Evolution Petroleum Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2017. Although the request metadata says “2016 Q3,” the filing identifies this as the third quarter of fiscal 2017.
Business and operating context
Evolution is an independent oil and gas company focused primarily on developing and producing reserves at the Delhi field in Louisiana. Delhi accounted for virtually all oil and gas revenue. The company had separated its artificial-lift technology operations in December 2015.
Delhi’s NGL plant began sales during the quarter. Gross oil production averaged 7,786 barrels per day, up 2.7% from the prior quarter; net oil production was 2,042 barrels per day. Net NGL sales averaged 218 barrels per day. The company reported that the plant was operating below full capacity during its initial ramp-up.
Financial performance
| Metric | Three months ended Mar. 31, 2017 | Year-ago quarter | Nine months ended Mar. 31, 2017 | Year-ago period |
|---|---|---|---|---|
| Total revenue | $9.53 million | $5.11 million | $25.65 million | $19.11 million |
| Operating income (loss) | $3.89 million | $(0.68) million | $10.30 million | $0.71 million |
| Net income (loss) attributable to company | $2.42 million | $(0.13) million | $6.54 million | $3.79 million |
| Net income available to common stockholders | $2.42 million | $(0.30) million | $5.29 million | $3.28 million |
| Diluted EPS | $0.07 | $(0.01) | $0.16 | $0.10 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $11.35 million | $5.77 million |
Quarterly revenue rose 87% year over year, while nine-month revenue increased 34%. Management attributed the improvement principally to higher production and realized prices. In the quarter, net oil production was up 11.3% year over year and the realized oil price was $49.29 per barrel versus $30.00. The equivalent realized price was $46.83 per BOE, up 56.2%.
Quarterly production costs were $2.81 million, up 28%; costs were $13.82 per BOE versus $13.13. Nine-month production costs were $7.45 million, up 5.9%, while costs per BOE declined 8% to $13.20. Quarterly G&A fell 44% to $1.28 million, primarily due to lower litigation costs. Nine-month G&A fell 38% to $3.76 million for the same principal reason. The filing does not present a standalone gross-margin figure.
Liquidity, capital and balance sheet
- Cash and cash equivalents were $20.22 million at March 31, 2017, down from $34.08 million at June 30, 2016. Working capital was $21.5 million, compared with $28.6 million at fiscal year-end.
- Operating cash flow of $11.35 million was offset by $10.45 million of investing outflows and $14.76 million of financing outflows; cash decreased $13.86 million over the nine-month period.
- The company had no borrowings under its credit facility and reported compliance with its covenants. The facility had a $10 million borrowing base and $10 million availability; it matures in April 2019.
- Oil and gas capital expenditures were $10.10 million in the nine-month cash flow statement. Management separately reported $6.9 million of Delhi capital expenditures for the period, including $4.8 million for the NGL plant. Approximately $26.3 million had been incurred cumulatively on the plant.
- Common dividends paid were $6.12 million in the nine months. The quarterly common dividend had risen to $0.07 per share, effective with the March 2017 payment. All 317,319 preferred shares were redeemed in November 2016 for approximately $7.93 million, plus accrued distributions.
Changes, outlook and risks
- Quarterly earnings turned positive versus a year-ago loss. For the nine months, common-stockholder income rose to $5.29 million from $3.28 million, despite lower derivative gains and the absence of a prior-year Delhi insurance recovery.
- NGL production and sales commenced in the quarter. Management said the plant averaged approximately 1,100 gross BOEPD in February and March while operating below full capacity, and believed it could exceed 1,400 gross BOEPD at full capacity. It expected full production during fiscal Q4, while noting ramp-up issues and purchaser quality deductions. No formal financial guidance was provided.
- Management expected less than $1 million of additional fiscal 2017 net capital spending. It described a possible fiscal 2018 infill program of up to five CO2 injection wells and seven production wells, and expected the Delhi Phase Five expansion in calendar 2018. These plans depend on operator and company capital allocation.
- Management said the oil and gas property ceiling was substantially above capitalized costs and did not expect a write-down in the remaining fiscal 2017 quarter. A sustained decline in commodity prices could reduce that cushion and trigger a future impairment.
- Commodity prices remain the principal market risk. The company had collars covering approximately one-third of oil production for March through May 2017 and no derivative commitments beyond May 31 at the filing date. Derivatives can limit upside as well as downside.
- A Louisiana lawsuit concerning alleged historical water disposal remained pending against the company and a subsidiary; trial was scheduled for late November 2017. Management, based on counsel’s input, considered the likelihood of a material loss remote. The filing reported no material changes to previously disclosed risk factors.
Most important facts to verify
- Whether the NGL plant reaches the expected throughput and resolves startup, product-quality and cost-allocation issues.
- Whether higher realized oil prices and production can sustain cash generation, dividends and planned Delhi investment if commodity prices weaken.
- The status and economics of the proposed infill program and Phase Five expansion, including operator funding and timing.
- Future borrowing-base availability and full-cost ceiling-test sensitivity to oil and gas prices.
- Developments in the pending Louisiana litigation and any resulting exposure.