Evolution Petroleum Corp (EPM) 2022 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Evolution Petroleum First Quarter Fiscal Year 2022 Earnings Release Conference Call. (Operator Instructions) It is now my pleasure to turn the floor over to your host, Ryan Stash, Chief Financial Officer. Sir, the floor is yours.

Thank you, Kate. Good afternoon, everyone, and welcome to Evolution Petroleum's earnings call for our first quarter of fiscal year 2022. Joining us today is Jason Brown, President and Chief Executive Officer; and myself, Ryan Stash, Chief Financial Officer. After I cover the forward-looking statements, Jason will review key highlights along with our operational results. I will then return to provide a more in-depth financial review.

Finally, Jason will provide some closing comments before we take your questions. As a reminder, if you wish to listen to a replay of today's call, it will be available by going to the company's website or via recorded replay until December 10, 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 our strategy as well as key operational and financial results and how these affect us going forward.

Please note that this conference call is being recorded. I will now turn the call over to Jason.

Thank you, Ryan. Good afternoon, everyone, and thanks for joining us today for Evolution's First Quarter Fiscal 2022 Earnings Call. Our first quarter represented another period of strong financial performance and continued cash generation that supports our long-term strategy of operating within cash flow and paying an ongoing meaningful cash dividend to our shareholders, which we've been able to do consistently over the past 8 years.

In addition to our financial performance, the team was able to successfully develop and publish our inaugural corporate sustainability report. It can be found on our recently updated website. I'm proud of the work that the team has accomplished in this regard and would be excited to hear for any feedback that our shareholders would care to give.

During the first quarter, we produced 5,843 net BOE per day. That was about 33% higher than the fourth quarter of fiscal 2021. This was primarily due to a full quarter of production from our Barnett Shale assets that were acquired on May 7.

I'm pleased with our team who is able to seamlessly integrate the Barnett assets into our systems without any material ongoing G&A additions. We also benefited significantly from higher commodity pricing as we continue to remain unhedged during the first quarter. These factors, combined with the efforts of our third-party operators, to leverage efficient field cost structures resulted in an adjusted EBITDA of $8.5 million.

This was more than 80% increase from the fourth quarter of last year. We once again generated operating cash flow in excess of capital expenditures, which allowed us to pay our 32nd consecutive quarterly cash dividend. In addition, we were able to grow our cash position to $8 million at quarter end, which is a 51% higher than our cash balance of June 30, 2021.

Now looking at our operating results in more detail. Net production at Delhi for the first quarter was 118,228 BOEs. That's about 1,285 BOEs per day. That's a slight decrease of around 3% compared to the prior quarter. Oil production still high was impacted by decreased reservoir pressure due to the suspension of CO2 purchases from July 15 through August 20 for preventative pipeline maintenance. During the scheduled pipeline repair, the CO2 recycle facilities operated as usual, providing about 80% of the typical injection CO2 volumes.

The pipeline is owned and operated by Denbury. And on August 21, the pipeline maintenance was completed and resumed flowing CO2 at a rate of approximately 85 million cubic feet per day. The operator anticipates to be able to increase rate up to about 110 million cubic feet per day during the next quarter in order to increase pressure to support to the reservoir and hopes to continue the elevated purchase rates throughout the winter and spring. Along with the operator, we are hopeful that these additional CO2 volumes will help to reestablish the reservoir pressure and some of the subsequent associated production that was lost as a result of the temporary pipeline failure in fiscal 2020.

In Hamilton Dome, we saw sequential quarterly increase in production of 2% to 37,145 barrels or 404 barrels of oil per day. This is primarily due to continued reactivation of previously shut-in wells, strategic adjustments to water injection locations and volumes as the operator merits field projects remain focused on maintenance, restoring production and optimizing the field.

Net production of the Barnett Shale assets for the first quarter of fiscal '22, 382,115 BOEs or 4,153 BOEs per day. This is about 59% higher than the fourth quarter of fiscal 2021, increased mostly due to this being a full quarter production compared to 55 days in the prior quarter due to our closing the purchase of the assets on May 7.

As we discussed in our last call, Blackbeard Operating, the primary operator of our Barnett Shale assets sold their interest to Diversified Energy Company in July of 2021. We look forward to providing more detail on the expected future CapEx and operational plans at the Barnett assets once Diversified has finalized their plans upon completion of the transition period. And although we are pleased we've already received a workover for the reactivation of the salt water disposal well from them, which will allow the return of production for 4 offset wells. So this is exactly the kind of work that we anticipate from diversified, and we are excited about other high rate of return projects that we can participate with them on those assets.

Our Barnett Shale acquisition has materially increased our exposure to natural gas through the acquisition of another long life low decline asset. We're excited about what that accretive acquisition does for our company and our shareholders moving forward. This purchase was particularly well timed, considering the sharp increase we've seen in natural gas prices in recent months.

Consistent with our successful past strategy, we'll continue to evaluate additional accretive opportunities to expand our business for the long term and benefit of our shareholders. These efforts support our long-term focus on continuing to operate within cash flow as we maintain and potentially increase the cash dividends that we pay to our shareholders over time. Despite the challenges of 2020, we have been proud of our commitment to return meaningful value to our shareholders through a consistent dividend program. This includes increasing our first quarter fiscal '22 dividend to $0.075 per common share of stock, and that was paid in September.

It's supported by continued improvement of our business and economic environment. We are pleased to declare a second quarter dividend that will be paid on December 31 to shareholders of record as of December 15. But this dividend evolution will have paid out $80 million -- over $80 million or $2.41 per share back to shareholders as cash dividends since 2013, maintaining and ultimately growing our expected dividend along with achieving disciplined growth through accretive acquisitions remain our key priorities moving forward, and we appreciate continued support of our shareholders. With that, I'll now turn the call over to Ryan to discuss our financial highlights.

Thanks, Jason. I'll now share some more details regarding our financial results for the first quarter of fiscal 2022. As I mentioned earlier, please refer to our press release from yesterday for additional information and details. And some of the key highlights are , as Jason had just mentioned that we paid our 32nd consecutive quarterly dividend in the first quarter of $0.075, which is a 50% increase over the prior quarter. And as Jason also mentioned, we declared a $0.075 dividend for this upcoming quarter, that's going to be payable on December 31, 2021.

Our adjusted EBITDA increased more than 80% to $8.5 million from the fiscal fourth quarter of 2021. And as Jason also mentioned, this is really due to a full quarter of production from the Barnett Shale that closed in May as well as improved commodity prices relative to the prior quarter. We're able to fully benefit from these increased commodity prices due to our strategy to remain unhedged. We funded all operations, development, CapEx and dividends out of operating cash flow and maintained our strong balance sheet with $8 million of cash on hand and $4 million drawn resulting in a net cash position of $4 million as of September 30.

Now we'll say we do expect to pay off this $4 million during this quarter, our fiscal second quarter, as we're set to have our final settlement with Tokyo Gas to sell over the Barnett assets, we expect that to happen this month. Working capital increased by $4.1 million to $15.6 million this quarter. And this is really due to a lag in revenue receipts and invoices from the operator of the assets diversified.

So we currently have more months than we would usually expect of revenues and expenses in our receivables and payables. We do expect these timing lags to be corrected during this fiscal second quarter as Diversified has now begun to take over operations. And also, as I had mentioned, we expect to complete the final settlement with the seller. Going forward, we would expect to have approximately 2 months of receivables and 1 month of payables in our working capital accounts, which is typical for nonoperated assets.

Turning to our credit facility. We incorporated our acquired Barnett assets in a recent amendment, the 8th amendment that was finalized on November 9. The result was the determination of a new borrowing base of $50 million, which was a $20 million increase from our prior borrowing base of $30 million.

However, we have elected a $40 million commitment amount resulting in current availability of $36 million as we currently still have 4 drawn -- $4 million drawn, as I mentioned. I would note that the amendment does add a covenant requiring us to hedge certain percentages of future production based on the utilization of the borrowing base under the credit facility. More specifically, once we reach a 25% utilization on our borrowing base, we're going to be required to enter into hedges for 25% of our PDP production on a rolling 12-month basis.

Once we hit 50% utilization, this required hedging increases to 50%. And once we hit 75%, it increases again to 75%. I will say that we do continue to maintain our strategy of retaining exposure and upside to commodity prices, which has benefited us recently. However, as we have mentioned in the past and feel like we're being consistent in the way we've talked about how we would handle potential acquisitions and that we would look to hedge a portion of the production from a potential acquisition to lock in return and ensure a quick pay down of any debt that we may borrow.

Now looking at our first quarter financials in a little more detail. We grew total revenue by 38% from the prior quarter, which was primarily due, again, to the benefit of a full quarter of production from Barnett as well as an overall 2% increase in realized commodity prices on a BOE basis. LOE increased to $8.6 million in the first quarter, primarily due to the higher volumes with the Barnett Shale and increased workover activity at Hamilton Dome. Partially offsetting this increase in LOE was a previously mentioned suspension of CO2 purchases at Delhi from July 15 to August 20 to perform the necessary pipeline maintenance.

This combination of lower CO2 purchase and lower -- and the lower operating cost in nature of our now Barnett Shale natural gas wells resulted in LOE cost of $16.05 per BOE for the first quarter, which was a 16% decrease from the fourth quarter of 2021.

G&A expenses were $1.9 million for the first quarter compared to $1.8 million for the prior quarter, with the overall increase primarily due to onetime costs associated with the retirement of the Chief Accounting Officer, professional fees associated with the Barnett Shale acquisition and some initial costs for the development of the company's inaugural Corporate Sustainability Report.

Net income for the first quarter was $5.2 million or $0.16 per diluted share compared to $2.2 million or $0.07 per diluted share in the previous quarter. Again, this increase was primarily driven by higher commodity prices and a full quarter of production from the Barnett Shale.

For the 3 months ended September 30, we invested $300,000 in CapEx, which is primarily associated with Delhi Field capital maintenance activities. We currently expect that the operators at Delhi and Hamilton Dome will continue conformance workover projects, and will likely incur additional maintenance capital expenditures as oil prices remain strong.

For fiscal year 2022, based on discussions with the operators, our total CapEx for Delhi and Hamilton Dome is expected to be in the range of $1 million to $2 million, primarily consisting of conformance workover and maintenance capital projects. Also, as Jason mentioned, a capital spending program has not yet been established for the Barnett Shale. But also, as Jason mentioned, we are beginning to see projects proposed and would expect to continue to see additional workovers and return to production projects given the commodity price outlook.

Now with that, I'll turn the call back over to Jason for his closing remarks.

Thanks, Ryan. We're very pleased with the momentum that we've built through the first quarter of fiscal '22. We remain focused on our core values, which include generating cash flow, providing our shareholders with a meaningful return on their investment through cash dividends and executing on additional accretive acquisitions.

As I said on our last call, I believe that we've demonstrated our ability to source value and successfully transact on opportunities that support this strategy. And equally important to those activities is the ability to integrate and manage those assets once they're owned.

The team has done a great job with this, which only increases our confidence in the outlook of our organization, supporting our efforts of providing shareholders with an ongoing cash return on their investment is our commitment to continuing sustainable business practices. As I mentioned earlier, last week, we released our inaugural Corporate Sustainability Report.

And while we currently do not operate into the assets in which we have ownership interest, we view our environmental, social and governance, or ESG programs, and initiatives is key to our strategy to further differentiate Evolution both now and in the future. ESG will be a consideration as we evaluate future accretive opportunities to grow our asset base and reserves.

Following our Barnett Shale acquisition, we remain eager to continue to grow in both in size and scale and feel that we're well positioned to execute on the right opportunities for our business. We continue to source and assess a wide variety of marketed and negotiated transactions.

We're optimistic that we will be able to grow our business and provide additional shareholder value through targeted expansion of opportunities in fiscal '22. With that, I think we're ready to take questions. Operator, if you'll please open the line for questions.

(Operator Instructions) And our first question today is coming from John White at ROTH Capital Partners.

I was really glad to see the strong results all the way around, and congratulations on the increased borrowing base. So some of the Hamilton Dome workovers were included in LOE. Are there more of those coming in the next quarter or so?

During -- those guys are really sharp. During 2020, they basically pulled it down to hardly anything. There's not really any new drilling going on up there or no new capital project. So those workovers there are more expense workovers, things that down pumps that sort of deal. There's a few items that -- our wells that they took off production immediately about 40%. And over the last year, they've pulled things back on.

This last set was now the final salt water injector well that they were able to turn back on. So we would consider this quarter to be high. There may be a little bit more in the next quarter. There are consistently some workovers from time to time there just in pumps going down or whatnot, normal maintenance.

It was extra than what we expect for 2 reasons. One, to kind of make up some things that they had been putting off in lower price environments and two, to get that fourth injector up, which is going to allow more water to be injected around the field. So the short answer is yes, maybe a little bit more it was higher than normal.

But we -- I think that put our lifting cost up to about $40 a barrel. We would anticipate that, that's going to ease back to the low 30s. I think we're in the $31.50 before and maybe even better than that, more of an ongoing thing, although the next quarter, it might be slightly somewhere in the middle. Does that make sense, John?

Yes, it does. Thanks for that detail. And boy, the -- that natural gas out of the Barnett sure has a positive effect on

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You mentioned one salt water disposal well as planned. And you said Diversified is still finalizing their plans. Are you getting any kind of informal indication of workovers at the Barnett?

No. We -- I think they're finalizing their transition services agreement with Blackbeard this month. So we would anticipate being able to have that -- we just -- we didn't -- weren't able to have a formal meeting with them before this call, but we anticipate that over the next few weeks. No, we just actually got an AFE from them, which we were actually pretty surprised to have and excited about. It's not the drilling of a new salt water disposal well. It's the reactivation of one that would then, in turn, a lot of those wells that were previously producing. I think there's 4 wells. They were making about 450 a day. So that's just gaPrimavera Sound that we're not going to make. So it's those kinds of activities, we anticipate quite a bit of . But I will say we also got an AFE on a new drill well out there, John. This is one of the minor -- we have some other assets there that I think we have about 1.25% interest. It's a small piece that are operated by a few other operators. Diversified is the main operator for -- and so this is one of the other ones. So it wasn't a significant thing, but there are people standing up rigs in the Barnett, which is interesting is to see as well. At some point, some of those locations might be of value to us. So we're going to be looking at that over the next quarter as well.

Well, very good. It looks like the acquisition is working out very well for you.

Our next question today is coming from Erik Volfing at Grand Slam.

Congratulations on a very nice quarter. And really, congratulations on having made such a good acquisition with the Barnett Shale. You mentioned that you're starting to look towards the final settlement with Tokyo Gas. What's involved in that?

So yes, if you recall, due to -- it took us a while to get the deal over the finish line with -- kind of working with the Japanese counterparty. But the actual -- so the effective date of the transaction, I think we talked about this before, was January 1 of this year. So when we closed in May, right, we received a portion of what Tokyo Gas had received, which is about a couple of months' worth of cash flows in May. And we expect to receive the remainder of kind of those cash flows between, call it, March and May when we closed finally, but there's actually probably even a little bit more as it's taken. It took the prior operator, Blackbeard, a while to get things transitioned over. So there's a decent amount that we will probably expect to receive when we close here on the final settlement, which is basically truing up every -- all the revenue that they received from January 1 to now.

Okay. So we're basically expecting this to be a positive. It's not that you owe them any more money, right? It's them paying you extra money.

Correct.

Okay. And there were also -- I think there were a few wells that they had that didn't immediately transfer because there was some question about, I think, whether somebody had a right of first refusal. Is any of that still -- is that -- were any of that be part of this? Or is that just completely dead?

I think we should assume at this point that it's dead. We're certainly open to it. That was actually not a right of first refusal. There was a lawsuit and it was backed off because the operator was also selling Blackbeard to Diversified. They chose to just go ahead and close despite of the lawsuit. So there's -- we kind of stayed away from that. If it got remedied, we would be fine to make a run at it. But I think also you have the complication of them probably wanting a whole lot more for it. So I'm not sure that we would buy it at this point. But I think it's safe to assume at this point, let's not and if it comes back around at some point, free and clear, then we would probably take a swing at it.

Okay. And obviously, you're generating a tremendous amount of cash, and it looks like you're going to generate some more cash here from, I guess, from this final settlement. So some of it will go to payoff, I guess, that $4 million that you have. I was actually a little bit surprised that the Board chose not to increase the dividend at this time, considering the amount of cash that you currently have. And then, I mean, looking out just a couple of quarters, you could be all the way back to the amount of cash you had before the last acquisition, probably by the end of June, if prices stay up here. Any thoughts on sort of what the Board's thinking is there?

Well, it's a pretty thoughtful Board and has the reputation long earned from being very fiscally disciplined and prudent. So I think what you're feeling here is a real reticence to go too aggressive to raise the dividend, not wanting to lower it again.

We feel like the reputation is really built around, we pay our dividend. We've only lowered it twice during to -- in 2014 when commodity prices collapsed and then in 2020 when they did as well, each time kind of measuredly moving forward. So I think what we're seeing there, of course, we could have went right back to our $0.10. But we're certainly feeling more comfortable about the stability of overall economic environment and COVID situation and our cash flows and everything else. But there's been quite a bit of volatility in the last 12 months. And I think it's...

Yes. For sure.

I don't know. Have a little bit more runway, I guess...

Yes. I mean I would just add real quick here. I mean when we had discussions on dividend policy, I mean, we look 5-plus years out, right? And so if you're looking at years 4 and 5, as you probably know, the strip is highly backwardated. So things look a little different, right? And so as Jason alluded to, I mean, we're setting a dividend rate for the long term. And so while we could have raised it, we felt being more prudent given kind of the backwardation in prices and, quite frankly, keeping some powder available as acquisition opportunities that we see.

Okay. And I guess, actually, that sort of leads to my last question, if I may. Just kind of on the acquisition front, with the big run we've had on commodity prices, is that making it harder to source deals?

Well, what he just -- no. Definitely not to source deals. There's a ton of deals out on the market, some of them with unrealistic expectations. The thing that's interesting is what Ryan just said, though, is that the strip is pretty backwardated. Now we're fairly bullish on long-term prices, but the market, in general, is pricing quite a bit of uncertainty evidenced by the backwardation, meaning that, yes, prices are pretty high right now.

But a couple of years out, gas is back to $3, oil is back to $55 or whatever it is. I mean it's changing pretty quickly. The interesting thing that, that is almost enabling though, if -- is transactions actually happen because people can get closer to strip pricing for their assets and people buying them, if you're reasonably confident about the future curve, you might be willing to pay closer to strip because the strips are backwardated.

For us, we're looking for that long tail. We're looking for barrels 5, 7, 10 years out there. And those things are getting priced way down right now. If that makes sense, so...

Absolutely. That makes a lot of sense.

And we're pretty hopeful like I said in there. And I think your -- Ryan is right. We're also pretty hopeful we'll be able to transact in the next 6 to 8 months on something else that will support the dividend.

(Operator Instructions) We have no further questions in queue at this time. I will now turn the floor back over to management for any closing comments.

Well, thanks, again. Thanks for your participation today, and feel free to contact us if you have any other questions or comments. We appreciate the continued support from our shareholders and look forward to providing everyone with further updates on our business and potential targeted growth opportunities on our second quarter fiscal '22 earnings call that will be in early February. Thank you.

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time, and have a wonderful day. We thank you for your participation.