Evolution Petroleum Corporation, Inc.

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Evolution Petroleum Fiscal Year End 2022 Earnings Release Conference Call. At this time, all participants are on a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. I would now like to turn the call over to Chief Financial Officer Ryan Stash. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to our earnings call for the fourth quarter and full year fiscal 2022. I am Ryan Stash, Chief Financial Officer. Joining me today is Kelly Lloyd, Interim President and Chief Executive Officer and a member of our Board of Directors. After I cover the forward-looking statements, Kelly will review key highlights along with operational results. I will then return to provide a more detailed financial review, and then Kelly 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. As 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. 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 13, 2022. With that, I will turn the call over to Kelly.

Thank you, Ryan. Good afternoon, everyone, and thanks for joining us for today's call. The fourth quarter marked a strong end to an exceptional fiscal 2022, and I want to thank our workforce for their continued dedication and hard work that drove the company's many accomplishments. During the 12 months ended June 30, 2022, we posted material year-over-year increases across the board, including production growth of 145%, revenue that was 233% higher, an increase of 550% in adjusted EBITDA, and approved reserves that were 55% higher than year-end fiscal 21, including replacing more than 550% of fiscal 22 production. We are focused on maximizing total shareholder return and optimizing every dollar that we invest. As such, we used the significant cash flow generated by our enhanced asset base to fund our development and operational needs, maintain our strong balance sheet through a rapid reduction of debt, and pay almost $12 million in cash dividends to shareholders during the year. We are proud that our consistent and longstanding program has returned approximately $86 million, or $2.61 per common share, of capital since December 2013. We have strong, long-life, and low-decline assets that will continue to support a substantive quarterly dividend for the immediate and long-term, benefiting our shareholders with a steady return of capital. A key highlight of the fourth quarter was the April 1st closing of our acquisition of natural gas weighted assets in the Jonah Field, located in Sublette County, Wyoming, that added 42.8 BCFE approved reserve inventory. We also saw a full quarter of operational and financial benefit from our purchase of oil weighted assets in the Williston Basin in North Dakota that closed on January 14th. The cash flow from these acquisitions has exceeded our expectations that were in place at the time of purchase. We look forward to working closely with the operators in both locations as they effectively develop the assets and leverage operational best practices to further support the long-term sustainability of our collective businesses. These two immediately accretive transactions follow our proven acquisition playbook executed during fiscal years 2020 and 2021, with the overall combination providing enhanced diversification of our product mix and reserve categories across an expanded geographic footprint in multiple key U.S. onshore plays. Most important, our enhanced asset base provides for significant cash flow generation that further supports our well-established shareholder capital return program, provides a visible source of funding for future targeted strategic growth opportunities, and places us in a strong position as we move into fiscal 2023 and beyond. During the fourth quarter, we produced 7,451 net BOE per day. which was 34% higher than the 5,578 net BOE per day that we produced in the third quarter. During fiscal 2022, we benefited from higher commodity pricing, and the fourth quarter was no exception. The combination of increased production and pricing, as well as prudent cost management for expenses that we can control, resulted in fourth quarter adjusted EBITDA of $21.7 million. a 76% increase from the third quarter. We generated significant operating cash flow during the fourth quarter, of which we used almost $16 million to pay down debt following the closing of the Jonah Field acquisition. Since June 30th, we have paid down additional debt and have $12.3 million outstanding as of September 1st. We remain committed to quickly paying down the remaining balance under our credit facility and expect to be debt-free by the end of the second quarter of fiscal 2023, assuming we do not execute on additional acquisition opportunities before then. We also used operating cash flow to pay our 35th consecutive quarterly cash dividend of 10 cents per common share on June 30th and are pleased to declare a fiscal first quarter 2023 dividend of 12 cents per common share to be paid at the end of September. As I mentioned earlier, our commitment to paying an ongoing substantive quarterly cash dividend to our shareholders is unwavering as it maximizes visibility for total shareholder return and is fundamental to our long-term investment thesis. In that light, we are pleased to announce a newly authorized share repurchase program. The Board has authorized a share repurchase of up to $25 million through December 31, 2024. We view our repurchase program as a complement to our dividend program so that we can augment our returns to our shareholders. Additionally, based on the current commodity price outlook, we don't expect the increased dividend or share repurchase program to limit our ability to complete accretive acquisitions or participate in any drilling on our existing assets. Looking at our fourth quarter results in more detail, Net production at Del High declined 9% from the third quarter to 102.1 thousand barrels of oil equivalent or approximately 1,122 barrels of oil equivalent per day. Driving the sequential decrease was NGL production that was 36% lower primarily due to extended downtime at the NGL plant in April related to turbine issues, as well as a natural decline in oil volumes. Denberry is the operator at Delhi, and they are continuing to perform conformance workovers and upgrades to the facilities. Hamilton Dome net production increased slightly to 37.4 MBOE from 37.3 MBOE in the third quarter, primarily due to a higher number of operating days during the fourth quarter. On a per-day basis, production declined slightly from 415 to 411 barrels per day. During the fourth quarter, we received 11 AFEs from Merritt for expense and capital workovers. We will continue to support them in their efforts to restore production at previously shut-in wells, adjust water injection locations and volumes, and execute on other targeted maintenance projects. Net production for our Barnett shale assets for the fourth quarter decreased 1% to 303.9 MBOE or 3,339 BOE per day. Diversified Energy has been very active since becoming operator last October, including running one workover rig continuously throughout calendar 2022 to date. Fourth quarter net production for our Williston Basin assets increased 2% to 44.4 MBOE or 488 BOE per day, of which approximately 80% was oil. During April, we saw extended downtime due to severe winter weather that temporarily reduced oil production levels and impacted our fourth quarter production. In the immediate term, we continue to work closely with the operator, Foundation Energy Management, on high-grading expense workovers, recompletes, and sidetrack drilling opportunities. Technical evaluations remain underway to assess and high-grade our Pronghorn, Three Forks drilling locations. As I discussed earlier, on April 1st, we closed on our acquisition of natural gas-weighted assets in the Jonah Field in Wyoming. Net production for the fourth quarter was 2,077 BOE per day for a total of 189 MBOE. This included one BCF of natural gas, or 88% of the production was natural gas. The Jonah Field acquisition embodies our continued sharp focus on long-life production low-declined reserves that generate significant cash flow. The transaction also provides access to attractive Western markets, and we will continue to work closely with Jonah Energy and support their future development efforts in the field. With that, I will now turn the call over to Ryan to discuss our financial highlights.

Thanks, Kelly. As mentioned earlier, please refer to our press release from yesterday afternoon for additional information concerning our fourth quarter and full year fiscal 2022 results. My comments today will primarily focus on comparative results between the fiscal fourth and third quarters. A key highlight of the fourth quarter was a generation of 21.7 million of adjusted EBITDA, which was a 76% increase from 12.3 million in the third quarter of fiscal 2022. Fourth quarter adjusted EBITDA was $31.96 on a per BOE basis, which was 30% higher than the third quarter. We continued to fund our operations, development capital expenditures, and dividends out of operating cash flow while also paying down $16 million in debt. Supported by our solid operational and cash flow outlook, we paid a dividend of $0.10 per share in the fourth quarter and declared an increased dividend of $0.12 per share for the first quarter of fiscal 2023, payable on September 30th to shareholders of record as of September 21st. This will represent our 36th consecutive quarter, or nine years, of paying a cash dividend. This is highly unique in the small-cap E&P space, but a clear representation of how we view the importance of returning value to our shareholders. Further evidenced by our strong cash flow generation and positive financial outlook, the Board has recently authorized a share repurchase program of up to $25 million through December 31st, 2024. we expect to fund the repurchase program with working capital and operating cash flows and do not expect to incur any debt. We view the repurchase program as a tax-efficient means to enhance our returns to our shareholders. Consistent with our conservative financial management, we remain squarely focused on ensuring we maintain a strong balance sheet. As of June 30, 2022, we had $8.3 million of cash and cash equivalents, working capital of $6.1 million, debt of $21.3 million, and liquidity of $37 million. As Kelly discussed, we have paid down additional debt since June 30th and have $12.3 million of debt outstanding as of September 1st. We did not enter into any additional hedges beyond what was previously disclosed in our last quarterly filing. Also, we remain below the threshold in our credit facility that requires us to add any incremental hedges. Looking at the fourth quarter financials in more detail, We grew total revenue to $42 million, which was a 64% increase from the third quarter. This included oil revenue, which increased to $18.4 million due to 6% higher sales volumes, primarily as a result of the closing of the Jonah Field acquisition on April 1st, as well as a 17% increase in realized pricing. An increase in natural gas revenue to $18.5 million from $6.1 million in the third quarter, primarily due to the Jonah Field acquisition and an 80% increase in realized commodity pricing. An NGL revenue that increased to $5.2 million due to the Jonah Field acquisition. This was partially offset by decreased volumes at Dell High due to downtime at the NGL plant in April 2022. Lease operating expenses increased from $12.1 million in the third quarter to $17.3 million in the fourth quarter. On a per BOE basis, lease operating expenses were $25.47 for the fourth quarter compared to $24.07 in the third quarter. Substantially driving the $5.2 million increase was the Jonah Field acquisition. Also contributing to the increase were higher charges in the Barnett for water hauling, chemicals, repairs, maintenance, and production taxes. General and administrative expenses increased slightly to $1.6 million from $1.5 million in the third quarter. Included in the fourth quarter was $700,000 in transaction costs and severance payments and a $1.2 million reduction in non-cash stock-based compensation related to the forfeiture of unvested shares in connection with the severance. Net income for the fourth quarter was $14.9 million, or $0.44 per diluted share, versus $5.7 million, or $0.17 per diluted share, in the third quarter, substantially driving the sequential increase was a Jonah Field acquisition and higher commodity prices. Adjusted net income was $15.1 million or $0.44 per diluted share compared to $7.7 million or $0.23 per diluted share in the third quarter. During the fourth quarter and full year of fiscal 2022, we invested approximately $1.8 million and $2.6 million respectively in development and maintenance capital expenditures. For fiscal 2023, We currently expect total development capital expenditures of $6.5 million to $9.5 million. This estimate includes upgrades to the Delhi Central Facility, workovers at Hamilton Dome, the Barnett Shale, and the Jonah Field, and low-risk development projects in the Williston Basin. This does not include development of the Pronghorn and Three Forks. As in the past, our spending outlook may change depending on conversations with our operating partners commodity pricing, and other considerations. So with that, I will turn the call back over to Kelly for his closing remarks.

Thanks, Ryan. Fiscal 2022 was clearly a transformative year for Evolution and its shareholders. Our Williston Basin and Jonah Field acquisitions have further diversified our product mix and expanded our operating footprint into additional prolific producing key U.S. onshore regions. Through these transactions, we have also secured further optionality to invest in low-risk organic drilling and development opportunities while maintaining and growing production with our ongoing partners. Most important, these strategic and immediately accretive acquisitions provide for increased visibility for a meaningful return of shareholder capital through our long-standing quarterly cash dividend program and our newly announced share repurchase program. Our board remains staunchly committed to maintaining and, as appropriate, increasing our dividend payout over the long term. We clearly recognize the tangible value of providing our shareholders with a consistent and substantive cash return on their investment, and we truly appreciate their support of our ongoing efforts. As in the past, we will continue to closely evaluate and execute on targeted acquisition opportunities that are immediately accretive, provide long-life established production, strategically expand our base of assets, and do not result in any material dilution. Any transaction must also clearly support our long-standing thesis of providing a significant total return for our shareholders. The oil and gas industry is inherently volatile, so we will continue to take the long view and ensure we maintain a strong balance sheet that allows us to succeed through the cycle. Our corporate goal is to keep our leverage below one times annualized EBITDA, and we are on track to pay down all of our outstanding debt within the next few months, assuming commodity pricing remains strong and we don't execute on any further acquisitions during that time frame. In conclusion, we believe our proven and consistent strategy of squarely focusing on the needs of our shareholders is a key differentiator for evolution. We will continue to pursue initiatives designed to maximize equity total shareholder return by optimizing the value of every dollar we invest on a risk-adjusted basis depending on where we are in the cycle. Our approach of building a targeted asset base of PDP reserves capable of supporting cash payments to shareholders has served us well over the past decade and will continue to benefit our shareholders for many years to come. With that, we are ready to take questions. Operator? Please open the line for questions.

Certainly. The floor 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 a speakerphone to provide optimum sound quality. Please hold one moment while we poll for questions. Your first question is coming from John White with Roth Capital Partners. Please pose your question. Your line is live.

Thank you, operator, and good afternoon. Congratulations on the very strong results for the quarter. Thanks, John. Yep, thank you, John. And just in terms of timing, have acquisitions, have additional acquisitions been put on hold until you find a permanent CEO, or could we see an acquisition before a new CEO is appointed.

So, really appreciate the question, John, and appreciate you coming on here because we know you are a valued follower of our stock and help us and help people understand it. So, really appreciate the question. Listen, the timing of an acquisition really will be or a potential acquisition really will be based on whether that acquisition exists. In other words, There's a pretty wide gap between sellers and buyers right now. The bid ask has sort of spread. But if the right deal were to come about, there's no reason to think we couldn't act on it if it required to be that case in a timely manner. I hope that makes sense. Listen, the goal is to get our CEO search done in an efficient manner and make sure we get the right person in place. But that said, if an acquisition happens before that is finalized, and it's something that's highly accretive, we'll be happy to go ahead and go forward with that.

I appreciate that answer, and I appreciate your kind words on my coverage. I would conclude by saying very nice move on the increased dividend and the stock buyback. I don't think I wasn't expecting, and I don't think investors were expecting, an increased dividend and not as large an increase in the dividend as was announced. And I wasn't expecting, and I don't think any investors were expecting, a stock buyback, especially of the size that was announced. So kudos to you for moving on those capital return items for shareholders and With that, I'll pass it on back to the operator.

Thanks, John. Thank you very much.

Your next question is coming from Donovan Schaefer with Northland Capital Markets. Please pose your question. Your line is live.

Hi, guys. Yeah, congratulations on the quarter. So, you know, I was pleased with the results because it seems to me like you did have – you know, you have more fields now, and so you have more assets to manage, but I still feel like maybe – I'd see this as kind of an above average number of kind of production headwinds, you know, with the winter weather impacts in the Williston. There's the NGL plant that was down at Dalhai. I know Denbury also, you know, had some issues with their CO2, the reservoir where they get their CO2. So, you know, CO2 injection was a bit lower. And yet, you know, The results were quite good. You know, I think as an analyst modeling everything, you know, the production numbers because of those reasons came in a bit lower than I expected, but then it was all made up for, it looks to me like basically the improved pricing differentials, you know, the basis differentials of Jonah Field, you're getting a nice, you know, 5% premium or something like that, you know, versus Henry Hubb. And, you know, a lot of peers end up selling at a significant discount because, you know, you've got transportation costs and all that stuff with pipelines. And then I was surprised to see oil actually, you know, you guys, the differential, the pricing differential on oil closed very significantly in the quarter. And that seems to have kind of made up for the rest of it. So even in spite of kind of the production headwinds, the thesis around oil getting better west coast pricing natural gas and maybe i don't know if there maybe there was improvement in the basis for the williston or something i'm not sure what's going on there but at a high level just am i characterizing that accurately would you consider this sort of above average production headwinds um you know there's all every quarter there's always going to be some issues that's just the nature of the business but that it seems like this was what I would think of as almost sort of above average, but then it seems to have been made up for with these differentials. Is that at a high level kind of accurate?

Yeah, no, thanks for the question, Donovan, and thanks for joining the call, so it's good to talk to you here. Look, I mean, I think you're right. I think, you know, as far as production goes, you know, we certainly had on the NGL side some headwinds at Dell High. And on the oil side, some headwinds in the Williston due to some of the weather in April. And really, actually, there's a little bit of windstorm in June, too. So there was a little bit of production headwinds, but, you know, differentials, to your point, did perform well. You know, we have seen, you know, some benefits in LLS pricing, as you know, in Del High. So that's helped our differentials in Del High. Williston came in pretty well on the oil side. And really, on the gas side, to your point, Paul Cecala, You know, we were, you know, obviously really pleased to see Jonah and the thesis we had and buying the asset sort of play out right so Paul Cecala, You know, we've seen a premium to Henry hub, which we had hoped for there and we we think and hope is going to continue right especially into the winter months so Paul Cecala, You know, I think overall, we were pleased with how differentials came in and even in spite of some production headwinds. But again, you know, that was sort of our thesis as well for diversifying our asset base, right? I mean, we have, you know, it's nice to have assets in different geographic regions and different commodities, and so when one asset's down, the other can pick it up, and, you know, we're hopeful that's going to continue kind of in the future here.

Okay. Yeah, and actually, so on the West Coast pricing differentials, you know, it's, I'm based in Los Angeles, and so, you know, I've been subjected to these flex alerts coming out of the California independent service operator with the grid. You know, they're increasing the penetration of renewables, and that means potentially more peaking plants. I think Governor Gavin Newsom came out and actually, I believe it was a proposal for the state to become the owner of a natural gas plant just to prevent it from shutting down and having this kind of, you know, almost like an emergency backup. So from a thesis standpoint, with the Jonah field acquisition, is that a trend you expect to see kind of continue? Like do you, do you see the pricing differential selling into, I think the Opal hub, which I guess is a bit more Northwest, but, um, are you expecting that trend to continue? Have you already seen some of that widen in July, August, September? Um, or is it kind of, it's, it's already sort of been realized in this second in the, um, fourth quarter you guys just reported and you're allowed to see that, but it'll just kind of stain. What's the thinking there?

Yeah, one thing I would say, so the way we're doing with our marketing, we obviously just took over the field, but we're marketing currently on six-month contracts, so kind of summer-winter, right? And we're actively going out currently for winter contracts, so we should have a better feel certainly next quarter what sort of the winter pricing will look like, and I hope it to be better than what we got on the summer pricing, you know, historically the assets gotten a premium to Northwest Northwest pipeline, which is, you know, which has been, which has done really well compared to Henry hub. And so we're certainly optimistic and hopeful for the winter months that we're going to see an even better premium than we saw in the summer out there.

Okay. And then I'm just curious, I might've asked you this before, but you know, the inflation reduction act, There's the emphasis on kind of carbon capture, storage, sequestration. You know, Denbury, I think the CO2 they're providing for Del Highfield, you know, that's not CO2 coming off a coal plant or something. It's actually like a naturally occurring CO2 reservoir that they're pumping out of. But, you know, are there incentives in place where if you were later to to expand the dell high field maybe move you know up dip or down dip or go after some of the wings that you know rather bypass and others but um yeah like if if that gets expanded into incremental phases where the phase can be deemed as a you know sort of standalone capital expenditure project and all that stuff are there potential benefits in the Inflation Reduction Act, or would that just not apply unless you're actually getting CO2 from, you know, coal plant or something?

I mean, so, Ryan, I'll take it. So, Donovan, the answer to that question is it remains to be seen, right? A couple parts of it, right, CO2, I guess you would have to consider fungible if it goes into the same line. So, we need to figure out It's our connection to the green line. Do we actually get credit for some percentage of that or not? It's something we're looking into for sure, though.

Yeah, I mean, I think as far as the Reduction Act specifically, right, I mean, it extended the 45Q sort of credit, right? And that's something, as Kelly said, we're doing some work around. And really, I mean, we're hopeful. Denver has been in the process, which I think we said in the past, of getting Del High certified. as a carbon capture field, and there's a whole process around it. They've done it with one or two other fields, and they're doing it with Delhi, too. Once that happens, you know, then the next step would be, you know, are they going to actually start taking, to Kelly's point, industrial CO2 from the contracts they've signed and the green line as well? And, you know, so we're a little ways off on that, but, you know, we're certainly looking at that pretty closely, and if there is a a benefit for us to take a 45Q credit, you know, with any CO2 that gets sequestered in the field, we're certainly going to do that.

Okay. So, yeah, not like a, oh, the act was passed and we all missed some hidden benefit and we should all be jumping up and down. Ensuring it's more of a gradual, you know, unfolding and kind of penciling it out at each point.

Okay. I would say, Donovan, we, at this moment, we have not described any value to that. Yeah. That doesn't mean that may not change, but I would value evolution on its other components at the moment.

Makes perfect sense to me. Okay. And then for the share repurchase program, so, you know, it doesn't look like, you know, the CapEx for 2023, you know, it's a healthy number, I think, compared to what it's done historically. And, you know, it's a non-op program. as a non-operated participant, you know, that can spread further or go further than just the face kind of dollar amount because, you know, you have a minority portion of every activity that's happening. But, you know, just it still seems relatively small versus the amount of cash I have or I expect you guys to be generating. So that should we be, I understand you're looking, you know, you're always open to acquisitions and everything, but if If we don't see acquisitions materialize, does that add an incremental sense of, you know, kind of more quickly pulling the trigger on buybacks? And the other thing would be in terms of buybacks, you know, there's now the 1% tax. I think that I can't remember when that goes into effect. That may not be going into effect this year. But do any of those factors kind of influence things where it should give us greater confidence in relatively near-term execution on the buyback versus otherwise. You know, sometimes companies establish these programs and, of course, there's no obligation to actually take action on them. So, you know, I'm just curious how you're thinking about that and if there is some impetus there coming from the capital spending versus cash regeneration and, you know, potential tax at some point, though, of course, a small amount, 1% tax, but. Yeah, anything there? That'd be great.

Yeah, no, all good questions. I think the first step from authorizing the program from the board's perspective is to give us another tool, right, in the toolbox, if you will, for shareholder returns. And so, you know, we felt it was a good-sized program for kind of the cash flow outlook we see and the size and being able to execute on it. Obviously, we're also going to be limited to some extent based on, you know, 10B18 rules, which is, you know, depending on how much you can buy on any given day. So, There are some inherent limitations from the SEC, but we're going to scale the program appropriately for where we feel the intrinsic value of the stock is on any given day versus the market value and other opportunities we have. So I think you're seeing it similar to us in that we do see a fair bit of cash-free cash flow generation, and we still think even with the buyback program and the dividend increase, we still have plenty of dry powder to go out and prosecute acquisitions. But as we see the market unfold, we're certainly going to potentially adjust, right? And to your point, you know, there are some, you know, there is some pending sort of SEC sort of rules. You mentioned the excise tax, which certainly we took into consideration, and other reporting rules of the SEC that, you know, it's going to be a little bit of a dynamic animal here as we go forward, but it's certainly something that we wanted to have in place to execute on.

Are you thinking about... Exactly.

Don, just the point is, listen, we needed to start somewhere. We need to make sure that it fits as a complement to our total shareholder return program. So that's where we started. And as Ryan said, it's very dynamic. It's fluid. It's going to be something we revisit on a fairly continual basis to make sure we're doing the best.

Yeah. And I guess the way I'm thinking about it, and I guess I'm wondering if you think about it this way as well, you kind of have the two vehicle or the different methods of providing returns to shareholders. One of them is the dividend, and you're trying to really establish yourselves as a company that provides this kind of consistent dividend with a large reserves base to support it over a long time frame, allowing enough, retaining enough cash flow to yourselves to grow and sustain that dividend and grow the dividend over time. And along the way, growing the reserves base involves You know, you can do it organically yourselves through, like, the Williston Basin. You know, that gives you one option. You can make asset acquisitions. That's one. Another option, you can also acquire, you know, other companies outright. And they're all kind of a different valuation multiple, and they all add your reserves. And in a way, I'm kind of thinking of the share buyback program as basically giving you a way to buy back a larger share of your own barrels, right? So it's sort of like, well, this company is undervalued with respect to its reserves and we're trying to, you know, feed and sustain our dividends. We can go after this company or we can go after this asset they're selling or we can organically develop our own reserves. Or, you know, if the dividend is 12 cents a share, we can spread that out even further and back that up even more by reducing the number of shares outstanding. Sort of increases reserves per barrel or, you know, buying back shares and taking a larger ownership for the remaining shareholders of the barrels you already have in the ground. To kind of fit in that paradigm, were you able to kind of look at all those different sources of barrels, essentially?

For sure, Donovan. I mean, these are exact type of conversations we have at the board level. There are going to be times where we think our most accretive acquisition is going to be our shares. And and we want to have the opportunity to take advantage of that.

Okay. All right. Well, that's super helpful. I'll leave it there, and I'll take the rest of my questions offline. Yeah, but congratulations on the quarter, guys. Awesome. I applaud the dividend increase. Well done.

Yeah, well, hey, thanks again, Donovan, and thanks again for your interest in following us as well. We need people out there telling the story, so thank you.

Your next question is coming from David Locke at Old Mammoth Investments. Please pose your question. Your line is live.

Good afternoon, gentlemen. Kelly, nice to meet you.

Nice to meet you as well.

First off, I'd like to thank you and Bob and the board for heeding the message of the market and pausing your acquisition activity a little bit and accelerating the shareholder returns. You're getting nicely rewarded for it. today, which is nice to see.

Well, thank you. And that is our job, first and foremost, make sure we're setting the company up for long-term success and evaluating what are the best options to invest what is ultimately shareholders' capital in the highest return to them. So that's for sure the way we look at things.

So a couple CapEx questions, if you wouldn't mind. The first thing is the numbers that you gave in the press release, which looks like just sort of blocking and tackling things on the existing assets. Would you expect that that would be enough investments to hold your production plus or minus flat from here?

No, I mean, I think that's a great question. And again, I would say from a production standpoint, it's probably what we budgeted at least is just what's known, right? And that's, to your point, a lot of workovers, blocking and tackling, kind of return to production. There's a little bit of development in there, and I think we mentioned in the Williston, not on the full development of the Pronghorn or Three Forks locations that we're still evaluating with our partner foundation, but there is some with some other sidetrack drilling there. So I wouldn't say that. in and of itself is going to be enough to keep production completely flat, but we do think it's going to help a rest of the decline, as we've seen from Diversified and the Barnett Shale specifically, and we certainly think it's going to help out in the Williston.

Okay, so if I'm thinking about maintenance capex, I should add something to that, to the budget for fiscal 2023.

I think that's fair. If you're looking at sort of to come up with a maintenance capital number, which would be, you know, which we could get from either drilling, you know, organic opportunities or acquiring assets that we've done in the past, yes, you would need to add, I would think, a little bit of extra capital to come up with a true maintenance capital amount.

Okay. And then moving on to the potential development plan in the Williston area. What's sort of the timeline for making that decision? To what extent are equipment and humans and whatnot to make that happen available? And then do you guys have to make any internal investments in people to make that happen? Or will that essentially also get covered by your operating partner?

So very... Very good question, and it has a lot of details to it. As you know, there can be several ways that this goes. It could be our operating partner wants to go gangbusters and drill like crazy faster than we do, and it could be the opposite. We're working together. We have a very good relationship with Foundation, and so we are together working on this, trying to figure out the best plan that will suit everybody. And in ways that we're going to be happy. And so it's kind of hard to answer that because depending on how it shakes out can affect your answer, I guess, is the question. But I do want to let you know that we are actively looking at the bigger ones, the pronghorn three forks. This is something we're... assessing and high grading on a very active basis together, and we're looking at it, and if and when the time is right, then you'll see something from us. The other side of that is the sort of, there's some Bakken vertical recompletes that we can do together. There's also some BirdBear NISQ PUDs that we could do together. So there's, it's a priority, right? Competition for dollars, and Ultimately, the best one will win out, and that's what we're going to do, if that makes sense. Okay. Yeah, that makes total sense.

To the extent that a rather large bunch of AFEs show up on your lap, either by your election or theirs, how would you approach that financially? Would you try to hedge any of the future production or just sort of sit back and say, you know what, we've got a lot of cash flow, so we can absorb the risk if we drill these wells, but then commodity prices fall.

Yeah, that's something that we would discuss further, but philosophically in general, if we decide to take the leap and drill, we're going to do it because it's a standalone project that makes sense at our projected commodity pricing. So... In general, the board does not choose to be hedged. We'd rather remain unhedged. We think people invest in us because they want exposure to the commodity markets, and it's our job to do better when things are going up and also outperform when commodity prices are going down. So in general, we want to stay away from hedges unless necessary.

Yeah, I mean, I would just add real quick, David, to that. I mean, we would, you know, as with... how we've been conservative in the past, you know, we would drill within cash flow, right? We're not going to outspend cash flow to drill. And so, you know, in that sense, we're not going to be taken on debt to where we would be worried about needing to hedge to pay down that debt, right? As Kelly said, you know, we would certainly evaluate the economics at a lower deck than strip, certainly on a test case or sensitivity case, if you will, strip. But, you know, we're not going to do the project unless we think it makes sense. And again, we're going to stay within cash flow.

Okay, so then I should think of growth kind of like as any sort of internal drilling growth you guys will fund internally, and then to the extent that you do acquisitions, you'll probably go out and utilize some external capital subject to that one-times EBITDA constraints that you sort of self-impose on yourselves.

I can say this. It's not a horrible way to look at it. Okay.

Hey, thanks a bunch. I, for one, was expecting the increase for what it's worth. Maybe I was the only one. But I'm really glad, and congrats on the performance of the stock today.

Well, thank you, and thanks again for your interest. It's great to have folks on who – look, when you have some really good news, it's nice that people understand that it's really good news. So thank you for doing that.

Your next question is coming from John Bear with Ascend Wealth. Please pose your question. Your line is live.

Thank you. I'll echo all the other comments and congratulate you on the good quarter and the increased dividend. Those are always wonderful to get. A lot of the color you just provided in a previous conversation there were ones I was going to put out in one way or another, but I guess I'll kind of look at it in a bigger sense, and that is on any kind of additional drilling going on in these various basins, do you have a preference at this point to look at gas development, predominantly gas development as opposed to oil, given that we're going into the winter season and we've got some pretty pretty decent spot prices out there.

I think if you look at our asset base, right, I mean, really, the Williston is the one area where we have, you know, really one, PUDs on the book, but two, you know, potential locations to drill, which is obviously oil-weighted, right? So, I mean, philosophically, you know, I'm not saying that I would disagree with your point where the gas curve sits, and certainly... We've had conversations with Diversified, for one, about prosecuting any locations in the Barnett, given where prices are. And at this point, they're certainly always looking at things, but that's just not what they do as a company. They're kind of focused on the blocking and tackling, and they're doing a great job of it on the PDP and getting that better on the asset. Well, I don't disagree with you philosophically on potentially looking at gas. You know, the opportunities as our portfolio sits today for us to control kind of drilling there just doesn't exist.

Yeah, I would say in the sort of to be able to drill a well and get it online in a timely manner to take advantage of any sort of real near-term differentials in prices, I just don't think that exists for us right now. I think when we do this, it's going to be based on a longer-term outlook for what the commodities are going to be.

Okay. And I guess another question, changing gears here a little bit, but there was a question earlier about acquisitions. What's the sense right now? Are you seeing a lot of deals being presented to you, or how active is that? People sitting on what they have right now, given that you've got pretty favorable commodity prices.

Yeah. So, look, I think we're in a point in the cycle where commodity prices are relatively elevated versus historical norms. It's led to a situation where I think most sellers are producing some significant amounts of cash flow and aren't really in a position where they feel the need to sell. potential buyers, unless they have a real need to or some reason to be highly aggressive, are kind of wanting to price deals at a reasonable discount to either their internal price deck or the strip. So sellers are printing cash and don't really need to sell and want front month pricing forever. Buyers kind of want a discount to the back-related strip, and it's leading to a pretty wide bid-ask spread. So I will say this, we're seeing lots of deals. The flow is still out there. I think there will be, and there are currently, you just got to find them. There's some highly accretive transactions out there. They're just a little bit harder to find. The last point on this I want to say is, The beauty of what our team has accomplished, and we have some outstanding professionals here. You're talking to Ryan on the phone. He's one of them and the rest of the folks here. They've built a diversified portfolio. Long life, low decline, very clean, soon-to-be pristine balance sheet, terrific, highly regarded operating partners, highly functioning, highly motivated team that can execute on any deal we look and evaluate any deal we look at. We have the capital to do anything. So if we get in a position to execute a deal, we can. But we can sort of live out that philosophy that no deal is better than a bad deal. And we're in a position where we can ensure that any M&A activity we consider will be done at metrics that we will want to transact at rather than have to. So I hope that helps you let us know where we are in that philosophy.

Oh, yeah. No, very good. I appreciate you taking my questions, and good luck in the next couple of quarters. Thank you for calling.

Really appreciate your interest.

Once again, if there are any remaining questions or comments, please press star 1 on your phone at this time. Please hold a moment while we pull for any additional questions. We have an additional question from David Locke with Old Mammoth Investments. Please pose your question. Your line is live.

Hey, so... Just a quick question on the M&A environment. If you sort of look at Foundation and Jonah and what you paid per flowing barrel or flowing MCF from those deals, where is kind of the ask now in the market from owners? And where's the bid, too, I guess?

So, yeah, I have a... I don't have it in front of me, but I can get back to you with this. I've got a chart where we've been tracking the deals. Of course, there's not enough that you can say everything is indicative, but there is a trend line if you normalize by gas or oil. It's moving up for sure on a flowing MBOE basis fairly steadily from where we did it, where we last transacted. I'll say this. The Jonah deal It is looking like a stellar purchase at the time.

Okay. So you'd say that if you had to do those deals, like if those deals were on the market today, they'd be at significant premiums to what you paid earlier in the year? Unquestionably.

Yeah, no, not a lot of surprise, right? I mean, metrics are probably trending closer to the $50,000 to $60,000 per flowing barrel. in the market, you know, whereas when we bought our assets, it was, you know, probably roughly half of that, right? So, I mean, the one point I do want to make on the M&A environment, you know, because John asked one just earlier too, you know, so the Jonah deal was one that, you know, came back to us, right? It was one that the broker wasn't getting a lot of traction and they brought us in sort of at the end. And so, you know, those are certainly opportunities that I could see coming up here. You know, the next few months there has been, I feel like the activity may have slowed a little bit from the broker side of just seeing, you know, teasers come out. But there are a lot of teasers that have come out and a lot of deals in the market that you haven't necessarily heard that have closed. And so I could see things coming back around, right, for sellers that really want to get out. So that's something that we're always on the lookout for because, you know, we are value buyers, clearly.

Yeah, it's tough to be value buyers when everybody is a wash in cash.

This is true. You're right.

Thanks again, Josh.

Thank you.

There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Kelly Lloyd for any closing remarks.

We appreciate everyone for being here and taking the time to listen and participate in our call. We appreciate your continued support of our efforts to enhance our long-term value. and maximize our total shareholder return. As always, please feel free to contact us if you have any additional questions. Ryan and I and our team here look forward to formally speaking again when we report our first quarter fiscal 23 in November. So thanks again. Really appreciate it, guys.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.