Earnings Call Transcript - EPM Q1 2022

Operator, Operator

Good day, ladies and gentlemen. And welcome to the Evolution Petroleum First Quarter Fiscal Year 2022 Earnings Release Conference Call. At this time, all participants have been placed on a listen-only mode. And the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Ryan Stash, Chief Financial Officer. Sir, the floor is yours.

Ryan Stash, Chief Financial Officer

Thank you, Kate. Good afternoon, everyone. And welcome to Evolution Petroleum's earnings call for our first quarter of fiscal year 2022. Joining us today is Jason Brown, President and Chief Executive Officer; and myself, Ryan Stash, Chief Financial Officer. After I cover the forward-looking statements, Jason will review key highlights along with our operational results. I will then return to provide a more in-depth financial review. Finally, Jason will provide some closing comments before we take your questions. As a reminder, 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 December 10, 2021. 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. 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 going forward. Please note that this conference call is being recorded. I will now turn the call over to Jason.

Jason Brown, President and Chief Executive Officer

Thank you, Ryan. Good afternoon, everyone. And thanks for joining us today for Evolution's first quarter fiscal 2022 earnings call. Our first quarter represented another period of strong financial performance and continued cash generation that supports our long-term strategy of operating within cash flow and paying an ongoing meaningful cash dividend to our shareholders, which we've been able to do consistently over the past 8 years. In addition to our financial performance, the team was able to successfully develop and publish our inaugural corporate sustainability report. It can be found on our recently updated website. I'm proud of the work that the team has accomplished in this regard and would be excited to hear any feedback that our shareholders would care to give. During the first quarter, we produced 5,843 net BOE per day. That was about 33% higher than the fourth quarter of fiscal 2021. This was primarily due to a full quarter of production from our Barnett Shale assets that were acquired on May 7. I'm pleased with our team who was able to seamlessly integrate the Barnett assets into our systems without any material ongoing G&A additions. We also benefited significantly from higher commodity pricing as we continue to remain unhedged during the first quarter. These factors combined with the efforts of our third-party operators, to leverage efficient field cost structures resulted in an adjusted EBITDA of $8.5 million. This was more than an 80% increase from the fourth quarter of last year. We once again generated operating cash flow in excess of capital expenditures, which allowed us to pay our 32nd consecutive quarterly cash dividend. In addition, we were able to grow our cash position to $8 million at quarter end, which is 51% higher than our cash balance of June 30, 2021. Now looking at our operating results in more detail. Net production at Delhi for the first quarter was 118,228 BOEs. That's about 1,285 BOEs per day. That's a slight decrease of around 3% compared to the prior quarter. Oil production at Delhi was impacted by decreased reservoir pressure due to the suspension of CO2 purchases from July 15 through August 20 for preventative pipeline maintenance. During the scheduled pipeline repair, the CO2 recycle facilities operated as usual, providing about 80% of the typical injection CO2 volumes. The pipeline is owned and operated by Denbury, and on August 21, the pipeline maintenance was completed and resumed flowing CO2 at a rate of approximately 85 million cubic feet per day. The operator anticipates to be able to increase the rate up to about 110 million cubic feet per day during the next quarter in order to increase pressure to support the reservoir and hopes to continue the elevated purchase rates throughout the winter and spring, along with the operator. We are hopeful that these additional CO2 volumes will help to reestablish the reservoir pressure and some of the subsequent associated production that was lost as a result of the temporary pipeline failure in fiscal 2020. In Hamilton Dome, we saw a sequential quarterly increase in production of 2% to 37,145 barrels or 404 barrels of oil per day. This is primarily due to continued reactivation of previously shut-in wells, strategic adjustments to water injection locations and volumes, as the operator merits field projects remain focused on maintenance, restoring production, and optimizing the field. Net production of the Barnett Shale assets for the first quarter of fiscal '22 was 382,115 BOEs or 4,153 BOEs per day. This is about 59% higher than the fourth quarter of fiscal 2021, increased mostly due to this being a full quarter of production compared to 55 days in the prior quarter due to our closing the purchase of the assets on May 7. As we discussed in our last call, Blackbeard, the primary operator of our Barnett Shale assets, sold their interest to a diversified energy company in July of 2021. We look forward to providing more detail on the expected future CapEx and operational plans at the Barnett assets once diversified has finalized their plans upon completion of the transition period. And although we are pleased we've already received a workover for the reactivation of the saltwater disposal well from them, which will allow the return of production for offset wells. So this is exactly the kind of work that we anticipate from diversified, and we are excited about other high rate of return projects that we can participate with them on those assets. Our Barnett Shale acquisition has materially increased our exposure to natural gas through the acquisition of another long life low decline asset. We're excited about what that accretive acquisition does for our company and our shareholders moving forward. This purchase was particularly well-timed, considering the sharp increase we've seen in natural gas prices in recent months. Consistent with our successful past strategy, we'll continue to evaluate additional accretive opportunities to expand our business for the long-term and benefit of our shareholders. These efforts support our long-term focus on continuing to operate within cash flow as we maintain and potentially increase the cash dividends that we pay to our shareholders over time. Despite the challenges of 2020, we have been proud of our commitment to return meaningful value to our shareholders through a consistent dividend program. This includes increasing our first quarter fiscal '22 dividend to $0.075 per common share of stock, and that was paid in September. It's supported by continued improvement of our business and economic environment; we are pleased to declare a second quarter dividend that will be paid on December 31 to shareholders of record as of December 15. But this dividend evolution will have paid out over $80 million or $2.41 per share back to shareholders as cash dividends since 2013, maintaining and ultimately growing our dividend while achieving disciplined growth through accretive acquisitions remain our key priorities moving forward. And we appreciate the continued support of our shareholders. With that, I'll now turn the call over to Ryan to discuss our financial highlights.

Ryan Stash, Chief Financial Officer

Thanks, Jason. I'll now share some more details regarding our financial results for the first quarter of fiscal 2022. As I mentioned earlier, please refer to our press release from yesterday for additional information and details. And some of the key highlights are, as Jason had just mentioned that we paid our 32nd consecutive quarterly dividend in the first quarter of $0.075, which is a 50% increase over the prior quarter. And as Jason also mentioned, we declared a $0.075 dividend for this upcoming quarter, that's going to be payable on December 31, 2021. Our adjusted EBITDA increased more than 80% to $8.5 million from the fiscal fourth quarter of 2021. And as Jason also mentioned, this is really due to a full quarter of production from the Barnett Shale that closed in May, as well as improved commodity prices relative to the prior quarter. We're able to fully benefit from these increased commodity prices due to our strategy to remain unhedged. We funded all operations, development, CapEx, and dividends out of operating cash flow and maintained our strong balance sheet with $8 million of cash on hand and $4 million drawn resulting in a net cash position of $4 million as of September 30. Now, I'll say we do expect to pay off this $4 million during this quarter, our fiscal second quarter, as we're set to have our final settlement with Tokyo Gas to sell over the Barnett assets; we expect that to happen this month. Working capital increased by $4.1 million to $15.6 million this quarter. And this is really due to a lag in revenue receipts and invoices from the operator of the assets diversified. So we currently have more months than we would usually expect of revenues and expenses in our receivables and payables. We do expect these timing lags to be corrected during this fiscal second quarter, as diversified has now begun to take over operations. And also, as I had mentioned, we expect to complete the final settlement with the seller. Going forward, we would expect to have approximately 2 months of receivables and one month of payables in our working capital accounts, which is typical for non-operated assets. Turning to our credit facility, we incorporated our acquired Barnett assets and a recent amendment at the eighth amendment that was finalized on November 9. The result was the determination of a new borrowing base of $50 million, which was a $20 million increase from our prior borrowing base of $30 million. However, we have elected a $40 million commitment amount resulting in current availability of $36 million, as we currently still have $4 million drawn, as I mentioned. I would note that the amendment does add a covenant requiring us to hedge certain percentages of future production based on the utilization of the borrowing base under the credit facility. More specifically, once we reach a 25% utilization on our borrowing base, we're going to be required to enter into hedges for 25% of our PDP production on a rolling 12-month basis. Once we hit 50% utilization, this required hedging increases to 50%. And once we hit 75%, it increases again to 75%. I will say that we do continue to maintain our strategy of retaining exposure and upside to commodity prices, which has benefited us recently. However, as we have mentioned in the past and feel like we're being consistent in the way we've talked about how we would handle potential acquisitions, and that we would look to hedge a portion of the production from a potential acquisition to lock in return and ensure a quick pay-down of any debt that we may borrow. Now looking at our first quarter financials in a little more detail, we grew total revenue by 38% from the prior quarter, which was primarily due again to the benefit of a full quarter of production from Barnett, as well as an overall 2% increase in realized commodity prices on a BOE basis. LOE increased to $8.6 million in the first quarter, primarily due to the higher volumes with the Barnett Shale and increased workover activity at Hamilton Dome. Partially offsetting this increase in LOE was a previously mentioned suspension of CO2 purchases at Delhi from July 15 to August 20 to perform the necessary pipeline maintenance. This combination of lower CO2 purchase and the lower operating cost in nature of our now Barnett Shale natural gas wells resulted in LOE cost of $16.05 per BOE for the first quarter, which was a 16% decrease from the fourth quarter of 2021. G&A expenses were $1.9 million for the first quarter compared to $1.8 million for the prior quarter, with the overall increase primarily due to one-time costs associated with the retirement of the Chief Accounting Officer, professional fees associated with the Barnett Shale acquisition, and some initial costs for the development of the company's Eargo corporate sustainability report. Net income for the first quarter was $5.2 million or $0.16 per diluted share compared to $2.2 million or $0.07 per diluted share in the previous quarter. Again, this increase was primarily driven by higher commodity prices and a full quarter of production from the Barnett Shale. For the 3 months ended September 30, we invested $300,000 in CapEx, which is primarily associated with Delhi Field capital maintenance activities. We currently expect that the operators at Delhi and Hamilton Dome will continue conformance workover projects and will likely incur additional maintenance capital expenditures as oil prices remain strong. For fiscal year 2022, based on discussions with the operators, our total CapEx for Delhi and Hamilton Dome is expected to be in the range of $1 million to $2 million, primarily consisting of conformance workover and maintenance capital projects. Also, as Jason mentioned, a capital spending program has not yet been established for the Barnett Shale, but also, as Ian mentioned, we are beginning to see projects proposed and would expect to continue to see additional workovers and return to production projects given the commodity price outlook. Now with that, I'll turn the call back over to Jason for his closing remarks.

Jason Brown, President and Chief Executive Officer

Thanks, Ryan. We're very pleased with the momentum that we've built through the first quarter of fiscal '22. We remain focused on our core values, which include generating cash flow and providing our shareholders with a meaningful return on their investment through cash dividends and executing on additional accretive acquisitions. As I said on our last call, I believe that we've demonstrated our ability to source value and successfully transact on opportunities that support this strategy. And equally important to those activities is the ability to integrate and manage those assets once they're owned. The team has done a great job with this, which only increases our confidence in the outlook of our organization, supporting our efforts of providing shareholders with an ongoing cash return on their investment is our commitment to continuing sustainable business practices. As I mentioned earlier last week, we released our Corporate Sustainability Report. And while we currently do not operate into the assets in which we have ownership interest, we view our environmental, social, and governance or ESG programs and initiatives as key to our strategy to further differentiate evolution both now and in the future. ESG will be a consideration as we evaluate future accretive opportunities to grow our asset base and reserves. Following our Barnett Shale acquisition, we remain eager to continue to grow in both size and scale and feel that we're well positioned to execute on the right opportunities for our business. We continue to source and assess a wide variety of marketed and negotiated transactions. We're optimistic that we will be able to grow our business and provide additional shareholder value through targeted expansion of opportunities in fiscal '22. With that, I think we're ready to take questions. Operator, if you'll please open the line for questions. Thank you.

John White, Analyst

Thank you, operator. Good afternoon, Jason and Ryan. I was really glad to see the strong results all the way around. And congratulations on the increased borrowing base. So some of the Hamilton Dome workovers were included in LOE. Are there more of those coming in the next quarter or so?

Jason Brown, President and Chief Executive Officer

During 2020, the team significantly reduced operations up there, and there isn’t much new drilling or capital projects happening. The focus has shifted to expenses related to workovers and down pumps. They took about 40% of the wells off production initially, but over the past year, they have constrained operations. Recently, they were able to turn on the final saltwater injector well. We view this quarter as strong, with the possibility of a bit more in the next. There are regular workovers due to equipment maintenance. This quarter had more expenses than usual for two reasons: to address delays from lower price conditions and to enable the fourth injector for better water injection across the field. So, while expenses were higher than normal, we expect lifting costs to settle around $40 a barrel but anticipate a return to the low $30s, potentially around $31.50 or even better in the near future. The next quarter may be somewhat in between. Does that make sense, John?

John White, Analyst

Yes, it does. Thanks for that. And boy that natural gas out of the Barnett sure has a positive effect on LOE. You mentioned one saltwater disposal well as planned. And you said Diversified is still finalizing their plans. Are you getting any kind of informal indication of workovers at the Barnett?

Jason Brown, President and Chief Executive Officer

No, I think they're finalizing their transition services agreement with Black Bear this month. We expect to have that wrapped up soon, but we didn’t manage to have a formal meeting with them before this call. We anticipate that will happen in the next few weeks. In fact, we just received an AFP from them, which was a pleasant surprise and we are excited about it. This isn’t related to the drilling of a new saltwater disposal well, but rather the reactivation of an existing one that will allow us to access previously producing wells. Currently, these four wells are generating around 450 a day, so that’s gas we will not be producing anymore. We expect to see more activities like this. Additionally, we received an AFP for a new drill well, which is a minor aspect as we hold about 1.25% interest in some other assets operated by different companies, with Diversified being the primary operator. This is just one of those smaller projects. It’s also interesting to note that some rigs are being brought back into the Barnett. At some point, those locations may hold value for us, and we plan to evaluate that over the next quarter as well.

John White, Analyst

Very good. Looks like the acquisition is working out very well for you. And I’ll pass it on.

Operator, Operator

Thank you. Our next question today is coming from Erik Volfing at Grand Slam. Your line is live. You may begin.

Erik Volfing, Analyst

Hi, guys. Congratulations on a very nice quarter and really congratulations on having made such a good acquisition with the Barnett Shale. You mentioned that you’re starting to look towards the final settlement with Tokyo Gas. What’s involved in that?

Jason Brown, President and Chief Executive Officer

It took us considerable effort to finalize the deal with the Japanese counterparty. The effective date of the transaction was January 1 of this year. When we closed in May, we received a couple of months' cash flow from Tokyo Gas. We anticipate receiving the remaining cash flows between March and May when we completed the closing. Additionally, there will likely be a bit more since the previous operator needed time to transition everything over. Therefore, we expect to receive a significant amount during the final settlement, which involves reconciling all the revenue received from January 1 until now.

Erik Volfing, Analyst

So, so we’re basically expecting those to be a positive. It’s not that you owe them anymore money. It’s them paying you extra money?

Jason Brown, President and Chief Executive Officer

Correct.

Erik Volfing, Analyst

Okay. There were a few wells that didn't immediately transfer due to questions about whether someone had a right of first refusal. Is that still a concern, or is it completely resolved?

Jason Brown, President and Chief Executive Officer

I think we should assume at this point that it's no longer an option. We are certainly open to it. There was a lawsuit involved that led the operator to proceed with the sale to a diversified entity instead of honoring a right of first refusal. Because of that, we chose to steer clear. If the situation changes, we would be fine moving forward. However, I think there is the additional complication that they probably want to move ahead significantly. Therefore, I’m not sure we would be interested in purchasing it at this time. But let’s assume for now that it’s not viable, and if it comes back around later, it will be clear that we would likely consider it.

Erik Volfing, Analyst

You're generating a significant amount of cash, and it appears you'll generate even more from the final settlement. Some of this will likely go towards paying off the $4 million you have. I was somewhat surprised that the board decided not to increase the dividend at this time, given your cash flow. Looking ahead a couple of quarters, you might be back to your previous cash levels before the last acquisition, potentially by the end of June, if prices remain stable. Do you have any insights into the board's perspective on this?

Jason Brown, President and Chief Executive Officer

The board is quite thoughtful and has a well-earned reputation for being fiscally disciplined. There seems to be a reluctance to raise the dividend aggressively due to not wanting to risk lowering it again. Our reputation is built on paying our dividend, having only reduced it twice, once in 2014 during the commodity price collapse and again in 2020 under similar circumstances, each time with careful consideration. While we could have reverted to our previous dividend amount, we feel more confident about the stability of the overall economic environment, the COVID situation, and our cash flows. However, there has been significant volatility over the past year, and we believe we have a bit more flexibility moving forward.

Ryan Stash, Chief Financial Officer

I mean I would just add real quick. I mean, when we had discussions on dividend policy, we look 5-plus years out. And so if you're looking at years 4 and 5, as you probably know, the strip is highly backward dated. So things look a little different. And so as Jason alluded to, I mean, we're setting a dividend rate for the long-term. And so while we could have raised it, we felt being more prudent given kind of the backwardation in prices, and, quite frankly, keeping some powder available as acquisition opportunities that we see.

Erik Volfing, Analyst

Okay. And I guess, actually, that sort of leads to my last question if I may. Just kind of on the acquisition front, with the big run we've had on commodity prices. Is that making it harder to source deals?

Jason Brown, President and Chief Executive Officer

Well, what he just mentioned definitely relates to sourcing deals. There are numerous deals available in the market, although some have unrealistic expectations. The interesting point Ryan made is that the strip is quite backward dated. While we are optimistic about long-term prices, the market is indicating considerable uncertainty, reflected in the backwardation, which means current prices are relatively high. However, in a couple of years, gas might return to $3, and oil could go back to $55 or so. This shift is happening fairly quickly. The intriguing aspect is that this scenario might actually facilitate transactions because sellers can align their asset pricing closer to the strip pricing. If buyers are reasonably confident about the future price curve, they may be inclined to offer closer to the strip due to its backwardation. We are focused on the long-term outlook, seeking barrels 5-7-10 years out, but those are currently being priced much lower. We are hopeful and, as I mentioned, think we will be able to make another transaction in the coming months that supports the dividend.

Erik Volfing, Analyst

Excellent. Thanks, again.

Operator, Operator

Thank you. We have no further questions in queue at this time. I will now turn the floor back over to management for any closing comments.

Jason Brown, President and Chief Executive Officer

Well, thanks again. Thanks for your participation today. And feel free to contact us if you have any other questions or comments. We appreciate the continued support from our shareholders and look forward to providing everyone with further updates on our business and potential targeted growth opportunities on our second quarter fiscal ‘22 earnings call that will be in early February. Thank you.

Operator, Operator

Thank you. Ladies and gentlemen, this does conclude today's event. You may disconnect at this time, and have a wonderful day. We thank you for your participation.