Evolution Petroleum Corp (EPM) Q1 2022 Earnings Call Transcript

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Evolution Petroleum Corp (EPM 0.52%)
Q1 2022 Earnings Call
Nov 10, 2021, 2:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Evolution Petroleum First Quarter Fiscal Year 2022 Earnings Release Conference Call. [Operator Instructions]

It is now my pleasure to turn the floor over to your host, Ryan Stash, Chief Financial Officer. Sir, the floor is yours.

Ryan Stash -- Senior Vice President, Chief Financial Officer and Treasurer

Thank you, Kate. Good afternoon, everyone, and welcome to Evolution Petroleum's earnings call for our first quarter of fiscal year 2022. Joining us today is Jason Brown, President and Chief Executive Officer; and myself, Ryan Stash, Chief Financial Officer. After I cover the forward-looking statements, Jason will review key highlights along with our operational results. I will then return to provide a more in-depth financial review. Finally, Jason will provide some closing comments before we take your questions.

As a reminder, if you wish to listen to a replay of today's call, it will be available by going to the Company's website or via recorded replay until December 10, 2021. 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 earnings release, this call will primarily focus on our strategy as well as key operational and financial results and how these affect us going forward. Please note that this conference call is being recorded.

I will now turn the call over to Jason.

Jason E. Brown -- President and Chief Executive Officer

Thank you, Ryan. Good afternoon, everyone, and thanks for joining us today for Evolution's first quarter fiscal 2022 earnings call. Our first quarter represented another period of strong financial performance and continued cash generation that supports our long-term strategy of operating within cash flow and paying an ongoing meaningful cash dividend to our shareholders, which we've been able to do consistently over the past eight years.

In addition to our financial performance, the team was able to successfully develop and publish our inaugural Corporate Sustainability Report. It can be found on our recently updated website. I'm proud of the work that the team has accomplished in this regard, and would be excited to hear for any feedback that our shareholders would care to give.

During the first quarter, we produced 5,843 net BOE per day. That was about 33% higher than the fourth quarter of fiscal 2021. This was primarily due to a full quarter of production from our Barnett Shale assets that were acquired on May 7. I'm pleased with our team who is able to seamlessly integrate the Barnett assets into our systems without any material ongoing G&A additions. We also benefited significantly from higher commodity pricing, as we continue to remain unhedged during the first quarter. These factors combined with the efforts of our third-party operators to leverage efficient field cost structures resulted in an adjusted EBITDA of $8.5 million. This was more than 80% increase from the fourth quarter of last year.

We once again generated operating cash flow in excess of capital expenditures, which allowed us to pay our 32nd consecutive quarterly cash dividend. In addition, we were able to grow our cash position to $8 million at quarter end, which is a 51% higher than our cash balance of June 30, 2021.

Now looking at our operating results in more detail. Net production at Delhi for the first quarter was 118,228 BOEs. That's about 1,285 BOEs per day. That's a slight decrease of around 3% compared to the prior quarter. Oil production at Delhi was impacted by decreased in reservoir pressure due to the suspension of CO2 purchases from July 15 through August 20 for preventative pipeline maintenance. During the scheduled pipeline repair, the CO2 recycle facilities operated as usual, providing about 80% of the typical injection CO2 volumes. The pipeline is owned and operated by Denbury. And on August 21, the pipeline maintenance was completed and resumed, flowing CO2 at a rate of approximately 85 million cubic feet per day. The operator anticipates to be able to increase rate up to about 110 million cubic feet per day during the next quarter in order to increase pressure to support to the reservoir and hopes to continue the elevated purchase rates throughout the winter and spring.

Along with the operator, we are hopeful that these additional CO2 volumes will help to reestablish the reservoir pressure and some of the subsequent associated production that was lost as a result of the temporary pipeline failure in fiscal 2020. In Hamilton Dome, we saw sequential quarterly increase in production of 2% to 37,145 barrels or 404 barrels of oil per day. This is primarily due to continued reactivation of previously shut-in wells, strategic adjustments to water injection locations and volumes as the operator merits field projects remain focused on maintenance, restoring production and optimizing the field. Net production of the Barnett Shale assets for the first quarter of fiscal '22, 382,115 BOEs or 4,153 BOEs per day. This was about 59% higher than the fourth quarter of fiscal 2021. Increase mostly was due to this being a full quarter production compared to 55 days in the prior quarter due to our closing the purchase of the assets on May 7. As we discussed in our last call, Blackbeard Operating, the primary operator of our Barnett Shale assets, sold their interest to Diversified Energy Company in July of 2021.

We look forward to providing more detail on the expected future capex and operational plans at the Barnett assets once the diversified has finalized their plans upon completion of the transition period. And although we are pleased we've already received a workover for the reactivation of the salt water disposal well from them, which will allow the return of production for four offset wells. So this is exactly the kind of work that we anticipate from diversified, and we are excited about other high rate of return projects that we can participate with them on those assets.

Our Barnett Shale acquisition has materially increased our exposure to natural gas through the acquisition of another long life, low decline asset. We're excited about what that accretive acquisition does for our company and our shareholders moving forward. This purchase was particularly well timed, considering the sharp increase we're seeing in natural gas prices in recent months. Consistent with our successful past strategy, we'll continue to evaluate additional accretive opportunities to expand our business for the long-term and benefit of our shareholders. These efforts support our long-term focus on continuing to operate within cash flow as we maintain and potentially increase the cash dividends that we pay to our shareholders over time.

Despite the challenges of 2020, we have been proud of our commitment to return meaningful value to our shareholders through consistent dividend program. This includes increasing our first quarter fiscal '22 dividend to $0.075 per common share of stock. And that was paid in September. Supported by continued improvement of our business and the economic environment, we are pleased to declare a second quarter dividend that will be paid on December 31 to shareholders of record as of December 15. But this dividend evolution will have paid out $80 million -- over $80 million or $2.41 per share back to shareholders as cash dividends since 2013. Maintaining and ultimately growing our stock dividend along with achieving disciplined growth through accretive acquisitions remain our key priorities moving forward. And we appreciate continued support of our shareholders.

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

Ryan Stash -- Senior Vice President, Chief Financial Officer and Treasurer

Thanks, Jason. I'll now share some more details regarding our financial results for the first quarter of fiscal 2022. As I mentioned earlier, please refer to our press release from yesterday for additional information and details. Some of the key highlights are, as Jason had just mentioned that we paid our 32nd consecutive quarterly dividend in the first quarter of $0.075, which is a 50% increase over the prior quarter. And as Jason also mentioned, we declared a $0.075 dividend for this upcoming quarter, that's going to be payable on December 31, 2021.

Our adjusted EBITDA increased more than 80% to $8.5 million from the fiscal fourth quarter of 2021. And as Jason also mentioned, this is really due to a full quarter of production from the Barnett Shale that closed in May as well as improved commodity prices relative to the prior quarter. We're able to fully benefit from these increased commodity prices due to our strategy to remain unhedged. We funded all operations, development, capex and dividends out of operating cash flow and maintained our strong balance sheet with $8 million of cash on hand and $4 million drawn resulting in a net cash position of $4 million as of September 30. Now, we'll say we do expect to pay off this $4 million during this quarter, our fiscal second quarter, as we're set to have our final settlement with Tokyo Gas to sell over the Barnett assets we expect that to happen this month.

Working capital increased by $4.1 million to $15.6 million this quarter. And this is really due to a lag in revenue receipts and invoices from the operator of the assets diversified. So we currently have more months than we would usually expect of revenues and expenses in our receivables and payables.

We do expect these timing lags to be corrected during this fiscal second quarter as Diversified has now begun to take over operations. And also as I had mentioned, we expect to complete the final settlement with the seller. Going forward, we would expect to have approximately two months of receivables and one month of payables in our working capital accounts, which is typical for non-operated assets.

Turning to our credit facility. We incorporated our acquired Barnett assets and a recent amendment, the eighth amendment that was finalized on November 9. The result was the determination of a new borrowing base of $50 million, which was a $20 million increase from our prior borrowing base of $30 million. However, we have elected a $40 million commitment amount resulting in current availability of $36 million as we currently still have $4 million drawn, as I mentioned.

I would note that the amendment does add a covenant requiring us to hedge certain percentages of future production based on the utilization of the borrowing base under the credit facility. More specifically, once we reach a 25% utilization on our borrowing base, we're going to be required to enter into hedges for 25% of our PDP production on a rolling 12-month basis. Once we hit 50% utilization, this required hedging increases to 50% and once we hit 75%, it increases again to 75%. I will say that we do continue to maintain our strategy of retaining exposure and upside to commodity prices, which has benefited us recently. However, as we have mentioned in the past and feel like we're being consistent in the way we've talked about how we would handle potential acquisitions and that we would look to hedge a portion of the production from a potential acquisition to lock in return and ensure a quick pay down of any debt that we may borrow.

Now, looking at our first quarter financials in a little more detail. We grew total revenue by 38% from the prior quarter, which was primarily due, again, to the benefit of a full quarter of production from Barnett as well as an overall 2% increase in realized commodity prices on a BOE basis. LOE increased to $8.6 million in the first quarter, primarily due to the higher volumes with the Barnett Shale and increased workover activity at Hamilton Dome.

Partially offsetting this increase in LOE was a previously mentioned suspension of CO2 purchases at Delhi from July 15 to August 20 to perform the necessary pipeline maintenance. This combination of lower CO2 purchase and the lower operating cost nature of our now Barnett Shale natural gas wells, resulted in LOE cost of $16.05 per BOE for the first quarter, which was a 16% decrease from the fourth quarter of 2021.

G&A expenses were $1.9 million for the first quarter compared to $1.8 million for the prior quarter, with the overall increase primarily due to one-time costs associated with the retirement of the Chief Accounting Officer, professional fees associated with the Barnett Shale acquisition and some initial costs for the development of the Company's inaugural Corporate Sustainability Report.

Net income for the first quarter was $5.2 million or $0.16 per diluted share compared to $2.2 million or $0.07 per diluted share in the previous quarter. Again, this increase was primarily driven by higher commodity prices and a full quarter of production from the Barnett Shale.

For the three months ended September 30, we invested $300,000 in capex which is primarily associated with Delhi field capital maintenance activities. We currently expect that the operators at Delhi and Hamilton Dome will continue conformance workover projects and we'll likely incur additional maintenance capital expenditures as oil prices remain strong. For fiscal year 2022, based on discussions with the operators, our total capex for Delhi and Hamilton Dome is expected to be in the range of $1 million to $2 million, primarily consisting of conformance workover and maintenance capital projects. Also, as Jason mentioned, a capital spending program has not yet been established for the Barnett shale, but also, as Ian mentioned we are beginning to see projects proposed and would expect to continue to see additional workovers and return to production projects given the commodity price outlook.

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

Jason E. Brown -- President and Chief Executive Officer

Thanks, Ryan.

We're very pleased with the momentum that we've built through the first quarter of fiscal '22. We remain focused on our core values, which include generating cash flow and providing our shareholders with a meaningful return on their investment through cash dividends and executing on additional accretive acquisitions.

As I said on our last call, I believe that we've demonstrated our ability to source value and successfully transact on opportunities that support this strategy. And equally important to those activities is the ability to integrate and manage those assets once they're owned. The team has done a great job with this, which only increases our confidence in the outlook of our organization. Supporting our efforts of providing shareholders with an ongoing cash return on their investment is our commitment to continuing sustainable business practices. As I mentioned earlier, last week we released our inaugural Corporate Sustainability Report. And while we currently do not operate into the assets in which we have ownership interest, we view our environmental, social and governance or ESG programs and initiatives is key to our strategy to further differentiate evolution both now and in the future. ESG will be a consideration as we evaluate future accretive opportunities to grow our asset base and reserves.

Following our Barnett Shale acquisition, we remain eager to continue to grow in both in size and scale and feel that we're well positioned to execute on the right opportunities for our business. We continue to source and assess a wide variety of marketed and negotiated transactions. We're optimistic that we will be able to grow our business and provide additional shareholder value through targeted expansion of opportunities in fiscal '22.

With that, I think we're ready to take questions. Operator, if you'll please open the line for questions. Thank you.

Questions and Answers:

Operator

Certainly. [Operator Instructions] And our first question today is coming from John White at ROTH Capital Partners. Your line is now live. You may begin.

John White -- ROTH Capital Partners -- Analyst

Thank you, operator. Good afternoon, Jason and Ryan.

Jason E. Brown -- President and Chief Executive Officer

Hey, John.

Ryan Stash -- Senior Vice President, Chief Financial Officer and Treasurer

Hey, John.

John White -- ROTH Capital Partners -- Analyst

I was really glad to see the strong results all the way around and congratulations on the increased borrowing base.

Jason E. Brown -- President and Chief Executive Officer

Thank you.

John White -- ROTH Capital Partners -- Analyst

So, some of the Hamilton Dome workovers were included in LOE. Are there more of those coming in the next quarter or so?

Jason E. Brown -- President and Chief Executive Officer

Those guys are really sharp. During 2020, they basically pulled it down to hardly anything. There's not really any new drilling going on up there, no new capital project. So those workovers there are more expense workovers or things that down pumps that sort of deal. There's a few items that are wells that they took off production immediately about 40%. And over the last year, they've pulled things back on. This last set was now the final saltwater injector well that they were able to turn back on.

So, we would consider this quarter to be high. There may be a little bit more in the next quarter. There are consistently some workovers from time to time there just in pumps going down or whatnot normal maintenance. It was extra than what we expect for two reasons. One, to kind of make up some things that they had been putting off in lower price environments. And two, to get that fourth injector up, which is going to allow more water to be injected around the field. So the short answer is yes, maybe a little bit more it was higher than normal. But I think that put our lifting cost up to about $40 a barrel. We would anticipate that that's going to ease back to the low-30s. I think we're in the $31.50 before and maybe even better than that, more of an ongoing thing. Although, the next quarter it might be slightly -- somewhere in the middle. Does that make sense, John?

John White -- ROTH Capital Partners -- Analyst

Yes, it does. Thanks for that. And boy that natural gas out of the Barnett sure has a positive effect on LOP. You mentioned, one saltwater disposal well as planned and you said Diversified is still finalizing their plans. Are you getting any kind of informal indication of workovers at the Barnett?

Jason E. Brown -- President and Chief Executive Officer

No. I think they're finalizing their transition services agreement with Black Bear this month. So we would anticipate being able to have that -- we just -- we didn't -- weren't able to have a formal meeting with them before this call, but we anticipate that over the next few weeks. No, we just actually got an AFP from them, which we were actually pretty surprised to have and excited about. It's not the drilling of a new saltwater disposal well, it's the reactivation of one that would then in turn allow us wells that we're previously producing. I think there's four wells that we're making about 450 [Phonetic] a day. So that's just gas that we're not going to make.

So it's those types of activities we anticipate quite a bit of. But I will say we also got an AFP on a new drill well out there, John. This is one of the minor -- we have some other assets there that I think we have about 1.25% interest. It's a small piece that are operated by few other operators.Diversified's the main operator for -- and so this is one of the other ones. So it wasn't a significant thing for them. But there are people standing up rigs in the Barnett which is interest to see as well. At some point some of those locations might be a value to us. So we're going to be looking at that over the next quarter as well.

John White -- ROTH Capital Partners -- Analyst

Well, very good. Looks like the acquisitions working out very well for you and I'll pass it on.

Jason E. Brown -- President and Chief Executive Officer

Thanks, John.

Ryan Stash -- Senior Vice President, Chief Financial Officer and Treasurer

Thanks, John.

Operator

Thank you. Our next question today is coming from Erik Volfing at Grand Slam. Your line is live. You may begin.

Erik Volfing -- Grand Slam -- Analyst

Hi, guys. Congratulations on a very nice quarter and really congratulations on having made such a good acquisition with the Barnett Shale. You mentioned that you're starting to look toward the final settlement with Tokyo Gas. What's involved in that?

Ryan Stash -- Senior Vice President, Chief Financial Officer and Treasurer

So yeah. If you recall, it took us a lot to get the deal over the finish line with kind of working with the Japanese counterparty. But the actual -- so the effective date of the transaction I think we talked about this before was January 1 of this year. So, when we closed in May, right, we received a portion of what Tokyo Gas had received which is about a couple months worth of cash flows in May. And we expect to receive the remainder of kind of those cash flows between call it March and May when we closed finally. But there is actually probably even a little bit more as it's taken -- it took the prior operator Black Bear a while to get things transitioned over. So, there is a decent amount that we will probably expect to receive when we close here on the final settlement which is basically truing up every -- all the revenue that they received from January 1 to now.

Erik Volfing -- Grand Slam -- Analyst

Okay. So, we're basically expecting this to be a positive. It's not that you owe them anymore money, right? It's them pay you extra money?

Ryan Stash -- Senior Vice President, Chief Financial Officer and Treasurer

Correct.

Erik Volfing -- Grand Slam -- Analyst

Okay. And there were also -- I think there were a few wells that they had that didn't immediately transfer because there was some question about -- I think whether somebody had a right of first refusal. Is any of that still -- is that -- would any of that be part of this or is that just completely dead?

Jason E. Brown -- President and Chief Executive Officer

I think we should assume at this point that it's dead. We're certainly open to it. That was actually not a right of first refusal. It was a lawsuit and it was backed off because the operator was also selling Black Bear to Diversified. They chose to just go ahead and close despite of the lawsuit. So we kind of stayed away from that. If it got remedied, we would be fine from like run of it. But I think also you have the complication of them probably wanting a whole lot more for it. So I'm not sure that we would buy it at this point. But I think it's safe to assume at this point, let's not -- and if it comes back around at some point and we're free and clear then, we would probably take a swing at it.

Erik Volfing -- Grand Slam -- Analyst

Okay. And obviously you're generating a tremendous amount of cash. And it looks like you're going to generate some more cash here from -- in terms of this final settlement. So some of it will go to pay off I guess that $4 million that you have. I was actually little bit surprised that the Board chose not to increase the dividend at this time considering the amount of cash that you currently have. And then looking out just a couple of quarters, you could be all the way back to the amount of cash you had before the last acquisition, probably by the end of June, if prices stay up here. Any thoughts on sort of what the Board's thinking is there?

Jason E. Brown -- President and Chief Executive Officer

Well, this is -- it's a pretty thoughtful Board and has the reputation long earned from being very fiscally disciplined and prudent. So, I think what you're feeling here is a real reticence to go too aggressive to raise the dividend not wanting to lower it again. We feel like the reputation is really built around. We pay our dividend. We've only lowered it twice during -- in 2014 when commodity prices collapsed and then in 2020 when they did as well, each time kind of measuredly moving forward. So I think what we're seeing there, of course, we could have went right back to our $0.10. But we're certainly feeling more comfortable about the stability of overall economic environment and COVID situation and our cash flows and everything else, but there's been quite a bit of volatility in the last 12 months. And I think [Speech Overlap]. I don't know, have a little bit more runway, I guess.

Erik Volfing -- Grand Slam -- Analyst

Okay.

Ryan Stash -- Senior Vice President, Chief Financial Officer and Treasurer

Yeah, I mean the only -- I would just add real quick, Erik, I mean when we had discussions on dividend policy, I mean, we look five-plus years out. And so if you're looking at years four and five, as you probably know, the strip's highly backwardated. So things look a little different. And so as Jason alluded to, I mean, we're setting a dividend rate for the long term. And so while we could have raised it, we felt being more prudent given kind of the backwardation in prices. This is quite frankly keeping some powder available as acquisition opportunities that we see.

Erik Volfing -- Grand Slam -- Analyst

Okay. And I guess, actually, that sort of leads to my last question if I may, just kind of on the acquisition front, with the big run we've had on commodity prices. Is that making it harder to source deals?

Jason E. Brown -- President and Chief Executive Officer

Well, what he just -- no, definitely not to source deals. There's a ton of deals out on the market, some of them with unrealistic expectations. The thing that's interesting is what Ryan just said, though, is that the strip is pretty backwardated. Now we're fairly bullish on long-term prices, but the market, in general, is pricing quite a bit of uncertainty evidenced by the backwardation, meaning that, yes, prices are pretty high right now. But a couple of years out gas is back to $3, oil is back to $55 or whatever it is. I mean it's down [Phonetic] pretty quickly.

The interesting thing that, that is almost enabling though, is transactions to actually happen because people can get closer to strip pricing for their assets and people buying them, if you're reasonably confident about the future curve you might be willing to pay closer to strip because the strip is so backwardated. For us, we're looking for that long tail. We're looking for barrels five years, seven years, 10 years out there and those things are getting priced way down right now if that makes sense. So...

Erik Volfing -- Grand Slam -- Analyst

Absolutely. That makes a lot of sense.

Jason E. Brown -- President and Chief Executive Officer

And we're pretty hopeful like I said in there. And I think your -- Ryan's right. We're also pretty hopeful we'll be able to transact in the next six months, eight months [Phonetic] on something else that will support the dividend.

Erik Volfing -- Grand Slam -- Analyst

Excellent. Thank you again.

Jason E. Brown -- President and Chief Executive Officer

Yep. Thanks, Erik.

Operator

Thank you. [Operator Instructions] We have no further questions in queue at this time. I will now turn the floor back over to management for any closing comments.

Jason E. Brown -- President and Chief Executive Officer

Well, thanks again. Thanks for your participation today. And feel free to contact us if you have any other questions or comments. We appreciate the continued support from our shareholders and look forward to providing everyone with further updates on our business and potential targeted growth opportunities on our second quarter fiscal '22 earnings call that will be in the early February. Thank you.

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

Ryan Stash -- Senior Vice President, Chief Financial Officer and Treasurer

Jason E. Brown -- President and Chief Executive Officer

John White -- ROTH Capital Partners -- Analyst

Erik Volfing -- Grand Slam -- Analyst

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