per day of stable, low decline production with a roughly 60-40 mix of oil and natural gas with relatively low-cost behind pipe upside potential. Subsequent to quarter end, we closed the largest minerals-only acquisition in company history in the SCOOP/STACK. Approximately 5,500 net royalty acres with roughly 420 net BOE per day at the effective date with years of upside drilling that comes with no net cost to evolution. Minerals cash flows are very high margin as they come without lifting costs, which pairs beautifully with our existing position in the basin. These acquisitions are a great example of the kind of low decline, high return exposure that we seek, scalable, capital-light, and immediately cash generative. They also represent a clear demonstration of our ability to effectively adapt to market environments and deploy capital in the most effective manner. When oil prices are low, it presents compelling M&A opportunities rather than drilling opportunities and vice versa. In the market environment and what's going on there, commodity prices remained choppy through the quarter. Our model, which is grounded in diversified commodity exposure and tight cost discipline, did what it is designed to do. It smoothed out cash flows and supported returns which is further reflected by our improved profitability despite essentially flat revenue and production. For oil, we see the demand picture as kind of steady as she goes. Over the last 10 years, on average, demand has grown a little over 1% per year, and we expect this trend to continue. OPEC+ is continuing to add back supply. This has recently put the global speculative trading community on defense to the point where net positioning has reached some of the shortest net positioning observed in the past decade. On the other end of the spectrum, there's very little geopolitical risk priced into the forward curves, although potential disruptive hotspots are popping up all over from Russia to the Middle East, down to Southeast Asia and to South America. Additionally, we all know that the best cure for low oil prices is low oil prices, but it doesn't happen overnight. If prices stay in the 60s, we fully expect there to be a negative production response, and we're already seeing many examples of CapEx budgets here in the U.S. being reduced. If the demand picture holds, it's reasonable to assume that if more U.S. barrels are needed, we will see higher near-term prices as flowing barrels are more sought after, as well as higher long-dated prices to incentivize increased CapEx from the North American E&P community. We're certainly not calling for it, but we could see a sharp snapback just like we did the last time WTI averaged in the 60s at $68 a barrel in 2021 and 2022's average WTI price increased to roughly $95 a barrel. For natural gas, we see the setup for a very strong forward demand curve. Current and planned incremental LNG exports as well as increased industrial demand tied to natural gas' portion of incremental power generation are the main drivers behind this. What is driving the expected increase in power usage? Well, that's in large part related to new data centers, AI implementation, and cryptocoin mining. In most years, since the beginning of the shale era, producers have needed forward Henry Hub prices of greater than $3.50 to grow production sufficiently enough to meet these levels of forward demand expectations. However, we must always remember that weather is a huge player for natural gas prices and can cause sharp near-term swings. The weak weather scenario that requires a curtailment of supply has a far lesser financial impact on evolution than the positive financial benefit that we would receive from the opposite weather scenario, one where it's so cold that there's much more demand than supply. Overall, our portfolio of low decline producing assets with additional upside potential from new drilling locations to behind pipe prospects is primed to both ride out any weakness and flourish when there's strength. Regardless of the market environment, our capital allocation framework is unchanged: prioritize durable free cash flow, return cash through a reliable dividend, and pursue accretive low-decline opportunities, both organic and inorganic. These will improve our per share value over time. The $0.12 per share dividend we recently declared for fiscal first quarter '26 reflects that discipline and our confidence in the portfolio and future cash flows. We also took a significant step to enhance flexibility with an amended and restatement of our senior secured reserve-based credit facility. The intent is straightforward: maintain conservative leverage and position our balance sheet with ample dry powder to capitalize on accretive opportunities for shareholders, be it organic or inorganic. With that, I'll hand it over to Mark for more details on the assets.

Thanks, 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. Starting with SCOOP/STACK on our working interest position, activity slowed towards the end of the quarter with several wells in progress, and contributions from late quarter activity are now beginning to show in the fiscal first quarter of 2026. For the minerals package that closed after the quarter ended, we expect a gradual increase aligned with operator schedules, with most of the initial royalty cash flow starting in fiscal 1Q '26 and gradually increasing thereafter. As Kelly mentioned earlier, mineral interests provide royalty cash flows without the usual working interest expenses and complement our existing footprint. In Chaveroo, we turned in line four gross wells on time and under budget, and early results are exceeding expectations. We are progressing with permits for the next phase and will adjust activity based on commodity prices to ensure appropriate returns and cash flow consistency. In Delhi, operations faced downtime due to facility safety upgrades. Seasonal factors from high ambient temperatures also limited CO2 injection, but the operator continues to inject only recycled CO2, which is economically advantageous for this field. In Jonah, operations remained stable, though reported sales volumes were lower due to pipeline balancing. We expect to see compensating volumes in the first quarter of fiscal 2026. Overall, our priorities across the portfolio remain unchanged: safety, cost control, and capital efficiency. We will continue to allocate capital where it performs best on a risk-adjusted per share basis.

Thanks, Mark, and good morning, everyone. As Brandi mentioned earlier, we released our earnings yesterday, which contains more information on our results. For today, I'd like to walk through our financial highlights. In fiscal Q4 2025, we had total revenues of $21.1 million, essentially flat year-over-year. This reflected flat production at 7,198 BOE per day and overall pricing that was roughly unchanged on an aggregate basis given our diversified commodity mix. Realized natural gas prices increased 66% year-over-year. However, oil prices declined 20% year-over-year and NGL prices declined 12% year-over-year. Operationally, temporary downtime at Delhi and pipeline balancing at Jonah weighed on reported sales volumes, while our four new Chaveroo wells turned in line and production from our TexMex acquisition helped to offset the downtime. Quarterly net income improved materially, both sequentially and year-over-year to $3.4 million or $0.10 per diluted share. Adjusted EBITDA for the quarter was $8.6 million, up 7% year-over-year and 16% sequentially, driven by portfolio mix and cost discipline as well as positive impacts from our hedge portfolio. On a per unit basis, LOE was $17.35 per barrel and G&A, excluding stock-based compensation, was $2.99 per barrel. Cash provided by operating activities was $10.5 million for the quarter, and capital expenditures were $4.7 million. Our hedging program remains a core pillar of risk management. We maintain a balanced portfolio with our ultimate goal to protect downside while retaining prudent upside. We evaluate markets regularly and will layer in hedges when required by our credit facility covenants or when economics support our objectives, which are supporting our dividend program, locking in returns for capital plans and preserving balance sheet flexibility. We align hedge levels with expected volumes and the pace of development, consistent with our focus on maintaining free cash flow through commodity cycles. At June 30, 2025, we had cash and cash equivalents totaling $2.5 million, borrowings of $37.5 million and total liquidity of approximately $30 million. As Kelly mentioned earlier, on June 30, we amended and restated our senior secured reserve-based credit facility, adding a second lender and establishing a $65 million borrowing base under a $200 million revolving credit facility that matures on June 30, 2028. Subsequent to year-end, we funded our acquisition of mineral and royalty interests in the SCOOP/STACK with $15 million in borrowings under our revolver and cash on hand. We returned $4.1 million through common dividends in the quarter and $16.3 million in fiscal 2025. On September 11, 2025, the Board declared a $0.12 per share dividend for fiscal 1Q '26 payable September 30, 2025, to holders of record September 22, 2025, marking the company's 48th consecutive quarterly dividend and 13th consecutive at the current level. Cumulatively, Evolution has returned approximately $134.8 million or $4.05 per share in common stock dividends, reinforcing our priority of steady capital returns and a dividend program built to remain dependable through cycles. Now I'll hand it back over to Kelly for closing comments.

Thanks, Ryan. To close, our team executed very well in both Q4 and fiscal 2025, especially when considering the volatile oil market we've been navigating this calendar year. We are very excited as we enter fiscal '26. We are well positioned to accelerate growth and advance the company's strategy with multiple tailwinds in place, including our recent acquisitions of TexMex and SCOOP/STACK minerals along with multiple organic opportunities across our asset base. At Chaveroo and across the portfolio, we will pace development to market conditions and stay focused on our core objectives, creating durable free cash flow, a reliable dividend, and disciplined accretive opportunities that compound per share value over time. With that, I'll turn it over to the operator to begin the Q&A session. Thank you very much.

And your first question comes from Poe Fratt with Alliance Global Partners.

I have a couple of questions, if I may. The first of which is, can you just give me an idea of sort of where your run rates are right now for like the SCOOP/STACK and also Barnett and even Chaveroo, if you wouldn't mind?

Sure. You're talking about on a production basis?

Yes. BOE, whatever the measure you want to use.

The SCOOP/STACK production is consistent with where we were during the quarter. In Chaveroo, we're seeing the wells come online, but they are expected to decline significantly, about 50% on average in the first year. I apologize for not providing specific intra-quarter run rates, but I’m intentionally being vague about that. Overall, the declines are in line with what we've been discussing for the quarter.

Okay. Maybe on Chaveroo, when did you hit full production there? When did all four wells hit full production?

Like in the first two weeks of May.

Okay. Great. And then can you talk about CapEx looking into fiscal '26?

Yes. Currently, our budget for fiscal year '26 is estimated to be around $4 million to $6 million. This primarily covers SCOOP/STACK CapEx, along with typical maintenance CapEx in our other areas. At this time, we are not planning any CapEx for Chaveroo, as it depends on our partner and the outlook for oil prices.

Yes, I’d like to mention that we are continuing to process permits for the wells and get them ready for drilling. However, we haven't made a decision on whether to proceed with drilling at this time. The decision will be influenced by commodity prices then. Our partner shares a similar perspective. We will likely make this decision closer to calendar year '26.

Yes, I'll just follow up. Look, we consider these to be really valuable locations. And obviously, when you're drilling new wells, they come on flush production. And again, we'll make that decision later on, but we're doing everything we need to, so we can dynamically change in response to prices. But we'd rather not go full board drilling when prices are in the low 60s. So, we'd rather save that for when prices are better and take advantage of that.

Understood. And just one last one, if you wouldn't mind, on the cost side. Can you just talk about where you might see LOE on SCOOP/STACK go? And also with the Barnett, you had the audit benefit for the fiscal fourth quarter on that asset? And can you just talk about a run rate for LOE for the Barnett looking at fiscal '26?

For the first question regarding SCOOP/STACK LOE, we see it as a single asset and plan to evaluate it collectively. We are still analyzing the impact as cash flows are received, but there will certainly be a significant improvement with the Minerals acquisition. Mark, would you like to add anything?

Yes. I'd say on SCOOP/STACK, like it's where it runs right. We don't expect on a BOE per basis for it to increase substantially. So I mean, we should stay right where it is. It's a good asset. It's very, very profitable for us.

But again, when you combine it with the minerals, it will be...

Even better. I'm referring specifically to the operating side, which has performed exceptionally well in terms of cost per BOE.

Yes, I'm guessing you see at least a 10% decline in your per BOE/LOE on SCOOP/STACK in the fiscal first quarter or maybe for the full year?

We will refine that as we integrate more of these cash flows as they come in. But for a starting point, I think that's a pretty good idea.

Yes. Regarding the Barnett, to answer your question, in our last quarter's press release, it was about $18.50 a barrel all-in for the Barnett. We expect some costs to decrease a bit moving forward. We believe there will be benefits from the audit due to changes in processes, and we also renegotiated gathering contracts with the operator that should provide some benefits. I would say we are seeing current levels slightly lower than that, so we hope to perform better than the March 31 number mentioned in the press release.

Your next question comes from Chris Degner with Water Tower Research.

I just wanted to ask a bit more about the recent SCOOP/STACK acquisition that was mostly mineral acreage. And curious if that's a shift in strategy or was more focused on that specific opportunity and how you think about acquisitions with working interest versus minerals?

Yes, thank you for the question. This acquisition was truly opportunistic. We evaluate many deals each year, primarily focusing on how they will enhance our cash flow per share, which impacts our ability to fund our dividend both in the short and long term. This particular deal aligns perfectly with our criteria. We acquired it at what I believe is a very reasonable price based on proven developed producing (PDP) reserves alone, which constitute more than 80% of the value we assessed. Among the 5,605 net royalty acres, there are numerous promising drilling locations that we won't have to pay for. We're very pleased with this deal, especially since we have a strong understanding of the basin and the performance of those locations. Moving forward, we will continue to pursue similar strategies, prioritizing any acquisitions—whether working interest or minerals—that significantly enhance our cash flow per share.

This concludes our question-and-answer session. I would like to turn the conference back over to Kelly Loyd for any closing remarks.

Thank you very much. And we want to thank everyone for taking the time to be here and to listen to us. As you know, you can follow up with our IR department with Brandi Hudson if you want to arrange for any more questions. Like I said, just really proud of the team and all the great work they've done putting this portfolio together that is truly primed to do really, really well when we get some favorable tailwinds on pricing and ride out all the storms. So, thank you very much for your time.

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