Evolution Petroleum Corporation, Inc.

Good day, ladies and gentlemen, and welcome to the Evolution Petroleum first quarter fiscal year 2022 earnings release conference call. At this time, all participants have been placed on the listen-only mode, and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Ryan Stash, Chief Financial Officer. Sir, the floor is yours.

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 10th, 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 risk and uncertainties that are listed and described in our filings at 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.

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 Burnett Shell assets that were acquired on May 7th. I'm pleased with our team who was 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 of 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 reservoir pressure due to the suspension of CO2 purchases from July 15th through August 20th for preventative pipeline maintenance. During the scheduled pipeline repair, the CO2 recycle facility is operated as usual, providing about 80% of the typical injection CO2 volumes. The pipeline is owned and operated by Denberry, and on August 21st, the pipeline maintenance was completed and resumed flowing CO2 at a rate of approximately 85 million cubic feet per day. The operator anticipates being able to increase its rate up to about 110 million, 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 a 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 JL AFTA for the first quarter of fiscal 2022 382,115 BOEs, or 4,153 BOEs per day. This is 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 7th. As we discussed in our last call, Blackbeard operating, the primary operator of our Barnett Shell 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 that the Barnett assets once 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 saltwater 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've seen 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've been proud of our commitment to return meaningful value to our shareholders through a consistent dividend program. This includes increasing our first quarter fiscal 22 dividend to 7.5 cents per common share of stock, and that was paid in September. Supported by continued improvement of our business and economic environment, we are pleased to declare a second quarter dividend that will be paid on December 31st to shareholders of record as of December 15th. With 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.

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, 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. This can 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 30th. Now, I will 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, the seller of 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 in a recent amendment, the Eighth Amendment, that was finalized on November 9th. 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 four 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 the 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 work over activity at Hamilton Dome. Partially offsetting this increase in LOE was a previously mentioned suspension of CO2 purchases at Del High, from July 15th to August 20th to perform the necessary pipeline maintenance. This combination of lower CO2 purchase and the lower operating cost nature of our now Barnett Shell natural gas wells resulted in LOE costs 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 Shell 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 in the full quarter of production for the Barnett Shell. For the three months into September 30th, 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 work over projects and will 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 to $2 million, primarily consisting of performance workover and maintenance capital projects. Also, as Jason mentioned, a capital spending program has not yet been established for the Barnett scale, but also, as he had 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.

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. But 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 released our inaugural corporate sustainability report. And while we currently do not operate any of the assets in which we have ownership interests, we view our environmental, social, and governance, or ESG, programs and initiatives as key to our strategy to further differentiate evolution both now and in the future. ESG will be a consideration as we evaluate future creative opportunities to grow our asset base and reserves. Following our born-on-shale acquisition, we remain eager to continue to grow 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.

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. If you wish to withdraw your question, you may press star 2 to leave the queue. We do ask that if you are listening on speakerphone to please pick up your handset for optimum sound quality. Once again, if you have any questions or comments, please press star 1 now. And our first question today is coming from John White at Roth Capital Partners. Your line is live. You may begin.

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

Hey, John.

I was really glad to see the strong results all the way around, and congratulations on the increased borrowing base. Thank you. Some of the Hamilton Dome workovers were included in LOE. Are there more of those coming in the next quarter or so?

You know, 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, 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-priced environments, and two, to get that forced 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 were in the 31.50 before, and maybe even better than that, more of an ongoing thing. Although the next quarter it might be somewhere in the middle. Does that make sense, John?

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

Okay. No. I think they're finalizing their transition services agreement with Blackbeard this month. So we would anticipate... being able to have that. We just 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 AFE 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 those wells that were previously producing. I think there's four wells that were making about 450 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 ASE 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 a 1.25% interest. It's a small piece that are operated by a few other operators. Diversified is the main operator for, and so this is one of the other ones. So it wasn't a significant thing for there, but there are people standing up rigs in the At some point, some of those locations might be of value to us, so we're going to be looking at that over the next quarter as well.

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

Thanks, John. Thanks, John.

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

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 towards the final settlement with Tokyo Gas. What's involved in that?

So, yeah, if you recall, it took us a while 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 1st of this year. So when we closed in May, right, we received a portion of what Tokyo Gas had received, which was 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 close finally, but there's actually probably even a little bit more as it's taken It took the prior operator, Blackbeard, a while to get things transitioned over. So there's a decent amount that we will probably expect to receive when we close here on the final settlement, which is basically truing up all the revenue that they received from January 1 to now.

Okay, so we're basically expecting this to be a positive. It's not that you owe them any more money, right? It's them paying you extra money?

Correct.

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, would any of that be part of this, or is that just completely dead?

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 filed. and it was backed off because the operator was also selling Blackbeard to Diversified, they chose to just go ahead and close this fight of the lawsuit. So we kind of stayed away from that. If it got remedied, we would be fine to make a run at 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 free and clear, then we would probably take a swing at it.

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, I guess, this final settlement. So some of it will go to pay off, I guess, that $4 million that you have. I was actually a 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, I mean, 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?

Well, this is a pretty thoughtful board and has a reputation long earned from being very fiscally disciplined and prudent. So I think what you're feeling here is a real opportunity reticence to go too aggressive to raise the dividend, not wanting to lower it again. We feel like the reputation's really built around we pay our dividend. We've only lowered it twice 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 10 cents, 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 it's, yeah, for sure. Right. To kind of, you know, I don't know, have a little bit more runway, I guess. Okay.

Yeah. I mean, I would just add real quick. I mean, you know, when we, when we have discussions on dividend policy, I mean, we look, you know, five plus years out. Right. And so if you're looking at years four and five, as you probably know, the strip's highly backwardated. So, you know, things look a little different, right? 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, you know, we felt being more prudent given kind of the backwardation in prices and quite frankly, you know, keeping some powder available as, you know, acquisition opportunities that we see.

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?

Well, what he just, no, definitely not the 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 Brian just said, though, is that the strip is pretty backward dated. 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 years out, gas is back to $3, oil is back to $55 or whatever it is. I mean, it's down pretty quickly. The interesting thing that that is almost enabling, though, is transactions 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 pricing. because the strip's so backward-headed. For us, we're looking for that long tail. We're looking for barrels five, seven, ten years out there, and those things are getting priced way down right now, if that makes sense.

Absolutely.

That makes a lot of sense. And we're pretty hopeful, like I said in there, and I think that Ryan's right. We're also pretty hopeful we'll be able to transact in the next six, eight months on something else that will support the dividend.

Excellent. Thank you again.

Yep. Thanks, Eric.

Thank you. Once again, ladies and gentlemen, if you have any questions or comments, please press star 1 at this time. We have no further questions in queue at this time. I will now turn the floor back over to management for any closing comments.

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 early February. Thank you.

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. We thank you for your participation.