Evolution Petroleum Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended June 30, 2015. This is an annual filing, not a calendar-year 2014 fourth-quarter report; fourth-quarter figures are identified separately below. The company is a U.S. oil and gas producer focused principally on its Delhi Field CO₂ enhanced-oil-recovery project in Louisiana, with a developing artificial-lift technology business (GARP®).
Financial and operating results
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $27.84 million | $17.67 million |
| Operating income | $8.58 million | $5.53 million |
| Net income attributable to company | $4.99 million | $3.60 million |
| Net income available to common shareholders | $4.32 million; diluted EPS $0.13 | $2.92 million; diluted EPS $0.09 |
| Cash from operating activities | $10.38 million | $8.11 million |
| Cash and cash equivalents at year-end | $20.12 million | $23.94 million |
| Total assets / total liabilities | $69.88 million / $21.31 million | $65.02 million / $13.14 million |
Operating margin was approximately 30.8% and net income attributable to the company was approximately 17.9% of revenue. Current assets were $23.69 million against current liabilities of $9.33 million, or working capital of approximately $14.36 million. The company had no funded debt and reported $5 million available under its unsecured revolving facility. Accounts payable rose to $8.17 million from $0.44 million, primarily reflecting post-reversion Delhi operating expenses and capital spending.
Delhi crude-oil revenue was $27.57 million. Delhi sales volume rose to 448,187 barrels from 164,224, while realized price fell to $61.52 per barrel from $102.96. Company-wide average sales price per BOE declined to $61.37 from $99.43. Delhi production costs were $8.52 million, versus none in FY2014 when the company’s Delhi revenue was from interests bearing no operating costs.
Fourth-quarter FY2015 revenue was $9.06 million, operating income $3.33 million, and net income available to common shareholders $1.72 million, or $0.05 per basic and diluted share.
Material changes versus the prior year
- Revenue increased 57% and common-shareholder net income increased 48%, mainly because the company’s 23.9% Delhi working interest reverted effective November 1, 2014. Together with its royalty and mineral interests, the company reported a 26.4% net revenue interest after reversion.
- Higher Delhi volumes were partly offset by sharply lower oil prices. Delhi gross production averaged 6,038 BOPD for FY2015, slightly below 6,076 BOPD in FY2014; the increase in the company’s net sales largely reflected its newly reverted interest.
- Operating costs increased with the Delhi working interest, and DD&A rose to $3.62 million from $1.23 million. General and administrative expense declined 25% to $6.26 million, partly because FY2014 included restructuring and other nonrecurring costs.
- Proved reserves declined to 12.4 MMBOE from 13.3 MMBOE; proved-reserve PV-10 fell to $218.7 million from $319.7 million. The filing attributes the decline in value principally to lower benchmark prices and changes in reserve assumptions. GAAP standardized measure was $159.2 million, down from $226.1 million.
- The company paid $9.83 million in common dividends and $0.67 million in preferred dividends. It reduced the common quarterly dividend from $0.10 to $0.05 per share beginning in March 2015 and authorized up to $5 million in common-stock repurchases.
Outlook, risks and unusual items
- Delhi investment: The company expects to complete a Delhi natural-gas-liquids recovery plant in the second half of calendar 2016. Estimated project cost is $103 million gross and $24.6 million net to the company; approximately $5 million had been spent by June 30, 2015. The company expected about $19.6 million of its net plant costs in the following fiscal year. Recovered methane is planned for field power, while NGL sales and a purer reinjected CO₂ stream are expected to benefit project economics.
- Development timing: Delhi production was expected to average above 6,000 BOPD before plant-related additions. Further CO₂-flood expansion was suspended after oil prices declined; management expected work to resume within two to three years, subject to prices, operator capital allocation, and project economics.
- Commodity hedges: Costless collars covered 1,100 barrels per day from July through December 2015, with a $55 floor and $64.05 ceiling per barrel. The company recorded a $109,974 derivative liability at year-end and disclosed subsequent realized gains for July and August 2015.
- Concentration and operating risks: More than 99% of FY2015 revenue came from Delhi and 99% was associated with Plains Marketing. The company does not operate Delhi and has limited control over its development, costs, and production. Oil-price declines, pipeline or purchaser disruption, and the operator’s decisions could materially affect results and liquidity.
- Litigation: The company’s dispute with Denbury concerns, among other matters, payout-account charges, contractual rights, and environmental liabilities related to the Delhi project. Denbury claimed remediation costs exceeding $130 million gross from the June 2013 fluid-release event could be charged to the payout account; Evolution disputes that position. Trial was scheduled for April 2016. Separately, a plaintiffs’ claim concerning Delhi royalty rights was pending before the Louisiana Supreme Court; management’s counsel assessed material-loss risk as remote. A separate Jones lawsuit was dismissed with prejudice in March 2015 without payment to plaintiffs.
- GARP®: Artificial-lift revenue fell to $247,000 from $623,000, while related costs were $744,000, including workovers. The company recorded a $276,000 impairment of equipment associated with third-party wells. Management cited a difficult market amid reduced industry spending, despite master service agreements with prospective operators.
- Other disclosures: FY2015 financial statements received an unqualified audit opinion, and the auditor also reported effective internal control over financial reporting. The filing reports no impairment of oil and gas properties under the full-cost ceiling test in FY2015.
Important facts for investors to verify
- Whether Delhi’s working-interest reversion, production, operating costs, and payout accounting are being applied as described, and the outcome and potential financial impact of the Denbury litigation.
- Actual plant spending, schedule, funding, operating performance, and whether the forecast NGL, methane, and CO₂-flood benefits are achieved.
- Current oil-price exposure and hedge coverage, including the effect of collar ceilings on upside and the company’s ability to fund capital spending and dividends.
- Reserve revisions, development timing, and the sensitivity of PV-10 and the full-cost ceiling test to prices, costs, and operator plans.
- Whether GARP® installations generate sustainable commercial revenue and whether the company can reduce the technology business’s costs and impairment risk.
- Liquidity after planned capital spending and shareholder returns, including the terms and availability of the revolving facility, which was scheduled to expire February 29, 2016.