Evolution Petroleum (EPM) Q4 2019 Earnings Call Transcript

Evolution Petroleum (EPM 1.78%)
Q4 2019 Earnings Call
Sep 12, 2019, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to this Evolution Petroleum fiscal 2019 earnings release conference call. [Operator instructions] And now for opening remarks and introductions, I am pleased to turn the floor to Evolution's CFO, Mr. David Joe. Welcome, David.

David Joe -- Chief Financial Officer

Thank you. Good morning, and welcome to Evolution Petroleum's earnings call for our fiscal year ended June 30, 2019, and our fiscal fourth quarter. We will discuss operating and financial results for the year and the quarter as well as year-end reserves. I am David Joe, senior vice president and chief financial officer of Evolution, and joining me on the call today is Jason Brown, president and chief executive officer.

And during the Q&A session, we'll also be joined by Steve Hicks, senior vice president of engineering. If you wish to listen to a replay of today's call, it will be available shortly by going to the company's website via a recorded replay until October 12, 2019. 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 primarily focus on key results, operations and an update on Delhi Field and plans for fiscal 2020. I would now like to welcome and turn the call over to our president and CEO, Jason Brown.

Jason Brown -- President and Chief Executive Officer

Thank you, David. Good morning, everyone, and thanks for joining us today for Evolution's year-end and fourth quarter fiscal 2019 earnings call. As you know, it's my first earnings call with the company. I'm excited to join the team and look forward to building upon a fantastic foundation that Evolution has built.

Overall, the company continues to generate consistent and solid financial results. Strong cash flows and a dependable dividend have been the bedrock of our operation, both of which continue to benefit from the premium Louisiana light pricing received over NYMEX WTI. With that, I am pleased to announce our eighth consecutive year of positive earnings for the company. Reserve volumes have been reported in prior press releases, but to give you some additional color on those results, I'm happy to say that our proved reserve volumes totaled 9 million barrels of oil equivalent with a standardized measure of $127 million and a PV-10 value of $157 million.

That's compared to prior years of 9.4 million barrels with a standardized measure of $119 million and a PV-10 value of $146 million. Improved performance of producing wells has led to about a 200,000 barrel or a 2% positive revision in proved oil reserves. Performance from the NGL plant was improved via capitalized modifications, resulting in 100,000 or approximately 16% positive revision in NGL reserves. Evolution continues to focus on cash flow and shareholder return.

Our balance sheet remains strong with $32.4 million in positive working capital, most of which is in cash, and we have no debt. We continue to provide an attractive cash return to shareholders, and we've now paid out $59 million in cash dividends to our common stockholders since December of 2013 or a total of $1.81 per share, said another way, a very unique performance for an independent energy company. Additionally, subsequent to our year end, the company repurchased approximately $1 million of stock. Evolution remains committed to growing value for our shareholders, which continues to guide the board of directors and the management team.

Looking forward, Evolution has been and will continue evaluating opportunities to acquire compatible developed oil and gas-related properties that meet our specific criteria and support our dividend policy. With that, I'll now turn the call back over to David to run through our financials, and then I'll wrap up the call, speaking briefly about our strategy and outlook on M&A opportunities.

David Joe -- Chief Financial Officer

Thanks, Jason. I would like to say that it's been a very positive experience working alongside Jason thus far. He has brought a fresh perspective and impressive skill set to the company, and I look forward to the contributions he will provide in the near term. That said, I'd like to share some highlights of our financial results for our fiscal fourth quarter ended June 30, 2019.

Total BOE volumes increased 3.2% led by a 23% increase in NGL volumes. We generated total revenues of $10.4 million versus $9.5 million in the prior quarter led largely by LLS oil prices up 9.5%, offset by a 6.7% decline in NGL prices, which have been quite volatile this past fiscal year. Overall, we improved operating income by $1 million to $4 million in the current quarter. That was led largely by lower production costs in the quarter due to primarily lower CO2 volumes.

Our absolute DD&A expenses were flat quarter over quarter. However, it's worth noting that our Q4 DD&A rate and the rate going into fiscal 2020 is going to be 4% lower than what it was in fiscal '19 at $8.07 per BOE. Our G&A expenses were up in the quarter, largely for consulting expenses, including those for an executive search, which has been concluded. We recorded net income of $3.3 million in the quarter versus $2.4 million in the prior quarter.

This equates to earnings per share of $0.10 in the current quarter versus $0.07 in the previous quarter. The 12-well infill drilling program consisting of 10 producer wells and two CO2 injector wells was completed and on production during fiscal 2019. Capital expenditures for the six-well water curtain program and related infrastructure preceding the planned Delhi Phase 5 development are nearly complete. The first pad commenced operations during fiscal 2019, and the second pad is expected to begin injections during our second quarter of fiscal 2020.

For fiscal year 2000 results, I will defer to the press release yesterday afternoon for highlights and details for full-year numbers compared to the prior year. In short, another solid year of financial performance. I would like to take this opportunity to reiterate a few key attributes of the company. The Delhi Field is 100% liquid-producing field comprised of about 85% oil and 15% NGLs.

Our unique ownership in this field, some 7.2%, is made up of an overriding royalty interest. Keep in mind this type of mineral interest bears no operating expenses or capital cost. Additionally, we have a 23.9% working interest, which carries a 19% net revenue interest. As Jason already mentioned, Delhi receives LLS oil pricing typically at premium to WTI pricing.

The Delhi oil production enjoys a severance tax holiday until payout. That's a 12.5% savings. The Delhi Field has sub-$20 lifting cost, therefore providing a very high operating margin. We have future development remaining in the field in Phase 5, Phase 5i potentially in the Mengel.

This is a long-life producing field, and we expect only a single-digit decline once production rolls over. Evolution continues to focus highly on being a shareholder-friendly company with over six years of quarterly cash dividends. The current yield is 6.4% based on yesterday's closing stock price. The five-year average dividend yield is approximately 4%.

We have an active share repurchase program, and as Jason mentioned, we recently purchased about 168,000 shares in July and August. We have $2.4 million remaining in a $5 million approved buyback program that was originally put in place back in 2014. Our balance sheet strength was $32.4 million of cash on hand, access to a $40 million credit facility remain strengths of the company. And we're generally debt-adverse but not on purpose to a low use of leverage.

The company remains in great financial shape and is poised for new growth opportunities. This concludes my review of financial results and ops for fiscal year ended June 30, '19. In summary, we reported net income for the eighth consecutive fiscal year, continue to create value for our shareholders with cash dividends and share repurchases, continued strong financial performance with excellent balance sheet strength and continued development and reinvestment into Delhi Field. I will now turn the call back over to Jason for final remarks.

Jason Brown -- President and Chief Executive Officer

Thank you, David. As I've mentioned, Evolution is actively seeking to acquire additional long-life producing reserves that will provide diversity and support to sustain and grow our dividend. The board has brought me in to help grow the company, and I'm very optimistic about our ability to do so. Evolution's fiscal discipline has put us in a great place with cash reserves and an untapped credit line to be able to take advantage of a fairly tumultuous A&D market.

We will not take undue risk or excessive leverage and will only pursue those opportunities that fit our criteria, but we're seeing a lot of inbound deal flow and feel confident that we'll be able to find properties that will be a good fit for us. I think with that, we're ready to take some questions. So operator, if you'll please open up the line for questions. Thank you.

Questions & Answers:

Operator

[Operator instructions] We'll go first to Jeff Grampp with Northland Capital. Please go ahead. Your line is open.

Jeff Grampp -- Northland Capital -- Analyst

Good morning, guys. And Jason, congrats on the first call.

Jason Brown -- President and Chief Executive Officer

Thanks. Thanks, Jeff.

Jeff Grampp -- Northland Capital -- Analyst

I was curious for you, Jason, on the acquisition side. I know, Bob, our Chairman of the board, obviously had a very disciplined view of the world when it comes to acquisitions. And just wondering based on your experience elsewhere if there's any kind of modest tweaks, modifications, qualifications that you would kind of put on Evolution's acquisition strategy. And I'm just going to ask to get a sense for how to think about the acquisition strategy under your leadership, if it's much different, if at all, than how we've historically thought about it.

Jason Brown -- President and Chief Executive Officer

Thanks for that. Well, I would say this. We had our first board meeting on Monday, and it was great, and this was the main subject that we went over. I think you're using the right word when you say strategy, and that was the main topic of discussion.

We're seeing a lot of deals, and they're all over the place. As you know, like I said, it's a pretty tumultuous market. We actually like that. We're in such a good position that we think that -- as opposed to last fall, where some people are going after the market and not really happy with the results they were getting in terms of bids and turning in a lot of failed sales.

This year, things have not gotten better for them, and that market has created some even more stress situation, and these stress situations, we think, we'll be able to take advantage of. That being said, do we want to stay in long-life oil? Do we want to stay and want to continue our CO2 thing? Are we open to gas? These are the discussions, and we kind of threw everything out on the table. Are we willing to go to one turn of EBITDA debt? Are we willing to spend all of our cash or our cash in the bank? And we kind of emerged from that with some parameters that let us narrow the box so that we don't waste time chasing a lot of deals that are not going to fit us. So in terms of going forward, I think we've got a pretty narrow box.

It's going to have a PDP component. It's going to be long-life. I think the No. 1 goal for the board and for the management is to secure the dividend, sustain it and then build in inventory for it in the future so that we can have that dividend many, many years into the future and then start to grow it, increase.

But sustaining it is the first priority, and then growing it is the second priority. So I would say this. For us to -- we like being non-op, and so for us to get into an operated situation, it would have to be a very, very special situation. I think that's probably not as likely.

And we like oil. So again, if we were going to go into gas, it would also have to be a very, very good situation for us. But we have seen some of those situations, at least in the short term, with gas prices probably not looking the greatest in the next 12 to 18 months. There might be some tremendous buying opportunities.

So hopefully, that kind of narrows the subject down a little bit.

Jeff Grampp -- Northland Capital -- Analyst

No, that's perfect. That's exactly what I was looking for. I appreciate that. And for my follow-up, more on the operational side.

I was kind of wondering if you guys have a handle on how we should think about purchased CO2 volumes in FY '20, so we kind of think of it hovering in that 90 million to 100 million a day kind of range, plus or minus, or any kind of sense that you guys have had from the operator on that.

Jason Brown -- President and Chief Executive Officer

Yeah. I don't think it's going to be quite that much. I think we're thinking in the low 80s, between 80 million and 83 million a day of purchased CO2. We've gotten some efficiencies there.

The plant has been working. It's been purifying the CO2, which is the main reason for the plant, dropping out those NGLs which we are very happy to sell. But the main purpose of the plant was to get a clean and more pure CO2 injection. So that process has been pretty efficient.

And we do have some higher volumes in the fourth quarter as we brought on our new wells, but we see that settling out in the low 80s.

Jeff Grampp -- Northland Capital -- Analyst

Got it. Sounds good. I appreciate the detail and [Inaudible] hop on. Thanks, guys.

Jason Brown -- President and Chief Executive Officer

Yep.

Jeff Grampp -- Northland Capital -- Analyst

Thanks, Jeff.

Operator

[Operator instructions] We'll go next to ROTH Capital in the line of John White.

John White -- ROTH Capital Partners -- Analyst

Good morning. And very nice financial results once again. The company is running on all cylinders. And my congratulations to you, Jason, on your appointment.

Glad to see you on board.

Jason Brown -- President and Chief Executive Officer

Thank you, John. Appreciate that. Good morning.

John White -- ROTH Capital Partners -- Analyst

So since A&D is the main topic, and I would enjoy hearing some of the valuations you're seeing, I'm wondering, given the state of the market, are there some properties that have a good PDP component plus some PUDs and probables that people are trying to buy for the PDP value only?

Jason Brown -- President and Chief Executive Officer

Yeah, I'll say this, John. I guess the overarching thing, a year ago, prices were pretty high. Our prices were pretty high. In September, there was a pretty significant falloff.

That precipitated quite a few processes, sale processes last -- in the fourth quarter last year. But I think a lot of those processes, people, in their minds, it was too close to August, and in their mind, they thought they were still worth more than they were at that time. Like I mentioned earlier, there was a lot of failed sales. So at that time, Evolution was bidding on PDP PV-9 and not able to be successful because asking prices were a little too large at that time, even though that's probably what they were worth.

Now we're seeing people asking us to consider PDP PV-12, PDP only PV-15, which is pretty attractive to us and our capital cost. So hopefully, that gives you some sense of the market therapy that's happened and that we're seeing the deal flow. Again, not playing -- paying for any upside PDP or PUD. We're talking about PDP only.

Does that answer your question?

John White -- ROTH Capital Partners -- Analyst

Yeah, that's very interesting. You said PDP valuations around PDP of PV-12 ranging to PV-15.

Jason Brown -- President and Chief Executive Officer

That's right. That's right. Even so have a PV-18 we're looking at. But it's got to be the right fit and location and area.

But particularly with gas, we want to kind of stay sort of one pipeline from the Main Pass area and to avoid some of the blip from the Permian.

John White -- ROTH Capital Partners -- Analyst

And that was -- my follow-up is, are you seeing much more stressed valuations for gas properties?

Jason Brown -- President and Chief Executive Officer

Oh tremendously, yeah, for sure. For sure. And regionally, they're more distressed than other regions. So I think you've got to be real smart when you're looking at gas in terms of it becomes a midstream marketing game, what can you -- what's your differential, right?

John White -- ROTH Capital Partners -- Analyst

All right.

Jason Brown -- President and Chief Executive Officer

Epecially in the short term.

John White -- ROTH Capital Partners -- Analyst

I really appreciate that feedback. And if Bob is there, tell him I said hello. And Bob, I know you're glad to get Jason in the driver seat there.

Jason Brown -- President and Chief Executive Officer

He's so glad that he's not even here. He's very happy about that, too, John.

John White -- ROTH Capital Partners -- Analyst

I understand. OK. Thank you very much.

Jason Brown -- President and Chief Executive Officer

Thank you, John.

Operator

And we'll take our next question from Joel Musante with the Alliance Global Partners.

Joel Musante -- Alliance Global Partners -- Analyst

Hey, guys. I just had a couple of questions. Just on the production profile going forward, you have kind of a light capex budget going into next year, at least that's what it looks like at this point. Just wondering if you can keep production flat with that? Or should we expect a mild decline just over the next couple other quarters?

Jason Brown -- President and Chief Executive Officer

Thanks, Joe. Yeah, I appreciate that. I'll tell you right up. I would say this, we're not an operator.

We're a very active non-operator, which is important to understand. We've got a great relationship with Denbury in terms of the technical team. They've given us the schedule of what they think, but of course, those aren't locked in until they go through their budgeting process in the fall. And so it's an estimate at this point.

We've put in a little bit of capex in terms of Phase 5. It's probably unlikely that it's going to start in our fiscal 2020. It's probably going to be in early 2021, although they said they're going to try to start that in what would be our fourth quarter of 2020. I'm not sure that that's going to happen.

We have a small amount of capex in there. We shouldn't expect any uplift from production probably until late of our next fiscal next year. So yes, I think this year, we'll probably see a little bit of decline single digits. We're talking about 4% or 5% this year.

I think you can expect a mild decline, but that should be lifted up when that Phase 5 comes on. They're also going to be doing conformance work and the workover, and we have capex for that. And that's been -- that's why we're successful. So it was last year, and we anticipate it being this year as well.

Joel Musante -- Alliance Global Partners -- Analyst

OK. So when you said Phase 5 would probably start up late next year, I guess? Does that mean fiscal year? Or are we talking calendar year?

Jason Brown -- President and Chief Executive Officer

I'd say late next summer. We've got some capex in for, let's see, June-ish, May, June. But likely, it would be starting -- that could easily slide. Let's put it that way.

That's what they've informed us, so that's what we're planning on. However, I wouldn't be surprised if that slid to July or August, which would be, of course, our fiscal 2021.

Joel Musante -- Alliance Global Partners -- Analyst

Right, right. OK. And just can you remind me where you stand on the tax -- severance tax holiday, when that might -- when you might reach payout from that point of view?

David Joe -- Chief Financial Officer

Hey Joe, it's David. So that severance tax holiday is still a ways out, 10-plus years out because that severance tax calculation is based also on current investments. And so based on investment to date plus an escalation per capital, it's 10-plus years out. So that -- so I keep kind of reminding people how that's extra accretive for the working interest on us.

Joel Musante -- Alliance Global Partners -- Analyst

OK. That's all I had. Good luck with the A&D market. It sounds like that things are pretty promising there.

I appreciate your time.

Jason Brown -- President and Chief Executive Officer

Thanks, Joel. We sure appreciate it.

Operator

And at this time, we have no signals from the audience. [Operator instructions] And we have no signals from the audience. Mr. Brown, I will turn it back to you for any additional or closing remarks, sir.

Jason Brown -- President and Chief Executive Officer

Thanks, Jim. I sure appreciate it. Thank you for your participation on the call today, and please feel free to contact me with any other questions. I look forward to providing you with an update in November.

Thanks, everyone.

Operator

[Operator signoff]

Duration: 25 minutes

Call participants:

David Joe -- Chief Financial Officer

Jason Brown -- President and Chief Executive Officer

Jeff Grampp -- Northland Capital -- Analyst

John White -- ROTH Capital Partners -- Analyst

Joel Musante -- Alliance Global Partners -- Analyst

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