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Evolution Petroleum (NYSEMKT:EPM)
Q2 2020 Earnings Call
Feb 06, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, hello and thank you for joining today's Evolution Petroleum fiscal second-quarter 2020 conference call. All participants are in a listen-only mode but you will be given an opportunity to ask questions after today's prepared remarks. And with that, I'm pleased to turn the floor over to Evolution [Inaudible], Mr. David Joe.

Welcome, David.

David Joe -- Senior Vice President, Chief Financial Officer, and Treasure

Thank you. Good morning, and welcome to Evolution Petroleum's earnings call for our fiscal second quarter ended December 31, 2019. We will discuss operating and financial results for the quarter. I am, as you said, David Joe, chief financial officer of Evolution.

And joining me on the call today is Jason Brown, president and chief executive officer. Couple of quick housekeeping notes. If you wish -- wish to listen to a replay of today's call, it would be available shortly by going to the company's website and be stored for the next month. Please note that any statements and information provided there 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 numbers are readily available to everyone in yesterday's news release, this call will primarily focus on key results, operations, and an update on our capital spending and the plans for the remainder of our fiscal 2020.

I would now like to welcome and turn the call over to our president and chief executive officer, Jason Brown.

Jason Brown -- President and Chief Executive Officer

Thank you, David, and good morning, everyone, and thanks again for joining us today on Evolution's second-quarter fiscal 2020 earnings call. I'm pleased to announce that Evolution has once again delivered earnings and positive cash flow for its shareholders for the 17th consecutive quarter. We continue to generate consistent positive financial results and improve the sustainability of our dividend despite the continued low commodity price and low capital spending environment throughout the industry. I'm delighted that we have announced our 26 consecutive quarterly cash dividend and perhaps, more importantly, our ninth dividend in a row at $0.10 per share.

There have been tremendous swings in commodity price over those 26 quarters even brief periods of oil price below $30 a barrel. But Evolution has consistently delivered and we feel very proud of this accomplishment in the ability to generate long-term stability for our shareholders. During the quarter, we were able to successfully close the acquisition of an interest in Hamilton Dome field in Hot Springs, Wyoming, operated by Marriott Energy. It's worth noting that all -- although Evolution has not closed any recent acquisitions we were able to not only get this closed but also integrated into our operations seamlessly without adding any material overhead.This was an important first step in demonstrating that the Evolution board and our management team have both the will and the ability to transact on oil and gas asset opportunities that fit within our strategy.

Although this quarter only reflects two months' worth of production, we're pleased with the performance of Hamilton Dome as that is meeting our expectations on production, price realization, and cash flow. Similar to other oil and gas producers, our overall performance during the quarter was impacted by lower price realizations. During the quarter, Evolution was further impacted by the short-term repair to the oil sales pipeline from Delhi which more than offset the increased volumes. This is a good example of why we're pleased with the Hamilton Dome acquisition and as a second source of cash flow and are committed to further acquisitions that will support our dividend.

With that, I'll now turn the call back over to David to run through financial highlights and then I'll wrap up the call briefly speaking about strategy and the outlook on the M&A landscape.

David Joe -- Senior Vice President, Chief Financial Officer, and Treasure

Thanks, Jason. I will share and reiterate highlights of our financial results of our fiscal second quarter. Please refer to our press release from yesterday afternoon for additional information and details and be on the lookout for our Form 10-Q to be filed shortly.So the biggest highlight, as previously mentioned, we acquired oil-producing assets in the Ham Dome field in Wyoming on November 1 for $9.5 million of cash. However, based on the effective date of October 1, 2019, we received and recorded a cash payment from the seller for approximately $0.2 million, thereby reducing the purchase price from $9.5 million to $9.3 million.

As you review and digest our quarterly financial results, it should be clarified that Ham Dome results are for only two months in the current quarter and includes production revenues, LOEs, DD&A, cash flow. Other highlights in the quarter include continue our -- our returning cash to the shareholders with our lengthy history of consecutive quarterly dividend supported by our oil assets, this yield is in excess of 7%.We generated total revenues of $9.4 million in the quarter, up 2.5% from the prior-quarter despite lower realized oil pricing and despite the temporary additional trucking costs incurred to Delhi which -- which has now been resolved. We reported net income of $1.7 million for the quarter marking the 17th consecutive quarter of positive net income. And if you go back further, it's more like 26 out of the last 28 quarters with just a couple quarters of losses back in 2014 and 2016.

We ended the quarter with about $21 million in cash and we still have a $40 million undrawn credit facility. Going into the quarter in a little bit more detail, gross production averaged approximately 8,500 barrels of oil equivalent per day during the quarter, a 16% increase from the prior quarter and a 9% increase from the year-ago quarter. Production improved primarily due to the acquisition of the Hamilton Dome Field albeit for only two months as previously noted. At Delhi, total gross barrels of oil equivalent per day averaged approximately 7,000 barrels of oil equivalent per day a 4% decrease from the prior quarter and about a 10% decrease from the year-ago quarter.As we all know, we have been, and still are, experiencing a low and volatile commodity price environment.

At the Delhi field, the current quarter's lower average realized oil price was further impacted by trucking cost resulting from a planned repair to a section of the oil sales pipeline. We estimate the erosion of value to be approximately $0.4 million. This effectively eliminated the LLS premium in the quarter shifting from a positive basis to a small deduction. This pipeline repair project commenced in November and was completed at the end of January about a month ahead of schedule thankfully.

As of February 1, all the trucking oil has been seized and oil sales are back on to pipeline. Total production costs were $4.2 million for the quarter, an increase of 37% from the prior quarter. Delhi's portion of this increase is primarily due to higher CO2 costs, directly resulting from a 20% increase in purchase CO2 volumes. Production costs attributable to Hamilton Dome was approximately $900,000 representing two months of cost based on the November 1st closing date.

In December, there were a few atypical AFE expense workovers in the field to address well repairs. Our composite DD&A rate per BOE at period-end declined 10% to $7.26 per BOE compared to the prior quarter of $8.07 per BOE. This is largely due to the accretive Hamilton Dome Field acquisition, which only has a two-month impact in the quarter. As we go forward, the expected consolidated DD&A rate per BOE is estimated to be between $6.80 and $6.90 per BOE.

In the current quarter, we reported slightly higher G&A expenses for costs typically associated with our second fiscal quarter ended December 31. This includes proxy statements and related calls, 10-K printing and related Annual Meeting costs. We continue to be mindful and manage our cash G&A expenses.It's worth noting that non-cash G&A makes up approximately 15% to 20% of our total G&A reported. Net income for the quarter was $1.8 million, or $0.05 per diluted share compared to $2.8 million and $0.08 per diluted share in the previous quarter.

The lower than expected EPS was disappointing, but we understand why and we've been working to manage these components.During the quarter, we incurred $10.7 million of capital largely attributable to the acquisition of Ham Dome, and a small amount spend at Delhi Field.The current expectations for net capital spending for the remainder of our fiscal 2020 is pretty modest, with about $0.5 million to $0.75 million earmarked for capital workovers at Delhi and a very small de minimis amount of capital allocated to Hamilton Dome Field.It's worth noting that the Delhi operator recently reported to us that the capital was -- capital has been deferred for the Phase 5 project until calendar 2021. They currently have a modest capital development plan for Delhi subject to increased oil prices. Our total working capital of the company decreased by $10 million in the -- from -- compared to the prior quarter, largely attributable to the $9.3 million, we spent acquiring the Hamilton Dome Field and for the payment of our common stock dividend in the quarter. As I mentioned, we ended the quarter with $21 million in cash on hand, have liquidity with our $40 million reserve-based credit facility, and the company continues to be well-positioned to fund future development of its producing assets through our current fiscal year and our next fiscal year.

Just would like to take the opportunity to reiterate a few key attributes of our assets. We now have two large oil fields, our Legacy Delhi field and the recently acquired Hamilton Dome Field, both fields are very similar and that their non-operating working interest to us, 100% liquids production, long-life with expected low decline profiles. They support our company's dividend strategy and our future development workover and in-fill opportunities in these fields. Just a reminder that our Delhi field we have a 7.2% override which bears no operating expense for capital burdens.

The Delhi oil is priced on LLS oil pricing, which typically is a premium to WTI prices for the past few years. This is a very high net operating margin property with revenues in the $50 per-barrel range, operating costs around the $20 per-barrel range, with net operating margins of $30 a barrel.Hamilton Dome Field is a 100% oil-producing field, long-life reserves, a premier field has produced over 100 years, operated by a top-tier operator in Merit Energy, we anticipate low digit -- low-double-digit operating margins in this field. This concludes our review of financial results and operations for our fiscal second quarter. In summary, we remain focused on delivering sustainable dividend yield to our shareholders, while seeking opportunities to maintain and grow production.

I will now turn the call back over to Jason for final remarks.

Jason Brown -- President and Chief Executive Officer

Thanks, David. The company continues to be positioned to fund further profitable development of its producing assets, while retaining sufficient financial resources to capitalize on new growth opportunities and funding for the current dividend strategy. Evolution continues to focus on cash flow, stability, and overall shareholder return.Although Evolution is excited to add another long-life producing assets to our reserves that will provide diversity and support to our dividend. We will continue to evaluate acquisition opportunities to further grow the company.

The company is uniquely positioned to pursue growth and we'll look to take advantage where we can in the market. The current weakness in oil and gas price -- prices presents an opportunity to acquire long-life production with upside at a very attractive price per BOE. I think it also validates Evolution's prudent decisions over the recent years to retain substantial liquidity with no debt. As previously mentioned, Evolution is seeking long-life producing reserves, much like the recent acquisition that will provide diversity long-term sustainability and support to grow our dividend.

With that, I think we're ready to take questions. operator, please open the lines.

Questions & Answers:


Operator

Gentlemen, thank you for your remarks this morning. [Operator instructions].We'll hear first from Jeff Grampp at Northland Capital. Please go ahead.

Jeff Grampp -- Northland Capital -- Analyst

Good morning, guys. 

Jason Brown -- President and Chief Executive Officer

Hey, Jeff.

Jeff Grampp -- Northland Capital -- Analyst

Jason, I was wondering first now you guys have had Hamilton Dome under your belt for a few months here now, I was wondering as you guys are kind of looking at that asset or trying to I guess, characterize how we should be thinking about it going forward? Are you guys seeing any kind of upside opportunities there in conversations with the operator, your own assessment? And just any I guess capital that could go to work there over the next couple years or so? Or should we more think about that as just kind of a terminal decline asset with some good cash flow?

Jason Brown -- President and Chief Executive Officer

I think it's fair to look at it as the latter. I think that's why we bought it; it's been producing for over 100 years. So it's not going to be a high growth asset, but it's very, very stable, very predictable. That being said, Merit is, this is right in the middle of their fairway of what they do, and they're just one of the best at controlling costs and looking out as much value as possible.

So, in this situation, I've never been, I think about part of any non-op deal that I closed on that I didn't get hit with a few AFEs as soon as we close. And this is no different. So I think we saw a few workovers here in the first couple months, P&A on a couple of wells and then also a couple of workovers that they've been waiting to do. But in that I think we've got a pretty predictable go-forward P&A schedule, maybe a couple of wells a year, which is pretty reasonable.

Those are not expensive. And the workovers one of which the reason I'm bringing it up is it's kind of an innovative new ESP, and so it's all about trying to save costs up there. So that's almost the PD&P in a field like Hamilton Dome. We know the reservoir, we understand the production.

And they've put in a new SP that we feel pretty happy, is going to save a tremendous amount of the electricity costs. And so as we move forward, when pumps go down, and that sort of thing, that's the plan is to replace them with these new pumps that both deliver a higher volume at lower costs. So I think that's the best way to answer that.

Jeff Grampp -- Northland Capital -- Analyst

Got it. No, that's great detail. I appreciate that. And as we look at Delhi and I think David noted, production was down a few percents sequentially.

Was that kind of in line with your expectations? Or was any that related to that that pipeline repair, I know you guys obviously highlighted the trucking cost but was there actually any production impact from that repair? Or was production basically kind of where you guys thought it would shake out?

Jason Brown -- President and Chief Executive Officer

Well, it's a little -- there is kind of two questions there. I think we were a little disappointed with production. I can't say that we attribute it to the repair. That was the planned repair of the integrity, the pipeline, so it was needed to happen.

But there are sort of trickle things that happen there. For instance, on blending projects, where we were able to get an upgrade in pricing, we had to dial that back in terms of the amount that we could go. So there's a little less lost revenue there as well. And I think that we didn't ramp up -- we didn't ramp up some of the wells that had to be shut down with a high CO2 in September, we didn't see the production come back as quickly as we thought that it would.And I think it was probably being less aggressive because of that situation.

Every dollar that they're increasing there is hit a little harder because of the trucking. So it's a little bit qualitative, and we don't quite have the quantitative but overarchingly I think we were a little disappointed and we expect to see some of that in January.

Jeff Grampp -- Northland Capital -- Analyst

Got it. So just to dig on that a little deeper from here and you're right, it sounds like from your perspective that you're thinking that maybe the operator was a little bit, I guess cautious and in terms of ramping up production, just given the pricing discount that you guys were observing during this period? And maybe with that now kind of in the rearview that there's some opportunities for them to I guess not be as conservative in producing some of the wells?

Jason Brown -- President and Chief Executive Officer

Well, I think -- OK, that's speculating just a little bit. And then there are several variables on the table as well. We saw them not do workovers in the last few couple months. At Conformis workovers, which are more typical, and I think there's some budgetary issues over there.

And now that we're into a new budget year, we've seen fired up and we've approved three and they're getting going on those. So I think it's kind of a combination of timing and several issues. So I think that's a fair assessment. We're feeling pretty positive.

Jeff Grampp -- Northland Capital -- Analyst

Got it. Sounds good. I appreciate the time. I'll let someone else hop on.

Jason Brown -- President and Chief Executive Officer

Thank you. 

Operator

Next, we'll hear from Bhakti Pavani at Alliance Global Partners. Please go ahead. Your line is open.

Bhakti Pavani -- Alliance Global Partners -- Analyst

Good morning, guys. 

Jason Brown -- President and Chief Executive Officer

Good morning, Bhakti.

Bhakti Pavani -- Alliance Global Partners -- Analyst

Just wanted to touch base upon the oil price realization. I know you mentioned that they were kind of lower this quarter. So how do we just wanted to get a better understanding on what factors are driving those realizations lower and do you expect them to kind of remain at this level going forward?

Jason Brown -- President and Chief Executive Officer

Well, the biggest impact was Delhi and beyond the normal WTI fluctuation that we've seen, we've seen a lower amount, we generally get an LLS premium of -- last year it averaged $4. Right now, I think it's closer to $3.70. It's kind of creeping its way back up. But the biggest impact is we sort of lost that premium because we had to pay for $54.60 a barrel for trucking during November and December.

So that kind of eroded the premium that we had. So that -- that impacted us. Now that I think they were expecting that to go into March. And we're very happy to hear, we had our operations meeting with Denbury a couple of weeks ago, which was great, by the way, to dive into that technically, and we're very happy that they got that finished.

Planes got that finished ahead of time. So we actually the pressure back up this last weekend, and we're all flowing through the pipeline now. So the trucking costs have ended.

Bhakti Pavani -- Alliance Global Partners -- Analyst

Perfect. So for the $0.4 million that was accounted or expensed in Q2 will be only cost, you don't expect anything to be accounted in Q3 at this point, is that correct?

David Joe -- Senior Vice President, Chief Financial Officer, and Treasure

Just to be clear, Bhakti, this is David. That $0.4 million estimate of erosion costs; it's not recorded in the book as an expense. It's lost value in a reduction of price as a result of trucking fees and the lower realized price we received. So we're just trying to quantify what could have been if there were no trucking but it was a necessity and that's a reality we have to live with.

And that will also flow to the January number in the next quarter as well.

Bhakti Pavani -- Alliance Global Partners -- Analyst

Got it.

Jason Brown -- President and Chief Executive Officer

To give it, I think we got back online February 1st or 2nd flowing. Yes, so yes, I would expect that in January's numbers, Bhakti. 

Bhakti Pavani -- Alliance Global Partners -- Analyst

OK. Perfect. I guess that's just my side. Thank you very much.

Jason Brown -- President and Chief Executive Officer

Thanks, Bhakti.

Operator

[Operator instructions] We'll hear next from Bruce Brown with Brown Capital.

Bruce Brown -- Brown Capital -- Analyst

Good morning, gentlemen. The question I have is at what point do you consider repurchasing stock a better investment than expanding production?

Jason Brown -- President and Chief Executive Officer

Well, I tell you, this is a good question. And it's one that we talk about. And it's -- it's one that we talk about both internally and with the board and also with investors and it seems like everybody has different opinions. So far our posture has been one of, I would describe defense.

And we have a stock buyback program out there that was approved. There's still a couple million left on that. And it has different tiers different tickers, and it's mainly like I say a defense to catch-up, catch a falling knife if things move in the markets as I do sometimes in the market. It, traditionally, it hasn't taken too many purchase shares for us to sort of quail any falling prices.

We feel like that's in line with supporting our shareholders and protecting them. Now, at what point is it switched to become an offensive strategy where we're going at that as an acquisition mode. Certainly, I can understand the idea that we -- we definitely believe that our stock is undervalued, and every share that we take off the market by purchasing it, it's real to us because it's almost 8% yield that we don't have to pay on it. That being said, we just feel like we're in a really good position.

We're seeing a lot of deal flow, and we think the next six, to eight months are going to be more important than that short-term grab. I came to the Dome for instance, like I said, it's been producing for over 100 years. We're thinking about this, how are we going to support our dividend in 2030. The $13 million to pay that, I need barrels in 2030 to do that.

Well, if you discount those barrels back to the day that most people don't value those at all, but they are tremendously valued to us and value to our shareholders. So we feel like it's the right opportunity and time for us to be able to almost get option value on our capital and our -- and our financial position to be able to garner a tremendous inventory of reserves to support that and be a healthy company for the next 10, 15, 20 years. So that's the kind of start with us, we're just -- we're pretty excited about the opportunities. 

Bruce Brown -- Brown Capital -- Analyst

Well, thanks very much. Appreciate it.

Jason Brown -- President and Chief Executive Officer

Yup. Thanks for the question.

Operator

[Operator instructions]. And gentlemen, I do not see any signals from our phones. I will turn it back to you Mr. Brown for any additional or closing remarks.

Jason Brown -- President and Chief Executive Officer

All right. Well, thank you and thanks, everyone, for your participation on today's call. Please feel free to contact us with any questions. I look forward to providing you with an update in May.

Operator

[Operator signoff]

Duration: 25 minutes

Call participants:

David Joe -- Senior Vice President, Chief Financial Officer, and Treasure

Jason Brown -- President and Chief Executive Officer

Jeff Grampp -- Northland Capital -- Analyst

Bhakti Pavani -- Alliance Global Partners -- Analyst

Bruce Brown -- Brown Capital -- Analyst

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