EVOLUTION PETROLEUM CORP quarterly report, Q3 FY2015

Business context and reporting period

Evolution Petroleum Corporation is an independent petroleum company focused on developing incremental oil and gas reserves, including its Delhi Field interest and GARP artificial-lift technology. The supplied filing is a Form 10-Q for the quarter ended March 31, 2015 (fiscal Q3 2015); this differs from the request metadata’s “2014 Q3.” The statements are unaudited.

Financial performance and liquidity

MetricThree months ended March 31, 2015Comparable 2014 periodNine months ended March 31, 2015Comparable 2014 period
Revenue$7.06 million$4.34 million$18.78 million$13.36 million
Operating income$1.25 million$1.36 million$5.25 million$3.16 million
Net income attributable to company$0.73 million$0.92 million$3.10 million$1.99 million
Net income available to common shareholders$0.57 million$0.76 million$2.60 million$1.48 million
Diluted EPS$0.02$0.02$0.08$0.05

Quarterly revenue rose 63% year over year, primarily because the company’s 23.9% Delhi working interest reverted to it effective November 1, 2014. The benefit of higher volumes was partly offset by sharply lower oil prices. Delhi’s average realized price was $47.69 per barrel, down 53% year over year and 32% sequentially; net Delhi production averaged 1,640 barrels per day. Quarterly operating margin was approximately 17.6%, versus 31.3% a year earlier, calculated from reported operating income and revenue.

For the nine-month period, operating cash flow was $6.62 million, investing cash outflow was $2.55 million, and financing cash outflow was $7.62 million. Cash declined $3.55 million to $20.39 million. At March 31, 2015, working capital was $18.4 million; current assets were $23.89 million and current liabilities $5.46 million. The company had no borrowings and reported $5.0 million of availability under its unsecured revolving facility. Total liabilities were $17.07 million. No separate cash-flow or profit guidance was provided.

Common dividends paid during the nine months totaled $8.19 million; preferred dividends totaled $0.51 million. The common dividend rate was reduced during the quarter from $0.40 to $0.20 per share annually.

Material changes and outlook

  • The Delhi working-interest reversion increased production and revenue but also made the company responsible for its share of field operating costs and capital spending. Delhi production costs were $2.93 million in the quarter, including $1.6 million for CO2 purchases and transportation.
  • Management estimated $25–35 million of net Delhi capital spending over the next two fiscal years, including approximately $24.6 million for the company’s share of a gas-processing plant; timing and spending depend on operator plans and project economics. The operator estimated the plant’s gross cost at $103 million and projected completion spending through summer 2016.
  • Management expected to fund anticipated capital spending from operating cash flow and working capital, while retaining access to credit. It was discussing replacement of the existing facility with a larger secured facility. The filing does not provide a committed amount or completed refinancing terms.
  • Management cited lower oil prices as the main near-term pressure on earnings and liquidity. The company did not hedge commodity prices and warned that further price declines could reduce revenue and cash flow and potentially trigger a non-cash full-cost ceiling impairment.
  • GARP revenues declined substantially year over year; management described continued marketing efforts and master service agreements, while noting that vendor approval does not guarantee installations. A third-party customer’s removed equipment installations resulted in $273,301 of additional depreciation for impairment of unrecovered costs.

Risks, contingencies and unusual items

  • Litigation with Denbury concerning Delhi agreements and revenue interests remained unresolved. Denbury released approximately $712,000 of previously suspended overriding-royalty revenue under a February agreement, but that agreement did not settle the litigation or Denbury’s counterclaim.
  • The Louisiana Supreme Court accepted the company’s writ application in the McCarthy royalty-rights case; the filing reported oral arguments were expected. The Jones lawsuit was dismissed with prejudice in March 2015 without compensation, with plaintiffs relinquishing claims to their overriding royalty interest.
  • A separate lawsuit relating to alleged water disposal at a former property remained defended by the company; management did not consider the claims material. The filing describes additional ordinary-course claims and contingencies.
  • The company requested approximately $1.5 million in Louisiana tax refunds, subject to final approval; the timing and ultimate recovery were uncertain. The potential refund would be recorded in additional paid-in capital, not as an income-tax benefit.
  • Asset-retirement obligations increased to $749,252 from $205,512 at June 30, 2014, primarily reflecting obligations associated with the Delhi working-interest reversion.
  • The company reported compliance with its credit-facility covenants, effective disclosure controls, and no material change in internal control over financial reporting.

Most important facts for investors to verify

  • Confirm the reporting period: the filing covers fiscal Q3 2015, ended March 31, 2015, not 2014 Q3.
  • Track Delhi realized prices, production, operating costs, and the timing and economics of the gas-processing plant and other planned capital expenditures.
  • Assess whether operating cash flow and working capital can support the stated capital program and dividends, especially if oil prices remain low.
  • Monitor the proposed replacement credit facility, the Denbury litigation and revenue-interest dispute, and the status of the Louisiana tax-refund request.
  • Evaluate the sustainability of the reduced common dividend and the commercial progress and economics of GARP installations.