Business context and reporting period
Evolution Petroleum Corporation is an independent oil and gas company focused primarily on the Delhi field in Louisiana. This filing covers the fiscal quarter and nine months ended March 31, 2016; it is not a 2015 Q3 filing. The results are unaudited. Delhi production and revenue make up virtually all oil and gas operations.
Financial performance and liquidity
| Metric | Three months ended March 31, 2016 | Nine months ended March 31, 2016 |
|---|---|---|
| Total revenue | $5.1 million, down 28% year over year | $19.1 million, up 2% year over year |
| Net income (loss) available to common shareholders | $(0.3) million; $(0.01) per share | $3.3 million; $0.10 per share |
| Operating income (loss) | $(0.7) million; operating margin approximately (13%) | $0.7 million; operating margin approximately 4% |
| Operating cash flow | $5.8 million for the nine-month period, versus $6.6 million a year earlier | |
| Investing cash flow | $(8.8) million for the nine-month period, including $12.2 million of capital expenditures and $3.5 million of derivative settlements received | |
| Cash and working capital | $14.0 million cash and $7.9 million working capital at March 31, 2016 | |
| Debt and available credit | No borrowings. The existing facility had $5.0 million available at quarter-end; a new facility with a $10.0 million initial borrowing base was entered into after quarter-end. |
Crude oil revenue for the quarter was $5.0 million. Production rose 12% year over year to 1,835 BOE per day, but the realized price fell 37% to $29.99 per BOE. Production cost was $13.13 per BOE, down from $21.63 a year earlier; oil and gas DD&A was $7.56 per BOE. For the nine-month period, realized price declined 38% to $38.58 per BOE, while production volume increased 63% to 489,921 BOE. The prior-year nine-month comparison is not fully comparable because Evolution’s Delhi working interest reverted to the company in November 2014.
Cash declined by $6.1 million from June 30, 2015. Financing cash use included $5.4 million of common and preferred dividends and $1.4 million of treasury-stock purchases, partly offset by stock-compensation-related tax benefits. The company remained debt-free and reported compliance with the prior facility’s covenants.
Material changes versus comparable periods
- Quarterly revenue fell year over year despite higher production, principally because realized oil prices were substantially lower. The company recorded a quarterly loss to common shareholders versus income in the prior-year quarter.
- Quarterly operating costs were nearly flat overall, but general and administrative expense rose 57% to $2.3 million, including approximately $1.1 million of litigation costs.
- Nine-month common-shareholder income increased to $3.3 million from $2.6 million, supported by derivative gains and an insurance recovery, despite higher operating expenses and a $1.3 million restructuring charge.
- The company separated its GARP artificial-lift operations in December 2015, transferring technology assets to Well Lift Inc. in return for a 5% royalty on future related gross revenue. Evolution retained a 17.5% interest in Well Lift, potentially convertible to 42.5%; it reported no obligation to provide further funding.
Outlook, risks and unusual items
- Delhi NGL plant: The company reported a $24.6 million total estimated cost, with approximately $15.1 million incurred by March 31 and about $9.5 million remaining. Completion was anticipated by the end of calendar 2016, later than the earlier target. Management expected remaining committed costs to be funded with operating cash flow and working capital; the plant had not yet contributed production.
- Production enhancement: The Delhi operator proposed $2.5 million of gross projects ($0.6 million net to Evolution) to restore southwestern-field production. The estimated 250–300 BOPD increase is an expectation, not a realized result.
- Hedging: Swaps covered 1,200 BOPD for April–June 2016 at $40 per barrel. No hedges beyond June 30, 2016 were in place as of the filing. Derivatives generated $4.1 million of nine-month gains, including $4.0 million realized; gains and losses are recognized in earnings without hedge accounting.
- Credit facility: On April 11, 2016, after quarter-end, the company entered a three-year secured reserve-based facility of up to $50 million with a $10 million initial borrowing base and no outstanding borrowings. Availability is subject to semiannual redeterminations and financial covenants.
- Commodity and impairment exposure: Management cited oil-price volatility as a key risk to revenue, cash flow, liquidity and borrowing capacity. The March quarter’s full-cost ceiling test had a cushion, but lower prices reduced it; management could not assure that a future property write-down would not be required.
- Litigation: The Delhi dispute with Denbury, including counterclaims, was scheduled for trial in late July 2016. A separate Louisiana lawsuit was being defended; management considered the likelihood of material loss in that matter remote. The filing states that litigation outcomes could affect liquidity.
- Other unusual items: Nine-month results included a $1.1 million Delhi insurance recovery, a $1.3 million GARP-related restructuring charge, and a $1.5 million Louisiana tax refund plus interest. The restructuring included asset impairments and personnel costs; estimated annual overhead savings were approximately $1.0 million.
Management expected to fund anticipated capital spending from operating cash flow and working capital, planned to remain debt-free under current operating plans, and described dividends as a priority. These expectations depend materially on commodity prices and operating results. No specific production or earnings guidance was provided.
Important facts for investors to verify
- Whether the NGL plant is completed on the stated timetable and within its remaining budget, and whether it delivers the forecast production and operating benefits.
- Subsequent Delhi production, realized prices, field costs and performance of the proposed southwestern-field projects.
- Hedge positions after June 30, 2016, including the effect of hedge settlements on cash flow and earnings.
- Current borrowing-base availability, covenant compliance and liquidity after facility redeterminations and capital spending.
- Progress and potential financial effects of the Denbury litigation and any other contingencies.
- Future full-cost ceiling-test headroom and whether lower commodity prices lead to an impairment charge.