Evolution Petroleum Corporation (EPM) Q2 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to your Evolution Petroleum Second Quarter Fiscal 2019 Earnings Release Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, David Joe, Chief Financial Officer. Sir, the floor is yours.

Thank you, Karen. Good morning and welcome to Evolution Petroleum's earnings call for our fiscal 2019 second quarter ended December 31, 2018. We will discuss operating and financial results for the quarter. I am David Joe, CFO, and joining me on the call today is Bob Herlin, Chairman of the Board and Interim CEO; and Steve Hicks, Senior Vice President of Engineering and Business Development. If you wish to listen to a replay of today's call, it will be available shortly by going to the company's website or via a recorded replay until March 6, 2019. 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 news release, this call will highlight the key results and overall trends and an update on Delhi for the remainder of our fiscal 2019. I am now going to turn the call over to Bob Herlin.

Thanks, David, and welcome to everybody for this second quarter of our fiscal 2019 earnings call. Once again Evolution has posted a really strong quarter of performance. We had earnings of almost $4 million on $11 million in revenues, nice ratio. We had quarterly cash flow from operations of $14 million, and we are able to fund our CapEx at Delhi payout over $3 million dividends and increase our working capital by $3 million compared to the start of the fiscal year. So we did pretty well fiscally for the shareholders. We now have almost $31 million of working capital, with no debt drawn on our elected $40 million borrowing base. Our Delhi Field asset is performing really well, with our 2018 infill well program already beginning to contribute meaningfully to production. We're working with the operator on some new projects that could further increase cash flows and value of our assets there. We expect to begin next phase of project expansion at Delhi sometime during our fiscal 2020 period. Since we don't have any debt outstanding, the board has elected to not utilize hedges on recent periods. Consequently, our current and future performance will be tied to losing the light sweet oil price that currently sells at a nice premium to NYMEX, which is a real benefit to our shareholders. Now we review that strategy on a quarterly basis and we consider what prices are at the time, what our expectations are and what our financial needs are. Looking forward, we continue to evaluate numerous opportunities to acquire compatible developed oil and gas related properties that meet our specific criteria and support our dividend policy. The process of selecting a new CEO is also continuing and I'm expecting that this should be completed this spring. Now, with that I'm going to turn this discussion back over to David for some more operating details. David?

Thanks Bob. As Bob mentioned we reported yet another excellent financial quarter despite much lower oil and NGL prices in our fiscal second quarter. The continued strength in the premium for Louisiana Light Sweet oil pricing in our fiscal second quarter, combined with production growth of 2% at Delhi were key factors to these financial results. Looking forward it appears that the LLS premium remains positive through at least February of 2019 and the operator expects stable production from Delhi as more infill wells come online and improved efficiencies at the NGL plant are expected to improve rates. For the quarter ended, December 31, 2018 total production volumes increased 2% compared to the prior quarter. As anticipated, oil production from the infill drilling program had contributions from six wells in our fiscal second quarter. One well commenced production in January and the remaining two wells are expected to commence production in our current fiscal third quarter. Realized quarterly oil prices on average were $64 in our fiscal second quarter, a 10% decrease from the prior quarter. Realized NGL prices were $22.46 per BOE, a 40% decrease from the prior quarter. Thus far, January's average WTI price is 5% higher than December's WTI price and the first six days in February is a bit higher than that. So, we all hope this trend continues throughout the month, the quarter and the year. Total CO2 cost, which makes up a significant portion of our operating cost or 45% or more was essentially flat quarter-over-quarter at $1.5 million. Purchased CO2 volumes were up 10% quarter-over-quarter to 77 million cubic feet per day. We expect these CO2 purchased volumes to increase to about 90 million cubic feet per day as additional injector wells commence injection in the current quarter ending March 31st. As previously mentioned, oil prices were down 10% in the quarter, which offset increased CO2 volumes and thereby helped maintain overall CO2 expenses flat quarter-over-quarter. Our other lease operating expenses in the field were flat quarter-over-quarter at $2 million. Our total lifting cost for the quarter was $18.45 per BOE, a 2% decrease from the prior quarter of $18.88 - $18.87 per BOE. With revenues per BOE at $59, Delhi continues to generate field operating margins in excess of $40 per BOE, which is an impressive 68% of revenues per BOE. With the large part of our operating costs relatively fixed and the majority of any commodity price increase will directly increase our operating margins in the field. In the current quarter our CapEx at Delhi remained modest at $1.3 million, the majority of which was for completing a water source well and a water injection well in preparation for next phase of the development and for some work over in conformance projects. The anticipated capital expenditure for the remainder of our fiscal year or for the next six months is estimated to be up to about $1 million net to Evolution. The operator has not yet proposed our capital development plans for Delhi for calendar year 2019, however, it's not expected to - it's expected to resemble historical spend rates in the field. It's worth reiterating that the Delhi field is a high-quality, long-lived asset, which has been a game changer for Evolution shareholders for a while now and she continue to generate free cash flow for the company in the foreseeable future. We continue to manage our G&A expenses prudently, reporting a decrease of about 4% to $1.25 million for the quarter ended December. The company remains committed to returning cash to shareholders and has now paid out $53 million or about $1.61 per share in dividends to shareholders since the program's inception over five years ago. Current dividend rate is $0.40 per annum, a robust 5.5% yield, based on yesterday's closing price. Our liquidity position remains very strong with working capital of $31 million and building at quarter-end, substantially all of which was cash. We have an undrawn reserve-based credit facility set in elected amount of $40 million and Evolution remains well-positioned to fund future development of Delhi to fund the dividend program and to pursue new growth opportunities. This concludes our review of financial results for our fiscal quarter. In summary, we reported strong revenues of $11 million, net income of $3.9 million or $0.12 earnings per share, continue to pay out a quarterly dividend and declared our next dividend and continue reinvestment into the development of Delhi Field. I would now like to turn the call back over to Bob for some closing remarks.

Thanks David. I just wanted to clarify one thing. We want to make sure everyone understands. While January prices are a little higher than December, oil prices declined substantially during the quarter, so our December oil price is far less than the average for the quarter. Just want to make that real clear. Now, as we've discussed in past calls over the last year, Evolution is actively seeking to acquire additional long-life, mostly developed and producing reserves, that are going to provide diversity, while supporting and growing our dividend. This effort is very disciplined and we won't take undue risk or excessive leverage. And we are only going to pursue those opportunities that fit our very specific criteria of location, fit appropriate risk-return ratio, and with our cash resource and untapped credit line, I think we're really uniquely positioned to pursue opportunities, and we do that on a regular basis. With that, we are ready to take questions. Operator, please open the line.

[Operator Instructions] And our first question comes from Jeff Grampp from Northland Capital. Please state your question.

I was hoping to get a little bit more clarity, in the release you guys talked about some efforts you're all making on the NGL side, both on - it sounds like both the pricing and the production side of the equation. Can you guys talk a little bit more about that? Is it - are there some kind of, I guess, NGL recovery issues you're working through or plant reliability, or I guess, just some more detail there and maybe expectations for the next couple of quarters as far as pricing and production levels of NGLs.

Sure, Jeff. There's really two things that we have been working and continue to work on. One is, to improve the production of the existing plant and improve reliability and reduce downtime. I think we've had some real good success so far and we're already seeing the benefits of that. I think production appears to be steadily higher. Now, whether or not we'd improve the uptime on that is something that spans out our time. On the second front which is a little more substantial, we're really not in a good position to talk about that. We're working with the operator Denbury on some opportunities on how to high grade what we make on our NGLs. But I really don't think it's appropriate at this time to go in any detail since that's still kind of fluid situation. So, I prefer not to go into more detail on that sorry.

No, I understand. I appreciate the details nonetheless. And for my follow-up, I just want to make sure I heard the comments properly, you guys talked about I think the CO2 injections going up to 90 million a day, kind of, in the near-term. I just wanted to clarify is that, kind of, related to expansion of the infill drilling program that you guys have completed? And I think in past quarters, you talked about expecting to see some increased injection rates once Phase V starts ramping up. So, just wanted to clarify that 90 million a day is, I guess, exclusive of any ramp-up that might also occur when Phase V gets up and running?

I think you are correct that the increase in injections is tied to the infill program which added additional injection wells to the field and obviously, then that would mean that we would need to have more injection of gas. So, we inject all the gas that's produced in the field of CO2 that is. And then we also have increased our purchase amounts. And we expect that purchase level to be higher for some period of time, not for life of the field, but certainly in the next few years, we'll see a little higher, in general, purchase rate of CO2.

Okay, great.

And obviously we're doing it because that's going to increase oil production which we have been seeing. We've seen a very nice improvement in production-related to the infill wells, of course, it's still early, but we're very pleased at this point with the results.

And our next question comes from Joel Musante from Alliance Global. Please state your question.

Yes, I just had a - I just was going to ask a question on the NGLs. And I'm not sure if you can talk about why there were - why the price was lower this quarter as opposed to given your previous comments to Jeff?

Yes, the simple answer, Joel, is the NGLs follow the price of oil. And so the WTI price in December for oil when we know what all the averages were for the quarter. December oil was $49 - $48, November was $56. So, we saw the NGL prices, kind of, falloff the cliff in relation to the drop in oil price in November and December unfortunately. That's the simple answer.

There's a second part to that Joel. Part of what - part of our NGL revenues are actually recorded as a reduction to LOE. And so our reported NGL price is really not indicative of our actual receipts. But under accounting requirements, we have to show a portion being reflected as a reduction of LOE. And that's somewhat deceptive in terms of the price we show is really not the real price that we're getting. Accounts will shoot me if I try to describe it better than that but...

And I just wanted to see if we can get a sense. I know you don't give guidance, but I just wanted to see if we can get a sense for third quarter production directionally, is we look into something that's flattish or maybe same kind of growth as the second quarter?

I would say that our daily rates are better and we had a little bit of downtime in January for turnaround of the plant. So that will impact January production a little bit. But I think on a daily rate, for the quarter, our uptime, that we'll do better than Q2. The flip side to that is obviously oil price. We're not going to get as much oil price as we averaged in Q2.

Right, right. So you should get help on the LOE side there to kind of offset?

Yes, a little bit. I mean, that's kind of the odd thing about Delhi and our operation there is that the impact of oil price is partially offset by the reduced cost of CO2 on per Mcf basis, because it is tied to oil price. But it isn't a one-to-one offset by any means, it just cushions it.

Right, right. Okay. And anything you can add on the acquisition front. I know the Delhi asset is kind of a hard asset to replicate from an acquisition point of view but I'm just wondering.

We are working very hard on it. That's what is basically the full time - almost full-time job of Steve Hicks, our Senior VP, and another fellow who helps him out. That's basically all they do is look at deals. We have some very hard criteria that we follow and we don't want to stray from. We have - in terms of size, in terms of location, in terms of the nature of the reserves, are they long life, what kind of the P&A obligation do they have, is it properly reflected, how does that asset impact our head? Because we roll that into our cost forecast. We worry about, okay, what kind of a commodity price they get, or they exposed to a volatile area, like if a gas asset that sells into the Waha Hub, that's a scary place to be, it has been for some time now. Do we really want to be exposed to that? Do we want to have - do we want to buy a gas asset where the gas can only flow to, let's say, California. You have to factor all those things in, in terms of how does it fit with what we are trying to accomplish. And what we're trying to accomplish is, how do we maintain our dividend, how do we extend it and how do we grow it. That's the question we ask every time we look at the deals, is how does it fit into that? How does it impact our risk-return profile? Our shareholders have made it clear to us that they don't want us to take undue financial risk. And quite honestly, with my background and history I really have no desire to take undue risk. I'd rather be a little boring and mundane and be consistent for our shareholders. I think that's why we get the valuation we get in the marketplace. So we've been very careful in what we do and how we do it. But that is a mandate by the board. So we want to do something, we want to acquire something that meets all of our criteria. Kind of long-winded answer, but it's a topic at the forefront of every board meeting and in a lot of our conversations in and around the office.

And there appear to be no further questions at this time.

All right. Thanks everybody. Appreciate you all listening in, and again, if you have any questions or comments please feel free to call in. I'm sure David will be happy to answer them or you can always get hold of me, I'll be happy to help you as well. Thanks again.