Evolution Petroleum Corp (EPM) 2021 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Evolution Petroleum Fiscal Year End 2021 Earnings Release Conference Call. (Operator Instructions) At this time, it is my pleasure to turn the floor over to your host, Ryan Stash. Sir, the floor is yours.

Thank you. Appreciate it, and good afternoon, everyone, and welcome to Evolution Petroleum's earnings call for our fourth quarter and fiscal year end 2021. Joining us today on the call are Jason Brown, President and Chief Executive Officer; and myself, Ryan Stash, Chief Financial Officer for Evolution Petroleum. After I cover the forward-looking statements, Jason will review key highlights along with operational results. Then I will return to provide a more in-depth financial review, and Jason will then add some closing comments before we take your questions.

If you wish to listen to a replay of today's call, it will be available shortly by going to the company's website or via recorded replay until December 13, 2021. 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 detailed numbers are readily available to everyone in yesterday's earnings release, this call will primarily focus on Evolution strategy as well as key operational and financial results and how these affect Evolution moving forward. Please note that this conference call is being recorded.

Now, let me turn the call over to Jason.

Thank you, Ryan. Good afternoon, everyone, and thanks for joining us today on Evolution's fourth quarter and fiscal 2021 earnings call. This past year has been an extraordinary one for Evolution with the backdrop of low commodity prices and our primary operator going through bankruptcy, restructuring early in our fiscal year to a swift recovery of prices and the substantial acquisition in the second half of our fiscal year, I'm pleased with the resilience and the dedication of our team. Although we're very happy to see commodity prices return to even pre-pandemic levels, we do believe the volatility still remains going forward and are cautiously optimistic amid the continued uncertainty of global markets.

We were able to take advantage of an opportunity to diversify our commodity footprint and materially increase our exposure to natural gas through the acquisition of Barnett asset and Shale. We're excited about this accretive acquisition, what it does for our company and shareholders moving forward. As I've stated before, we are interested in and continually evaluate both oil and natural gas deals and are pleased that we were able to add these natural gas reserves to our portfolio. Through the past year's challenges, we've maintained our commitment to returning meaningful value to our shareholders.

Through a consistent dividend program we increased our first quarter dividend in fiscal 2022 to $0.075 per share of common stock payable in September of 2021. This decision is in line with what we previously stated and is supported by continuing improvement in commodity prices and the additional cash flows generated by the Barnett Shale acquisition. Including the first quarter dividend that will be paid on September 30 to shareholders of record as of September '20, Evolution will have paid out over $77 million or $2.34 per share back to shareholders as cash dividends since 2013. Maintaining and ultimately growing our common stock dividend, along with achieving disciplined growth through accretive acquisitions remain our key priorities moving forward.

As we look to fiscal 2022, I'm very excited about the trajectory of Evolution. In the fiscal fourth quarter, our production grew to 4,378 net BOE per day, which is an increase of about 156% over the prior quarter. Substantially due to the production benefit of the Barnett shale acquisition that closed in May, even though it only contributed for 55 days of the quarter. We generated $4.7 million in adjusted EBITDA in the fourth quarter, almost doubling the $2.5 million we generated in the third quarter. Our year-end crude reserves increased 129% to 23.4 million BOE as well. Although both Delhi and Hamilton Dome had positive reserve provisions net of production, the majority of the increase was due to the acquisition of the non-operating interest in the Barnett Shale.

It added 48.6 Bcf of natural gas, just under 5 million barrels of natural gas liquids and a small amount of oil. It's a little over 13 MMBOE of long life reserves, which is a substantial add of extended support to our dividend program. The SEC pricing used at year-end was $49.72 per barrel and $2.46 per MMBtu of gas. You'll note that's quite a bit below the current commodity pricing. Proved SEC reserves for the year ended 6/30/2021 consists of approximately 65% of liquids, that's about 36% crude and 29% NGL and 35% nat gas. At fiscal year-end, approximately 92% of crude reserves were classified as proved developed producing and 8% as proved undeveloped.

Turning to our operational highlights of Delhi and Hamilton Dome, we continue to have good activity in both areas and are seeing field work and new projects pick up due to the uptick in commodity prices. Our operating partner, Delhi returned the conformance projects in early 2021. Net production at Delhi in the current quarter was 121,911 BOE or approximately 1,340 BOE per day and that's about a 3% increase over the prior quarter. Purchased CO2 volumes were up following the pipeline repair and the operator completed several performance projects. As we discussed last quarter, it will take a while to recover the reservoir pressure and production loss following the CO2 purchased pipeline failure last year.

But we are starting to see a trend in the right direction and are pleased with the attention and capital support that Delhi is getting in 2021. At Hamilton Dome, we saw a quarter-over-quarter increase in production of 4% and the 36,453 barrels or right at 400 barrels a day, primarily driven by the reactivation of wells that were shut in during the last quarter. During fiscal 2021, in response to commodity prices, operator at Hamilton Dome shut in a number of wells at present all wells that were shut in, substantial all wells that were shut in due to the volatility of pricing have been returned to production.

We were very impressed by Merit's responsiveness to the pricing challenge that they faced over the last year. Net production is the Barnett Shale for the fourth quarter of fiscal 2021 was 240,000 BOE, which represents approximately 55 days of production as we closed on the acquisition of the first week of May, 4,364 BOE per day based on 55 days in production. I would like to note that Blackbeard Operating, the primary operator in the Barnett Shale, sold their interest to Diversified Energy in July 2021.

We will be able to provide more detail on the expected future capital and operational plans in the Barnett once Diversified has finalized their plans upon completion of the transition period. We feel that this is an exciting time for Evolution, and as we build size and scale through accretive acquisitions while continuing to deliver strong operational and financial results to support our dividend.

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

Thanks, Jason. I'll now share some more details regarding our financial results for the fourth quarter and fiscal year ended June 30, 2021. Please refer to our press release from yesterday afternoon for additional information in detail. But some of our key highlights include, as Jason had earlier mentioned, we increased our 32nd consecutive quarterly dividend to be paid September 30 to $0.075 per share, which is a 50% increase over the prior quarter. We also paid our 31st consecutive quarterly cash dividend on June 30 at $0.05 per share, which was a 67% increase from the third quarter of fiscal 2021.

In May, we closed on the acquisition of the non-operated liquid-rich natural gas, minerals and working interest in the Barnett Shale for $18.3 million, which is net of preliminary purchase price adjustments. We expect these final purchase price adjustments to occur in October. As Jason also mentioned, adjusted EBITDA increased about 50% in the fiscal fourth quarter to $4.7 million, again, primarily driven by production from the Barnett Shale acquisition as well as strong commodity pricing. Total revenues increased approximately 80% over the prior quarter to $13.7 million.

Also, we funded all operations, development capex and dividends out of operating cash flow, and we maintained our strong balance sheet with zero net debt and $5.3 million of cash on hand at June 30, 2021. We ended our fiscal year with a $30 million borrowing base. This, however, does not yet include any impacts for our Barnett acquisition, and we are currently working with our lender to redetermine the borrowing base to include the reserves from the Barnett acquisition and incorporate our year-end reserves from Delhi and Hamilton Dome. This combination of $5.3 million of cash on hand and $26 million of availability under the revolver at our current borrowing base gives a total liquidity of $31.3 million as of June 30.

Because of the Barnett Shale acquisition, its overall impact to our results, I'm going to focus more on the current quarter results as they are a much better indicator of our financial strength and capabilities moving forward. As I mentioned, the approximately 80% increase in total revenues for the quarter to $15.7 million from $7.6 million in the prior quarter, primarily due to a 56% increase in production to 4,378 BOE per day, driven again by the Barnett Shale acquisition, but also coupled with the 16% increase in realized oil prices, which averaged $62.30 per barrel for the fourth quarter of fiscal '21. Our lease operating expenses increased to $7.6 million in the fourth quarter compared to $3.6 million in the prior quarter.

This increase is driven by the Barnett Shale acquisition and also increased CO2 costs due to higher CO2 injection volumes and increased oil prices. As a reminder, the purchase cost of CO2 is directly tied to oil price. But despite these increases, production costs per BOE decreased 17% to $19.02 compared to the prior quarter. General and administrative expenses were $1.8 million, which was consistent with the prior quarter. And net income for the quarter also nearly doubled to $2.2 million or $0.07 per diluted share compared to $1.2 million or $0.04 per diluted share in the previous quarter, again, primarily due to the increase in income from operations related to the Barnett Shale.

For the 3 months ended June 30, 2021, we invested $16.4 million in capital expenditures, consisting of $16 million for the acquisition of Barnett Shale assets, which, as I'll remind you, is net of a $2.3 million deposit that we paid in the prior quarter. And we also spent $400,000 at Delhi for field capital maintenance. Based on discussions with Delhi and Hamilton Dome operators, we do expect to continue conformance workover projects and will likely incur additional maintenance capex as oil prices remain strong.

As Jason mentioned, the majority of the volumes at Hamilton Dome or substantial majority, I should say, a Hamilton Dome shut in during -- oil price conditions during calendar year 2020 has been restored, and any future reactivations will be considered depending on economics. For fiscal year 2022, based on discussions with the operators, the company's total capital expenditures for Delhi and Hamilton Dome are expected to be in the range of $1 million to $2 million, primarily consisting of conformance, workover and maintenance capital projects.

Again, as Jason had mentioned, a capital spending program has not yet been established for the Barnett Shale due to the recent sale by Blackbeard operating to Diversified. Working capital decreased $8.6 million from the prior quarter to $11.5 million, and this decrease is primarily attributable to the Barnett Shale acquisition, which I had mentioned before, had a purchase price of $18.3 million net of preliminary purchase price adjustments. This now concludes the financial review of results and operations.

And with that, I will turn it back over to Jason for his final remarks.

Thank you, Ryan. Our reserves in production are not the only additions this year. We have grown as an organization as well. We added a Controller, Michael Gough to the team as well as a Senior Financial Analyst, Karen Jensen as Rod Schultz, our Chief Accounting Officer retired after 9 years of service. We are very grateful to him for his effort in helping the team transition through the year end and 10-K process. I continue to be impressed with our team at Evolution as I'm feeling encouraged and excited for the year ahead as we begin to evaluate new opportunities for accretive growth and sustainable development.

We worked hard to build meaningful relationships with our operating partners and have already begun fostering a dialogue with Diversified Energy who in the transition process of assuming the majority of operations for our Barnett asset. We are in communication with several levels within the organization as appropriate for operational and financial processes. And Ryan and I have been pleased with the responsiveness of their upper management through several conversations. As they get further into their assumption and responsibilities, we'll be able to give a little more insight as to capital spending plans.

We believe that to be limited to minor workovers and return to production type activities at this point. We remain focused on generating cash flow, returning cash to our shareholders through dividends and evaluating accretive acquisitions that help profitability and sustainability to grow Evolution. We are seeing an influx of marketed and negotiated transactions lately and are optimistic that we will be able to build upon the successful Barnett Shale acquisition with additional assets over the next fiscal year.

I believe that we've proven our ability to source and invest and successfully transact on various opportunities that support this strategy and evidenced by our Barnett Shale acquisition.

This acquisition was a significant step for our company to grow in size and scale. We remain focused on adding shareholder value. Finally, we're excited about the future and believe Evolution is very well positioned to grow and return meaningful cash value to shareholders. We will continue to focus on assets that bolster our cash flow in the short-term without specific biases in any commodities. We look to take advantage of our strong financial position and add additional assets that will further grow and diversify the company. Thank you for your continued support and interest in Evolution.

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

(Operator Instructions) Our first question comes from John White with ROTH Capital.

Congratulations on the very nice results.

Hey, John, thank you. Thanks for the note as well. We appreciate those.

Of course, the press release said CO2 injections at Delhi are 82 million a day. Do you think we'll see that increase over the next quarter or 2?

Yes, I do. Actually, we just had our operational call with Denbury this morning. As you'll recall in the past, August and September, generally the warmer months where they're limited in terms of visibility of how much CO2 they can put away. In past years, they've even dropped below that 82 million, so holding at the 82 million level we were pretty pleased with that. I think that we'll be able to kick up once temperature breaks a little bit. I think they're anticipating in October being able to kick it up in the '90s and maybe as much as 100 Mcf a day. I think that the goal is to try to get it close to the 100 million mark to a substantial part of the winter, again, to try to make up some of that reservoir pressure loss that we've talked about.

Yes, could be not. The buyer of Blackbeard, Diversified Energy, I would guess you're pretty pleased with them. I took a look at their presentation. They operate a large number of wells and looks like they have a significant footprint in Appalachia area. So I would get, they're -- they've got experience operating a lot of natural gas flow.

They do. They also have successful position in East Texas. Natural gas is a being little costly to the operator. We talked to Brad, Ryan and I did, their COO and try to get a feel for what type of projects that we'd be looking at. There are quite a few drilling locations out there and the gas prices where they are now. Although we didn't underwrite this thing, I think we underwrote it on kind of $2.78 gas to somewhere around there. We're substantially over that at this point. A lot of those locations will be justifiable.

But I think their MO and frankly, ours as well, you said it best. We didn't like to do anything that doesn't have more than about a 6-month payout. So they think in terms of payout, which is great. That's what we think of in terms as well. It's real money, that's going to return back to you and then contribute to cash flow. So we think pretty aligned there. I think we'll be limited to that sort of activity before there's any rigs that are standing up. So this is going to be workover and return and production type of things.

Okay. Our next question comes from [David Locke].

Congrats on the Barnett deal. You might have just bought them stake natural gas. So the question -- the question I have.

David going to win every now and then, right?

We've been waiting 15 years, right? So you said you've been seeing more deals recently. So I was curious just directionally how sort of asks have responded in the last few months to the improvements in commodity prices. And then relatedly, could you just talk about how you evaluate using capital on external acquisitions as opposed to just buying back your own assets with an extremely cheap stock price?

Yes. It's a good question. Let me start kind of from the last going forward. In terms of the buybacks, we're pretty thinly traded right now. I think the vast majority of our owners, our shareholders, our long-term holders and then low turnover holders. So I think buyback isn't -- we think we're undervalued at this point. But we also think that we'd like to get some more shares out there and grow through some scale. So I think we've done some buyback programs in the past that have been more definitive because we are thinly traded. It didn't take very many shares to kind of unrest some near-term volatility in the market.

So we're really looking at growth through accretive acquisitions and so to that end, the deals that we've been seeing lately the ask bid has been tightening a little bit. I think said another way, maybe a little more reasonable in the sense that when prices were low, that might be an opportunity to get deals done, but nobody really wanted to take the mark down. At this point, we're seeing people that are reasonable to take kind of what the current projections are in terms of strip or different acquisition pricing, thinking that it's going to double or triple again when prices were down in the low 40s, nobody really wanted to take the hit, hoping the prices have gotten back in the 60s.

And even though there's some speculating the prices are going to go to 80 or whatever, most people are pretty happy to take the mark. And the thing that's been attractive to us is people looking to do something for a little bit of equity and a little bit of cash, which we have the option of doing, so they can participate a little bit, which allows them to do something in a way that gives them some potential to participate on any more upside. So lots of opportunities that are coming our way, like I said, I negotiated, which is nice. So see you. Ryan, you have any thoughts on that?

Yes. I mean the only thing I would add to what Jason said on -- you mentioned buybacks, we sort of think about it as shareholder return, right, return of capital to shareholders. So we certainly consider the dividend as part of that. And we're continually evaluating at the Board level whether or not it makes sense to pay a dividend or to buy back shares. And as Jason mentioned, certainly giving the float higher is a big kind of focus of ours. And we do think that our share is undervalued. But we're continually having those conversations. You can definitely expect us to have shareholder kind of return on its capital kind of for far on their minds.

Okay. And if I could just ask an unrelated follow-up, which is again, after a 15-year bear market, I think a lot of people are looking at the natural gas strip and saying well, hell yes, I'll take $4.50. So what's the current thinking and the strategy on hedging and what, if anything, would make that change?

Well, that's also something we talk about every board meeting. We're constantly watching it. We don't like to hedge. And right now, I think you'll find them a lot of operators are struggling try to how to present their numbers to the public in both net income and EBITDA because they want to show if we didn't have the hedges on, we'd be making so much more money. Very few of them because they're so largely levered and by extension, have to be largely hedged are not receiving the benefit of these high prices right now. We're unhedged. And so we're receiving all of that. That hurts on the downside.

We've only put in few hedges in our history. One was in '14 when everything collapsed and the other one was a short-term in April of 2020 that expired last December. We look at it, but David, it's still pretty backwardated. And we like to be an option, the call option on commodity. And I think with zero debt we feel like we're in a pretty good position to do that. We start taking on a little bit of leverage. There might be a small amount. But I think generally, the posture of the Board is that we're not going to be speculative. That's kind of another traders business. You can lose your share pretty fast because that's not your expertise. Our expertise is trying to make accretive acquisitions, and so we'll probably stay in that in a fair way. Ryan?

Yes. I mean I think to Jason's point, I mean, you mentioned gas. I mean the curve is so backwardated right now that certainly, we don't think it makes sense to go out a number of years in hedging. But like Jason said, if we took on some additional leverage, make an acquisition, we might look to hedge a portion of that through the period, we think it will take to pay off the debt, right, just to kind of preserve the balance sheet because that's obviously a big sign going for us and something that the Board and Jason I focus on a lot. So we might look at that in a short-term or a short run sort of hedging scenario if we took on some debt.

Okay. And just one more quick one, and maybe it's in the proxy, but I haven't seen it. How do you guys get paid vis-a-vis sort of share price appreciation, dividends, growth of the business, et cetera?

Well, clearly, not enough, I guess, is it the dial. Okay. It's, I think, on our long-term I think this last year, STIP was designed 50% through M&A. The Board felt like a strategic acquisition was the most important thing to us. And I think in hindsight, that's what we delivered, and they're happy that where we're at on that. I think there were some part of earnings per share, 25% and 25% discretionary on the STIP. LTIP is a TSR. So one third kind of time vesting, third, third, third and then 2 thirds based on a TSR compared to peer group.

And now that's an interesting situation there because finding peers like us that are E&P that deliver a dividend, that we're fairly low beta. There's very few companies that don't have any debt for years of consistent dividends. And so what you find there is some of our peer group were kind of in the middle. A lot of them underneath us went bankrupt, and some of them above us in this last year have a higher beta with the reserves. So that's kind of a mixed bag anyway, but essentially, it's a coarse out saying in terms of the percentage of our shares got debt.

Yes. And the one thing on the long and short of it -- just on the proxy, so right, so we have 120 days after the end of our fiscal year. So by the end of October, we'll have filed a proxy for our upcoming annual shareholder meeting, which will be in kind of early December. So that will have -- our fiscal year '22 STIP and LTIP as adopted by the Board.

I will say one more thing about that, and that was what it was last year on the STIP. The Board has made a pretty big commitment so as management this summer to commitment to ESG. And as I stated in the intercom presentation, I sort of ignorantly a year ago thought the ESG was health and safety, environmental safety. But of course, it's not. We're coming out with our inaugural, what they call CSR, the Corporate Sustainability Report. And the Governance Nominating Committee has advised the Comp Committee to include ESG as one of our markers as a component of our (inaudible) in the entire company.

And so Comp Committee has done that. We haven't come out exactly with what that is, but we're probably somewhere in the 10% of our bonus dependent on some ESG hurdles. So I think it just kind of shows the board's commitment and focus to ESG. And that consumer or that corporate sustainability report you'll see on the website that we just rolled out with the sustainability section, and we're trying to be responsible and -- but not like overreact to. We're a non-operator, so some of the things that we don't have any control over. And so we're focused on it, and we'll have that report out somewhere around the proxy time or is that late October? That's right, we'll spin that out.

(Operator Instructions) Our next question comes from John Bair.

Thank you for the dividend increase. Always nice. Question on -- are you seeing any tighter spreads between the oil prices you're receiving at Ham Dome versus WTI? Was that Canadian -- was Canadian slit? And also, you're getting pretty good spot prices then for the Delhi production?

I think it's what's happened. Go ahead.

No, no. That's fine. Go ahead.

Yes. No, I -- well, you're welcome to the dividend. We appreciate our shareholders. In May, I talked to a significant portion of what, I think, that you want one as well, most of which we're pleased that we cut the dividend even though everybody really likes the dividend to preserve our cash balance, which we did in May of 2020. But it's, of course, our hope to get that back to some levels. I'm not sure that we're going to prudently do that, and I think you've seen the Board be able to do that go from $0.025 up to $0.03 and then $0.03 to $0.05 and now $0.05 to $0.075. Now I'm not sure that we'll go back to $0.10 anytime soon.

We're going to be prudent about that. But I was very pleased, and I think the Board made a good excellent decision there. Getting on to pricing, we've seen kind of a different thing in both of those areas. Hamilton Dome has tightened and has been very pretty consistent in an unusual way. Normally, it blows out in the winter and tightens in the summer. And we thought to be pretty consistent around the $10 to $11 range. We generally get a bonus of around $1.50 to $2 off of that. So we've been getting sub-10 differentials in Wyoming, which we've been very happy about. So in Delhi, it's been the opposite.

Brent is still a premium to WTI, but not new the premium as it was last year. So just for a point of reference last year in the SEC report, we had the trailing 12-month dip at $1.65 over so that was our net realized price. So that means we have $3.40, which is the transportation cost it playing, so roughly. So then it would be $1.65 plus $3.40. So that meant that Brent was about $5 averaging over at WTI. And that's where it's been in years past. This year, it's been closer to, I think, the trailing 12 months was an average of $2 under although we've seen that pricing improve over the last 4, 5 months. And we feel like going forward, it's going to be closer to the $1.15 under. So that would actually be $2.40 over -- that's about what Brent is trading. So whatever Brent's trading over WTI subtract $3.40. And that's pretty darn close to what we're getting at. Does that make sense, John?

Yes. Yes. Yet again.

We feel like that tightened spread at Hamilton Dome. We probably will see that we're hoping through '22.

And then as far as Barnett, that I don't know how much of a discount you're getting there over these spot prices. I think yesterday, I saw was it $5.25 or so for October. So the capture must -- most of that or?

Yes. So obviously, we're marketing ours under Blackbeard and now Diversified where it's going to market on behalf, and they have a longer-term contract that's tied to Huston chip. But it is tied to sort of first day of the month for index. So if you see a big movement in pricing throughout the month, you may not benefit as much. But for the most part, on a month-to-month basis, as prices have gone up, we will obviously benefit for that Houston ship channel pricing, which is generally right around, if not a little bit better than Henry Hub.

Good. And one last question. Have you had any impact weather-related impact to operations, given the last month of ugly weather down there?

So we talked to Denbury about that. I had -- there's a couple of wells that we -- there was a couple of rewriting we shut in for a couple of days, but there was no damage to the field and the field itself didn't shut down the plant didn't shut down or anything like that. So very, very, very minor.

That's good to hear. Very good. Well, good quarter and congrats. Nice timing on the purchase, and look forward to seeing what you come up with next.

Thank you, sir. Appreciate it.

Okay. Our next question comes from [Carl Hake].

Sure. So I was one of your new investors in May you had met on the tour. And so I just wanted to better understand, when you were negotiating with Tokyo for the Barnett acquisition, I assume you were doing due diligence all under Blackbeard's profile and assumptions. So how soon will you know or be able to dovetail what your expectations are with the new operator? And what could the delta be positive or negative or in other words, how do you get a read-through on that relative to what I assume you did pretty insensibly prior to that acquisition? Or did you know at the time that they were going to sell the stake Blackbeard?

Yes, we did. It was kind of in parallel. A little bit behind our process. In fact, we looked at. We're not really an operated company although we look at potentially making run at that Diversified has been pretty aggressive. I would say more qualitative at this point than quantitative and the qualitative nature of it is that Blackbeard, although a very competent operator. They got handed these assets through a combination of several smash cos that NGP, which is their back-end private equity, had gone through a number of companies. This is originally through Bluestone which is NGP company. John Rimini his crew.

So I think there's some nature of this that Blackbeard's main focus was in the Permian. And again, really sharp guys, but I get the feeling qualitatively that they had this to kind of shepherd over until prices stabilized enough for the NGP to be able to send it out the door, which they did. Diversified is coming into these assets was a complete different purpose and underwriting and plan and capital structure, publicly traded, they more like us in terms of long term, they give a dividend, like the way they develop assets are more like us. So I think qualitatively, we're pretty excited. They're going to focus on squeezing value out of it and we're going to benefit from that. Ryan, any thoughts on it?

Yes. No, yes, absolutely. I mean we -- as Jason mentioned, with sort of Blackbeard inheriting the assets, like Jason said, they're a good operator, we could see and looking at the data, they've done some nice things on the cost side. They hadn't really looked at much upside at all, returning well to production or doing workover as well. Diversified has done a lot of that. And so that was actually one of the things when we looked at the deal that got us a little bit excited is knowing that you had an operator that got handed an asset that was going to sell it to someone who really wants to work it. So that was part of the thing that we looked at.

Okay. Our next question comes from [David Locke].

Just a quick Delhi follow-up. How far below peak is that producing right now? And is there any likelihood of it getting back there? And what would the timeframe be?

I'd say we're a couple. We're 30% below peak. And the likelihood of getting back there probably will not be for a few years. And I would probably say at this point, probably not all the way back there. I think the peak was somewhere around 7,000 barrels a day of oil. There's a couple of reasons for that. One, we've had the lack of CO2 during the 9-month period. We dropped some reservoir pressure. As John asked before about CO2 levels, we're going to over inject -- not over inject, but inject more than we have in the past to sort of make up some of that reservoir pressure.

We think that's probably, as I've stated before, kind of an 18- to 24-month build. It just takes a while you're continuing to pull out oil to overcome that that you're producing plus makeup that we lost. So I think that's probably rest of the decline. We also have in play the test site 5, which is a further expansion of that area with a fit phase. And that's not -- that's been put off for 2 years. It was supposed to start this past spring. I put that off at least a couple of years.

Oil prices coming back up, may bring that in a little sooner. We don't know, but we're not planning on that before 2023. That would have a drilling program of around 12 to 13 wells. And what we've seen in the past with our different base programs is a substantial kind of arc so that over a 3-year period, you sort of average much higher. So I think we have a chance to get north of -- certainly north of where we are now and substantially higher. I don't know that we're back in the peak level that we saw probably 2 or 3 years ago. That's my best guess at this point.

(Operator Instructions) Our next question comes from [Stefan Mahale].

I was just wondering if there's any continuing dialogue with Tokyo Gas on those remaining stranded assets left out from the Barnett? I know there's maybe about $5 million left?

Yes. We definitely have been in touch with those guys. We're actually still going through our post-closing settlement that will settle up here in October. I think our intention there was to see if there was some sort of resolution to the dispute there. The parties have put that on hold. And they -- I believe they filed a complaint against the operator, that the operator Diversified didn't see it was a problem, and we closed over that. So I think we're on pause to not get involved until that reaches some sort of resolution. The other thing is we didn't agree on a set price to it. So prices have come up pretty significantly. I think probably we're not really planning on that at this point.

And it looks like that was the final question.

Excellent. Okay. Well, thank you for your participation today. Please feel free to contact us if you have any other questions. We appreciate the continued support of our shareholders and look forward to providing everyone with further updates on our business and potential targeted growth opportunities on our next earnings conference call in November. Thank you.

Thank you. This concludes today's conference call. Thank you for your participation. You may disconnect your lines at this time, and have a great day.