Evolution Petroleum Corp (EPM) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Evolution Petroleum first quarter of fiscal 2012 conference call. (Operator Instructions). This conference is being recorded today, Wednesday, November 9, 2011.

I would now like to turn the conference over to Lisa Elliott of DRG&L. Please go ahead.

Thank you and good morning, everyone. We appreciate you joining us for Evolution Petroleum's conference call to discuss results from the first quarter of fiscal 2012, which ended September 30.

In a moment, I will turn the call over to management, but first I have a couple of items to cover. If you'd like to be on the Company's e-mail distribution list to receive future news releases, please feel free to let me know. My contact information is in the earnings release we put out this morning.

If you wish to listen to a replay of today's call, it will be available in a few hours and archived for one year via webcast by going to the Company's website at www.EvolutionPetroleum.com or via recorded telephone replay until November 16, 2011, and that dial-in number and passcode can also be found in the earnings release. Information recorded on the call today is valid only as of today, November 9, 2011, and therefore time-sensitive information may no longer be accurate as of the date of any replay.

Today, management is going to discuss certain topics that may contain forward-looking information, which are based on management's beliefs, as well as assumptions made by management and information currently available to them. Forward-looking information includes statements regarding expected future drilling results, production, and expenses.

Although management believes that these expectations reflected in such forward-looking statements are reasonable, they can give no assurance that such expectations will prove to be correct. Such statements are subject to certain risks and uncertainties and assumptions, which are described and listed in the Company's filings with the Securities and Exchange Commission. If one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may differ materially from those expected.

Also, today's call may include discussions of probable or possible reserves to use terms like volumes, reserve potential, probable reserves. Please note that these estimates are of nonproved reserves or resources, and are by their very nature more speculative than estimates of proved resources and reserves, and accordingly are subject to substantially greater risk.

Now with that, I'd like to turn the call over to Bob Herlin, Evolution's Chief Executive Officer. Bob?

Thanks, Lisa, and good morning to everyone. We certainly appreciate you joining us for this fiscal first-quarter call.

I'll briefly review some key operating results and provide an update on our future plans. Then Sterling McDonald, our CFO, will go over some select financial information, and then we'll be able to take your questions.

As you may have read in the earnings release we put out this morning, we had a solid first quarter with an increase in net earnings of some 89% over the previous quarter on a diluted basis ended June 30, which is our fiscal fourth quarter of 2011. This growth was driven by a 48% increase in daily oil production at the Delhi field, so a gross quarterly average of some 4,400 barrels per day.

It's great to see this project ramping up at a time when the price at which we sell Delhi oil, at Louisiana light sweet prices, continues to receive a premium, averaging almost $106 a barrel per quarter.

Delhi production during the quarter was primarily from development work through calendar 2010, or what we have referred to as Phases 1 and 2 of the CO2 enhanced oil recovery project that is being developed by Denbury Resources.

It's important to note, however, that our Q1 oil production already includes a small contribution from ongoing development work during calendar 2011.

As already noted by Denbury in their recent earnings call, the Delhi reservoirs are performing at the higher end of expectations, due in part to a more efficient CO2 flood than expected. Good EUR performance is a function of reservoir quality and [remain] economic reserves. And we have in the past stated our belief that Delhi has reserves' upside due to more original oil in place that originally estimated and potentially higher recovery rates.

The operator has also previously stated that the peak production rate net to their interest was expected to be between 5,000 and 10,000 barrels per day. And that corresponds to a peak post-payout production rate net to Evolution of between 2,300 and 4,600 barrels a day.

We continue to expect the operator to complete rolling out for the project over the next three years or so, so we are still in the early production growth phase of the field. For now, our net production comes from our 7.4% royalty interest that doesn't bear any operating costs or severance tax. We also don't bear any capital expenditures since our deemed payout occurs, at which time we gain a 24% working interest and an additional 19% revenue interest. Now these revenue interests or [inversionary] interests are in addition to our royalty interests that we have today.

Based on our independent SEC reserves report of June 30 of this year, payout is projected to occur in late calendar 2013, about two years from now. By that point, Delhi production is projected to be much higher than today's level and still growing to a peak gross level in excess of 10,000 barrels a day, and we'll be netting over 26% of that production.

Actually, we're generating a fair amount of cash now. We reported $2 million in income from operations in our first fiscal quarter, which is up about -- from $1.2 million in the prior quarter and from a loss of $650,000 in the first quarter of last year. The combination of cash flows from operations and current working capital are well in excess of the expected high end of our capital expenditures during the fiscal 2012 plan.

Now that we have a better visibility of the revenue-generation capability of the Delhi field, our focus is to step up the pace of identifying and developing attractive low-risk projects into which we can invest our growing cash flow. As you may know, over the last couple of years we've focused on testing two projects targeted to provide opportunities for long-term development. One is a mid-depth Woodford shale gas project in Oklahoma and the other is an infill drilling project in an established oilfield in south Texas, or the Lopez Field.

Continued low natural gas prices has diminished the projected return from the Woodford shale project, so like many other operators, we're moving much more deliberately there. On the other hand, our oil project in south Texas appears potentially attractive, both for reserves addition and value creation.

During the fourth quarter of 2011, we installed a larger downhole pump in our Lopez Field test well and determined that we could produce a much higher fluid rate and still maintain the same percentage of oil. These wells typically produce a low rate of oil and a high rate of water; consequently, we recently began drilling a four-well program of two producers and two water injection wells designed for high fluid rate. If these wells confirm our expectations, we expect to ramp up our development activity in the area, as we believe that our finding and development costs there will be less than $20 per net barrel of oil and the production is 100% crude oil.

Our activity in the Giddings Field, central Texas, was limited during the quarter. Normal production declines and no recent drilling resulted in production declining net to us of about 172 barrels of oil equivalent per day. Giddings wells include about a 50% natural gas component on average and a high flush production.

So, we have not been aggressive in drilling new wells to date. We are retaining leases that hold proved undeveloped reserves, and continue to consider opportunities to best realize our value in Giddings, while watching the activity of other operators who are testing some of the potential oilier zones in the area.

We entered into an agreement to contribute leases covering one of our less attractive proved undeveloped locations to a joint venture in exchange for minority work and interest in what we believe will be a much larger and more economic well. Additional drilling of our proved undeveloped portfolio likely will be through new industry joint ventures, and our 2012 plan includes drilling of up to two wells at a reduced working interest.

Also during this quarter, the U.S. Patent Office formally granted us a patent covering our gas-assisted rod pump technology that we have trademarked as GARP. We've also filed a continuation [prior] to cover further improvement in broader applications of this technology.

Subsequently, we signed two commercial GARP demonstration agreements with industry partners. Each agreement allows us to install our technology at our sole expense in a fully equipped and currently producing horizontal well contributed by the partnering company. In return, we earn a 50% net profit interest in one of the agreements and the 76.5% working interest in the second, after payout of installation costs. The wells are both located in the Giddings Field in central Texas and were selected to demonstrate the benefit of GARP in a typical target well provided by a third party.

Additional installations of the technology with either of the two partnering companies would be subject to further negotiation. We are operating the wells and we expect to have the GARP technology installed in both prior to year-end -- calendar year-end, I should say.

Overall, we are steadily improving our financial results while generating substantial liquidity to redeploy into new projects and other opportunities that may arise. Now with that, I'm going to turn it over to Sterling.

Thanks, Bob, and good morning to everyone.

Before we get started on my section, I see that for some reason our press release is not showing up on Yahoo, but I do see it on some other sites. I think Zacks has it. I haven't had a chance to check where all it has been printed. I don't know what the problem is, but we'll get it addressed.

So for those of you who have seen the press release and have found it on a service, I guess you can imagine that we are pleased with the significantly higher results we reported. I'll just hit the high points here and -- before we discuss some additional color to our financing and business strategy going forward.

On the numbers, Q1 2012 basic net income more than doubled, while diluted income to shareholders increased 89% sequentially over the prior quarter and improved by $1.6 million from the $0.5 million loss in the comparable prior-year period.

Blended product prices per BOE and revenues were up across the current, the preceding, and the prior year's quarter, although oil prices were 8% significant -- sequentially lower over the prior quarter. Expenses per BOE were down in every category across all three comparable periods, except for a minor increase in our depletion rate due to an acceleration of our expected payout to date at Delhi.

While some expenses dropped absolutely, such as LOE and total operating expenses, absolute DD&A increased proportionately to our increased sales volumes across all periods compared. At the field level, these improvements produced pretax margins of $73 per BOE in Q1 2012, $65 per BOE in the prior sequential quarter, and $26 per BOE in Q1 of fiscal 2011.

Moving to the balance sheet and cash flow statements, our financial position remains solid with no debt. We tripled our working capital sequentially to $12.2 million, $2.6 million of which was from cash flow from operations before changes in working capital and $6.1 million of which was from net proceeds from our preferred stock sales during the quarter.

Our capital budget for fiscal 2012 is a base case of $4 million and expandable up to $12 million, subject to results of our early drilling and other opportunities that may arise. Today, our working capital in hand is sufficient to meet any level of expenditures within that range.

As to our preferred stock issuance, we chose this additional vehicle to add to our options in financings going forward, should they become necessary. We believe this offers our shareholders several advantages, as follows. By its perpetual nature, there is no due date, nor is it redeemable by the holder. When combined with its preference price, this allows us to classify the issue as permanent equity.

Secondly, the preferred stock is not convertible into our common shares, so it does not dilute our common stockholders' ownership in our net assets. Third, minimal covenants and no due date allows us to maintain control of our assets and operations. Fourth, we may redeem the preferred shares for any reason after June 2014 at $25 per share, plus accrued dividends, or earlier at a slight premium in the event of a change in control.

Next, the issue is listed on the New York stock exchange AMEX, offering liquidity to its holders, and to date our Board of Directors has authorized up to 400,000 shares of the 1 million shares legally authorized for our Series A -- 8.5% Series A cumulative preferred stock -- kind of messed that one up.

In Q1 2012, we began issuances that totaled 282,255 shares through an initial underwritten public offering and subsequent sale to the market. Our average offering price through September 30 was $23.56 per share, netting us approximately $6.1 million after all underwriting discounts, legal, and accounting fees, printing, and other fees and expenses of the offering.

So to sum this financing strategy up, we've passed all the hurdles of SEC registration, underwriting, due diligence, and fixed-cost expenditures necessary to put this additional financing tool on the shelf to be used as the markets permit, when necessary. When combined with our expected increase in cash flows coming off of Delhi, our unlevered balance sheet, we are positioned, as Bob said, to take advantage of E&P investment opportunities as they may arise in these volatile markets.

I will now turn it back over to Bob.

Thanks, Sterling.

Please note that Sterling is going to be presenting on Thursday at the New York Society of Security Analysts conference at 325 Eastern time at the offices of the society. This is going to be webcast and accessible through our website tomorrow, as will be our latest presentation.

We are encouraged that the Delhi reservoir continues to respond well to the CO2 injection -- in fact, better than expected. We're also pleased that Denbury is moving steadily forward in installation of the remainder of the project in the eastern half of the field. The higher production rate there, combined with the premium Louisiana light sweet pricing, is providing a great uplift to our results.

While our current projects are sufficient to redeploy the current level of cash flows, the projected ramp-up in cash flows from Delhi over the next couple of years provides us with the opportunity to consider other development project opportunities that meet our very stringent criteria of location, required expertise, oily product, and an appropriate risk/reward ratio.

As employees and major shareholders, our focus here remains clearly on protecting and building share value. That's a key issue for us every day.

Now with that, we're ready to take questions. Operator, please open the line.

(Operator Instructions). [Mark Adan], [MLV & Co.].

Good morning, gentlemen. Congratulations on the quarter. Just a couple questions for you guys. On the cost side, is this a level that we should expect them to stay out going forward or is there going to be some variability?

Which costs?

Just (multiple speakers) operating costs.

The LOE cost, as you may notice, on a quarter-to-quarter basis are actually quite flat, and the reason is that we don't bear any operating cost on any of the production at Delhi, so as that goes up, there is no increase in our operating costs.

Those are really tied to our operations, primarily in the Giddings Field and starting to be a greater extent -- a large extent, I should say, in south Texas. As we add more wells in south Texas, that number will go up accordingly, but not a very big number.

Okay, and my only other question was the development plans for the expansion into the eastern half of the Delhi Field. Has that already begun or is that sometime in the near future?

Well, in the past what we've talked about is Delhi being done in phases, and actually the operator has kind of gotten away from that concept.

We are -- I shouldn't say we. They are still in the process of completing the installation of the project in the western half of the field. It just so happens that the way they did it this year, they were able to begin CO2 injection and generate oil production at an earlier stage of that development.

So while we've realized production from activities out there this year, they are still in the process of completing that installation on the western half. Starting next year, we expect them to move into installation and in eastern half, and that will be likely over about a three-year period.

Okay, thank you very much. Congratulations again.

(Operator Instructions). Dick Feldman, Monarch Capital.

I've got a question about GARP. What will those installations cost you in terms of capital?

That's going to really vary depending on the nature of the well that we get. Right now, our focus has been we want to install it in the wells that are already currently operating, producing. They already have the rod pump, the drive, and so forth, so we don't have to put a lot of money into the installation of a non-GARP equipment.

So in that case, we're actually going to be spending on the order of about $100,000 or so for those kind of applications for a typical full installation of the GARP. If we have to actually include the installation of the rod pump and the rods and so forth, then that could easily add another $150,000 to $200,000.

On the other hand, you typically get additional reserves associated with just the rod pump and installation on its own because that is typically a more efficient artificial lift than, say, a gas lift.

Okay. How long do you think it will take for you to know whether these two tests are living up to expectations?

It'll take anywhere from -- we would expect to see fairly rapid response, but then you also want to see it hold up for a number of months. So I suspect that we'll make some disclosure of results in the third quarter or at the third-quarter results earnings call, some time in that period of time.

Your fiscal third quarter (multiple speakers)

(Multiple speakers) I should say. Third fiscal quarter? That would be -- we want to make sure we have adequate information so that we have a reliable answer.

Okay. Good luck and thank you.

(Operator Instructions). I'm currently showing that there no further questions at this time. I will turn it back over to Mr. Herlin for any closing remarks.

Again, I would like to thank everyone for joining us. We're very pleased with the results this quarter and we have every reason to believe that we're going to continue to see these kind of results going forward.

So if you have any other questions, feel free to give us a call. Otherwise, I encourage you to listen in to the full presentation by Sterling tomorrow or to review the presentation that will be online tomorrow. Thank you.

Ladies and gentlemen, this does conclude the conference call. If you'd like to listen to a replay of today's conference, please dial 303-590-3030 and enter in the access code of 448-565. Thank you for your participation. You may now disconnect.