Evolution Petroleum Corp (EPM) 2023 Q3 法說會逐字稿

Good afternoon, and welcome to the Evolution Petroleum Fiscal Third Quarter 2023 Earnings Conference Call. (Operator Instructions)

I will now turn the call over to your host, Brandi Hudson, Investor Relations Manager. Please go ahead.

Thank you. Welcome to Evolution Petroleum's Fiscal Third Quarter Earnings Call. I'm joined by Kelly Loyd, President and Chief Executive Officer; Ryan Stash, Senior Vice President, Chief Financial Officer and Treasurer; and Mark Bunch, Chief Operating Officer.

We released our third quarter financial results after the market closed yesterday. Please refer to our earnings press release for additional information concerning these results. You can access our earnings release in the Investor Relations section of our website.

Please note that any statements and information provided in today's call speak only as of today's date, May 10, 2023, and any time-sensitive information may not be accurate at a later date.

Today's discussion will contain forward-looking statements of management's beliefs and assumptions based on currently available information. These forward-looking statements are subject to the risks, assumptions and uncertainties as described in our SEC filings. Actual results may differ materially from those expected. We undertake no obligation to update any forward-looking statement.

During today's call, we may discuss certain non-GAAP financial measures, including adjusted EBITDA and adjusted net income. Please refer to the reconciliations of these measures to the comparable GAAP measures in our earnings release.

Kelly will begin today's call with a few opening comments, followed by our operational results from COO, Mark Bunch, and Ryan Stash, our CFO, will review our third quarter financials before turning back over to Kelly for closing comments. After our prepared remarks, the management team will be available to answer any questions.

As a reminder, this conference call is being recorded. If you wish to listen to a webcast replay of today's call, it will be available on the Investor Relations section of our website.

With that, I will turn the call over to Kelly.

Thanks, Brandi. Good afternoon, everyone, and thank you for joining us for today's call.

Our results in the third quarter of Fiscal 2023 were excellent and continued to demonstrate our diversified portfolio of long-life, low-decline oil and natural gas assets' ability to generate strong free cash flow even during periods of high commodity price volatility.

A couple of highlights from the quarter are: we reported record quarterly revenue of $36.9 million and record quarterly net income of $14 million, or $0.41 per diluted share; we returned cash of roughly $8 million to shareholders via cash dividends and share repurchases; and we generated record adjusted EBITDA of $22 million while maintaining 0 debt outstanding and building our cash reserves to $18.4 million.

We continue generating meaningful free cash flow from the acquisitions completed over the last couple of years to fund our strategic objectives. Of course, our ongoing success is a direct reflection of the hard work and accomplishments of our team. I want to thank each and every member of the Evolution team for their contributions and continued dedication to driving near- and long-term value for our shareholders.

During the third quarter, we paid a cash dividend of $0.12 per common share. This was 20% higher than the same period for Fiscal 2022, which we view as a clear indicator of the growth and strength of our business. Our board recently declared a cash dividend of $0.12 per share for Fiscal Q4, payable on June 30 to shareholders of record on June 15, marking the payment of our 39th consecutive quarterly dividend and our fourth in a row at the $0.12 per share amount.

Since the company began paying dividends in December 2013, we have returned approximately $98.4 million, or $2.97 per share, of capital to shareholders. As we've discussed in the past, there are very few small-cap E&P companies that can say that they have consistently paid a dividend for that length of time throughout several tumultuous commodity price cycles. We believe this reinforces the strategic view our board takes as we prudently grow the business through the targeted acquisition of solid, long-life and low-decline assets that will continue to support a sustainable quarterly dividend for the immediate and long term.

In short, maintaining and ultimately growing the payment of a quarterly cash dividend remains front and center for our board and management team.

I will now turn the call over to Mark to discuss operations.

Thanks, Kelly. Third quarter Fiscal 2023 production of 7,089 net BOE per day was down around 2% from 7,250 net BOE per day for Fiscal Q2, in large part due to the extended recovery of gas production in the Barnett associated with the severe winter storm at the end of Q2.

Looking at our third quarter results in more detail, net production at Jonah Field for Q3 was 1,844 BOE per day, with an average gas price of $20.31 per Mcf for the quarter. The Jonah Field is our most recent acquisition, and we remain pleased with its performance. Similar to other assets, the field is highlighted by long-life and low-decline reserves that generate significant cash flow. In addition, the asset base provides access to attractive Western markets.

Third quarter net production in the Williston Basin was up 16% relative to the last quarter, at 567 BOE per day, of which approximately 76% was oil. The Williston Basin oil production was impacted by the winter storm during Q2, which has been restored in Q3.

During the quarter, we participated in a vertical Bakken recompletion and are awaiting results. We continue to work closely with our operator on high-grading opportunities in the field, such as expense workovers, additional recompletions and sidetrack drilling opportunities.

Q3 net production for Barnett Shale was 3,156 BOE per day, of which approximately 76% was natural gas. As mentioned previously, production was lower due to the effects of the severe winter storm. Production was down by 4.5% relative to last quarter.

Net production for Q3 at Hamilton Dome was essentially flat, at 400 BOE per day. We continue to support the operator, Merit Energy, in their efforts to restore production, adjust water injection locations and volumes and execute on other targeted projects, both maintenance and improvement.

Third quarter net production at Delhi Field was essentially flat, at approximately 1,111 BOE per day. We continue to work with our operator to perform conformance workovers and upgrades to the facilities.

With that, I will turn it over to Ryan to discuss our financial highlights.

Thanks, Mark. As mentioned earlier, please refer to yesterday's earnings release for additional information concerning our third quarter results. My comments today will primarily focus on financial highlights and comparative results between Fiscal Q3 and Q2.

A key highlight of the third quarter was our continued strong generation of cash flow, including adjusted EBITDA of $22 million. This was $34.42 on a per BOE basis, which was an increase from the second quarter. We have now generated $55.4 million in adjusted EBITDA for Fiscal 2023 year-to-date.

As Kelly discussed, during the third quarter we continued to fund our operations, development capital expenditures, cash dividends and share repurchases out of operating cash flow, while also maintaining 0 debt. Supported by our continued strong operational and cash flow outlook, we paid a dividend of $0.12 per share in the third quarter and declared a dividend of $0.12 per share for Fiscal Q4, payable on June 30 to shareholders of record as of June 15. Our cash dividend program has been and will continue to be a top priority, as we clearly recognize the strategic importance of returning value to our shareholders.

During the third quarter, we maintained our debt-free balance sheet and ended the quarter with cash and cash equivalents of $18.4 million and working capital of $10.7 million. The result was increased liquidity of $68.4 million, up 85% since June 30, 2022. This is a direct result of our targeted and immediately accretive acquisitions over the past couple of years as well as our continued focus on cost control. We are ideally positioned for the continued execution of targeted future growth opportunities that meet our strategic vision.

In May, we entered into the 10th amendment to our credit facility that extended the maturity date to April 2026 and also replaced LIBOR as a benchmark interest rate with SOFR. All the existing terms remain substantially the same.

Now looking at the third quarter financials in more detail. Our total revenue of $36.9 million was up 9% from last quarter due to a combination of factors, including: higher natural gas revenue due to a 34% increase in realized pricing, partially offset by a 5% decrease in daily production; increased NGL revenue due to 10% higher realized pricing; this was offset by lower oil revenue associated with the 10% decrease in realized pricing. The result was an average realized price per BOE increase of 14%, to $55.79.

Lease operating expenses decreased 10% sequentially, to $13.6 million, in the third quarter. On a per BOE basis, lease operating expenses were $21.26 for the third quarter, compared to $22.55 in the second quarter. Primarily contributing to the decrease in LOE were lower costs at the Barnett Shale. The costs were partially offset by higher production taxes associated with higher natural gas prices at Jonah Field.

Also contributing to the decrease was reduced CO2 costs at Delhi Field associated with the decrease in crude oil prices from the prior quarter. As a reminder, our CO2 costs at Delhi Field are directly impacted by the price of oil. Therefore, lower oil prices result in lower CO2 costs.

General and administrative expenses were $2.3 million for the third quarter, versus $2.6 million for Q2. The decrease was primarily associated with lower consulting and audit fees.

Net income for the third quarter was $14 million, or $0.41 per diluted share, versus $10.4 million, or $0.31 per diluted share, in the second quarter.

Adjusted net income for the quarter was $14.1 million, or $0.42 per diluted share, compared to $9.6 million, or $0.28 per diluted share, in the prior quarter.

During the third quarter, we invested $2.3 million in development and maintenance capital expenditures. For Fiscal 2023, we continue to expect total development capital expenditures of $6 million to $7 million. This estimate includes upgrades to the Delhi Field central facility, workovers at Hamilton Dome Field, Barnett Shale and the Jonah Field and a vertical recompletion in the Williston Basin.

We expect capital spending on our existing properties will continue to be met from cash flows from operations and current working capital. Of course, our spending outlook may change depending on conversations with our operating partners, commodity pricing and other considerations.

During the quarter, we repurchased $3.9 million worth of common shares under our 10b5-1 plan.

I will now turn the call back over to Kelly for his closing remarks.

Thanks, Ryan. We continue to benefit from the targeted acquisitions we have completed over the past few years. As a result, we enjoy a larger and more geographically diverse asset base and commodity mix. This provides us with a solid platform for significant cash flow generation that we will continue to use to support and enhance our well-established shareholder capital return program. Our shareholders expect a consistent and meaningful cash return on their investment, and we remain committed to maintaining and, as appropriate, increasing our dividend payout over time.

Another component of our capital return strategy is the share repurchase program we put in place and began making purchases on after the end of the second fiscal quarter. This provides us the optionality to opportunistically repurchase our shares from time to time through open market transactions, privately negotiated transactions or by other means in accordance with federal securities laws.

As in the past, we will maintain a conservative balance sheet and remain disciplined in our management of capital, as we fully recognize the cyclicality of our business. Our ongoing commitment to remaining fiscally prudent is evidenced by our 0 debt balance and meaningful cash reserves at quarter's end.

As a result, we are well positioned to execute on targeted, high-rate-of-return and immediately accretive growth opportunities, as appropriate. We will pursue initiatives designed to maximize total shareholder return by optimizing the value of every dollar we invest on a risk-adjusted basis depending on where we are in the cycle. Our approach of building a targeted asset base of oil and natural gas reserves capable of supporting cash payments to shareholders has served us well over the past decade and will continue to benefit our shareholders for many years to come.

As we have discussed in the past, we will closely evaluate and only execute on targeted acquisition opportunities that provide long-life production and strategically enhance our base of assets and do not result in any material dilution. Any transaction must also clearly support our longstanding thesis of providing a significant total return for our shareholders.

With that, we are ready to take questions. Operator?

(Operator Instructions) At this time, we will take our first question, which will come from Donovan Schafer, with Northland Capital Markets.

I want to start with -- so looking at the production numbers. In the Williston, you saw a nice bounce-back there from the reversal of the weather impacts. And then it looks like this quarter, the Barnett had a similar kind of impact in this quarter's results. So for next quarter, is it kind of, of a nature where we could see some kind of a bounce-back in the production there, similar to what we saw for the Williston this quarter? Or is there something kind of more fundamentally different between the 2?

First of all, Donovan, thank you very much for calling. Really appreciate it. Look, it was -- as we mentioned last quarter, at the end of the quarter there was a winter storm which affected the Barnett. And it didn't just come back immediately. So you should see a bit of a recovery just due to that. But look, the field has declined.

I don't know, Mark, do you want to take it from here?

Well, Donovan, good to talk to you. The Barnett, it makes a lot of water. So what happens when you shut in large areas or even sometimes even smaller areas is the water kind of builds up on the well. It just takes a while to get them unloaded. They come back. It's just slower than a lot of other types of production. So I think Kelly is spot-on on what the deal is. So you should see an adjustment upward, but there's always other things that can go on in the oil and gas field.

Yes, I'm familiar with that. My first job out of college was in the Marcellus. I know (inaudible) -- fluid would build up. So it shut in for a while, putting hydrostatic pressure, and then it shuts, the gas stops flowing and you go around to the (inaudible) rig. So Okay. That makes sense.

And then for natural gas prices, fantastic in Jonah. It was north of $20 in Mcf this quarter, and I think it was, like, $11 last quarter. And I think we might have gone over this before, but so there's sort of a lag there. Correct me if I'm wrong, but there's sort of a lag in timing, right? Or maybe it's, like, a first day of the month pricing or something? Because we think of it as November or December when pricing really blew out, unless I'm just forgetting that it was also crazy in January. So why the higher natural gas price in Jonah this quarter versus last quarter?

Sure. Ryan, why don't you talk about that a little bit?

Dom, good talk to you as well. If you recall, yes, we did talk about that last quarter. And so we sell our gas at the Jonah, probably a little more than half of it we sell on what we call inside-FERC first-of-month pricing. And so what really happened in this quarter is the price spiked at the end of December, during December and the end of December, which bumped up that first-of-month pricing for January, which really benefited it there, obviously, for quite a bit in January. And then honestly, it stayed pretty high throughout January and didn't even start coming down until maybe February and more in March.

So there is a little -- I wouldn't call it a lag necessarily because we do know what we're going to get and we book the revenue in that month. But we do sell most of our -- more of our production, more than half, on first-of-month pricing. So that's what was happening, at least in January, for this past quarter.

Okay. And then being on other calls, a lot of people are talking about what's the future for natural gas pricing or the outlook for natural gas pricing sort of nationally, or some people really focus even in on Europe. But of course, you guys stand out a bit because of this great West Coast exposure. So things have changed a bit. I think most recently, I just saw there's supposed to be a heat dome this weekend in the Northwest, but they don't run a lot of AC. So I don't know if that creates a lot of electricity burn. And then you had flooding and outages and all this stuff, but that also raised the reservoir levels, right? So say we get an extremely hot summer, on the one hand, that could raise natural gas prices west of the Rockies because of peaker plants operating. But then again, on the flip side, the hydroelectric reservoirs should be higher. Just curious if you have any kind of special perspective or anything you're watching in terms of where natural gas prices west of the Rockies might go, or to the hubs where you sell.

Sure. I'll say this. There isn't a lot of storage in the Western markets. One of the bigger natural gas storage facilities they had, they shut down. So I think it leaves us in a position where you can continue to see some of these more weather-driven events create more volatility. I think we are -- we can't predict what they're going to be, but we're happy to be exposed to these largely sort of uncorrelated and volatile markets relative to Henry Hub.

So yes, it's difficult, but I think there's a real opportunity that this could continue from time to time. Natural gas, as you know, is a much more regionalized mini-market sort of deal, versus oil. And we feel like it could happen at any place we sell natural gas. I mean, I'm reading where it's supposed to be an El Nino coming up, right? So that can mean a hot summer in the Southeast, where the bulk of electrical demand driven from natural gas is in this country.

So the point is, Donovan, we do think that these kind of weather-driven pricing events will continue. I'm not exactly sure how they'll play out, but we're intentionally happily exposed to them.

Okay. So you can't predict the weather, but you feel good about the exposure. Makes sense.

I think you know what I mean. We want to make sure that we were exposed to markets that we felt could be uncorrelated and could see some outsize events. And look, (inaudible) right this time.

I mean, the results clearly show, like, the strength of the strategy. So kudos there.

Okay. And so my last question, part of me hates asking this question because basically talking about capital allocation. And of course, like, this is part of what your job is, is you are in these positions, and it's even more so the case with a non-Op business model, is you're kind of every day thinking about capital allocation. And so you can't just commit to something and tell me something and then be beholden to that. You guys need that flexibility in being return-driven. But it would be good to just get any kind of an update on your thinking in terms of you talked about the -- you have the dividend as an option.

That's something. There's always the potential that you have -- it is something within your power and the board's approval where you could raise the dividend, but you also want to keep that as a base thing. Then you have the buybacks to kind of riff around that and return money to shareholders that way. And then, of course, there's acquisitions and M&A. And with all the price volatility, perhaps there are some opportunities that have opened up. So maybe you're seeing, looking at more opportunities, considering things. Or maybe there's not much that's come across your desk, I don't know. So just kind of curious if we can get an update current state of affairs, how things are looking to you guys.

Sure. And you hit the nail on the head. I mean, it's a highly dynamic situation. It's constantly changing. And we're always evaluating marketed deals. We're leveraging our contacts to sort of source negotiated deals. And we're looking to grow our company. And we think that we can continue our track record of accretive acquisitions. And in this lower price environment, it has maybe shaken a few things around. We're starting to see a little bit more on the deal front.

But as I mentioned last time, having our balance sheet as pristine as it is and the nature of our assets being long-life and low-decline, we have the financial security to wait for a deal. We don't have to do something. We're not in that position. No deal is better than a bad deal.

But I will say this, look, deal flow is starting to pick up a little bit compared to the final 3 months of Calendar '22. We're starting to get a little bit more Evolution-esk kind of deals crossing our desk. The bid-ask, obviously, look, we haven't done anything. So I would say the bid-ask is still a little off, but we're getting there. And I think there's some exciting opportunities out there, and we're going to keep pushing for them.

And our next question will come from John White with ROTH Capital.

Let me start by offering my congratulations to Mr. Bunch on his appointment. Glad to see that.

Thanks, John.

Sure. Look, I know you don't put out guidance and you're a nonoperator, and I'm not trying to pin you down to a lot of specific numbers, but could you just kind of talk about what you're seeing and what you're thinking about CapEx for the remainder of the year? I saw you pushed 2 of your Williston wells to later in the year. Do you just want to talk about what might be unfolding over the rest of the year?

Sure. So it's a multipart question. I assume you're talking about Foundation as a company, and then we can get into more specifics on CapEx at Williston.

So I don't know if you noticed or not, but in the press release we announced our CapEx guidance. I think we reduced it for the full year to $6 million to $7 million, and it had been $6.5 million to $9.5 million. And there will be certain reasons that I'll let Mark go into for maybe why that moved down. I will say on the Delhi front, we still have the rest of the heat exchanger coming in, correct?

That's correct.

That's still fully on the books. And then look, I'll let Mark take over, because I really want him to say some things about the Williston Basin.

Okay. So John, thanks for the question, by the way. And really the reason the sidetracks got pushed out into 2024 is because there was -- the permitting process in North Dakota is really, really slow. And Foundation has done a great job trying to get permits and get things pushed through. But basically, the NDIC kind of went on holiday while the legislature was in session. So nothing was passed.

And so really, that's the total cause of pushing things out. Nothing to represent what we think of the Birdbear locations at all. We're actually really excited about finishing that up and getting starting on one of them. Did that answer your question about the Birdbear?

And then on the rest of the stuff, we should have, like at Delhi, we should have the heat exchanger, which will improve operations out there, allow us to be able to stay up and running during really cold phases in the winter time and also help us in the hot times in the summer be able to inject more CO2. And it also should lower our operating costs. So we're real excited about getting that put in. That will be installed by the end of this month.

And I think everything else is -- I'm trying to remember if there's anything else we missed.

Did we push a recomplete?

Yes, we did push a recomplete back in the Williston, too, and that was the same issue. It was a permitting issue, getting the permit through. And that was actually even sillier because recompletions are fairly simple. So really, it's kind of a regulatory problem.

Thank you, John. Always appreciate you calling in and keeping us on our toes.

And our next question will come from Bruce Brown with Brown Capital Management.

It was a well-performed quarter given the impediments, weather impediments you had in a couple of fields. I just was curious as to the number of shares you've repurchased. I'm assuming it's around 600,000.

Yes, that's right, Bruce. And we'll put it out in our Q. A little over 600,000 shares we repurchased, for just a little over $6 per share, on average, for the program throughout this quarter.

Well, that's good. I think that if you look at the current strip today and also what the Jonah Field net gas pricing is currently, even though I know you have the first of the month for a lot of that gas pricing, et cetera, what would that do to your cash flow, assuming those prices are maintained for the rest of the quarter? Have you run that yet? Or can you just give me a fresh -- some idea?

So pricing today on the pipelines coming off of (inaudible) has come back much more in line with Henry Hub, as it typically does during the shoulder season. Again, that's today. We're sitting here in May. In April, there was a differential. I've got to be a little careful. I don't want to give any kind of guidance.

So I think -- they're hard to find, to be honest with you. You almost have to have a subscription to Platts to get the pricing. But it is, well, I don't know, semi-publicly available to see what the pricing coming off of those pipelines are.

But listen, if you're not getting $20 an Mcf, it will definitely affect your cash flow. I can say that. How about that.

I mean, we would -- we think it's probably going to be somewhere around Henry Hub, we would think, for kind of this quarter, roughly. Obviously, you're going from $20 to wherever Henry Hub shakes out at the end of this quarter on the gas side.

All right. I hear you. So it sounds like the cash flow for the current quarter will be possibly a little bit less than the one just reported.

Since you said "possibly," I'll say yes.

And our next question will come from John Bair with Ascend Wealth Advisors.

I'm going to ask John White's question in kind of a different way. And that is, what do you -- what is your sense from the operators as to proposed activity that might potentially increase the need for CapEx spending, not just in the current quarter, but say, over the next 6 to 12 months? And I realize some of that is probably going to be dependent upon commodity prices. But just generally speaking, what's your sense there?

Sure. I'm going to let Mark take this.

Well, as Kelly said, and we talk to our operators all the time. Then we kind of look at potential acquisitions, development of [incurred] assets, dividend payments, share repurchase. We kind of look at the whole thing because we're trying to get the best risk-reward for the company, and just so it helps our investors out.

And we're always melding that in with what the operators are telling us. And currently, we just look at all of these opportunities. And one of the biggest deals is we're going to -- we're pushing forward, like the Birdbear activity, which sidetracks at the Williston Basin, because they kind of rise to the top of the heap in our current position.

We work with each of the operators closely and they all -- we value that relationship with them, and we have a bunch of good operators that we work with. And in the Williston, Foundation is one of them. And that's really, I guess, all I can really tell you is that we're constantly looking for things that add value, like sidetracks in the Birdbear and also recompletions of existing well bores.

Okay. So evaluation of the properties hasn't uncovered some new perspectives or different horizons or whatnot that they might want to give an attempt to develop those. So it's pretty much a steady-as-we-go kind of thing? Is that kind of the way to look at it?

I'd argue that the Birdbear is probably kind of an extension of kind of a newer idea. It's an existing zone that people have produced before. But I think we have kind of a new way of going about doing it, and there's some opportunity there. So I could think that that has legs, but we'll have to just see what happens.

If you think about it field by field, so the Barnett Shale, I don't think we expect, honestly, to see much different than we've seen historically. In fact, the workovers may be a little lighter since they've put a lot of the wells on already. The Jonah Field has been pretty steady as well.

So really what we're talking about that Mark has mentioned is really a lot of it's in the Williston, where there's some potential for CapEx that we're sorting out, if that helps.

And listen, Delhi Field, we think it has plenty of potential. We think there's some economic projects that can happen there. And we think our operator, Denbury, is doing an excellent job of working through all this. And hopefully, we come up with a plan there that will allow us to spend some capital productively. We're working together with them on all that, too.

Well, speaking of Denbury, I'm curious as to whether there's any progress on the CO2 utilization and getting it categorized as green use? Or whether you're able to get some industrial gas into that that's been produced that could be used for CO2 injection? Is there any new -- can you shed light on that?

Again, and I hate to use the same thing I told you last time, it's still a little early. But I will say this, we have confirmed that work is being done to progress it towards that end goal, and not just by us. So I'm optimistic and I'm positive, and we have a timeline in mind where we should get some news, going forward. But it's a little too early to say anything definitive.

(Operator Instructions) Our next question here will come from Jeff Robertson with Water Tower Research.

Mark, a question on the asset base. Now that you all have had an apples-to-apples asset base for a handful of quarters, can you just talk about the natural decline you see in the production base as we think about Fiscal '24 and whether or not there's an acquisition?

And whether there's not an acquisition?

Assuming there are no acquisitions.

Okay. Sorry, I misunderstood what your question was. I think like in some of the assets, we saw actually bump up last year because prices were high. So they were doing a lot of extra work to get extra things on. I think we're going to be seeing now, now that prices have more normalized, that the decline will be back typically what you've seen with Evolution, which is still a relatively very flat sub-10% decline. And that's what I would expect for the company as a whole.

That's an annual decline, right?

Yes. I hope it's not daily.

Thanks, Jeff. Really appreciate it. Like, just to follow up with what Mark said, we think things are sort of back in line. We have 20-plus year reserve lives as a company, and our declines are, at least relative to the rest of this world, really flat, and we're very proud to have that.

And this concludes our question-and-answer session today. I would like to turn the conference back over to Mr. Kelly Loyd for any closing remarks.

Thank you. And thanks again to everyone for taking the time to listen, and we really do appreciate you all participating in today's call. As always, please feel free to contact us if you have any additional questions. We appreciate your continued support and look forward to updating you on our ongoing efforts when we report our fourth quarter and Fiscal 2023 results in September. Thanks again.

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines.