Evolution Petroleum Corporation, Inc.

Good morning, everyone, and welcome to the Evolution Petroleum third quarter fiscal year 2024 earnings release conference call. All participants are in a 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. To ask a question, you may press star and then one on your touch-tone telephones. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Brandi Hudson, Investor Relations Manager. Brandi, please go ahead.

Thank you. Welcome to Evolution Petroleum's fiscal Q3 2024 earnings call. I'm joined by Kelly Lloyd, President and Chief Executive Officer, Mark Bunch, Chief Operating Officer, and Ryan Stash, Senior Vice President, Chief Financial Officer and Treasurer. We released our fiscal 2024 third quarter financial results after the market closed yesterday. Please refer to our earnings press release for additional information containing these results. You can access our earnings release in the Investors section of our website. Please note that any statements and information provided in today's call speak only as of today's date, May 8, 2024, and anytime sensitive information 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 the risks, assumptions, and uncertainties as described in our SEC filings. Actual results may differ materially from those expected. We undertake no obligation to update any forward-looking statement. During today's call, we may discuss certain non-GAAP financial measures, including adjusted EBITDA and adjusted net income. Reconciliations of these measures to the closest comparable GAAP measures can be found in our earnings release. Kelly will begin today's call with some opening comments. Mark will provide an update on our properties and plans as they relate to our ongoing strategy of maximizing shareholder returns. And Ryan will provide a brief overview of our fiscal quarter highlights. After our prepared remarks, the management team will be available to answer any questions. As a reminder, this conference call is being recorded. If you wish to listen to a webcast replay of today's call, it will be available on the investor section of our website. With that, I will turn the call over to Kelly.

Thanks Brandy. During our last quarterly call, we told you that we were working to increase our scale and economic efficiency. We told you that expanding regionally and further diversifying our production base are important goals for us. Most importantly, we also told you that the point of all this is to increase our cash flow and therefore either extend our dividend fairway, allow us to increase our dividend, or do both. With our current asset base and the additions of our recent Scoop stack acquisitions and participation in the operations at Shavaroo, we've come a long way towards achieving what we set out to accomplish. And we've done so while keeping our balance sheet in our comfort zone and adding no incremental dilution. In fact, we repurchased shares during the quarter. We added to our producing asset base and our portfolio of drilling locations. We entered into two prolific areas, the Permian Basin and the Anadarko Basin. We increased our oil production as a percent of sales. In fact, this quarter represented a record amount of oil production net to the company. And by the end of the quarter, we had participated in 35 newly drilled wells or wells in progress, 32 in the scoop stack and three in Chavarru, which represent some of the most economic returns the company has seen to date. Evolution today versus evolution a year ago looks very promising. Our oil production for the fiscal third quarter this year versus last year is up by approximately 19%. Our NGL production is the same, and our natural gas production is down by roughly 4%. These numbers only include about half of the quarter for the scoop stack acquisitions, as the transaction closed on 2-12, and less than two-thirds of the quarter for the new Chavarru wells, as all three wells were only finished being placed on production in early February and ramped up in production as frac fluid was recovered. Today we have a much deeper and higher quality inventory of drilling locations versus a year ago, with economics that are very compelling. We believe that with our current inventory of assets, we have the firepower to fund our dividend for many years to come with the potential for growth, particularly as natural gas prices recover as expected, and we certainly don't intend to rest now. we're always on the lookout for the next highly accretive transaction that will benefit our shareholders. From October of 2019 through February of 2024, Evolution has participated in six major transactions, putting over $119 million to work for our shareholders. During that time, we've paid down over 41 million of borrowings, while our share count has remained virtually unchanged. Since we began paying dividends 10 years ago, we have returned over $3.45 per share to shareholders in cash and another $0.26 per share in share repurchases. These six major transactions have added substantial volumes of approved oil, natural gas, and NGLs, all of which gain us exposure into different, largely uncorrelated markets, both by product and locations, many of which have recently experienced outsized favorable pricing versus other sales points. These six major transactions also provide evolution with hundreds of undrilled upside locations operated by proven and experienced teams. We can either choose to participate, non-consent, or even sell many of these undeveloped locations, depending on which will bring the most value to our shareholders at the time. Throughout the years and across many diverse transactions, our goal remains the same as it has been since 2013, the year we paid our first of 42 consecutive dividends. That goal is to maximize total shareholder returns by carefully evaluating every dollar we use to drive dividend payments, share repurchases, and replenishing and or growing our cash flow producing asset base. all while avoiding significant dilution or over-leveraging our balance sheet. I'll hand it over to Mark now, who will give you an update from an operational standpoint on some of our recent actions supporting our strategy.

Thanks, Kelly. I will focus on some of our notable items since our listeners can refer to our press release and 10Q filings for additional details. Our latest acquisition, ScoopStack, is a very exciting add to the company's portfolio. We closed on this acquisition on February 12th. On a pro forma basis for the third quarter, the net production rate was approximately 1,550 BOE per day, which was essentially flat with the production rate at the effective date of the acquisition, November 1st, 2023. Also on the effective day of the acquisition, we acquired over 300 gross drilling locations, 21 of which were ducts. At the close of the third quarter, 19 of the 21 ducts have been placed on production, and we have agreed to participate in an additional 15 gross or .2 net new horizontal wells across the acreage, of which 13 are currently in progress. Based on limited information, the completed wells have so far, on average, exceeded expectations. Based on current performance, we are confident that ScoopStack will be a real value add for the long term. At Shaveroo, We brought our first three wells on production around February 1st. All three wells' gross production peaked at between 300 and 375 BUE per day, which is significantly better than our pre-drill estimates. On a pro forma basis for the third quarter, Chavarru has produced approximately 290 BUE per day net to our interest. In conjunction with the operator, we are planning to drill the next four wells beginning in September 2024, followed by another six wells beginning in April 2025. We are very pleased with the results of our drilling program at Chavarri and believe it will continue to support the dividend through a continual drilling program over the next decade. Again, we would like to highlight that the addition of Shaveroo and ScoopStack are perfect fits for our evolving strategy of both adding a long-life production during commodity price downswings and adding undeveloped locations by making acquisitions through the drill bit. We view this as crucial to enhancing our ability to maintain or increase production at an attractive rate of return for years to come. As for our legacy properties, we've had a successful third quarter. Jonah Field still receives a premium over Henry Hub pricing since we sell into the West Coast market and continues to perform as expected at its historical decline rate. The Williston asset production increased slightly due to the 1-0 grassland system downtime in the prior quarter, even though we did experience some downtime due to a winter storm in January. The Barnett Shell asset experienced some downtime due to a winter storm in January as well. Subsequently, operations were resumed with production back on its historical decline rate. The operator continues to work on ways to reduce operating expenses there. Hamilton Dome continued to perform very well even though it experienced more downtime due to well workovers than usual at the beginning of the quarter. Net production was only slightly down from the previous quarter. At Del High, production was affected during the quarter by winter storms that impacted oil production and repeated downtime from rental turbine failures impacting NGL production, both of which resolved by the end of the quarter. The CO2 purchase pipeline was taken offline for preventative maintenance at the end of February, and the operator anticipates resuming CO2 purchases in June 2024. This will reduce del high field LOE during this time period. The field continues to inject recycled CO2, which is the bulk of the normal CO2 injection, and we do not anticipate a significant production impact from the temporarily decreased CO2 injection volumes. The operators also indicated that Delhi is expected to be certified as a carbon capture utilization and storage site designated for enhanced oil recovery by the summer. All in all, fiscal quarter three production increased 14% from the prior quarter to 7,209 net BOE per day, with oil increasing 27% and natural gas and NGLs each increasing approximately 10%. With drilling results and the contribution of the acquisitions more than offsetting normal declines, maintenance and weather-related downtime. I'll turn it over to Ryan to discuss the highlights of the quarter.

Thanks, Mark. As Brandy mentioned earlier, we released our earnings yesterday, which contains more information on our results. My comments will focus mainly on the highlights of the current quarter. This quarter we had total revenues of $23 million, adjusted net income of $1 million, and adjusted EBITDA of $8.5 million. Our financial results demonstrated the positive impact of our ScoopStack acquisitions and Shavaroo drilling program, as revenue and EBITDA were higher than last quarter, despite receiving lower realized prices due to the continued weakness in natural gas prices. On the development side, we spent $2.6 million in CapEx, primarily related to the drilling and completion of the three initial wells at Shavaroo. We ended the quarter with $3.1 million in cash on hand and borrowings of $42.5 million on our credit facility. Our cash balance and borrowings do not yet include the impact of net cash we expect to receive for the final purchase price adjustment on the ScoopStack acquisitions. As of March 31st, we recorded an interim settlement receivable of $3.3 million and expect additional cash upon the final settlement set to occur during the fourth fiscal quarter. we continue to expect to remain at or below our leverage target of one times pro forma EBITDA. We entered into oil and gas hedges during the quarter and after the quarter in order to comply with the terms of our credit facility. We also amended our credit facility to give us more flexibility regarding the mix of individual commodities we are required to hedge. We now have the option to hedge 40% of oil production or 25% of oil and gas production for each individual month. Given the extremely low prices of natural gas throughout calendar year 2024, we are currently only hedging oil production for that period. We also hedge natural gas beyond the required 12-month period to capitalize on the high prices available in calendar year 2025 and beyond. Our goal for our hedging program will continue to be to reduce downside commodity price risk while maintaining the maximum amount of upside available. As such, we will continue to monitor the market and may add additional opportunistic hedges. On the shareholder return front, we paid a 12-cent dividend in March and declared another 12-cent dividend to be paid in June, which will mark our 42nd and 43rd consecutive quarterly dividends and 7th and 8th consecutive dividends at the current level. We also repurchased approximately $800,000 worth of shares during the quarter. I'll hand it over to Kelly now for closing comments.

Thanks, Ryan. At Evolution, we accomplish our strategy of maximizing total shareholder returns by carefully weighing the use of every dollar we put to work for all our stakeholders, always with an eye towards increasing or extending the runway of our dividend for many years to come. We have a proven track record of paying dividends with stronger yields than the S&P 500 and our peers, returning cash to shareholders of over $3.45 per share over the last 10 years. We are building our company into one designed to cover our dividend and our capital spending even in challenging times, like we see today with natural gas pricing, while maintaining ample capacity to return cash to shareholders. We have built and continue to build a diverse, resilient set of assets strategically designed to facilitate and complement our consistent approach to returning cash to shareholders. In building this base, our balance sheet has remained rock solid and we've added no material dilution. With that, I'll turn it over to the moderator to begin the Q&A session. Thank you very much.

Ladies and gentlemen, at this time, we'll begin that question and answer session. If you'd like to ask a question, please press star and one using a touch-tone telephone. To withdraw your questions, you may press star and two. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys to ensure the best sound quality. Once again, that is star and then one to join the question queue. We'll pause momentarily to assemble the roster. Please go ahead with your question.

Hey, guys. Thanks for taking the questions. So the first question I want to ask about is, so for the certification for Delhi and that expectation to happen in summer, that sounds more or less like, you know, reiterating a consistent statement that kind of we heard before in terms of that timeline. So was there an incremental step or just sort of it's more of a saying like it's on track, that is still the expectation, and then have you advanced any negotiations or conversations around that with the operator?

Thanks, Donovan. So to answer your question, It's really steady as she goes. The updates are, no, they still expect it to be in the same time frame they did. So as far as advancing negotiations and where that's going to shake out, no, we're not there yet.

Okay. And just kind of real quick, and I don't know if you'll have the answer or not, but do you know for Phase 5 for Delhi, because I've had this thought or speculation or wondering that, that it could sort of nudge Exxon over into having more of a desire to do phase five because, you know, that's more poor space conceivably to inject CO2 into. So do you know, has that come up at all in conversations and do you know if that requires additional certification or if that can just, you can expand a project and it's kind of automatic?

So I'll answer it this way. We certainly think phase five is a very strong economic project on its own merit. And we hope that Exxon will come to that conclusion with the additional benefit of having more pore space to inject CO2. As for additional, I mean, it's within the field. I don't expect it would be, but I'm actually not sure on that.

Okay. And then turning to Shaveroo, some language jumped out at me in the release saying, uh, you know, and I know you guys have secured these, uh, a lot of different locations that you can participate in. So it's not new per se that it's something you've been, that you want to do this or, you know, like having it on the table, but in the release, the language you say, um, you know, that your plans are to. systematically participate in the remainder. So beyond, you know, we've got four and Jim black too, and then another six. And then, yeah, the company also expects to systematically participate in future development blocks, holding rights, you know, to over 69 additional horizontal locations and aggregate is that talking about systematic participation, does that signal or indicate any kind of a, um, flipping of a switch or something where you kind of feel like you're, you know, of course, if things change and you start to get some bad well results or something, you'll reassess. But does that kind of indicate you're at a point where you're kind of feeling like, gee whiz, we're kind of ready to run with this at an appropriate pace, you know, for, for dividend support and so forth, but just that you want to keep doing these over and over?

Yes, honestly, is the answer to that. We've got more data. We're more comfortable than we were. Look, everything's subject to change. But as of now, we intend to systematically keep going with it. So yes, is the answer. Excited about it.

Yeah, and am I right in kind of picking up on that language, like systematic participation is kind of suggesting a feeling or a reaction to how things have been going that's a step forward or a step incremental to the initial kind of toe in the water?

Yeah, more confident than a let's wait and see, like maybe we were before. Now it's, yeah, absolutely, good catch. That was on purpose.

Got it, okay. All right, well, thanks, guys. I'll take the – I'll jump back in the queue.

Perfect.

Thanks, Donovan.

Once again, if you would like to ask a question, please press star and then one. To withdraw your questions, you may press star and two. Our next question comes from John White from Roth Capital. Please go ahead with your questions.

Good morning. Good morning. Yeah, good morning. Congratulations on closing the scoop stack and getting your Shavaroo wells flowing back. Very nice additions to the portfolio. Wanted to see about additional detail on the scoop stack. Primarily, where is the acreage? What counties in the Anadarko Basin is the acreage concentrated in?

So I can answer that or Mark, but I mean, it's in various places throughout the Scoop stack. I would say it's got a large concentration over in Grady and Garvin. Those have kind of been the focus on where most of these wells in progress are. Okay. But I mean, truly, look, it has, excuse me, Blaine, Canadian, Carter, Custer, Dewey, Garvin, Grady, Kingfisher, McLean, Stevens, it's the whole scoop stack. But the biggest concentration and where the most activity is over there in sort of Grady and Garvin right now.

Basically, John, this is Mark Bunch. It's kind of near where Norman is.

I know where Grady County is. I've driven around there a lot. So it's pretty spread out across the Anadarko.

Yes and no. Like I said, it's sort of more concentrated in that grady, eastern grady kind of area. But yes, we do have various species throughout.

And is there a concentration of operators or is that pretty diversified too?

There's, you know, we have a big position with Oventive and Continental. There's some with the EOG, Marathon, Gulfport. There's probably, in total, somewhere around, realistically, around 20 operators that we'll end up dealing with. But the ones I mentioned are the major ones. Those are good names. Oh, I looked up Continental Resources, too. Sorry. Yeah, that's a big one.

No, you mentioned it. And what is the primary formation being targeted for?

Mainly like the Woodford, but they also look for the Sycamore, anything in the Mississippi. The way they pool there is they pool a larger section, so a lot of times this section is a pretty good size that they pool. All right, so 640? Well, actually a lot of them now are getting to be 10,000 foot laterals, so they're actually going to be 1280s. Okay, thank you.

I know you don't give guidance, but with the initial results from Scoopstack and obviously the Shavaroo results, is the feeling we should see your percentage of oil cut of total production increase over time?

Yeah, John. Yeah, you should see that because both of them are, especially Shavaroo, is really oily. And the scoops stack is oilier than our current mix.

Yeah, the only caveat, John, would just be, you know, we obviously have control and have more insight into Chevroo timing and drilling in the scoops stack. Depending on what happens with gas prices, we could see some areas that have more gas content get drilled. Right now they're focused more on the oil and liquids areas, which makes sense. But, you know, there is some gas there too, right? So there's a little bit of TBD depends on what the operators drill.

Okay, thanks for the additional detail. I really appreciate it, and I'll pass it back to the operator.

Thanks, John.

And once again, if you would like to ask a question, please press star and 1. And ladies and gentlemen, it's showing no additional questions. Actually, we do have an additional question. This comes from Bruce Brown from Brown Capital. Please go ahead with your question.

Good morning, fellas. Thanks for the good work. I know you've given no real guidance, but I'm just wondering if prices stay right around where they are today for like the next 12 months, which is probably not going to happen, but let's assume it does, would your asset-based lending line be paid down significantly?

Yeah, so thanks, Bruce. Obviously, we're not paying guidance. So really what we're looking at, and to answer your question, is a balance of paying down our line versus capital, right? And one of the big unknowns, obviously, is how much capital we'll have in the scoop stack, given pricing. I would say we're generating enough cash to significantly pay down, but we may choose to spend more and reinvest in CapEx and pay the line down a little bit slower. But we're certainly going to remain below our target of one times EBITDA. And as I mentioned, from a cash flow perspective, yes, we're generating plenty of cash to be able to pay it down if we want. We do have capital projects that we think are really attractive that we'll probably put some capital to as well.

Do you have any comment on additional capital projects in the Williston? Sure.

So we are working with, the operator there is Foundation. What's interesting is that area is, if you're talking about drilling new wells, we're actually getting kind of excited. It's starting to get drilled and the activity is moving towards us. So we're going to kind of wait and see and look how things move towards us there. So we're getting incrementally more excited about that area. As far as other projects within the field, I think it's just general workovers, Mark.

Yeah, it's just general workovers, general fix-up. We're also doing some electrification in some areas that will improve efficiency, reduce operating costs. But, you know, no wells plan to be drilled right now, at least like in the near term. Thank you, Mark. Appreciate it. Good thing, Bruce.

And our next question is a follow-up from Donovan Schaffer from Northland Capital. Please go ahead with your follow-up. And Mr. Schaffer, is it possible your phone is on mute?

Sorry about that. Okay. So talking about organic growth, kind of the levers that you guys have to pull, you know, at this point we've got the Williston, um the scoop stack well i guess yeah you've got some huds there i can't remember if you're in a position to you know accelerate on the gas they're not that may not be but but there's like puds there and then you've got um you know the uh shavaru so the question is do you feel like there's a need to kind of add any more organic uh gross potential you know, shoe M and a type stuff, or do you feel like given your size as a company and kind of what you see from, um, you know, flow funds, CapEx and other things over, you know, over the next say 12 months or so, do you feel like you're, you're kind of pretty content and pretty good. You've got everything you sort of need unless something just really opportunistic comes along. Um, you know, I think you said in the scoop stack, you've seen more, things coming across your desk or more people kind of pitching things. So maybe if there's a great opportunity, but otherwise, in terms of what you need in your portfolio for any type of organic growth potential, do you think you need more or do you feel kind of like you're set there now?

Hey, thanks, Donovan. This is Kelly. So the answer is we had a definite focus to make sure we added that arrow to our quiver, right? And like I said, we've come a long way to accomplishing that. But along with everything else, you're never done. So if the next deal that comes along is pure PDP and it fits wonderfully with our portfolio, then that's the deal we're going to do if it's highly accretive for us. If the next one comes along and it does have an organic growth piece, we're certainly going to absolutely consider it. So again, it's like you said, if it's the right deal and it's really accretive for our shareholders, for sure. I would say it's not as much of a push as it might have been prior to these last two acquisitions or partnerships, but it's certainly never off the table. How about that?

Okay, that's good. And kind of related to this, I think Mark made the comment that, you know, with Shavaroo, and maybe it was also a reference to the Scoop and Stack, but just with the combination of those, that's extended the dividend, you know, helps the dividend coverage for a decade or more or something like that. And so I'm curious if there's any kind of quantification you could give. I mean, I could ask it in the form of, like, gee whiz could you do a dividend increase or something but that's you know that's just sort of the type of thing you can't really comment on i know you guys place dividend protection first in any case so is there any kind of quantification or analysis or a sense you know maybe now is talking about shaver from this kind of systematic participation standpoint do you have an internalized sense of how much how many extra years these have gotten you or you know, stress test case where you say, you know, we think we have the dividend covered as it is for X number of years. Is there any color or anything you can give there that would be helpful?

Yeah, I mean, so this is Ryan Donovan. Look, I mean, I don't think we can comment specifically on, you know, as you mentioned, long-term sort of guidance here. But what I will tell you is, you know, Obviously, you can look at the assets themselves and how much cash flow they bring, and you can sort of model out how much we think should ever remain in the future. So from there, you can obviously see quite a bit of dividend coverage. I think as we're looking over at least the near term, we're going to generate a good amount of cash flow and we have potential uses, right? One of those is increasing the dividend. However, others are also reinvesting in the business, right? So now that we have this organic growth leg, we have more capital to put to work than we have in the past. Whereas in the past, we could have just returned it all to shareholders, now we'll probably take some of that capital and put it back into the business to keep sustaining our production level. So I know I'm not exactly answering your question, but I'll let you know that at the board level, we certainly look at every single dollar we put to work and whether that makes sense to reinvest in the business, buy stock, raise a dividend. Obviously, our goal is to keep it for a sustainable business at our base dividend or better for a long period of time.

And I suppose because you guys don't, you characteristically do significantly less hedging than a lot of other kind of oil and gas companies. In practice, that whole process pathway just sort of becomes accelerated with pot with upward commodity price cycles um is that correct like you would it's in that situation where you know with natural gas recoveries materially or oil climbs you know in some material way that just puts you in a position to kind of double down where you think it makes sense and then you know add in layer in more assets that give you the kind of, uh, the number of years of coverage you'd want, but then also at a higher dividend, because like you've, you've gotten this almost like a windfall of sorts with, with what commodity prices may do on the upside to kind of the right way to think about it.

Yeah. I mean, except that I would say, you know, obviously we're, we're looking out multiple years, so let's take, for instance, you know, when we saw gas, you know, not too long ago, run up past five, eight, $9, right. You saw us actually, we helped to pay down some of our debt repayment at that point, and we bought back quite a bit of shares. So, you know, again, the dividend is just one tool. And so if we were to see, you know, if we saw a price recovery that we feel is sustained for a long period of time, then, you know, that's one thing. But if it's, you know, with natural gas, all it takes, as we really well know, is a warm winter and all bets are off, right? So it's hard to really forecast gas at a $5 level for a long term. But if we were to get, you know, a run again here, then we could look to, again, accelerate debt pay down. We could buy back some additional shares, even look at acquisition opportunities, right? So, again, it would be all of those things we would examine.

I mean, just to follow on and carry on with where he's going, with our base sort of commodity price expectations, you know, we've said many times we think we can absolutely have great dividend coverage for many years to come. With something above that, It is cash flow with which we will make a prudent decision at that time what to do with it.

Yeah, okay. That makes a lot of sense. All right. Thank you guys for taking all the questions. I appreciate it. Terrific. Yeah, thank you.

And, ladies and gentlemen, once again, in showing no questions at this time, I'd like to turn the floor back over to management for any closing remarks.

We just want to say thank you all for joining us today. And if you have any further questions, feel free to contact Brandy, who is our IR manager. So thank you all very much.

And, ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for joining. You may now disconnect your lines.