Evolution Petroleum Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2015; comparisons are with the three months ended September 30, 2014 unless noted. The filing is unaudited.
Business context
Evolution develops oil and gas reserves, with its principal asset the Delhi field in Louisiana, and commercializes its GARP artificial-lift technology. The company began funding its 23.9% Delhi working interest after reversion effective November 1, 2014. It is also investing in a Delhi natural-gas-liquids (NGL) recovery plant.
Financial and operating performance
| Metric | Quarter ended Sep. 30, 2015 | Comparable period |
|---|---|---|
| Total revenue | $7.38 million | $4.00 million |
| Income from operations | $1.85 million | $1.84 million |
| Net income attributable to company | $3.09 million | $1.13 million |
| Net income available to common shareholders | $2.92 million; $0.09 per diluted share | $0.96 million; $0.03 per diluted share |
| Cash from operating activities | $2.24 million | $0.63 million |
| Cash used in investing activities | $6.04 million | $0.21 million |
Revenue increased 84%, principally because of Delhi working-interest revenues and 12% higher gross field production, partly offset by much lower oil prices. Delhi realized oil price fell 53% to $46.70 per barrel. Reported operating margin was approximately 25% (income from operations divided by revenue); net income included significant derivative gains and an insurance recovery, so it is not a measure of recurring operating performance.
Derivative gains totaled $1.94 million: $0.87 million settled and $1.07 million unrealized. The company also recorded $1.07 million of Delhi insurance recovery related to a 2013 fluid-release event. Income tax expense was $1.75 million, at a 36.2% effective rate.
Balance sheet, liquidity and capital returns
- Cash and cash equivalents were $16.32 million, down from $20.12 million at June 30, 2015. Working capital was $16.3 million, up from $14.4 million.
- Total assets were $67.71 million and total liabilities were $15.65 million. The company reported no borrowings and no letters of credit under its revolving facility; $5.0 million of borrowing-base capacity remained available.
- The unsecured facility expires February 29, 2016. Management was discussing renewal or extension and had postponed plans for an expanded secured facility.
- Operating cash flow was $2.24 million; investing outflow was $6.04 million, primarily for Delhi property spending. The cash-flow statement reports $6.57 million of oil and gas property capital expenditures, while MD&A identifies $2.6 million of Delhi capital expenditures incurred in the quarter; the filing does not clearly reconcile these figures.
- The company paid $1.63 million of common dividends and $0.17 million of preferred dividends, and repurchased shares under its $5 million buyback authorization. It reported 317,319 preferred shares outstanding, with a $7.93 million liquidation preference.
Material changes and outlook
- Delhi net production averaged 1,698 barrels per day, about 300% above the prior-year quarter, primarily reflecting the working-interest reversion. Gross production averaged 6,423 barrels per day.
- Delhi production costs were $2.56 million, or $16.37 per BOE as presented in the operating comparison. Management cited lower CO2 costs and other operating efficiencies as partial offsets to low oil prices.
- The NGL plant was estimated to cost $24.6 million net to Evolution; approximately $6.6 million had been incurred by quarter-end, with about $18.0 million remaining. Management continued to anticipate startup in summer 2016. The filing describes expected plant-related production and operating benefits, but these remain projections.
- Costless collars covered 1,100 barrels per day through December 2015, with a $55.00 floor and $64.05 ceiling. After quarter-end, the company entered fixed-price swaps for 1,100 barrels per day for January–March 2016 at $51.45 per barrel. Hedging reduces downside exposure but limits gains if prices rise.
- Management stated that oil and gas property costs were below the full-cost ceiling at quarter-end and expected them to remain below it for the rest of fiscal 2016. Sustained low prices could reduce the ceiling and potentially cause a non-cash write-down.
- GARP installations were completed for new customers in the Eagle Ford and, after quarter-end, the Barnett Shale; initial results were described as promising. The company said it was assessing options to accelerate commercialization.
Risks, contingencies and unusual items
- Commodity-price volatility is a major risk to revenue, cash flow, capital spending capacity and full-cost ceiling-test values. Management expects anticipated capital spending over the next two fiscal years to be funded by operating cash flow and working capital, subject to results and prices.
- In the Denbury dispute concerning Delhi agreements, Evolution’s claims and Denbury’s counterclaims remain pending; trial was scheduled for April 2016. Litigation outcomes could affect liquidity, but the filing does not quantify a potential outcome.
- After quarter-end, on October 14, 2015, the Louisiana Supreme Court dismissed the McCarthy case with prejudice, reinstating the district court dismissal. Evolution considered potential loss in a separate Brooks/Hawkins matter remote.
- The quarter included a $1.5 million Louisiana tax refund, plus $57,467 interest; the tax-loss carryback arose from prior exercises of stock options and incentive warrants.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to previously disclosed risk factors.
Key facts for investors to verify
- How much of reported earnings and cash generation is sustainable after excluding derivative gains, the insurance recovery and the tax refund.
- Delhi production, realized prices, operating costs and the effect of the working-interest reversion on netbacks.
- NGL plant cost, remaining funding needs, construction schedule and expected operating and production benefits.
- Renewal or replacement of the credit facility before its February 2016 expiration, and the company’s liquidity under prolonged low oil prices.
- Progress and potential financial effects of the Denbury litigation, and the status of insurance recovery claims related to the Delhi event.
- The reconciliation of capital expenditures reported in the cash-flow statement and MD&A, and whether the full-cost ceiling remains above capitalized costs.