Evolution Petroleum Corporation — Form 10-Q Summary
Business context and period. This unaudited report covers the three months ended September 30, 2018, the company’s first quarter of fiscal 2019. Evolution is an oil and gas producer focused on dividend income and developing or acquiring producing assets. Its largest investment is a working, royalty and mineral interest in the Delhi CO2 enhanced oil recovery field in Louisiana.
Key financial results
| Metric | Quarter ended Sep. 30, 2018 | Year-ago quarter | Change |
|---|---|---|---|
| Revenue | $12.31 million | $8.40 million | +46.5% |
| Income from operations | $5.99 million | $2.54 million | +136% |
| Operating margin | 48.7% | 30.2% | +18.5 percentage points |
| Net income | $5.80 million | $2.14 million | +171% |
| Diluted EPS | $0.17 | $0.06 | +$0.11 |
| Cash from operations | $7.66 million | $4.20 million | +$3.45 million |
| Capital expenditures | $3.09 million | $0.51 million | +$2.58 million |
Revenue growth reflected higher realized prices, partly offset by lower volumes: average realized crude oil price was $71.72 per barrel, up 52.7%, while net production was 1,992 BOEPD, down 4.5%. NGL price averaged $37.28 per barrel, up 64.3%. Production costs rose 25.5% to $3.46 million, including higher CO2 and other operating costs. General and administrative expense declined 17% to $1.31 million. The filing does not present a separate gross margin.
Cash, liquidity and debt. At September 30, cash and cash equivalents were $28.84 million, current assets were $34.12 million and current liabilities were $4.65 million; reported working capital was $29.5 million. The company had no borrowings under its credit facility, with $40 million of borrowing-base availability within a $50 million facility, maturing April 11, 2021. It was in compliance with facility covenants. Operating cash flow funded investment and dividends. Cash, cash equivalents and restricted cash increased $1.16 million; the balance-sheet cash increase also reflects release of the $2.75 million acquisition escrow deposit. The company paid $3.32 million in dividends, or $0.10 per share.
Material changes and notable items
- Compared with the year-ago quarter, net income increased $3.66 million, aided by revenue growth and a $1.1 million Enduro transaction breakup fee received in August. The fee was a one-time item and substantially related to costs and work incurred before the prior fiscal year-end.
- Delhi gross production averaged 7,599 BOEPD, up 0.7% from the prior quarter but down 4.5% year over year. The company said infill wells were beginning to contribute, with fuller effects expected over several quarters; it does not expect a significant production increase from the infill program.
- Delhi capital spending was $2.7 million during the quarter, including infill drilling and field infrastructure. The company estimated a further $2.0–$2.5 million of net capital spending for the remainder of fiscal 2019 and expected Phase V development to begin in fiscal 2020, subject to operator plans and infill results.
- The board declared a $0.10-per-share quarterly dividend payable December 31, 2018. The company reported 20 consecutive quarterly dividends paid.
- The former CEO retired effective May 31, 2018; the chairman became Executive Chairman and Interim CEO. Management expected the CEO search and transition process to conclude during the quarter ending March 31, 2019.
- Adoption of ASC 606 did not affect net income or equity; it reclassified $135,904 of comparative-period costs from production costs to NGL revenue.
Outlook, risks and contingencies
Management expected Delhi spending to be funded from operating cash flow and working capital and said field development would be managed within those resources. The board reviews the dividend in light of financial condition, oil and NGL price outlook, development timing and potential growth opportunities; no earnings or production guidance was provided.
Key risks include volatile crude oil and NGL prices, which can affect revenue, cash flow, borrowing capacity and the possibility of a full-cost impairment; rising operating and oilfield service costs; CO2 purchase costs and response timing; and dependence on the Delhi operator’s spending priorities for Phase V. The company reported no material changes to previously disclosed risk factors, no legal proceedings, and no off-balance-sheet arrangements. It reported no material change in market-risk disclosures and no material change in internal controls.
Investor verification priorities
- Separate recurring operating performance from the $1.1 million Enduro breakup fee when assessing earnings.
- Track Delhi production response from infill wells, CO2 volumes and costs, and the operator’s timing and funding of Phase V.
- Assess whether commodity prices and production costs support operating cash flow, planned capital spending and the $0.10 quarterly dividend.
- Confirm ongoing compliance with credit-facility covenants and the availability of the $40 million borrowing base.
- Monitor the CEO transition and the timing of the planned leadership appointment.