Evolution Petroleum Corp (EPM) 2014 Q3 法說會逐字稿

Hello, and welcome to the Evolution Petroleum Corporation's third-quarter 2014 earnings conference call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Randy Keys, CFO. Please go ahead, sir.

Good morning. I'd like to welcome you to Evolution Petroleum's conference call to discuss results for the quarter ended March 31, 2014. This is our third quarter of our fiscal 2014 year.

I'm Randy Keys, CFO of the Company. With me today is Bob Herlin, our CEO; and Daryl Mazzanti, who is VP of Operations and Executive VP of our wholly-owned sub, NGS Technologies, which has our GARP services technology.

Before we begin, I want to cover a couple of basics. If you'd like to be on the Company's email distribution list to receive future news releases, please see the contact info in our news release. If you wish to listen to a replay of today's call, it will be available shortly by going to the Company's website at EvolutionPetroleum.com, or via a recorded telephone replay until May 23.

The necessary information can be found in the earnings release. Please note that any statements and information provided herein are time-sensitive and may not be accurate at a later date. Our discussion today may contain forward-looking statements that are based on management's beliefs and assumptions that are based on currently available information. We can give no assurance that such forward-looking statements will prove to be correct, as they 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.

Our discussion also may include discussions of probable, possible, or potential reserves, or potential recovery. Such non-proven estimates are more speculative than proven reserves.

We will begin with comments about our results for the year and quarter, and then go to questions. Bob?

Thanks, Randy. Since detailed numbers are readily available to everyone in the news release yesterday evening, I will focus my remarks on key operating results and our nonrecurring items. Randy will provide some additional commentary, particularly focused on our GARP business. And then we'll take your questions.

I am pleased to report that we returned to profitability this quarter, with earnings of approximately $800,000 compared to a $600,000 loss last quarter. Our current earnings were impacted by the restructuring process that began in second-quarter and were completed in the third quarter, with the retirement of our previous CFO. As a consequence, current results were reduced by a related one-time charge of $600,000. Now, that should be the end of these nonrecurring, one-time charges that were related to the restructuring.

Our results continue to be impacted by the fluids release event that occurred last summer in the Southwest tip of the Delhi Field and the resulting remediation work. Delhi daily production was essentially flat compared to last quarter, as purchased volumes of CO2 did not appear to increase until late in the quarter. We expected an increase in CO2 injection volumes. And a continued response to the previous year's development expenditures should increase oil production this calendar year, but we really can't reliably predict when or by how much at this point.

Current quarter revenues were $4.3 million on net production of 487 barrels of oil equivalent per day at an average price of $99 per BOE. And that reflects our 96% oil content in our production. Really not much change in volumes of revenues, but as a temporary increase in lease operating costs due to workovers on two GARP wells and production testing on two Mississippi Lime wells in Oklahoma.

Now that the testing of those two wells is done, LOE should be materially lower in our fourth quarter. Overhead costs dipped again to reflect the [bits] after restructuring begun last quarter by decreasing by some $300,000 despite the $600,000 one-time charge and continued litigation expense.

Now let's go to some specific projects. The operator of Delhi, which is a subsidiary of Denbury, announced that the field is back to normal operations with remediation completed. The data that we get suggests that any incremental CO2 injections during the quarter were modest until late in the quarter. Thus any production response will likely not occur for several months.

The operator further stated that the development plan now includes installing a recycled gas processing plant to recover methane in all NGLs in 2015. And that's about a year earlier than we had originally projected. And it also incorporates a fuller recovery of natural gas liquids than we projected in our last summer's reserve report. We also believe that additional changes in reordering in the development plan are likely. But we really don't have enough information, since we're a nonworking interest holder, to accurately project the impact at this time.

Gross production averaged 6173 barrels of oil to date for the quarter compared to 6254 last quarter. And the oil price at Delhi averaged almost $102 a barrel, which is about a $5 improvement over the last quarter's. Now, I did speak with the operator after several breaches of our 2006 agreement, including the applicability of their 2006 indemnity for environmental liability has not been resolved. And our lawsuit is moving forward. We believe that the primary effects of this litigation, however, is to determine just when in 2014 our working interest reversion will occur.

As far as GARP, I'm going to let Randy cover that with his remarks with you shortly. In the Mississippi Lime project up in Oklahoma, we were conducting a production test of our Sneath well, but that test has neither approved nor disapproved our hypothesis for drilling results to date or the remaining opportunity. Since the lateral on the Sneath well begins at a low point in the reservoir and runs up-structure, we isolated the lower -- or the first two-thirds of the lateral and kept open the last third, the tiring structure, to show the potential for structural recoveries.

Unfortunately, it appears that we were not able to shut off water production. Therefore, we weren't able to generate enough oil and gas production to approve a significant amount of reserves. So at this point in time, we've got those wells shut in, and we do expect to invest our assets on that project.

Looking forward, we are in excellent financial health. We've got $25 million in cash. We have no debt. We have substantial free cash flow from operations. And we have our pending working interest conversion at Delhi, which will more than triple our revenue interest in that project. At this time, we do not expect significant capital expenditures during the balance of our fiscal 2014, other than the $1 million or so to fund the first 10 GARP installations under the contract we entered into in February.

We do expect substantial CapEx in fiscal 2015, primarily related to our Delhi asset. But our working capital that we have, plus our projected cash flows from operations, should be more than adequate to meet those needs, as well as continue providing our very attractive dividend to shareholders. We will continue to retain considerable flexibility and liquidity to meet our needs at Delhi and to grow our GARP business.

We remain very excited about the opportunities in front of us and our ability to continue providing share value growth and yield to our shareholders. Randy will now give you some additional background.

Okay. Pleased to report that last week, we moved a workover rig in to begin the first of five consecutive GARP installations under our previously announced contract. We are scheduled to complete all five installations back-to-back with the same rig, with completion sometime in early June. Our current staff capacity is about four installations per month. We can do approximately one a week, and we are nearing completion on the first of those five installations.

As we have previously disclosed, the operator is providing the lease, the wellbore, and most of the downhole and surface accompanying equipment. We are providing certain incremental hardware and funding the installation costs, the total of which we estimate to be approximately $100,000 per well. In exchange for this investment and the use of our technology, we will receive 25% of the net profits from each well.

This particular customer has a large portfolio of good candidates for GARP, and we expect that the results from this initial 10-well package will be a strong inducement to a much larger opportunity. Our current marketing efforts are focused on identifying specific targets for GARP through industry databases, and then contacting operators directly to show how our enhanced recovery system can increase production and profitability, and allow them to maintain their leases for an extended period of years.

We were honored to receive the Special Meritorious Award for Engineering Innovation from Hart Energy, which was presented to us at the Offshore Technology Conference this week. We are also presenting at an Artificial Lift Symposium and Workshop in Houston next week. The technology continues to get positive feedback from the industry, as we continue with our marketing efforts, which include industry trade shows and other media channels.

As Bob mentioned, the Company has an excellent liquidity position with no debt, approximately $25 million in cash, and $5 million of undrawn capacity on our line of credit. This balance sheet strength is a key part of our strategy as we transition from a royalty position at Delhi to a 23.9% working interest after reversion.

Thanks, Randy. As you can see, our strong value proposition for shareholders remains in place. With that $25 million in cash, with no debt, with the pending reversion at Delhi that will triple our revenue stream, we look forward to executing our strategy to maximize share value for our shareholders.

And with that, we're ready to take questions. Operator, you can please open the line for those questions.

(Operator Instructions). Chris McCampbell, SW Securities.

Thanks for answering the questions, guys.

Thanks, Chris.

Would there be a share price at which repurchase would be attractive? Or do you expect the majority of cash and cash flow to go towards dividends?

There is clearly an attractive point at which that we would start buying back stock. We're not planning on doing anything with that, though, until after reversion has occurred. We want to make sure that we retain full flexibility to meet any CapEx demands from our partner on that project, and there's a possibility of some sort of a cash call, whatever.

We just want to make sure that we don't forgo any opportunity there. Once that is resolved, which is something that would happen right around reversion day, we would then be in a position to reconsider how we deploy our available capital and our revolver that we're expecting to probably expand by quite a bit as well, if the share price where to be at a level that we think is far below where it should be.

Okay. Thank you so much.

Joel Musante, Euro Pacific Capital.

Hi, Bob and Randy. I just had a question about the recycling gas plant. Just trying to get a better handle on what that -- what kind of an impact that will have on your (multiple speakers) and costs.

Keep in mind, first of all, what we know is probably not a whole lot different than what the general public knows, because since we're not a working interest partner, we're not entitled to a lot of detailed information. But what we do know is that in our reserve report a year ago, we had to assume basically the worst case scenario for processing. So it was the least recovery for the most money in the shortest period of time, which is the most inefficient use of capital.

And in that particular -- in our reserves then, we only were able to include, as proved reserves, recovery of our C5 pluses, or the natural gasolines. Recovery of methane was a probable part of our reserves, and we weren't recovering anything in the C2 to C4 ranges, where the bulk of the liquids are. Subsequent to that, we have found and determined and heard and so forth that Denbury has announced a smaller plant that has a broader recovery on a smaller slipstream.

Therefore, they are going to be recovering the full suite of natural gas liquids, which is much greater volumes. Since it's part of the project, that ought to move all those reserves into a proved category, and it's a much more capital-efficient way of doing it. Our understanding is that the capital costs of that plant is substantially less than what was in our reserve report. Again, what they have announced that they're going to start on in 2014 with expectations of it being up and running in 2015. And that is about a year earlier than what we had projected in our reserves report as well.

It will be processing a smaller slipstream of the recycled gas. As a result, it will probably be in operation for a lot longer time; and that's why it's a much more efficient operation. The side benefit is that that will allow the recycled stream to have a lower content of methane, which makes it easier to pressurize and cool off; and therefore, make the overall CO2 flood a more efficient project and process. It will also allow, I think, a little lower operating pressure in the fields, which would also be helpful. So, that's all we know; probably more than we know.

Okay, all right. Does it reduce your operating costs because you're recycling your CO2? Or I assume that that's part of what it does.

Well, there's going to be a lot of benefits. And the obvious thing, it's a more efficient process that's better. It means that you're now -- that all of the recycled gas is helpful for creating a miscible flood as opposed to some of the gas which is not helpful. Obviously that's better for you. So, on an effective basis, yes. Would it drive down your operating costs? It should.

I think one of the benefits is -- or the big benefits is that by recovering the methane, you can use that to fuel your plant instead of buying natural gas. So that's a really nice benefit. Because instead of selling gas, and paying all the transport costs and the marketing costs to get it to market, you are getting the full value at the plant itself, and you're not having to buy natural gas at the regulated rate there in the state. So that's very helpful. So, there's a lot of benefits to this that are probably more extensive than are obvious on the surface.

Okay. Well, that's all I had. I appreciate it. Thanks.

(Operator Instructions). Bruce Brown, Brown Capital Management.

Hi, Bob and Randy. On that topic -- I tuned in late; I missed the first 10 minutes. I apologize for that. On the recycling gas processing facility, what do you think -- are you -- you will be -- are you obligated for a certain percentage of that? Assuming the reversion kicks in, I would assume that 23.9% of whatever the cost is would be borne by Evolution. Is that right?

That is our expectation. Denbury has stated from time to time that they really don't want to spend a significant amount of capital at Delhi this year until reversion occurs, which makes a lot of sense from their perspective. Obviously, we'd love to have them spend their money for our benefit and us not have to pay for it, but that is not our expectation. We really don't expect to see much capital to be spent out there until reversion occurs later this year. And at that point in time, we will be paying our full 23.9% share of those costs.

All right. Now does your royalty interest continue after the reversion?

Yes, it does. The royalty interest is totally independent and separate from our reversion and working interest. So, today, we collect 7.4% off the top on the revenues and we don't pay any OpEx. And frankly, we're not even paying severance tax because we're on a severance tax holiday with the state of Louisiana, which is going to go on for a number of years. After payout, or after reversion occurs, we will continue to get that 7.4%, but we will also be getting an additional 19.1% revenue interest to give us a total of 26.5% of the revenues. And then we'll be paying our 23.9% of all the operating costs and CapEx.

Okay, that's good. Yes. And the Denbury slides on their latest presentation, which I think was last week, indicate that the proven and the 2P and 3P -- I guess it's the 2P and 3P reserves -- are some 40 million barrels for the field as a whole.

There's two errors in that statement. Number one, Denbury doesn't recognize 3P reserves as far as I know. Theirs is just a 2P number. Second, that 40 million is their net reserves. It's not the gross; it's their net.

After reversion?

Period. I mean, it's their total reserves before and after reversion. And so, as a result, if you back-calculate that, I believe it works out to a number closer to 80 million gross barrels for the whole project, of which I think 5 million has been produced to date.

So, it's 75 million barrels are left to produce over time, assuming everything continues to work according to plan?

Right. That would be a gross number, and that would be barrels of oil equivalent, I believe.

Okay. And that would include the gas that would be subject to the putting through the gas recycling plant?

Correct. That would be the recovered methane and natural gas liquids and so forth. And remember, I'm just using the same numbers you're using, that you're seeing, but we know what their interests are and so forth, and we can back-calculate what that means on a gross level.

Yes. What percentage of the 75 million barrels would be oil, roughly?

Boy, you got me there.

A very high percentage. It's north of 90%.

No, no. It's 68 million, maybe. 68 million of the 80 million, or 68 million -- it's on the order of (multiple speakers). You asked me a quick question I can't, off the top of my head, tell you.

All right, so 68 million barrels of oil (multiple speakers) and another 12 million of BOEs coming from (multiple speakers) the --?

(multiple speakers) [31 Bcf] of gas.

And liquids, yes.

It's 31 Bcf of gas, and then there's -- which is 5 million equivalent in gas. And then there's gas liquids make up the difference. Now these are all just rough numbers that I would hate to be held to, because they're just off the top of my head here.

In that case, it would be about 85%.

Yes.

Yes, well, Bob, I must say the top of your head is probably not that inaccurate. (laughter)

Well, there's not much hair up there, so --.

Neither have I.

Very shiny up there.

Yes, yes, but not enough room for a solar panel (laughter).

Although I have been accused of that.

All right, fellows. Thanks so much.

Thank you.

(Operator Instructions). And I am showing no more questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Robert Herlin for any closing remarks.

Sure. Thanks again to everyone for participating. As you can see, I think we've got a decent quarter and things are looking for potential improvements, rapid improvements over the balance of this calendar year. And with conversion coming up, we expect to see a several-fold increase in revenues and cash flow and so forth.

So, we're very excited about the opportunity, with GARP starting to take off better and better. We're very pleased with where we are. And hopefully, the shareholders and the market will come to agree with us. Thank you again, and feel free to call us if you have any questions.

The conference is now concluded. Thank you for attending today's conference. You may now disconnect.