Evolution Petroleum Corporation (EPM) Q1 2013 Earnings Report, Transcript and Summary

Good morning. And welcome to the Evolution Petroleum Conference Call. All participants will be in a listen-only mode. (Operator Instructions) After today’s presentation there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Sterling McDonald, CFO. Please go ahead, sir.

Thank you, Operator, and good morning. And thank you for listening to Evolution Petroleum conference call to discuss results of our First Quarter of Fiscal 2013, which ended September 30, 2012. My name is Sterling McDonald. I'm CFO of Evolution and with me today are Bob Herlin, our CEO; Daryl Mazzanti, our VP of Ops. Before we begin, let us cover the basics. If you'd like to be on the company's e-mail distribution list to receive future news releases, please see the contact information on our news release. If you wish to listen to a replay of today's call, it will be available shortly by going to the company's website at evolutionpetroleum.com or via recorded telephone replay until November 16, 2012. The necessary information can be found in the earnings release. Please note that any statements and information provided today are time sensitive and may not be accurate at later date. Our discussion today may contain forward-looking statements that are based on management's beliefs and assumptions that are based on currently available information. We can give no assurance that such forward-looking statements will prove to be correct as they 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. Our discussion also may include discussions of probable, possible or potential reserves or recovery. Such unproven estimates are more speculative than proven reserves. Now, Bob will give you some results of our fiscal quarter to start off. Bob?

Thanks, Sterling, and good morning, everyone. Thank you for joining us. Since we did release detailed numbers in our news release last night, I’m going to focus my remarks on key results, operations and projects, as Sterling will similarly review key financial results. I’ll fellow up with the few general observations and then we’ll take your question and what that goes along to your questions. Earnings to common increased some 7% over the previous quarter to $1 million that works out about $0.03 per fully diluted share but that was on 6% lower revenues. Our results were, as now expect impacted by lower oil and natural gas prices, natural gas liquid prices I should say, but even probably more importantly the temporary restriction on Delhi production that began in the later part of the previous quarter and extended through the first two months of the current quarter. As I discussed in our last earnings call, the hot envious summer time temperatures is stronger than expected response in the field exceeded the capacity of equipment that was cooling the recycle gas coming off the compressors in the field prior to reinjection. Consequently, the operator had to temporarily restrict product in CO2 injection wells during the summer. Now as cooler weather return in the field in September the operators able to restore normal production CO2 rate and field production quickly returned to pre-summer rate. In fact, we are very pleased that the field is now exceeding the previous higher rates and the operator is reporting improved response in the field. Additional cooling capacity is implant -- this plant to be added before next summer, so we’ll don’t have a repeat. The other significant move during the quarter is pending monetization of non-core asset in the given field. This will allow us to…

Thanks Bob. And thanks again those of you participating in this morning’s conference call. I’d like to address several topics today including some key financial metrics as well as some corporate governance matters. Now, the feedback on our side, I apologize, if you’ll are hearing this. I’ll also address several topics today including the key financial metrics as well as some corporate governance matters. But first I’d like to summarize our production that’s resiliency. As reported, our overall net reduction in the most recent quarter average 581 net BOE a day which was up a little more than 1% sequentially and 14% over the year-ago quarter. So we have started increasing production performance sequentially and over the year-ago quarter, despite Delhi’s temporary but meaningful drop off during December and despite normal depletion to client’s we expect in our non-GARP getting field well. I’ll point this out because the production that’s filled in for this temporary and permanent respective declines, now we’re beginning to gain traction on our GARP and Lopez field initatives. When taken together are currently contributing about 45 net BOE a day much of it oil. Now, as Rob as pointed out, we plan on monetizing our Giddings and non-GARP production which was recently running about 175 net BOE a day. So the potential lack of this production going forward may not be immediately replaced by expected production coming online in our two newly completed Mississippi line wells, strengthening production levels expected at Delhi and potential ads to our GARP and Lopez field activity. Really it’s a good segue in our financial results especially with respect to our expenses. Although revenues decline 6% sequentially while increasing 11% over the year ago quarter. Total operating expense declined only 4% sequentially but increased 26% over the year-ago quarter. This is…

Thanks, Sterling. Resumption of normal production in growth, in the production of Delhi during the quarter was a very positive step currently and bodes well for strong fiscal year. With no debt growing cash flow, cash on hand and pending proceeds from monetization non-core asset, we believe that we continue to be well-positioned for much more focused on growing Mississippian Lime oil project in our GARP business as well as taking manage many other opportunities within our define business that may arise. Our overall strategic goals continue to be growth of per share value and transferring that great value to shareholders in the most efficient manner. With that, we’re ready to take questions. Operator, can you please open the line for questions.

(Operator Instructions) Our first question is from Jeffrey Connolly. Please go ahead.

Hi, good morning. If you can give us some color on the GARP installation process and how the performance on the first four wells compare through expectations?

Sure. The GARP installation ideally is targeting the top two quartiles of wells that are out there. Because what we do is we think we can add anywhere to 10% to 30% additional recovery to what’s already been produced and so obviously you want to do, target wells that made a fair amount to start with. Ideally, it’s a well. They already is fully equipped with the broad pump and tubing and rod string so forth. In that case, in the GARP installation is pretty reasonable, it primarily installation of its small compressor that can generate a small volume of high pressure gas, a second string of tubing to deliver that gas, so specialized tool downhaul to handle all this and then what we do is we’re injecting gas at the very lowest point in the horizontal well or vertical well, which then mobilizes the fluid but not up to the surface but it si going to mobilize it up everywhere from couple 100 feet to most of 1000 feet the intake of the rod pump. By doing this we are able to recover a far more oil and gas seeing with otherwise we achieve. A lot of people that have drilled wells in the new plays over the last 5, 10 years there are peak they are accounting very high reserves based on high MISO, rate rapid decline stabilizing into a long life tail production. And what’s going on in many of these is that when the reservoir pressure falls to certain level then the fluid if it’s an oil well in the fluid level falls below rod pump intake and you can’t stick that rod pump very four times a curve, but then you have issues with mechanical failures. And so once the fluid falls that point, the…

Yeah. And then when you install a unit, about how long until it starts to see an increase in production?

It really varies. It can be anywhere from immediate to, it might take about a month. I think the month is the long has it taken for its technology to start producing substantial oil and gas. A lot of times, they’ve all been sitting here for a long time. We have to produce a lot of water that’s accumulate in the near well bore area. Another time, it’s been fairly rapid. So every well is a different story.

Okay. Thank you, guys.

Yeah.

(Operator Instructions) We have a question from [Hasing Draga] from MLV Company. Please go ahead, sir.

Hi, guys. How you doing?

Good. How are you?

I’m doing well. Just about a question on Mississippi line. I hope these wells come out really well and if these wells come out well, would you consider levering up and speeding up operations in Mississippi line?

Well, we have to keep in mind that in our current joint venture, we are not the operator. Our partner who we acquired the position from is the operator. We have an agreement in terms of how many wells they have to drill. It’s max or minimum. We do have – let’s see, are proposing wells if they don’t do the minimum number. So at the moment we don’t anticipate that being an issue. We are on the same page. We are working very closely with them. We are both interested in maximizing our value, but we are also – I guess something, we’d say extremely cautious or conservative that we drilled these two producers. We wan to see how they operate and how they create. We want to try and learn from what we’ve done. We look forward to start doing new wells, so we can apply that knowledge. I mean, we are paying a hefty price to get this information. So it will be kind of silly not to take advantage of that information. We’ve already been fitted from looking at what other people have done in terms of focusing on where we drill in the formation. Apparently, the March study and talks with various other competitors and service providers makes a big difference varying the line. You actually put your horizontal, in the property zone or the bottom zone or whatever. It makes a big difference in terms of kind of results we get. So we have a plan that we learned so far. We’ve actually utilized a new form of fracturing. And in one of our wells, we are very pleased with those results. But have also noted that complex act, you have to drill with certain way to avoid too many circum time, up and down motions in the drilling. So we are planning all that. But that’s the stake we don’t really drill our next well until probably after the first of the calendar year. Hopefully, at that point, Joe, we will be in a very aggressive drilling mode with the one rig program and that would be basically one well per month, which for us is a pretty aggressive approach because that would be 45% of the $3 million well. I’m pleased that our costs have actually come in extremely closed to what we originally projected and apparently less than what industry is averaging current from wells, wet and herd, just another company. So we are very pleased with that our wells that we have been drilling, which are fairly long lateral. And actually end at very attractive costs. So far, is what they were. The important thing is that they didn’t raise the reserves and that part obviously we are still waiting on as we do water our west well. And our second well, we should have within the next couple of week and start their rewarding progress.

Okay. And could you remind me if what the minimum and maximum number of wells could be relive at?

Minimum was six wells and the first two months of the program and the maximum was 12 wells.

Okay.

14 maximum wells that include disposals wells and so we’ve already had – we’ve already drilled 3 wells to date. So by sometime around mid year, next calendar year would be the end points of that program. So at minimum we have to drill eight more wells. In the case, it could be more than that. And I suspect there is probably more like five or six wells, I actually expect that we would drill during our peak.

All right. Tom, good. Thank you, guys.

Thank you.

(Operator Instructions) We are showing no further questions at this time. So, I will turn the conference back over to Management for closing remarks.

Like I said, I’d like to thank you everybody for joining us. We are very pleased on what’s going on the field today. We are very pleased with what’s happening in Delhi. We have to tell you more hovered by prior agreement with Denbury. We try -- we have to limit our discussions on results out there. But we are very pleased with where the company is. We are extremely pleased that in this uncertain and volatile times but we have no debt. I’m pleased that I’ll have to report hedging lockies and derivative lockies. We are trying so. I hope shareholders are pleased and we think that things are going to continue to improve and we look forward to an excellent fiscal year. Thank you and again, if you have any questions of like clarifications, I will say, please free to e-mail us and call us. Thank you and I hope you have good day. Bye.

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