Evolution Petroleum Corp (EPM) 2018 Q4 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Evolution Petroleum Corporation Fiscal Year-end 2018 Earnings Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to David Joe, Chief Financial Officer. Please go ahead.

Good morning, and welcome to Evolution Petroleum's earnings call for our fiscal year ended June 30, 2018 and our fiscal fourth quarter. We will be discussing operating and financial results for the year and the quarter.

I am David Joe, CFO for Evolution; and joining me on the call today is Robert Herlin, Chairman of the Board and interim CEO; and Steve Hicks, Senior Vice President, Engineering & Business Development.

If you wish to listen to a replay of today's call, it will be available shortly by going to the company's website via recorded replay until September 14, 2018.

Please note that any statements and information provided today are time-sensitive and may not be accurate at a later date. Our discussions 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 focus on key highlights, operations, an update on Delhi and plans for fiscal 2019.

I'm now going to turn the call over to Bob Herlin.

Thanks, David. Good morning to everyone, and thank you for joining us today. We are pleased to report that Evolution had a good quarter and a good fiscal year for performance of our -- for our shareholders.

I'm particularly pleased that we're able to increase the dividend rate by 43% during the year to $0.40 per share annually. Evolution is one of the few companies in our industry that have generated earnings for 7 consecutive years, including the very low-price period from 2015 through 2017. The tax legislation last year has allowed us to become even more efficient vehicle for converting oil and gas reserves into shareholder dividends.

Our commitment to our primary focus on shareholders has remained consistent, and we -- it guides the Board of Directors, management and staff. After David runs through our financials, I'll speak briefly about our future efforts. David?

Thanks, Bob. For our highlights for our fourth fiscal quarter. I won't, per se, rehash the Delhi production and prices, since they were prereleased and disclosed in August 15 press release and again in yesterday's full year results press release. Overall, though, total production at Delhi was up 5% from the prior quarter. This is despite production being impacted by reduced volumes of purchase CO2 in the quarter, due to strategically reduced injections near wells being drilled as part of the infill drilling program. This trend continued into July, but we expect August purchase volumes to return to normal levels.

The company followed up an excellent fiscal third quarter with even a better fourth quarter, improving on all financial metrics. We recorded net income of $4.5 million versus $3.1 million in the prior quarter. We generated revenues of $11.4 million versus $10.2 million in the prior quarter. This was based on a realized oil price of $67.41, the highest quarterly average price since December of '14, which also represents a 6% increase to prior quarter and a 45% increase to the year-ago quarter.

We improved operating margins to $5.2 million versus $3.7 million in the prior quarter. This was largely due to lower CO2 purchase costs by roughly $0.5 million due to the lower volumes I mentioned earlier. We recorded net -- we recorded earnings per share of $0.14 in the quarter compared to $0.09 in the previous quarter.

The infill drilling program is progressing on schedule. And as planned, at the end of the quarter, June 30, there were 4 wells online. All 12 wells have since been drilled as of the end of August with only a few completions remaining.

In our fiscal fourth quarter, our capital expenditures were relatively modest at $3.1 million for Delhi, the majority of which was for the infill drilling program and some Test Site 5 infrastructure work. The remaining cost of $1.9 million for the infill drilling program is expected to be recorded in the fiscal -- first fiscal quarter of 2019. Our G&A expenses were substantial in Q4 due to the Enduro acquisition efforts. However, we substantially recovered these costs by receipt of the previously disclosed $1.1 million breakup fee that we received on August 31, 2018.

In summary, our balance sheet remains solid with almost $28 million of working capital. This is it -- this excludes the $1.1 million that we received, largely all cash with no debt. And this is net of the dividends that are paid out in the quarter.

Moving on to full year results. Delhi production year-over-year was down 3% to roughly 7,800 barrels of equivalent per day gross or about 2,040 barrels of oil equivalent per day net. Shut-in operations for unusually cold weather in fiscal Q3, scheduled and unscheduled NGL plant times and lower CO2 injections in fiscal Q4 were all contributing factors for this decline.

The CO2 -- Delhi CO2 operations are complex and a field of this age will always have some of the [150-some] wells down for maintenance and repairs, workovers, et cetera.

For the full year, we recorded record revenues of $41.3 million, which was the result of higher realized oil and NGL pricing. Thus far, into fiscal -- first quarter fiscal '19, the commodity price environment continues to look good for increases in future revenues and cash flows. Full year lifting costs per BOE were up some $2 to $16.36. Higher oil prices have driven up CO2 costs, our largest single production cost, which is tied directly to oil price. While the NGL plant operating expenses were higher due to a full year of operations versus only 6 months in the prior year. Nonetheless, at current fuel prices, operating margins are still very high and profitable.

On a full year basis, our G&A expenses, inclusive of noncash stock-based compensations, were up 36% year-over-year. As previously noted, included in this year were some nontypical expenses, including the Enduro and other acquisition and evaluation-related expenses. As I mentioned, we have recovered the Enduro expense by virtue of the receipt of $1.1 million received here in the last month in August. We also had some legal expenses related to a legacy lawsuit settlement in the third quarter and additionally, some severance-related costs in the year along with slightly higher board compensation expense for a new director.

Net income benefited from a onetime tax benefit of $6.1 million for the revaluation of deferred tax balances at the new 21% corporate income taxes -- tax rate. Full year capital expenditure was $5.4 million at Delhi. This is largely broken down into a number -- a couple of categories. Infill drilling program accommodated $2.8 million of that. Future Test Site 5 infrastructure work was a net of $1.1 million, conformance and capital maintenance was another $1.1 million, and NGL plant capital upgrade for $400,000 made up the difference. We expect to fund all future developments at Delhi with -- within -- with cash flow from operations and our working capital.

The company remains committed to returning cash to shareholders and has paid over $46 million in dividends since inception. At the current dividend rate, the yield is 4.2% based on yesterday's closing stock price.

In summary, we have reported, as Bob mentioned, consecutive net income for 7 years now. We've increased our cash dividends to $0.40 per share on an annual basis. Continuing strong financial performance with an excellent balance sheet and continuing development of the Delhi Field with the infill drilling program.

Our liquidity position remains very strong with working capital of $28 million at the end of June, substantially all of which is cash. Again, subsequent to year-end, we received another $1.1 million breakup fee from the Enduro acquisition efforts.

We remain debt free and in an excellent position and poised for new growth opportunities.

With that, I'll turn the call back over to Bob.

Thanks, David. As we've discussed in the past calls over the last year, Evolution is actively seeking to acquire additional long-life producing reserves that will provide diversity and support and grow our dividend. This effort is very disciplined. We will not take any undue risk or excessive leverage. And we're only going to pursue those opportunities that fit our criteria very carefully. With our cash resource and untapped credit line, we're uniquely positioned to pursue other opportunities. And one other note, I am the interim CEO. We are in the process of looking for a new CEO. But it'll be someone who follows along in this philosophy that the board has set out.

With that, we'll take questions. Operator, you can go ahead and open the line for questions.

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

Was curious, I know there was some noise in the last quarter on the CO2 front on the purchases there. Do you guys have any sense of how we should think about that going forward? And maybe the gives and takes and fluctuations that may go on as the infill drilling program kind of wraps up?

Sure. The CO2 purchases were down because injections were down. You don't want to inject CO2 in and around the area where you're drilling a new well. With the drilling operations completed that limitation is gone. And so we can -- and the operator is increasing injections and therefore, purchase is back up again. In fact, the infill program includes 4 injector wells. And so we actually expect to see a slight increase in CO2 purchases over the next couple of quarters. As we get into Phase V development, which we think is going to be sometime in the next year or 2, that actually could ramp up purchases even a little bit more because that'll obviously include a few more injectors. It's not just few more but 8 or 10 more. So long term -- not so long term, medium term, over a couple of years we should actually see a small increase in purchases, then over time that'll decrease.

Okay, got it. That's really helpful. And that kind of segues into my next question on Test Site 5 there. Do you have, kind of, what the CapEx is net to you guys for what that program runs? And then, I guess, kind of, if you dovetail that into a broader conversation on the dividend, and how you guys maybe think about potentially further increasing that? And how the CapEx needs of Test Site 5 or anything else may impact that decision-making process?

Sure. Steve Hicks, our Senior VP of Engineering has specific numbers, so correct me if I'm wrong Steve. But I think the gross Test Site 5 program, which is -- all of our remaining PUD CapEx is in that $40 million to $50 million gross. And our share, that is roughly -- slightly less than a quarter. Is that about right, Steve?

That's about right. Absolutely $11 million, $12 million that is what we're forecasting. And it's a small percentage of your cash flow over the next few years. It's -- so that -- I don't see any issues at all with the dividend.

Yes. Our dividend is still running along with our philosophy of paying out roughly half of our free cash flow. Obviously, we have plenty of excess cash flow to take care of the Test Site 5 or Phase V development. In any conformance work going forward we -- in our reserve [port] we actually do have maintenance CapEx every year for minor items, conformances and so forth. Longer term, in terms of the dividend. Obviously, our intent is to reinvest a portion of cash flow into new properties to the extent that we don't do that, we'll be building cash. And at some point that cash will return to shareholders, whether it'd be an special dividend or an increased dividend. Ideally, what I'd like to do is make sure that the standard base dividend that we pay out is something that we can live with for a long period of time. And so in terms of excess cash down the road we might be dealing with, that would be probably in the form of a stock buyback or it would be in the form of special dividends. Ideally, I'd like to have increases in the dividends tied to increases in our asset base. But that's something that the board can easily change its mind on each year.

Okay, got it. That's all are helpful. And then last one for me, just more of a housekeeping one on the modeling side maybe for David. Any expectations as far as how we should be thinking about cash income taxes going forward?

Yes. Basically 21%, Jeff. We've pretty much used up all of our prior credits to date. So you -- but it's pretty safe to model 21%. Which is the statutory rate -- federal statutory rate for corporations.

So basically we should...

So we do get a depletion, reduction for the first 1,000 barrels a day.

We do. But it is limited. But -- yes. But on a conservative basis.

Okay. So vast majority cash income tax payer going forward?

Yes. Unfortunately, on a go-forward basis for Evolution, yes. Over the past few years we've had offsetting credits.

(Operator Instructions) This concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Joe for any closing remarks.

Thanks everybody for your participation on this Friday. And if you guys have any questions, feel free to contact myself or the management team. Again, have a great weekend.

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