Evolution Petroleum Corp (EPM) 2020 Q2 法說會逐字稿

Ladies and gentlemen, hello, and thank you for joining today's Evolution Petroleum Fiscal Second Quarter 2020 Conference Call. (Operator Instructions)

And with that, I'm pleased to turn the floor over to Evolution's CFO, Mr. David Joe. Welcome, David.

Thank you. Good morning, and welcome to Evolution Petroleum's earnings call for our fiscal second quarter ended December 31, 2019. We will discuss operating and financial results for the quarter. I am, as he said, David Joe, Chief Financial Officer of Evolution; and joining me on the call today is Jason Brown, President and Chief Executive Officer.

A couple of quick housekeeping notes. If you wish to listen to a replay of today's call, it will be available shortly by going to the company's website and be stored for the next month.

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 numbers are readily available in -- to everyone in yesterday's news release, this call will primarily focus on key results, operations and an update on our capital spending and the plans for the remainder of our fiscal 2020.

I would now like to welcome and turn the call over to our President and Chief Executive Officer, Jason Brown.

Thank you, David, and good morning, everyone, and thanks again for joining us today on Evolution's Second Quarter Fiscal 2020 Earnings Call.

I'm pleased to announce that evolution has once again delivered earnings and positive cash flow for its shareholders for the 17th consecutive quarter. We continue to generate consistent positive financial results, improve the sustainability of our dividend despite the continued low commodity price and low capital spending environment throughout the industry.

I'm delighted that we have announced our 26th consecutive quarterly cash dividend, and perhaps more importantly, our 9th dividend in a row at $0.10 per share. There have been tremendous swings in commodity price over those 26 quarters, even brief periods of oil price below $30 a barrel. But Evolution has consistently delivered, and we feel very proud of this accomplishment and the ability to generate long-term stability for our shareholders.

During the quarter, we were able to successfully close the acquisition of an interest in Hamilton Dome field in Hot Springs, Wyoming, operated by Merit Energy. It's worth noting that although Evolution has not closed any recent acquisitions, we were able to not only get this closed, but also integrated into our operation seamlessly without adding any material overhead. This was an important first step in demonstrating that the Evolution Board and our management team have both the will and the ability to transact on oil and gas asset opportunities that fit within our strategy. Although this quarter only reflects 2 months' worth of production, we are pleased with the performance of Hamilton Dome as it is meeting our expectations on production, price realization and cash flow.

Similar to other oil and gas producers, our overall performance during the quarter was impacted by lower price realizations. During the quarter, Evolution was further impacted by the short-term repair to the oil sales pipeline from Delhi, which more than offset the increased volumes. This is a good example of why we are pleased with the Hamilton Dome acquisition as a second source of cash flow and are committed to further acquisitions that will support our dividend.

With that, I'll now turn the call back over to David to run through financial highlights, and then I'll wrap up the call briefly, speaking about strategy and the outlook on the M&A landscape.

Thanks, Jason. I will share and reiterate highlights of our financial results of our fiscal second quarter. Please refer to our press release from yesterday afternoon for additional information and details and be on the lookout for our Form 10-Q to be filed shortly.

So the biggest highlight. As previously mentioned, we acquired oil-producing assets in Ham Dome Field in Wyoming on November 1 for $9.5 million of cash. However, based on the effective date of October 1, 2019, we received and recorded a cash payment from the seller for approximately $0.2 million, thereby reducing the purchase price from $9.5 million to $9.3 million. As you review and digest our quarterly financial results, it should be clarified that Ham Dome results are for only 2 months in the current quarter, that includes production, revenues, LOEs, DD&A, cash flow.

Other highlights in the quarter include continue -- our returning cash to the shareholders with our lengthy history of consecutive quarterly dividend supported by our oil assets. This yield is in excess of 7%.

We generated total revenues of $9.4 million in the quarter, up 2.5% from in the prior quarter despite lower realized oil pricing and despite the temporary additional trucking costs incurred at Delhi, which has now been resolved.

We reported net income of $1.7 million for the quarter, marking the 17th consecutive quarter of positive net income. And if you go back further, it's more like 26 out of the last 28 quarters, with just a couple of quarters of losses back in 2014 and 2016. We ended the quarter with about $21 million in cash, and we still have a $40 million undrawn credit facility.

Going into the quarter in a little bit more detail. Gross production averaged approximately 8,500 barrels of oil equivalent per day during the quarter, a 16% increase from the prior quarter and a 9% increase from the year-ago quarter. Production improved primarily due to the acquisition of the Hamilton Dome field, albeit for only 2 months, as previously noted. At Delhi, total gross barrels of oil equivalent per day averaged approximately 7,000 barrels of oil equivalent per day, a 4% decrease from the prior quarter and about a 10% decrease from the year-ago quarter.

As we all know, we have been and still are experiencing a low and volatile commodity price environment. At the Delhi field, the current quarter's lower average realized oil price was further impacted by trucking costs resulting from a planned repair to a section of the oil sales pipeline. We estimate the erosion of value to be approximately $0.4 million. This effectively eliminated the LLS premium in the quarter, shifting from a positive basis to a small deduction. This pipeline repair project commenced in November and was completed at the end of January, about a month ahead of schedule, thankfully. As of February 1, all of the trucking oil has been ceased and all sales are back on to pipeline.

Total production costs were $4.2 million for the quarter, an increase of 37% from the prior quarter. Delhi's portion of this increase is primarily due to higher CO2 cost directly resulting from a 20% increase in purchased CO2 volumes. Production costs attributable to Hamilton Dome was approximately $900,000, representing 2 months of cost based on the November 1 closing date. In December, there were a few atypical AFE-expense workovers in the field to address well repairs.

Our composite DD&A rate per BoE at period-end declined 10% to $7.26 per BoE compared to the prior quarter of $8.07 per BoE. This is largely due to the accretive Hamilton Dome field acquisition which only has a 2-month impact in the quarter. As we go forward, the expected consolidated DD&A rate per BOE is estimated to be between $6.80 and $6.90 per BoE.

In the current quarter, we reported slightly higher G&A expenses for costs typically associated with our second fiscal quarter ended December 31. These include proxy statement and related cost, 10-K printing and related annual meeting costs. We continue to be mindful and manage our cash G&A expenses. It's worth noting that noncash G&A makes up approximately 15% to 20% of our total G&A reported.

Net income for the quarter was $1.8 million or $0.05 per diluted share compared to $2.8 million and $0.08 per diluted share in the previous quarter. The lower-than-expected EPS was disappointing, but we understand why and we've been working to manage these components.

During the quarter, we incurred $10.7 million of capital largely attributable to the acquisition of Ham Dome and a small amount spent at Delhi field. The current expectations for net capital spending for the remainder of our fiscal 2020 is pretty modest, with about $0.5 million to $0.75 million earmarked for capital workovers at Delhi and a very small de minimis amount of capital allocated to Hamilton Dome field.

It's worth noting that the Delhi operator recently reported to us that the capital has been deferred for the Phase V project until calendar 2021. They currently have a modest capital development plan for Delhi, subject to increased oil prices.

Our total working capital at the company decreased by $10 million in the -- compared to the prior quarter. Largely attributable to the $9.3 million we spent acquiring the Hamilton Dome field and for the payment of our common stock dividend in the quarter.

As I mentioned, we ended the quarter with $21 million in cash on hand, have liquidity with our $40 million reserve-based credit facility, and the company continues to be well positioned to fund future development of its producing assets through our current fiscal year and our next fiscal year.

Just would like to take the opportunity to reiterate a few key attributes of our assets. We now have 2 large oil fields, our legacy Delhi field and the recently acquired Hamilton Dome field. Both fields are very similar in that they're non-operated working interest to us, 100% liquids production, long life with expected low decline profiles. They support our company's dividend strategy. And there our future development, workover and infill opportunities in these fields.

Just a reminder that our Delhi field, we have a 7.2% override which bears no operating expense or capital burdens. The Delhi oil is priced on LLS oil pricing, which typically is a premium to WTI prices for the past few years. This is a very high net operating margin property with revenues in the $50 per barrel range, operating cost around the $20 per barrel range with net operating margins of $30 a barrel.

Hamilton Dome field is a 100% oil-producing field, long life reserves, a premier field that has produced over 100 years, operated by a top-tier operator in Merit Energy. We anticipate low digit -- low double-digit operating margins in this field.

This concludes our review of financial results and operations for our fiscal second quarter. In summary, we remain focused on delivering a sustainable dividend yield to our shareholders while seeking opportunities to maintain and grow production.

I will now turn the call back over to Jason for final remarks.

Thanks, David. The company continues to be positioned to fund the further profitable development of its producing assets while retaining sufficient financial resources to capitalize on new growth opportunities and funding for the current dividend strategy. Evolution continues to focus on cash flow, stability and overall shareholder return.

Although Evolution is excited to add another long-life producing asset to our reserves that will provide diversity and support to our dividend, we will continue to evaluate acquisition opportunities to further grow the company. The company is uniquely positioned to pursue growth, and we'll look to take advantage of wherever we can in market.

The current weakness in oil and gas prices presents an opportunity to acquire long-life production with upside at a very attractive price per BoE. I think it also validates Evolution's prudent decisions over the recent years to retain substantial liquidity with no debt. And as previously mentioned, Evolution is seeking long-line producing reserves much like the recent acquisition that will provide diversity, long-term sustainability and support to grow our dividend.

With that, I think we're ready to take questions. Operator, please open the line.

(Operator Instructions) We'll hear first from Jeff Grampp at Northland Capital.

Jason, I was wondering, first, now you guys have had Hamilton Dome under your belt for a few months here now. I was wondering, as you guys are kind of looking at that asset -- or trying, I guess, characterize how we should be thinking about it going forward. Are you guys seeing any kind of upside opportunities there in conversations with the operator, your own assessment? And just any, I guess, capital that could go to work there over the next couple of years or so. Or should we more think about that as just kind of a terminal-decline asset with some good cash flow?

I think it's fair to look at it as the latter. I think that's why we bought it. It's been producing for over 100 years. So it's not going to be a high-growth asset, but it's very, very stable, very predictable. That being said, Merit is -- this is right in the middle of the fairway of what they do, and they're just one of the best at controlling costs and milking out as much value as possible. So in this situation, I've never been, I think, about part of any non-op deal that I closed on that I didn't get hit with a few AFEs as soon as we closed, and this is no different.

So I think we saw a few workovers here in the first couple of months, P&A in a couple of wells and then also a couple of workovers that they've been waiting to do. But in that, I think we've got a pretty predictable go-forward P&A schedule, maybe a couple of wells a year, which is pretty reasonable, those are not expensive.

And the workovers, one of which, the reason I'm bringing it up, is kind of an innovative new ESP. And so it's all about trying to save cost up there. So that's almost the PDNP in a field like Hamilton Dome. We know the reservoir, we understand the production and they've put in a new SP that we feel pretty happy is going to shave a tremendous amount of the electricity cost.

And so as we move forward, when the pumps go down and that sort of thing, that's the plan, is to replace them with these new pumps that both deliver a higher volume at lower cost. So I think that's the best way to answer that.

No, that's great detail. I appreciate that. And as we look at Delhi, and I think David noted, production was down a few percent sequentially. Was that kind of in line with you all's expectations? Or was any of that related to that pipeline repair? I know you guys obviously highlighted the trucking cost, but was there actually any production impact from that repair? Or was production basically kind of where you guys thought it would shake out?

Well, it's a little -- there's kind of 2 questions there. I think we were a little disappointed with production. I can't say that we attribute it to the repair. That was a planned repair of the integrity of the pipeline, so it was needed to happen. But there are sort of trickle things that happened there.

For instance, on our blending project, where we're able to get an upgrade in pricing, we had to dial that back in terms of the amount that we could give. So there's a little less -- lost revenue there as well.

And I think that we didn't ramp up -- it didn't ramp up some of the wells that had to be shut in with a high CO2 in September. We didn't see the production come back as quickly as we thought that it would, and I think it was probably being less aggressive because of that situation. Every dollar that they're increasing there is -- hit a little harder because of the trucking.

So it's a little bit qualitative, and we don't quite have that quantitative, but overarchingly, yes, I think we were a little disappointed. And we expect to see some of that in January.

Got it. So just to dig on that a little deeper, if I'm hearing you right, it sounds like from your all's perspective that you're thinking that maybe the operator was a little bit, I guess, cautious in terms of ramping up production, just given the pricing discount that you guys were observing during this period. And maybe with that now kind of in the rear view, that there's some opportunities for them to, I guess, not be as conservative in producing some of the wells?

Well, I think -- okay, that's speculating just a little bit. And there are several variables on the table as well. We saw them not do workovers in the last few -- couple of months, conformance workovers, which are more typical. And I think there's some budgetary issues over there. And now that we're into a new budget year, we've seen them fired up and we've approved 3 and they're getting going on those. So I think it's kind of a combination of timing and several issues. So I think that's a fair assessment. We're feeling pretty positive.

Next, we'll hear from Bhakti Pavani at Alliance Global Partners.

Just wanted to touch base upon the oil price realization. I know you mentioned that they were kind of lower this quarter. So how do we -- just wanted to get a better understanding on what factors are driving this realization lower? And do you expect them to kind of remain at this level going forward?

Sure. Well, the biggest impact was Delhi. And beyond the normal WTI fluctuation that we've seen, we've seen a lower amount, we generally get an LLS premium of -- in the last year, it averaged $4; right now I think it's closer to $3.70, it's kind of creeping its way back up. But the biggest impact is we sort of lost that premium because we had to pay $4.50, $4.60 a barrel for trucking during November and December. So that kind of eroded the premium that we had, so that impacted us.

Now that -- I think they were expecting that to go into March, and we're very happy to hear -- we had our operations meeting with Denbury a couple of weeks ago, which was great, by the way, to dive into that technically. And we're very happy that they got that finished -- Plains, got that finished ahead of time. So we actually pressured -- they pressured back up this last weekend, and we're all flowing through the pipeline now. So the trucking costs have ended.

Perfect. So the $0.4 million that was accounted or expensed in Q2 were the only cost. You don't expect anything to be accounted in Q3 at this point, is that correct?

Just to be clear, Bhakti, this is David. That $0.4 million estimate of erosion cost, it's not recorded in the books as an expense, it's lost value and a reduction of price as a result of trucking fees and the lower realized price we received. So we're just trying to quantify what could have been if there were no trucking, but it was a necessity and it's a reality we have to live with. And that will also flow through to the January number in the next quarter as well.

I think we got back online February 1, 2, flowing? Yes. So yes, I would expect that in January's numbers, Bhakti.

(Operator Instructions) We'll hear next from Bruce Brown with Brown Capital.

The question I have is at what point do you consider repurchasing stock a better investment than expanding production?

Well, I'll tell you, this is a good question and it's one that we talk about. And it's one that we talk about both internally and with the Board and also with investors, and it seems like everybody has a different opinion. So far, our posture has been one of, I would describe, defense. And we have a stock buyback program out there that was approved, there's still a couple of million left on that, and it has different tiers, different kickers.

And it's mainly, like I say, a defense to catch up -- catch a falling knife, if things move in the markets as they do sometimes in the market. Traditionally, it hasn't taken too many purchased shares for us to sort of quail any falling prices. And we feel like that's in line with supporting our shareholders and protecting them.

Now at what point does it switch to become an offensive strategy, where we're going at that as an acquisition mode? Certainly, I can understand the idea that we definitely believe that our stock is undervalued. And every share that we take off the market by purchasing it is real to us because it's almost 8% yield that we don't have to pay on it. That being said, we just feel like we're in a really good position. We're seeing a lot of deal flow and we think the next 6 to 8 months are going to be more important than that short-term grab.

Like Hamilton Dome, for instance, like I said, it's been producing for over 100 years. We're thinking about this, how are we going to support our dividend in 2030? The $13 million to pay that, I need barrels in 2030 to do that. Well, you discount those barrels back to today, that -- most people don't value those at all, but they're tremendously of value to us and value to our shareholders. So we feel like it's the right opportunity and time for us to be able to almost get option value on our capital, on our -- and our financial position to be able to garner a tremendous inventory of reserves to support that and be a healthy company for the next 10, 15, 20 years.

So that's the kind of story with us. We're just -- we're pretty excited about the opportunities, Bruce.

(Operator Instructions) And gentlemen, I do not see any signals from our phones. I'll turn it back to you, Mr. Brown, for any additional or closing remarks.

All right. Well, thank you. And thanks to everyone for your participation on today's call. Please feel free to contact us with any questions. I look forward to providing you with an update in May.

Ladies and gentlemen, this does conclude today's telephone conference. We thank you all for your participation, and you may now disconnect your lines.