Evolution Petroleum Corporation (EPM) Q4 2015 Earnings Report, Transcript and Summary

Good day, and welcome to the Evolution Petroleum Corporation Fourth Quarter and Year End 2015 Earnings Release Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. David Joe, Vice President and Controller. Please go ahead, sir.

Good morning, and thank you for listening to Evolution Petroleum’s conference call to discuss operating and financial results for its fiscal fourth quarter and fiscal year end June 30, 2015. I am David Joe, Vice President and Controller for Evolution. On the call with me today is Bob Herlin, our Chairman and CEO; and Randy Keys, our President and CFO. Before we begin, let us cover the basics. If you would like to be on the company’s e-mail distribution list to receive future news releases, please see the contact information on our recent 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 www.evolutionpetroleum.com or via recorded telephone replay until September 17, 2015. 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 a 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 may also include discussions of other categories of reserves besides proved reserves, such as probable, possible or potential reserves or recovery. Such estimates of non-proved reserves are more speculative than proved reserves. Since detailed numbers are readily available to everyone in yesterday’s news release, this call will focus on key overall results, operations, and our capital plan for fiscal 2016. Starting with financial results, I’m pleased to report another strong quarter of financial results for the company, which has been remarkably consistent with 17 out of the last 18 quarters having reported net income. In this most recent quarter, it includes record revenues of $9.1 million, a 28% increase from prior quarter, and a 110% increase from the year ago quarter. Quarterly net income to shareholders was $1.7 million, a 204% increase from the prior quarter and a 19% increase from the year ago quarter. Earnings per diluted share in the quarter were $0.05 compared to $0.02 in the prior quarter and $0.04 in the year ago quarter. For the full-year, we reported record revenues of $27.8 million, a 58% increase from the prior year. Income from operations was $8.6 million, a 55% increase from the prior year. Net income to shareholders was $4.3 million, a 48% increase from the prior year. Earnings per diluted share for the year were $0.13 compared to $0.09 in the prior year. Bear in mind, these financial results were mid significantly lower oil prices in our fiscal year ended June 30, 2015. We can generally attribute our strong financial results to our Long-Lived Foundation Oil Resource in the Delhi field. As a reminder, we backed into our current 23.9% working interest and associated 19% revenue interest effective on November 1, 2014. Since then, our revenue interest in the field more than tripled to 26.4%, inclusive of our existing 7.4% overriding royalty and royalty mineral interest since our acquisitions of them in 2006. The gross oil production at Delhi in the fourth quarter increased to 6,328 barrels of oil per day, net to us, that’s 1,677 barrels of oil per day, a 2% increase from the prior quarter. Production in the field is expected to average in excess of 6,000 barrels of oil per day until projected volumes are added when our natural gas liquids extraction plant becomes operational in the second-half of calendar 2016, and the planned expansion into the eastern portion of the CO2 project in subsequent years. Production is expected to last into the next decade before plateauing for a period and then beginning a slow decline. For the year ended June 30, 2015, Delhi field production costs was $8.5 million, which translates to a lifting cost metric of $19 per barrel, based on all of our volumes net to us. Of this amount, approximately 59% of this is for CO2 purchases and related transportation costs. Over the past year or so, the operator of Delhi has focused on lowering other field OpEx and we have started to see the benefits of their initiatives. In closing at fiscal year end, we continue to maintain a healthy balance sheet with approximately $20 million in cash, a working capital balance of over $14 million, and $5 million of availability on a revolving unsecured credit line. The company remains debt-free. We believe that the current liquidity combined with the expected operating cash flows will be more than sufficient to fund the capital – the company’s capital budget for fiscal year 2016. I’m now going to turn the call over to Randy Keys, President and CFO.

Thank you, David. As David discussed, we posted very strong results for our fourth quarter and fiscal year. And looking forward, the next major catalyst for near-term growth is the Delhi NGL plant, which is expected to be online in mid-2016. Based on the projections in the reserve report, we expect the NGL plant to deliver net volumes to Evolution of around 500 barrels per day of heavy natural gas liquids. These are propane, butane, and pentane plus, and do not include any ethane. In addition, we are expecting an additional 130 barrels of oil per day net to the company, which is an increase of approximately 8% over our current production rate through greater efficiency of the CO2 flood. This occurs because the methane and liquids had been accumulating in the CO2 recycle stream and now make up almost 11% of the total volume. As the NGL plant removes these lighter hydrocarbons, we expect to see an improvement in efficiency of the flood. And even in today’s low-price environment, we see compelling economics in the NGL plant and expect a significant increase in cash flow when it is fully operational next year. Our budgeted capital commitment for the NGL plant is $24.6 million and we had incurred approximately $5 million of that as of June 30. So our remaining commitment is about $19.6 million. As we previously disclosed, we entered for the first time into costless collars as a price protection mechanism. And they provide an average price floor of $55 a barrel based on WTI prices. And these collars cover approximately two-thirds of our estimated production for the balance of calendar 2015. In addition to the WTI floor price, we also received the differential for Louisiana Light Sweet crude which is traded around $4 per barrel over WTI levels for most of this year. The purpose of this price protection program is to provide additional confidence in our ability to fund our capital commitments and to continue our common stock dividend at its current rate of $0.05 per quarter during this commitment period, when we’re spending relatively large amounts of capital relative to cash flow. So far, we have received almost $600,000 in positive hedge price differentials for July and August, and we are currently in the money by around $10 a barrel. However, as we have witnessed over the past several months, this differential could move significantly in either direction. On the legal front, we won dismissal of one lawsuit in Louisiana, the Jones matter; and continue to defend our shareholders’ interest in our breach of contract lawsuit against the operator, Denbury, which is now scheduled for trial in April of 2016 next year. As we look beyond the coming fiscal year, we completed the first four development phases in the Delhi field and have two remaining development phases in the eastern part of the field. Since these remaining two phases are already substantially developed by virtue of the field infrastructure that is already in place, the related future development costs are less than $10 a barrel. We believe these are solid economics even in this low price environment and are compelling, because they have a short lead time between investment and cash flow. The timing of the remaining development is dependent on our plants – on both partners’ plants in the field. But we expect to see them underway within a couple of years after completion of the NGL plant. We would prefer to see them sooner rather than later, but we are one partner in the project. Our situation is very different from most of our peers who will require substantial amounts of capital just to maintain much less increased production. In our earlier press release disclosing our year-end reserves, we included a table which showed our expected production over the next five years based on the reserve report, broken down into Proved Developed Producing, Proved Undeveloped related to the gas plant, and other Proved Undeveloped Reserves. This table shows a fairly flat decline in our PDP reserves exiting the five-year period at 85% of our projected rate for next year and very nice built-in growth from development of the NGL plant and the PUD reserves as we continue the development of the eastern part of the field. Furthermore and more importantly, given the long stable life, the value of reserves is driven by the average price of oil over the next 20 to 30 years, not the next one or two years typical of shale plays that produce half of their reserves in the first two years of their well life, nor have we invested a large amount of capital in land and well to describing some of the asset write-downs that we’re seeing in the industry. This built-in growth over the next five years and beyond in the Delhi field, together with our strong financial position and debt-free balance sheet, position us very well to succeed and prosper in this current down-cycle of the industry. I’m now going to turn the call over to Bob Herlin, Chairman and CEO.

Thanks, Randy. I just wanted to reiterate my comments in news release last night. Our solid increase in results over the previous quarter, I think, demonstrates the value of our assets and conservative management approach over the last couple of years, a very strong position in value have attracted increased attention from institutions, and actually have pushed me down to being the fourth largest shareholder now. So I’m really pleased by the increased interest and support by institutional shareholders. We’re well-positioned to take advantage of opportunities in this market, but only if the right one arises and passes all of our very rigid criteria, which includes accretive cash flow, accretive share value in support of our dividend policy. On a more relative basis, I’m pleased though with our performance of these trying times. I look forward to a very interesting year for the company. I would like to point out that once we have completed the capital expenditures related to the NGL plant next year, we will be not only have increased revenues and cash flows coming in, but our CapEx going out the door will essentially be down to essentially zero until we start up the expansion of the project to eastern side of the field. So we will be generating vast amounts of cash flow accordingly. Now with that, I think, we’re ready to take some questions. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Jeff Grampp from Northland Capital Markets. Please go ahead.

Good morning, guys.

Good morning, Jeff.

Hi, Jeff.

Just, I guess, first one to hit on the NGL plant, I agree with you guys that there’ll be a nice catalyst here moving into next year. But can you guys talk a little bit about how that production comes online, just wondering if there’s some kind of gradual ramp to that 1,850 a day number, is that effectively online once that plant is ready to go? And then kind of second part of that question, just wanted to get a little bit more color on the probable NGL volumes that are 1,100 or so a day, and just kind of get some more color on what exactly those are attributable to?

I’ll take your first part of that question, Jeff. As in any start up of a new facility, there’s going to be some process of couple months of ramping up just the operation getting up and running, troubleshooting and so forth. But once that is up and running, the full capacity is there and we have this recycle stream that is 150 million, 200 million cubic feet a day, that’s 11% of NGLs, and so that will immediately start producing. And so we really would expect to see pretty high rate fairly quickly. Randy, do you want to talk about the probable category?

Sure. And I would add that the plant was sized for the current recycle stream, and perhaps even slightly below the current recycle stream. It’s about 155 million barrel cubic feet per day throughput, which is well within the current capacity of the field and will be able to be maintained at a flat level going forward. As to the probables, there’s two components to those. The first is based on varying assumptions between proved and probable. There’s the 90% confidence level and the 50% confidence level. And we frankly believe that we’ll see results better than the 90% confidence level and that’s a component of it. And then as the other probable projects get developed, there are associated liquids with those projects. So those also add to the probable component of the future production. And that’s out into the next decade in many cases for both our proved – both our oil and NGL production.

Okay, great. Great color on that. And then as far as the reduction to operating costs that you guys are anticipating once you start recovering that methane, do you guys have any estimate as far as, what the downside is to your op costs either on a percentage or dollar basis, or unit basis? Just trying to, I guess, wrap our heads around, what kind of implications are to your cost structure?

Sure. Actually, I want to clarify a point. We are expecting the net effect on op cost to be close to zero, because we are going to be adding some costs associated with the plant. But we are expecting to save costs on the power side in the field from the field side of the operations, and those two are roughly offset each other. So we are – that results from burning the methane in a generator to a turbine to generate electricity and provide power for the field. They were currently spending about $600,000 a month on a gross basis for electricity and power. And we’re going to avoid those costs with the new – once the plant and the generation facility are up or operational.

Okay. I appreciate that color, Randy. And then, last one for me, just more a modeling one. Looks like cash G&A was maybe a bit higher than I was modeling up a little bit sequentially. That just kind of some fiscal year end stuff and some litigation costs or just kind of wondering how you’re expecting the G&A line to be trending throughout the next fiscal year.

Randy, go ahead and take that one.

Sure, the real driver of that is litigation cost and they were up significantly. In other areas, we are driving our costs down. Our incentive compensation was down along with many others in the industry. David, you want to weigh in on that as well?

Yes, I think where we’re going to model is probably anywhere from $75,000 to $90,000 a month for the Delhi litigation. That’s kind of what we’re trending at the moment, Jeff. It’s a bit unknown number obviously. As the case gets closer to trial, I suspect the cost will perhaps go up.

Yes, the costs are going to vary month-to-month depending on depositions and our expert, and so forth, so will be high for a period of time while we’re doing depositions and completing our review of materials and discovery. It will then drop down for a while and then it’ll pick back up again as preparation for the trial itself. And then, it should drop off to very low level, because we would assume that the other side will appeal the trial court decision so. But that has been a driver. I think we’re looking at probably close to $1 million of litigation cost to finish down all. The good news is that we did get rid of the Jones lawsuit. That is gone away. So there won’t be any more costs associated with that. We didn’t have to pay them anything. They agreed to dismiss with prejudice, if we agree not to go after them for various reasons so…

Okay. Great. Now, that’s super helpful color and a good quarter guys. Thanks.

Thanks, Jeff.

Our next question comes from Joel Musante of Euro Pacific Capital. Please go ahead.

Good morning, guys. It was nice to see that your production cost came down for the second quarter in a row. And the oil price for the quarter, benchmark price on WTI was about $60 and price has fallen since then. Do you – so do you still – do you see that unit cost coming down any further with oil prices?

Well, as oil goes – it goes down, the cost for CO2 goes down. Cost for CO2 is 1% of the price of oil that we receive at the field plus $0.20 transportation per Mcf. So, right now, if we’re getting – if WTI is $45, then we’re netting, let’s say, $49 at the field. So our CO2 cost is $0.49 plus $0.20 or a total of $0.69 per Mcf, so over two-thirds of the costs is sliding with oil price. Now, as oil price goes down, the proportion of the CO2 price that is proportional to oil also goes down accordingly. So we have less and less cushion. But, yes, if oil price goes down, then, yes, our LOE will go down accordingly. So we would see additional downside. In addition, we would expect based on what we’ve been told that the non-CO2 operating costs, we’re hopeful that will continue to decline somewhat as Denbury, the operator, puts into effect efficiencies.

All right. And, so far you haven’t reported any production taxes. I just figured we can revisit that. And, I think, that’s dependent on – you’re currently getting a holiday right now on that, and it’s based on the payout of the – I don’t know, I’m just wondering how that…?

Yes, Delhi is a qualified tertiary project by the State of Louisiana. And as such, it doesn’t – we don’t pay any severance tax until the project is reached payout, which includes cost of capital. And consequently, I think the current projection is that, that payout won’t occur into sometime around the middle of next decade. So we’re 19 years out from having to pay any severance tax, which obviously is a very positive for our financial results of the field.

Okay, all right. And just one more, on the M&A front, as you’ve screened, I was just wondering if you – if – on any other things that you are looking at if you’ve gotten kind of passed the screening phase, and maybe took a harder look on some of them, maybe, I don’t know, there might be something in the middle between due diligence and screening?

Yes. We actually have gone and passed the screening on a couple of deals. We’re still looking at some. As I’ve mentioned, we have some very, very rigid criteria. We’re not going to do a deal just to get a deal done at all. And if we don’t do a deal, I wouldn’t surprise me. If we do a deal, I wouldn’t surprise me either. But we have some very rigid criteria. It’s got to be accretive to cash flow at current prices. It’s got to be accretive and value per share. It has to be supportive of our dividend policy. It’s got to make operational sense. It’s got to bring an operating team with credibility with the assets. It has to bring with it diversity of cash flow and revenues. It has to bring a significant amount of upside. It has to be an area that that we have some reasonable ability to manage. So, I mean, those are all tough criteria, and we’re not willing to stint on any one of them quite honestly. So it’s going to be tough to find a deal, bill passes all that. On the other hand, we think that in the next six months that the way the industry is going that we are likely to see some interesting candidates, we’re looking at some deals. We expect to see more deals. We may or may not do something, it all depends. But one thing I can guarantee you since I’m one of the largest shareholders in the company that we’re not going to do anything they did in the best interest of the shareholders.

Okay. On the deals that you were looking at a little bit harder, was it based on kind of valuation, or was it, you looked at your assets and you just thought it wasn’t a good fit at that point?

There’s always a variety of things that that might tip something over. But I think up to now the valuation has been probably the biggest problem area. People – sellers want to value based on trailing 12-month prices, assuming that we’re in the V-shaped recovery, and we look at it and say, now that’s nice, but we’re not going to agree with you there. We wanted to, if we can do a deal that’s going to fly on current prices. So that’s a – that is a bit of an issue. Looking at privately owned assets is a bit of a challenge, because they don’t have the rigor of the public markets to tell them what value is today.

Right.

But quite honestly that’s probably where the better opportunity is in the future, because the traditional model of invest a bunch of money, develop it somewhat, and then roll it into the public market, and IPO, that model is dead. And the people that started investments along those lines over the last couple of years are probably looking for a way to exit, because what they had planned in guffaw [ph]. So I think that in the next six months, we’re going to see a whole lot more rational valuation by sellers. And, therefore, we could very easily see something that that may meet all of our criteria.

Okay.

I don’t want to preset too hard. I don’t want to make people – give people the idea that by one way or another, we’re going to get the deal done. We’re being very cautious, very deliberate in our process.

Understood, Bob. Well, that’s all I had. I appreciate it. Thanks.

You bet.

Our next question comes from John White from Roth Capital. Please go ahead.

Good morning, gentlemen. I noticed in the commentary on the 2016 capital budget, capital expenditures on Page 2. It actually reviews the 2015 CapEx. It was mentioned, the re-drilling of a production well at Delhi. Are there going to be some more re-drills we’re going to add to the well count at Delhi?

Don’t really expect it. That was a very specific case, a well that had mechanical issues and went down last year, causes a couple of hundred barrels a day of gross production, and it was why production was well below 6,000 barrels until the end of the year, end the calendar – or calendar 2014. That well came back online, that has pushed us back up over 6,000 barrels a day gross rate. And since then, we’ve had some additional improvements due to better filed operations efficiencies. So that was a fairly singular event. We have no expectation of a re-drill. That doesn’t mean it won’t happen, but we have no current expectation that I’m aware of.

Yes, and we – there is a small level of maintenance capital that is expected in the field of this size. And it’s all manner of things from – on the extreme, a re-drill of a well, but in many cases it’s smaller work-overs and little minor operations here and there. And frankly, we don’t see that being a significant cost over the next year, particularly in this environment, because I think the operator and us are – we’re looking to do as much as we can with as little capital and as little investment as we can accommodate.

Thank you. And it was mentioned – you talked about drilling and completion of some more monitoring wells, are those in connection with the NGL plant?

No, those are more in connection with the CO2 flood and trying to – it’s actually part of their conformance process, where they’re trying to make sure that the CO2 is going where they wanted to go to recover the maximum amount of oil and also to make sure it’s not going where they don’t want it to go as well. So it’s part of a broader approach of monitoring the flood, trying to get the best data. And frankly, we’ve seen positive results from that on the production side, with some of these conformance things, where they may plug off a particular series of – particular zone or particular subzone and reroute the CO2 to try to sweep a different area in the field, because there are different layers within the primary producing zone in the CO2 flood.

So it’s about improving efficiency of the flood.

Right. And safety as well.

Okay. Well, thanks. And it’s a pleasure to cover a E&P company that actually has earnings per share, so…

And not doing write-off.

Thanks for your time.

You bet, John.

[Operator Instructions] Our next question comes from John Fox from Fenimore Asset Management. Please go ahead.

Okay. Thank you. Hello, everyone.

Hey, John.

Hello.

A few questions, first on the hedging, just to make sure I have it. It’s $55 plus the LOS spread for the next two quarters on all your production.

Correct. Well, on two-thirds of our production.

On two-thirds, I’m sorry, on two-thirds, so on or about 100,000 per quarter.

Yes, it’s roughly 1,000 barrels a day.

It is a 100,000 per quarter. That’s right.

Okay. I got that. The CapEx of $19.6 million, is that all for the gas plant?

Yes.

So there is no additional CapEx for Delhi in the next fiscal year.

There will be some amounts, but they will be very minor amounts.

Okay. So the future CapEx of the oil part, let’s call it, is really coming in the eastern expansion of the field, that’s a few years out or…?

Yes, it could be – that could start as early as the fall of 2016, they started their expansion, I think, more likely you’re looking at 2017, 2018 timeframe.

Bob, is there a sense of how much that would be?

Well, it’s hard to really say, I mean, we have a reserve report CapEx numbers. But generally, I think, we’re looking on the order of versus about…

It’s about…

$12 million to $14 million net to us for each phase.

Yes, I think it maybe a little higher than that $14 million or $15 million per phase net to us, but it’s in that range. It’s in the somewhere of low teens.

And that will be split over the two years?

Well, it would be $14 million or so per phase. So in each phase, it will be essentially a year and not necessarily consecutive, I mean, I think it’s like – that’s where it’s run right now in the reserve report.

Okay, great. And then if you could give a little more clarification on the gas plant, on the press release you had a 1,736 a day gross number for fiscal 2017. And then earlier in this call, Randy, you mentioned, if I got it correctly, 500 a day of NGLs and then an additional 130 of oil, which would be 630 a day, which something kind of jibe with the 1,736. So could you just give a little bit more in the production breakout for the NGL plant and the additional oil that might come out with the CO2 flood?

Sure, actually, I can. If you’re – are you looking at the schedule in the earlier press release for the reserves?

Yes, I’m.

Okay. Well, basically, if you take that around to 1,800 times to our net combined, net revenue interest is 26.5%.

Right, I have that.

That’s approximately the 500 barrels per day net to us. And then actually if you look over the, the oil is coming in on the PDP, because it is currently producing wells that we’re in. So we see that increase from $16 million to $17 million of about, in this case, about 280 barrels a day. That’s really – 130 of that is our estimate of the effect of the plant on efficiency in the field, that’s going to give us a little more oil.

Oh, I’m sorry. Yes, that’s a gross basis. So it’s declining from $16 million to $17 million, but then it’s also increasing as a result of the new oil from the improved efficiency, and it’s about 8% according to our reserve engineer’s models on the increase. So that’s where you get that 130 barrels. So it’s about 500 barrels a day gross, 130 barrels a day net.

Okay. So the 130 is in the column on the press release that proved developed producing oil barrels per day?

That’s correct.

And then the NGLs are – under the NGL column and that’s just simple take your revenue interest percentage?

Right.

Okay. And if I sold a barrel of those NGLs of today’s prices, what would I get per barrel?

Well, it’s a heavy mix. And we’re – we model it at any – somewhere between 48% and 54% of the oil price. And so if you wanted to be very simplistic about it, you just say approximately half of the oil price.

And that was…

It breaks down about a third of the NGL stream, about a third of it is propane, which has the lowest price then the third of it is butane, which has a better price, and then a third of it is pentane plus, which are also called natural gasoline. And those traded at a high percentage relative to the WTI or LLS price, because those are almost the same as refined products natural gasoline. So the blended price ends up being, like I said, somewhere in the high 40s to low-50% of the equivalent oil price.

All you need is half. Thank you.

That’s a good one. That’s a good way to look at it.

And is there a – if you look at the reserve report kind of a cash margin on those NGLs?

Well, like I said earlier, we’re going to use the methane, which is now not – which is no longer in the reserve report. We’re going to use the methane to generate electricity and offset our power costs, both our existing power costs and our future power costs for the plant. And we expect that to be about a wash on kind of combined basis. And by the way, I’d say, they’re no longer – they’re not in the reserve report as sales volumes, because we’re not going to sell them, but they’re in there as offset to operating costs.

Yes, I guess, I asked the question poorly. So we have $45 oil and $23 per barrel of NGL using half. There’s production cost in that total. The $23, how much would net for you cash margin after your production costs and all that?

It should be almost 100%.

Almost 100%.

It’s on a combined basis, where if you assume our existing LOE for the field.

On an incremental basis that will be…

Yes, combined incremental basis. Sorry about that. Yes.

Okay. Because – the reason you’re telling me about the methane, because that’s the cost reduction that factors into all that.

Right.

Correct.

All right. Thank you. Those are all my questions.

Our next question comes from Jim Collins from Portfolio Guru. Please go ahead.

Hey, Jim.

Good morning, Bob. A question on the share repurchase program. It looks like as of June 30, the share count was actually up a little bit. So just want to know if you’d sort of walk me down that $5 million authorization between June 30 and today.

Yes. Today, we have bought a little over 200,000 shares back with that program. I think it’s about $1.5 million expended. So that’s where we stand right now. The share count would be up due to vestings and so forth.

Sure, and can you just say, Bob, as a board member, how are you thinking about returning capital to shareholders in terms of priority between dividend and share repurchases? And, I guess, category three would have to be accretive acquisition at this point, how are you sort of prioritizing that?

Well, there are really two different things. The dividends are a continuing policy of returning capital, our earned capital back to shareholders, giving them the fruits of the business that we’ve been able to complete today. The share repurchase is more of an opportunistic. Whenever we see the stock price at a level that we believe is at a severe discount value, then we look at it as one opportunity for – in our portfolio for how to place capital, all within the limitations of what’s in the long-term best interest of the company and the shareholders in terms of liquidity preservation and so forth. So we’re willing to consider that to be an opportunity to make a good investment as long as it doesn’t put us at risk of completing the Delhi project and so forth. So it will be an opportunistic type of thing going forward in terms of additional share buyback.

Okay. That clears that up. Thanks for answering my question, Bob.

Our next question comes from Scott Bedford from PCM. Please go ahead.

Good morning, guys.

Hi, Scott.

Great quarter.

Thank you.

Just a follow-up, my question was somewhat answered. But on the acquisition front what is on your screen, the size of acquisition looking forward in terms of – given your market cap is still relative to small, is it going to be more than your market cap, half the market cap? Do you have some type of the governor on that? How much debt would you put on or would you use convert or would you use stock? And the second question is, in this whole acquisition modeling that you’re doing, how does it your EPM stock fit into that? I mean, are you looking at that as one of the better acquisitions out there, given the amount of cash flow you’re going to give and the fact that you’re just buying back stock more aggressively would be a better use of capital than trying to buy something and not sure if breaking into your portfolio? Thanks.

Sure, we are looking at – we were only looking at deals that are manageable from our perspective on the financial side. So we’re looking at deals that are like may be in the $25 million to $50 million on the low-end, nothing bigger than market cap on the upper end. But anything that we do is going to have to be a deal that gives us assets an equal or greater discount than what we see in our current stock right now. And it has to help us with diversification of our revenue stream, and it has to add considerable upside that we will be paying a little – very little for. So it gives us more of a gross story on top of what we’re doing in Delhi. To the extent that that we get this kind of in the marketplace, I think, is because of our lack of diversity we’re dependent on one field. And so to the extent that we can improve that issue, and I think that the market will reward us. We will only look at deals that will give us as good or better opportunity than buying back our stock. Obviously, if we can do better by buying back stock, that’s what we’re going to do, because, again, that – my focus is what’s in the best interest of shareholders since I’m one of the major shareholders. I’m not going to do anything that that impacts that in a negative way. So we’re looking for ways that will improve the value of the stock near-term and long-term basis and only things that are as good as or better than buying back our own stock.

Should we expect [Multiple Speakers] go ahead.

As to leverage, we’re always been historically very conservative on leverage. So I think that would always be part of our focus is to maintain a lower risk profile than the industry as a whole. And so I don’t think you would see us lever up significantly in this kind of transaction.

But that doesn’t mean that we are scared of leverage and we don’t mind doing that. But that leverage is going to be on a very conservative level and is going to be based on current pricing, it’s not going to be based on some expectation of a higher price. It’s going to, where they’re getting today, and we can also stress test that what happens if oil price goes down, what happens if gas price goes down, is a lever still very manageable in those scenarios in terms of using stock as currency. Again, we’re not afraid of doing that as long as we’re making a deal that is accretive to shares on value, cash flow, and earnings. So we’re really different from a lot of other companies, and that management has their own personal wealth at stake. So we’re not going to do anything that shoots us in the flood; personally, I can assure you that. So we’re going to be very cautious, very careful, and we’re going to increase the value of the shares going forward and position us to have an even bigger bounce when oil prices do recover, as we expect they will in the coming years, not to $100, but $70 to $80 range.

So should we expect to see the share and repurchase, at least, cover the dilution or not going forward?

I’m not sure of all of your question.

Dilution on management?

Yes, on the options, I mean, it’s not really covering. I mean, shares are still increasing, right, look at the numbers.

Well, we have very, very few options left. I mean, almost, I think, almost all of our options and warrants held by staff were excised long time ago. There’s very little left. I mean, Randy, I don’t know, how many, maybe 100,000?

Yes, [indiscernible] shares. And then we’ve got – and our plan, we really don’t have many shares left, and we’ve been pretty frugal with those in the way, we don’t issue a lot of options, we issue primarily a restricted stock, and lately performance-based restricted stock.

Yes, going forward vesting for restricted stock awards is going to be driven by some very tough performance goals, based on total shareholder return, based on hitting earnings targets, revenue targets, things of that nature. And then if we hit those, I think, our shareholders in general would be more than happy with the small amount of dilution on those awards, because we’re not really giving out that much on a percentage basis whatsoever anymore.

Okay. So we can expect that going forward then?

Oh, yes.

Okay. Thanks.

Our next question comes from Kevin Reinhard from Derivatives Capital Investing. Please go ahead.

Good morning.

Good morning.

I would like to go back to the hedges. I know there are two-thirds of production through the rest of 2015 calendar year last two quarters or first two quarters of 2016 fiscal year. What’s the game plan going forward for extending those, the price targets maybe that you’re looking at and things of that nature, because I’m assuming that’s always on your mind?

Sure, I guess, I’m not entirely sure I want to go into lot of detail about our tactical strategy near-term. But we don’t pretend that we’re experts on timing and hedging, and we’re not traders whatsoever. We do have our certain set of beliefs about what we think commodity prices are going to do long-term. And so when we see the divergences from that belief, then we will act accordingly on our hedging strategy. So if oil price goes down a lot, we will definitely look at liquidating their hedge. If we see oil price bounce up higher than our expectations, then we may look at reinstituting those hedges that we liquidated or maybe extending them slightly. But I don’t know that we will be looking at entering into hedges on a long-term basis, especially when prices are low to start with in general. If our long-term belief is that oil prices have to bounce back into the $60, $70, even as much as $80 range over the next couple years, just to be a sustainable level, that then makes sense to lock in a low price at that same timeframe. So…

So is there anything really looking forward into calendar year 2016, or is that still just a play that you should go and see what this overall market is going to do?

We have no hedges for calendar 2016 at this time. That doesn’t mean we won’t enter into some. If we see prices get to certain level.

Okay. Thank you.

Yes, our primary goal is to cover our short-term capital requirements associated with the gas plant and being able to maintain the dividend in that period. After we get past the gas plant, the financial picture of the company changes pretty dramatically. We’ve ended this fairly large capital project and we should see a nice increase in our cash flow. So we don’t want to hedge away. We won’t be in a – we don’t need to be in a defensive position at that point. We certainly wouldn’t want to hedge away our upside potential. So I think it’s really pretty short-term the way we’re looking at this hedging program. Just trying to get through the…

That’s an excellent point that Randy has reminded us of. It’s that our CapEx – our cash needs are really limited to between now and next summer. And once that plant is installed we don’t really have significant cash expenditures to look forward to. We don’t have a lot of debt we have to cover, debt service we have to cover, and at the same time production of these remarkably increase. So the need to hedge is – will get changed.

Okay. Thank you very much. I really like covering a company that doesn’t have to play that defensive game all the time. It’s good news to hear it.

Yes.

Thank you very much.

Thank you.

Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Herlin for any closing remarks.

Thanks for joining us. Again, we think we had a good quarter. We look forward to the coming year and think it’s going to be a good one relatively speaking. If you have any other questions feel free to give us a call and we’d be happy to chat with you. Thanks again.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.