Business Context and Reporting Period
Evolution Petroleum Corporation is an oil and gas company focused on building a diversified portfolio and sustaining dividends. This unaudited Form 10-Q covers the quarter and six months ended December 31, 2019. Although the request labels the period “2019 Q2,” the filing identifies this as the company’s second quarter of fiscal 2020.
Assets include a 23.9% working interest in the Delhi field in Louisiana and, from November 1, 2019, a 23.51% working interest and 19.70% revenue interest in Wyoming’s Hamilton Dome field. The company is a non-operator.
Financial and Operating Highlights
| Metric | Three months ended Dec. 31, 2019 | Six months ended Dec. 31, 2019 |
|---|---|---|
| Revenue | $9.38 million, down 15.1% year over year | $18.53 million, down 20.6% |
| Operating income | $2.25 million | $5.52 million |
| Net income | $1.76 million, or $0.05 per diluted share; down 54.8% | $4.56 million, or $0.14 per diluted share; down 53.0% |
| Operating / net margin | 24.0% / 18.8% | 29.8% / 24.6% |
| Operating cash flow | Not provided separately for the quarter | $8.17 million, versus $14.14 million |
| Investing / financing cash flow | Not provided separately for the quarter | $(10.42) million / $(8.37) million |
- Crude oil realized price was $53.38 per barrel for the quarter, down 17.1%; equivalent realized price was $48.00 per BOE, down 18.7%. Quarterly net production was 2,124 BOEPD, up 4.4%, including Hamilton Dome production.
- Production costs were $4.23 million for the quarter, up 22.7%, reflecting Hamilton Dome costs. Cost per BOE rose 17.5% to $21.67. DD&A declined 8.9% to $1.46 million.
- At December 31, cash was $20.94 million, working capital was $21.7 million, and total liabilities were $17.75 million. No credit-facility borrowings were outstanding; the company had $40 million of elected borrowing-base availability. It reported compliance with covenants.
- Six-month cash declined $10.62 million, principally reflecting the Hamilton Dome acquisition, dividends, and share repurchases. Cash dividends were $6.62 million; repurchases, including shares surrendered for tax withholding, were $1.75 million.
Material Changes Versus Comparable Period
- Six-month revenue fell 20.6%, while equivalent production was nearly flat, up 0.2%. Lower realized oil and NGL prices were the primary drivers; equivalent price per BOE declined 20.8%.
- Six-month net income declined 53.0%. The prior-year period included a $1.1 million Enduro transaction breakup fee, while the current period did not.
- The Hamilton Dome acquisition added approximately $1.1 million of oil revenue for the two months included in the quarter. The $9.5 million closing payment was reduced by a $0.2 million post-closing adjustment; the net acquisition cash outlay was approximately $9.3 million. The acquisition also added $0.9 million of asset retirement obligations.
- Quarterly Delhi sales were affected by temporary trucking and handling charges of approximately $0.4 million during a pipeline repair. The repair was completed in late January 2020, and Delhi oil sales were back on pipeline as of February 1, 2020.
Outlook, Risks, and Other Items
- Management expected remaining fiscal 2020 net capital spending of approximately $0.5 million to $0.7 million at Delhi and $0.1 million to $0.2 million at Hamilton Dome, funded from operating cash flow. Delhi Phase V development was deferred by the operator until 2021.
- The company described acquisition opportunities as attractive amid weak oil and gas prices and said its liquidity positioned it to pursue growth. It stated there were no specific plans to issue equity.
- The next quarterly dividend of $0.10 per share was declared February 4, 2020, payable March 31, 2020. Management said the board reviews the dividend in light of financial condition, forecasts, commodity prices, and growth opportunities; future dividend levels are not assured.
- Key risks include volatile oil and NGL prices, operating risks, and the possibility of a non-cash oil and gas property impairment after a sustained commodity-price decline. Hamilton Dome costs per BOE were higher than expected during its initial two reported months, partly due to atypical well workovers.
- The company reported no legal proceedings and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether oil and NGL prices, production volumes, and realized differentials recover, and how commodity-price changes affect cash generation and impairment risk.
- Whether Hamilton Dome operating costs normalize from the reported $34.37 per BOE and whether production is affected by future workovers.
- Whether Delhi pipeline operations remain normal and the deferred Phase V project proceeds on the operator’s expected timetable.
- The sustainability of the $0.10 quarterly dividend given cash balances, capital needs, acquisition plans, and commodity-price exposure.
- Credit-facility availability and covenant compliance following the next borrowing-base redetermination, scheduled for spring 2020.