Business context and reporting period
Evolution Petroleum Corporation is an independent oil and gas producer focused primarily on developing and producing reserves at the Delhi field. This Form 10-Q covers the three months ended September 30, 2017, the first quarter of fiscal 2018; financial comparisons are generally with the three months ended September 30, 2016.
Financial and operating results
| Metric | Quarter ended September 30, 2017 | Comparison |
|---|---|---|
| Revenue | $8.54 million | Up 12.4% from $7.59 million year over year; 3% below the prior quarter |
| Net income attributable to the Company | $2.14 million | Compared with $1.82 million a year earlier and $1.5 million in the prior quarter |
| Net income available to common shareholders | $2.14 million; $0.06 per basic and diluted share | Compared with $0.56 million and $0.02 per share a year earlier, after preferred dividends and a deemed preferred-stock dividend |
| Operating income | $2.54 million | Compared with $2.73 million a year earlier |
| Cash flow from operations | $4.20 million | Compared with $1.47 million a year earlier |
| Investing cash flow | Use of $0.51 million | Compared with a use of $5.16 million a year earlier |
| Financing cash flow | Use of $2.59 million | Included $2.48 million of common dividends |
Production costs rose 23% year over year to $2.89 million, or $15.06 per BOE, and DD&A was $1.52 million, or $7.87 per BOE. G&A was $1.57 million, including $0.49 million of non-cash stock compensation. The filing does not present an explicit operating or net margin.
Liquidity and capital structure
Cash and cash equivalents were $24.13 million at September 30, up from $23.03 million at June 30, 2017. Working capital was reported as $24.4 million. The company had no borrowings under its senior secured facility, with a $10 million borrowing base available within a stated $50 million maximum facility; it was in compliance with the facility’s covenants. Total liabilities were $20.16 million, including $15.85 million of deferred income taxes and $1.28 million of long-term asset retirement obligations. The quarterly common dividend was $0.075 per share.
Material changes versus the prior comparable period
- Revenue increased 12.4%, reflecting higher realized prices and a 7.9% increase in equivalent production volumes. The realized price rose 4.2% to $44.47 per BOE; oil production volumes declined 6.3%, while NGL sales began contributing materially following the plant’s startup.
- Net income attributable to the Company rose to $2.14 million. Common-shareholder earnings also benefited from the absence of preferred dividends and a deemed dividend recorded in the year-ago quarter; the preferred stock was redeemed in November 2016.
- Production costs increased 23.3%, primarily due to NGL plant operating costs and higher other lease operating expenses. DD&A rose 19.4%, reflecting higher production and a higher depletion rate.
- Operating cash flow improved, while investing outflows fell substantially because capital expenditures were lower than a year earlier.
Outlook, management commentary, risks and contingencies
- Delhi gross oil production averaged 6,912 BOEPD, down 8.3% sequentially and 6.3% year over year. Management attributed the decline to reduced field spending and higher declines from certain conformance projects.
- Following inlet modifications, the NGL plant was operating near maximum capacity and efficiency. Management expected gross NGL production to average 1,200 BOEPD or higher over the next two quarters; it was also working with the operator to address off-spec product deductions.
- Planned development includes an infill program estimated at $3.2 million net, targeted for the second half of fiscal 2018. Phase V infrastructure and pattern development are estimated at $2.8 million and $8.1 million, respectively; the filing says Phase V is expected to resume in fiscal 2019, subject to oil prices, capital availability and project economics. Remaining estimated capital expenditures for proved undeveloped reserves were $14.1 million.
- Management expected anticipated Delhi capital expenditures over the next fiscal year to be funded from operating cash flow and existing working capital. The operator had delayed some projects in response to its capital allocation and the oil-price environment.
- Commodity-price volatility is identified as the principal market risk. A sustained decline in oil and gas prices could reduce revenue, cash flow and borrowing capacity and could trigger a full-cost ceiling impairment. No impairment was expected for the remaining fiscal 2018 quarters based on conditions at the reporting date, but management gave no assurance against a future write-down.
- A Louisiana lawsuit concerning alleged historical water disposal remained pending against the company and its subsidiary; trial was scheduled for March 2018. Management, citing legal counsel, considered the likelihood of a material loss remote. The filing also describes routine claims and regulatory contingencies.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether Delhi production trends and the anticipated NGL output target are achieved, and how they affect realized prices and operating costs.
- Timing, cost and funding of the infill program and Phase V, including the operator’s capital allocation decisions.
- Oil-price assumptions and the remaining cushion under the full-cost ceiling test.
- The sustainability of the $0.075 quarterly dividend relative to operating cash generation and planned capital spending.
- The status and potential exposure from the pending Louisiana litigation.
- The MD&A states working capital was $23.4 million at “June 30, 2016,” although the balance-sheet comparison is June 30, 2017 and the reported prior-period balance-sheet amounts imply approximately $23.4 million. Verify the intended date.