Evolution Petroleum Corporation — Form 10-Q Summary
Business context and period. Evolution Petroleum acquires, develops and exploits U.S. oil and natural gas properties. This filing covers the three months ended September 30, 2012, the first quarter of fiscal 2013 (not calendar 2012 Q1). Comparisons below are generally with the year-ago quarter ended September 30, 2011 unless otherwise noted.
Financial performance and position
| Metric | Quarter ended Sep. 30, 2012 | Comparable 2011 period |
|---|---|---|
| Total revenue | $4.292 million | $3.885 million |
| Operating income | $1.931 million | $2.009 million |
| Net income | $1.160 million | $1.144 million |
| Net income available to common shareholders | $0.991 million | $1.016 million |
| Diluted EPS | $0.03 | $0.03 |
| Cash from operating activities | $1.620 million | $1.934 million |
| Cash used in investing activities | $2.729 million | $0.493 million |
- Revenue rose 10.5%, as sales volumes increased 14.2% to 53,441 BOE, partly offset by a 3.3% decline in average realized price to $80.30/BOE. Crude oil revenue increased 16.1%; NGL and natural gas revenue fell 36.5% and 32.8%, respectively.
- Operating income declined 3.9% despite higher revenue, reflecting increased operating costs. General and administrative expense rose 21% to $1.705 million; lease operating expense and production taxes rose 56% to $0.338 million. DD&A increased 25% to $0.297 million.
- Net income increased 1.4%, while income available to common shareholders declined 2.4%, principally reflecting higher preferred dividends. The effective tax rate was 39.6%, versus 43.3%.
- Field margin was $68/BOE, versus $73/BOE in both the prior quarter and year-ago quarter. Management attributed the year-over-year decline to lower revenue per BOE and higher LOE and DD&A rates.
- At September 30, cash and cash equivalents were $13.134 million; working capital was $12.8 million, versus $11.7 million at June 30, 2012. Total assets were $58.616 million and total liabilities $10.648 million.
- The company had no borrowings or letters of credit outstanding under its unsecured revolving facility; the borrowing base available was $5 million. The facility has a stated maximum size of $50 million, subject to borrowing-base limits and lender approval. The company reported compliance with its covenants.
- Oil and gas capital expenditures incurred were $2.1 million, versus $0.4 million a year earlier; cash oil and gas capital spending was $2.6 million. Preferred dividends paid were $0.169 million. There was no preferred-stock issuance in the quarter.
Material developments and outlook
- The fiscal 2013 approved base plan provides for up to $10 million of capital expenditures. Management expected to fund the remaining base plan from working capital; expenditures above the plan could be funded with operating cash flow, joint ventures, project financing, asset sales or additional preferred-stock issuance.
- In the Mississippian Lime joint venture in Kay County, Oklahoma, the company committed to drill 6–14 gross wells by April 2013. The first saltwater-disposal well and producer well had been completed; two producer wells were subsequently completed in October and November, with production start-up or dewatering underway or expected. The company reported 45% and 36.6% working interests in the two wells.
- Delhi EOR production averaged 5,057 gross BOPD, down 3% sequentially and up 15% year over year, after temporary operator-imposed restrictions related to process cooling. Restrictions were lifted in September. Management cited an independent engineer’s forecast of approximately 11,800 gross BOPD by late 2017. A late-2013 working-interest reversion was forecast to increase the company’s revenue interest from 7.4% to 26.5%, while increasing its cost-bearing interest from 0% to 23.9%.
- The operator’s Delhi eastern-field extension spending was not required to be funded by Evolution. The company reported $24 million of operator gross expenditures in the quarter and more than $60 million in calendar 2012 to date.
- Four GARP installations were producing 55–60 gross BOEPD (27–30 net) as of early November. The company also reported progress in its Lopez Field. It had entered agreements in principle to divest portions of its Giddings assets to concentrate resources on the Mississippian Lime and GARP projects; the filing does not provide transaction terms or completion status.
- Management identified commodity-price changes, operating risks, uncertain economic conditions, potential cost inflation in oilfield services and materials, and increased cost-bearing production as important uncertainties. The company held no commodity derivatives for hedging or speculation during the period.
Risks, contingencies and notable items
- The company reported no material changes to risk factors in its 2012 Form 10-K and no material developments in previously disclosed legal proceedings. It stated that it had no off-balance-sheet arrangements.
- Future minimum office-lease commitments totaled $0.610 million. Contingent severance obligations under three named officers’ employment agreements were approximately $0.685 million.
- Asset retirement obligations were $0.998 million. No impairment of unevaluated properties was recorded in the quarter; those properties, principally Mississippi Lime acreage, totaled $7.8 million and are reviewed at least quarterly.
- Non-cash stock-based compensation was $0.354 million. The company issued 154,227 restricted shares to employees; $3.014 million of compensation expense related to restricted-stock grants remained unrecognized.
- The 8.5% Series A preferred stock had a $25-per-share liquidation preference and ranked ahead of common equity for dividends and liquidation, but behind debt. Preferred dividends were $0.169 million for the quarter.
Important facts for investors to verify
- Whether Delhi production remains unrestricted and whether the forecast timing and economics of the working-interest reversion are achieved.
- Mississippian Lime well production, drilling commitments, capital needs and actual results relative to the independent reserve report.
- Progress and terms of the proposed Giddings asset divestitures, and the performance and economics of GARP installations.
- Whether the $10 million fiscal 2013 base capital plan and any spending above it can be funded while maintaining liquidity and credit-facility covenant compliance.
- Sensitivity of revenue and cash generation to oil, NGL and natural-gas prices, and the effect of rising operating and development costs as working interests increase.