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spk10: Good day, ladies and gentlemen, and welcome to the Evolution Petroleum Third Quarter Fiscal Year 2022 Earnings Release Conference Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Ryan Stash. Sir, the floor is yours.
spk06: Thank you, and good afternoon, everyone, and welcome to Our earnings call for a third quarter of fiscal year 2022. I'm Ryan Stash, Chief Financial Officer. Joining me today is Jason Brown, President and Chief Executive Officer. After I cover the forward-looking statements, Jason will review key highlights along with our operational results. I'll then return to provide a more in-depth financial review. And finally, Jason will provide some closing comments before we open it up and take your questions. 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 with the SEC. Actual results may differ materially from those expected. Now, 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 moving forward. Please note that this conference call is being recorded, and if you wish to listen to a replay of today's call, it'll be available by going to the company's website or via recorded replay until August 9th, 2022. With that, I'll turn the call over to Jason.
spk01: Thank you, Ryan. Good afternoon, everyone, and thanks for joining us for today's call. As always, we appreciate your time and effort and giving consideration of our company as part or potential part of your investment portfolio. Our fiscal third quarter was a bit of a watershed moment for our team. We were able to close our third acquisition, enter into definitive agreements on our fourth acquisition, return the dividend to pre-pandemic levels of 10 cents a share per quarter, and upgrade our staff with a few key hires, all in a rising commodity price environment. I'm very proud of the work this small team has been able to do and execute as they prove themselves to be capable of sourcing, valuing, transacting, and managing our interest in oil and gas properties. This allows us to pay a consistent and substantive substantive dividends to our shareholders. We were extremely pleased with our overall results from the third quarter, which were highlighted by continued free cash flow generation and payment of an ongoing meaningful cash dividend to our shareholders. A key highlight for the third quarter was closing of the purchase of oil-weighted assets in the Wilson Basin in North Dakota. That was on January 14th. And on April 1st, we closed the acquisition of natural gas-weighted assets in the Jonah Field located in Sublette County, Wyoming. As such, we will see full period of operational and financial benefit from the two acquisitions in our fourth quarter, which should help drive a solid end to fiscal 2022. and places in a great position for continued success moving into fiscal 23 and beyond. During the third quarter, we produced 55.79 net BOE per day. That was about 13% higher than the 49.57 net BOE per day that we produced in the second quarter. Our third quarter also benefited from higher overall commodity pricing. The combination of increased production and pricing, as well as our continued focus on managing costs we can control, resulted in adjusted EBITDA of $12.3 million. This is about 20% higher than the second quarter. During the third quarter, we once again generated operating cash flow in excess of development capital expenditures, which supported the payment of our 34th consecutive quarterly cash dividend on March 31st. Additionally, due to the continued strength and growth of our business, we're pleased to declare a fourth quarter dividend of 10 cents per common share to be paid at the end of June. With the fourth quarter dividend, Evolution will have paid out approximately $86 million, or $2.61 per share, back to stockholders as cash dividends since the inception of our dividend program on December 31st of 2013. Now let's look at our operating results in a little more detail. Net production and dental high for the third quarter grew about 4% from the second quarter. to 112,494 BOE, or approximately 1,250 BOE per day. This increase is attributed to consistent runtime of the NGL plan during the third quarter, following the turbine maintenance and interrupted operations in the second quarter. Oil production in Delhi continues to be impacted by the nine-month suspension of CO2 purchases during the calendar of 2020 due to repairs of the purchase supply pipeline. As previously discussed, the result has been lower reservoir pressure that Denberry has worked diligently to restore to pre-2020 levels. Just as a reminder, Denberry operates the field in addition to owning and operating the CO2 purchase pipeline, and Evolution did not incur any pipeline repair costs. Denberry has been able to increase volumes of CO2 since December of 2021, and we have seen some results of that effort in production volumes. However, we still have a long ways to go in restoring reservoir pressure. We will continue to monitor and anticipate improvements over the next 18 to 24 months. Net production for the Barnett shale assets for the third quarter grew 8% to 307,318 BOE, or 3,415 BOE per day. This includes the decision to adjust the production mix in fiscal 22 to capture the most favorable commodity prices and maximize the overall field operating cash flow. We have been pleased with Diversified Energy's efforts since becoming an operator last October. Diversified is running one work-over rigmarole workover rig continuously throughout the calendar of 2022. We look forward to participating with them on projects that will provide attractive ROI for our shareholders. In Hamilton Dome, production was essentially flat at 37 312 net barrels. There were a few fewer days in the quarter, so the volumes are slightly less, but it's essentially the same. Our operating partner's merit remains focused on maintenance projects, including continued restoration of previously shut-in wells, and strategic adjustments to water injection location and volumes. As I mentioned earlier, we're pleased to close our acquisitions of certain Wilson Basin assets in mid-January. Net production for the partial third quarter was 43 510 BOEs, which was approximately 83% oil. As reported, this is 483 BOE per day. However, remember that that represents a 90-day period. We ended up the quarter at a daily rate around 565 BOE per day. is a little more representative of the 77 days in the quarter that we own the asset, as well as our anticipated levels of production going forward. Technical evaluations are underway to assess and high-grade potential drilling locations in the Williston assets. We will let the geomechanical and reservoir analysis inform our economics and subsequent capital investments and development drilling plans. We anticipate those beginning sometime in fiscal 2023. With that, I'll turn the call over to Ryan to discuss our financial highlights.
spk06: Thank you, Jason. I'll now share some highlights from our strong results for third quarter fiscal 2022. As I mentioned, please refer to our press release from yesterday afternoon for additional information and details. But some of the key highlights include adjusted EBITDA increasing 20% to $12.3 million from $10.2 million in the second quarter of fiscal 2022. Third quarter adjusted EBITDA was $24.58 per BOE, which was 9% higher than the second quarter. As Jason mentioned, we once again funded all operations, development capital, and dividends out of operating cash flow and maintained our strong balance sheet with $13.4 million of cash on hand, $20 million of debt as of March 31st. Now, supported by our solid operational and cash flow outlook, as Jason mentioned, we paid a dividend of $0.10 per share in the third quarter, and we'll pay one in the fourth quarter. that will be payable on June 30th to shareholders of record as of June 15th. At the end of the third quarter of fiscal 2022, working capital was $15.4 million, liquidity was $43.4 million, including the $13.4 million of cash I just mentioned and $30 million of availability. Now, as we announced in early April, we closed on our Jonah Field acquisition on April 1st and borrowed $17 million, bringing our total outstanding amount to $37 million. Since closing the acquisition, we have subsequently paid down $4.25 million. Based on the current robust commodity price outlook, we expect to be able to rapidly pay down this remaining debt. As a further result of closing the joint acquisition, the margin collateral value as defined under our credit facility was increased to $160 million. As a reminder, the company is required to enter into hedges on a rolling 12-month basis when borrowings exceed 25% of the margin collateral value. And since we're below this minimum threshold of 25%, we're not required to enter into any additional hedges at this time. However, on April 1st, we did enter into hedges for 25% of the expected incremental natural gas production from the Jonah acquisition through March of 2023. We utilized costless callers, which is consistent with our strategy of retaining exposure to commodity prices. Details of all of our existing hedges will be available in our 10Q filing. Looking at the third quarter financials in a little more detail. We grew total revenue to 25.7 million, which is a 15% increase from the second quarter. Oil revenue increased to 14.9 million due to 8% higher sales volumes, primarily as a result of the closing of the Wilson Basin acquisition in January 14, as well as a 30% increase in realized pricing. Natural gas revenue decreased to 6.1 million from 9.2 million in the second quarter. Now, as we discussed in the last earnings call, the second quarter included Additional natural gas volumes in the Barnett as a result of an adjustment for prior periods to reflect ethane rejection that had occurred in the field. Excluding these adjustments, revenue in the second quarter would have been approximately $8.5 million. Also contributing to the decline in revenue from the prior quarter was a 16% decline in the realized price of natural gas. NGL revenue increased to $4.7 million due to lower NGL volumes last quarter as a result of the adjustments made related to the ethane rejection in the Barnett that I just mentioned. As a reminder, the operator decides to reject ethane into the gas stream to capitalize on a more favorable natural gas pricing environment to maximize overall cash flow. Also contributing to the increase in NGL revenues was higher consistent runtime at the Delhi NGL plant, leading to higher NGL volumes at Delhi. Lease operating expenses increased 12.1 million in the third quarter. Contributing to this increase was $400,000 in higher CO2 costs at Delhi compared to the prior quarter. primarily did higher volumes, higher CO2 volumes and increase in the CO2 cost per MCF as a purchase price, as we mentioned before, for our CO2 is based on the price of oil. There was $1 million increase in other lease operating costs, which was primarily a result of the closing of the Wilson Basin acquisition in January. Total lease operating expenses for the third quarter was $24.07 per BOE, which is just 3% higher than the prior quarter of $23.40. General administrative expenses decreased 17% to $1.5 million from $1.8 million in the second quarter. Contributing to the overall decrease were lower consulting, legal, and compensation costs in the third quarter. Net income from the third quarter was $5.7 million, or 17 cents per diluted share, versus $6.8 million, or 20 cents per diluted share in the second quarter. The decrease in net income was attributable to a $2.4 million unrealized loss on derivative contracts recorded in the third quarter, which was offset by increased income from operations, primarily due to higher production commodity prices. Adjusted net income for the third quarter, excluding selected items, came in at $7.7 million, or $0.23 per diluted share. Please see our press release for reconciliation of our non-GAAP measures. For the third quarter, we invested $100,000 in capital expenditures and conformance projects. We currently expect that our operators will continue conformance projects and likely incur additional maintenance capital expenditures as oil prices remain strong. It was Jason who mentioned that the Barnett show we expect to see one continuous work over rig running throughout calendar 2022. And in our newest asset, the Jonah Field, we recently received two AFEs from the operator, Jonah Energy, for re-completes that are scheduled for our fiscal fourth quarter. This was a nice surprise for us as we actually didn't base any of our acquisition economics on any activity at Jonah, so it's nice to see Jonah Energy looking to do some work to take advantage of the pricing environment. At our Wilson Basin properties, our Operating Partner Foundation is planning some re-completes and development projects that are scheduled to begin in the first quarter of our fiscal 2023. Now, for the remainder of our fiscal year, we anticipate total capital spending in the range of $500,000 to $1 million. Our preliminary budget for fiscal year 2023 is set at $4 to $6 million, and I would note that this does not include any potential drilling in the Williston Basin or really any more incremental activity at Jonah, as we had not budgeted for that at this time. And with that, I'll turn the call back over to Jason for his closing remarks.
spk01: Thanks, Ryan. Over the past several months, we've made significant progress in further positioning evolution for continued success and providing increased visibility for meaningful return of shareholder capital through our long-term quarterly cash dividend program. Our Wilson Basin and Jonah Field acquisitions have further diversified our product mix and expanded our footprint into two additional prolific producing basins in onshore U.S. We also have added optionality to invest in low-risk, organic drilling and development opportunities while maintaining and growing production with our operating partner. As we discussed today, we clearly saw a positive impact from the Wilson Basin acquisition in our third quarter results, and we look forward to a full period of results during the fourth quarter. Our fourth quarter will also have the benefit of operating results from the Jonah Field acquisition. These two recent strategic transactions represent our latest success in our targeted efforts that began in late 2019 to increase immediate and long-term cash generation for the benefit of our shareholders through the strategic expansion of our geographic footprint of assets and production mix. We've accomplished our significant growth in value creation without material shareholder dilution or onerous debt. And most importantly, we have continued to return value to our shareholders through a constant dividend over the past eight years. With $37 million of incremental debt from the two transactions, we estimate that our outstanding debt will remain well below one-time annualized EBITDA. An increase in free cash flow generation will allow rapid debt reduction as we continue to support our dividend strategy. Our corporate goal is to keep our leverage below one times annualized EBITDA, and we currently are on track to pay down our outstanding debt associated with these two acquisitions well within the fiscal year. I would also note that we have strategically grown the business with minimal increases in overhead, which is expected to dramatically reduce our G&A cost per barrel metrics. With the addition of our ownership interest in the Wilson Basin and Jonah Field, we have transformed the company from having ownership in a single field in 2019 to one that has now a presence in five key U.S. oil and natural gas plays. We've also expanded our operating partner base as we are now working with five proven and respected operators that are squarely focused on ensuring long-term sustainability of their operations and working closely with their business partners and other stakeholders. As we've discussed in the past, maintaining and ultimately growing our common stock dividend remains our top priority. With the Wilson, Basin, and Jonah field acquisitions, we have increased our size and scale while diversifying our asset areas and product mix. This has allowed us to enhance the visibility of our cash flow generation for the next decade to fund our dividend and consistently return value to shareholders. We will continue to look for and evaluate accretive acquisition opportunities that meet our requirements of long life, established production, and disciplined growth opportunities, both of which support value creation for our shareholders. With that, we're ready to take questions. Operator, please open the line for questions.
spk10: Thank you. Ladies and gentlemen, SOAR is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please vote when we poll for questions.
spk11: Thank you.
spk10: Your first question is coming from John Morris at Roth Capital. Sir, please ask your question.
spk04: Good morning, guys, and nice quarter. Hey, John. Thanks.
spk06: Thanks, John.
spk04: I know you talked about it in your opening remarks, but could you give us a little bit more on Del High in terms of what Denberry is thinking about the injection rates, and what's Denberry thinking about drilling some more wells there?
spk01: Well, they're doing a reassessment. We're doing that of our own right now. We're kind of doing a deep dive, and we've got a what we kind of feel like is a CO2 expert doing a deep dive technically on our side. They're doing the same on their side on their asset team. And we're looking at how to further develop the field. They focused their efforts this year in what we would call the remainder of fiscal 22, basically calendar 23 for them. And they focused on conformance projects. And there is a, which we already reported about a month ago, work over with heat exchanger. Now, that's a pretty big deal, and we're very excited about that. That's going to be able to, you know, John, sometimes in the summertime when the temperature's too hot, we have to lower the CO2 volumes. In the wintertime, it's too cold, and sometimes it freezes. This is going to help both of those to have more consistent delivery of CO2. That really is the priority right now, is delivering as much CO2 as possible. They repaired the line in October of 21, I'm sorry, October of 20, but they really weren't able to kick up what we would call extra volumes above what was just needed to maintain until December of 21, so just the last four or five months. We've already seen a response, sort of a flattening, which is great, and even a turn The rock, the good news is, over the last 15 years, the rock has always responded very well to pressure. So, like I said, we're going to be monitoring that over the next 18 to 24 months. So, we think more than additional wells at this point, consistent delivery of that CO2, which is going to increase pressure, is the best thing they can do, and they're aligned with us on that.
spk04: Okay, thank you. That sounds positive. And the additional AFEs at Jonah and Williston, those are all workovers? There's no new drills?
spk01: Yes, that's right. That's right. We're also doing kind of a deep dive technically in the Williston Basin right now. But Jonah, that's a very populated drill down to 10-acre spacing and much of it. It's a 3,000-foot reservoir. So, There's quite a bit of work over opportunities to do, and I think we got pitched a couple of AFEs this week, which we're really excited about any work that's going to happen there. Gas prices are very strong, and even stronger in that part of the country headed west, as we've discussed before. So happy anything they're doing up there, and we're excited about that. We had great technical meetings with our operator foundation, our partner up in the Williston Basin. And I've got to say, we took the whole team up there in late March and met with their team. We met again in Denver with some engineers that we're working on to do kind of some geomechanical and reservoir studies there. Very, very happy with what we see. Very happy with the cooperation. I'm very pleased with that relationship so far. So I wouldn't anticipate, and we'll let everybody know well in advance of that, but I wouldn't anticipate anything starting up there in terms of beyond workovers until next year. probably early calendar 23, at least the second half of our fiscal 23.
spk04: Well, that's the kind of activity you like. Keep the capex up and then bring on some increased production.
spk01: That's the same thing with Barnett there. They've got a workover rig just running this. We took the whole team to meet, diversified as well. Their operating team is great, many of which have been with the asset for many years, but just didn't have the capital support and diversified after taking over that asset in October. It's providing the ops team with capital to do work that they probably have been wanting to do out there for years. So they're getting to it, and we're appreciative of that. Thanks very much.
spk02: I'll pass it on. Thanks, John.
spk10: Thank you. Your next question is coming from John Blair, Ascend Wealth Advisors. Sir, please ask your question.
spk09: Thank you. There's no L in the last name. Hey, Jason and Ryan. Nice quarter. Got a couple of questions here. I want to kind of circle back to Delhi. More specifically, I was wondering if Denberry were y'all internally involved are looking at doing anything with regards to the phase five areas that has kind of been on the books for a while, and or the Mangle unit that you've had in some past slide decks?
spk01: You know, we haven't discussed the Mangle unit. Their capital program or budgeting process starts in August, so we're going through, started our reserves process now, and which kind of concludes in about that same time. And like I said, we're doing a deep dive on Delhi to kind of come up with what we would propose, I guess, John, is the best way to say that. They seem to express some cooperation, which is great. The mingle unit specifically, I think that we had a higher price environment before that was even considered. We're clearly in a higher price environment now, so that's something that we want to bring back up on the table. But I wouldn't... Nothing's been discussed about it right now. In terms of phase five, they're doing a re-look at that as well. As part of their restructuring process, most of those projects got, I guess, I don't want to say clipped, but most of those projects got set aside when they went through their restructuring and sort of need to be re-proposed internally. So that process and that study is going in parallel on our side and their side right now to hopefully get submitted into their program next fall or in the fall. Fall of 23, you mean? All kinds of opportunities. What's that? You said fall of 23? Is that your meaning? No, this next fall for their budgeting process. Oh, this coming fall. Okay. We had said that that probably was going to be 23, potentially 24. You know, it basically just got pushed off a couple years. So I think we've asked them to take a harder look at it and see if we can schedule a little bit further. But they're a large company and have capital competition in all the different asset areas. And we're the non-op person, so we're doing what we can do. But it's still on the table. Let's say that.
spk09: Yep. Ryan addressed my point. guess on your capex maybe for next year was four to six million and that would not include any you know new drilling proposals I guess rather than workovers is that right yeah no that's right John it's just really what we expect in each and really work over in conformance type projects for each process okay and and Is that including the two AFEs that you just recently got from Jonah, or was that kind of estimate prior to receiving that?
spk06: Yeah, it was prior to receiving that from Jonah. So, you know, obviously if activity picks up there, we'll, you know, we take a look at that budget every course. We'll have to take another look at year-end to see if we need to update it. But, you know, obviously we had a range there, so certainly, you know, some things will happen, some things won't. But, yeah, we hadn't considered Jonah activity really when we had put that together. Yeah.
spk09: Yeah. And then that bump up, because you'd said in your prepared press release, half a million to a million in CapEx for the fourth quarter, so that's kind of, you know, I just said, okay, times four, so you get $4 million on the downside and maybe $6 million and up. How much of that might be attributable to higher service and material costs? In other words, you know, work over rig costs and so forth.
spk02: How much is that hitting you?
spk01: We're building in about 20%, John. Yeah. Now, a company like Diversified, they're being pretty salty with what they're pulling together. They've got tubing in other areas, and they're doing a lot of transfer stuff that's been pretty great and saved everyone a lot of money. But that won't last forever. So I think in general, I think 20% is the number If we were staying on the fourth quarter of 500 to a million, I'd say probably we're going to be on the upper end of that now, inclusive of Jonah. But it's not different than we kind of talked about. Remember, a small amount of maintenance or work over capex in each one of these plays to sort of flatten production and do the best we can.
spk09: Very good. Thanks for taking my questions.
spk01: We haven't seen the massive crunch, John, to answer that just a little more specifically, on tubulars and, you know, Fraxan and all the things that the supply chain, particularly in the Permian, has jammed people up and led to some exorbitant prices. So we're anticipating building in kind of a 15% to 20%, but we're also hopefully that some of those things will get worked out over the course of the next year.
spk09: Right, right. One last question about M&A. What's the M&A landscape for you right now? Given prices are up, are people being real proud of their projects and not really willing to trade them off, or there's more activity offering properties to sell because of the higher prices?
spk01: Well, John, it's kind of both. The backward-dated curve is actually making it to where people can get things done still I think there's an instability in the market that's priced in so people just aren't quite comfortable long term. As people get more and more comfortable in the go forward and believe the prices go forward, the back end of that curve is gonna raise and everything's gonna get a whole lot more expensive, probably untenable. But at the point now, we still think it's within striking distance. Our appetite is, is not quite as aggressive as it was, so we can be a little more choosy now. We are seeing quite a few failed deals, and we're seeing some private equity-backed portfolio companies with assets that they're starting to get a little market therapy, and if they don't sell now, when are they going to sell? So we still feel pretty hopeful that there might be something that we can pull in over the next six months.
spk09: Great. Great.
spk11: Thanks very much.
spk10: Thank you, sir. Your next question is coming from Jeff Robertson, Water Tower Research.
spk07: Sir, please pose your question. Thank you, Jason. A question on Delhi. I think you said 18 to 24 months for the reservoir pressure to respond to increased CO2 injection. Do you have an opinion or a view as to how you think production will behave as the reservoir responds?
spk01: I do, but it's being informed by this deeper dive that we're doing now. I think it's probably going to be even a longer haul than that. My best guess is that at 24 months, we would hope to be back on decline of where we were prior to it going off in the spring of 2020. So it doesn't mean that we would be back to that rate. I think it was 5,500 eight-eighths production at the time. I think we wouldn't expect to get there, but if that was just to do its normal roll-off of eight or nine percent annually in 24 months now, we'd be back to that curve. I think that's my best guess. The reserves are there, and we'll get them. It's just going to take a little longer now. And like I said before, the ROCs always responded to pressure. It's something they would get to a lot quicker if we could pump 120 million cubic feet a day. They're probably just not going to run that hard. So right now they've been averaging around 95 million cubic feet a day for the last couple months, and we're seeing a softening, but it's just going to take a while, Jeff.
spk07: Are they doing any, is the injection as it's going in, are they changing the way they're looking at any of the patterns, repressure the areas that they know they lost.
spk01: Yes, that's also part of this kind of deep dive. We're doing a deep pattern analysis that we actually haven't done here before. And that's part of our reserves process. And we feel like we've got someone who's had 30 years experience doing nothing but CO2. So that's been a real addition for us. Hopefully that's going to inform and help us propose to them. They're doing the same thing over there. There's generally where everythings are open and the team is constantly working on conformance projects as different zones start to gas out. They rework those and put it in the zones that are not gassed out. They're constantly working the field and they have returned conformance projects and that's been very, very needed because there was two years they didn't do anything. That's really all I can say. We're doing a deep dive, and we're going to have, we feel like, a better understanding of it over the next couple months.
spk07: Jason and Jonah, you said you all were pleasantly surprised for the two AFEs that you've gotten from Jonah Energy. Are those just opportunistic with where gas prices are, or are they trying a couple of projects that, if successful, they might lead to additional work over projects in your fiscal 23?
spk01: We do believe there'll be more, yes. I think that the company's kind of been focused on other areas, and the ops team has sort of expressed that they were excited to have a partner that wanted to participate, and they've been very forthcoming with information. We've got the asset teams together, or the ops teams together, and that's been really great, too. So it's important for us to be an active non-op participant, and that starts with a pretty proactive relationship with these guys and gals. I guess I'm a little bit surprised because it is fairly developed, but there's quite a few areas that they wanted to pursue before in lower-price environments that just didn't make sense that are very attractive now. So we did not bank on that, so it would be unquantified upside for us. We just bought it for the PDP roll-off, so very excited about that.
spk07: A question, Ryan, can you shed a little light on how fourth quarter or fiscal fourth quarter LOE might look with a different mix of assets now that you'll have a full quarter from Williston, but also a full quarter from Jonah?
spk06: Yeah, so I mean, so the LOE itself, do you saw Jonah or sorry, Williston was almost a full quarter, right? We're only short about 15 days. So really what we would hope to see is it lowering a little bit, right? Because obviously Jonah being a little bit lower cost, we're talking in kind of the, you know, $10 to $11 per barrel range. So when we add that in on a pro forma basis, we would certainly hope that the LOE would reduce at least a little bit from kind of the $24 roughly that we were at this quarter. That would be our expectations right now, Jeff.
spk02: Okay. Thank you.
spk10: Thank you, sir. Your next question is coming from David Locke, Old Mammoth Investments. Sir, please pose your question.
spk03: Hey, guys. How you doing? Thanks for taking the question. So based on what you said about CapEx for next year, you add the dividends and CapEx together, you've got about $5 million of commitments a quarter for cash out the door. You're obviously... bringing it in the door a heck of a lot faster than that. So can you sort of describe for me what the waterfall of the uses of that excess cash is?
spk01: Well, David, it's a good problem. It is a problem. We've got to figure out what to do with it, I guess. But no, we've got the optionality of these locations. And I just described a situation where The M&A environment is probably tightening, I think still potential, so we're looking at two or three deals there as well. We're now starting to consider some things where we would potentially use some of our shares as part of a deal, a smaller transaction, in the sense that if our prices are up, because our stock's up and their prices are up, you can kind of, if you're both up, you can still make a relative deal It starts to become a little more difficult to pay just straight cash for deals as prices continue to increase. So the M&A market is something that we're definitely right in the middle of, and I am hopeful that we can pull something else in and put some cash to work, as we'll probably have our debt paid down by, I don't know, by the holiday season, I think, towards the end of the calendar year. So we're bringing in cash quite a bit. But the other thing is this potential drilling locations that gives us some optionality we've never had before. And if you're ever going to drill when oil is over $100 and you've got oil wells that you can go drill development, we're working that in parallel at the same time. So if we have a potential to make an acquisition, which I hope that you're hearing, I'm definitely hopeful on that, then we'll pull the trigger there. If the bid ask is a little too wide, we've We've shown over two decades that we're going to be disciplined there. And now we have some optionality to put some capital to work drilling. So that's probably what the next 12 months look like.
spk03: Okay. How much more expensive, roughly, would you say the A&D market is now relative to when you did the Williston and Gemini deals?
spk11: That's a good question.
spk01: I think about things in terms of, as an actual acquisition guy, in terms of flat pricing. So right now, the current strip starts at around 102 or something, and over five years gets down to 70-ish, something like that. So it's kind of, I think of it as a five-year average. And we look for assets that are more 10, 20 years long. So even kind of look at a 10-year out. But we generally hold the fifth-year flat. So if you look at a five-year average, it's going to be somewhere in the 78 range, 75 range. 10-year is going to be closer to 72 range. I think when we bought the Williston, when we first started negotiating that deal, it was more in the 63, 64 range flat. If you look anywhere in the last 3, 5, 7, 10 years, average oil is going to be about 57. So we're clearly in a higher-priced environment than we were. But going forward, Could we get something where we're transacting somewhere in the 67 to 70 range flat? That's still probably tenable, and it's still probably gettable at this point. That's higher than we did with the Williston, but percentage-wise, it's within that 15%-ish range. Obviously, all this depends on the quality of the asset. Something like Hamilton Dome that's been producing for 100 years, it's just super flat, but you can You can pay a little more in the near term because you've got a longer term production that's going to support our dividends. So our business strategy lets us have a little wider lens, I guess, on deals like that. Brian, anything?
spk06: No, I agree with that on M&A. I did want to circle back up, though, on your question, David, on kind of use of proceeds for cash. The one thing that we did mention is dividend Obviously, it's the board looks at dividend every quarter. And so, you know, dividend increase is certainly not off the table, depending on the outlook and how the assets perform. So, you know, as you look at spectrum of things we can do, certainly debt pay down, right, as Jason mentioned, we're looking at new deals and dividend and returning capital to shareholders, you know, even above and beyond the current one is certainly on the table. But it's something the board looks at every quarter.
spk03: Okay, thanks. And so if I could just ask, One more maybe slightly annoying question, which is if you're finding the bid-ask spread in the M&A market to be a little wider than you're liking, how does including what is probably an underpriced stock in the transaction help close that gap?
spk01: It has to be a group that understands that the value of the stock in combination with additional assets is going to likely be stronger. And so the premium that they're wanting from the assets that the market's not currently giving them, it's a way for us to get into those assets in what looks like a more reasonable sticker price. but then the combination of this helps our stock, and then they get the benefit, and that's where they get the uptick. So, you know, that felt a little better a month ago. Things are a little volatile right now, so I'm not disagreeing with you, and it's constantly a moving target. The bid-ask that we're seeing that's too expansive are people who are just trying to take advantage of the strip price, which I also mentioned earlier, there's a lot of failed deals out there, too, so... got to be the right set and it's got to work for both parties. It's not a perfect environment, but we feel really good about it because we're in a really good spot to be able to... No is an acceptable answer for us right now. Not to beat it to death, the only thing I would add to that
spk06: It's just, you know, what you're not going to see us do is go buy, you know, probably a PV20 sort of PDP decline asset with potentially cash in stock, right? What Jason's talking about is sort of more of a strategic potential deal where you're looking at a relative value between two companies. And if they, you know, if the potential partner would give us the value that we think our stock is worth and that the shareholders would appreciate, it's something we could potentially transact on, right? But we're not going to necessarily go issue it first. you know, issue stock right now for cash, right, and go buy some more, you know, PDP assets.
spk03: Oh, yeah, I wouldn't have expected that. And then if you guys turned around and started putting some significant capital into the Williston, would you hedge some of that early production or would you just take the risk that it's going to work?
spk02: I'd have to take a look at it at the time.
spk01: We're working our revolver, so some of that depends on the bank. And the hedging, we generally like to stay away from it as much as we can. We want to be a call option. We feel like we've got the balance sheet to endure it. But we would look at it.
spk06: Yeah, I think we... I think we would consider it. I think, you know, really what we would also look at is only engaging in projects that we feel really good about the returns on, right? Even in a lower potential price environment, right? That's the other way we would look at it is running pricing scenarios, right? I mean, hedging is one thing we could do to try to lock in a return on drilling, but we could also, and we do look at sensitivity analysis on, well, what do the drilling economics look like at such and such a price, right? Call it 65 flat or, you know, more mid-cycle pricing. So I think we'd probably look at everything when we evaluate those opportunities.
spk01: The other thing, David, is there's always the potential for an increased dividend. That's on the table as well. There's lots of things that we can do with the cash, and we don't like to back up from the dividend, so we want a long-term support of that. So all of these things are on the table to sort of figure out how to grow and return capital to shareholders, return value to shareholders through an increased stock price, a dividend, additional assets, or... It's all on the table.
spk03: All right. Hey, thanks a bunch for engaging with all the questions.
spk10: Thank you. Your next question is coming from John White of Roth Capital. Sir, please pose your question.
spk04: Thank you, Operator. Just responding to the comment of, I believe I heard the words low-priced stock. According to my comp tables, Evolution trades at some pretty nice multiples. But on to my questions. Jonah is the last deal you closed on. So I'm wondering, now that you're in the ownership position, have you seen anything that you weren't expecting or have there been any surprises on operations or land or any surprises?
spk01: With Jonah, no, actually, the only surprise that they want to do some work. We were very pleased with that. So, no, that's been really good. They prepped a small little piece, but, you know, we reported that. But, no, other than that, we're very, very pleased with it.
spk04: I wasn't trying to pull negatives out of you, but I just wanted to ask. In your answer on the M&A question, you mentioned there had been some recently failed deals. Any more color on that as to why they failed, or were they big, were they small?
spk01: No, some smaller ones, kind of the whole range. We're really focused on things kind of in that $25 to $50 million range. We would consider things a little bigger, but there's been several over the spring, and Anytime prices move the way they do, and it's been pretty volatile, it's kind of hard to hold deals together. So we've seen a couple things that might have a chance of coming back around, but nothing specifically. I also wanted to say on the Wilson Basin, you asked me about any surprises on the Jonah Basin. On the Wilson Basin, the board and I were actually able to go up there last week. We had our board meeting off-site, and we were able to travel to the Wilson field and met with our foundation, our partner up there, and wow, I was very, very impressed. We did a pretty thorough environmental due diligence where we take photographs of everything, but it was really great to see them in person and just how well-run of an operation that is. We were pretty happy. I think the board was very pleased to get to meet with their HSE personnel and their production foremans and superintendents and whatnot. It was an impressive operation, so I was a little bit surprised.
spk04: Glad to hear it, and it's good to go to the Williston in the spring.
spk01: Yep.
spk04: Okay, that's it. I'll pass it on.
spk10: Thank you, sir. Your next question is coming from Zach Pankratz at BRZ. Sir, please pose your question.
spk05: Hey, guys. Actually, the caller two ago kind of nailed all mine on the cash flow side. You know, the only thing I would add is with regards to your dividend comments, would you be considering a base plus maybe a variable dividend As an option here, the reason I ask is historically evolution has been attractive for its strong balance sheet and it's higher than pure yield. And now you look at today, you've got a lot of royalty companies, other non-op companies, and even some of these smaller EMPs that are getting more competitive from a yield standpoint. So just trying to understand maybe what that dividend methodology kind of looks like
spk06: Yeah, I mean, I think we've traditionally obviously had kind of paid kind of this 10 cent per quarter dividend, you know, historically, which has, you know, obviously as there's been periods of stress, it's been lowered and then back up. You know, I think going forward, you know, the board likes to be thoughtful and look out on a long spectrum. You know, as Jason's kind of mentioned in the past, we look at things on five, 10-year basis. So we want to have, you know, at least a base dividend, if you will, if you're using that analogy, that we can support and pay for multi-years. We've had the discussions at the board level about a base plus variable. Personally, I'm not convinced that the market really pays or gives credit to companies for that yet on that kind of variable piece. It's hard to sort of look at that yield on an annualized basis, right, to really buy a stock on a yield basis looking at that variable. So I'm not sure that we're there yet on the variable piece, but certainly we look at wanting to have a base dividend that we can support over a longer-term period. I don't know, Jason, what do you?
spk01: Yes, it's all on the table. I think in general we just want to get probably recognition for it. So we want something that's sustainable. We don't want to be too reactive. We want something that we can deliver and not have to back up from. And I think that's what we've displayed in our entire history. So a variable dividend, do you really get credit in the market for it in the share price and the market share? Don't know. I think probably most people would say no. But we'll see. We're not afraid of raising the dividend.
spk06: It's something we're going to keep our eye on. I mean, you make a valid point, right? I mean, when we started paying a dividend in 2013 and even as recent as a year or two ago, there weren't a lot of E&P companies outside of, which aren't really around anymore, the MOPs that really paid a consistent dividend, right? You're starting to see that. Because investors demand it, right? So it's something that we are certainly keeping our watch on.
spk01: We're just particularly focused on not getting on a treadmill that's not sustainable, where we have to start making poor oil and gas decisions on buying things and supplying inventory to just try to meet an ever-increasing dividend yield, which is kind of the trap that some of the MLPs got into.
spk05: It's a good problem to have.
spk10: Thank you. Your next question is coming from Charles Finney of EFW Partners. Sir, please pose your question.
spk08: Hi, guys. Great quarter. New shareholder at EPM. As I look at this array of sort of high class decisions that you have in front of you now, uh, with that, you referenced paying down debt, paying dividend, et cetera. Uh, maybe even buying back stock. Nobody's mentioned that. Um, I just wonder how, and then of course acquisitions are a big part of the array of options that you have in front of you every day is I try to understand a little better how you make these decisions. trade-offs, I find myself wondering, well, what's personally motivating management? Is it, if you don't mind my asking that question, is it, aside from salary, are you guys motivated entirely by share price or are you getting bonuses for doing M&A deals or other kinds of things? Can you shed any light on that whatsoever? Thanks very much.
spk02: Sure.
spk01: Our comp committee, we have base salaries. I think they're pretty modest compared to our peer groups, but we have an STIP and a short-term incentive and a long-term incentive. So each one of those are driven with a whole array of metrics that are in our proxy. So I think this last year we had a certain percent of our base, like, I think my base bonus could be as much as a one times my salary, but like, I don't know, 25% of that maybe was been on giving an acquisition of a certain size or whatnot, I think a dollar amount. And then some of it was earning free cash flow per share was a decent chunk of it. And then there's certain investor relations, you know, conferences and, you know, just kind of a variety of things that the boards decides they want management to focus on throughout the year, and it's our job to go out and try to make those things happen. Analyst coverage and whatnot, that's a little more difficult. Then the LTIP, or the long-term incentive, is more kind of a percentage of our salary and shares that some of it vests over three years on the time period, maybe a third of it, and then two-thirds of it are based on where we rank in terms of a peer group or a total Shareholder return in terms of I think this year it's a double hurdle where we've got to get in the top quarter of our peer group and then also a double digit return or whatever over a certain period of time to get full price or full target. So all of that will be in the proxy. So it's kind of a combination. I think management owns about 9% of the company. Our largest shareholder management is our chairman, who owns, what, five and a half or so, whatever, and I'm about a point and a half. The rest is held by the rest of the board and management. So we all have some portion of shares that motivate us, so we're all owners.
spk06: Yeah, I mean, I would say we're, as Jason mentioned, we're focused on total shareholder return, right? Yeah. you know, that's a big driver. So share price, yes, but obviously the dividend is one piece of shareholder return, right? So we look at both pieces as we comp ourselves to our peer group and as we try to perform for the shareholders.
spk11: Thank you.
spk10: Once again, if there are any remaining questions or comments, please press star 1 on your phone at this time. Sir, there appear to be no further questions in the queue. Do you have any closing comments you'd like to finish with?
spk01: Sure. Once again, we appreciate everyone's time today and look forward to speaking in September when we report our fiscal 22 fourth quarter and full year earnings. On behalf of our full team and our board, I want to thank you and our shareholders for their continued support of our strategic long-term efforts. As always, please feel free to contact us with any other questions or comments. Have a good day.
spk10: Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.
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