Evolution Petroleum Corp (EPM) 2022 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Evolution Petroleum Third 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. Sir, the floor is yours.

Thank you, and good afternoon, everyone, and welcome to our earnings call for fiscal -- for our third quarter of fiscal year 2022.

I'm Ryan Stash, Chief Financial Officer. And joining me today is Jason Brown, President and Chief Executive Officer. After I cover the forward-looking statements, Jason will review key highlights along with our operational results. I'll then return to provide a more in-depth financial review. And finally, Jason will provide some closing comments before we open it up and take your questions.

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.

Now 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 moving forward. Please note that this conference call is being recorded. And 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 August 9, 2022.

With that, I'll now turn the call over to Jason.

Thank you, Ryan. Good afternoon, everyone, and thanks for joining us for today's call.

As always, we appreciate your time and effort in giving consideration of our company as part or potential part of your investment portfolio. Our fiscal third quarter was a bit of a watershed moment for our team. We were able to close our third acquisition, entered into definitive agreements on our fourth acquisition, returned the dividend to pre-pandemic levels of $0.10 a share per quarter and upgrade our staff with a few key hires, all in a rising commodity price environment. I'm very proud of the work the small team has been able to do and execute as they prove themselves to be capable of sourcing, valuing, transacting and managing our interest in oil and gas properties. This allows us to pay a consistent and substantive dividends to our shareholders.

We were extremely pleased with our overall results from the third quarter, which were highlighted by continued free cash flow generation and payment of an ongoing meaningful cash dividend to our shareholders. A key highlight for the third quarter was closing of the purchase of oil-weighted assets in the Williston Basin in North Dakota, that was on January 14. And on April 1, we closed the acquisition of natural gas-weighted assets in the Jonah Field located in Sublette County, Wyoming. As such, we will see a full period of operational and financial benefit from the 2 acquisitions in our fourth quarter, which should help drive a solid end to fiscal '22 and place us in a great position for continued success moving into fiscal '23 and beyond.

During the third quarter, we produced 5,579 net BOE per day. That was about 13% higher than the 4,957 net BOE per day that we produced in the second quarter. Our third quarter also benefited from higher overall commodity pricing. The combination of increased production and pricing as well as our continued focus on managing costs we can control resulted in adjusted EBITDA of $12.3 million. This is about 20% higher than the second quarter.

During the third quarter, we once again generated operating cash flow in excess of development capital expenditures, which supported the payment of our 34th consecutive quarterly cash dividend on March 31. Additionally, due to the continued strength and growth of our business, we're pleased to declare a fourth quarter dividend of $0.10 per common share to be paid at the end of June. With the fourth quarter dividend evolution, we'll have paid out approximately $86 million or $2.61 per share back to stockholders as cash dividends since the inception of our dividend program on December 31, 2013.

Now let's look at our operating results in a little more detail. Net production at Delhi for the third quarter grew about 4% from the second quarter to 112,494 BOE or approximately 1,250 BOE per day. This increase is attributed to consistent run time of the NGL plant during the third quarter, following the turbine maintenance and interrupted operations in the second quarter. Oil production in Delhi continues to be impacted by the 9-month suspension of CO2 purchases during the calendar of 2020 due to repairs of the purchase supply pipeline.

As previously discussed, the result has been lower reservoir pressure that Denbury has worked diligently to restore to pre-2020 levels. Just as a reminder, Denbury operates the field in addition to owning and operating the CO2 purchase pipeline and Evolution did not incur any pipeline repair costs. Denbury has been able to increase volumes of CO2 since December of 2021, and we have seen some results of that effort in production volumes. However, we still have a long ways to go in restoring reservoir pressure. We will continue to monitor and anticipate improvements over the next 18 to 24 months.

Net production for the Barnett Shale assets for the third quarter grew 8% to 307,318 (sic) [307,381] BOE or 3,415 BOE per day. This includes the decision to adjust the production mix in fiscal '22 to capture the most favorable commodity prices and maximize the overall field operating cash flow. We have been pleased with Diversified Energy's efforts since becoming an operator last October. Diversified is running one workover rig continuously throughout the calendar of 2022, and we look forward to participating with them on projects that will provide attractive ROI for our shareholders.

In Hamilton Dome, production was essentially flat to 37,312 net barrels. There were fewer days in the quarter so the volumes were slightly less, but it's essentially the same. Our operating partners Merit remains focused on maintenance projects, including continued restoration of previously shown wells and strategic adjustments to water injection, location and volumes.

As I mentioned earlier, we're pleased to close our acquisitions of certain Williston Basin assets in mid-January. Net production for the partial third quarter was 43,510 BOEs, which was approximately 83% oil. As reported, this is 483 BOE per day. However, remember that, that represents a 90-day period. We ended up the quarter at a daily rate around 565 BOE per day, which is a little more representative of the 77 days in the quarter that we owned the asset as well as our anticipated levels of production going forward. Technical valuations are underway to assess and high-grade potential drilling locations in the Williston assets. We will let the geomechanical and reservoir analysis inform our economics and subsequent capital investments and development drilling plans. We anticipate those beginning some time in fiscal 2023.

With that, I'll now turn the call over to Ryan to discuss our financial highlights.

Thank you, Jason. I'll now share some highlights from our strong results for third quarter of fiscal 2022. As I mentioned, please refer to our press release from yesterday afternoon for additional information and details, but some of the key highlights include adjusted EBITDA increasing 20% to $12.3 million from $10.2 million in the second quarter of fiscal 2022. Third quarter adjusted EBITDA was $24.58 per BOE, which was 9% higher than the second quarter. As Jason mentioned, we once again funded all operations, development capital and dividends out of operating cash flow and maintained our strong balance sheet with $13.4 million of cash on hand, $20 million of debt as of March 31.

Now supported by our solid operational and cash flow outlook, as Jason mentioned, we paid a dividend of $0.10 per share in the third quarter and will pay one in the fourth quarter that will be payable on June 30 to shareholders of record as of June 15. At the end of the third quarter of fiscal 2022, working capital was $15.4 million and liquidity was $43.4 million, including the $13.4 million of cash, I just mentioned, and $30 million of availability.

Now as we announced in early April, we closed on our Jonah Field acquisition on April 1 and borrowed $17 million, bringing our total outstanding amount to $37 million. Since closing the acquisition, we have subsequently paid down $4.25 million. Based on the current robust commodity price outlook, we expect to be able to rapidly pay down this remaining debt. As further a result of closing the Jonah acquisition, the margin collateral value as defined under our credit facility was increased to $160 million.

As a reminder, the company is required to enter into hedges on a rolling 12-month basis when borrowings exceed 25% of the margin collateral value. And since we're below this minimum threshold of 25%, we're not required to enter into any additional hedges at this time. However, on April 1, we did enter into hedges for 25% of the expected incremental natural gas production from the Jonah acquisition through March 2023. We utilized costless collars, which is consistent with our strategy of retaining exposure to commodity prices. Details of all of our existing hedges will be available in our 10-Q filing.

Looking at the third quarter financials in a little more detail. We grew total revenue to $25.7 million, which is a 15% increase from the second quarter. Oil revenue increased to $14.9 million due to 8% higher sales volumes, primarily as a result of the closing of the Williston Basin acquisition on January 14 as well as a 30% increase in realized pricing. Natural gas revenue decreased to $6.1 million from $9.2 million in the second quarter. Now as we discussed in the last earnings call, the second quarter included additional natural gas volumes in the Barnett as a result of an adjustment for prior periods to reflect ethane rejection that had occurred in the field. Excluding these adjustments, revenue in the second quarter would have been approximately $8.5 million. Also contributing to the decline in revenue from the prior quarter was a 16% decline in the realized price of natural gas.

NGL revenue increased to $4.7 million due to lower NGL volumes last quarter as a result of the adjustments made related to the ethane rejection at the Barnett that I just mentioned. As a reminder, the operator decides to reject ethane into the gas stream to capitalize on a more favorable natural gas pricing environment to maximize overall cash flow. Also contributing to the increase in NGL revenues was higher consistent run time at the Delhi NGL plant, leading to higher NGL volumes at Delhi.

Lease operating expenses increased to $12.1 million in the third quarter. Contributing to this increase was $400,000 of higher CO2 costs at Delhi compared to the prior quarter, primarily due to higher volumes -- higher CO2 volumes and an increase in the CO2 cost per Mcf as a purchase price, as we mentioned before, for our CO2 is based on the price of oil. There was a $1 million increase in other lease operating costs, which was primarily a result of the closing of the Williston Basin acquisition in January. Total lease operating expenses for the third quarter was $24.07 per BOE, which is just 3% higher than the prior quarter of $23.40. General and administrative expenses decreased 17% to $1.5 million from $1.8 million in the second quarter. Contributing to the overall decrease were lower consulting, legal and compensation costs in the third quarter.

Net income for the third quarter was $5.7 million or $0.17 per diluted share versus $6.8 million or $0.20 per diluted share in the second quarter. The decrease in net income was attributable to a $2.4 million unrealized loss on derivative contracts recorded in the third quarter, which was offset by increased income from operations, primarily due to higher production commodity prices. Adjusted net income for the third quarter, excluding selected items, came in at $7.7 million or $0.23 per diluted share. Please see our press release for a reconciliation of our non-GAAP measures.

For the third quarter, we invested $100,000 in capital expenditures and conformance projects. We currently expect that our operators will continue conformance projects and likely incur additional maintenance capital expenditures as oil prices remain strong. As Jason had mentioned, at the Barnett Shale we expect to see one continuous workover rig running throughout calendar 2022. And in our newest asset, the Jonah Field, we recently received 2 AFEs from the operator of Jonah Energy, for recompletes that are scheduled for our fiscal fourth quarter. This was a nice surprise for us as we actually didn't base any of our acquisition economics on any activity at Jonah. So it's nice to see Jonah Energy looking to do some work to take advantage of the pricing environment.

At our Williston Basin properties, our operating partner, Foundation, is planning some recompletes and development projects that are scheduled to begin in the first quarter of our fiscal 2023. Now for the remainder of our fiscal year, we anticipate total capital spending in the range of $500,000 to $1 million. Our preliminary budget for fiscal year 2023 is set at $4 million to $6 million. And I would note that this does not include any potential drilling in the Williston Basin or really any more incremental activity at Jonah as we hadn't budgeted that -- as we had not budgeted for that at this time.

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

Thanks, Ryan. Over the past several months, we've made significant progress in further positioning Evolution for continued success and providing increased visibility for meaningful return of shareholder capital through our long-term quarterly cash dividend program. Our Williston Basin and Jonah Field acquisitions have further diversified our product mix and expanded our footprint into 2 additional prolific producing basins in onshore U.S. We also have added optionality to invest in low-risk organic drilling and development opportunities, while maintaining and growing production with our operating partners.

As we discussed today, we clearly saw a positive impact from the Williston Basin acquisition in our third quarter results, and we look forward to a full period of results during the fourth quarter. Our fourth quarter will also have the benefit of operating results from the Jonah Field acquisition. These 2 recent strategic transactions represent our latest success in our targeted efforts that began in late 2019 to increase immediate and long-term cash generation for the benefit of our shareholders through the strategic expansion of our geographic footprint of assets and production mix.

We've accomplished our significant growth and value creation without material shareholder dilution or onerous debt. And most importantly, we have continued to return value to our shareholders through a constant dividend over the past 8 years. With $37 million of incremental debt from the 2 transactions, we estimate that our outstanding debt will remain well below 1x annualized EBITDA. An increase in free cash flow generation will allow rapid debt reduction as we continue to support our dividend strategy. Our corporate goal is to keep our leverage below 1x annualized EBITDA. And we currently are on track to pay down our outstanding debt associated with these 2 acquisitions well within the fiscal year.

I would also note that we have strategically grown the business with minimal increases in overhead, which is expected to dramatically reduce our G&A cost per barrel metrics. With the addition of our ownership interest in the Williston Basin and Jonah Field, we have transformed the company from having ownership in a single field in 2019 to one that has now a presence in 5 key U.S. oil and natural gas plays. We have also expanded our operating partner base as we are now working with 5 proven and respected operators that are squarely focused on ensuring long-term sustainability of their operations and working closely with their business partners and other stakeholders.

As we've discussed in the past, maintaining and ultimately growing our common stock dividend remains our top priority. With the Williston Basin and Jonah Field acquisitions, we have increased our size and scale, while diversifying our asset areas and product mix. This has allowed us to enhance the visibility of our cash flow generation for the next decade to fund our dividend and consistently return value to shareholders. We will continue to look for and evaluate accretive acquisition opportunities that meet our requirement of long-life established production and disciplined growth opportunities, both of which support value creation for our shareholders.

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

(Operator Instructions) Your first question is coming from John White at ROTH Capital.

Nice quarter. I know you talked about it in your opening remarks, but could you give us a little bit more on Delhi in terms of what Denbury is thinking about the injection rates? And what's Denbury thinking about drilling some more wells there?

Well, they're doing a reassessment. We're doing that on our own right now. We're kind of doing a deep dive and we've got a -- we kind of feel like gives a CO2 expert doing a deep dive technically on our side. They're doing the same on their side and their asset team, and we're looking at how to further develop the field. They focus their efforts this year and what we would call our -- the remainder of fiscal '22, basically calendar '23 for them, and they focused on conformance projects and there is a -- which we already reported about a month ago, a workover with the heat exchanger. Now that's a pretty big deal, and we're very excited about that.

That's going to be able to, John, sometimes in the summertime when it's -- the temperature is too hot, we have to lower the CO2 volumes. And in the wintertime, it's too cold and sometimes it freezes. This is going to help both of those to have more consistent delivery of CO2. That really is the priority right now is delivering as much CO2 as possible. They repaired the line in October of '21 -- I'm sorry, October of '20, but they really didn't -- weren't able to kick off what we would call extra volumes above what was just needed to maintain until December of '21. So just the last 4, 5 months.

We've already seen response sort of flattening, which is great and even a turn. The rock, the good news is over the last 15 years, the rock has always responded very well to pressure. So like I said, we're going to be monitoring that over the next 18 to 24 months. So we think more than additional wells at this point, consistent delivery of that CO2, which is going to increase pressure is the best thing they can do and they're aligned with us on that.

Okay. That sounds positive. And the additional AFEs at Jonah and Williston, those are all workovers. There's no new drills?

Yes, that's right. That's right. We're also doing kind of a deep dive technically in the Williston Basin right now. But Jonah, that's a very populated drill down to 10-acre spacing and much of it's a 3,000-foot reservoir. So there's quite a bit of workover opportunities to do. And I think we've got pitched a couple of AFEs this week, which we're really excited about any work that's going to happen there. Gas prices are very strong and even stronger in that part of the country headed West, as we've discussed before. So happy anything they're doing up there, and we're excited about that.

We had great technical meetings with our operator, Foundation, our partner up in the Williston Basin. And I've got to say we took the whole team up there in late March and met with their team. We met again in Denver with some engineers that we're working on to do kind of some geomechanical and reservoir studies there. Very, very happy with what we see. I'm very happy with the cooperation. That's -- I'm very pleased with that relationship so far. So I wouldn't anticipate -- and we'll let everybody know well in advance of that, but I wouldn't anticipate anything starting up there in terms of beyond workovers. And so probably early calendar '23, at least the second half of our fiscal '23.

Well, that's kind of activity you like, keep the CapEx in order and bring on some increased production.

That's the same thing with Barnett there. They've got a workover rig just running this. We took the whole team to meet Diversified as well. Their operating team is great, many of which have been with the asset for many years, but just didn't have the capital support and Diversified after taking over that asset in October, it's providing the ops team with capital to do work that they probably have been wanting to do out there for years. So they're getting to it, and we're appreciative of that.

Your next question is coming from John Bair, Ascend Wealth Advisors.

There's no L in the last name. Jason and Ryan, a nice quarter. Got a couple of questions here. I want to kind of circle back to Delhi. More specifically, I was wondering if Denbury or you all internally are looking at doing anything with regards to the Phase 5 areas. It has kind of been on the books for a while and/or the Mengel unit that you've had in some past slide decks.

We haven't discussed the Mengel unit, their capital program or budgeting process starts in August. So we're going through -- started our reserves process now and which kind of concludes in about that same time. And like I said, we're doing a deep dive on Delhi to kind of come up with what we would propose, I guess, John, is the best way to say that. They seem to express some cooperation, which is great. The Mengel unit specifically, I think that we had a higher price environment before that was even considered.

We're clearly in a higher end price environment now. So that's something that we want to bring back up on the table. But I wouldn't -- nothing has been discussed about it right now. In terms of Phase 5, they're doing a relook at that as well. As part of their restructuring process, most of those projects got, I guess, I don't want to say cliff, but most of those projects got set aside when they went through their restructuring and sort of need to be reproposed internally. So that process in that study is going in parallel on our side and their side right now to hopefully get submitted into their program next fall, so in the fall. So it's opening up all kinds of opportunities.

What's that?

You said fall of '23. Is that you're meaning?

No, the next fall for the budgeting process.

This coming fall. Okay.

Yes, we had said that, that probably was going to be '23 potentially '24. It basically just got pushed off a couple of years. So I think we've asked them to make -- to take a harder look at it and see if we can schedule a little bit further. But they're a large company and have capital competition in all the different asset areas, and we're the nonoperation, so we're doing what we can do. But it's still on the table, let's say that.

Yes. Ryan addressed the -- my guess on your CapEx maybe for next year was $4 million to $6 million. And that would not include any new drilling proposals, I guess, rather than workovers, is that right?

Yes. No, that's right, John. It's just really what we expect and really workover and conformance type projects for each of our assets.

Okay. And is that including the 2 AFEs that you just recently got from Jonah or was that kind of estimate prior to receiving that?

Yes. It was prior to receiving that from Jonah. So obviously, if activity picks up there, we'll -- we take a look at that budget every quarter. So we'll have to take another look at year-end to see if we need to update it. But obviously, we had a range there. So there's certainly some things will happen. Some things won't, but yes, we hadn't considered Jonah activity really when we had put that together.

Yes. And then that bump up because you had said in your prepared press release, $0.5 million to $1 million in CapEx for the fourth quarter. So that's kind of I just said, okay, times 4, so you got $4 million on the downside and maybe $6 million and up. How much of that might be attributable to higher service and material costs? In other words, workover rig costs and so forth. How much is that hitting, yes?

We're building in about 20%, John. Now a company like Diversified, they're being pretty stealthy with what they're pulling together. They've got tubing in other areas, and they're doing a lot of transfer stuff that's been pretty great and saved everyone a lot of money, but that won't last forever. So I think in general, we're I think 20% is the number. If we were saying in the fourth quarter of $500,000 to $1 million, I'd say probably we're going to be on the upper end of that now inclusive of Jonah, but it's not different than we kind of talked about. Remember, a small amount of maintenance or workover CapEx in each one of these plays to sort of flatten production as we can.

We haven't seen the massive crunch, John, to answer that a little more specifically on tubulars and frac sand and all the things that the supply chain and particularly in the Permian has jammed people up and led to some exorbitant prices. So we're anticipating building in kind of 15% to 20%. But we're also hopeful that some of those things will get worked out over the course of the next year.

Right. One last question about M&A. What's the M&A landscape for you right now, given prices are up or people being real proud of their projects and not really willing to trade them off or there's more activity offering properties to sell because of the higher prices?

Well, John, it's kind of both. The backwardated curve is actually making it to where people can get things done, still I think there's an instability in the market that's priced in, so people just aren't quite comfortable long term. As people get more and more comfortable in the go forward and believe the prices go forward, the back end of that curve is going to raise and everything is going to get a whole lot more expensive, probably untenable. But at the point now, there's -- we still think it's within striking distance. Our appetite is not quite as aggressive as it was, so we can be a little more choosy now. We are seeing quite a few failed deals, and we're seeing some private equity-backed portfolio companies with assets that they're starting to get a little market therapy. And if they don't sell now, when are they going to sell? So we still feel pretty hopeful that there might be something that we can pull in over the next 6 months.

Your next question is coming from Jeff Robertson, Water Tower Research.

Jason, a question on Delhi. I think you said 18 to 24 months for the reservoir pressure to respond to increased CO2 injection. Can you -- do you have an opinion or a view as to how you think production will behave as the reservoir responds?

I do, but it's being informed by this deeper dive that we're doing now. I think it's probably going to be even a longer haul at that. My best guess is that 24 months, we would hope to be back on decline of where we were prior to going off in the spring of 2020. So it doesn't mean that we would be back to that rate. I think it was 5,500 production at the time. I think we wouldn't expect to get there, but if that was just to do its normal roll-off of 8% or 9% annually in 24 months now, we'll be back to that curve. I think that's my best guess.

The reserves are there, and we'll get them. It's just going to take a little longer now. And like I said before, the rock has always responded to pressure. It's just -- it's something that would get to a lot quicker if we could pump 120 million cubic feet a day, the approach is not going to run that hard. But right now, they've been averaging around 95 million cubic feet a day for the last couple of months, and we're seeing a softening, but it's just going to take a while, Jeff.

Are they doing any -- is the injection as it's going in? Are they changing the way they're looking at any of the patterns? Or are they just going back and trying to repressure the areas that they know they lost?

They're -- yes, they're -- that's also part of this kind of deep dive. We're doing a deep pattern analysis that we actually haven't done here before. And that's part of our reserves process, and we feel like we've got someone who's had 30 years of experience doing nothing, but CO2. So that's been a real addition for us. Hopefully, that's going to inform and help us propose to them. They're doing the same thing over there. There's generally where everything is open, and the team is constantly working on conformance projects as different zones start to gassed out they rework those and put it in the zones that are not gassed out. So they're currently working in the field, and they have returned conformance projects, and that's been very, very needed because there was 2 years they didn't do anything. So that's really all I can say we're doing a deep dive, and we're going to have -- we feel like a better understanding of it over the next couple of months.

Jason, at Jonah, you said you all are pleasantly surprised for the 2 AFEs that you've gotten from Jonah Energy. Are those just opportunistic with where gas prices are? Or are they trying a couple of projects that, if successful, they might lead to additional workover projects in your fiscal '23?

We do believe there'll be more, yes. I think that they've -- the company has kind of been focused on other areas, and the ops team was sort of expressed that they were excited to have a partner that wanted to participate, and they've been very forthcoming with information. We've got the asset teams together or the ops teams together, and that's been really great, too. So it's important for us to be an active non-op participant and that starts with a pretty proactive relationship with these guys and gals. I guess I'm a little bit surprised because it is fairly developed, but there's quite a few areas that they wanted to pursue before a lower price environments that just didn't make sense that are very attractive now. So we did not bank on that, so it would be unquantified upside for us. We just bought it for the PDP roll off, so very excited about that.

And a question, Ryan, can you shed a little light on how fourth quarter or fiscal fourth quarter LOE might look with a different mix of assets now that you'll have a full quarter from the Williston, but also a full quarter from Jonah?

Yes. So I mean, so the LOE itself, you saw, Jonah -- or sorry, Williston was almost a full quarter, right. We're only short about 15 days. So really, what we would hope to see is it lowering a little bit, right, because obviously, Jonah being a little bit lower cost. We're talking in kind of the $10 to $11 per barrel range. So when we add that in a pro forma basis, we would certainly hope that the LOE would reduce at least a little bit from kind of the $24 roughly that we were at this quarter. That would be our expectation right now, Jeff.

Your next question is coming from [David Locke, Old Mammoth Investments].

So based on what you said about CapEx for next year, you add the dividend and CapEx together, you've got about $5 million of commitments a quarter for cash out the door. You're obviously bringing it in the door a heck of a lot faster than that. So can you sort of describe for me what the waterfall of the uses of that excess cash is?

Well, David, it's a good problem. It is a problem. We've got to figure out what to do with it, I guess. But no, we've got the optionality of these locations. And I've just described a situation where the M&A environment is probably tightening, I think still potential. So we're looking at 2 or 3 deals there as well. We're now starting to consider some things where we would potentially use some of our shares as part of a deal, a smaller transaction in the sense that if our prices are up because our stock is up and their prices are up, you can kind of -- if you're both up, you can still make a relative deal. It starts to become a little more difficult to pay just straight cash for deals as prices continue to increase. So the M&A market is something that we're definitely right in the middle of, and I am hopeful that we can pull something else in and put some cash to work is we'll probably have our debt paid down by -- I don't know, by the holiday season, I think, towards the end of the calendar year. So we're bringing in cash quite a bit.

But the other thing is this potential drilling locations that gives us some optionality we've never had before. And if you're ever going to drill when oil is over $100 and you've got oil wells that you can go drill development. We're working that in parallel at the same time. So if we have a potential to make an acquisition, which I hope that you're hearing, I'm definitely hopeful on that, and we'll pull the trigger there. If the bid ask is a little too wide, we've shown over 2 decades that we're not going to -- we're going to be disciplined there. So -- and now we have some optionality to put some capital to work on drilling. So that's probably what the next 12 months look like.

Okay. How much more expensive roughly would you say the A&D market is now relative to when you did the Williston and Jonah deals?

That's a good question. I think about things in terms of an acquisition guy in terms of flat pricing. So right now, the current strip starts at around 102 or something and over 5 years, gets down to 70-ish something like that. So it's kind of -- I think of it as a 5-year average, and we look for assets that are more 10, 20 years long. So even kind of look at a 10-year out, but we generally hold the fifth year flat. So if you look at a 5-year average, it's going to be somewhere in the 78 range, 75 range, 10-year is going to be closer to 72 range. I think when we bought the Williston, we were -- when we first started negotiating that deal was more in the 63, 64 range flat. If you look anywhere in the last 3, 5, 7, 10 years, average oil is going to be about 57.

So we're clearly in a higher price environment than we were. But going forward, could we get something where we're transacting somewhere in the 20 -- the 67 to 70 range flat, that's still probably tenable and it's still probably gettable at this point. That's higher than we did with the Williston. But percentage-wise, it's within that 15%-ish range. Obviously, all of this depends on the quality of the assets, something like Hamilton Dome that's been producing for 100 years. It's just super flat, but you can pay a little more in the near term because you've got a longer-term production that's going to support our dividend. So our business strategy lets us be -- have a little wider lens, I guess, on deals like that.

Ryan, if anything.

No, I agree with that on M&A. I did want to circle back up though on your question, David, on kind of use of proceeds for cash. And the one thing that we did mention is dividend. Obviously, it's the Board looks at dividend every quarter. And so dividend increase is certainly not off the table depending on the outlook and how the assets perform. So as you look at spectrum of things we can do, certainly, debt pay down, right, as Jason mentioned, we're looking at new deals and dividend and returning capital to shareholders even above and beyond the current one is certainly on the table. But it's something the Board looks at every quarter.

Okay. And so if I could just ask one more, maybe slightly annoying question, which is if you're finding the bid-ask spread in the M&A market to be a little wider than your liking, how does including what is probably an underpriced stock in the transaction to help close that gap?

It has to be a group that understands that the value of the stock in combination with additional assets is going to likely be stronger. And so the premium that they're wanting from the assets that the market is not currently giving them. It's a way for us to get into those assets and what looks like a more reasonable sticker price. But then the combination of this helps our stock, and then they get the benefit, and that's where they get the uptick. So that felt a little better a month ago. Things are a little volatile right now. So I'm not disagreeing with you, and it's constantly a moving target. The bid-ask that we're seeing that's too expansive or people who are just trying to take advantage of the strip price, which I also mentioned earlier, there's a lot of failed deals out there, too. So it's got to be the right set, and it's got to work for both parties. And it's not a perfect environment, but we feel really good about it because we're in a really good spot to be able to -- no is an acceptable answer for us right now.

Not to beat it to death, I mean, the only thing I would add to that is just what you're not going to see us do is go by probably a PV-20 sort of PDP decline asset with potentially cash and stock, right. What Jason is talking about is sort of more of a strategic potential deal where you're looking at a relative value between 2 companies. And if they -- if the potential partner would give us the value that we think our stock is worth and that the shareholders would appreciate, it's something we could potentially transact on, right. But we're not going to necessarily go issue it first. Issue stock right now for cash right and go buy some more PDP assets.

Yes, I wouldn't have expected that. And then if you guys turned around and started putting some significant capital into the Williston, would you hedge some of that early production? Or would you just take the risk that it's going to work?

I had to take a look at, at the time. We're working on our revolver. So some of that depends on the bank. And the hedging we generally like to stay away from it as much as we can. We want to be a call option. We feel like we've got the balance sheet to endure it. We would look at, I don't know.

Yes, I think we would consider it. I think really, what we would also look at is only engaging in projects that we feel really good about the returns on, right, even in a lower potential price environment, right. That's the other way we would look at it. It's running pricing scenarios, right. I mean, hedging is one thing we could do to try to lock in a return on drilling, but we could also -- and we do look at sensitivity analysis on what do the drilling economics look like at such and such a price, right at, call it, 65 flat or more mid-cycle pricing. So I think we probably look at everything when we evaluate those opportunities.

The other thing, David, is there's always the potential for an increased dividend. That's on the table as well. There's lots of things that we can do with the cash, and we don't like to back up from the dividend. So if we're going to -- we want a long-term support of that. So all of these things are on the table to sort of figure out how to grow and return capital to shareholders, return value to shareholders is there an increase in stock price at dividend, additional assets are all on the table.

Your next question is coming from John White of ROTH Capital.

Just responding to the comment of -- I believe I heard the word low-priced stock according to my comp tables, Evolution trades at some pretty nice multiples. But on to my questions, Jonah is the last deal you closed on. So I'm wondering now that you're in the ownership position, have you seen anything that you weren't expecting? Or have there been any surprises on operations or land or any surprises?

With Jonah, no, actually the surprise -- the only surprise that they want to do some work. We were very pleased with that. So no, that's been really good. They prepped a small little piece, but we reported that. But no other than that, we're very, very pleased with it.

I wasn't trying to pull negatives out of you, but I just wanted to ask. In your answer on the M&A question, you mentioned there had been some recently failed deals. Any more color on that as why they failed or were they big, were they small?

No, some smaller ones. It's kind of the whole range. We're really focused on things kind of in that $25 million to $50 million range. We would consider things a little bigger. But there's been several over the spring. And any time prices move the way they do, and it's been pretty volatile, it's kind of hard to hold deals together. So we've seen a couple of things that might have a chance of coming back around, but nothing specifically. I also wanted to say on the Williston Basin, you asked me about the index prices on the Jonah.

On the Williston Basin, with the Board and I were actually able to go up there last week, we had our Board meeting off-site, and we were able to travel to the Williston field and met with Foundation, our partner up there. And wow, I was very, very impressed. We did a pretty thorough environmental due diligence where we take photographs or everything, but it was really great to see them in person and just how well run of an operation that is. We were pretty happy. I think the Board is very pleased to get to meet with their HSE personnel and their production formants and superintendents and whatnot, and it was an impressive operation. So that was a little bit surprised.

Glad to hear it, and it's good to go to the Williston in the spring.

Your next question is coming from Zach Pancratz at DRZ.

Actually, the color 2 ago kind of nailed on line on the cash flow side. The only thing I would add is with regards to your dividend comments, would you be considering a base plus maybe a variable dividend as an option here? The reason I asked is historically Evolution has been attractive for its strong balance sheet and its higher than peer yield. And now you look at today, you've got a lot of royalty companies, other non-op companies and even some of the smaller E&Ps that are getting more competitive from a yield standpoint. So just trying to understand maybe what that dividend methodology kind of looks like?

Yes. I mean I think we traditionally obviously had kind of paid kind of the $0.10 per quarter dividend historically, which has obviously, as there's been periods of stress, it's been lowered and then back up. And I think going forward, the Board likes to be thoughtful and look out on a long spectrum. As Jason has kind of mentioned in the past, we look at things on a 5-, 10-year basis. So we want to have at least a base dividend, if you will, if you're using that analogy that we can support and pay for multiyears. We've had the discussions at the Board level about a base plus variable. Personally, I'm not convinced that the market really pays or gives credit to companies for that yet on that kind of variable piece. It's hard to sort of look at that yield on an annualized basis, right, to really buy a stock on a yield basis, looking at that variable. So I'm not sure that we're there yet on the variable piece, but certainly, we look at wanting to have a base dividend that we can support over a longer-term period.

I don't know, Jason, why don't you?

Yes, it's all on the table. I think we -- I think in general, just want to get probably recognition for it. So we want something that's sustainable. We want -- we don't want to be too reactive, what's something that we can deliver and not have to back up from. And I think that's what we've displayed in our entire history. But -- so a variable dividend, do you really get credit in the market for it and the share price and the market share. I don't know. I think probably most people would say no. But we'll see. We're not afraid of raising the dividend and.

Yes. It's something we're going to keep our eye on. I mean you make a valid point, right? I mean when we started paying a dividend in 2013 and even as recent as a year or 2 ago, it was -- there weren't a lot of E&P companies outside of -- which aren't really around more MLPs that really pay a consistent dividend, right? You're starting to see that because investors demand it, right? But -- so it's something that we are certainly keeping our watch on.

We're just particularly a focus on not getting on a treadmill that's not sustainable where we have to start making poor oil and gas decisions on buying things and supplying inventory to just try to meet an ever-increasing dividend yield, which was kind of the trap that some of the MLPs got into.

Well, it's a good problem to have. So appreciate it.

Your next question is coming from Charles Finnie of [EFW Partners].

Great quarter, new shareholder at EPM. As I look at this array of sort of high-class decisions that you have in front of you now with -- that you referenced paying down debt, paying dividend et cetera, maybe even buying back stock, nobody has mentioned that. I just wonder how -- and then, of course, acquisitions are a big part of the array of options that you have in front of you every day. As I try to understand a little better how you make these decisions and trade-offs, I'd find myself wondering what's personally motivating management? Is it -- if you don't mind my asking that question, is it -- aside from salary, are you guys motivated entirely by share price? Or are you getting bonuses for doing M&A deals or other kinds of things? Can you shed any light on that whatsoever?

Sure. Our comp committee we have base salaries. I think they're pretty modest compared to our peer groups, but we have an STIP and a short-term incentive and a long-term incentive. So we -- each one of those are driven with a whole array of metrics that are in our proxy. So I think this last year, we had a certain percent of our base, like I think my base bonus is -- could be as much as 1x my salary. But like, I don't know, 25% of that maybe was -- been on giving an acquisition of a certain size or whatnot, I think a dollar amount. And then some of it was earning free cash flow per share was a decent chunk of it. And then there's certain Investor Relations conferences and just kind of a variety of things that the Board decides they wanted management to focus on throughout the year, and it's our job to go out and try to make those things happen, analyst coverage and whatnot, that's a little more difficult.

Then the LTIP or the long-term incentive is more kind of a percentage of our salary that in shares that some of it vests over 3 years on the time period, maybe 1/3 of it and then 2/3 of it are based on where we rank in terms of a peer group or a total shareholder return in terms of -- I think this year, it's a double hurdle where we've got to get in the top quarter of our peer group and then also a double-digit return or whatever over a certain period of time to get full price or full target. So it's all of that will be in the proxy. So it's kind of a combination. I think the management owns about 9% of the company. Our largest shareholder management is our Chairman, who owns what, 5.5 or so, whatever and I'm about 1.5 points. The rest is held by the rest of the Board and management. So we all have some portion of shares that motivate us. So we're all owners.

Yes. I mean I would say we're -- as Jason mentioned, we're focused on total shareholder return, right. So that's a big driver. So share price, yes, but obviously, the dividend is one piece of shareholder return, right. So we look at both pieces as we comp ourselves to our peer group and as we try to perform for the shareholders.

(Operator Instructions) Sir, there appear to be no further questions in the queue. Do you have any closing comments you'd like to finish with?

Sure. Once again, we appreciate everyone's time today and look forward to speaking in September when we report our fiscal '22 fourth quarter and full year earnings. On behalf of our full team and our Board, I want to thank you and our shareholders for their continued support and our strong strategic long-term efforts. As always, please feel free to contact us with any other questions or comments. Have a good day.

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