Evolution Petroleum Corp. (NYSEMKT:EPM) Q1 2019 Earnings Conference Call November 8, 2018 10:30 AM ET
David Joe – Chief Financial Officer
Bob Herlin – Chairman of the Board and Interim CEO
Jeff Grampp – Northland Capital Markets
John White – Roth Capital
Jim Collins – Portfolio Guru
Thank you for standing by. This is the conference operator. Welcome to the Evolution Petroleum Corporation’s First Quarter Fiscal 2019 Earnings Release. [Operator Instructions] And the conference is being recorded.
[Operator Instructions] I would now like to turn the conference over to David Joe, Chief Financial Officer. Please go ahead.
Thank you and good morning, everyone, and welcome to the Evolution Petroleum’s earnings call for our Fiscal 2019 first quarter, ended September 30, 2018. We will discuss operating and financial results for the quarter. Joining me on the call today is Bob Herlin, Chairman of the Board and Interim CEO; and Steve Hicks, Senior Vice President of Engineering and Business Development. If you wish to listen to a replay of today’s call, it will be available shortly by going to the company’s website or via recorded replay until November 15, 2018. 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 news release, this call will highlight key results and overall trends in an update on Delhi for the remainder of fiscal 2019.
I’m now going to turn the call over to Bob Herlin.
Thanks, David. Welcome to everybody to our first quarter of fiscal 2019 earnings call. As you can see from our earnings release yesterday, Evolution had a great quarter with revenues of $12.3 million and earnings of $5.8 million or $0.17 per share. Of course, a small portion of that income but not the revenues was from the transaction breakup fee that we received from Enduro. But our operating results were still excellent. Production from our Delhi field continues to be strong and we expect it to hold up for an extended period due to the infill joint program recently completed.
Looking forward, we expect the operator to begin Phase V development at Delhi sometime in the latter half of calendar 2019. If there is repeating – anyways the Phase V development should be in improved production sometime in calendar 2020. We believe there remain several additional areas in the field for CO2 flood to be extended in the next decade. It does bear repeating that Delhi oil receives very favorable Louisiana Light Sweet pricing with a very low transportation cost and our natural gas liquids contain a high level of more valuable components tied to oil price. Therefore, we are in a very favorable position of as far as commodity prices being realized, compared to our industry peers.
Our efforts to acquire additional long-life developed reserves to complement Delhi are continuing. We are following a very disciplined approach and specific criteria with the goal of growing a sustainable cash dividend to our shareholders. While we are disappointed the Enduro transaction did not close, we will not stray from our criteria or compromise our financial philosophy just to get any deal completed. The board is engaged in a careful process of searching for our next CEO to take the company through this exciting growth phase, and we hope to complete that process on or before the end of March 2019.
And with that, I’m going to turn the call back over to David for a little more color on our financial and operating results. David?
Thank you, Bob. It’s worth reiterating that Evolution turned in another excellent financial quarter and this follows three successive-performing quarters. Looking forward, based on the present premium of LLS pricing through 2/3 of this current quarter and expected stable production from Delhi, our financial metrics are poised to continue into the quarter ended December 31 and perhaps, beyond.
Looking into the quarter, crude oil volumes are 2% higher compared to the prior quarter. Realized quarterly oil prices were $71.72 per barrel, a 6.4% increase from the prior quarter. These two factors combined resulted in record quarterly oil revenues for Evolution, which comes on the hills of record oil revenues in the prior quarter. Since the end of the quarter, we have seen further improvement in realized oil prices.
Total CO2 production cost increased by $568,000 in the current quarter for two reasons: purchase CO2 volumes are up 54% quarter-over-quarter to 70 million cubic feet per day. Recall that in the prior quarter, CO2 injection rates were below normal level due to the infill drilling program, thus purchased CO2 volumes were also below normal. In fact, that trend carried into July 2018 as well. The August and September purchased CO2 volumes averaged 83 million cubic feet per day.
Secondly, oil prices were up, as I mentioned, 6.4%. Recall that by contract, our purchased CO2 cost per Mcf is tied directly to realized oil prices received in the field or specifically 1% of the price of oil plus sales taxes and pipeline transportation costs. Other lease operating expenses were flat quarter-over-quarter at $2 million. Total lifting cost for the current quarter was $18.80 per BOE. With revenues per BOE of $67.14, we generated field operating margins of $48.27 per BOE, which is an impressive 72% of revenues per BOE. With a large part of for operating costs relatively fixed, the majority of any commodity price increases will directly increase our operating margins in the field.
I believe these metrics alone speak volumes to the quality of the Delhi asset and are uniquely positioned interest in this long-life 100% liquid-producing oilfield. As Bob previously mentioned, we collected and recorded the $1.1 million breakup fee related to the Enduro acquisition efforts in the current quarter. CapEx for the quarter were modest at $2.74 million for Delhi, the majority of which was for the infill drilling program and Phase V infrastructure projects. The anticipated capital expenditures for the remainder of the fiscal year is estimated to be $2 million to $2.5 million net to Evolution. The company remains committed to returning cash to our shareholders and has paid out nearly $50 million or $1.51 per share in cash dividends to shareholders since the program’s inception in December of 2013. The dividend rate is currently $0.40 per annum, a 4.1% yield based on yesterday’s closing stock price. Our liquidity position remains very strong with working capital of almost $30 million and building at the end of the quarter, substantially, all of which is cash. We have an undrawn reserve base credit facility set at $40 million and Evolution remains well positioned to fund future development at Delhi, fund the dividend program and to pursue new growth opportunities.
In summary, we reported in this quarter record oil and gas revenues of $12.3 million, net income of $5.8 million or $0.17 per share, paid our 20th consecutive quarterly dividend and declared the next quarterly dividend and continued reinvestment into the development of Delhi field with the completion of the infill drilling program. I’m now going to turn the call back over to Bob for some closing remarks.
Thanks, David. As we’ve discussed in past calls over the last year, Evolution is actively seeking to acquire additional long-life producing reserves that would provide diversity and support and grow our dividend. This effort is very disciplined. We will not take undue risk or excessive leverage and we’ll only pursue those opportunities that fit our criteria. With our cash resource and untapped credit line, we’re uniquely positioned to pursue these opportunities. And with that, I think we’re ready to take some questions. Operator, you can open the line.
[Operator Instructions] Our first question comes from Jeff Grampp with Northland Capital Markets. Please go ahead.
Was hoping, Bob, to maybe get a little bit more color to the best you guys can kind of comment on the production trajectory kind of moving forward. Is it fair– it kind of sounds like flattish, maybe if the cards play out, maybe a little bit of growth incrementally, but largely flat until Phase V comes on in calendar 2020. Is that kind of a fair expectation?
Yes, I really think that’s probably the safest thing to say. The field was developed in various phases. Each phase, we’re doing like one phase every year so in the initial phases we did are probably quite mature and they are seeing some normal production decline. Later phases are still more flat. So really we’re looking for the infill program to basically keep this at the current level pretty much for the next short period of time, year two, three, whatever. And then that takes us into Phase V, which right now, we’re expecting to start end of next calendar year, 2019 calendar year.
And then that phase should start showing production improvements in calendar 2020 and, of course, it takes a while for production response because you’re flooding new areas of the reservoir and tax a while for the CO2 to percolate through and pressure up and affect the physical component or characteristics of the oil. But quite honestly, with the proved reserves, proved and developed in our current production, we’re looking at a profile that’s kind of flat to slight increasing with the Phase V and then flat going into probably the middle of next decade before we’ll start seeing any kind of a real significant decline.
And then we have several other parts of the field that are currently not described as proved and developed because we just don’t have them in our five year plan. But we think we’ve got two solid areas that could be added to the flood, one is a single reservoir that we participate in with Delhi – I mean with the operator in there that can be added. And then there is some thinner reservoirs on the south side of field that we also think can be brought in.
Right now, it just doesn’t make sense to do that because we don’t really have the capacity on our CO2 plant, the recycle plant, to handle additional amounts of injection. But we think those are opportunities that could easily extend production flat or whatever, all the way maybe through the end of the next decade. So when I think about Delhi, it’s one of those really good high-quality fields that when you have a good field, it always tends to get better and better over time. And we just – we’ve been seeing that consistently.
And for my follow-up, just on the CO2 purchased volumes, you guyed talk about, sounds like the exiting kind of purchased rates were a little bit above what the quarterly average was. So is that number – I think you guys said like $83 million a day. Is that – $80 million $85 million range, is that kind of good run rate for the next few quarters? And could that change at all as the infill program kind of gets up and running or is that a good number to think about?
That’s a good number to think about.
I think mid $80s million is good number from what operators report to us.
Yes, it will probably increase a bit once Phase V gets going because that’s going to be a whole new area of injection and so we would actually, sometime in late 2019 or pardon me late 2020, we would probably see a small increase in the CO2 purchases for a period of time while we’re doing the initial fill-up of that part of the field for years off.
Sure, sure okay really helpful appreciate you guys.
[Operator Instructions] Our next question comes from John White with Roth Capital. Please go ahead.
Well, it’s sure nice not to worry about basis blowouts and that can get that LLS pricing.
Well, I guess we do have a basis blowout, but it’s in the other direction.
Touché. As I think everybody knows you’re in the M&A market all day every day and – if you could give us some color on that and I’m kind of under the assumption you’re focused on conventional vertical wellbore reserves and production. If you could clarify that and just offer some observations on what you’re seeing?
Sure. We’re clearly not going to be a competitor for your, I say these days, in the traditional shale price. We are just embedded into who we are. We don’t want to get into the business of drilling a bunch of wells. We don’t want to spend a lot of capital just for the privilege of spending more capital. We want to spend our capital in order to generate an immediate cash return that we can share with our shareholders. So that does carve out a large amount of the deals that are out there. We also don’t want to get exposed to areas where there are significant political and regulatory risks.
Again, we just don’t want to take that risk for our shareholders. And so that kind of defines areas of interest to Texas, Oklahoma, Wyoming, North Dakota, Montana, the areas of that type. We’re going to avoid – plus New Mexico, but we’re just – we’re going to avoid a lot of the other things – a lot of the other areas that are just more risky. We are definitely looking for primarily PDP reserves. We do like the opportunity to have some development but mostly to allow for maintenance CapEx type of an opportunity. As you said, we are actively in the market, we are looking at deals constantly. That really is 90% of what’s Steve Hicks' job is. He is very busy at that. We look at lots and lots of deals.
We have looked at several deals in great detail to the point of negotiations. We haven’t closed on anything. We got, obviously, very close on Enduro. That would have been a great fit for us, I think to a marked degree. It just ran into a bidder that was playing with dollars that were more valuable than our dollars as a creditor. So – but we are looking for opportunities of the similar nature. We are very – actually, we’re pretty optimistic that we are going to get a deal done in the next year or so that would be a very impactful for the shareholders. But we’re going to stick to our guns. We are not going to do anything stupid. We’re not going to compromise on the important criteria that we’ve set for ourselves.
Well, I appreciate that and it’s in line with what I was thinking and you’ve got a lot of experience to perform rigorous analysis and as you’ve emphasized, you have a lot of patience. So we wish you all the best now that you’re in the driver’s seat and good hunting.
Well temporarily. I’m the interim CEO, I’m looking forward to being just back to my old Chairman position and having the ability to look over the shoulder and provide advice. We do plan on having a new CEO here in place in the next couple of months that will take us into this next growth phase. We are pretty excited about it, and we think this is a great opportunity for somebody to come in with a lot of energy to get a deal done.
Well good luck on finding at CEO and good luck on finding a deal.
Our next question comes from Jim Collins with Portfolio Guru. Please go ahead.
Good morning, Bob. Good morning, David. Fantastic quarter both in terms of realization of margins, almost 72 on both field margins. So my question is – obviously, we’ve pull back a bit since then on crude pricing. So at what point do you think about hedging? And in terms of thinking about hedging, can you just walk me through the process, the levels at which you are are looking for and the process at which the board uses to decide whether or not to lock in prices?
Sure. First, I want to point out that the prices that have come down a lot with WTI, we sell against Louisiana Light Sweet, which has not come down nearly as much. That spreader has widened. So we’re probably still getting close to the $70 a barrel, if not more in the current month. David can correct me but I believe that its fairly accurate statement. So we’re still seeing a pretty good oil price and we don’t have the same exposure to basis differentials that almost everybody else does. So as far as hedging goals, we look at that every board meeting. That is a standard agenda item and every time we talk about it, we go around a circle of all the characteristics of what do we think?
We think all participants are going to do what we feel about hedging and consistently there has been a very low appetite for hedging for a number of reasons. One being that I think we’re still fairly bullish about oil prices in the long term. Second, we have really no tremendous need for locking in oil prices quite honestly. We don’t have debt that we have to pay. Our cash flow is – free cash flow is twice what we need for the dividend. So we really don’t have a binding need to secure the oil price so when you look at that, it just isn’t a lot of enthusiasm among the board. We still think there’s potential for upside especially now. So right now, it’s the – the hedging is not a strong priority for the company. And then, obviously, we do a transaction, we take on some debt, that might change some.
Right. On the other aspect of that, you talked about the dividend coverage, which is quite strong. At what point do you think about increasing the dividend? Same question, what are the sort of levels and what is the process in terms of...
Yes, I suspect that we’ll be looking at that very closely in the next quarter or two at the minimum just because we do have all the excess cash right now, we do have excess cash flow. It does make sense. Quite honestly, we were focused in this last board meeting more on some M&A activities and so we really didn’t put a lot of time into discussing increase in the dividend. I think where we are right now, we’re comfortable with the current dividend level, but I can easily see an increase in the not-too-distant future.
And should we look at that – obviously you have a different corporate structure, but if you look at statements of the MLP, they do acquisitions sort of with the expressed purpose of supporting the dividend or supporting dividend growth. Is that how we should look at potential transaction...
Quite honestly, we are – we have a very similar mindset. Our goal – as the old upstream MLPs in a sense of you buy assets with the idea that you’re going to direct cash flow to shareholders, the difference being the C corp is – and especially with the tax legislation, we can be very efficient. We have a low tax rate and we don’t have near the complexity of the MLP structure for the shareholders. We don’t have average tax consequences that MLPs offer.
We have a lot more flexibility and obviously, we have a much wider bandwidth or universe of potential holders of our C corp stock that otherwise wouldn’t be able to participate with the MLP. But I think the overall focus is probably not the similar in a sense that yes, we’re focused on buying production with the idea of taking that cash flow and returning the very large chunk of it to shareholders. However, I think one significant difference is that we do not believe in massive leverage. Our application has a lot of depth. we just not going to take that risk. We just don’t think that’s what shareholders want. It’s definitely not what the boards wants and it’s not what I want. We do – we like being able to sleep better at night and knowing for sure that we can meet that dividends for years to come.
That’s great, thanks a lot Bob and thank you David.
This concludes the question-and-answer session. I would now like to turn the conference back over to David Joe for any closing remarks.
Thank you, everyone, for your time and participation today and feel free to contact Steve or myself, Bob with any questions. I want to wish everyone a great holiday season. Bye now.
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.