Evolution Petroleum Corporation (EPM) Q4 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to this Evolution Petroleum Fiscal 2019 Earnings Release Conference Call. As a reminder, all lines have been placed in a listen-only mode and after today's prepared remarks you will have the opportunity to ask questions. [Operator instructions]And now for opening remarks and introductions, I am pleased to turn the floor to Evolution’s CFO, Mr. David Joe. Welcome David.

Thank you. Good morning and welcome to Evolution Petroleum’s earnings call for our fiscal year ended June 30, 2019 and our fiscal fourth quarter. We will discuss operating and financial results for the year and the quarter, as well as year-end reserves.I am David Joe, Senior Vice President and Chief Financial Officer of Evolution and joining me on the call today is Jason Brown, President and Chief Executive Officer, and during the Q&A session, we’ll also be joined by Steve Hicks, Senior Vice President of Engineering.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 reply until October 12, 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 primarily focus on key results, operations and an update on Delhi field and plans for fiscal 2020.I would now like to welcome and turn the call over to our President and CEO, Jason Brown.

Thank you, David. Good morning everyone, and thanks for joining us today for Evolution’s year-end fourth quarter fiscal 2019 earnings call. As you know, it's my first earnings call with the company. I'm excited to join the team and look forward to building upon a fantastic foundation that Evolution has built.Overall, the company continues to generate consistent and solid financial results. Strong cash flows and a dependable dividend have been the bedrock of our operation, both of which continue to benefit from the premium Louisiana Light pricing received over NYMEX WTI. With that, I'm pleased to announce our eighth consecutive year of positive earnings for the company.Reserve volumes have been reported in prior press releases, but to give you some additional color on those results – result I’m happy to say that our proved reserve volumes totaled 9 million barrels of oil equivalent with a standardized measure of 127 million and a PV-10 value of 157 million. That’s compared to prior years of 9.4 million barrels with a standardized measure of $119 million and a PV-10 value of $146 million.Improved performance of producing wells has led to about a 200,000 barrel or a 2% positive revision in improved oil reserves. Performance from the NGL plant was improved via capitalized modifications resulting in 100,000 or approximately 16% positive revision in NGL reserves.Evolution continues to focus on cash flow and shareholder return. Our balance sheet remains strong with $32.4 million in positive working capital, most of which is in cash, and we have no debt. We continue to provide on our attractive cash return to shareholders as we've now paid out $59 million in cash dividends to our common stockholders since December of 2013 or – and a total of $1.81 per share, said another way, a very unique performance for an independent energy company.Additionally, subsequent to our year-end, the company repurchased approximately $1 million of stock. Evolution remains committed to growing value for our shareholders, which continues to guide the Board of Directors and the management team. Looking forward, Evolution has been and will continue evaluating opportunities to acquire compatible developed oil and gas related properties that meet our specific criteria and support our dividend policy.With that, I’ll now turn the call back over to David to run through our financials and then I’ll wrap up with the call speaking briefly about our strategy and outlook on M&A opportunities.

Thanks, Jason. I would like to say that it's been a very positive experience working alongside Jason thus far. He has brought a fresh perspective and impressive skill set to the company and I look forward to the contributions he will provide in the near-term. That said, I’d like to share some highlights of our financial results for our fiscal fourth quarter ended June 30, 2019.Total BOE volumes increased 3.2% lead by a 23% increase in NGL volumes. We generated total revenues of $10.4 million versus $9.5 million in the prior quarter led largely by LLS oil prices up 9.5%, offset by a 6.7% decline in NGL prices, which have been quite volatile this past fiscal year.Overall, we improved operating income by $1 million to $4 million in the current quarter. That was led largely by lower production costs in the quarter, due to primarily lower CO2 volumes. Our absolute DD&A expenses reflect quarter-over-quarter. However, it's worth noting that our Q4 DD&A rate and the rate going into fiscal 2020 is going to be 4% lower than what it was in fiscal 2019 at $8.07 per BOE.Our G&A expenses were up in the quarter largely for consulting expenses, including those for an executive search, which has been concluded. We recorded net income of $3.3 million in the quarter versus $2.4 million in the prior quarter. This equates to earnings per share of $0.10 in the current quarter versus $0.07 in the previous quarter. The 12-well infill drilling program, consisting of 10 producer wells and two CO2 injection wells, was completed and on production during fiscal 2019.Capital expenditures for the six-well water curtain program and related infrastructure preceding the planned Delhi Phase V development is nearly complete. The first pad commenced operations during fiscal 2019 and the second pad is expected to begin injections during our second quarter of fiscal 2020.For fiscal year [2000] results, I will refer to the press release yesterday afternoon for highlights and details for full-year numbers compared to the prior year. In short, another solid year of financial performance.I would like to take this opportunity to reiterate a few key attributes of the company. The Delhi field is a 100% liquid producing field, comprises of about 85% oil and 15% NGLs. Our unique ownership in this field, some 7.2%, is made up of an overriding royalty interest. Keep in mind, this type of minimal interest bears no operating expenses or capital costs. Additionally, we have a 23.9% working interest, which carries a 19 point – 19% net revenue interest.As Jason already mentioned, Delhi received LLS oil pricing, typically a premium to WTI pricing. The Delhi oil production enjoys a severance tax holiday until payout, that’s a 12.5% savings. The Delhi field has sub-$20 lifting costs, therefore, providing a very high operating margin. We have future development remaining in the field in Phase V, Phase VI potentially and the Mengel. This is a long-life producing field and we expect only a single-digit decline once production rolls over.Evolution continues to focus highly on being a shareholder-friendly company with over six years of quarterly cash dividends. The current yield is 6.4% based on the yesterday’s closing stock price. The five-year average dividend yield is approximately 4%. We have an active share repurchase program, and as Jason mentioned, we recently purchased about a 168,000 shares in July and August. We have $2.4 million remaining in a $5 million approved buyback program that was originally put in place back in 2014.Our balance sheet strength was $32.4 million of cash on hand, in excess to a $40 million credit facility remained strengths to the company, and we’re generally debt-adverse, but not opposed to a low use of leverage. The company remains in great financial shape and is poised for new growth opportunities.This concludes my review of financial results and ops for fiscal year ended June 30, 2019. In summary, we reported net income for the eighth consecutive fiscal year, continue to create value for our shareholders with cash dividends and share repurchases, continued strong financial performance with excellent balance sheet strength, and continued development and reinvestment into Delhi field.I would now turn the call back over to Jason for final remarks.

Thank you, David. As I’ve mentioned, Evolution is actively seeking to acquire additional long-life producing reserves that will provide diversity and support to sustain and grow our dividend. The Board has brought me in to help grow the company and I’m very optimistic about our ability to do so.Evolution’s fiscal discipline has put us in a great place with cash reserves and an untapped credit line to be able to take advantage of fairly tumultuous A&D market. We will not take undue risk or excessive leverage and will only pursue those opportunities that fit our criteria, but we’re seeing a lot of in-bound deal flow and feel confident that we’ll be able to find properties that will be a good fit for us.I think with that, we’re ready to take some questions. So operator, if you’ll please open up the line for questions. Thank you.

I’d be happy to. Thank you, Jason. [Operator Instructions] We’ll go first to Jeff Grampp with Northland Capital. Please go ahead, your line is open.

Good morning, guys, and Jason, congrats on the first call.

Thanks, Jeff.

Was curious for you, Jason, on the acquisition side, you know, I know Bob, you know, the Chairman of the Board obviously had a very disciplined view of the world when it comes to acquisitions, and, you know, just wanted based on your experience elsewhere, you know, if there's any kind of, you know, modest tweets, modifications, qualifications that you would kind of put on Evolution’s acquisition strategy? And just going to ask and to get a sense for, you know, how to think about the acquisition strategy under your leadership if it's, you know, much different if at all than how we’ve historically thought about it.

Thanks for that. Well, I would say – so we had our first board meeting on Monday and it was great and this was the main subject that we went over. I think you're using the right word when you say strategy and that was the main topic of discussion. We’re seeing a lot of deals and they are all over the place. As you know, it’s – like I said, it’s pretty tumultuous market. We actually like that. We’re in such a good position that we think that as opposed to last fall where some people were going after the market and not really happy with the results that we’re getting in terms of bids and turning in a lot of field salesThis year, things have not gotten better for them and that market has created some even more stressed situations and distressed situations that we think we’ll be able to take advantage of. That being said, you know, do we want to stay long-life oil? Do we want to stay, you know, and want to continue our CO2 thing? Are we open to gas? You know these are the discussions and we kind of threw everything out on the table. Are we willing to go to a turn of EBITDA debt? [Reason] willing to spend all of our cash or our cash in the bank. And we kind of emerged from that, you know, with some parameters that let us narrow the box so that we don't waste time chasing a lot of deals that are not going to fit us.So, in terms of going forward, I think we've got a pretty narrow box. It’s going to have a PDP component. It’s going to be long life. I think the Number 1 goal for the Board and for the management is to secure the dividends, sustain it, and then, build in inventory for – in the future so that we can have that dividend many, many years into the future, and then, start to grow it, increase, but sustaining is the first priority, and then, growing is the second priority. So, I would say this for us to – we like being non-op, and so, for us to get into an operated situation, we would have to be very, very special situation. I think that's probably not as likely, and we like oil.So, again, if we were going to go into gas, it would also have to be a very, very good situation for us. But we have seen some of those situations at least in the short-term with gas prices probably not looking the greatest in the next 12 months to 18 months. We’re – there might be some tremendous buying opportunity. So, hopefully that kind of narrows the subject down a little bit, but…

No, that’s perfect. That’s exactly what I was looking for. I appreciate that. And for my follow up, more on the operational side, just kind of wondering if you guys have a handle on how we should think about purchase CO2 volumes in FY 2020? Should we kind of think of it hovering that, you know, 90 million to 100 million a day type of range plus or minus? Or any kind of sense that you guys have had from the operator on that?

Yes. I don’t think it’s going to be quite that much. I think we are thinking in the low 80s, between 80 million and 83 million a day of purchase CO2. We've gotten some efficiencies there. The plant has been working. It's been purifying the CO2, which is the main reason for the plant dropping out those NGLs, which we are very happy to sell. But the main purpose of the plant was to get a clean and more pure CO2 injection. So that process has been pretty efficient and we did have some higher volumes in the fourth quarter as we brought on our new wells. But we see that settling out in the low 80s.

Got it. Sounds good. I appreciate the detail and [indiscernible]. Thanks guys.

Yes. Thanks, Jeff.

[Operator Instructions] We’ll go next to Roth Capital in the line of John White.

Good morning, and very nice financial results once again. The company is running on all cylinders and my congratulations to you, Jason, on your appointment. Glad to see you on board.

Thank you, John. Appreciate that. Good morning.

So, since A&D is the main topic, can you – I would enjoy hearing some of the valuations you're seeing. I’m wondering, given the state of the market, are there some properties that have a good PDP component [plus and PUDs and probable’s] that people are trying to buy for the PDP value only?

Yes. I’ll say this, John, I guess the overarching thing, you know, a year ago, price was pretty high; a lot of stock prices were pretty high. In September, there was a pretty significant fall off. That precipitated quite a few process and sales processes last – in the fourth quarter last year, but I think a lot of those processes, people in their minds, it was too close to August and in their minds they thought they were still worth more than they were at that time. Like I mentioned, earlier there was a lot of failed sales.So, at that time, Evolution was bidding on PDP, PV-9 and not able to be successful because asking prices were a little too large at that time, even though that's probably what they were worth. And now, we’re seeing people asking us to consider PDP PV-12, PDP only PV-15, which is pretty attractive to us in our capital cost. So, hopefully that gives you some sense of the market therapy that’s happened and that we’re seeing in the deal flow. Again, not paying for upside PD or PUD, we’re talking about PDP only. Does that answer your question?

Yes, that’s very interesting. You said PDP evaluations are on PDP or PV-12 ranging to PV-15.

That’s right. That’s right. Even so have a PV-18 we’re looking at. So – but it’s got to be the right fit in the location and area, but particularly with gas. We want to kind of stay sort of one pipeline from being passed area and to avoid some of the blip from the Permian.

That was it. My follow-up is, are you seeing much more stress valuations for gas properties?

Oh! Tremendously, yes for sure, for sure.

Yes.

And regionally they are more distressed than other regions. So, I think you got to be real smart when you’re looking at gas in terms of it becomes a mid-stream marketing game, what can you – what’s your differential, right.

Alright.

Especially in the short-term.

I really appreciate that feedback, and if Bob is there, tell him I said hello, and Bob, I know you're glad that get Jason in the driver seat there.

He’s so glad that he’s not even here.

Okay.

He’s very happy about that too John.

I understand. Okay, thank you very much.

Thanks John.

And we’ll take our next question from Joel Musante with Alliance Global Partners. Please go ahead, your line is open.

Hi, guys. I just had a couple of questions. Just on the production profile going forward, you know, you have kind of a late CapEx budget going into next year, at least that’s what it looks like at this point. So, just wondering if you can keep production flat with that or should we expect, you know, a mild decline or, you know, just over the next couple of quarters?

Thanks, Joel. Yes, I appreciate that. I saw you right up. I would say this, you know, we’re a non-operator; we’re very active non-operator, which is important to understand. We’ve got a great relationship with Denbury in terms of the technical team. They've given us a schedule of what they think, but of course, those aren’t locked in until they go through their budgeting process in the fall. And so, it’s an estimate at this point and we put in a little bit of CapEx in terms of Phase V. It’s probably unlikely that it’s going to start in our fiscal 2020; it’s probably going to be in early 2021, although they said they’re going to try to start that in what would be our fourth quarter of 2020.I’m not sure that that’s going to happen. We have a small amount of CapEx in there. We shouldn't expect any uplift from production probably until late of our next fiscal – next year. So, yes, I think this year we’ll probably see a little bit of decline of single digits, we’re talking about 4%, 5% this year.

Okay.

I think you can expect a mild decline, but that should be lifted up when that Phase V comes on. They’re also going to be doing conformance work, you know, and the work over, and we have CapEx for that. And that’s been widely successful. So, you know, it was last year and we anticipate it being this year as well.

Okay. So, when you said Phase V would probably start up late next year, I guess, does that mean fiscal year or are we talking about the calendar year?

I’d say late next summer. We’ve got some CapEx in for let’s say June-ish, May-June, but likely it would be starting. That could easily slide, let’s put it that way. That’s what they’ve informed us, so that’s what we’re planning on. However, I wouldn't be surprised if that's led to July or August, which would be, you know, of course our fiscal 2021.

Right, right. Okay. And just could you remind me where you stand on a tax – severance tax holiday? When that might – you know when you might reach to payout from that point of view?

Hi, Joel. It’s David. So that severance tax holiday is still a way out, 10 plus years out because that severance tax calculation is based also on current investments. And so, based on investment to-date and plus an escalation for capital, its 10 plus years out. So, that – so I keep kind of reminding people how that’s extra accretive for the working [interest on us].

Okay. That’s all I had. Good luck with the – you know with the A&D market. It sounds like it – you know things are pretty promising there. I appreciate that.

Thanks, Joel. We appreciate it.

And at this time, we have no signals from the audience. [Operator Instructions] And we have no signal from the audience. Mr. Brown, I will turn it back to you for any additional or closing remarks, Sir.

Thanks, Jim. I sure appreciate it. Thank you for your participation on the call today, and please feel free to contact me with any other questions. I look forward to providing you with an update in November. Thanks everyone.

Ladies and gentlemen, this does conclude today’s conference. We thank you all for your participation. You may now disconnect your lines. We hope that you enjoy the rest of your day.