Q3 2022 Evolution Petroleum Corp Earnings Call
Good day, ladies and gentlemen, and welcome to the evolution petroleum third quarter fiscal year 2022 earnings release conference call.
At this time, all participants have been placed on them. They can only mode and the floor will be opened for questions and comments after the presentation.
It is now my pleasure to turn it over to your host Ryan Slash.
So where is yours.
Thank you and good afternoon, everyone and welcome to our earnings call for fiscal third quarter of fiscal year 2022.
<unk> Chief Financial Officer, joining me today is Jason Brown, President and Chief Executive Officer. After I cover the forward looking statements Jason will review key highlights along with our operational results. I will then return to provide a more in depth financial review and finally, Jason will provide some closing comments before you 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.
We're 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.
Since detailed numbers are readily available to everyone. In Yesterdays 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.
Please note that this conference call is being recorded and if you wish to listen to a replay of today's call it'll be available by going to the company's website or via recorded replay until August nine 2022 with that I'll now turn the call over to Jason.
Thank you Ryan.
Good afternoon, everyone and thanks for joining us for today's call as always we appreciate your time and effort.
In consideration of our company as part or potential part of your investment portfolio.
Our fiscal third quarter was a bit of a watershed moment for our team.
We were able to close our third acquisition.
Enter into definitive agreements on our fourth acquisition.
The dividend to pre pandemic levels 10 cents a share per quarter.
And upgrade our staff on a few key hire a few key hires.
In a rising commodity price environment.
Proud of the work that small team has been able to do.
And execute as they prove themselves to be capable of sourcing valuing transacting and managing our interest in oil and gas properties.
It allows us to pay a consistent and substantive.
Substantive dividend to our shareholders.
We were extremely pleased with our overall results for the third quarter, which were highlighted by continued free cash flow generation.
Payment of an ongoing meaningful cash dividend to our shareholders.
A key highlight for the third quarter was clothing.
Purchaser oil weighted assets in the Williston basin in North Dakota that was on <unk>.
January 2014.
And on April one we closed the acquisition of natural gas weighted assets in the Jonah field.
And Sublet County, Wyoming.
As such we will see full period of operational and financial benefits from the two acquisitions in our fourth quarter.
Which should help drive a solid end to fiscal 'twenty to 'twenty two.
It places us in a great position for continued success in moving into fiscal 'twenty three and beyond.
During the third quarter, we produced $55 79, net Boe per day and was about 13% higher than the $49 57, net Boe per day that we produced in the second quarter.
Our third quarter also benefited from higher overall commodity pricing.
The combination of increased production and pricing as well as our continued focus on managing costs. We can control resulted in adjusted EBITDA of $12 $3 million.
About 20% higher than the second quarter.
During the third quarter, we once again generated operating cash flow in excess of development capital expenditure.
Which supported the payment of our 34th consecutive quarterly cash dividend on March 31st. Additionally.
Additionally, due to the continued strength and growth of our business.
We're pleased to declare a fourth quarter dividend of 10 cents per common share to be paid at the end of June .
With a fourth quarter dividend evolution will have paid out approximately $86 million.
Or $2 61 per share back to stockholders.
Cash dividends since the inception of our dividend program on December 31.
Of 2013.
Now, let's look at our operating results in a little more detail net production at Delhi for the third quarter grew about 4% from the second quarter.
112 for 94 Boe or approximately 250 Boe per day.
This increase is attributed to consistent run time of the NGL plant during the third quarter following the turbine maintenance and the interrupted operations in the second quarter.
Oil production at Delhi continues to be impacted by the nine months suspension of CRT purchases during the calendar 2020 due to repairs to the purchase supply pipeline. As previously discussed. The result has been lower reservoir pressure that <unk> worked diligently to restore to pre 2020 levels.
Just as a reminder, Danbury operated the field in addition to owning and operating the C. O two purchase pipeline and evolution did not incur any pipeline repair costs.
<unk> been able to increase volumes of C. O. Two since December of 2021, and we have seen some results of that effort and production volumes. However, we still have a long ways to go in restoring reservoir pressure, we will continue to monitor and anticipate improvements over the next 18 to 24 months.
Net production from the Barnett shale assets for the third quarter grew 8% to.
370, 318 Boe.
Or 30 415 BOE per day. This included the decision to adjust the production mix in fiscal 'twenty two to capture the most favorable commodity prices and maximize the overall field operating cash flow. We have been pleased with diversified energies efforts since becoming operator last October .
Diversified is running one workover rigor.
Workover rig continuously throughout the calendar 2022, and we look forward to participating with them on projects that will provide attractive ROI for our shareholders.
The Hamilton Dome production was essentially flat at 37 312 net barrels.
There were a few fewer days in the quarter. So the volumes are slightly less but it's essentially the same our operating partners Merit remains focused on maintenance projects, including continued restoration of previously shut in wells and strategic adjustments to water injection location and volume.
As I mentioned earlier were pleased to close our acquisition of certain Williston basin assets in mid January net production for the partial third quarter was $43 $5 10, which was approximately 83% oil.
As reported this is 483 BOE per day, however, remember that that represents a 90 day period.
We ended up the quarter at a daily rate of around 565 Boe per day, which is little more representative of the 77 days in the quarter that we own the asset as well as our anticipated levels of production going forward.
Technical evaluations are underway to assess and high grade potential drilling locations in the Williston asset we will let the geo mechanical and reservoir analysis in.
Our economics, and subsequent capital investments and development drilling plan.
We anticipate those beginning sometime in fiscal 2023.
With that I'll turn the corner call over to Ryan to discuss our financial highlights.
Thank you Jason.
I'll share some highlights from our strong results for third quarter of fiscal 2022 as I mentioned, please refer to our press release from yesterday afternoon for additional information and details, but some of the key highlights include.
Adjusted EBITDA, increasing 20% to $12 3 million from $10 2 million in the second quarter of fiscal 2022.
Third quarter, adjusted EBITDA was $24 58 per BOE, which was 9% higher than the second quarter at.
As Jason mentioned, we once again funded all operations development capital and dividends out of operating cash flow and maintained our strong balance sheet with $13 4 million of cash on hand $20 million of debt as of March 31.
Supported by our solid operational and cash flow outlook as Jason mentioned, we paid a dividend of <unk> 10 per share in the third quarter and we pay one in the fourth quarter.
That will be payable on June 30 to shareholders of record as of June 15th.
At the end of the third quarter of fiscal 2022, working capital was $15 4 million liquidity was $43 4 million, including the $13 4 million of cash I, just mentioned and $30 million of availability that.
Now as we announced in early April we closed on our Jonah field acquisition on April 1st and borrowed $17 million, bringing our total outstanding amount to $37 million since closing the acquisition. We had subsequently paid down 404 in a quarter million dollars.
Just on the current robust commodity price outlook, we expect to be able to rapidly pay down this remaining debt.
As further result of closing the Jonah acquisition the margin collateral value as defined under our credit facility was increased to $160 million. As a reminder, the company is required to enter into hedges on a rolling 12 month basis, when borrowings exceed 25% of the margin collateral value and since we are below this minimum threshold of 25%, we're not required to enter into.
Any additional hedges at this time however on April 1st we did enter into hedges for 25% of the expected incremental natural gas production from the Jonah acquisition through March 2023.
We utilize costless colors, which is consistent with our strategy of retaining exposure to commodity prices details of all of our existing hedges will be available in our 10-Q filing.
Looking at the third quarter financials, a little more detail. We grew total revenue to $25 7 million, which is 15% increase from the second quarter.
Oil revenue increased to $14 9 million due to 8% higher sales volumes, primarily as a result of the closing of the Williston Basin acquisition in January 2014, as well as a 30% increase in realized pricing.
Natural gas revenue decreased to $6 1 million from $19 2 million in the second quarter and as we discussed in our last earnings call. The second quarter included additional natural gas volumes in the Barnett as a result of an adjustment for prior periods to reflect ethane rejection that had occurred in the field. Excluding these adjustments revenue in the second quarter would've been approximately.
$8 5 million.
Also contributing to the decline in revenue from the prior quarter with a 16% decline in the realized price of natural gas.
NGL revenue increased to $4 7 million due to lower NGL volumes last quarter as a result of the adjustments made related to the ethane rejection in the Barnett that I just mentioned.
As a reminder, the operator decides to reject ethane into the gas stream to capitalize on a more favorable natural gas pricing environment to maximize overall cash flow.
Also contributing to the increase in NGL revenues was higher consistent run time at the Delhi, NGL plant, leading to higher NGL volumes at Delhi.
Lease operating expenses increased $12 1 million in the third quarter contributing.
Controlling this increase was 400000 at higher <unk> cost at Delhi compared to the prior quarter, primarily due to higher volumes higher CRT volumes, an increase in the Sidoti cost per Mcf as a purchase price as we mentioned before for <unk> is based on the price of oil.
There was $1 million increase in other lease operating costs, which was primarily a result of the closing of the Williston Basin acquisition on January <unk>.
Total lease operating expenses for the third quarter was $24 seven per BOE, which is just 3% higher than the prior quarter of $23 46.
General and administrative expenses decreased 17% to $1 5 million from $1 8 million in the second quarter.
Turning to the overall decrease were lower consulting legal and compensation costs in the third quarter.
Net income for the third quarter was $5 7 million or <unk> 17 per diluted share versus $6 8 million or <unk> 20 per diluted share in the second quarter. The decrease in net income was attributable to a $2 $4 million unrealized loss on derivative contracts recorded in the third quarter, which was offset by increased income from operations, primarily due to higher.
And commodity prices.
Adjusted net income for the third quarter, excluding selected items came in at $7 7 million or <unk> 23 per diluted share. Please see our press release for a reconciliation of our non-GAAP measures.
For the third quarter, we invested 100000 in capital expenditures and conformance projects. We currently expect that our operators will continue conformance projects and likely incur additional maintenance capital expenditures as oil prices remain strong.
So as Jason had mentioned that the Barnett shale, we expect to see one continues workover rig running throughout calendar 2022, and in our newest asset the Jonah field. We recently received two two a piece from the operator Jonah energy for re completes that are scheduled for our fiscal fourth quarter.
This was this was a nice surprise for US is we actually didn't base any of our acquisition economics on any activity in China. So it's nice to see Jonah energy looking to do some work to take advantage of the pricing environment.
Our Williston basin properties, our operator operating partner Foundation is planning some re completes and development projects that are scheduled to be scheduled to begin in the first quarter of our fiscal 2023.
Now for the remainder of our fiscal year, we anticipate total capital spending in the range of 500000 to $1 million.
Our preliminary budget for fiscal year 2023 is set at $4 million to $6 million and I would note that this does not include any potential drilling in the Williston basin or really any more incremental activity at Jonah is we hadn't budgeted that as.
So we have not budgeted for that at this time.
And with that I'll turn the call back over to Jason for his closing remarks.
Thanks Ryan.
Over the past several months, we've made significant progress in further positioning evolution for continued success.
And providing increased visibility for meaningful return of shareholder capital through our long term.
Orderly cash dividend program or.
Our Williston basin, and Jonah field acquisitions have further diversified our product mix.
And expanded our footprint and to do with two additional prolific producing basins and onshore U S.
We also have added the optionality to invest in low risk organic drilling and development opportunities.
While maintaining and growing production with our operating partners.
As we discussed today, we clearly saw positive impact from the Williston Basin acquisition in our third quarter results.
We look forward to a full period of results during the fourth quarter. Our fourth quarter will also have the benefit of operating results from the Jonah field acquisition.
These two recent strategic transactions represent our latest success in our targeted efforts.
Beginning late 2019 to increase immediate and long term cash generation for the benefit of our shareholders.
Through the strategic expansion of our geographic footprint of assets and production mix.
We've accomplished our significant growth and value creation without material shareholder dilution or onerous debt.
And most importantly, we have continued to return value to our shareholders through a constant dividend over the past eight years.
With $37 million of incremental debt from the two transactions, we estimate that our outstanding debt will remain well below one times annualized EBITDA.
An increase in free cash flow generation will allow rapid debt reduction as we continue to support our dividend strategy. Our corporate goal is to keep our leverage below one one times annualized EBITDA.
Currently we're on track to pay down our outstanding debt.
With these two acquisitions well within the fiscal year.
I would also note that we have strategically grown the business with minimal increases in overhead, which is expected to dramatically reduce our G&A cost per barrel metrics.
With the addition of our ownership interest in the Williston Basin and Jonah field.
We have transformed the company from having ownership in a single field in 2019 to one that have now a presence in five key U S oil and natural gas plays we've also expanded our operating partner base because.
Because we are now working with five proven and respected operators that are squarely focused on ensuring long term sustainability of their operations and working closely with their business partners.
Other stakeholders.
As we've discussed in the past maintaining and hopefully growing our common stock dividend remains our top priority.
The Williston basin, and Jonah field acquisitions, we have increased our size and scale, while diversifying our asset areas and product mix. This has allowed us to enhance the visibility of our cash flow generation for the next decade to fund our dividend and consistently return value to shareholders.
We will continue to look for and evaluate accretive acquisition opportunities that meet our requirements our requirement of long life established production and disciplined growth opportunities both of which support value creation.
For our shareholders.
With that we're ready to take questions. Operator, please open the line for questions.
Thank you ladies and gentlemen, sorry is now open for questions. If you have any questions or comments. Please press star one on your phone at this time.
While closing your question. Please pickup your handset listening on speaker phone.
And some quality people we poll for questions.
Thank you. Your first question is coming from John Walsh at Roth Capital Sir Please ask your question.
Good morning, guys and nice quarter.
Hey, John Thanks, Thanks, John .
I know you talked about it in your opening remarks, but could you give us a little bit more on Delhi.
In terms of what Dan Barry is thinking about the injection rates and whats been Barry thinking about drilling some more wells there.
While were doing Theyre doing a reassessment were doing that of our own right now it's kind of doing a deep dive in the.
We'll get to.
Kind of feel like if a C O two expert doing a deep dive technically on our side, they're doing the same on their side and our asset team.
And we're looking at how to further develop the field they focus their efforts this year and what we would call.
<unk>.
Are the remainder of fiscal 'twenty, two basically calendar 'twenty three for them.
They focused on conformance projects and there is a which we already reported about a month ago a workover with.
Heat exchanger now that that's a pretty big deal and we're very excited about that.
That's going to be able to.
Sometimes in the summer time, when the temperature is too hot we have lowered the Sidoti <unk> <unk>.
In the wintertime.
Too cold in some kind of freezes. This is going to help both of those to have more consistent delivery of Sidoti.
Really as the priority right now is delivering as much cotwo possible. They repaired the line in October of 'twenty one.
I am sorry October 'twenty, but they really didnt werent able to kick up what we would call extra volumes above what was needed to maintain until December of.
'twenty one so just the last four or five months, we've already seen.
Response sort of a flattening and which is great and the even a term the rock. The good news is over the last 15 years. The rock is always responded very well to pressure. So like I said, we're going to be monitoring that over the next 18 to 24 months. So we think more than additional wells at this point consistent deliberating that C O two.
It is going to increase pressure is the best thing they can do and they are aligned with us on that.
Okay. Thank you that sounds positive.
And.
The additional <unk> at Jonah and Williston.
Those are all Workovers, there's no new drills.
Yeah, that's right that's right.
We're also doing kind of a deep dive technically in the Williston basin right now, but the Jonah that thats, a very populated and then drill down to 10 acre spacing and much of it. It's a 3000 foot reservoir, so theres quite a bit of workover opportunities to do and I think we've got we get pitched a couple a few this week, which we're real excited about any work there.
It's going to happen there gas prices are very strong and maybe even stronger in that part of the country headed west as we've discussed before so having anything they are doing up there and we're excited about that we had a great technical meetings with our operator founding foundation, our partner up in the Williston Basin and I've got to say, we took the whole team up there in late March and met with their team.
<unk>.
We met again in Denver with some engineers that were working on to do kind of have some geo mechanical and reservoir studies there.
Very very happy with what we see are very happy with the cooperation.
Sure.
I am very pleased with that relationship so far so I wouldn't anticipate and we'll let everybody know well in advance of that but I wouldn't anticipate anything starting up there in terms of beyond workovers.
Until.
Probably early calendar 'twenty three at least the second half of our fiscal 'twenty three.
That's the kind of activity you like keep debt.
Keep the Capex yet.
Yeah.
And then bring on some increased production.
The same thing with the Barnett there that they've got a workover rig that's running this we took the whole team to meet that diversified as well they're operating team is a great many of which have been with the asset for many years, but just didn't have the capital support and diversified.
After taking over that asset in October is providing the ops team with.
With capital to do work that they probably have been wanting to do out there for years.
They are getting to it and we're appreciative of that.
Thanks, very much I'll pass it on.
Thanks, Jeff.
Thank you. Your next question is coming from John Blair.
And wealth advisors, Sir please ask your question. Thank.
There is no well and the last name.
Hey, Jason and Brian Nice quarter.
Couple of questions here want to kind of circle back to Delhi.
More specifically I was wondering if sudden Danbury were you all internally are looking at doing anything with regards to the phase five areas has kind of been on the books for a while and door.
The Mengel unit.
That you've had and some.
Some past.
Slide decks.
Okay.
We haven't discussed the mengel unit their.
Capital program, our budgeting process started in August so we're going through we started our reserves process now.
Which kind of concludes in about that same time.
Like I said, where we're doing a deep dive on Delhi to kind of come up with.
What we would propose I guess drop is the best way to say that they seem to express some cooperation which is great. The mengel unit, specifically I think that we had a higher price environment before that was even considered.
We're clearly in a higher price environment now so that's something that we want to bring back up on the table, but I wouldn't.
Nothing has been discussed about it right now in terms of phase five there they're.
Theyre doing a re look at that as well.
As part of their.
Restructuring process most of those projects Scott.
I guess.
I don't want to say clift, but most of those projects got set aside when they went through their restructuring and sort of need to be.
Re proposed internally so that process and that study is going in parallel on our side and their side right now to hopefully get.
Submitted into their program next.
Fall sewer.
Fall so.
Paul Good morning.
What kinds of opportunities.
You said fall 'twenty three.
Youre, meaning no. This next fall for their budgeting process coming fall okay.
<unk> said that that probably was going to be 23 potentially 24.
It's basically just got pushed off a couple of years. So I think we've asked them to make.
To take a harder look at it and see if we can schedule a little bit further, but there are a large company and have capital competition in all the different asset areas.
Where the non op person. So we're doing what we can do.
It's still on the table with let's say that yes.
Ryan.
Address the mic.
On your Capex, maybe for next year was $4 6 million and that would not.
Include any.
New drill.
Drilling proposals I guess, rather than workovers is that right.
Yes, no that's right John It's just really what we expect in each and really Workover and conformance type projects for each for assets, Okay and is that including the <unk> that you. Just recently got from Jonah or was that kind of estimate prior to to receiving that yes. It was prior to receiving them.
From Jonah so obviously if activity picks up there will we take a look at that budget every quarter. So we'll have to take another look at year end to see if we need to update it but.
Obviously, we had a range there. So there's certainly some things will happen some things won't but yeah, we hadn't considered jonah activity really when we had put that together yes.
Yes.
And then.
That bump up.
Because you had said in your prepared press release.
Half a million a million in capex for the fourth quarter. So that's kind of.
Okay times, Fortunately, you get $4 million on the downside, maybe $6 million up how much of that might be.
Tribute to bowl too.
Higher service and material costs.
Words.
Workover rig costs and so forth.
How much is at it and yes.
And.
We are building in about 20%.
Yeah now.
Company like diversified therapy.
Being pretty salty with what they're pulling together, they've got tubing and other areas and they're doing a lot of transfer stuff, but that's been pretty great and saved everyone a lot of money but.
That won't last forever.
So I think in general we're I think 20% the number if we were saying on the fourth quarter of $502 million I'd say, probably we're going to be on the upper end of that now.
Jonah, but it's not different than we kind of talked about I remember, a small amount of maintenance and workover capex in each one of these plays to sort of flatten production as our DDA as we can.
Very good well thanks for taking my questions. We haven't seen the massive crunch John to answer that it's a little more specifically.
On tubular and.
Frac sand and all the things that the supply chain, particularly in the Permian is jammed people up and led to some exorbitant prices. So we're anticipating building in kind of a 15% to 20%, but we're also hopeful that some of those things will get worked out over the course of the next year.
Alright, great.
One last question about M&A, what's the M&A landscape for you right now given prices are up or people being real proud of their projections.
Not really willing to.
Trade them off or there is more activity offering.
Properties to sell because of the higher prices.
Well, John it's kind of both.
Backward dated curve is is actually making it to where people can't get things done still.
Inc.
There is an instability in the market that's priced in so people would return quite comfortable long term as people get more and more comfortable in the go forward and believe the prices go for the back into that curve is going to raise and everything is going to get a whole lot more expensive probably untenable.
At the point now we still think it's within striking distance.
Sure.
Our appetite is.
Not quite as aggressive as it was so we can be a little more choosy now.
We are seeing quite a few failed deal and we're seeing some private equity backed portfolio companies with assets.
They are starting to get a little market therapy, and if they don't sell now what are they going to sell so we still feel pretty hopeful that.
There might be something that we can pull out over the next six months.
Great great. Thanks very much.
Yes.
Thank you Sir your next question is coming from Jeff Robertson Watercolor research Sir Please post your question.
Thank you Jason a question on Delhi, I think you said 18 to 24 months for.
For the reservoir pressure to respond to increased Cotwo injection.
Can you do you have an opinion or a view as to how you think production will.
Will behave as the reservoir responds.
I do but it's being informed by the deeper dive that we're doing now.
I think it's probably going to be even a longer haul that back.
My Best guess is that 24 months.
We are.
We would hope to be back on decline of where we were prior to.
So were going off in the spring of 2020.
So it doesn't mean that we would be back to that rate I think it was 50 580 <unk> production at the time.
I think.
I think we wouldn't expect to get there, but if that was just to do its normal roll off of 89% annually and 24 months now we'd be back to that curve I think that's my best guess the reserves are there and we'll get them. It's just going to take a little longer now and like I said before the rocks always responded to pressure.
It's something they would get to a lot quicker.
If we can pump 120 million cubic feet a day. The approach is not going to run that hard but right now they've been averaging around 95 million cubic feet. A day for the last couple of months and we're seeing a softening but.
It's just going to take well done.
Are they are they doing any is the injection is it's going in is it are they changing the way they're looking at looking at any of the patterns or are they just going back and trying to.
Refresh of the areas that they know they lost.
They are yes they are.
So part of this kind of a deep dive we're doing a deep pattern analysis that we actually haven't done here before and.
That's part of our reserves process.
We feel like we've got someone who's had 30 years' experience doing nothing with tier two.
So that's been real addition for us.
That's going to inform and help us proposed to them. They are doing the same thing over there.
This is generally where everything's are opening.
Team is constantly working on conformance projects.
Different zones start to gas out.
They rework goes and put it in the zones that they.
Theyre not yet done so.
They're constantly work in the field and they have returned conformance projects and that's been very very needed because there was two years they didn't do anything so.
That's really all I can say, we're doing a deep dive and we're going to have we feel like a better understanding of it over the next couple of months.
Jason that Joni you said Youll pleasantly surprise for the two <unk> that you've gotten from Jonah energy are they are those just opportunistic with where gas prices or are they trying a couple of projects that if successful they might need to.
Additional workover projects in your fiscal 'twenty three.
We do believe there'll be more yes.
I think that they've the company's kind of been focused on other areas and the ops team to sort of express that.
We're excited to have a partner that wanted to that wanted to participate and they've been very <unk>.
<unk> coming with them from information, we've got the asset teams together or the ops teams together and Thats been a really great too. So it's important for us to be inactive non op participant and that starts with a pretty proactive.
Our relationship with these guys and gals.
I guess I'm, a little bit surprised because it is fairly developed but theres quite a few areas that.
They wanted to proceed before at a lower price environment that just didn't make sense that are very attractive now so.
<unk>.
We did not bank on that so it would be unquantified upside for US we just bought it for the PDP roll off so very excited about that.
And a question Ryan can you.
<unk> had a little light on power.
<unk> fourth quarter fiscal fourth quarter, LOE might look with a different mix of.
Assets now that you'll have a full quarter from the.
The Williston, but also a full quarter from Jonah.
Yes, so I mean, so the LOE itself do you saw Joan are sorry, Williston was almost a full quarter REIT World made short about 15 day, so really what we would hope to see it.
Is it lowering a little bit right, because obviously, jonah being a little bit lower cost, we're talking and kind of the <unk>.
10 to $11 per barrel range. So when we add that in a pro forma basis, we would certainly hope to Diablo <unk> would reduce it.
At least a little bit from kind of the $24 roughly that were at this quarter that would be our expectations right now Jeff.
Okay. Thank you.
Thank you Sir your next question is coming from David Lock Bold investments Sir please pose your question.
Hey, guys. How are you doing thanks for taking the question.
Yeah.
So based on what you said about Capex for next year, yet add the dividends and Capex together, you've got about $5 million of commitments this quarter.
For cash out the door.
You're obviously, bringing it in the door, a heck of a lot faster than that.
So can you sort of describe for me what the waterfall of the uses of that excess cashes.
Well, David its a good problem and it is a problem we got to figure out what to do with it I guess, but.
Now we're we've got the Optionality of these locations and I just described a situation where the M&A environment.
It's probably tightening I think still potential. So we were looking at two or three deals there as well.
We're now starting to consider some things, where we would potentially use some of our shares.
As part of a deal a smaller transaction in the sense that if.
R R.
Prices are up because our stocks effort and their prices are up you can kind of if you rollout both up you can still make a relative deal.
To become a little more difficult to pay just straight cash for.
For deals as prices continue to increase.
So the M&A market is something that we're definitely right in the middle of and I am hopeful that we can pull something out there and put some cash to work is we'll probably have our debt pay down.
Bye.
I don't know by the holiday season, I think towards the end of the calendar year.
We're bringing in cash quite a bit but the other thing is this potential drilling locations that gives us some optionality, we've never had before and if youre ever going to drill when oil was over 100 box and you've got oil well that you can go drill development.
We're working that in parallel at the same time so.
If we have a potential to make an acquisition, which I I.
I hope that you are hearing them definitely hopeful on that and we will pull the trigger there is the bid ask is a little too wide.
We've shown over two decades that we're not going to.
We're going to be disciplined there, so <unk> and <unk>.
Now we have some optionality and put some capital to work drilling so.
That's probably what the next 12 months look like.
Okay, how much.
How much more expensive roughly would you say the A&D market is now relative to when you did the Williston and Jonah deals.
That's a good question.
I think about things in terms of as inaccurate acquisition guide in terms of flat pricing.
So right now.
Current strip starts at around 102 or something in over five years it gets down to.
70 ish something like that so it's kind of I think of it as a five year average and we look for assets that are more 10 to 20 years long. So you can kind of look at a 10 year out, but we generally hold the fifth year flat. So if you look at our five year averages can be somewhere in the 78 range 75 range.
10 years is going to be closer to 72 range.
I think when we bought the Williston we were when we first start negotiating that deal is more in the $63 64 range flat. If you look anywhere in the last 357 10 years average the oil it's going to be about 57%. So we're clearly at a higher price environment than we were but going forward.
Could we get something where we're transacting somewhere in the $20 67 to 70 range flat, that's still probably tenable and it's still probably <unk> at this point.
That's higher than we did with the Williston, but.
Percentage wise, it's within that 15% ish range.
Obviously all of this depends on the quality of the assets something like Hamilton downloads been producing for 100 years.
Super flat.
But the.
You can you can pay a little more in the near term because you've got a longer term.
Production, that's going to support our dividend so our business strategy.
Lets us be.
A little wider lens I guess on deals like that.
Brian anything.
No I agree with that on M&A I did want to circle back up on your question David on kind of use of proceeds for cash and the one thing.
That we did mention is dividend obviously, its the board looks at dividend every quarter and so.
Dividend increase is certainly not off the table, depending on the outlook and how the assets perform so as you look at spectrum of things. We can do certainly debt paydown rate as Jason mentioned, we're looking at deals and dividend and returning capital to shareholders, even above and beyond the current one is certainly on the table, but it's something the board looks at every quarter.
Okay. Thanks.
So if I could just ask one more maybe slightly annoying question.
Which is if youre finding the bid ask spread in the M&A market to be.
A little wider than your liking.
How does including.
What is probably underpriced stock in the transaction to help close that gap.
Okay.
It has to be a group that understands the value of the stock which in combination with additional assets is going to likely be stronger.
And so the the.
The premium that they are wanting from the assets that the market is not currently giving them, it's a way for us to get into those assets and what it looks like.
A more reasonable sticker price, but then the combination of this helps our stock and then they get the benefit and Thats, where they get the uptick so.
That felt a little better a month ago things.
Things that are a little volatile right now so I am not disagreeing with you and it's constantly moving target.
Bid ask that we're seeing that's too expensive or people, who are just trying to take advantage of the strip price, which.
I also mentioned earlier there is a lot of failed deals out there too so.
Got to be the right set and it's got to work for both parties and.
Okay.
Got it.
It's not a perfect environment, but we feel really good about it because we're in a really good spot to be able to know as an acceptable answer for us right now.
Alright.
Let's see.
Not to beat not to beat it to death from Neil.
I would I would add to that is just what you are not going to see US do is go by.
Probably a PV 20 sort of PDP decline asset with with potentially cash in stock rate with Jason is talking about is sort of more of a strategic potential deal where you are looking at a relative value between two companies and if they if the.
Part would give us the value that we think our stock is worth and that the shareholders. We appreciate it's something we could potentially transact on rate and we're not going to necessarily go issue at first.
Issue stock right now for cash right and go buy some more PDP assets.
Oh, yes, I wouldn't have expected that.
And then.
If you guys turned around and started putting some significant capital into the Williston.
Would you when.
When would you hedge some of that early production or would you just.
Take the risk that it's going to work.
Taking a look at at the time.
We're working our revolver so some of that depends on the bank.
And.
The hedging we generally like to stay away from it as much as we can we want to be a call option. We feel like we've got the balance sheet too to endure it.
But we wouldn't we would look at it I don't know I think when we.
I think we would consider it I think really what we would also look at is only engaging and projects that we feel really good about the returns on right even in a lower potential price environment right. That's the other way we would look at it as running pricing scenarios right. I mean hedging is one thing we could do to try to lock in our return on drilling, but we can also and we do look at sensitive.
The analysis is on well what what are the drilling economics look like at such and such a price right at call. It 65 flat or more mid cycle pricing. So I think we'd probably look at everything when we evaluate those opportunities.
The other thing David is this how is.
The potential for an increased dividend that's on the table as well lots of things that we can do with the cash and we don't like to back up from the dividend. So if we're going to we want a long term support of that so.
All of these things are on the table to sort of figure out how to grow and return capital to shareholders return value to shareholders.
Is there an increased stock price at dividend additional assets or.
It's all on the table.
Alright.
Thanks, a bunch for engaging with all the questions.
Okay.
Yes.
Thank you. Your next question is coming from Jon Weiss of Roth capital Sir Please pose your question.
Thank you operator, just responding to the comment of the.
I believe I heard towards low price stock.
Gordon to my comp tables.
Evolution trades at some pretty nice multiples.
But on to my questions.
Jonah is the last deal you closed on so I'm wondering.
Now that you are in.
In the ownership position.
Have you seen anything that you weren't expecting or have there been any surprises on the operations or land.
Yeah.
Any surprises.
With the Jonah know exited surprise the only surprise available they want to do some work.
We're very pleased with that so.
Now that's been that's been really good.
They they prep the small little piece, but.
We reported that but.
No other than that where we.
We're very very pleased with it.
No I wasn't trying to pull negatives out of you, but just wanted to ask.
In your answer on the.
The M&A question you mentioned there had been some recently failed deals any more color on that is as why they failed or were they bag with a small.
Okay.
No.
Some smaller ones.
Kind of the whole range, we're really focused on things kind of in that $25 million to $50 million range, we would consider things a little bigger.
But.
There's been several over the spring and anytime prices move the way, they do and Thats been pretty volatile.
It's kind of hard to hold deals together. So we've seen a couple of things that might have a chance to come back around.
Okay.
Nothing nothing specifically.
Hi.
I also wanted to say.
In the Williston Basin. He asked me about any surprises on the Jonah.
On the Williston basin with the board and I were actually able to go up there last week, we had our board meeting.
Offsite and we were able to travel to the Williston field and met with our foundation our partner up there.
Wow I was very very impressed we did a pretty thorough environmental due diligence, where we take photographs of everything but it was really great to see them in person and just how well run of an operation that is we were pretty happy.
The board is very pleased to get to me with there.
HSE.
Personnel and their production performance and superintendents and whatnot.
It was impressive operation so.
That was a little bit surprise.
Glad to hear it.
It's good to go to the Williston in the spring.
Yes.
Okay, that's great I'll pass it on.
Okay.
Okay.
Thank you Sir your next question is coming from Zach Congrats DRC, Sir please pose your question.
Hey, guys.
Actually the color.
Two ago.
Nailed all mine on the cash flow side.
The only thing I would add is.
With regards to your dividend comments.
Would you be considering.
A base plus may be variable dividend.
As an option here and the reason I ask is historically.
Evolution has been attractive for its strong balance sheet.
Higher than peer yield and now you look at today.
You've got a lot of royalty companies other non op companies and even some of the smaller e&ps that are getting more competitive from a yield standpoint. So.
Just trying to understand maybe what that that dividend.
Methodology kind of looks like.
Yes, I mean I think we've.
<unk> traditionally obviously had kind of pay kind of his 10 cents per quarter dividend historically, which has obviously as there have been periods of stress has been lowered in the back up and I think going forward.
<unk> likes to be thoughtful and look out on a long spectrum as Jason kind of mentioned in the past when we look at things on 510 year basis. So we want to have.
The base dividend, if you will if you're using that analogy that we can we can support and pay for multi years.
Had the discussions at the board level about a base plus variable personally I'm not convinced that the market really pays are gives credit to companies for that yet on that kind of a variable piece, it's hard to sort of look at that yield on an annualized basis right to really buy a buy a stock on a yield basis looking at that variable sell I'm not sure that we're there.
Yet on the variable piece, but certainly look at wanting to have a base dividend that we can support over a longer term period I know, Jason when you look at it.
Yes, it's all on the table I think we.
I think in general just wanted to get probably recognition for it so we.
We want something that's sustainable we want we don't want to be too reactive whats something that we can deliver and not have to backup from and I think that's always displayed in our entire history.
But.
So a variable dividend do you really get credit in the market for it in the share price and the market share going up.
I think probably most people would say no.
But it.
We'll see we're not we're not afraid of raising the dividend in <unk>.
It sounds like we're going to keep our eye on I mean, you make a valid point right I mean, when we started paying a dividend in 2013 and even as recently as a year or two ago.
There aren't a lot of your E&P companies outside of.
Which aren't really around two point of Mlps that really paid a consistent dividend right youre, starting to see that because investors demand right but.
So it's something that we're certainly keeping our keeping our watch on we're just particularly can.
Focused on not giving on a treadmill, that's not sustainable where we have to start making poor oil and gas decisions.
On buying things and supplying inventory.
Just try to meet an ever increasing.
Dividend yield, which is kind of a trap that some of the mlps got into.
Yes.
Good problem to have so appreciate that.
Yes.
Thank you. Your next question is coming from Charles <unk> of E. F. W partners. Sir please pose your question.
Hi, guys and great quarter.
New shareholder at DPM.
As I look at this.
Ray.
Sort of high class decisions that you have in front of you now.
With that you referenced paying down debt paying dividend etsy.
Et cetera.
Maybe even buying back stock nobody has mentioned that.
I just wonder how and then of course acquisitions are a big part of that.
We have options that you have in front of you every day.
I try to understand a little better how you make these decisions and trade offs I find myself wondering.
What what's personally motivating management is it.
If you don't mind my asking that question is it.
Aside from salary or you guys motivated entirely by share price or are you getting bonuses for doing M&A deals or other kinds of things can you shed any light on that whatsoever.
Very much.
Sure.
We are.
Our comp committee.
We have we have base salaries, I think they're pretty modest compared to our peer groups, but we haven't and as chip in a short term incentive and a long term incentive so.
Each one of those are driven with a whole array of metrics that are in our proxy. So I think this last year, we had a certain percent of our base like I think my my base bonuses could be as much as a one times my salary.
I don't know 25% of that maybe was worse.
Ben on giving an acquisition of a certain size or whatnot.
The dollar amount.
And then some of it was earning free free cash flow per share with a decent chunk of it and then there is certain.
Investor Relations conferences.
Kind of a variety of things that the board does.
They wanted management to focus on throughout the year and it's our job to go out and try to make those things happen.
Analyst coverage and whatnot, but it's a little more difficult than the L. Tip of the long term incentive is more kind of a percentage of our salary that.
And shares that.
Some of it vests over three years on the time period, maybe a third of it and then two thirds of it or based on where we rank in terms of appear.
Our peer group.
Total.
Shareholder return in terms of I think this year, it's a double hurdle, where we've got to get in the top quarter.
Our peer group and then also a double digit return or whatever a certain period of time.
To give full price or full target.
So it's all of that will be in the proxy.
So it's kind of a combination I think.
Management owns about 9% of the company.
Our largest shareholder management is.
As our chairman who owns what five five or so whatever it is.
About a point and a half.
The rest is held by the rest of the board and management.
So we'll have some portion of shares good motivated so world owners.
Yes, I mean, I would say where we are.
Jason mentioned, we're focused on total shareholder return right. So.
That's a big driver so share price, yes, but obviously the dividend is one piece of shareholder return right. So we look at we look at both pieces as we comp ourselves to our peer group and as we try to perform for the shareholders.
Thank you.
Yes.
Once again, if there are any remaining questions or comments. Please press star one on your phone at this time.
Sir there appear to be no further questions in the queue do you have any closing comments you'd like to finish with.
Sure.
Once again, we appreciate everyone's time today and look forward to speaking in September when we report our fiscal 'twenty, two fourth quarter and full year earnings on behalf of our full team and our board I want to thank you our shareholders for their continued support of our strong strategic long term efforts.
Please feel free to contact us with any other questions or comments.
Have a good day.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your lines at this time and have a wonderful day. Thank you for your participation.
Yes.