Evolution Petroleum Corporation (AMEX:EPM) Q4 2023 Earnings Call Transcript

Evolution Petroleum Corporation (AMEX:EPM) Q4 2023 Earnings Call Transcript September 13, 2023

Operator: Good afternoon and welcome to the Evolution Petroleum Fiscal Fourth Quarter 2023 Earnings Release Conference Call. At this time, all participants have been placed in a listen-only mode and floor will be open for questions and comments after the presentation. I will now turn the call over to your host Brandi Hudson, Investor Relations Manager. Please go ahead.

Brandi Hudson: Thank you. Welcome to Evolution Petroleum’s fiscal full year 2023 earnings call. I’m joined by Kelly Loyd, President and Chief Executive Officer; Ryan Stash, Senior Vice President, Chief Financial Officer, and Treasurer; and Mark Bunch, Chief Operating Officer. We released our fiscal 2023 full year and fourth quarter financial results after the market closed yesterday. Please refer to our earnings press release for additional information concerning these results. You can access our earnings release in the Investor Relations section of our website. Please note that any statements and information provided in today’s speak only as of today’s date September 13th, 2023, and any time-sensitive information may not be accurate at a later date.

Copyright: Elnur / 123RF Stock Photo

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 statements. 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 closet comparable GAAP measures can be found in our earnings release. Kelly will begin today’s call with a few opening comments; followed by our operational results from COO, Mark Bunch; and then Ryan Stash, CFO will review our fiscal year financials before turning back over to Kelly for closing comments.

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.

Kelly Loyd: Thanks, Brandi. Good afternoon, everyone, and thanks for joining us for today’s call. We appreciate everyone’s interest in our reporting of our successful fiscal 2023 operational and financial results. However, before we begin to discuss our recent results, I’d first like to make some general comments related to the announcement we put out this morning with PEDEVCO concerning our definitive participation agreement to jointly develop the Chaveroo oil field in the Northwest Shelf of Southern New Mexico. It’s a conventional oil-bearing San Andres play in the Permian Basin located in Chavez County. We’re proud to partner with PEDEVCO, a company that shares our values and goals of providing superior total returns to shareholders.

I will let Mark go into the details of this strategic partnership later, but I want to point out the biggest highlight of this arrangement first. The deal adds a new and exciting arrow in our quiver of capital allocation opportunities. In the past, in order to grow our production and reserves, we have relied heavily on the A&D market. While we’ve been quite successful and plan to continue that strategy, the 80-plus high quality locations covered by this agreement will allow Evolution to grow or maintain its production and reserves, even in times where asset level transactions are priced at what we consider to be unattractive levels. In turn, we believe this will be highly supportive to our dividend program for years to come. The wells here are 90%-plus oil and located in the Permian Basin, which is an important market to which we want to be exposed.

Now, on to our fiscal 2023 results. Our results for the period were solid and continued to demonstrate our assets’ ability to generate strong free cash flow. We used our cash flow to once again fund operations, capital spending, and shareholder dividends. In addition, I’m pleased to report that we repaid $21.5 million of debt, again, all from cash flow and exited the year with a debt-free balance sheet and increased liquidity. We continue generating meaningful free cash flow from the acquisitions completed over the previous years and we’ll use these to continue to fund our strategic objectives. Of course, our ongoing success is a direct reflection of the hard work and accomplishments of our team. I want to thank each and every member of the Evolution team for their contributions and continued dedication to driving near and long-term value for our shareholders.

During the fiscal year, we paid cash dividends totaling $0.48 per common share. This was 37% higher than for fiscal 2022, which we view as a clear indicator of the growth and strength of our business. Our Board recently declared a cash dividend of $0.12 per share for fiscal Q1 2024, payable on September 29th, marking the payment of our 40th consecutive quarterly dividend. Since the company began paying dividends in December of 2013, we’ve returned approximately $102.4 million or $3.09 per share of capital to investors. As we have discussed in the past, there are very few small cap E&P companies that can say they’ve consistently paid a dividend for that length of time throughout several tumultuous commodity price cycles. We believe this reinforces the strategic view our Board takes as we prudently grow the business through the targeted acquisition of solid long-life and low decline assets that will continue to support a sustainable quarterly dividend for the immediate and long-term, in short, maintaining and ultimately growing the payment of a quarterly cash dividend remains front and center for our Board and management team.

I will now turn the call over to Mark to discuss operations.

Mark Bunch: Thanks Kelly. Total production for the fourth quarter fiscal 2023 was 6,484 net barrels of oil equivalent per day, consisting of 1,736 barrels per day of crude oil; 22,462 thousand cubic feet per day of natural gas, and 1,000 barrels per day of natural gas liquids. Looking at our fourth quarter results in more detail, oil decreased 6% from 1,856 barrels of oil per day in the prior quarter, primarily due to downtime at the Delhi Field, where production was shut in for approximately one week to upgrade the facilities and install a heat exchanger to increase plant efficiencies. Natural gas production decreased 8% from 24,489,000 cubic feet per day or 4,077 barrels of oil equivalent per day in the prior quarter, primarily due to downtime in the Barnett Shale properties associated with extreme summer weather conditions, along with gathering line maintenance and compressor issues.

NGL production decreased 13% from 1,156 barrels of NGLs per day in the prior quarter, primarily attributed to downtime at our Delhi Field properties to install the heat exchanger, perform NGL plant maintenance. At our Barnett Shale properties, our NGL volumes were affected by the same factors that impacted our natural gas production. Looking at our full year results in more detail, total production for the full year fiscal 2023 was 7,104 net barrels of oil equivalent per day, consisting of 1,806 barrels per day of crude oil, 24,956,000 cubic feet per day of natural gas, and 1,140 barrels per day of NGLs. Oil increased 6% from 1,696 barrels of oil per day in the prior year, primarily due to our acquisitions of non-operated working interest in the Jonah Field and the Williston Basin in the second half of fiscal 2022.

This increase was offset by the downtime in fiscal 2023 at the Delhi Field as mentioned previously. Natural gas production increased 28% from 19,564,000 cubic feet per day in the prior year, primarily due to acquisitions of non-operated working interest in the Jonah Field and the Williston Basin in the second half of fiscal 2022. The increase is partially offset by downtime in our Barnett Shale properties as mentioned previously. NGL production increased 14% from 997 barrels of NGLs per day in the prior year, primarily attributable to the two acquisitions in fiscal 2022, offset by decreases attributed to downtime at our Delhi Field and the same factors that impacted our natural gas production in our Barnett Shell properties as mentioned previously.

Based on discussion with our operators, we expect capital workover projects to continue in all the fields. Overall, for fiscal year 2024, we expect budgeted capital to be in the range of $4 million to $5 million, which excludes any potential acquisitions. Our expected capital expenditures for the next 12 months include two new drill wells at Delhi Field drilled by our operator, Denbury. As Kelly already said, we’re really excited about our strategic partnership with the PEDEVCO in the Permian. The agreement covers approximately 25,000 gross acres in and around the Chaveroo Field in Northeast, New Mexico. The Chaveroo Field was originally developed targeting the San Andres formation with vertical wells on 40-acre spacing. We view the horizontal development of the San Andres in the Chaveroo Field to be very compelling based on extensive vertical well control, the data and results from previous PEDEVCO horizontal wells, and analog developments of other 40-acre non-waterflooded vertical San Andres Field.

We expect this project will significantly contribute to the success of Evolution for years to come. We expect our CapEx increase over the $4 million to $5 million budgeted for our existing assets due to drilling and completing expected three wells in this fiscal year. The ultimate amount of capital spent during fiscal year 2024 for drilling in the Permian will depend on the schedule agreed to with our partner. With that, I will turn the call back over to Ryan to discuss our financial highlights.

Ryan Stash: Thanks Mark. As mentioned earlier, please refer to yesterday’s earnings release for additional information concerning our results. My comments today will primarily focus on financial highlights and comparative results between fiscal 2023 and 2022. During the fourth quarter, we experienced extended downtime and maintenance across multiple assets and were negatively impacted by much lower realized natural gas and NGL prices. However, our fiscal year 2023 results still represented record revenue production and net income. During the past fiscal year, we had solid generation of cash flow, including adjusted EBITDA, which was $60.1 million for the current year compared to $52.8 million in the prior year, a 14% increase.

During this fiscal year, we funded our operations, development capital expenditures, dividends, and share repurchases all out of operating flow outlook, while also paying debt drawn for our acquisitions. Supported by our continued operational and cash flow outlook, we paid a dividend of $0.12 per share in the fourth quarter and declared a dividend of $0.12 per share for fiscal Q1 of 2024, payable on September 29th. Our cash dividend program has been and will continue to be a top priority as we clearly recognize the strategic importance of returning value to our shareholders. We ended the fiscal year debt free and our borrowing base remained at $50 million. On June 30th, 2023, cash and cash equivalents totaled $11 million and working capital was $8.9 million.

As a result, total liquidity on June 30th, 2023 was $61 million, including cash and cash equivalents. This represents an increase in liquidity of 65% since June 30th of 2022. This is a direct result of our targeted and immediately accretive acquisitions over the past couple of years. We are ideally positioned for the continued execution of targeted future growth opportunities that meet our strategic vision. Lease operating costs increased to $59.5 million from $48.7 million in fiscal 2022. Primarily driving the overall increase was the acquisitions of the Jonah Field and Williston Basin, which occurred in the latter half of fiscal year 2022. Cash G&A expenses increased 18% to $7.9 million from $6.7 million in fiscal year 2022. The increase in expenses is due to approximately $600,000 in salary and employee benefits from the addition of personnel added since the prior year and $300,000 in professional fees associated with our search for our CEO.

Also contributing to the increase are additional fees for accounting audit-related services and public reporting expenses due to the increased size of our company. Net income for the fiscal year was $35.2 million or $1.04 per diluted share compared to $32.6 million or $0.96 per diluted share in fiscal year 2022. I’ll now turn the call back over to Kelly for his closing remarks.

Kelly Loyd: Thanks Ryan. We continue to benefit from the targeted acquisitions we have completed over the past few years and as a result, we enjoy a larger and more geographically diverse asset base and commodity mix. This provides us with a solid platform for significant cash flow generation that we will continue to use to support and enhance our well-established shareholder capital return program. Our shareholders expect a consistent and meaningful cash return on their investment and we remain committed to maintaining and, as appropriate, increasing our dividend payout over time. As in the past, we will maintain a conservative balance sheet and remain disciplined in our management of capital as we fully recognize the cyclicality of our business.

Our ongoing commitment to remaining fiscally-prudent was evidenced by our prompt paydown of our debt position, following the closing of our most recent acquisitions. As a result, we are well-positioned to execute on targeted high rate of return and immediately accretive growth opportunities as appropriate. We will continue to execute our strategic plan, focused on maximizing total shareholder returns and optimizing every dollar that we invest. With today’s announcement, we have added an opportunity to have a meaningful organic growth component. As with all of our capital allocation decisions, any drilling here must compete with dollars to be used elsewhere and the nature of this arrangement will allow for that. We’re not required to pay upfront for anything other than the acreage cost for the immediate development block, which we will be developing next.

This is unlike other situations where companies must pay in advance for entry into a field and prepay for well locations. This is a true strategic partnership where development will occur sequentially with the decision moved forward based on success. We and PEDEVCO expect that this partnership will produce positive results for many years to come. With that, I’ll turn the call over to the operator for questions. Thank you.

See also Jim Cramer Recommends Selling These 12 Stocks and Long-Term Returns of Paul Singer’s Activist Targets.

Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from John White of ROTH Capital. Please go ahead.

John White: Good afternoon and congratulations on the PEDEVCO deal. I agree with you, I think it was very attractive.

Kelly Loyd: Thank you, John. Hey, John, before we get to your question, can I just make one additional comment?

John White: Yes, of course.

Kelly Loyd: Okay. So, I just want to reiterate, as I’ve said before, that we — when we and the Board we set dividends, we do so with a multiyear horizon expectation based on our production and resulting cash flow that is generated from our forecasted pricing and production levels. With this in mind, we fully expect that our cash flow, combined with our pristine balance sheet and our cash and cash equivalents, will be able to more than fully cover our dividend, which by the way, we just reset at $0.12 per share. It — not only do we believe it will fully cover our dividend, it should cover all of our capital needs up to, and including, any planned drilling activity. We’re confident, as you mentioned, John, that this strategic partnership will be highly supportive of our dividend for quite some time.

John White: Okay. I appreciate that add on. So, regarding the PEDEVCO deal, with respect to capital expenditures, Mr. Bunch [ph] offered some commentary. However, this commentary was, I would say, highly conditioned or highly qualified. Can you offer any more detail about the potential CapEx at the PEDEVCO deal, maybe put it in terms of a minimum or a maximum or a six-month timeframe or a 12-month timeframe, whatever you’re comfortable?

Kelly Loyd: I can – absolutely, look, these are fluid in their plans that we’re going to come up with and finalize with our partner, PEDEVCO. Initially, I’ll tell you what we’re both thinking on this. We have an initial three well pad, which we’re working on. It’s been permitted. The expectation is that we want to get to that three well pad sooner or rather than later. Again, we need to finalize all the details. In general, the way we thought about this is basically, again, fluid can change depending on conditions, environments, and all this, but essentially about eight wells gross per year is in general how we’ve started thinking about the budget on this together. So, again, three wells at roughly 3 million per copy or half of that is 4.5 million and we have acreage payments.

So, 4.5 million to 5 million would be our expectation for the initial three well pad. And then as I mentioned, the initial goal again, which is highly dynamic and fluid and we’ll adjust as we go, but at least our initial sort of game plan is roughly around eight wells per year together, which we’d be 50% of.

John White: That’s a lot of extra detail and I really appreciate that, Kelly. So, on the maintenance or some of the infrastructure work, let’s just make sure we understand. Is the work at Delhi, is that all completed? Is the heat exchanger installed and working?

Mark Bunch: John, this is Mark Bunch. And the heat exchanger is up and running. The plant turnaround has — was completed and so we expect that Delhi is back running at rated load. So, we’re — we see that Delhi is performing as we would be expected to.

John White: Okay. Thank you. And same question on the Barnett Shale with the gathering line maintenance and compressor issues. The Barnett Shale, that was all obviously related to compressor and gathering stuff. We see that that is — we believe that that is kind of generally on the demand, but as of right now, we don’t know whether that is — whether it is completely back up and running as it’s supposed to be?

Kelly Loyd: As you know, John, when it’s 112 degrees in Fort Worth, compressors don’t always act properly and they’re going to run into issues, which clearly they did for much of the summer, but I think we’re starting to see that get better.

John White: Okay. I appreciate that and I’ll turn the call back to the operator. Thank you.

Kelly Loyd: Thank you.

Operator: The next question comes from Jonathan [ph] Schafer of Northland Capital Markets. Please go ahead.

Donovan Schafer: Hey guys, thanks for taking the questions. I’m sure you know this, but it’s Donovan Schafer. So, I want to start picking up where John left off. The — so we covered the Delhi and the Barnett, but in the Williston — and this could actually honestly be a data entry error on my part. I haven’t been able to double check this, but it looks like the Williston was down quite a bit too. Am I just wrong on that? I have that Williston down something like north of 10% quarter-over-quarter. So, was there a decline there or is that just an error in my model?

Mark Bunch: Yes, Donovan, this is Mark Bunch, and there was — during one month, we had a downtime on the compression side there and so it affected NGLs and also affected gas production and that’s the main cause.

Donovan Schafer: Well, I’m talking about — are you saying this is true for the — that this is the Bakken, the Williston?

Mark Bunch: Yes, Yes. For the Williston.

Donovan Schafer: Oh, really? Okay. Also there – so, yes, the compression issues in both and also compressor down in the Barnett? Okay. Got it.

Mark Bunch: Yes.

Donovan Schafer: Okay. And then I want to turn to — so for the year-over-year production and maybe Ryan has this information. But for the full year, the year-over-year production numbers were good and up, but of course, part of that comes from the Jonah and the Williston acquisition being — having a partial contribution last year and having a full year contribution this year. So, is there anything you can give us in terms of — to be able to kind of compare apples-to-apples either last year versus this year, kind of including those pro form for the full year last year or stripping them out just like what is the apples-to-apples change in production, presumably some amount of decline? Do you have that information?