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
| Metric | Three months ended March 31, 2015 | Comparable 2014 period | Nine months ended March 31, 2015 | Comparable 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.