Evolution Petroleum Corporation, Inc.

Good day, and welcome to the Evolution Petroleum first quarter fiscal year 2023 earnings release call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Ryan Stash, Evolution's Chief Financial Officer. Please go ahead.

Thank you and good afternoon everyone. Welcome to our earnings call for the first quarter of fiscal 2023. Joining me today is Kelly Lloyd, a recently named 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 our 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 risks 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 webcast replay of today's call, it will be available by going to the company's website. 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. Before I begin my prepared remarks, I'd like to thank the board for naming me president and CEO. I've gotten to know the full team here at Evolution very well since I was named the interim CEO in June, and I'm truly excited to lead this talented group of professionals as we move forward and continue to make progress towards and ultimately achieving our long-term goals. I am fully committed and aligned with the board in executing the company's strategy of disciplined financial management and accretive capital allocation with a goal of maximizing total shareholder returns. I look forward to leading evolution in this next chapter. The first quarter marked a solid start to fiscal 2023. I want to thank all of our team members for their continued hard work and dedication. We're pleased with our overall results for the period, which was highlighted by another period of strong free cash flow generation, which we used to fund operations, capital spending, shareholder dividends, and to reduce a significant amount of debt. We made a commitment to continue to pay down borrowings on our credit facility, and we delivered on that commitment by reducing debt by $9 million, a decrease of more than 40% since June 30th. Our strong cash flow generated during the first quarter was also used to fund the payment of our quarterly cash dividend of $0.12 per common share, which was 20% higher than the $0.10 per share that was paid during the fourth quarter of fiscal 2022. Our board declared a cash dividend for the second quarter of fiscal 2023 of 12 cents per share. This will mark the 37th consecutive quarterly cash dividend paid by the company since we began this return of capital program in December 2013. There are very few small cap EMP companies who can say they have consistently paid a dividend for that length of time throughout several tumultuous commodity price cycles. We are proud to say that over the past nine years, Evolution has paid over $90 million, or $2.73 per share, back to our shareholders. We have strong, long-life and low-decline assets that will continue to support a sustainable quarterly dividend for the immediate and long-term, benefiting our shareholders with a steady return of capital. Maintaining and ultimately growing the payment of a quarterly cash dividend remains a top priority. In further support of our shareholders, on September 8th, our board authorized a share repurchase program of up to $25 million of our common stock through December 31st, 2024. Turning now to operations. In the first quarter of fiscal 2023, we produced 7,598 net BOE per day, which was 2% higher than the 7,451 net BOE per day that we produced in the fourth quarter of fiscal 2022. The first quarter benefited from higher natural gas and NGL production, as well as higher natural gas pricing. This was offset by lower oil and NGL pricing versus the fourth quarter of fiscal 22. Having said that, we have been encouraged to see an upward trend in oil and NGL pricing recently, which will support additional cash generation in the second quarter of fiscal 2023. Looking at our first quarter results in more detail, Net production at Jonah Field for the first quarter was 181 MBOE, or 1,967 BOE per day. This included 958 million cubic feet of natural gas, or 88% natural gas. The Jonah Field is our most recent acquisition and, similar to our other assets, is highlighted by long life and low decline reserves that generate significant cash flow. In addition, the transaction also provides access to attractive western markets where we continue to see favorable natural gas pricing. First quarter net production for our Williston Basin properties increased to 45 MBOE, or 489 BOE per day, of which approximately 82% was oil. We continue to work closely with the operator, Foundation Energy Management, on high-grading expense workovers, recompletes, and sidetracked drilling opportunities. In addition, technical evaluations remain underway to assess our pronghorn and three-forks drilling locations. Net production for our Barnett shale properties for the first quarter increased 8% to 329 MBOE, or 3,576 BOE per day, of which approximately 77% was natural gas. This is a result of Diversified Energy's capital workover program, which has been very active since becoming operator 11 months ago. Hamilton Dome Field net production increased slightly to 38 MBOE or 413 BOE per day. We will continue to support the operator Merit Energy 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 at Del High Field increased slightly to 106 MBOE, or approximately 1,153 BOE per day. Denbury is the operator at Del High Field, and they are continuing to perform conformance workovers and upgrades to the facilities. Before I turn the call over to Ryan, I'd like to point out that we recently posted our 2022 Corporate Sustainability Report to our website, which details our commitment to high-quality, transparent, and comprehensive ESG efforts and disclosures. I am proud of our employees' commitment to sustainability and our Board's hands-on oversight, which is demonstrated by the Board's newly formed Sustainability Committee. environmental stewardship, sound corporate governance, and contributing positively to our employees and the communities where we work are cornerstones of our culture. We invite you to review our report to learn more about our sustainability efforts and our plans to continue to work with our third-party operators who share our core values and are committed to being good environmental stewards as we responsibly produce our energy resources together. 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 first quarter fiscal 2023 results. My comments today will primarily focus on financial highlights and comparative results between the first quarter of fiscal 2023 and the fourth quarter of fiscal 2022. A key highlight of the first quarter was our continued solid generation of adjusted EBITDA, which included $17 million during the period. Adjusted EBITDA was $24.33 on a per BOE basis. During the first quarter, we continued to fund our operations, development capital expenditures, and dividends out of operating cash flow while also paying down $9 million in debt. Supported by our solid operational and cash flow outlook, We paid an increased dividend of 12 cents per share in the first quarter and declared a dividend of 12 cents per share for the second quarter of fiscal 2023, payable on December 30th to shareholders of record as of December 15th. We clearly recognize the strategic importance of returning value to our shareholders and remain focused on the continuity of this program. As Kelly discussed, in September, our Board authorized a share repurchase program of up to $25 million through December 31, 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. One of the key reasons that we have been able to execute on our long-term program to provide a consistent return of capital to our shareholders over the past nine years is due to our conservative financial management. As such, we remain squarely focused on ensuring we maintain a strong balance sheet. As of September 30, 2022, we had $10.7 million of cash and cash equivalents, working capital of $6.5 million, and debt of $12.3 million. We grew our liquidity to $48.5 million, a 31% increase since the end of the fourth quarter. As Kelly discussed, we were pleased to pay down $9 million of debt in the first quarter. Since the end of the quarter, we have paid down an additional $7.5 million and expect to pay down the remaining balance by the end of the calendar year. We did not enter into any additional hedges beyond what was previously disclosed in our last quarterly filing, and we remain below the threshold in our credit facility that requires us to add any incremental hedges. Looking at the first quarter financials in more detail, our total revenue of $39.8 million was 5% lower than the fourth quarter due to a combination of factors, including lower oil revenue due to 2% lower sales volumes and a 16% decrease in realized pricing, lower NGO revenue, which was primarily due to a 16% decrease in realized pricing. The reduction in oil and NGO revenue was partially offset by a 7% increase in natural gas revenue, primarily due to a 3% higher sales volume, and a 4% increase in realized natural gas pricing. The result was an average realized price per BOE decrease of 8% to $56.93. Lease operating expenses increased from $17.3 million in the fourth quarter to $19.1 million in the first quarter. On a per BOE basis, lease operating expenses were $27.35 for the first quarter compared to $25.47 in the fourth quarter. Primarily contributing to the increase was higher gathering, transportation, and other expenses in the Barnett shale associated with increased production volumes and commodity pricing, as well as changes in estimates from prior periods. Also contributing to the increase was higher workover expense in the Williston Basin. Partially offsetting the overall increase in lease operating costs was lower CO2 costs at Del High Field associated with a decrease in crude oil prices from the prior quarter. As a reminder, our CO2 costs at Del High Field are directly impacted by the price of oil. Therefore, lower oil prices result in lower CO2 costs. General and administrative expenses increased to $2.5 million from $1.6 million in the fourth quarter. The current quarter included a little more than $300,000 in non-recurring transaction and severance costs. Also, the prior quarter was positively impacted by a $1.2 million reduction in non-cash stock-based compensation related to the forfeiture of unvested shares. Net income for the first quarter was $10.7 million or $0.32 per diluted share versus $14.9 million or $0.44 per diluted share in the fourth quarter. Contributing to the sequential decrease was lower overall commodity prices and higher lease operating and general administrative expenses for the reasons I previously discussed. Adjusted net income for the first quarter was $10.1 million or $0.30 per diluted share versus $15.1 million or $0.44 per diluted share in the fourth quarter. During the first quarter, we invested $1 million in development and maintenance capital expenditures. For fiscal 2023, we continue to expect total development capital expenditures of $6.5 million to $9.5 million. This estimate includes upgrades to the Delhi Field Central Facility, workovers at Hamilton Dome Field, the Barnett Shale, and the Jonah Field, and sidetrack drilling opportunities and low-risk development projects in the Williston Basin, excluding the development of the Pronghorn and Three Forks locations. 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 would turn the call back over to Kelly for his closing remarks.

Thanks, Ryan. We are clearly seeing the benefits afforded by the two acquisitions we completed in the second half of fiscal 2022, which have provided evolution with a much larger and diversified asset base, both geographically and by commodity mix. The cash flow from these two acquisitions has exceeded our expectations from the time of purchase. These two immediately accretive transactions follow our proven acquisition playbook executed over the past three years, 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. We continue to survey the market for opportunistic acquisitions that align with our company's growth strategy. The intrinsic value of our enhanced sales mix was on full display in the first quarter as higher natural gas production and pricing were able to significantly offset the impact of lower oil prices compared to the fourth quarter of fiscal 2022. 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 through fiscal 2023. Our steadfast commitment to maintain a conservative balance sheet and to remain disciplined in our management of capital puts us in a strong position to continue to execute our strategic plan focused on maximizing total shareholder returns and optimizing every dollar that we invest. 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. We truly appreciate their support of our ongoing efforts. As part of our comprehensive shareholder return strategy, we were also pleased to recently put in place a meaningful share repurchase program that allows us to opportunistically repurchase our shares from time to time through the open market transactions, privately negotiated transactions, or by other means in accordance with federal securities laws. We will continue to pursue initiatives designed to maximize 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. As in the past, we will continue to closely evaluate and execute on targeted acquisition opportunities that are immediately accretive, provide long-term established production, strategically expand our base of assets, and do not result in material dilution. Any transaction must also clearly support our long-standing thesis of providing a significant total return for our shareholders. We look forward to capitalizing on additional opportunities to profitably grow the business while continuing to provide our shareholders with a meaningful and tangible return on their investment through our proven and consistent strategy of squarely focusing on the needs of our shareholders. With that, we are ready to take questions. Operator, please open the line for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchstone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Donovan Schaefer from Northland Capital Markets. Please go ahead.

Hey, guys. Thanks for taking the questions. I want to start off by asking for just some more details on the lease operating expenses, kind of the other LOEs, excluding the CO2 injection and ad valorem taxes. So Ryan talked through some of what drove the increases, higher gathering transportation in the Barnett shale. I guess I'd be curious to get some more details because I tend to think of natural gas production often skewing LOEs lower on kind of a BOE basis. And then, you know, commodity pricing. I understand that the CO2 contract is linked to the price of oil, but, you know, sort of excluding that, it seems like there was still a sense that commodity pricing impacted, you know, LOEs like in the Barnett shale. So just curious if you can give some kind of more specifics on what was going on there.

Yeah, no, happy to, Donovan, and And thanks for your support and thanks for the question. Yeah, so for the Barnett shale, you know, there is a little bit in the marketing contract itself that has a component that's tied to natural gas, so the KD hub. So there's a piece of it that is tied to that as prices go up. But the other thing that's obviously going on is, you know, we've seen some inflation at the field level there as well. And so if you think about the Barnett, you know, and being a non-op player too, we've got actual costs that come in about two months in arrears. So really what's going on in this quarter is what I call some catch-up expenses from kind of prior quarters, as we've seen this increase in commodity prices, which does impact the gathering costs a little bit, and also some of the feed level costs. So really, I think going forward, what we would think and hope to see is that cost to level out a little bit, you know, in the next and coming quarter. So, you know, we think currently we kind of think somewhere around the kind of $20 to $25 per barrel range we think is a more normalized number for the Barnett kind of going forward.

Okay. That makes sense. That's helpful. And then I'm curious for, you know, trying to follow, I've written before, you guys are kind of, Um, I like that you try to hedge as little as possible. It kind of makes you guys, I think an interesting vehicle for someone who's wanting to have that commodity price exposure, but also sort of like almost like a prudent sort of portfolio management. Um, so, but, but that does that the hedging that does make me think a lot about pricing. Um, and. You've got, you talked about the West coast exposure through Jonah field. Um, that's obviously a positive development, but just in general, curious if you have any kind of nuggets on the outlook for natural gas pricing, um, you know, both West and also, uh, you know, Gulf coast or whatever markets you sell into. If you see. She kind of have an outlook, I guess, sort of for the winter. Um, And then similar thing on the oil side, because I know you're selling crude to the refiners and the refiners, you know, you're not, it's not like you're selling finished refined product, but it seems like with, with what's going on in Europe and kind of the Northeast and there's, um, there've been some reports about tight inventories for diesel. Those are all sort of middle distillates. Um, so I don't know, does Dell high.

being a product that you know sells at a premium does that does that skew towards the middle of distillates and does that benefit flow through or does that all just get captured by the refiners yeah hey don't thanks um i would say specifically with regard to the delhi right it we get paid that due to where our crude is located um and also the type of crude that it is. So that would already be made up for in the price we receive at the purchase, if that makes sense.

Yeah, I mean, really, the impact is going to be more just LLS pricing and how that translates to WTI. You know, there are some transportation charges that are relatively fixed in there. So for the most part, you know, as LLS moves, which, as you know, is sort of driven by Brent and you know, kind of how the international markets are, that's really what's going to impact Delhi specifically.

You know, I would say in the other areas... You don't see spread changes from, like, product, you know, based on changes in refined products, you know, dynamics there that don't have a historical... It could be eventually, right?

But that would be a longer-term thing. Okay, okay. Yeah.

Yeah, the only thing, and this is just kind of reaching out there, I mean, obviously on the NGL barrel, right, some of the heavier components that we have in Del High, if those are used for blending or whatnot, they could see some uplift and benefit there, but that's not going to be a big driver of our cashless.

Okay, okay. And then for the natural gas, yeah, go ahead.

Yeah, I was going to say, to go to the natural gas front, obviously you've seen storage catch up to Well, almost catch up to. It seems like we're going to be there pretty quickly to year ago and middle of the five-year average range. And when that happens, current gas prices become more of a call on the next two weeks' weather. And so it's really going to be more volatile than it has been in the past year or so, in line with norms of past years. But over the last year or so, when you're trading at a significant discount, there was considerable tightness. And currently at this exact moment, it's not as tight as it has been. That isn't to say a couple of weeks worth of, you know, give it two to four weeks of really cold winter, I think we'd get back into a deficit situation. So, yeah, I think you're going to see some near-term volatility on natural gas prices for sure. Okay.

Yeah, but just to answer on basis, you know, obviously Houston Ship Channel has, I struggled a little bit here recently, just given kind of the Permian production coming online. Now, we hope that'll sort of even out. But, you know, on the West Coast, so the Northwest Pipeline, you know, the actual, if you're looking at kind of the differentials going forward, I mean, those actually look pretty good, right, for this winter at least and early next year. So, we're kind of hopeful that we're going to continue to see strong pricing out of Jonah.

Okay, great. I just wanted to backtrack for half a second. So, Back to the LOE, I know Ryan walked you through the Barnett. You know, on the Williston, there was, you know, the Williston LOE was a little elevated this quarter as well. We don't expect it to run at those levels going forward. A lot of what was done, our operator, we had workovers there where, you know, you'll see a lot of operators just, you know, pull the string and replace the one piece of tubing, you know, a couple joints or whatever that have issues. And then you'll see them have to go back more often and do it again. What we did with Foundation is we did a very thorough job of completing these. So the effect of this upfront LOE in the Williston should allow us to have fewer workovers for a longer period of time going forward. So we pushed a little bit of that cost forward into this quarter, but that should have longer-term benefits as well.

Okay, okay. And then on sort of CapEx, I mean, this kind of ties in with workovers. When I think about workovers in Barnett or Williston or something like that, you're really trying to sort of stem the decline rate, and maybe there's been a mechanical failure down hole or something like that that necessitates it. But in something like the – uh i can't remember i think hamilton dome is water flood i can't remember if jonah field is water flood too um but in those ones you know if you come in and do a work over you could it depends on what you're doing but you could get maybe a more sustained actual uplift um and same thing you know in delhi and so the cap of the 6.5 million to 9.5 million capital expenditures In those more traditional non-shale plays that you're investing in, is any of that more like something that could add some incremental production, or is it, broadly speaking, largely just flattening out the declines?

I would say, broadly speaking, it's flattening out the decline, but we do have some re-completion opportunities. Specifically in the Barnett there were some wells that were shut in that they brought back online And they've been working through that program. So some of it is Potential to add incremental production or really put old production back up to where it was as much as anything but you know, we complete two new zones would be Additional potential reserves and there we do have a few of those projects on the books Okay, and then for

You know, capital allocation between, you know, paying down debt, dividends, buybacks, you know, you kind of have a lot of options at your disposal. I'm curious if you can give some framework, you know, the dividend is going to be steady and growing, but, you know, there's the question there about at what point or kind of what decision framework do you use to make the decision, okay, now is the right time for us to increase it? Or alternatively, you know, again, because kind of a lot of options, you can turn to the buyback program and then with that one, you know, what framework are you using? Is it kind of a PV10 on strip value or something, you know, per share? Like what are the frameworks that you're using when you look at Okay, when do we increase the dividend? Okay, when do we pull the trigger on a buyback for where the share price is at? And when do we instead, you know, turn things on in the sort of where you have upside levers in the Williston and try and do drilling or something there? What are your mental sort of frameworks?

Okay, sure. So, yeah, I mean, to read it, you've got dividends, you've got potential acquisitions, you've got share repurchases. You've got drilling. You've got debt repayment, right? Those are all uses of capital. And I'll just tell you this. It's very dynamic, and we look at it quite often. And we make our decision based on what do we think at that time and for the near term going forward that we care to project to. what do we think is the highest return and the best use of the investor's dollar? And that can change quickly. But yeah, I mean, Donovan, it is complex. And there's lots of capital projects competing for dollars. And we just try to make the best decision, the most accretive decision we can at that time. So it'd be tough to give you any sort of specific metrics on that at this point. Okay.

All right, and then I just, my last, go ahead.

I was going to say, I will say on the dividend, again, every time we've raised it, we have been able to hold it there at that elevated level or raise it for at least four quarters. So raising the dividend is not something we take lightly. It's something, when we do it, it means something.

Yeah, and I mean, it's from a... buyback, just real quick, Tom. So from a buyback slash acquisition standpoint, right? I mean, it's almost, you know, obviously we're always going to be looking at acquisitions and we do think that, you know, we're hopefully, so we're going to be into a market here where it's going to be attractive for acquisitions for us. So we want to balance having the liquidity and ability to do an acquisition, right, with also returning capital shareholders and You know, from a buyback standpoint, we think about, well, we can either buy our own shares or we can go buy something in the market. So we're sort of evaluating. It's kind of dynamic, right? We're evaluating what do we think we can get in the market versus what should we buy our shares for. So while Kelly said it's not, you know, we certainly don't look at the intrinsic value of our shares, but it's more than just that as a factor.

Right. And, I mean, maybe if I restate it, the thinking might be, hypothetically, if your shares came down in some significant amount, you could look at it and say, well, gee, that looks far too low, and it's an attractive return to shareholders for us to buy back shares, but then you might find yourself in a situation where you say, but by not buying back shares in a situation like that, it might also give us more ability to make a very savvy opportunistic acquisition. And so, you know, the trade-off of pre-committing to, okay, here's the price where we're going to do buybacks. If you pre-commit to that, it kind of ties your hands in terms of, you know, because you're going to be seeing things in terms of what's happening where private transactions are happening. And having conversations around M&A. And so you'll have some sense about where things are trending there. And so maybe the trend and opportunity there is even more attractive and it allows you to do something even on kind of a bigger scale. Is that right?

Yes, that is definitely a true statement. That's how we look at it. And we weigh them very regularly. And, you know, you've seen our decisions over time and they lean in different directions over time.

Yes. Okay, that makes sense. And then the last kind of line of questioning here is just kind of I'm going to hone in on Dell Highfield, even though I know that's not – you have so many other assets now. But I think – and so if you feel like this applies to some other assets, let me know and feel free to elaborate on that. But when I think of the Dell Highfield, it's the one that really stands out as an example of something that – you know has like these entities additional phases um all these sorts of potential initiatives there's the heat exchanger you guys were adding um there's just sort of like a lot of incremental ways to come at that one and of course delhi is the one to say hey we think we want to start trying to do this now we want to start trying to do that now but i'm curious if there's um been any incremental conversations in the operator there about they're becoming interested somehow in some new phase, initiative, program. Delhi, it could be Jonah, Hamilton. Yeah, anything there going on.

Okay, so I'll speak to Delhi. We have regular conversations with the team at Denbury and I've been encouraged they sort of have a renewed sense of vigor to the asset. I don't know if it's just the personnel or if it's something corporate, but I do think that they've been really doing a great job with their conformance work, and I think they're committed to that. And they've also mentioned other projects that they want to go forward with there, and I think... I think they're excited about Delhi, just like we are. It's a small piece of their overall portfolio, so I doubt that you'll hear them talking about it on their corporate presentation very much. But I do think the asset team believes they have a really good asset there and that there's more that can be done with it. So I hope that gives you something. Until we have a firm AFE, I don't want to... say anything along those lines. But I do think they're considering various options and they're excited to enhance the project and have been doing a really good job on the conformance side. Okay.

Yeah, I know I think kind of in the shale world, people look at stacked pay and the Bakken or whatever at three forks and say, oh, you know, in some ways some of this can almost be like free money in a sense, if you, if you bought it with one layer in mind and you find that another one's economic, um, then that can seem really appealing. But I think, you know, my sense of under my understanding is that that's kind of always been the case with all of these conventional, all the conventional stuff too. Um, and especially as you go through secondary and tertiary recovery and multiple different phases. And so sometimes those require more programmatic. upfront capital commitment. You can't just do those types of things one well at a time. Or at least it has to be planned and thought through and scheduled ahead of time where you're like, well, it'll be one well this month and then another well this month in this spot in this location. And so you can't just stop and go on it. And so it has to be a higher sustained commodity price for some stretch of time and outlook for it to sort of to get that capital buy-in. But if we're in that kind of environment or headed in that way, you know, it's just be interesting if these additional, I mean, they're not technically layers in this context, but they kind of have that quality that that becomes interesting. So, um, I appreciate your commentary. I'm sure I'll be asking you guys about that at other points in the future. Um, so if there's anything else you want to add on that, feel free, but otherwise I'll, I'll take the rest of my questions offline, but, uh, yeah, good, good job on the court, I guess. Thanks.

Thanks, John. Yeah, I really appreciate it. And happy to follow up with you further to help you out.

The next question comes from John White from Roth Capital. Please go ahead.

Good afternoon, everybody. And Kelly, I'd like to offer my congratulations on your recent appointment as CEO. Thank you, John.

I really appreciate that.

Well, you've been on the board a number of years, so you know the company very well, and you've got your own successful track record within the industry, so I'm glad to see it.

Well, terrific. Yeah, look, it was the opportunity to work with this, I mean, truly talented team of professionals here and continue working with the board from a different capacity. It's terrific. So, yeah, thank you very much. I really am excited. It's a It's a wonderful spot.

Well, good. I may be a little late in noticing this, but in your September presentation on slide five, under the heading return of capital, there's a line, a bullet point special dividends. I believe that's a new addition to the presentation. Is that right?

Yeah, and honestly, that was something we've talked about at the board level. We have not pulled the trigger on doing it, but it is in our calculus of what's the best way to return capital to shareholders in the most effective way that will have, hopefully, a longer-term lasting effect. It was definitely one of the options we considered.

And I suppose that might be employed if if things are quiet on the acquisition and CapEx front and give you the flexibility to pay a special dividend?

Yeah, I would say along those lines. There would be a number of factors that have to take place, but for sure, thinking along those lines, that would be the kinds of things that would make that more attractive.

Okay, well, the press release and the comments today were very detailed, so I don't have any further questions, and I'll pass it on.

Well, great, John. Yeah, thanks for calling. I really do appreciate it. Always enjoy talking to you.

Yep, thanks, John.

The next question comes from Jeff Robertson from Water Tower Research. Please go ahead.

Thank you. Kelly or Ryan, can you talk about the $6.5 to $9.5 million capital program that you referenced for fiscal 23 and how that might impact production as you progress through the rest of this year, the rest of fiscal year?

Sure. I would say for the most part that will be to keep production at levels consistent with our reserve report. We may see a few sort of chances to bump it on some projects along the line and hold some of the production flat. But I mean, that's really where that number came from, the midpoint of that. It is just to sort of match what we've already planned out. So I think the corporate decline that we have, it doesn't really change that. We have chances to do a couple of recompletions. We have chances to do some sidetracks. Those would be sort of incremental. But for the most part, it's sort of steady as she goes in there.

Yeah, I mean, I would think... Yeah, sorry. I know we've gotten the question on kind of maintenance capital. Everyone's trying to figure out, right? I mean, I... I wouldn't expect this program to be a true, quote, maintenance capital program to keep production flat. But, you know, we would hope that it would add some production, certainly potentially in the Williston, right, with some drilling. We could see a little bit of an increase there. And the other areas just maybe stem the decline a little bit.

Yeah, and so like in the Jonah, there's some central compression facilities going in that'll help. That'll help as much with cost as anything else, just like in Delhi. with the heat exchanger could help improve OPEX, lower LOE. So it's not all production. Some of it affects costs as well.

Are some of those costs workovers that will flow through the LOE line, or are they true capital costs?

These would be capital.

Yeah, I think we'll see probably. As with history, we'll probably see a mix of that. Jeff, obviously, we make a determination when we get the AFEs

know if it's a capital or expense work over but we'll probably see a mix of both then kelly on the williston have you all how far along are you in your technical and engineering evaluation of the inventory of the pronghorn and three forks to start deciding whether or not some of those wells might fit into your capital program and i guess foundation for that matter um in 2023

Okay, so it's kind of like you're going down a road, and so to answer how long are you, we're not to the end yet. I'll say that. We're still evaluating it. Obviously, prices change both on the input and on the cost side and the output side. So it's dynamic, and we are doing basin-wide study, 3D geographic model, There is a lot of work going into it, and I would say we're not at a point nor foundation where we're ready to say we're going to go forward with this program at this level right now or at a different level right now. So, I mean, yeah, listen, we're – We're working with foundation and we're moving the ball forward. We're just not there yet. And I wish I could give you a more specific answer on timing, but I can just say we've done a lot. We've looked at a lot, but there's still more to do. And anyway, I hope that helps.

It does. Last question on capital allocation. The revolver balance, I think, at the end of the quarter was probably around $12.5 million, having come down $9 million in the quarter. Can you just talk about how debt repayment on the revolver competes or compares for your uses of capital with the share repurchase authorization and the dividend?

Yeah, so I think we, you know, we kind of put this out in our prepared comments and professionally. So we pay down another seven and a half million after the quarter end. So, you know, currently we're just under five million sort of drawn and expect to have that gone. you know, towards the end of this kind of calendar year, right? I think what we've been consistent on the share repurchase is to say that, you know, we want to have our debt paid off before we really look at a share buyback. And so, you know, that's obviously our debt's going to be paid off soon to where we would start really looking at potentially using the program depending on, as we talked about earlier, right, with Donovan, just depending on how the board and how we feel about kind of the outlook for M&A versus kind of where our stock is trading. Now, for the dividend, you know, I'd say that's a little independent, right, of kind of the debt pay down, right? We've always made a priority of paying down the debt, and we're pretty much done. So that really hasn't impacted how we think about necessarily raising the dividend. You know, if we sort of felt like, you know, if the board felt like the outlook warranted us raising the dividend with a little bit of debt drawn, we would still do that. So I don't think I wouldn't want people to think that, look, we're not going to raise a dividend unless we, you know, pay down all our debt and vice versa. Once we pay down all our debt, we're going to raise a dividend, right? It's kind of a dynamic outlook that we do, you know, every quarter and given sort of the volatility and pricing, right, is something that we may look at even more often than that.

Thank you.

Thanks, John.

Again, if you have a question, please press star, then one. Our next question comes from John Bear from Ascend Wealth Advisors. Please go ahead.

Thank you. I'd like to echo the congratulations to Kelly on your appointment. Thank you. I really appreciate it. I have quite a number of questions, but given the time constraints here, I'll try to take them offline, but a couple of quick ones. We've talked a lot about the the payoff of the debt and so forth. So at the end of this calendar year, you'll probably be debt-free, and your hedges will be rolling off pretty quickly. So my question is, with regards to the dividend, a lot of talk about that, have you considered the idea of a variable like so many other companies have? initiated as opposed to, say, a one-time special dividend if that were deemed appropriate?

Yes, we have. We have considered a variable. And at this point in time, you know, the Board and I consider a consistent dividend to really add more value to shareholders.

Well, I mean if you had a base, I mean when they talk about a variable, from what I've seen, the companies have a fixed base dividend, and then the variable component is based on cash flow or whatever. And so in that context, let's say, okay, you have your base dividend right now at $0.12 a quarter, and then decide on – how much additional of your cash flow you might want to pay out as a variable, you know, that kind of concept. Okay.

I understand what you mean. Rather than just a true variable you pay out X percent of your cash, whatever it is. Right, right, right. I understand. Yeah, we've considered that for sure. And it's something we will continue to consider. You also have to keep in mind, I mean, we have an asset base that, given the right parameters, we can find acquisitions that can grow to it in a meaningful way without having to take on a lot of debt. So on the acquisition front, for the right acquisition, that's always going to be something we want to have in mind. And we don't always want to do it with all debt. I mean, look, if we have some cash on hand, that helps as well.

Yeah, and I would say, John, I mean, you know, it's from a dividend standpoint, and we've done a lot of work and analysis on this, you know, we mentioned in John White brought up the question on special dividend. It's certainly something that's kind of a tool in the toolbox, if you will, but, you know, in our opinion, in my opinion, too, you don't get a lot of value for just a one-time special dividend that's not recurring. But to your point, if you wanted to look at a variable dividend based on a percent of cash flow, you probably, and I think you would get a little more credit to the market, but what you don't see very often is small cap companies employing that strategy. The people that have done that variable strategy are Pioneer, Diamondback, Devon. You're looking at really large producers that effectively have, what I would say, cash that they don't know what to do with. You know, they've got a buyback program in place. They've got a base dividend. The market doesn't really want them to go out and buy additional properties. And so they have this, they don't want to build up a cash balance. So a variable dividend for them makes a lot of sense. You know, for us, you know, we do want to reserve some cash and cash flow to be able to be opportunistic and grow the asset base via acquisition.

Yeah, I mean, to further what Ryan's saying, for those guys, I mean, it's sort of the law of big numbers, right? For them to be able to use that portion of cash flow, which is above the base, to go make an acquisition, it's just, it's hard to find something big enough and meaningful enough to really make a difference. Whereas for us, we can find sort of onesies and twosies kind of acquisitions that do make a difference for us, so.

Okay, fair enough. Kind of going back to some of this CapEx and lease operating expenses and so forth, Given the big push and effort on reducing greenhouse gas emissions and so forth, how much of your operating expenses or are you seeing a lot of need or attention being paid towards equipment being put on these producing wellheads and so forth that is requiring new new equipment to help mitigate leakage and so forth. Is that a meaningful part of your ongoing operating expenses?

I would say for the most part, no. I mean, look, historically, I know that energy companies get a bad rap, but I mean, most of the time, most companies are not venting and they're trying not to flare. And we're in places where, you know, if we make gas, we want to sell it, right? So, yeah, I mean, again, if we had some huge wells that were making oil and a bunch of associated gas and you can't really sell the gas, well, what do you do, right? That's a dilemma that we're trying not to get ourselves in. And for those guys, it might be a meaningful cost that they have to do something extraordinary to capture that and not waste. But

We've had some equipment obviously have to go in, but you know, it's just sort of normal course stuff So I wouldn't I don't think there's really been anything extraordinary No, I mean I would just add so if you look kind of just a couple of examples for you So for for Jonah for instance, you know, they're big on what they call responsibly sourced gas You know, luckily we actually bought the asset after they put any equipment in that needed that so we haven't really seen any capital and You know, any LOE that we see ongoing is really minimal. It's more of a capital expense, which we didn't have to, you know, put up. You know, in the Barnett, we talked to Diversified. I mean, they are looking at things like, you know, solar-powered compressors. But, you know, there's nothing that we've seen from a large sort of capital expense. And I would hope that anything they put in, like, for instance, a solar-powered compressor, you'd see some savings on the electricity side. So I would say in general we're not seeing a big push or impact to our financials for that.

Yeah. Yeah, I think it's a fallacy that anybody thinks that any sized oil and gas company would want to flare gas. I mean, it's burning money if they're not – right? I mean, is it – but I guess what I was trying to get at more was monitoring, is there any either regulatory-wise or from an operational standpoint, maybe older fields, maybe older equipment and so forth that you're having to put some new equipment on to monitor that kind of stuff.

Okay, sure. No, I understand. And, yeah, I would say there's really nothing substantially new or different I hope that helps.

Yeah. I mean, luckily, right, if you look at, you know, Delhi's, you know, they're trying to get that certified as a carbon sequestration field, right? So that's probably the forefront of sort of the, you know, CCUS movement here. And like I mentioned, Joan has already put in a lot of the monitoring equipment. You know, in the Barnett, I think, like I said, diversified, you know, is going to replace things as it's needed. You know, some of the wells are You know, some of them have been drilled, you know, call it 10 or so years ago, but by, you know, a lot of oil and gas standards are not incredibly old. So, I mean, I think they're really potentially just looking at replacing things as it comes out.

Sure. Okay, well, I have more questions, but I'll arrange to get with you offline then. Thanks a lot.

Yeah, listen, great. Thanks for the call, and we'll be happy to touch base with you anytime you like.

I'll be in Houston, actually, in the next week or so, so.

There are no more questions in the queue. This concludes our question and answer session. I would like to turn the conference back over to Kelly Lloyd for any closing remarks.

Thank you, Jason. Thanks again for everyone for taking the time to listen and participate in today's call. We really do appreciate your continued support of our efforts. As always, please feel free to contact us if you have any additional questions. We look forward to formally speaking again when we report our second quarter for fiscal 2023 in February. Thanks again.

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.