Earnings Call Transcript - EPM Q3 2024

Operator, Operator

Good morning, everyone, and welcome to the Evolution Petroleum Third Quarter Fiscal Year 2024 Earnings Release Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. At this time, I'd like to turn the floor over to Brandi Hudson, Investor Relations Manager. Ma'am, please go ahead.

Brandi Hudson, Investor Relations Manager

Thank you. Welcome to Evolution Petroleum's fiscal Q3 2024 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 2024 third quarter 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, May 8, 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 the 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 statement. 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 some 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 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.

Kelly Loyd, CEO

Thanks, Brandi. During our last quarterly call, we told you that we were working to increase our scale and economic efficiency. We told you that expanding regionally and further diversifying our production base are important goals for us. Most importantly, we also told you that the point of all this is to increase our cash flow and, therefore, either extend our dividend framework, allow us to increase our dividend, or do both. With our current asset base and the additions of our recent SCOOP/STACK acquisitions and participation in the operations at Chaveroo, we've come a long way towards achieving what we set out to accomplish. And we have done so while keeping our balance sheet in our comfort zone and adding no incremental dilution. In fact, we repurchased shares during the quarter. We added to our producing asset base and our portfolio of drilling locations. We entered into two prolific areas, the Permian Basin and the Anadarko Basin. We increased our oil production as a percentage of sales. In fact, this quarter represented a record amount of oil production net to the company. And by the end of the quarter, we had participated in 35 newly drilled wells or wells in progress, 32 in the SCOOP/STACK and three in Chaveroo, which represent some of the most economic returns the company has seen to date. Evolution today versus Evolution a year ago looks very promising. Our oil production for the fiscal third quarter this year versus last year is up by approximately 19%. Our NGL production is the same, and our natural gas production is down by roughly 4%. These numbers only include about half of the quarter for the SCOOP/STACK acquisitions as the transaction closed on 2/12, and less than two-thirds of the quarter for the new Chaveroo wells as all three wells were only finished being placed on production in early February and ramped up in production as frac fluid was recovered. Today, we have a much deeper and higher-quality inventory of drilling locations versus a year ago, with economics that are very compelling. We believe that with our current inventory of assets, we have the firepower to fund our dividend for many years to come with the potential for growth, particularly as natural gas prices recover as expected. And we certainly don't intend to rest now. We're always on the lookout for the next highly accretive transaction that will benefit our shareholders. From October of 2019 through February of 2024, Evolution has participated in six major transactions, putting over $119 million to work for our shareholders. During that time, we've paid down over $41 million of borrowings, while our share count has remained virtually unchanged. Since we began paying dividends 10 years ago, we have returned over $3.45 per share to shareholders in cash and another $0.26 per share in share repurchases. These six major transactions have added substantial volumes of proved oil, natural gas and NGLs, all of which gain us exposure into different largely uncorrelated markets both by product and location, many of which have recently experienced outsized favorable pricing versus other sales points. These six major transactions also provide Evolution with hundreds of undrilled upside locations operated by proven and experienced teams. We can either choose to participate, non-consent or even sell many of these undeveloped locations, depending on which will bring the most value to our shareholders at the time. Throughout the years and across many diverse transactions, our goal remains the same as it has been since 2013, the year we paid our first of 42, and counting, consecutive dividends. That goal is to maximize total shareholder returns by carefully evaluating every dollar we use to drive dividend payments, share repurchases, and replenishing and/or growing our cash flow producing asset base, all while avoiding significant dilution or over-leveraging our balance sheet. I'll hand it over to Mark now, who will give you an update from an operational standpoint on some of our recent actions supporting our strategy.

Mark Bunch, CFO

Thanks, Kelly. I will focus on some of our notable items since our listeners can refer to our press release and 10-Q filings for additional details. Our latest acquisition, SCOOP/STACK, is a very exciting addition to the company's portfolio. We closed on this acquisition on February 12. On a pro forma basis for the third quarter, the net production rate was approximately 1,550 BOE per day, which was essentially flat with the production rate at the effective date of the acquisition on November 1, 2023. Also, on the effective date of the acquisition, we acquired over 300 gross drilling locations, 21 of which were DUCs. At the close of the third quarter, 19 of the 21 DUCs have been placed on production, and we have agreed to participate in an additional 15 gross or 0.2 net new horizontal wells across the acreage, of which 13 are currently in progress. Based on limited information, the completed wells have so far, on average, exceeded expectations. Based on current performance, we are confident that SCOOP/STACK will be a real value add for the long term. At Chaveroo, we brought our first three wells on production around February 1. All three wells' gross production peaked at between 300 and 375 BOE per day, which is significantly better than our pre-drill estimates. On a pro forma basis for the third quarter, Chaveroo has produced approximately 290 BOE per day net to our interest. In conjunction with the operator, we are planning to drill the next four wells beginning in September 2024, followed by another six wells beginning in April 2025. We're very pleased with the results of our drilling program at Chaveroo and believe it will continue to support the dividend through a continual drilling program over the next decade. Again, we would like to highlight that the addition of Chaveroo and SCOOP/STACK are perfect fits for our evolving strategy of both adding a long-life production during commodity price downswings and adding undeveloped locations by making acquisitions through the drill bit. We view this as crucial to enhancing our ability to maintain or increase production at an attractive rate of return for years to come. As for our legacy properties, we have had a successful third quarter. Jonah Field still receives a premium over Henry Hub pricing since we sell into the West Coast market and continues to perform as expected at its historical decline rate. The Williston asset production increased slightly due to the ONEOK Grassland System downtime in the prior quarter, even though we did experience some downtime due to a winter storm in January. The Barnett Shale asset experienced some downtime due to a winter storm in January as well. Subsequently, operations were resumed with production back on its historical decline rate. Hamilton Dome continued to perform very well, even though it experienced more downtime due to well workovers than usual at the beginning of the quarter. Net production was only slightly down from the previous quarter. At Delhi, production was affected during the quarter by winter storms that impacted oil production and repeated downtime from rental turbine failures impacting NGL production, both of which resolved by the end of the quarter. The CO2 purchase pipeline was taken offline for preventative maintenance at the end of February and the operator anticipates resuming CO2 purchases in June 2024. This will reduce Delhi Field LOE during this time period. The field continues to inject recycled CO2, which is the bulk of the normal CO2 injection, and we do not anticipate a significant production impact from the temporarily decreased CO2 injection volumes. The operators also indicated that Delhi is expected to be certified as a carbon capture utilization and storage site designated for enhanced oil recovery by this summer. All in all, fiscal quarter's rate production increased 14% from the prior quarter to 7,209 net BOE per day, with oil increasing 27% and natural gas and NGLs each increasing approximately 10%, with drilling results and the contribution of the acquisitions more than offsetting normal declines, maintenance and weather-related downtime. I'll turn it over to Ryan to discuss the highlights of the quarter.

Ryan Stash, CFO

Thanks, Mark. As Brandi mentioned earlier, we released our earnings yesterday, which contains more information on our results. My comments will focus mainly on the highlights of the current quarter. This quarter, we had total revenues of $23 million, adjusted net income of $1 million, and adjusted EBITDA of $8.5 million. Our financial results demonstrated the positive impact of our SCOOP/STACK acquisitions and Chaveroo drilling program as revenue and EBITDA were higher than last quarter despite receiving lower realized prices due to the continued weakness in natural gas. On the development side, we spent $2.6 million in CapEx, primarily related to the drilling and completion of the three initial wells at Chaveroo. We ended the quarter with $3.1 million in cash on hand and borrowings of $42.5 million on our credit facility. Our cash balance and borrowings do not yet include the impact of net cash we expect to receive for the final purchase price adjustment on the SCOOP/STACK acquisitions. As of March 31, we recorded an interim settlement receivable of $3.3 million and expect additional cash upon the final settlement set to occur during the fourth fiscal quarter. We continue to expect to remain at or below our leverage target of 1x pro forma EBITDA. We entered into oil and gas hedges during the quarter and after the quarter in order to comply with the terms of our credit facility. We also amended our credit facility to give us more flexibility regarding the mix of individual commodities we are required to hedge. We now have the option to hedge 40% of oil production or 25% of oil and gas production for each individual month. Given the extremely low prices of natural gas throughout calendar year 2024, we are currently only hedging oil production for that period. We also hedged natural gas beyond the required 12-month period to capitalize on the high prices available in calendar year 2025 and beyond. Our goal for our hedging program will continue to be to reduce downside commodity price risk while maintaining the maximum amount of upside available. As such, we will continue to monitor the market and may add additional opportunistic hedges. On the shareholder return front, we paid a $0.12 dividend in March and declared another $0.12 dividend to be paid in June, which will mark our 42nd and 43rd consecutive quarterly dividends and seventh and eighth consecutive dividends at the current level. We also repurchased approximately $800,000 worth of shares during the quarter. I'll hand it over to Kelly now for closing comments.

Kelly Loyd, CEO

Thanks, Ryan. At Evolution, we accomplish our strategy of maximizing total shareholder returns by carefully weighing the use of every dollar we put to work for all our stakeholders, always with an eye towards increasing or extending the runway of our dividend for many years to come. We have a proven track record of paying dividends with stronger yields than the S&P 500 and our peers, returning cash to shareholders of over $3.45 per share over the last 10 years. We are building our company into one designed to cover our dividend and our capital spending even in challenging times like we see today with natural gas pricing, while maintaining ample capacity to return cash to shareholders. We have built and continue to build a diverse, resilient set of assets strategically designed to facilitate and complement our consistent approach to returning cash to shareholders. In building this base, our balance sheet has remained rock solid and we've added no material dilution. With that, I'll turn it over to the moderator to begin the Q&A session. Thank you very much.

Operator, Operator

Please go ahead with your question.

Unidentified Analyst, Analyst

So, the first question I want to ask about is, so for the certification for Delhi and that expectation to happen in summer, that sounds more or less like reiterating a consistent statement that kind of we've heard before in terms of that timeline. So, was there an incremental step, or just sort of it's more of a saying like it's on track, that is still the expectation? And then have you advanced any negotiations or conversations around that with the operator?

Kelly Loyd, CEO

Thanks, Donovan. So, to answer your question, it's really steady as she goes. The updates are no, they still expect it to be in the same timeframe they did. So as far as advancing negotiations and where that's going to shake out, no, we're not there yet.

Donovan Schafer, Analyst

Okay. I have a quick question. Do you have any information about Phase 5 in Delhi? I've been wondering if it might encourage Exxon to pursue Phase 5 since it could provide more space for CO2 injection. Has this topic come up in any discussions? Also, does this require additional certification, or can the project just be expanded automatically?

Unidentified Company Representative, Company Representative

I believe Phase 5 stands as a strong economic project on its own, and I hope Exxon reaches that conclusion, especially considering the added benefit of having more space for CO2 injection. Regarding any additional matters within the field, I don't expect there will be, although I'm uncertain about that.

Donovan Schafer, Analyst

Okay. Regarding Chaveroo, I noticed some language in the release that mentioned your plans to systematically participate in more locations. You’ve already secured some areas and have plans for additional development blocks. The Company expects to take part in future projects, holding rights to over 69 more horizontal locations in total. Does this systematic participation suggest that you’re ready to move forward confidently, provided that there aren’t any adverse well results, and that you intend to continue this approach consistently?

Kelly Loyd, CEO

Yes, honestly, that's the answer. We have more data and are more comfortable than we were. Everything is subject to change, but as of now, we intend to systematically continue with it. So yes, that's the answer. We are excited about it.

Donovan Schafer, Analyst

Yes. Am I right in kind of picking up on that language, like systematic participation is kind of suggesting a feeling or a reaction to how things have been going that's a step forward or a step incrementally, the initial kind of toe in the water?

Kelly Loyd, CEO

Yes, I'm more confident now than I was before. Absolutely, good observation.

Operator, Operator

Our next question comes from John White from ROTH Capital. Please go ahead with your question.

John White, Analyst

Congratulations on closing the SCOOP/STACK and bringing your Chaveroo wells back online. These are excellent additions to the portfolio. I would like more information regarding the SCOOP/STACK, specifically the location of the acreage and which counties in the Anadarko Basin it is focused on.

Kelly Loyd, CEO

So, I can answer that, or Mark. But I mean, it's in various places throughout the SCOOP/STACK. I would say it's got a large concentration over in Grady and Garvin. Those have kind of been the focus on where most of these wells in progress are.

John White, Analyst

Okay.

Kelly Loyd, CEO

It has various locations throughout the SCOOP/STACK, but the largest concentration and the most activity is currently in Grady and Garvin.

Mark Bunch, CFO

Basically, John, this is Mark, it's kind of near where Norman is.

John White, Analyst

Yes. I know where Grady County is. I've driven around there a lot. So, it's pretty spread out across the Anadarko.

Kelly Loyd, CEO

Yes and no. As I mentioned, it is more concentrated in the Grady area. However, we do have various species throughout.

John White, Analyst

And is there a concentration of operators or is that pretty diversified too?

Mark Bunch, CFO

We have significant partnerships with Ovintiv and Continental, along with some involvement from EOG, Marathon, and Gulfport. Overall, we expect to engage with around 20 operators, but the ones I've mentioned are the primary ones.

John White, Analyst

Those are good names.

Mark Bunch, CFO

Yes. Some Continental Resources too, sorry.

John White, Analyst

It's a big one. No, you mentioned it. And what is the primary formation being targeted?

Mark Bunch, CFO

Mainly like the Woodford, but they also look for the Sycamore, anything in the Mississippi. The way they pool, there is a pool of a larger section. So, a lot of times, this section is pretty good size that they pool.

John White, Analyst

All right. So, 640?

Mark Bunch, CFO

Well, actually, a lot of them now are getting to be 10,000-foot laterals. So, they're actually going to be 1,280s.

John White, Analyst

I know you don't give guidance, but with the initial results from SCOOP/STACK and obviously the Chaveroo results, is the feeling we should see your percentage of oil cut of total production increase over time?

Mark Bunch, CFO

Yes, John, yes, you should see that because both of them are, especially Chaveroo, are really oily. And SCOOP/STACK is oilier than our current mix.

Ryan Stash, CFO

Yes. The only caveat, John, would just be we obviously still have more insight into Chaveroo timing and drilling in the SCOOP/STACK, depending on what happens with gas prices; we could see some areas that have more gas content get drilled. Right now, they're focused more on the oil and liquid areas, which makes sense, but there is some gas there, too, right? So, there's a little bit of TBD. It depends on what the operators drill.

John White, Analyst

Okay. Thanks for the additional detail. I really appreciate it and I'll pass it back to the operator.

Operator, Operator

And ladies and gentlemen, I'm showing no additional questions. Actually, we do have an additional question. This comes from Bruce Brown from Brown Capital. Please go ahead with your question.

Bruce Brown, Analyst

Thanks for the good work. I know you've provided no specific guidance, but I'm curious. If prices remain around their current levels for the next 12 months, which may not occur, but hypothetically, would your asset-based lending line be significantly reduced?

Ryan Stash, CFO

Yes. So, thanks, Bruce. Obviously, we're not saying guidance. So really what we're looking at, and to answer your question, is the balance of paying down our line versus capital, right? And one of the big unknowns obviously is how much capital we'll have in the SCOOP/STACK given pricing. I would say we're generating enough cash to significantly pay down, but we may choose to spend more and reinvest in CapEx and pay the line down a little bit slower. But we're certainly going to remain below our target of one-time EBITDA. And as I mentioned, from a cash flow perspective, yes, we're generating plenty of cash to be able to pay it down if we wanted to. We do have capital projects that we think are really attractive that we'll probably put some capital too as well.

Bruce Brown, Analyst

Do you have any comment on additional capital projects in the Williston?

Kelly Loyd, CEO

Sure. We are collaborating with the operator, Foundation. What's interesting is that area is beginning to see new well drilling, and we are getting more excited as the activity advances toward us. We will observe how things progress in that region. Overall, we are becoming increasingly optimistic about that area. Regarding other projects in the field, there are mainly just general workovers. Mark?

Mark Bunch, CFO

Yes, it's just general workover, it's general fix-up. We're also doing some electrification in some areas that will improve efficiency, reduce operating costs. But no wells planned to be drilled right now, at least like in the near term.

Operator, Operator

And our next question is a follow-up from Donovan Schafer from Northland Capital. Please go ahead with your follow-up.

Donovan Schafer, Analyst

Sorry about that. So, regarding organic growth and the resources available, we currently have the Williston, the SCOOP/STACK, and the Chaveroo. My question is, do you think there's a need to pursue additional organic growth potential or engage in some mergers and acquisitions? Or considering your company's size and your expectations for cash flow, capital expenditures, and other factors over the next year, do you feel satisfied with your current position? Unless an exceptional opportunity arises, do you believe your portfolio is sufficient for organic growth at this time?

Kelly Loyd, CEO

Thank you, Donovan. This is Kelly. To answer your question, we have been focused on adding that capability to our portfolio, and we have made significant progress toward that goal. However, there is always more to do. If the next opportunity that arises is purely PDP and aligns well with our portfolio, we will pursue it, provided it is highly beneficial for us. If the next opportunity includes an element of organic growth, we will definitely take it into serious consideration. Ultimately, if a deal is advantageous for our shareholders, we will pursue it. I would say we are not as aggressive in seeking new deals as we might have been before our last two acquisitions or partnerships, but we are always open to opportunities.

Donovan Schafer, Analyst

Okay. That's good. Related to this, I think Mark mentioned that with Chaveroo, and possibly also referring to the SCOOP/STACK, the combination of these has extended the dividend coverage for a decade or more. I'm curious if you could provide any quantification on this. I could ask if a dividend increase is possible, but I understand this might be something you can't comment on. I know you prioritize dividend protection, so is there any analysis or estimation on how many additional years of coverage these have provided? Do you have an internal assessment of how long the dividend is covered? Any insights you can share would be helpful.

Ryan Stash, CFO

Yes, this is Ryan, Donovan. I can't provide specific long-term guidance, but I can say that you can assess the assets and the cash flow they generate, which helps in estimating future dividend coverage. In the near term, we expect to generate a significant amount of cash flow, with various potential uses. One option is to increase the dividend, but we may also choose to reinvest in the business. With our new organic growth strategy, we now have more capital available for investment than before. In the past, we could only return capital to shareholders, but now we can allocate some of it back into the business to maintain our production levels. While I may not directly answer your question, I want you to know that at the Board level, we carefully evaluate every dollar we invest, considering whether it makes sense to reinvest in the business, buy back stock, or raise the dividend. Our aim is to sustain our base dividend or improve it over time.

Donovan Schafer, Analyst

I understand that your company typically engages in less hedging compared to many other oil and gas companies, which means that during upward commodity price cycles, your strategies may accelerate. If natural gas prices rise significantly or if oil prices increase materially, that would allow you to reinforce your position where it makes sense. You might also consider acquiring more assets that provide the coverage you desire for many years, while potentially increasing the dividend due to the favorable impact of higher commodity prices. Is this an accurate way to consider your strategy?

Ryan Stash, CFO

Yes, we're definitely considering the long-term. For example, when gas prices recently surged past $5 and even reached $8 or $9, we used that opportunity to reduce some of our debt and repurchase a significant number of shares. The dividend is just one approach we have. If we experience a sustained price recovery, that would be one scenario. However, with natural gas, as we all know, a warm winter can change everything. It's difficult to predict gas prices at $5 over the long term. If we do see a price increase again, we might choose to accelerate debt reduction, buy back more shares, or explore acquisition opportunities. We would review all of those options.

Kelly Loyd, CEO

I mean just to follow on, and carrying on with where he's going, with our base sort of commodity price expectations, we've said many times where we think we can absolutely have great dividend coverage for many years to come. With something above that, it is cash flow with which we will make a prudent decision at that time what to do with it.

Donovan Schafer, Analyst

Yes. Okay. That makes a lot of sense. All right. I appreciate it.

Kelly Loyd, CEO

Terrific. Yes. Thank you.

Operator, Operator

And ladies and gentlemen, once again, I'm showing no questions at this time. I'd like to turn the floor back over to management for any closing remarks.

Kelly Loyd, CEO

We just want to say thank you all for joining us today. And if you have any further questions, feel free to contact Brandi, who is our IR Manager. So, thank you all very much.

Operator, Operator

And ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for joining. You may now disconnect your lines.