Evolution Petroleum Corporation (EPM) Q1 2020 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Evolution Petroleum Fiscal 2020 First Quarter Earnings Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, the CFO, David Joe. Sir, the floor is yours.

Thank you. Good morning, and welcome to Evolution Petroleum's earnings call for our fiscal 2020 first quarter ended September 30, 2019. My name is David Joe, Chief Financial Officer of Evolution. And joining me on the call today is Jason Brown, President and Chief Executive Officer.If you wish to listen to a replay of today's call, it would be available shortly by going to the company's website via recorded replay until December 7, 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. This call will primarily focus on key results, operations and comments on the Hamilton Dome acquisition.I would now like to turn - would now like to welcome and turn the call over to President and Chief Executive Officer, Jason Brown.

Thanks, David. Good morning, and good morning, everyone. And again, thank you for joining us today for Evolution's Fiscal 2020 First Quarter Earnings Call.Evolution continues to generate consistent financial results despite the low commodity prices and lower capital spending environment throughout the industry. I'm pleased to report that we have now distributed our 24th consecutive quarterly cash dividend and have declared the 25th quarterly dividend of $0.10 per share payable on December 31, 2019.I'm also delighted to announce that Evolution successfully purchased a 23.51% non-operating working interest that has a 19.7% revenue interest, which is a net revenue interest of 83.79%, in the Hamilton Dome field located in Hot Springs County, Wyoming, from entities owned or controlled by Merit Energy for $9.5 million in cash. Merit will continue to operate the field and Merit entities retain the vast majority ownership of the balance of the working interest.Evolution has been searching and evaluating opportunities to acquire developed oil and/or gas related properties that meet our specific criteria and support our dividend policy for quite some time. This field shares many qualities with our current asset, the Delhi Field, in its relatively low geologic and operational risk, low production decline and long-life reserves, which should materially contribute to our dividend.This is a solid first step in growing our business in a way that we believe is accretive to our shareholders. In addition to giving our company diversification from the single Delhi Field asset, it adds over 23% to our daily production and 30% to our proved reserves, all while lowering our DD&A and G&A per BOE by more than 10% and 15%, respectively.Although operating expense per barrel is somewhat higher than Delhi and realized oil price is lower, we believe that improving pipeline capacity to the region will result in a stronger market over the next year or 2. It's also worth noting that while Hamilton Dome does not include royalty interest, such as Delhi, the net revenue interest is higher than the industry norm.With that, I'll now turn the call back over to David to run through our financials. And then I'll wrap up the call by speaking briefly about our strategy, outlook and the M&A landscape.

Thanks, Jason. I will share some highlights of our financial results of our fiscal quarter ended September 30. Please see our press release yesterday afternoon for further details on the quarter.Operating revenues were $9.2 million for the quarter, which generated $3.3 million in income from operations. Lower commodity prices were the primary drivers of less revenues when compared to each of the comparative periods, and to a lesser extent, single-digit decline in sales volumes.Despite that, the Delhi revenues per BOE and operating margins per BOE remained very healthy at $52 and $35 per barrel equivalent, respectively.Gross reduction at Delhi averaged approximately 7,281 barrels of oil equivalent per day during the quarter, a 7% decrease from the prior quarter and a 4% decrease from the year-ago quarter.Oil production was impacted by seasonal high ambient temperatures during the quarter, causing limited CO2 recycle capacity. This resulted in limited capacity to produce high gas-oil ratio wells. We anticipate this trend to flip as cooler temperatures have arrived on the calendar.Facility modifications resulting in higher NGL volumes in the spring of this year were not sustained due to complications caused by the separation of rich gas to a dedicated facility. The operator is currently reviewing solutions to return to higher NGL rates seen in prior quarters.The production cost in the Delhi Field were $3.1 million in the current quarter, equating to a BOE - $17.59 per BOE, which is a decrease of 13.3% from $3.6 million in the prior quarter and about 11% decline from the year-ago quarter. Production cost decreased from the prior quarter, primarily due to lower CO2 costs, which are tied to oil prices.Purchased CO2 volumes in the current quarter were 69.7 million cubic feet per day, down 24% from 92 million cubic feet per day in the prior quarter. The CO2 cost decline was due to decrease in purchased CO2 volumes together with about a 7.7% decline in cost per Mcf of CO2.Both our DD&A expense and G&A expenses were essentially flat this quarter compared to each of the comparative periods. The income tax provision in - were lower in the current quarter due to lower pretax income and a lower-than-expected effective tax rate of 15.6% due to a post year-end return to provision true-up adjustment. All in all, we reported net income of $2.8 million for the current quarter or $0.08 earnings per share.The company remains in excellent financial shape and is poised for new growth opportunities with working capital of approximately $32 million. We repurchased 222,437 shares of stock at a cost of $1.3 million or an average price of $5.89 during the quarter, and subsequent to the quarter, repurchased an additional 67,710 shares at an average cost of $5.71.There is approximately $1.7 million remaining on a previously approved $5 million stock buyback program. Additionally, our elected borrowing base was recently reconfirmed at $40 million, and this reserve-based credit facility remains undrawn.During the quarter, we incurred about $600,000 of capital projects, consisting of $0.5 million for water curtain costs and completion costs related to a water source well in preparation for Phase V expansion of the CO2 flood into the eastern side of the unit, additionally about $0.1 million of capital maintenance in the field. The current expectation for net capital spending for the remainder of fiscal 2020 is roughly $3 million net to Evolution.It is our expectation that the operator will continue to fund Test Site 5 in calendar 2020. As such, we have budgeted $3 million of Phase V completion costs in our fiscal 2021.This concludes our review of financial results and operations for our first fiscal quarter ended September 30, 2019. In summary, we have continued to create value for our shareholders with cash dividends and share repurchases, continued strong financial performance with net income and maintaining excellent balance sheet strength, continuing reinvestment into our Delhi Field, and subsequent to quarter end, completed a successful acquisition, creating diversification of our asset base.I will now turn the call back over to Jason for final remarks.

Thanks, David. The company continues to be positioned to fund further development of its producing assets while retaining sufficient financial resources to capitalize on new growth opportunities and funding for current dividend program.We continue to provide an attractive cash return to shareholders, as we've now paid out $62.7 million in cash dividends to our common shareholders since December of 2013 or a total of $1.91 per share, a very unique performance for an independent energy company of our size.Although Evolution is excited to add Hamilton Dome, a long-life producing assets or reserves that will provide diversity and support our dividend, we will continue to evaluate acquisition opportunities to further grow the company and enhance shareholder value.The company is uniquely positioned to pursue growth opportunities, and we'll look to take advantage where the market allows the company to do so. This effort will remain very disciplined, and we'll not take undue risk and excessive leverage. We'll only pursue those opportunities that fit our criteria.With that, we're ready to take questions.

[Operator Instructions] We'll go first to Jeff Grampp at Northland Capital.

Acquisition, was curious, Jason, if we could start there? First being, do you guys have or want to disclose the PDP, PV-10 at, I don't know now, year-end or strip deck or however you guys kind of evaluated that?And maybe more broadly, can you just kind of talk about the genesis of the transaction as far as if this was a competitive process or on an unsolicited basis or just kind of take us through the transaction now that it's out here?

Sure. Thanks, Jeff. I start with the PV-10. It's a pretty nebulous number. You give me an oil price that you want to pick it out, and we'll give you one. Our year-end, which is what our reserves were sort of in SEC, that number is something, I think, that's not probably helpful and it's also not really the priority for us here.If you're looking at a PV-10 driver that generally are wells that are a lot steeper decline, this is flat as a pancake. It's been producing for over 100 years. This is going to be reserves for us in 2025, 2030, well through the next decade. So our thoughts here are not necessarily the straight IRR in PV-10.Although we're probably bullish, we don't think that we're in a high oil price environment. So we like that further down the road. So I don't know that we'll throw out specific PV-10, but we think it's accretive to us. More importantly, it adds. And I think you mentioned - I read you write up this morning about it not being material in terms of our overall valuation, but - which I agree, this is a small transaction. This is more like a single or a double as opposed to a grand slam.But it's substantial for us in a number of different ways. It shows that we can close. It shows that we can transact. It gets us in the market and moving. And for all the metrics that we really think are important, our production, our reserves, the long life of this, this was very accretive, also on the DD&A and the earnings per share and our G&A per barrel, as I mentioned.In terms of the genesis of the transaction, we bought this through EnergyNet. So this is a competitive process - competitive bidding process. There's number of things that go into that. And I'm pleased that something that is substantial for us, and this is the reputation of being able to close.So I've known Merit for over a decade and - going back to my RBC Richardson Barr days. And I think that's important when you're in the marketplace of buying that you can do your due diligence, which we were happy that they were very accommodating and cooperative. We were able to drive through the field and get into their office and go through the records.All of that was in tip-top shape, and it was very impressive, both field-wide and office records. But we responded in kind by being able to do what we said we could do. So the more of those that we get under our belt, that reputation is very important in the business. So the genesis of this was also done in many transactions with EnergyNet, having sold and bought. So I think that was helpful in this process with both parties that were involved.

Great, great. Great detail. I appreciate that. And for my follow-up, I was wondering how comfortable are you guys weaning into another deal? I think you mentioned last call, deal flow was really positive for you guys.Should we think about you guys maybe taking a quarter or two to kind of assimilate this and kind of watch this transaction play out? Or should we think about you guys being right back in the market trying to find accretive deals?

We're definitely in the market. I don't think there's going to be a big pause here. It might be a different situation if we were operated and had to digest a little bit. But in this particular situation, it's the same operator, Merit. They're just - they're a great operator. We know them. And as a non-op guy, you're really trying to avoid the bad operators.So you don't have a lot of control in these situations. So working with the right type of operators is a really big deal, and we feel very comfortable about this situation. So in terms of the amount that it would slow us down, it's a much, much different situation as opposed to assuming operations.So in this particular one, we're going to integrate it pretty quickly into our accounting systems in that, and we're already looking at other deals. So I wouldn't anticipate any sort of lag in looking at deals, although the staff [ph] might appreciate that, but no, we're continuing to do that.

[Operator Instructions] We do have a question from Tyler Olson at Karlin Asset Management.

Just on the size, wondering if you have more appetite to take a bigger working interest? Or if this was just that Merit was willing to sell? And in the future, [do you have a sense] of what size variant might you be targeting? And kind of what's the max that you'd be looking at right now in kind of these PV acquisitions?

Tyler, you're breaking up just a little bit. Thanks for the question. I'm going to try to answer the first part of it. The second, I might need a clarification. But in general, I think your understanding of, is this - we were wanting to take a bigger piece or is this just what Merit was willing to sell.And I think you're probably familiar with them. They've a pretty strong reputation in the market for a long period of time of both being a buyer - active buyer and an active seller at the same time with their structure in terms of multiple funds and stuff. This particular one was a fund that was winding down, which is a very common event for them.They have funds. They want to be in this for many years. And of course, they have operated it for over 20. So I would anticipate, yes, this is just a particular interest. It was owned by a certain funds that they have that's winding down, which is why the opportunity came available.I'm not sure that if there's going to be more within this particular field that will unwind over the next year, but we would certainly be interested in pursuing that as well. But in general, I think that over the next couple of years, they're continuing to be active sellers.So this is a great relationship for us to establish that may lead to some other opportunities in other fields. Tyler, I'm going to have to ask you to repeat the second question. Was it - how big of an acreage, acquisition and the appetite going forward? Is that right?

No, not acreage specifically, but just the size of [indiscernible] you're going to try to keep it with [indiscernible] and I think that $30 million range? Or are you…

Yes, acquisition side, not the acreage side, got it. I think that - the drivers going forward are more quality-driven. I think that it's important for us to stay low debt. I think that means less than a turn of EBITDA. We have cash in the bank. We have an undrawn revolver. So I think you're going to see us playing in that space, kind of $7.50 million, probably with the sweet spot sort of in the $10 million to $20 million range. I don't know. We're in play for larger things. But to get larger than that, we'd have to use stock, and we don't - I think we'd like not to do that. So I think there's plenty of things for us to grow our business like this, which is substantial in a place that doesn't extend us too much debt and out of cash.

Thinking on the dividend, is - try to keep it flat or continue growing it over time?

No. I think we're pretty committed to $0.10 right now. We don't want to go up until we know that we can keep it at $0.10 a quarter. If you look back over the last few years, we did have to dip down in 2015, '16 down to $0.05 a quarter and then quickly got back up to $0.075 and back up to $0.10. It's - we feel like that's the linchpin in our company is being able to consistently give that $0.10 dividend.I will say, when we had to dip down, that was just about the apocalypse for oil and gas. Oil had dipped down below $30 a barrel and we still delivered a dividend. So we feel like we earned quite a bit of credibility to continually give that.And it's our intention not to go back below $0.10 going forward. That's a big, big priority. And - but at the same time, probably not move up to $0.11 or $0.12 until we know that we can sustain that as well. So does that answer your question there?

Yes. Thank you for the details.

Okay.

[Operator Instructions] There appear to be no further questions at this time. Mr. Brown. I'll turn the conference back to you for any additional or closing comments.

Thank you. Thank you for your participation on the call today. Please feel free to contact me with any other questions. I look forward to providing you with an update in February of 2020.

Ladies and gentlemen, that will conclude today's conference. We thank you for your participation. You may disconnect at this time, and have a great day.