Evolution Petroleum Corporation (EPM) Q3 2017 Earnings Report, Transcript and Summary

Thank you for standing by. This is the conference operator. Welcome to the Evolution Petroleum Corporation Third Quarter Fiscal 2017 Earnings Release Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Randy Keys, Chief Executive Officer and President. Please go ahead, sir.

Welcome to Evolution Petroleum's earnings presentation for our fiscal third quarter ended March 31, 2017. We will discuss operating and financial results for the quarter. I am Randy Keys, CEO of Evolution Petroleum. Please note that any statements and information provided today are time-sensitive and may not be accurate at a later date. This presentation contains 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 described in our filings with the SEC. Actual results may differ materially from those expected. Evolution reported continuing positive results for the quarter ended March 31, 2017. Our net income was $2.4 million on total revenues of $9.5 million, which gave us earnings of $0.07 per common share. If we compare back to the same quarter a year-ago, the industry was at the bottom of this downturn with oil prices below $30 per barrel. Our revenues in that quarter were $5.1 million fairly over half the current quarter and we reported our only quarterly loss in the past six years at $0.01 per common share. What a difference a year makes. While current oil prices in the high $40 and low $50 per barrel are not ideal, they certainly beat the year ago. Last quarter we announced an increase in our quarterly dividend to $0.07 per common share and we announced the same dividend for this quarter. We have now paid 14 consecutive quarterly dividends and have authorized the 15 payable on June 30. At our closing stock price on Friday, our dividend yield was 3.9%. Production in the Delhi field has continued to increase adding over 200 barrels of oil per day on a gross basis. Our net share of oil production during the quarter exceeded 2,000 barrels of oil per day for the first time in our history. And with the initial production from the NGL plant, we averaged 2,260 barrels of oil equivalent per day for the quarter. During the quarter, we reported revenues of $9.5 million at an average oil price of $49.29 per barrel. Our total costs were $5.6 million resulting in income from operations of $3.9 million. Of these costs, our non-cash DD&A expense was $1.5 million and our stock based compensation was $0.3 million. So our earnings before interest taxes in DD&A was $5.7 million. Our tax expense for the quarter was $1.5 million based on an expected combined state and federal tax rate for the year of 36.5%. However, with bonus depreciation from the NGL plant in the current year we expect our combined cash income taxes to be approximately 5% to 6% of taxable income. That means we expect to defer the other 30% of our book tax expense for the current fiscal year. We reported net income of $0.07 per common share in the quarter which brings our fiscal year-to-date earnings to $0.16 per common share. Gross production in the Delhi field averaged 7,786 barrels of oil per day during the March quarter. Based on our 26.2% net revenue interest, our net production was 2,042 barrels of oil per day for the quarter. We have shown a very positive trend of increasing production over the past two years. Our production rate for the quarter is 25% higher than it was two years ago in the first quarter after reversion. Most of the increase has resulted from conformance projects to increase the efficiency of the CO2 flood through selectively sending the CO2 to the most productive sub-zones within the formation. Our net capital investment in these conformance projects over the past two years has been around $6 million. So the return on investment in both cash flow and production has been very strong. This quarter we began initial production from the NGL plant and added over 200 barrels per day of natural gas liquids production. Our average oil price for the quarter was $49.29 per barrel, an increase of 6% over the prior quarter and our highest average price since June of 2015. It is a huge improvement over the $30 per barrel net price of a year ago. Our net realized pricing in the Delhi field was $2.49 per barrel below average WTI prices as quoted on the NYMEX. This is a slight improvement over the prior quarter as the LLS price premium improved slightly. Since the oil from Delhi is moved by pipeline and not by truck, we have a relatively small discount to WTI pricing. We continued our positive trend of lower purchased CO2. It's a very strong accomplishment of the conformance process that our production has increased while volumes of purchased CO2 have declined dramatically. In the span of two years, purchased CO2 volumes have dropped from over 100 million cubic feet per day in early 2015 to the current level of under 70 million cubic feet per day. Part of the conformance process is shutting off zones that produced high volumes of CO2 with relatively small volumes of oil. This improves the overall efficiency of the flood and allows for similar or even higher rates of production with less purchased CO2. This has been a key driver of the drop in our total production costs per barrel, from nearly $20 per barrel to current levels of around just under $14 per barrel. In the current price environment, these lower lifting costs are very important to maintaining profitability. Purchased CO2 is our largest component of total production costs, accounting for up to 50% or more of total costs. Under our contract, CO2 costs are tied directly to the realized price of oil in the field. So our largest cost is variable with revenues. Along with reduced volumes of purchased CO2, this pricing is another key factor to maintaining profitability in a challenging oil price environment. We saw an increase in production cost of approximately $0.5 million this quarter primarily from incremental cost of the NGL plant. During this initial quarter there were some non-recurring start-up costs, so we do not believe that this is representative of the additional costs of the NGL plant going forward. Also these incremental costs are estimated as the NGL plant is in many ways integrated with the overall CO2 recycle facility. As such it is difficult to accurately separate the costs of the NGL plant from the CO2 recycle cost. We did not see significant savings in power costs in the current quarter which is one of the benefits that we expect from the electric generating capacity which is part of the plant. In the future when we consider potential power cost saving and other costs which benefit both the NGL plant and the CO2 recycle facility, we may not be able to accurately split the net costs of the NGL plant from the rest of our Delhi field operation. Our G&A costs have come down dramatically over the past three quarters now that the litigation settlement has been resolved. Our litigation costs were very high prior to the settlement exceeding $1 million in the March quarter of last year. Our normalized cash G&A is continuing below $1 million per quarter which is our current target. We mentioned in the press release that we incurred a small amount of discretionary costs in connection with evaluating potential producing property acquisitions. We plan to keep these costs at a modest level for such things production databases and software and assistance with engineering evaluations. Evolution began paying a quarterly cash dividend on common stock in December of 2013 and has now paid 14 consecutive quarterly dividends. Our cumulative return to shareholders now totals over $32 million or $0.985 per common share. We were forced to cut the dividend in early 2015 based on the significant drop in crude oil prices. There are many factors in addition to oil prices that way into the decision on the amount of the dividend, but an improving oil price recovery is certainly a foundation to increasing distributions. Over the past three quarters, we've increased the dividend from $0.05 per common share to $0.07 per common share. Management in the board remained committed to returning cash to shareholders in the form of a common stock dividend. The Delhi Central CO2 processing facility, is a very large operation with the new NGL plant located on the on the Western side of the facility. This facility handles the compression and injection of almost 300 million cubic feet of CO2 per day. While also processing the oil and water produced from the field and returning almost 200 million cubic feet of recycle CO2 for reinjection into the field. The NGL plant at full capacity is designed to process 150 million cubic feet of this recycle stream. Our goals with the NGL plant are threefold. First, the plant removes methane and ethane for field used to generate electricity with a gas powered turban. Second, it cleans and purifies the CO2 stream for reinjection into the field, which we believe will increase the efficiency of the CO2 flood and ultimately increase oil production. Lastly, the plant generates an additional revenue stream from the production of higher value natural gas liquids for sale. The NGL plant was commissioned in late December and commenced operations in January. By early February the plant was producing at 70% of capacity, but we have identified certain factors, which needed to be fixed in order to reach full capacity. New processing plants with this level of complexity often require a period of adjustments to reach full operating capacity and efficiency. The plant is not yet achieved full throughput volume on a consistent basis, but we are working to remedy this issue. The plant has been producing a very rich mix of liquids with one-third of the product and high value pentane and heavier liquids and an additional one-third of the product in butane. Our net pricing in the quarter was seasonally strong at $23.71 per barrel. Butane prices are typically higher in the winter when it can be blended into gasoline. These prices will fluctuate over time and will not always be correlated to WTI pricing. We have also encountered an issue with impurities in the NGL spring. This gives rise to a quality differential and reduces our net pricing. We are working with the operator to identify and correct this issue. Despite, these early startup issues the NGL plant is on track to meet our three main goals as described above. We are extracting the methane and ethane for power generation. Cleaning up the CO2 stream for reinjection and producing a yield of higher value NGL's to generate incremental revenues. This concludes our review of financial results and operations for the March 2017 quarter. In summary, we reported positive net income of $0.07 per common share and increase in cash dividends on our common stock to $0.28 per share on an annual basis, very strong performance from the Delhi field and the startup of the NGL plant. Our liquidity position remains very strong with working capital increasing by $2.9 million to $21.5 million at the end of the quarter, substantially all of which is cash. We paid out $2.3 million in common stock dividends for the quarter, which was a little over 40% of our EBITDA. We were tired all of our preferred stock and have no debt on the balance sheet. We are in a very enviable position to look at new growth opportunities. Thank you very much for your interest in Evolution Petroleum.

We'll now begin the question-and-answer session. [Operator Instructions] The first question comes from Jim Collins with The Portfolio Guru. Please go ahead.

Good morning, Randy.

Hi, Jim, how are you?

I am doing fine. Thank you. Thanks for taking my question. In terms of the - if you look at Slide 5 and Slide 8 it's interesting that purchase CO2 is coming down, the production is going up. I'm Just how do we sort of look at that going forward you know how might one model that will the purchase CO2 volume continue to decline as the field increases production or sort of mathematically, how do we look at that?

But I think we've achieved a lot of the efficiencies that we set out with this conformance project. We should - I would look for CO2 to remain fairly consistent at these levels. There is a possibility that the NGL plant will require some additional purchased CO2 for makeup volumes as we were moving the methane. We don't have a way to quantify that yet, but we may see a slight increase in purchased CO2 and as far as the increase in production, we do have some future - additional conformance projects and we have a fairly significant infill drilling program planned for later in the year that may have another significant increase in production. That one will probably require a little additional CO2. So let me step back in general more CO2. Great - in order to increase oil production, you need more CO2. That's the general theory. We've been able over the last two years to improve the efficiency of the CO2 that we're using and be able to achieve these results with less purchased CO2 that's a little counterintuitive for most CO2 flood, but it's just unique for our ability with these conformance projects to achieve that results.

Okay, and on the infill drilling program that you mentioned, how much will that cost sort of net to - net evolution towards capital and it seems like in the press release that was a calendar 2018 event. Is that correct?

Well, no there's two there's two additional projects.

Okay.

There's the program and that one is about a $4 million to $5 million net to us. Now there are some other capital projects as well in conformance and preparation for Test Site 5 that may bring that total closer to $6 million for the for the calendar year. So we've got a situation where the operators on a calendar year, we're on a fiscal year, so the two don't lineup very well. But then the part that we talk about is being in fiscal 2018 is our Test Side 5 expansion and that is - that's somewhere out at least in 2018. It's dependent to some degree on all prices that one has a net cost fairly substantial. It's in excess of $10 million to us. And like I said the timing is has not been put into a firm timeline at this point. But we do see it as a very attractive project both for us and the operator and assuming we get at least reasonable prices, we should see that in the near-term.

So would you done Denbury actually, do you think that they would green light that at current oil prices or does that project need somewhat better prices?

Well, current from two weeks ago, yes, probably. I think somewhere in the in the mid-50s that project would in my view would get a green light, certainly Denbury would have their own decision on that. In the mid-40s if this were sustained that project would probably be deferred. So but anyway does - the point being, it doesn't need $60 or $70 oil to be sanctioned.

Okay. That's great, thanks. Thanks for taking my questions Randy.

[Operator Instructions] Next question comes from Chris McCampbell with Hilltop Securities. Please go ahead.

Good morning guys. Can you talk about the environment out there in terms of M&A and I believe you've still got a stock repurchase agreement as well and maybe some color on that?

Good to hear from you. We have seen a significant increase in the number of properties that are coming on the market that there are of interest to us. We've gone through a long period of adjustment over the past two years where sellers were reluctant to sell for prices that we considered to be market value and that market value has trended down over the past two years. So we think that supply and demand and market view of pricing has come into equilibrium really just since late last year and into this first part of 2017. The other thing too is that we've got several of the large MLPs that are exiting the Chapter 11 process and they are starting to put some of their properties on the market. We've got another couple - there were five large MLPs that went through Chapter 11 and two of them have started to divest through some of their non-core properties and we've got two more that are going to likely exit in the next few months. So it is creating an interesting supply of these mature conventional properties that produce nice cash flow, but are not trading at significant premiums because they really don't have a lot of perceived upside from both undeveloped locations or other potential shale development or other upside. And so we think we can - we may be able to buy these properties that what we consider to be rational pricing. As to your other question, we do still have $3.6 million authorized in our share buyback. The position that we're taking now is that we're going to give this current period some time to see if we can be successful in property acquisitions. We think that we can add properties, we believe we can add properties that will be accretive in a material way to our shareholders and therefore are a better use of that cash than share repurchases. And we're going to take some time this year to evaluate that. We've already been evaluating it over the past several months. And I don't look for us to do share repurchases in the near-term, although we are sitting on a fairly large working capital and cash balance, but it is a tool that we have for the future based on where we see the market.

Thanks, Randy. Good luck.

Appreciated.

There are no more questions at this time. This concludes the question-and-answer session. I would now like to turn the conference back over to David Joe for any closing remarks.

Thank you, everyone for participating on the call today. Just as a reminder, the Company prerecorded a message on our website with accompanying slides that are generally available after the press release. We did that last quarter. We did that this quarter and that trend should continue in the future. And we look forward to our fourth quarter and full-year results in early September. Thanks, everybody. Have a great day.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.