Q4 2020 Evolution Petroleum Corp Earnings Call
Good day, ladies and gentlemen, and welcome to evolution Petroleum fourth Curt fourth quarter and fiscal year and Twentytwenty Oh you.
All lines have been placed kinda listen only mode and the floor will be open for questions and comments following the presentation.
He should require assistance throughout the conference. Please press star zero on your telephone keypad to reach a life operator.
At this time it it's my pleasure they try to flip over to your host David Joe Chief Financial Officer, Sir the floor is yours.
Thank you good morning, and welcome to evolution Petroleum's earnings call for our fiscal year, and 2020 and our fiscal fourth quarter ended June 30.
Well discuss operating and financial results for the fiscal year in fourth quarter as well as you're in reserves I am David Joe Chief Financial Officer for evolution Petroleum and joining me on the call today is Jason Brown, President and Chief Executive Officer.
If you wish to listen to a replay of todays call. It will be available shortly by going to the company's website until October 10th 2020.
Please note that any statements and information provided today, our time sensitive and may not be accurate at a later date our discussion today will contain forward looking statements in management's beliefs and assumptions based on currently available information.
These forward looking statements are subject to risks and uncertainties that are listed in described in our filings with the FCC.
Actual results may differ materially from those expected.
Since detailed numbers are readily available to everyone. In Yesterdays news release. This call will primarily focus on key results volatility in oil prices and how that impacts us our typical update on operations and our plans for fiscal 2021, including anticipated capital spending.
I would now like to welcome and turn the call over to our President and Chief Executive Officer, James Jason Brown.
Thanks, David Good morning, everyone and thanks for joining us today on evolution year ended fourth quarter fiscal 2020 earnings call.
Overall, physical 2020 has been unexpected and challenging year for everyone into that I wish you all your families and businesses very bad insane save.
Well move forward through these Unprecedent times together.
As you know, it's been particularly difficult time in the oil and gas sector.
As a global covert 19 pandemic continues to disrupt the balance of oil and supply and demand as I stated last quarter, we took immediate steps to ensure our employee safety in our financial security.
We have continued to focus our efforts on implementing additional cost cutting measures to better protect our investors and it's your long term sustainability.
We are well positioned to take advantage of potential opportunities that arise in these turbulent markets remain focused on creating long term shareholder return.
With that I'm pleased to announce our ninth consecutive year of positive earnings for the company as of June Thirtyth. After funding all operations for fiscal 2020, we remain debt free $19.7 million in cash and an Undrawn bank revolver.
We continue to concentrate on cash flow and overall shareholder return we provide an attractive cash returned to shareholders is we've now paid out or 20 eightth consecutive dividend returned a total of 10.7 million in fiscal 2020 to common shareholders in the form of a quarterly cash dividend.
This marks more than $70 million in cash dividends since the inception of the dividend program in December of 2013.
As previously reported we recently went through our annual year in reserves process, which was impacted by the lower price environment as we expected.
Our reserves were once again evaluated and determined by the goal here and not a independent reserve engineering firm.
For the year end.
For the year end June Thirtyth 2020, evolutions proved reserves 100%.
Which are all oil and natural gas liquids totaled 10.2 million barrels of oil equivalent M.B. Riley.
With approximately 82% of that being PDP and the remaining 18% being pod.
That is a 13% increase from the previous year, including physical 2020 production of approximately 745000, India we.
This increase was primarily due to the strategic acquisition of Huh.
We completed in November of 2019.
[laughter] acquisition, we anticipated reserve.
Sounds to be larger impact as previously stated actually close to 30%.
Right.
Lower isn't mark guarantee or operator at Hamilton don't shut in wells.
<unk> deal.
Close Kathy.
Although many oh returned to production as prices improve over the summer as of June Thirtyth, approximately 25% of the wells remain shut in.
Lower historical production curve combined with a lower FCC average price resulted in the field, reaching its economic limit sooner than it had when proved reserves were estimated at the time of acquisition.
These shut in wells will be brought back in brought back online at commodity price increase and so we look at these barrels more of a delayed rather than long we've been very impressed with merits operational team their focus to optimize the field.
To be as economic as possible.
Yeah, Hi, we had positive revisions NGL volumes due to the change in methodology by being in forecasting NGL stream independently of the oil forecast as they are really a function of the constant recycle gas to the plan.
In July 2020, Denbury resources, the operator, we're interested though how they'll high field and now that it entered into a restructuring support agreement under chapter 11 bankruptcy code in Texas.
Denbury subsequently announced on September Threerd did its plans as to eliminate 2.1 billion of its bond that had been confirmed by the court. This will substantially reduced its debt it will strengthen the balance sheet and free up capital for investment in property such a delay we are encouraged by our continue.
Actions within Barry and believe that they'll high phase five expansion will begin later in our fiscal 2021.
We further expect resumption of historically beneficial conformance expenditure to improve the CEO to flip performance.
With that I'll now turn the call over to David that run through our financial highlights and then I'll wrap up the call by speaking briefly about our strategy outlook in M&A landscape David.
Thanks, Jason.
I will share highlights of our financial results for our fourth quarter in fiscal year end.
Please also refer to our press release that I mentioned yesterday for additional information the details and be able to look out for our annual report on form 10-K to be filed shortly.
[noise] our fiscal fourth quarter ended June 30, 2020 with financially challenging due to extreme more price volatility steep declines in oil prices caused by geopolitical factors and exasperated by the global pandemic.
I realized oil prices were down approximately 50% from the prior quarter ended March 31, 2020, which resulted in about a 56% decline in oil revenues, partially offset by a 9% decline in operating costs.
This all resulted in a quarterly net loss of approximately $2.3 million or seven cents loss per share down from net income of 3.7 million or 11 cents per share in the per quarter.
Included in the fiscal fourth quarter was a $1.4 million net losses on derivative contracts for the fixed priced all swaps entered into in April 2020.
In the quarter, we really we recorded realized gains on derivative contracts of point $5 million.
But also recorded and offset a mark to market unrealized loss on derivatives contracts of $1.9 million.
[noise], although evolution does not routinely and typically employ hedging strategies. The company hedged as you partial price protection to enable it to maintain its current financial strength through the rapidly changing in uncertain economic periods faced in the quarter.
Total video he's in the fourth quarter were.
1918 be always down 11% from 21 64 believes in the prior quarter.
Oh, Hi production was impacted by the lack of new CEO to purchases the deferral of conformance capital body, operator, and normal field decline, while Hamilton don't field was impacted by temporary shut in of uneconomic wells due to lower realized oil prices in the field during the quarter.
A few operating highlights in the fourth quarter include lower lease operating expenses by 41% to 2.3 million down from 3.9 million in the prior quarter, primarily driven by lower Seo two calls and cost limiting strategies implemented in both field operations.
Our lifting cost per before we were $13 a nine cents down 33% from 956.
<unk>. This was largely due to zero zero to purchases that del high for the quarter caused by the shut in of the pipeline for repairs and also by.
At 26% decline in other lease operating expenses.
We ended the quarter with $21 million in working capital of which 20 million was in cash and we remain debt free as Jason mentioned.
In the quarter, we also completed the remaining capital expenditures.
For the water curtain program and related infrastructure preceding the plan Delphi phase five development.
<unk> expenses decreased 30% to $1 million down from 1.5 million in the prior quarter, primarily due to a trip adjustment for reduced to short term incentive payouts and a decrease in.
Consulting expenses.
It should be noted that the noncash gene expenses accounts for approximately 35% of total gene expenses in this period.
Now looking at full year fiscal 2020 results.
We recognized net income of $5.9 million or 18 cents per common share.
We returned 10.7 million in cash dividends to shareholders and invested an additional 2.5 million in stock repurchases throughout the year.
We reported 12.4 million of cash flow from operations for the full year and internally funded all operations, including 11.8 million of capital spending, including the acquisition of the Hamilton don't feel.
I mentioned, we ended the year with 20 million in cash.
Total gross oil production year over year was up 7% to almost 7000 barrels of oil per day from 6500 from a year ago NGL production was down 6% to 11, no six Boe per day from 11, 71 Boe per day.
On a on a b O b basis total production is up approximately 5% year over year.
The inclusion of Hamilton dumb, albeit for only eight months attributed to the increase in oil volumes offset by lower production that now high for the reasons previously mentioned.
Our total revenues for the year decreased by 32% to about $30 million. This decrease was primarily driven by 32% decrease in the company's average equivalent price could be are we to $39 in 74 cents down from 50 850 in the prior year.
Full year lifting cost per BOE, you was $18 in 13 cents down from 1931, but from the prior year.
The decrease in total production costs was primarily due to a 48% decrease in C. O two costs, partially offset by 32% increase in other lease operating costs.
The decrease since year, two cost was largely due to a 39% decrease in purchase Seo to volumes together with a 14% decrease in price per Mcf associated with.
Lower realized oil price to Adelheid.
Note that that's a natural hedge we have Delphi with a as low oil prices are.
C O two is priced indexed on the price of oil.
The increase in other at least operating cost is primarily due to the acquisition of Hamilton Dome field in November well del highs other lease operating expenses decreased by 6% impacted by cost control measures because of the recent decline in oil prices.
Full year, GNS expenses increased slightly to $5.3 million from year ago, primarily due to higher noncash stock based compensation expenses related to new grants associated with the hiring of a new executive officer.
This increase was partially offset.
By an overall decrease in activity as a result at the recent decline in oil prices.
Again noncash expenses accounted for approximately 24% of told you in a expenses in this period.
In the fiscal year, we we have a net income tax benefit of $2.2 million, primarily due to enhanced oil recovery tax credits related to our interest and I feel.
Net income to common shareholders again, with 5.9 $5.9 million or 18 cents per common share. Although this represents a large decrease from the prior year. This marks our ninth consecutive year to reported net income to our shareholders, which speaks.
Sure the quality of our assets.
Full year capital expenditures were $11.8 million.
And just consist primarily of 9.3 million cash for the acquisition of Hamilton don't field point 9 million of noncash asset addition related to the had Hamilton don't asset retirement obligation and about $1.4 million spent adelheid for completing the existing infrastructure projects in advance of phase five development.
We expect to continue to fund future development cost at del high in Hamilton Dome with cash flow from operations and our working capital over the next 12 months.
The company remains committed to returning cash to our shareholders and as Jason mentioned Weve returned over 70 million in dividends to our shareholders since inception in 2013, our dividend remains very attractive with the current yield of 3.8% based on yesterdays closing stock price.
Our liquidity position remains healthy with cash on hand.
Access to an Undrawn credit facility and an effective shelf registration statement under which the company may issue up to $500 million of new debt or equity securities.
We continue to be Underlevered and remain in an excellent financial condition and are uniquely positioned to pursue opportunities.
This concludes our review our financial results for the fiscal year ended June 30 2020.
Well now turn the call back over to Jason for additional remarks.
Thanks, David.
It is a priority for us to invest in the working relationship we have with our operators I'm pleased with the substantial dialogue, we've been able to engage in with both Denbury end Merit.
Regarding a proper balance on reservoir integrity and cost control and both field.
So these past few months.
Looking at the future of our current assets and based on recent discussions our expectations are the emergence of denbury from the restructuring process.
Bringing about the resumption of conformance work over projects, which were very happy about and will likely incur additional maintenance capital expenditures. Although these will primarily be it they'll high field. We anticipate merit also evening back into economically viable project.
Through the remainder of our fiscal year.
Such amounts are not known or approved yet. However, we expect expenditures to run in is $750000 to 1 million dollar range over the next 12 months net EM.
In addition, the company is planned for expenditures of approximately 1.9 million again that to EM in fiscal 2001.
To begin the development of phase five it they'll high field, which is expected to commence in the company's fourth quarter.
Phase five development costs next evolution are expected to total approximately $8.6 million.
Again, that's the us with 3.7 of that to be incurred and physical 22, and the remainder over the next couple of years.
These projects all focused around this strategy to continuously extend the life of our reserves and I've been very successful over the past few years, largely interestingly natural decline.
Finally, although we're very pleased with the forecast of much needed additional capital investment in our current assets. We continue to selectively look for opportunities, where we can take advantage of our financial position.
In added additional assets.
Further grow and diversify the company.
The acquisition of handles and don't last November was the complementary assets Adelheid field, it strategically diversified our asset base.
Fit with our strategy of having long life low to client assets and also represented an important step toward our goal growing our business. We continue to look for additional low production.
Decline long life reserves to add to our assets and will contribute to our dividend for years to calm I'm excited the potential that we are beginning to see in the marketplace and confident in our strategy moving forward.
We are in great position and I look forward.
For the future of evolution petroleum with that I think we're ready to take questions. Operator, Please open the lines for questions.
Thank you [noise].
Sure now open for questions. If you do have a question you May proceed star one on your telephone keypad at this time. If your question husband answers you can remove yourself from the Q by pressing one again, ladies and gentlemen that star one I know first question comes from John My from Roth Capital Go ahead John.
Good morning, gentlemen.
Hi, good morning, John.
Yeah on the 2021 cat bags or is that all going to be directed at the phase five.
Oh, we anticipate about 1.9 net to us.
Within our fiscal 2001 again, I think they're gonna start that project going about say April or May. So we're anticipating 1.9 is that to be net to us I think on top of that 1.9 between merit a up in Hamilton dome, and Dell hide there's probably going to be about another million dollars net to us of conformance work and that sort of thing so all in.
Kind of in the two nines somewhere sub three for a total capex for for 21.
Thanks, and or will there be set a new oh locations drilled in phase five during your Kisco 2021.
Yeah, we anticipate the drilling to begin like like I said in May and June a they generally take.
They do that kind of in phases. So we anticipate the drilling kind of happening through the full calendar of 21 into our physical 22 again physical 22, we think probably around 3.63 0.7 net to us so but yeah, we anticipate them starting drilling in 21, a in may or June.
Okay and ER.
On the a C O two pipeline or are you gonna be responsible for any of the repair costs on there or is that all going to be borne by the operator.
No I appreciate you asking that I'm not sure that we've made that clear. So thank you for that that's CEO to line is operating and owned by Denbury. So we don't actually purchase anything until it gets to our field. So that's all operate a known by them. So there's no cost associated with the repair that are going to be a paid by us.
And now we did go they're anticipating that coming online around October 1st to somewhere in the first couple weeks of October we actually went up there in the <unk> to see how they were doing on progress because some of these projects slide and you know we think it's going to be July and then it goes to August and they get September, but we're very pleased that they're up and they were.
Out there on Saturday and had multiple crews working in that looks like they're making a lot of progress. So we're pretty confident that's going to be a back up and running shortly but again no cost us.
Hands on management I like it [laughter] circuit.
All right I'll turn back in May come back for a follow up.
Thanks, John.
Our next question comes from Jeff Crap.
Northland Capital go ahead, Jeff.
Hi, guys.
Hey, Jeff.
Jason for five can you remind us kind of production expectations that you have for that I'm understanding that you know I imagine, it's going to be kind of slower ramp to peak of any kind of incremental not.
Sure.
Profile, but what kind of I guess gross or net production response do you expect and do you have a sense either up based on your own worker conversations with Denbury, how did the oil price that you would need to see for that.
Forward It sounds like you guys have confidence.
It's going to happen here, but I guess just to kind of prepare ourselves in terms of sensitivities to to oil prices for when that project may or may not make sense.
Sure well.
First of all the production, it's probably going to make sense over over time, as we get closer to give them to get a better sense of that it will be a slow ramp up like you said so as John asked when does the drilling start drilling is going to starting may or June and when there's 15 wells involved in this I'm injector some producers.
And that probably be through the course of at least full calendar 21 and into the start of calendar 23.
[music].
They they generally don't as soon as they start drilling it they they like to kind of gets through the program before they really start ramping it up because the overall process is a combination of injecting new asks you to in different places and you don't want to start producing without the injection and you don't want to start injecting without the producers so it's a little bit more.
On a batch process and then once you start injecting you basically increasing pressure support and it kind of fully ramps up over another six months so.
We wouldn't anticipate much of any production to be added from Dell high in calendar of 21, but really what we would expect.
That to be starting to get a calendar of 22.
So the overall peak, we've we've seen a you know.
Several hundred barrels a day or net to us over the previous a test programs and we would anticipate this to be it's a pretty substantial phase five is pretty substantial we would expect it to be quite a bit.
But again, that's going to kind of wrap up over about a six month period and then.
Get to a peak and then.
[noise] sort of fall off in kind of single digit decline. So it will be a nice arc over a two to three year period.
Okay.
That's really helpful and my follow up.
On the acquisition side you guys ended the years as David said 20 million a cash.
Hi, Capex that you'll be incurring over the next couple of years. So I guess just kind of wondering as you guys kind of think about.
The dry powder are you effectively I guess earmarking a portion of your cash for that Capex.
Or would you really view that is kinda unencumbered.
Investable liquidity and I guess, just ultimately trying to figure out how the size of your acquisition universe has maybe changed.
Given that you have done Hamilton obviously.
World today versus.
12 months ago, but any thoughts on that.
Yes sure we.
Sure well use the cash to do Capex for sure I don't think that that wildly limits are below our.
Acquisition size.
We were really looking to put the capital to work in and I didn't quite as answer your first question there.
The capex in terms of what price makes sense I do want to say that according to denbury.
Well I was one of their lowest if not the lowest lifting cost field and all of their portfolio. So as they try to recover sort of emerging from this restructuring.
I would think fit a device can be pretty top priority for them. So even in the $40 range. It makes sense and makes money adelheid. So if that's any indication on on a adelheid, but along that same line you know if we have cash sitting in the bank. It definitely makes sense for us to use that for these capex programs and.
I wouldn't I don't really think of it in terms of being set aside per se, we're more than willing to go into our revolver to make a acquisition deal size I think our revolver right now is $27 million now and 19 million in cash that's about 47 $50 million of liquidity there to to do all of these operation.
Yeah, there's covenants there with a with the banks, so dipping because the price depending on it.
No were rabbit those covenants.
I'm not.
Not sure that we can draw the full $27 million at this time, but if we were looking at make an acquisition that would be brought into a devaluation as well so.
Its own table, maybe they have any thoughts on that.
Got it but that's perfect and if I can just sneak one more in here as you guys are expecting.
[music] line to get repair to back up and running here.
Not you shortly.
Should we expect injections, maybe in kind of in near term maybe go above normalized levels to kind of play a little catch up or refresh rise the field or you guys have any sense I guess as far as what what purchase.
Once that gets back up and running.
Yeah, I think before it went down we were kind of in the 80 to 83 million cubic feet a day eight AIDS and I would anticipate seeing closer to 100 range at least in the 90. It it would make sense for us to do a little make up pressure support.
We're anticipating that I don't have a real good number for you but.
It's it's not going to be any any sort of a crazy amount, but but I think that there will definitely be buying a little bit more than normal.
In the short term to kind of make up some of that.
Got it that makes sense that's it from <unk>.
Yeah.
Our next question comes from David Snow from Energy equity incorporated go ahead David.
<unk>.
Yeah.
Any shut in.
Production.
[noise] the merits merits gotta list of wells that kind of and they do they make that decision based on that back receive price.
And so right now we're going to kind of a $35 netback received price.
Because the the differential based off of the WCS is somewhere around $10, it's actually shrunk a little bit as prices have gone down.
When we were in the $55 range, we were anticipating a differential somewhere in the netback Christy price around $12 under the T.I., including all our transportation fees and whatnot, but but that's shrunk a little bit which is good news so that.
I think that's kind of in the 45 range, which 43 dollar range W.P.I. gets as to where we're or cash flow positive for those wells a there's about 25% of the wells that are.
It's still shut in so I think you're probably going to need to see 50.
Somewhere in the 48 to 50 range to get it fully back up and running.
Yeah.
But again, you know where we see those is more delayed barrels you know were will get them doesn't make sense to produce some of.
But.
<unk> currently.
I think there's 30 wells currently shut in making up about 25% of the eight eight production.
Okay. Okay. Thank you.
Yep.
Our next question comes from Andrew upon from ATP aligns Global go ahead and true.
Hey, good morning, guys. Thanks for taking my questions Andrew.
Hey.
First of all just wanted to get some clarity on that phase five development Capex number you're budgeting does that totaled 8.6 million number inclusive of the 1.9 million budgeted in fiscal fourth quarter 21.
That's right yeah.
That's about 1.9 in our fiscal 21 about 3.6 or seven in 22, and then the remainder over the following two years after that but that totaled <unk> total around 8.6.
Okay got it. Thank you and then maybe just touching on M&A, obviously evolution spend historically liquids focused in you know you guys have 100% liquid assets as you look at M&A opportunities that diversify the asset base and continue to support the dividend.
Are you also considering maybe gassier assets can you provide a little color about how you're thinking about your reserve production mix going forward.
Yeah, we're definitely looking at gas effects were looking at several gas deals now I guess, the worsening thought for US there. There's a lot of I guess that we really like we'd like to commodity and we also like its its nature for our our business strategy, meaning gas is a lot cheaper to lift in so it gets into a very flat.
Long life.
Production mode, and if you think about the just the economics of physically lifting all the fluid from oil versus gas. It's just everything's lot cheaper. So there's a lot we'd like about it. However gas is kind of a midstream marketing play you've got to that can really make your break you as many companies have found out.
So we're probably going to focus our efforts are close to take away capacity take away.
And markets, so what does that mean.
We like East, Texas close to the Carthage pipeline coming straight down to Sabine pass, we think our differentials there will be probably better than if we were to move up in Oklahoma or move out west in up to compete with a lot of the gas coming in from the Permian associated gas, that's that's lower right now and its ease back.
At Corpus and Houston are gonna get jammed up if drilling resumes in a in the Permian, which we assume that it will as soon as prices get back to any sort of reasonable.
Well, so we'd like not to be competing with all that associated gas coming in from the west So we'd like east, Texas, we like wheezing, Anna we like close to a sales markets. So it makes sense.
Yeah, that's that's great color, thanks, Jason and that's it from my side. Thanks for taking my questions. They said.
Our next question comes from Rich Howard from filing <unk> point resource, Let's go ahead rich.
Good morning.
I'd like to ask about the derivatives contracts do you have any after.
A january of.
2021.
Oh, no the and a 12 31 of 2020, so just saying if you want.
And.
You mean, the current a level of W.G. I should we assume approximately.
Well done a half a million dollar loss each quarter for the last for the next.
Two reporting.
Well that's a good question rich this is David so.
The the out months contracts from September October November December those those are those prices haven't settled yet we have liabilities owed for July and August we don't we don't report interim numbers, but could clear to the oil prices are above our fixed price swaps that we in.
Entered into at 32.
Settlement in July and August as it is a bit higher than that so.
We have liabilities due for July and August in and out months September forward or.
Remain to be settled <unk> have you seen last couple of days old price volatility we've dropped several dollars on WT.
No. If that helps you are not sure so I'm using a million and a half each quarter for the next two quarters that doesn't sound silly.
For the yeah, I can't speak to the outlets from September on but for July and August Yeah. It was about two months settled and it's it's not it's not a million five.
Okay, Great and were there any unpaid bills from Denbury I mean, obviously you have a royalty on the field I don't know exactly how it's structured.
When they went when they declared bankruptcy did they you know not pay a payment or anything of that nature.
No it's been business as usual, we'll denbury, we we receive our our our share revenues.
Scheduled each month twice now since the their announcement of bankruptcy and similarly, we paid our share our are below our Jim to them. So we've seen no disruption from from Denbury is operations since their announcement of bankruptcy. That's an important things on oil companies. If they go through that they've got to have a what they call. It they.
One motion because a lot of times, if you file it triggers an automatic stay of accounts and that was a pretty your concern for us on the 30 Firstenergy why before we paid our Jay if we wanted to make sure that they were still going to be able to do that and they shared if they weren't trying to get out of midstream contracts are going to short change any vendor and a and <unk>.
It's it's been flawless so that's worked really well.
Thank you very much that's very important okay. Thanks, thanks for taking my questions.
I think.
Our next question comes from John My from Roth Capital Go ahead John.
Thanks again.
Just wondering in previous years have there been any upside locations drilled on the phase five acreage.
Yes.
No we did some advance work.
With the water curtain to be able to control. The that's that was a set up pre.
Pre phase five to make phase five more efficient that to keep the phase five production from.
I'm going where we wanted to but that's all those aren't producers.
Okay. Thank you.
Thank you for SAP. So last question at this point I would now like to turn it back over to.
Management, Oh, I'm, sorry, [laughter], if you have any questions. Please press star one.
And of course, okay.
Well. Thank you for your participation please feel free to contact us with any other questions I look forward to providing you with an update in December.
And that does conclude today's conference. We appreciate your participation you may disconnect. Your lines at this time and have wonderful day.
[music].