Evolution Petroleum Corp (EPM) 2020 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Evolution Petroleum Fourth Quarter and Fiscal Year-End 2020. (Operator Instructions)

At this time, it is my pleasure to turn the floor over to your host, David Joe, Chief Financial Officer. Sir, the floor is yours.

Thank you. Good morning and welcome to Evolution Petroleum's earnings call for our fiscal year-end 2020 and our fiscal fourth quarter ended June 30. We will discuss operating and financial results for the fiscal year and fourth quarter as well as year-end reserves.

I am David Joe, Chief Financial Officer for Evolution Petroleum. And joining me on the call today is Jason Brown, President and Chief Executive Officer.

If you wish to listen to a replay of today's call, it will be available shortly by going to the company's website until October 10, 2020.

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 and 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 primarily focus on key results, volatility in oil prices and how that impacts us, our typical update on operations and our plans for fiscal 2021, including anticipated capital spending.

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

Thanks, David. Good morning, everyone, and thanks for joining us today on Evolution's year-end and fourth quarter fiscal 2020 earnings call. Overall, fiscal 2020 has been an unexpected and challenging year for everyone. And to that, I wish you all, your families and businesses the very best and staying safe, as we all move forward to these unprecedented times together.

As you know, it's been particularly difficult time in the oil and gas sector, as the global COVID-19 pandemic continues to disrupt the balance of oil supply and demand. As I stated, last quarter we took immediate steps to ensure our employees safety and our financial security. We have continued to focus our efforts on implementing additional cost-cutting measures to better protect our investors and ensure long-term sustainability. We are well positioned to take advantage of potential opportunities that arise in these turbulent markets and remain focused on creating long-term shareholder return.

With that, I'm pleased to announce our ninth consecutive year of positive earnings for the company. As of June 30, after funding all operations for fiscal 2020, we remain debt free with $19.7 million in cash and an undrawn bank revolver. We continue to concentrate on cash flow and overall shareholder return.

We provide an attractive cash return to shareholders as we've now paid out our 28th consecutive dividend and returned a total of $10.7 million in fiscal 2020 to common shareholders in the form of a quarterly cash dividend. This marks more than $70 million in cash dividends since the inception of the dividend program in December of 2013.

As previously reported, we recently went through our annual year-end reserves process, which was impacted by the lower price environment as we expected. Our reserves were once again evaluated and determined by DeGolyer & MacNaughton, an independent reserve engineering firm.

For the year end, 6 -- for the year ended June 30, 2020, Evolution's proved reserves, 100% of which are all oil and natural gas liquids, totaled 10.2 million barrels of oil equivalent, MMBOE, with approximately 82% of that being PDP and the remaining 18% being PUD. That is a 13% increase from the previous year, including fiscal 2020 production of approximately 745,000 MBOE. This increase was primarily due to the strategic acquisition of Hamilton Dome field that we completed in November of 2019.

Despite the acquisition, we anticipated the reserve of Hamilton Dome to be a larger impact, as previously stated, potentially closer to 30% of that. Responding to oil -- lower oil prices in March, [Merit Energy], our operator in Hamilton Dome shut-in wells [over uneconomic] (inaudible) deals to close the cash flow as positive as possible.

Although many of the wells have returned to production, and as prices improves over the summer, as of June 30, approximately 25% of the wells remain shut-in.

The lower historical production curve, combined with a lower SEC average price resulted in the field reaching its economic limit sooner than it had when proved reserves were estimated at the time of acquisition. These shut-in wells will be brought back in -- brought back online as commodity prices increase and so we look at these barrels more as delayed rather than lost. We've been very impressed with Merit's operational team and their focus to optimize the field to be as economic as possible.

At Delhi, we have positive revisions in NGL volumes due to the change in methodology by D&M, forecasting an NGL stream independently of the oil forecast, as they're really a function of the constant recycled gas to the plant.

In July of 2020, Denbury Resources, the operator of our interest at Delhi field announced that it has entered into a restructuring support agreement under Chapter 11 of the Bankruptcy Code in Texas. Denbury subsequently announced on September 3, that its plan to eliminate $2.1 billion of its bond debt had been confirmed by the court. This will substantially reduce its debt. It will strengthen its balance sheet and free up capital for investment in properties such as Delhi. We are encouraged by our continued conversations with Denbury and believe the Delhi Phase V expansion will begin later in our fiscal 2021. We further expect the resumption of historically beneficial conformance expenditures to improve the CO2 flood performance.

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

Thanks, Jason. I will share highlights of our financial results for our fourth quarter and fiscal year-end. Please also refer to our press release, as I mentioned yesterday, for additional information and details and be on the lookout for our annual report on Form 10-K to be filed shortly.

Our fiscal fourth quarter ended June 30, 2020 was financially challenging due to extreme oil price volatility and steep declines in oil prices caused by geopolitical factors and exacerbated by the global pandemic.

Our realized oil prices were down approximately 50% from the prior quarter ended March 31, 2020, which resulted in about a 56% decline in oil revenues partially offset by a 9% decline in operating cost. This all resulted in a quarterly net loss of approximately $2.3 million or $0.07 loss per share, down from net income of $3.7 million or $0.11 per share in the prior quarter.

Included in the fiscal fourth quarter was a $1.4 million net loss on derivative contracts for the fixed priced oil swaps entered into in April of 2020. In the quarter, we recorded realized gains on derivative contracts of $0.5 million, but also recorded an offset of mark-to-market unrealized loss on derivative contracts of $1.9 million.

Although Evolution does not routinely and typically employ hedging strategies, the company hedged a partial price protection to enable it to maintain its current financial strength through the rapidly changing and uncertain economic periods faced in the quarter.

Total BOEs in the fourth quarter were 1,918 BOEs, down 11% and from 2,164 BOEs in the prior quarter. Our Delhi production was impacted by the lack of new CO2 purchases, the deferral of conformance capital by the operator and normal field decline, while Hamilton Dome field was impacted by temporary shut-in of uneconomic wells due to lower realized oil prices in the field during the quarter.

A few operating highlights in the fourth quarter include lower lease operating expenses by 41% to $2.3 million, down from $3.9 million in the prior quarter primarily driven by lower CO2 costs and cost limiting strategies implemented in both field operations.

Our lifting costs per BOE were $13.09, down 33% from $19.56 per BOE. This was largely due to 0 CO2 purchases at Delhi for the quarter caused by the shut-in of the pipeline for repairs and also by a 26% decline in other lease operating expenses.

We ended the quarter with $21 million in working capital, of which $20 million was in cash and we remain debt free, as Jason mentioned. In the quarter, we also completed the remaining capital expenditures for the water curtain program and related infrastructure preceding the planned Delhi Phase V development.

Our G&A expenses decreased 30% to $1 million, down from $1.5 million in the prior quarter primarily due to a true-up adjustment for reduced short-term incentive payouts and a decrease in consulting expenses. It should be noted that the noncash G&A expenses accounts for approximately 35% of the total G&A expenses in this period.

Now looking at full year fiscal 2020 results. We recognized net income of $5.9 million or $0.18 per common share. We returned $10.7 million in cash dividends to shareholders and invested an additional $2.5 million in stock repurchases throughout the year. We reported $12.4 million of cash flow from operations for the full year and internally funded all operations, including $11.8 million of capital spending, including the acquisition of the Hamilton Dome field.

As I mentioned, we ended the year with $20 million in cash. Total gross oil production year-over-year was up 7% to almost 7,000 barrels of oil per day from 6,500 from a year ago. NGL production was down 6% to 1,106 BOE per day from 1,171 BOE per day. On a BOE basis, total production is up approximately 5% year-over-year. The inclusion of Hamilton Dome, albeit for only 8 months, attributed to the increase in oil volumes, offset by lower production at Delhi for the reasons previously mentioned.

Our total revenues for the year decreased by 32% to about $30 million. This decrease was primarily driven by the 32% decrease in the company's average equivalent price per BOE to $39.74, down from $58.50 in the prior year. Full year lifting costs per BOE was $18.13, down from $19.31 from the prior year. The decrease in total production costs was primarily due to a 48% decrease in CO2 costs partially offset by a 32% increase in other lease operating costs.

The decrease in CO2 costs was largely due to a 39% decrease in purchase CO2 volumes together with a 14% decrease in price per Mcf associated with a lower realized oil price at Delhi. Note that, that's a natural hedge we have at Delhi with -- as the low oil prices -- the CO2 is priced -- indexed on the price of oil.

The increase in other lease operating costs is primarily due to the acquisition of Hamilton Dome field in November. While Delhi's other lease operating expenses decreased by 6%, impacted by cost control measures because of the recent decline in oil prices.

Full year G&A expenses increased slightly to $5.3 million from the year ago primarily due to higher noncash stock-based compensation expenses related to new grants associated with the hiring of a new executive officer. This increase was partially offset by an overall decrease in activity as a result of the recent decline in oil prices. Again, noncash G&A expenses accounted for approximately 24% of total G&A expenses in this period.

In the fiscal year, we have a net income tax benefit of $2.2 million primarily due to enhanced oil recovery tax credits related to our interest in the Delhi field.

Net income to common shareholders, again, was $5.9 million or $0.18 per common share. Although this represents a large decrease from the prior year, this marks our ninth consecutive year to report net income to our shareholders, which speaks through the quality of our assets.

Full year capital expenditures were $11.8 million, and this consists primarily $9.3 million of cash for the acquisition of Hamilton Dome field, $0.9 million of noncash asset addition related to the Hamilton Dome asset retirement obligation, and about $1.4 million spent at Delhi for completing the existing infrastructure projects in advance of Phase V development. We expect to continue to fund future development costs at Delhi and Hamilton Dome with cash flow from operations and our working capital over the next 12 months.

The company remains committed to returning cash to our shareholders. And as Jason mentioned, we've returned over $70 million in dividends to our shareholders since inception in 2013. Our dividend remains very attractive with the current yield of 3.8% based on yesterday's closing stock price.

Our liquidity position remains healthy with cash on hand, access to an undrawn credit facility and an effective shelf registration statement, under which the company may issue up to $500 million of new debt or equity securities. We continue to be under-levered and remain in an excellent financial condition and are uniquely positioned to pursue opportunities.

This concludes our review of financial results for the fiscal year ended June 30, 2020. I will now turn the call back over to Jason for additional remarks.

Thanks, David. It is a priority for us to invest in the working relationship we have with our operators. I'm pleased with the substantial dialogue we've been able to engage in with both Denbury and Merit regarding a proper balance on reservoir integrity and cost control in both fields, especially these past few months.

Looking at the future of our current assets and based on recent discussions, our expectations are the emergence of Denbury from the restructuring process will bring about the resumption of conformance workover projects, which we're very happy about, and will likely incur additional maintenance capital expenditures.

Although these will primarily be at Delhi field, we anticipate Merit also easing back into economically viable projects through the remainder of our fiscal year. Such amounts are not known or approved yet. However, we expect the expenditures to run in the $750,000 to $1 million range over the next 12 months, net to EPM.

In addition, the company has planned for expenditures of approximately $1.9 million, again net to EPM, in fiscal '21 to begin the development of Phase V at Delhi field, which is expected to commence in the company's fourth quarter. Phase V development costs net to Evolution are expected to total approximately $8.6 million. Again, that's us, with $3.7 million of that to be incurred in fiscal '22 and the remainder over the next couple of years.

These projects all focused around the strategy to continuously extend the life of our reserves and have been very successful over the past few years largely interesting the natural decline.

Finally, although we are very pleased with the forecast of much needed additional capital investment in our current assets, we continue to selectively look for opportunities where we can take advantage of our financial position and add additional assets that will further grow and diversify the company.

The acquisition of Hamilton Dome last November was a complementary assets and Delhi field has strategically diversified our asset base. It fits with our strategy of adding long-life, low-decline assets and also represented an important step towards our goal of growing our business. We continue to look for additional low production decline, long-life reserves to add to our assets and will contribute to our dividend for years to come.

I'm excited at the potential that we are beginning to see in the marketplace and confident in our strategy moving forward. We are in a great position, and I look forward for the future of Evolution Petroleum.

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

(Operator Instructions) And our first question comes from John White from ROTH Capital.

On the 2021 CapEx, is that all going to be directed at the Phase V?

We anticipate about $1.9 million net to us within our fiscal '21. Again, I think they're going to start that project in about April or May. So we're anticipating $1.9 million of that to be net to us. I think on top of that $1.9 million between Merit up in Hamilton Dome and Delhi, there's probably going to be about another $1 million net to us of conformance work and that sort of thing. So all in, kind of in the 2 9s, somewhere sub-3 for total CapEx for '21.

And will there be some new PUD locations drilled in Phase V during your fiscal 2021?

Yes. We anticipate the drilling to begin, like I said in May and June. They generally take -- they do that kind of in phases. So we anticipate the drilling kind of happening through the full calendar of '21 into our fiscal '22. Again, fiscal '22, we think probably around $3.6 million, $3.7 million net to us. So -- but yes, we anticipate them starting drilling in '21 in May or June.

Okay. And on the CO2 pipeline, are you going to be responsible for any of the repair costs on that? Or is that all going to be borne by the operator of the line?

I appreciate you asking that. I'm not sure that we've made that clear. So thank you for that. That CO2 line is operated and owned by Denbury. So we don't actually purchase anything until it gets to our field. So that's all operated and owned by them. So there's no cost associated with the repair that are going to be paid by us.

Now we did go -- they're anticipating that coming online around October 1 to somewhere in the first couple of weeks of October. We actually went out there and -- to see how they were doing on progress because some of these projects slide, and we think it's going to be July, and then it goes to August and then it goes to September. But we're very pleased that they're -- they were out there on Saturday and had multiple crews working, and it looks like they're making a lot of progress. So we're pretty confident that's going to be back up and running shortly. But again, no cost to us.

And our next question comes from Jeff Grampp from Northland Capital.

Jason, for Phase V, can you remind us kind of production expectations that you have for that? Understanding that, I imagine it's going to be kind of a slower ramp to a peak of any kind of incremental, not a shale well type of profile. But what kind of, I guess, gross or net production response do you expect?

And do you have a sense, either based on your own work or conversations with Denbury, kind of the oil price that you would need to see for that to move forward? It sounds like, you guys have good confidence that, that project is going to happen here. But I guess, just to kind of prepare ourselves in terms of sensitivities to oil prices for when that project may or may not make sense.

Sure. Well, first of all, the production, it's probably going to make sense over time as we get closer to get a better sense of that. It will be a slow ramp up, like you've said. So as John asked, when does the drilling start? Drilling is going to start in May or June. And there's 15 wells involved in this, some injectors, some producers and that will probably be through the course of at least full calendar '21 and into the start of calendar '23. They generally don't -- as soon as they start drilling, they like to kind of get through the program before they really start ramping it up because the overall process is a combination of injecting new CO2 in different places, and you don't want to start producing without the injection. You don't want to start injecting without the producers.

So it's a little bit more of a batch process. And then once you start injecting, you're basically increasing pressure support and it kind of slowly ramps up over another 6 months. So we wouldn't anticipate much of any production to be added from Delhi in calendar of '21. But really, we would expect that to be starting in the calendar of '22.

So the overall peak, we've seen several hundred barrels a day net to us over the previous test programs, and we would anticipate this to be -- this is a pretty substantial -- Phase V is pretty substantial. We would expect it to be quite a bit. But again, that's going to kind of ramp up over about a 6-month period and then get to a peak, and then sort of fall off in kind of single-digit decline. So it will be a nice arc over a 2- to 3-year period.

Okay. Perfect. That's really helpful. And my follow-up, kind of on the acquisition side. You guys ended the year, as David said, $20 million of cash, but then you have this Delhi CapEx that you'll be incurring over the next couple of years. So I guess, just kind of wondering, as you guys think about the dry powder, are you effectively, I guess, earmarking a portion of your cash for that CapEx? Or would you really view that as kind of unencumbered investable liquidity? And I guess, just ultimately trying to figure out how the size of your acquisition universe has maybe changed, given that you have done Hamilton Dome. Obviously, we're in a newer world today versus 9, 12 months ago, but any thoughts on that would be great.

Yes, sure. We're going to use the cash to do CapEx for sure. I don't think that widely limits our acquisition size. We were really looking to put the capital to work. And I didn't quite ask -- answer your first question there on the CapEx in terms of what price makes sense.

I do want to say that according to Denbury, Delhi is one of their lowest, if not the lowest lifting cost field in all their portfolio. So as they try to recover sort of emerging from this restructuring, I would think that Delhi is going to be pretty top priority for them.

So even in the $40 range, it makes sense and makes money at Delhi, so if that's any indication on Delhi. But along that same line, if we have cash sitting in the bank, it definitely makes sense for us to use that for these CapEx programs. And I wouldn't -- I don't really think of it in terms of being set aside per se. We're more than willing to go into our revolver to make acquisition deal size.

I think our revolver right now is $27 million now and $19 million in cash. So that's about $47 million, $50 million of liquidity there to do all of these operations. There's covenants there with the bank. So depending -- because of price, depending on where we're at with those covenants. I'm not sure that we can draw the full $27 million at this time. But if we were looking at making an acquisition, that would be brought into the valuation as well. So it's all on the table. David, do you have any thoughts on that?

Got it. That's perfect. And if I can just sneak one more in here. As you guys are expecting the CO2 line to get repaired and back up and running here not too shortly, should we expect injections maybe in kind of the near term to maybe go above kind of normalized levels to kind of play a little catch-up or repressurize the field? Or do you guys have any sense, I guess, as far as what purchase CO2 volumes could be once that gets back up and running?

Yes. I think before it went down, we were kind of in the 80 million to 83 million cubic feet a day, 88, and I would anticipate seeing closer to a 100 range, at least in the 90s. It would make sense for us to do a little make up pressure support. And we're anticipating that. I don't have a real good number for you, but it's not going to be any sort of crazy amount. But I think that they'll definitely be buying a little bit more than normal in the short term to kind of make up some of that.

And our next question comes from David Snow from Energy Equity (sic) [Energy Equities] Incorporated.

What oil price would you bring back your remaining shut-in Ham Dome production?

Merit has got a list of wells that kind of -- and they make that decision based on that back-received price. And so right now, we're at kind of a $35 netback-received price because the differential base off of the WCS is somewhere around $10. It's actually shrunk a little bit as prices have gone down.

When we were in the $55 range, we were anticipating a differential somewhere in the netback-received price of around $12 under WTI, including all our transportation fees and whatnot. But that shrunk a little bit, which is good news. So that -- I think that's kind of in the $45 range, which $43 range, WTI gets us to where we're -- were cash flow positive for those wells. There's about 25% of the wells that are -- that it's still shut in. So I think you're probably going to need to see $50. Somewhere in the $48 to $50 range to get it fully back up and running. But again, we see those as more delayed barrels. We'll get them. It doesn't make sense to produce somewhat at a...

What did you say you shut-in currently? How many barrels of this...

I think there's 30 wells currently shut-in, making up about 25% of the 88 production.

And our next question comes from Andrew Bond from AGP, Alliance Global.

First of all, just wanted to get some clarity on that Phase V development CapEx number you're budgeting. Is that total $8.6 million number inclusive of the $1.9 million budgeted in fiscal fourth quarter '21?

That's right. Yes. That's about $1.9 million in our fiscal '21, about $3.6 million or $3.7 million in '22, and then the remainder over the following 2 years after that. But total around $8.6 million.

Okay. Got it. And then maybe just touching on M&A. Obviously, Evolution has been historically liquids focused, and you guys have 100% liquid assets. As you look at M&A opportunities that diversify the asset base and continue to support the dividend, are you also considering maybe gassier assets? Can you provide a little color about how you're thinking about your reserve or production mix going forward?

Yes. We're definitely looking at gas. In fact, we're looking at several gas deals now. I guess the overarching thought for us there, there's a lot about gas that we really like. We like the commodity, and we also like its nature for our business strategy, meaning gas is a lot cheaper to lift. And so it gets into a very flat long-life production mode.

And if you think about the, just the economics of physically lifting all the fluid from oil versus gas, it's just everything is a lot cheaper. So there's a lot we like about it. However, gas is kind of a midstream marketing play. You've got -- that can really make you or break you as many companies have found out. And so we're probably going to focus our efforts close to takeaway and markets.

So what does that mean? We like East Texas, close to the Carthage pipeline, coming straight down to Sabine Pass. We think that our differentials there will be probably better than if we were to move up into Oklahoma or move out West to compete with a lot of the gas coming in from the Permian -- associated gas. That's lower right now, and it's eased back. But Corpus and Houston are going to get jammed up, if drilling resumes in the Permian, which we assume that it will as soon as the prices get back to any sort of reasonable level. So we'd like not to be competing with all of that associated gas coming in from the West. So we like East Texas. We like Louisiana. We like close to sales markets. Does it make sense?

Yes. Yes. That's great color.

And our next question comes from Rich Howard from Boiling Point Resources.

I'd like to ask about the derivatives contracts. Do you have any after January of 2021?

No. They end at 12/31 of 2020. So just hanging a few months.

12/31. And assuming the current level of WTI, should we assume approximately $1.5 million loss each quarter for the last -- for the next 2 reporting periods?

That's a good question, Rich. This is David. So the out months contracts from September, October, November, December, those prices haven't settled yet. We have liabilities owed for July and August. We don't report interim numbers. But clearly, the oil prices are above our fixed price swap that we entered into at 32. Settlement in July and August is a bit higher than that. So we have liabilities due for July and August. And the out months, September forward are remaining to be settled. As you've seen in the last couple of days, oil price volatility, we've dropped several dollars on WTI. I don't know, if that helps you or not?

Sure. So I'm using $1.5 million each quarter for the next 2 quarters. That doesn't sound silly?

For the -- yes, I can't speak to the out months from September on. But for July and August, we've got 2 months settled, and it's not $1.5 billion.

Okay. Great. And were there any unpaid bills from Denbury? I mean obviously, you have a royalty on the field. I don't know exactly how it's structured. When they went -- when they declared bankruptcy, did they not pay a payment or anything of that nature?

No. It's been business as usual with Denbury. We receive our share of revenues as scheduled each month, twice now since their announcement of bankruptcy. And similarly, we've paid our share -- our bill, our JIB to them. So we've seen no disruption from Denbury's operations since their announcement of bankruptcy.

That's an important thing on oil companies. If they go through that, they've got to have a -- what they call a Day 1 motion because a lot of times, if you file, it triggers an automatic stay of accounts and that was a particular concern for us on the 31st of July. Before we paid our JIB, we wanted to make sure that they were still going to be able to do that. And they assured us, they weren't trying to get out of midstream contracts or going to shortchange any vendors. And it's been flawless. So that's worked real well.

Our next question comes from John White from ROTH Capital.

Just wondering, in previous years, have there been any PUD locations drilled on the Phase V acreage?

No. We did some advanced work with the water curtain to be able to control the -- that was a setup pre-Phase V to make Phase V more efficient, to keep the Phase V production from going where we wanted to, but that's all -- those aren't producers.

Thank you. That's the last question. At this point, I would now like to turn it back over to management. I'm sorry. (Operator Instructions)

No questions. Okay. Well, thank you for your participation. Please feel free to contact us with any other questions. I look forward to providing you with an update in December.

And that does conclude today's conference. We appreciate your participation. You may disconnect your lines at this time, and have a wonderful day.