Evolution Petroleum Corp (EPM) 2018 Q2 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Evolution Petroleum Second Quarter Fiscal 2018 Earnings Release Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to management. Please go ahead.

Welcome to Evolution Petroleum's Earnings Presentation for our fiscal second quarter ended December 31, 2017. We will discuss operating and financial results for the quarter. I'm Randy Keys, CEO of Evolution Petroleum.

Please note that any statements and information provided today are time-sensitive and may not be accurate at a later date. This presentation contains 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 described in our filings with the SEC. Actual results may differ materially from those expected.

Evolution reported excellent financial results for the quarter ended December 31, 2017. Our revenues of $11.1 million were a quarterly high for Evolution since its founding in 2003. Most of this increase resulted from higher oil prices which averaged $57.30 per barrel in the quarter. These are price levels we have not seen since mid-2015.

Since the end of the quarter, we've seen a further improvement in oil price. Our net income for the quarter was $9.9 million or $0.30 per share. This includes a one-time tax benefit of $6 million from the adjustment of our deferred tax liability to reflect the lower corporate income tax rate in the 2017 Tax Cuts and Jobs Act.

The big news for the quarter is the increase in our quarterly common stock dividend from $0.075 to $0.10 per common share. This is $0.40 per share on an annual basis. This increase restores the dividend to the original levels set before the industry downturn in late 2014.

Our balance sheet remains very solid with $27.6 million of working capital, substantially all of which is cash. Even after the increase in the dividend, we are well positioned financially to continue development of the Delhi field and also to capitalize on potential new acquisition opportunities.

During the quarter, we reported total revenues of $11.1 million. Our total operating cost was $6.2 million, resulting in income from operations of $4.8 million. Of these costs, our noncash DDA expense was $1.6 million and our stock-based compensation was $0.5 million. So our earnings before interest, taxes and DD&A totaled almost $7 million for the quarter. We reported net earnings of $9.9 million which was $0.30 per common share in the quarter.

Our tax expense for the quarter was a credit of $5.1 million. This was based on an expected combined state and federal income tax rate for the year of slightly over 20%, which was offset by a $6 million benefit from tax reform. Based on the passage of the 2017 Tax Cuts and Jobs Act in late December, we recorded a $6 million benefit to our liability for deferred income taxes. This adjustment revalued our expected future deferred tax liability from the prior statutory rate of 34% to the new lower corporate tax rate of 21%.

For the year, our blended corporate rate is 27.6% based on our June 30 year end. We get the benefit of the lower rate for approximately half of the year. Our effective rate is reduced by the expected benefit from percentage depletion in excess of basis, offset by an increase for state income tax. These adjustments, along with a few smaller items, result in our expected tax rate of 26%.

More importantly, Evolution benefits greatly from a much more efficient tax structure going forward. We previously faced a potential combined tax rate of over 47%, based on paying corporate taxes at a 34% rate and distributing dividends, which would be taxable at a 20% rate. We now have a combined tax rate of 37% which is currently the marginal tax rate for individuals. This is a very simplified analysis but we view the new tax structure as a significant benefit for our shareholders.

Our average realized oil price for the quarter was $57.30 per barrel, up 22% from the prior quarter. Our net realized pricing in the Delhi Field has been improving over the past several quarters. The majority of this improvement results from a significant increase in the premium of Light Louisiana Sweet or LLS over WTI. During most of fiscal 2017, this premium was around $1.67 per barrel. However, during the most recent quarter, the LLS premium surged to $5.48 per barrel. This resulted in our realized oil price swinging from $1.24 discount to WTI to a premium of almost $2 per barrel.

In late January, we saw the LLS premium narrow to slightly under $3 a barrel but we are still encouraged by the relative strength of our crude oil in the market.

Our NGL pricing has also been very strong although this accounted for only about 8% of our total revenues. From a seasonal low in the late spring and early summer of this year, we have seen our NGL prices as a percentage of oil increase from 40% of WTI to over 60% of WTI. There are several positive factors behind this relative strength which we will discuss later in this call.

Our operating cost per equivalent barrel of production showed continuing improvement, dropping from $16.67 per barrel 2 quarters ago to $14.30 per equivalent barrel in the most recent quarter. This brings us closer to the trend line since late 2015. At a cost per barrel of $14.30, we generate a very substantial field operating margin of over $40 per equivalent barrel. With a large part of our operating cost relatively fixed, the majority of any commodity price increases should directly increase our operating margin in the field.

Two quarters ago, we saw an unusual spike in our purchased CO2 to 85 million cubic feet per day. Over the past 2 quarters, we've dropped back to more typical levels in the range of 70 million cubic feet per day. Based on our contract cost of CO2, which is directly tied to the realized price of oil, we saw a 16% increase in our total CO2 cost compared to the last quarter. This increase was offset by lower repairs and maintenance and lower costs associated with the NGL plant. The overall effect was that our total LOE cost were flat with the prior quarter.

With the NGL plant now operating at normal capacity, we expected to see a drop in feedstock cost for purchased natural gas to run the electric turbine, and we've seen that drop. We hope to see a further cost reduction in our power cost over the next couple of quarters.

Overall, if we continue to see higher oil prices, we should also expect to see higher purchased CO2 costs which are a direct function of oil price. However, this should be more than offset by an increase in our field operating margin.

Our G&A expenses have ticked up slightly over the past 2 quarters. We had higher stock-based compensation in both quarters to account for the vesting and probable vesting of certain performance-based incentive awards. These costs were higher than expected based on positive performance results and should be down in the $350,000 range over the next couple of quarters.

Our cash G&A was up in the past 2 quarters as a result of engineering, consulting and other property evaluation cost. We also had some severance cost last quarter from a reduction in headcount as we continue to streamline our accounting overhead to match our current asset base. We may see our future G&A cost slightly above the trend line for the additional cost of engineering and other technical resources as we continue to evaluate new acquisition opportunities.

Evolution began paying a quarterly cash dividend on common stock in December 2013 and has now paid 17 consecutive quarterly dividends. Yesterday, we declared our 18th dividend at the increased quarterly rate of $0.10 per common share. This is $0.40 per share on an annual basis. Our cumulative return to common shareholders now totals almost $40 million or $1.20 per common share. We have now doubled the dividend over the past 18 months since September 2016, and it is back to the level originally set by the Board in December 2013. This is a clear demonstration of the commitment of management and the Board to rewarding our shareholders with a meaningful common stock dividend.

The Delhi central CO2 processing facility now handles the compression and recycle of almost 300 million cubic feet of CO2 per day while also processing the oil and water produced from the field. At present, the field has around 45 CO2 injection wells and almost 100 production. Our next step in the development of the field is a 12-well infill drilling program which we expect to kick off in early March 2018. This program consists of 5 new CO2 injections wells and 7 new production wells in the central part of the field. These wells will target existing zones within the reservoir which we believe are not being effectively swept with the existing flood paths. We expect this program to add production and increase ultimate recoveries above the current proved producing oil reserves. Our net cost is estimated at around $4.7 million for the program.

In addition, using the same drilling rig, we plan to finish the last 3 wells of a water injection project on the eastern edge of the field. These wells are part of the infrastructure for the planned Phase Five expansion of the Delhi Field. We expect net cost in the range of $2.3 million to complete this program.

As previously reported, we completed a capital improvement at the inlet of the recycle plant in August of last year. Since completion of the project, the NGL plant has run at normal capacity, and we had gross production of 1,079 barrels per day of NGLs in the quarter.

The NGL plant has been producing a very rich mix of liquids. Over the past 2 quarters, we've seen the yield of high-value pentanes and heavier liquids increase significantly. These products, which are referred to as C5-plus and sometimes called natural gasoline, sell at a price very close to WTI, less deductions for transportation and processing. We have also seen relative strength in the pricing of our other NGL components.

We are entering into a seasonal period of higher demand for these products, both for heating in the winter and for blending with gasoline in the cooler months. Lastly, we made further progress in resolving a product quality issue which had led to a reduction in our net pricing.

Our net NGL price increased 21% from the prior quarter from $28.07 per barrel to $33.85 per barrel. This resulted from the combination of all 3 factors: better market prices, a significant improvement in the yield of higher-value products and progress on meeting the purchaser's quality specifications.

This concludes our review of financial results and operations for the December 2017 quarter. In summary, we've reported a 33% increase in our quarterly common stock dividend to $0.40 per share on an annual basis, very solid operating results for the quarter, an encouraging commodity price environment which continues to look promising for increases in future revenues and cash flows, and the expected benefit from a significant reduction in our corporate income tax rate as a result of tax reform.

Our liquidity position remains very strong with working capital of $27.6 million at the end of the quarter, substantially all of which was cash. We paid out $2.5 million in common stock dividends during the quarter. We've retired all of our preferred stock and have no debt on the balance sheet. We are in a great position to look at new growth opportunities.

Thank you very much for your interest in Evolution Petroleum.

(Operator Instructions) Our first question comes from Jeff Grampp of Northland Capital Markets.

First, I wanted to, I guess, get any kind of line of sight that you guys have on your end regarding the Phase Five expansion. I know you guys kind of highlighted a little of the preliminary work that is being done ahead of that. Is there any kind of line of sight towards when that project may be initiated from your end?

Well, I think the first step is we need to get this infill drilling program behind us. It will require some additional CO2 resources, and we're somewhat limited on our overall recycle capacity in the field. We think that's a 2019 calendar year project. That's what our preliminary discussions with the operator had been. But I think we'll have better line of sight toward the end of the year after we've got this infill drilling program completed. I would add that it remains an economic project. It does remain a project if the operator intends to execute, and we do expect it, it's just the timing is not firm at this point.

Okay. Perfect. Perfect. Appreciate that detail. And then on the M&A side, you guys highlighted getting the revolver up to $40 million. And I guess, just kind of wondering how you guys are thinking about potential financing of any deals? I mean, is the revolver there, I guess, intended to be -- to permanently finance the deal? Or would that be kind of a shorter-term opportunity to get something done and equity is a longer-term option? I guess, generally, your appetite towards putting any leverage on the balance sheet is my question.

Well, we're not opposed to having debt on the balance sheet. And so a portion of that -- a portion of any financing for a potential acquisition would likely be debt. It depends -- we want to maintain a very manageable leverage. My personal preference is that we stay about 1x, 1x cash flow over a long-term period. But we could easily stretch to 1.5x or perhaps beyond in order to get a transaction done. But then we'd want to bring that back down, either from repayment of debt through cash flow, or potentially through the issuance of equity. Equity comes into play if we talk about a longer-term growth and a significant growth in the market cap and enterprise value of the company.

(Operator Instructions) Our next question comes from Jon Burke of Amica Insurance.

Appreciate the big move in the dividend. That is definitely appreciated on our part. Now is that just to kind of keep it at a similar targeted level of cash flow given that cash flows are higher now with the production and, obviously, the move in oil? Or is it somewhat leading into a bearishness on getting M&A prospects done?

Well, it is clearly the former. We've seen a very significant increase in our cash available. And the target that I set internally is we don't want our dividend to be more than 50% of our estimated cash flow EBITDA in the company. And really, I'd like to keep it around 40%. We are under 50%, probably in the very low 40% range based on our expectation and obviously, those are based on prices. But no, I think we remain confident in our ability to execute. We've been very patient. We've actually been doing a lot of work in looking at potential acquisitions. We're -- we've been in an environment where we've seen a lot of deal flow for producing properties for 2 primary -- well, really, 3 primary functions or situations in the market. We've seen a lot of the MLPs that have exited Chapter 11, a lot of the very large MLPs exit Chapter 11 and seek to divest a lot of their producing -- legacy producing properties. We've also seen some private equity companies that -- whose growth prospects are limited and their sponsors are ready to exit and wrap those up. And thirdly, we've seen some of the large independents look to rationalize their portfolios as they want to pivot their spending into the more, in their view, higher rate of return plays, more attractive plays, the Permian, the Scoop, Stack, wherever, the Bakken, mostly shale plays. And in fact, we noticed yesterday that Pioneer had made a strategic announcement that they're going to exit most of their other onshore properties over time to focus entirely on the Permian Basin. So those 3 factors have given us a lot of deal flow but we've been very patient. We're very disciplined about the rate of return that we want to see and we just don't feel a huge sense of urgency. We want to be patient and try to find the right deal.

And how is -- expectations change on the sellers' point of view since we've had this, obviously, big move in spot oil. Obviously, you go out on the forward curve and the move is much more moderate. So has price expectation changed much?

Well, it has changed a bit, and it's really changed in 2 ways. There's obviously just a pure impact on the value. But it also has a more subtle impact on perception of the upside value, what may be economic to expand. Some of these projects that we're looking at, we view as primarily PDP projects but they may have certain potential upside that would come into play at a $70 oil price, as an example. And so one of the struggles that we face is that as the price moves, sellers have a tendency to want to be compensated for some of that potential upside, whereas we're trying to buy primarily on a cash flow basis. And I would add that, that's just true on the oil side, because we've really seen a fairly weak market in the gas side. We got a little spike with the cold weather in the -- in January, and then it's pulled back since then. So it's truly just on the oil side on that.

Okay. And just as a reminder, you're using a spot price deck. You're not -- you don't have like your own internal price deck when you do these?

We try to stay pretty close to the strip. Because that would give us the ability to hedge. We try not to deviate too far from prices that we could lock in if we chose to do so.

(Operator Instructions) This concludes the question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

Well, thank you very much for participating in the call. I think I've gone through all of the details and happy to talk to shareholders individually as necessary. We look forward to next quarter's call in early May, and thank you very much.

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.