Evolution Petroleum Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2021. Results are unaudited. Evolution owns primarily non-operated oil and gas interests, including Delhi, Hamilton Dome, and Barnett Shale assets.
Key financial results
| Metric | Three months ended Dec. 31, 2021 | Six months ended Dec. 31, 2021 |
|---|---|---|
| Revenue | $22.3 million | $41.2 million |
| Operating income | $8.6 million | $15.4 million |
| Net income | $6.8 million; $0.20 per diluted share | $12.1 million; $0.36 per diluted share |
| Operating margin | Approximately 38.6% | Approximately 37.4% |
| Operating cash flow | Not separately stated for the quarter | $13.9 million |
| Development capital expenditures | Not separately stated for the quarter | $0.6 million |
For the six-month period, oil revenue was $19.4 million, NGL revenue $7.1 million, and natural gas revenue $14.6 million. Lease operating costs were $19.3 million; DD&A was $2.8 million. No property impairment or derivative loss was recorded in the period. No open derivative contracts were outstanding at December 31.
Liquidity, debt, and capital returns
- At December 31, cash was $13.6 million and working capital was $22.0 million, compared with $5.3 million cash and $11.5 million working capital at June 30, 2021.
- Quarter-end credit-facility borrowings were $4.0 million, with $36.0 million of available capacity under the elected $40 million commitment. The facility matures April 9, 2024; the company reported covenant compliance.
- After quarter-end, Evolution used cash and a $16.0 million facility draw to fund its $25.9 million Williston Basin acquisition. Management reported $20.0 million of borrowing capacity remaining after that transaction.
- Six-month dividends paid were $5.0 million, at $0.075 per share per quarter. On February 3, 2022, the company declared a $0.10 per-share dividend, payable March 31, 2022.
Changes versus comparable periods
- Quarterly revenue rose 287% year over year and six-month revenue rose 263%, reflecting the Barnett Shale acquisition, substantially higher commodity prices, and $1.1 million of accumulated past royalties recognized in the quarter. The past-royalty receipt is unusual and is not expected to recur at a material level.
- Six-month net income improved to $12.1 million from a $19.8 million loss a year earlier. The prior-year period included $24.8 million of property impairment; the current period had none.
- Six-month operating cash flow increased to $13.9 million from $1.2 million. Higher revenue and lower derivative settlement payments were partly offset by higher lease operating costs and working-capital movements.
- Quarterly production averaged 4,957 net BOE per day, versus 1,797 a year earlier, principally reflecting Barnett Shale assets acquired in May 2021. Current-quarter revenue also benefited from higher realized prices. Quarterly net income increased 30.9% from the preceding quarter, to $6.8 million.
- Operating costs increased with the acquired Barnett assets, resumed workovers, higher CO2 purchases, and higher power and fuel costs. In the quarter, lease operating cost was $23.40 per BOE, up 28.8% year over year.
Outlook, commentary, and risks
- Management expects $0.5 million to $1.5 million of capital expenditures across Delhi, Hamilton Dome, and Barnett during the remainder of fiscal 2022, plus $0.5 million to $1.0 million for Williston. It expects funding from operating cash flow, working capital, and facility capacity as needed.
- Delhi Phase V development includes 1.81 million barrels of oil equivalent of proved undeveloped reserves and approximately $8.6 million of future development costs. Drilling is not expected to begin before the second half of fiscal 2023; timing depends partly on the operator’s capital plans.
- On February 8, 2022, Evolution agreed to acquire non-operated Jonah Field interests for $29.4 million, with closing expected around April 1, 2022. The agreement is a subsequent event, not a completed quarter-end transaction.
- The company’s properties are operated by third parties, limiting its control over spending, production, and development. A change of Barnett operator caused delays in revenue and expense statements and contributed to current-period adjustments related to prior periods.
- Delhi output remains exposed to reservoir pressure and CO2 supply, while field maintenance, workovers, and plant downtime can affect production and costs. Commodity-price volatility, COVID-19 impacts, and operating and acquisition risks may affect results.
- The credit agreement’s hedging provisions were amended after quarter-end. The February 2022 amendment requires hedges covering 25% of expected oil and gas production over the next 12 months; the filing reported no open hedges at December 31.
- At December 31, property carrying value was below the full-cost ceiling, and management said a 10% decrease in the commodity prices used in the ceiling test would not have caused impairment. A substantial price decline could nonetheless trigger a future write-down.
Important facts for investors to verify
- How much of revenue and production growth is sustainable after separating the Barnett acquisition, commodity-price changes, and the one-time $1.1 million royalty receipt.
- Post-acquisition debt, remaining borrowing capacity, and compliance with facility covenants following the Williston funding and the Jonah transaction, if completed.
- Whether Delhi CO2 supply and reservoir pressure recover as expected, and how workovers, operator plans, and Barnett reporting delays affect production and costs.
- The timing and funding of planned capital expenditures, Delhi Phase V, and the increased dividend, particularly under lower commodity-price scenarios.
- The operator’s ethane-rejection decisions and related Barnett volume and revenue estimates: current-quarter adjustments reduced NGL revenue by $1.1 million and increased natural gas revenue by $0.7 million.