Evolution Petroleum Corporation — Form 10-Q Summary
Period: Fiscal third quarter and nine months ended March 31, 2019. Although the request metadata labels this “2018 Q3,” the filing itself covers fiscal 2019 Q3; comparisons below are to the three and nine months ended March 31, 2018 unless stated otherwise.
Business context and reporting period
Evolution Petroleum focuses on oil and gas assets and a sustainable dividend, with its largest active investment being a working and royalty interest in the Delhi CO2 enhanced-oil-recovery field in Louisiana. The unaudited interim statements are prepared under U.S. GAAP. The company reported net production of 2,016 BOEPD in the quarter, primarily from Delhi.
Financial performance and liquidity
| Metric | Three months ended March 31, 2019 | Nine months ended March 31, 2019 |
|---|---|---|
| Revenue | $9.50 million; down 6.4% year over year | $32.86 million; up 11.5% |
| Income from operations | $2.95 million | $13.68 million |
| Operating margin | 31.1%, versus 36.1% a year earlier | 41.6%, versus 37.4% |
| Net income | $2.40 million, or $0.07 diluted EPS | $12.10 million, or $0.36 diluted EPS |
| Net cash provided by operations | Not presented for the quarter alone | $18.33 million, versus $14.52 million |
| Capital expenditures | Not separately stated for the quarter in the cash-flow statement | $6.37 million |
Quarterly revenue was down 7% from the prior quarter, and net income was $2.4 million versus $3.9 million in the prior quarter. The year-over-year quarterly revenue decline primarily reflected lower realized commodity prices: oil averaged $59.12 per barrel, down 7.0%, and NGLs averaged $16.37 per barrel, down 42.7%. Production volume rose 7.0% year over year to 2,016 BOEPD. Quarterly production costs increased 16.3% to $3.79 million; DD&A rose 12.7% to $1.56 million. General and administrative expense fell 35% to $1.20 million.
At March 31, 2019, cash and cash equivalents were $29.55 million, current assets $33.92 million, and current liabilities $2.79 million; working capital was $31.1 million. The company had no borrowings outstanding. Its facility provided $40 million of elected borrowing-base availability, within a stated maximum facility capacity of $50 million, and matures April 11, 2021. Total liabilities were $15.52 million, including $11.19 million of deferred taxes and $1.53 million of long-term asset-retirement obligations. Stockholders’ equity was $79.97 million.
For the nine-month period, the company paid $9.95 million in dividends and used $10.09 million in financing activities. Cash, cash equivalents and restricted cash increased $1.87 million; restricted cash was zero at period end. The quarterly dividend was $0.10 per share, and the board declared another $0.10 dividend payable June 28, 2019.
Material changes versus comparable periods
- Nine-month revenue rose 11.5%, as a 14.2% increase in equivalent realized price more than offset a 2.4% decline in production volumes. The equivalent price was $59.54/BOE versus $52.14.
- Nine-month production costs rose 21.7% to $10.70 million, driven by higher CO2 costs and other operating expenses. Costs per BOE increased 24.8% to $19.40.
- Nine-month operating income increased to $13.68 million from $11.03 million. Net income nevertheless declined 19.8% to $12.10 million, principally because the prior-year period included a one-time $6.0 million tax benefit related to the Tax Act.
- Nine-month cash from operations increased $3.8 million year over year, while investing outflow increased $4.7 million due to higher capital spending. Dividends paid increased $1.7 million.
- Cash was $29.55 million at March 31, 2019, compared with $24.93 million at June 30, 2018; the earlier balance also included $2.75 million of restricted cash associated with the Enduro transaction.
Outlook, commentary, risks and unusual items
- Management expected approximately $0.5 million of Delhi net capital spending for the remainder of fiscal 2019 and approximately $1.5 million in the first half of fiscal 2020, mainly for conformance, workovers and NGL-plant maintenance. Management expected Delhi Phase V development to begin in fiscal 2020, subject to infill results, CO2 requirements, and the operator’s funding and spending priorities.
- Management said production could benefit over time from new CO2 injector wells and higher injection volumes. Scheduled January plant maintenance affected oil production; plant changes improved NGL production and reduced downtime.
- The $1.1 million Enduro breakup fee was received in August 2018 after a higher bidder acquired the assets. It was recorded in nine-month results and was non-recurring.
- The CEO had retired in May 2018; the board’s executive chairman was serving as interim CEO. The CEO search was expected to conclude during the quarter ending June 30, 2019.
- Key exposures include volatile oil and NGL prices, operational risks, and possible full-cost accounting impairment if commodity prices decline significantly. The company stated it was in compliance with its credit-facility covenants and that disclosure controls were effective; it reported no material change in internal control over financial reporting and no material change to previously disclosed risk factors.
- The company reported no legal proceedings. It disclosed a $12,179 minimum office lease commitment for the twelve months ending March 31, 2020 and described ordinary-course claims and contingencies without stating a quantified loss.
Important facts for investors to verify
- Whether Delhi production, CO2 injection, realized prices and operating costs support the planned Phase V development and projected production benefits.
- The timing, capital requirements and operator funding priorities for Phase V, and whether planned spending remains within operating cash flow and working capital.
- How commodity-price changes affect revenue, cash generation, dividend capacity and the risk of a full-cost impairment.
- Whether the $0.10 quarterly dividend remains supported by future cash flow, capital needs and the board’s assessment.
- Progress in appointing a permanent CEO and any subsequent changes in leadership or strategy.