Evolution Petroleum Corporation — Form 10-Q Summary
Reporting period: Three months ended September 30, 2021, the company’s first quarter of fiscal 2022. The unaudited financial statements cover Evolution Petroleum Corporation and its subsidiaries.
Business context
Evolution owns non-operated interests in producing oil and natural gas properties, including the Delhi field in Louisiana, Hamilton Dome in Wyoming, and Barnett Shale assets in North Texas. Its stated objective includes generating a sustainable dividend yield and growing a diversified portfolio, primarily through acquisitions.
Key financial and operating metrics
| Metric | Quarter ended Sep. 30, 2021 | Comparable period |
|---|---|---|
| Revenue | $18.9 million | $5.6 million in 2020 |
| Operating income (loss) | $6.8 million | $(9.4) million in 2020 |
| Net income (loss) | $5.2 million; $0.16 per diluted share | $(7.1) million; $(0.22) per diluted share in 2020 |
| Operating cash flow | $5.6 million | $1.1 million in 2020 |
| Capital expenditures | $0.3 million | $0.2 million in 2020 |
| Cash dividends paid | $2.5 million; $0.075 per share | $0.8 million; $0.025 per share in 2020 |
| Net production | 5,843 BOE per day | 1,841 BOE per day in 2020 |
Revenue increased 237% year over year, reflecting stronger realized commodity prices and a full quarter of Barnett Shale production following the May 2021 acquisition. Realized prices were $66.14 per barrel of oil, $28.95 per barrel of NGLs, and $3.70 per Mcf of natural gas. Operating costs were $12.1 million, including $8.6 million of lease operating costs; no proved-property impairment or derivative loss was recorded in the quarter. The operating margin, measured as operating income divided by revenue, was approximately 36%.
At September 30, cash was $8.0 million, current assets were $28.3 million, and current liabilities were $12.7 million; reported working capital was $15.6 million. Total assets were $85.7 million and total liabilities were $28.2 million. The company had $4.0 million outstanding under its secured credit facility, against a $30 million borrowing base, and reported covenant compliance. The facility matures April 9, 2024.
Material changes and management commentary
- Compared with the year-ago quarter, oil revenue rose 65%, NGL revenue rose 2,012%, and natural gas revenue increased from a nominal amount to $5.5 million. Oil production declined 8%, while NGL production increased 564% and total BOE production increased 217%, largely reflecting the Barnett acquisition and production mix.
- Versus the prior quarter, management reported net income more than doubling to $5.2 million and total production increasing 33%, mainly due to a full quarter of Barnett production. Oil production was down 3% from the prior quarter, partly following a temporary interruption in purchased CO2 supply at Delhi.
- Lease operating costs increased 260% year over year, primarily with the added Barnett assets and higher field costs. Management said Hamilton Dome workover spending had increased as previously deferred maintenance became economic and expected that elevated make-up workover expense to decline in future quarters.
- General and administrative expenses increased to $1.9 million, including costs associated with the Chief Accounting Officer’s retirement, new employees, the acquisition, and sustainability-report and related materials.
- The company paid its 32nd consecutive quarterly dividend. The board declared a subsequent $0.075-per-share dividend payable December 31, 2021.
Outlook, risks, and unusual items
- Management expected $1.0 million to $2.0 million of additional maintenance capital expenditures across the fields during the remainder of fiscal 2022. Funding was expected from operating cash flow and working capital.
- Delhi Phase V development includes approximately 1.81 million BOE of proved undeveloped reserves and $8.6 million of estimated future development costs. Management did not expect drilling to begin before the second half of fiscal 2023; timing depends partly on the operator’s capital plans.
- On November 9, 2021, after quarter-end, the credit-facility amendment raised the borrowing base to $50 million. The company elected a $40 million commitment and reported $36 million of availability as of November 10. The amendment also added a requirement to hedge 25% to 75% of future production on a rolling 12-month basis when at least 25% of the borrowing base is utilized.
- Commodity-price volatility, COVID-19-related uncertainty, and reliance on third-party operators are key risks. The company cannot control field operations; a Denbury-operated CO2 pipeline maintenance shutdown from July 15 to August 20 temporarily reduced purchased CO2 supply at Delhi. Barnett operator transition to Diversified Energy also contributed to timing delays in revenue and operating-cost statements and receipts.
- The full-cost ceiling test showed no impairment at September 30, 2021, but management cautioned that materially lower commodity prices could reduce the cushion and lead to future impairment. A 10% decrease in the commodity prices used in the test would not have caused impairment at quarter-end.
- The balance sheet included $3.1 million of income-tax refund receivables. The company had received $0.7 million by the filing date and anticipated receiving the remainder within 12 months, without assurance of timing. The company noted that some deferred tax assets may not be realized.
- Asset retirement obligations totaled $5.7 million; management expected the Hamilton Dome operator to plug two wells during the next 12 months. No legal proceedings were reported. No open derivative contracts remained at quarter-end.
Important facts for investors to verify
- Whether Barnett production, revenue collections, and operating-cost reporting normalize following the operator transition, and whether receivable balances convert to cash as expected.
- Whether Delhi production and CO2 injection remain stable after pipeline maintenance, and how field-level costs and Hamilton Dome workovers evolve.
- Whether commodity prices and reserve assumptions sustain the full-cost ceiling-test cushion and support profitability and the dividend.
- Progress on the fiscal 2022 maintenance-capital range and timing, operator funding, and cost of Delhi Phase V development.
- Credit-facility availability, covenant compliance, and the effect of the new borrowing-triggered hedging requirement on production exposure.
- Receipt of the remaining tax refund and the recoverability of deferred tax assets.