Evolution Petroleum Corporation (EPM) Q1 2021 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Evolution Petroleum First Quarter Fiscal 2021 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 of Evolution Petroleum. Sir, the floor is yours.

Thank you, and good afternoon, everyone, and welcome to Evolution Petroleum's earnings call for our fiscal first quarter of 2021. We will discuss operating and financial results for the quarter. And I am David Joe, CFO for the company, and joining me on the call today is Jason Brown, President and Chief Executive Officer. A little bit of housekeeping, if you want to wish -- if you wish to listen to today's call, a replay of today's call, it will be available shortly by going to the company's website and available until December 6, 2020. 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, the continued volatility in oil prices and impairment write-down we had this quarter and a typical update on ops, operations and plans for -- remaining plans for fiscal '21, including capital spending. I would now like to welcome and turn the call over to Jason Brown.

Thank you, David. Good afternoon, everyone, and thanks for joining us today on Evolution's First Quarter Fiscal 2021 Earnings Call. The first quarter of fiscal '21 has continued to be challenging. And although we at Evolution have found ourselves to be quite effective in the remote working arrangement. I know we're all getting a bit fatigued and look forward to better days ahead. To that, I again wish you all very best and staying safe as we all continue to negotiate this uncertain social and economic time together. As you know, it continues to be particularly difficult time in the oil and gas sector, as global COVID-19 pandemic continues to disrupt the balance of oil supply and demand. We continue to monitor the state of COVID-19, making decisions to best protect our employees' health. In order to ensure our financial security, we have continued to focus our efforts on implementing additional cost cutting measures to better protect our investors. We remain well positioned to take advantage of potential opportunities that arise and are focused on our ongoing strategy to create long-term shareholder return as evidenced by a long-standing dividend program. With that, I'm pleased to announce that -- our 28th consecutive quarter issuing a cash dividend. For our first fiscal quarter of 2021, we recorded revenues of $5.6 million, 67% increase from the prior quarter. We ended the quarter with $19.8 million in cash and remain debt free with an undrawn bank revolver that we recently have redetermined to $23 million and extended that revolver for additional 3 years. We continue to concentrate our focus on cash flow and total shareholder return. We provide an attractive cash return to shareholders and with paying our 28th consecutive dividend, we've now returned more than $71 million in cash dividends since the inception of the dividend program in December of 2013. In July of 2020, Denbury Resources, the operator of our interest at Delhi Field announced that it has entered into a restructuring support agreement under Chapter 11 of Bankruptcy Code in Texas. On last quarter's call, we mentioned that we thought this would ultimately be positive for EPM, as it would speed up the process for them to be able to put capital to work in our field, which we need. On September 18, Denbury announced that they had emerged from Chapter 11 bankruptcy and completed their financial restructuring. This is another meaningful step towards freeing up capital to be spent on projects at Delhi that will increase production. We are encouraged by our continued conversation with Denbury and believe the Delhi Phase V expansion will begin later in our fiscal 2021. We further expect the resumption of historically beneficial conformance expenditures to arrest the decline of current production and improve the CO2 flood performance. It is also important to note that during Denbury's Chapter 11 filing, EPM was not affected in terms of continuity of payments to Evolution or operational at Delhi field. Before turning the call back over to David, I would like to comment on David Joe's upcoming retirement, as previously announced on Wednesday, and congratulate him for over 15 years of dedicated service to Evolution Petroleum. David has served in a multitude of roles during his tenure at Evolution and has been an integral part of our continued successes. David will remain on Board until the end of the year to help seamlessly transition our investors, our business processes and our core institutional knowledge so that there is little to no disruption for our business. Our Board, our team, and I'm sure our investors join me in thanking you, David, for your time, your dedication to this company and for your friendship. We have enjoyed having you as a colleague. We wish you all the best as you move to pursue other adventures in retirement. With that, I'll now turn the call over to David to run through our financial highlights, and then I'll wrap the call speaking briefly about our strategy and outlook and the M&A landscape. David?

Thanks, Jason. It's been a real pleasure and honor to work for Bob Herlin and the Board of Directors, it's dedicated employees, both current and past and to serve the company's shareholders for quite a few years now. I remain confident in the asset portfolio and the strategy of the company moving forward. I plan to remain an interested shareholder for many years to follow. I will now like to share some more details regarding our financial results for the first quarter ended September 30. Again, please refer to our press release, in case you missed it yesterday afternoon for full details on the quarter. And be on the lookout for our 10-Q to be filed soon. As Jason already mentioned, we had revenues this quarter of $5.6 million, which was largely attributable to increased oil prices which average about $37 per barrel. Average daily net production was down about 4% this quarter to 1,841 barrels of oil equivalent per day, due to continued suspension of CO2 purchases at Delhi, along with NGL plant downtime and maintenance and some unplanned power outages. Although production was down, we are encouraged to see increasing realized commodity prices for both oil and NGLs quarter-over-quarter. It should be noted that LLS pricing has been volatile this year and the historical stable premium to WTI at Delhi is currently a deduction, as Delhi's realized oil price is approximately $2.20 per barrel below WTI in the quarter ended September 30. Unfortunately, until the global macro environment for oil demand improves, I expect this trend to continue in the near term. In part due to that and due to the low oil price environment we realized in March 2020 through May 2020, the company's ceiling test for the book value of our producing properties was adversely affected. For the first time in the company's history, Evolution recorded a significant noncash impairment charge in the amount of $9.6 million pretax. Per prescribed rules of full cost method of accounting, a quarterly ceiling test is performed and calculated using the trailing 12 months first day of month average oil prices. Based on this test, our ceiling was less than our net book cost, hence the required impairment. This result reflected a lower average benchmark WTI oil price in the current quarter, about $41 a barrel. In the absence of a higher year ago quarter average price, about $56 per barrel, which no longer impacts the 12-month trailing average oil price computation used to derive the estimated discounted future net revenues from production of proved reserves. Impairments can take in a variety of forms in our industry. For example, some of our peers have taken impairments for changes in their current development plans for proved undeveloped locations or impairments related to expiring lease expirations or impairments for reserve performance revisions based on well results. Evolution is not likely to have any of those issues, largely due to our proved developed producing dominant reserves and high percentage of those proved reserves being produced. The noncash impairment in this quarter is largely attributable to lower oil prices. Barring a substantial oil price increase, we will likely need to record impairments in the coming quarters as well as the higher average oil price for -- from fiscal Q2 of 2020 rolls off. While this accounting measure has affected our book value in the near term, we remain confident in the long-term value of our long-life, low-decline asset base. Because of the impairment write-down, the company will benefit from a lower DD&A rate going forward. Lease operating expenses in the current quarter increased about 4.9% to $2.4 million. This was primarily due to increased activity at both Hamilton Dome field and Delhi field as prices have increased and stabilized. We expect LOEs to increase at Delhi in the coming quarters now that CO2 purchases have been restored at Delhi upon the completion of the pipeline repair on October 26. Our G&A expenses inclusive of noncash expenses increased about $260,000 to $1.3 million for the current quarter, which is about the normal recurring G&A rate. The increase in G&A is primarily attributable to the prior quarter's reduction of compensation incentives accrued earlier in the fiscal year 2020. On the income statement, you will see an income tax benefit increase of $1.8 million compared to the prior quarter, primarily due to a higher current quarter pretax loss driven by the impairment. At September 30, the company continues to carry a receivable for income tax refunds of approximately $3.1 million for previously reported enhanced oil recovery tax credits. Net loss for the quarter was $7.1 million or $0.22 per diluted share compared to a net loss of $2.3 million or $0.07 per diluted share in the prior quarter. The company incurred about $189,000 on capital projects in the first quarter, primarily at Delhi for reentry, capital maintenance and plugging projects. We do anticipate productivities to pick up slightly with conformance workovers and maintenance projects. All projected capital expenditures for the remainder of fiscal 2021 are expected to be funded by operating cash flows and existing working capital. During the 3 months ended September 30, the company funded operations, capital expenditures and cash dividends with cash generated from operations. Working capital increased $0.5 million to $21.5 million at quarter end. The company was able to preserve its balance sheet and generate positive cash flows through a combination of increased total revenues, previously announced reduction of dividend rate -- dividends paid out and various cost-cutting initiatives, partially offset by $1.2 million realized loss on our derivative contracts. Our liquidity position remains strong with $19.8 million in cash and an undrawn credit facility, which was recently extended for additional 3 years to April 2024 and redetermined at $23 million, subject to financial covenants. Despite the challenging calendar year, we remain -- we continue to maintain a clean balance sheet and remain in an excellent financial position. This concludes our review of financial results and operations for our fiscal first quarter ended September 30. And now I'd like to turn the call back over to Jason for some final remarks.

Thank you, David. As announced earlier this week, in conjunction with David's upcoming retirement, the Board has appointed a new CFO to be his successor, effective November 18. Although I won't go into all the details of his background, I will say that we're very excited about Ryan Stash coming on board. He comes to Evolution from Harvest Oil & Gas Corporation, where he served as Vice President and CFO since October of '18. Prior to joining Harvest, Mr. Stash spent 11 years in Energy Investment Banking Group for Wells Fargo Securities, here in Houston in several years prior to that as an auditor at Ernst & Young. He's a rare combination of investment banker and CPA big 4 auditor with public company CFO experience. He earned his MBA, Masters in Professional Accounting and the Bachelors in Business all at McCombs School of Business and the University of Texas. We're excited to find such a thoughtful and experienced financial executive as Ryan to carry on the torch that David has carried so well for Evolution in their next chapter. We look forward to integrating a skill set and experience into our team as we look forward to grow our asset base and our dividend. In addition to David's retirement, and announced last week was the -- our Board member and Audit Committee Chair, Marran Ogilvie has elected not to stand for reelection. We wish her the best in her future endeavors and thank her for her years of service as Evolution's Board of Directors. Details of these changes can be seen in our recent filed Form 8-K report. It's a priority for us, as we've said before, to invest in the working relationship we have with our operators. I continue to be pleased with the relationship and dialogue we've been able to have with both Denbury and Merit regarding our assets and cost optimization initiatives. We're very happy to see purchased CO2 volumes start to flow into Delhi once again. This will bring some very much needed pressure support and bring some of that oil production back. Although it may take a few months, we should start seeing the benefit of new CO2 volumes as they help to bring reservoir pressures back to previous levels. It should rest the abnormal decline we've seen in oil production over the last 6 months. And we expect to start to see an increase of production gradually through the remainder of our fiscal year. The CO2 volumes are currently about 65 million cubic feet a day. As you recall, historically, we've averaged in the 80 million to 85 million cubic feet a day of purchased volumes. Denbury will ease those volumes back up over the next 6 months and may even be able to increase those volumes as high as 100 million cubic feet a day for some period to sort of make up volumes. And of course, all of that is subject to prudent operational integrity of their pipeline. At Hamilton Dome, we still have about 20% of the production shut in, that's about 30 wells. And we do not expect those to become economic enough to reactivate at prices below about $45 of WTI sustained. As you recall, the differentials there are not as good as Delhi and the operational cost are higher per barrel as well. That being said, we're very happy with the operational team at Merit, who are using this opportunity to maximize cost-cutting processes and operations in the field, much of which we anticipate will be permanent captures. They have brought on 2 wells in September and exceeded production expectations, which is also great news. Looking at the future of our current assets and based on recent discussions, our expectations are that the emergence of Denbury from the restructuring process will bring about the resumption of conformance workover projects, which are very helpful. As I've said, in arresting the decline of our current production, we expect expenditures related to conformance to run approximately in the $600,000 to $800,000 remaining in our fiscal year. I think last quarter, we reported -- we had on budget, about $750,000 to $1 million. We spent a couple of hundred thousand in the first quarter. So it's -- we don't really have any anticipated changes, and we're kind of still on target for that in the remainder of fiscal '21. In addition, the company has planned and still does for expenditures of approximately $1.9 million. Again, that's net to EPM. In fiscal '21 to begin the development of Phase V at Delhi. We'll find out more at our annual working interest owner meeting with Denbury in January. But at this point, as we understand it, Denbury's plan is to commence this program in the spring of 2021, which is our fiscal fourth quarter. Phase V development costs are expected to total $8.6 million net to us in total, with $3.7 million to be incurred in fiscal 2022 and the remainder of that over the next 2 years. These projects all focus around the strategy of continuously extend the life of our reserves and have been very successful over the past few years, largely arresting the natural decline. Finally, although we're very pleased about the forecast of much needed additional capital investment in our current assets, we continue to selectively look for opportunities where we can take advantage of our financial position and add additional assets and that we'll further grow and diversify the company. We're seeking a low production decline, long-lived reserves to add to our assets that will contribute to our dividend for many years to come. We're seeing some price stabilization and that encourages us over the last couple of weeks, it's been a little bit in flux. But that led us to several new deals. We've started to see a number of recent transactions. We're confident in our acquisition strategy moving forward and the financial stability of our company to take advantage of these opportunistically. We're in a great position, and I look forward to the future of Evolution Petroleum. With that, I think we're ready to take some questions. Operator, please open up the line for questions.

[Operator Instructions] Our first question comes from Jeff Grampp with Northland.

Congrats, David, on the retirement. I hope you enjoy some well deserved time yourself.

Thanks, Jeff.

Jason, maybe on the acquisition front, I'll start there. Can you touch on kind of what you're seeing deal flow wise? I guess, particularly curious on maybe generically kind of asset characteristics? Are you seeing more interesting things of the Ham Dome type? Or I know in the past you had said gas could be interesting in certain circumstances and that pricing there is obviously firmed up. So just kind of curious generically where you guys are seeing maybe a little bit more interesting deals across the spectrum?

Sure. I appreciate that. Well, we've been working fast and furious on a number of different strategies. As I've said -- as you and I've talked before, and I've said before on these calls, we're interested in both oil and gas. We like assets like Hamilton Dome and Delhi because they're long life oil and oils kind of be down right now. But if we can get a purchase, it might be a good time over the -- that we would enjoy profits over the next couple of decades there because we're pretty bullish long-term on oil. Right now, it's pretty tough. The landscape there with oil with those types of assets are -- it's still tough right now. The stabilization has now gotten people to the table to do some transactions, but particularly in the private space -- as a public company, our company is measured every day. The private space, they still have a view of what their assets are worth. So there's a little bit of market therapy that's going out there. We're starting to see some deals that have gone on the market for a while and not transacted. So they're coming back for second rounds, which is real positive. The antisense of that to us, we've said before, we're also interested in gas in a regionally probably specific area. And as we've talked about, we like East Texas, North Louisiana, anything that kind of keeps us in that one pipe down to Sabine Pass. Eventually, the drilling out West will kick back up. So we kind of want to stay not competitive with that. And if you get too far away it's a midstream marketing game. So we're digging into East Texas to look for some gas, and we're actually seeing some pretty interesting opportunities there, nonmarket and negotiated. So there's a lot of things about gas we like in the sense that it's -- once it gets to past its initial decline, it stabilizes in a long, flat decline and the lifting costs are very low, much lower than oil. So we like it for that reason, too.

Okay. Great. That's helpful. And final follow-up, maybe to not let David sneak off without putting him on the spot on the call. It seems like you guys had historically kind of moved to a cash taxpayer status, and it's kind of been a little bit choppier in the last few quarters. Just kind of wondering what we should think about in terms of kind of a split between deferred versus current taxes for you guys going forward?

Yes. That's a good question, Jeff. And so given the outlook for oil prices going forward, unfortunately, one would project that Evolution won't be making profits based on strip prices. So like you said -- as you pointed out, we've been a cash payer unlike many E&P registrants. It's hard to project going forward. We're already off to a rough start this first quarter. But I would expect that we're not a cash payer in this fiscal year, at least as I sit and see it today.

Okay. And if oil prices were to rise measurably to a point where you guys are GAAP profitable, should we expect cash taxes to return then? Is that -- is it as simple as that?

Yes, I believe so.

Our next question comes from Richard ( sic ) [ Rob ] Howard with Boiling Point.

Yes, you almost answered my question in the second half there. So, yes, nice quarter. So I see this current asset of the taxes. Do you anticipate that, that cash will actually come in?

Are you referring to the income tax receivable?

Yes, I am, on the balance sheet.

Yes, it's our expectation that we are going to get the income tax refund from the federal taxpayer, and there may even be a state refund barred in there as well, but the majority of it is a federal income tax return from enhanced oil recovery tax credits taken from previous 2 years of returns.

So what is your tax basis of a barrel of oil production? Can you give me just a rough ballpark on that?

I cannot give you a number. I don't have that number off the top of my head, Richard. I don't -- I'm not sure if that's a number I could disclose publicly.

Our next question comes from Andrew Bond with AGP.

So great color on the M&A. So that question was already asked, but just wanted to get an idea, are you able to provide the gross production volumes like you have in quarters past? Or can we expect to see that in the filing when it comes? I know you all don't really report a breakout of production by field, but just trying to get a better sense of production and prices net to EPM between kind of Delhi and Ham Dome?

Yes, Andrew, that information is in the 10-Q. We hope to be filing that today or if not today, Monday.

Our next question comes from John White with ROTH Capital.

Yes. No question from me. I just wanted to tell David Joe, congratulations and have really enjoyed working with you. And thanks for all your help for some of my stupid questions over the years.

John, thank you for that. Let's have lunch when time permits. Enjoyed working with you as well.

And it looks like that was our final question.

Okay. Well, we sure appreciate you guys joining us for our Q1 fiscal 2021 call, and we look forward to updating you on December -- I'm sorry, in early February with our Q2 results.

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.