Evolution Petroleum Corporation — FY2012 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended June 30, 2012, not calendar-year 2011 or a standalone fourth quarter. Evolution Petroleum is a U.S. oil and gas company focused on acquiring and developing known resources. Its key asset is a royalty and reversionary working interest in the Delhi Field CO₂ enhanced-oil-recovery project in Louisiana.
Financial and operating highlights
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $18.0 million | $7.5 million |
| Operating income | $8.8 million | $0.2 million |
| Net income (loss), company | $5.1 million | ($0.2 million) |
| Net income (loss) attributable to common shareholders | $4.5 million; $0.16 basic EPS | ($0.2 million); ($0.01) basic EPS |
| Cash from operating activities | $10.4 million | $3.1 million |
| Cash and cash equivalents | $14.4 million | $4.2 million |
| Working capital | $11.7 million | $4.1 million |
| Total liabilities | $12.3 million | $6.5 million |
| Funded debt | None; $5.0 million borrowing base available and undrawn | No funded debt reported |
- Revenue increased 139%, driven chiefly by Delhi oil sales: total sales volumes rose 79% to 208,156 BOE, and average realized price increased to $86.29/BOE from $64.68/BOE. Delhi contributed $15.1 million of revenue; its average realized oil price was $111.29/barrel.
- Operating margin was approximately 49% of revenue, compared with approximately 3% in FY2011. FY2012 net income attributable to the company was approximately 29% of revenue. These percentages are calculated from reported figures.
- Operating costs totaled $9.1 million, up from $7.3 million; reported lease operating expense and production taxes declined to $8.53/BOE from $11.85/BOE. General and administrative expense rose 15% to $6.1 million, including $1.5 million of non-cash stock-based compensation.
- Investing cash outflow was $6.6 million and financing cash inflow was $6.4 million. Oil and gas capital expenditures incurred were $8.9 million; cash paid for oil and gas capital expenditures was $7.0 million.
- At June 30, 2012, total assets were $59.0 million and stockholders’ equity was $46.6 million. The current ratio was approximately 3.3x, based on reported current assets and current liabilities.
- Proved reserves were 13.44 million BOE, down 3% year over year; 60% were developed. Proved-reserve PV-10 was $445.5 million, up 19%, while the GAAP standardized measure was $283.6 million. PV-10 is a non-GAAP measure and is not market value. Probable reserves were 12.68 million BOE, largely reflecting the Oklahoma Mississippian Lime position; probable reserves are not proved reserves.
Material changes versus the prior comparable period
- FY2012 returned to profitability from a FY2011 net loss. Higher Delhi production and oil prices were the principal drivers; Delhi oil volume rose 208% year over year.
- Operating cash flow increased to $10.4 million from $3.1 million, and cash increased to $14.4 million from $4.2 million. Working capital rose to $11.7 million from $4.1 million.
- Proved reserves fell by about 0.4 million BOE, primarily due to production and negative revisions in Oklahoma and Giddings, partly offset by Delhi revisions and additions in Texas. Proved developed reserves rose from 39% to 60%, mainly as Delhi reserves moved from undeveloped to developed.
- The company entered a 45%-interest, non-operating joint venture in the Mississippian Lime play in Oklahoma. Its 6.4 million BOE of assigned probable reserves accounted for nearly all the increase in probable volumes.
- It issued 317,319 shares of 8.5% Series A preferred stock, receiving $6.9 million net proceeds, and paid $0.6 million in preferred dividends. Common-shareholder earnings therefore differ from company net income.
Outlook, risks and unusual items
- Management’s FY2013 base capital budget was approximately $10 million: $8 million for Mississippian Lime wells, $1 million for initial GARP artificial-lift installations, and $1 million for other projects. Management expected to fund the plan from working capital and internally generated cash flow, with financing or joint ventures possible for expanded activity.
- Management expected Delhi production to benefit from continued CO₂-flood development. It reported temporary FY2012 production constraints from summer heat reducing injection capacity, plant maintenance and drilling activity; the operator expected additional cooling equipment before the next summer.
- Delhi currently provides a 7.4% royalty interest without operating or capital-cost burdens. The 23.9% reversionary working interest was projected to revert around late 2013; after reversion, the company expected a 26.5% aggregate net revenue interest and to bear 23.9% of costs. Estimated company capital expenditures were $2.2 million in calendar 2013 and $14.5 million in 2014.
- Principal risks include commodity-price volatility, dependence on Delhi and its operator, production declines at Giddings, reserve-estimation uncertainty, development and service-cost risks, and limited control over non-operated properties. Plains Marketing accounted for 84% of FY2012 revenue, largely reflecting Delhi sales.
- Legal matters: a Delhi royalty-rights lawsuit filed in August 2012 named the company, a subsidiary and its CEO; management disputed the claims and said it intended to defend them. A separate Delhi-related case dismissed in March 2012 was on appeal. The company agreed in July 2012 to settle another lease dispute for $67,000.
- The company reported no impairment from its full-cost ceiling test for FY2012. Its independent auditor issued an unqualified opinion, and management and the auditor reported effective internal control over financial reporting as of June 30, 2012.
Important facts for investors to verify
- Confirm Delhi’s actual production, CO₂ injection capacity, reversion timing and the capital costs Evolution will assume after reversion.
- Review results from the first Mississippian Lime wells, completion costs, and whether the probable-reserve estimates convert to proved reserves and economic production.
- Assess GARP’s commercial performance beyond the two demonstration wells and the terms of any expanded agreements.
- Track oil and gas prices, reserve revisions and the impact of the company’s full-cost accounting ceiling test.
- Review the status and potential financial exposure of the Delhi-related legal proceedings, and the concentration of sales with Plains Marketing.
- Consider the 8.5% cumulative preferred dividend obligation, potential dilution from outstanding options and warrants, and the distinction between PV-10 and GAAP standardized measure.