Evolution Petroleum Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter ended December 31, 2011, with comparative results for the three and six months ended December 31, 2010. The filing describes fiscal 2012 Q2; this is not calendar-year Q2.
Business context
Evolution Petroleum acquires, develops, and exploits U.S. oil and natural gas properties. Its principal activities include the Delhi enhanced oil recovery project in Louisiana, producing properties in the Giddings and Lopez fields in Texas, and commercialization of its GARP artificial-lift technology.
Financial and operating performance
| Metric | Three months ended Dec. 31, 2011 | Six months ended Dec. 31, 2011 |
|---|---|---|
| Revenue | $4.65 million, up 294% year over year | $8.53 million, up 263% |
| Net income attributable to company | $1.43 million | $2.57 million |
| Earnings attributable to common shareholders | $1.26 million; diluted EPS $0.04 | $2.28 million; diluted EPS $0.07 |
| Operating cash flow | Six-month total: $4.30 million | |
| Cash and cash equivalents | $13.65 million at Dec. 31, 2011 | |
| Debt | Company reported it was debt-free |
Quarterly oil and gas sales volume rose 137% year over year to 52,306 BOE; crude oil volume increased 301%. The blended realized price rose 67% to $88.84/BOE. Field margin was $75/BOE, versus $73.12 in the prior quarter and $34 in the year-ago quarter. Lease operating expenses and production taxes were $8.24/BOE, down 44% year over year. These field-margin and per-BOE figures are operating measures, not consolidated GAAP profit margins.
For the six months, investing cash flow was a use of $1.54 million, including $1.33 million for property development and $0.17 million for acquisitions. Financing cash flow provided $6.64 million, principally from preferred-stock issuance, partly offset by preferred dividends. Current assets were $16.21 million and current liabilities $2.30 million at December 31. Total liabilities were $7.88 million, including $4.59 million of deferred taxes and $0.91 million of asset retirement obligations.
Changes and notable items
- Revenue and earnings improved substantially from the year-ago loss, primarily on higher Delhi crude-oil volumes and stronger liquids prices. Delhi sales averaged 366 net BOPD, up 438% year over year.
- The company sold 317,319 shares of 8.5% cumulative perpetual preferred stock during the six months, generating $6.93 million net proceeds. The stock is nonconvertible, has a $25-per-share liquidation preference, and ranks ahead of common equity; dividends paid were $293,240.
- During the six months, approximately $2.2 million of unevaluated Woodford Shale acreage was impaired and transferred to the full-cost pool.
- G&A rose 14% for the quarter and 11% for the six months, partly due to personnel and legal costs. Stock-based compensation was $355,000 for the quarter and $772,000 for the six months.
Outlook, risks, and contingencies
- The approved fiscal 2012 capital budget is $4 million to $12 million; management said the low end was fundable from existing working capital. It expected to fund spending above the base plan through cash flow, joint ventures, asset sales, project financing, or potentially further preferred-stock issuance. No production or earnings forecast was provided.
- Delhi development exceeded the operator’s 2011 plan. Management cited oil-gravity indications of potentially favorable miscibility and recovery, but these are not guarantees of reserves or project outcomes.
- One GARP demonstration was producing with encouraging initial indications; the second was about one month behind schedule. Lopez reinjection rates remained an operational challenge. Low natural-gas prices were weighing on Giddings drilling and kept Woodford projects on hold; a Woodford lease sale was among options under consideration.
- Commodity prices, demand, service costs, operating conditions, and project execution could affect results. The company reported no commodity hedges in place. Proposed federal tax-law changes could reduce or defer oil-and-gas tax deductions if enacted.
- The filing reported no material developments in previously disclosed legal proceedings and no off-balance-sheet arrangements. It disclosed office-lease commitments of $728,800 and contingent executive severance obligations of approximately $588,000. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether Delhi production, project payout timing, and any associated working-interest reversion evolve as assumed, including the effect on future costs and depletion.
- Whether GARP demonstrations deliver sustained production and reserve benefits, and whether Lopez water reinjection can be operated consistently.
- How the $4 million–$12 million capital budget will be deployed and funded, and whether further preferred-stock issuance or its 8.5% dividend burden is contemplated.
- Current reserve estimates, commodity-price assumptions, and the potential effects of low natural-gas prices and proposed tax changes; interim results are not necessarily indicative of full-year results.