Evolution Petroleum Corporation — Form 10-Q Summary
Business context and reporting period
Evolution Petroleum is an independent oil and gas company focused primarily on development and production, including its Delhi field interests. This filing covers the quarter ended December 31, 2017, the second quarter of fiscal 2018, and the six months then ended. Financial statements are unaudited.
Financial performance and liquidity
- Quarter revenue: $11.07 million, up 29.7% from $8.53 million a year earlier. Crude oil revenue was $10.19 million and NGL revenue was $0.88 million.
- Quarter production and pricing: Net equivalent production was 2,215 BOE per day, up 11.5% year over year. Realized crude oil price was $57.30 per barrel; equivalent realized price was $54.30 per BOE.
- Quarter earnings: Operating income was $4.83 million, versus $3.68 million; net income was $9.88 million, or $0.30 per diluted share, versus $2.31 million, or $0.07 per share. The 2017 result included a one-time, non-cash tax benefit of approximately $6.0 million from the Tax Cuts and Jobs Act.
- Six-month results: Revenue was $19.60 million, up 21.6%; operating income was $7.37 million, versus $6.40 million; net income was $12.02 million, or $0.36 per diluted share, versus $4.12 million. Prior-year earnings available to common shareholders were $2.87 million after preferred-stock dividends and a deemed dividend.
- Costs: Quarter production costs were $2.91 million, up 27.1% year over year; production cost was $14.30 per BOE versus $12.54. Six-month G&A increased 31% to $3.24 million, including higher stock compensation, severance, litigation, due-diligence and director costs.
- Cash flow: Six-month operating cash flow was $9.10 million, compared with $5.85 million. Investing used $1.02 million versus $8.33 million, primarily reflecting lower capital spending. Financing used $5.36 million, mainly dividends and share withholding-related repurchases. Cash increased $2.72 million to $25.74 million.
- Balance sheet and debt: At December 31, cash was $25.74 million, working capital was $27.6 million, and total liabilities were $14.94 million, including $10.58 million of deferred taxes and $1.30 million of long-term asset-retirement obligations. No credit-facility borrowings were outstanding; the company was covenant-compliant. The facility’s borrowing base availability was $10 million at quarter-end and increased to $40 million effective February 1, 2018.
- Shareholder returns: The company paid two quarterly dividends of $0.075 per share during the six-month period, totaling $4.97 million. In February 2018, the board declared an increase to $0.10 per share beginning with the March 2018 payment.
Material changes and operating developments
- Compared with the year-ago quarter, higher revenue reflected a 16% increase in realized equivalent price and 11.5% higher equivalent volumes, including NGL production that began in January 2017. Net crude oil production itself was down 2.8%.
- Quarter revenue was also reported as approximately 30% above the prior quarter. Delhi gross oil production averaged 7,370 barrels per day; net production increased 6.6% from the prior quarter. Management cited added compression, larger choke sizes, fewer facility outages and cooler weather.
- Production costs rose with CO₂ costs and NGL plant operating costs. Management said the plant was operating at or near maximum capacity after upgrades and was improving CO₂ recycle-stream quality.
- The federal corporate tax rate reduction from 34% to 21% revalued deferred tax liabilities and generated the one-time non-cash tax benefit. The company said its accounting for this rate change was complete.
- Capital expenditures at Delhi were $1.4 million for the six months, versus $6.5 million in the prior-year period. A 12-well infill program, estimated at $4.7 million net, was planned to begin in the quarter ending March 31, 2018; additional fiscal 2018 infrastructure projects were budgeted at $2.8 million, with about $0.5 million incurred by December 31.
Outlook, risks and contingencies
- Management expected Delhi development spending to be funded from operating cash flow and working capital, with at least $40 million of credit-facility availability after the February 2018 borrowing-base increase. Phase V development was expected to begin in calendar 2019, subject partly to infill results and CO₂ requirements.
- The company said it did not then expect a full-cost ceiling-test write-down during the remaining fiscal 2018 quarters, but warned that sustained, substantially lower oil prices could reduce the ceiling-test cushion and cause a future write-down.
- Commodity prices are the principal market risk; lower prices could reduce revenue, cash flow, liquidity and borrowing capacity. Management also cited potentially rising oilfield service and operating costs. Weather can disrupt production: extreme cold in January 2018 caused two disruptions, including an extended NGL plant outage, which management said had been remedied.
- A Louisiana lawsuit concerning alleged historical water disposal remained pending against the company and a subsidiary. A bench trial was scheduled for March 2018; management, based on counsel’s advice, considered a material loss remote. The filing reports no off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of earnings growth and reported EPS is attributable to the one-time tax benefit, and how results compare excluding it.
- Whether oil and NGL prices, production volumes, and higher production and G&A costs support sustained operating cash generation and the increased dividend.
- Progress, timing and final cost of the 12-well infill program and infrastructure work, and any effect on Phase V development.
- Terms and actual availability under the February 1 credit-facility amendment, covenant headroom, and the company’s ability to fund planned spending and dividends.
- Developments in the Louisiana litigation and any change in the assessed likelihood or potential magnitude of loss.