Business context and reporting period
Evolution Petroleum Corporation is an independent oil and gas company focused on developing incremental reserves, including its Delhi enhanced oil recovery (EOR) interest and GARP® technology. This filing covers the quarter ended March 31, 2014—the company’s third quarter of fiscal 2014—and the nine months then ended. The request metadata says “2013 Q3,” but the filing itself reports fiscal 2014 Q3.
Financial performance and position
| Metric | Three months ended March 31, 2014 | Year-ago quarter | Nine months ended March 31, 2014 | Year-ago period |
|---|---|---|---|---|
| Revenue | $4.34 million | $6.01 million | $13.36 million | $15.95 million |
| Net income | $0.92 million | $2.40 million | $1.99 million | $5.52 million |
| Net income available to common shareholders | $0.76 million; diluted EPS $0.02 | $2.23 million; diluted EPS $0.07 | $1.48 million; diluted EPS $0.05 | $5.01 million; diluted EPS $0.16 |
| Operating income | $1.36 million | $3.39 million | $3.16 million | $8.35 million |
| Operating cash flow | Nine-month figure: $5.66 million | Prior nine-month figure: $9.11 million |
Quarterly revenue fell 27.8% year over year and net income fell 61.5%. Nine-month revenue declined 16.2% and net income declined 64.0%. Operating margin was approximately 31% for the quarter versus 56% a year earlier; nine-month operating margin was approximately 24% versus 52%.
For the quarter, oil and gas sales volumes were 43,794 BOE, down 22% year over year; realized revenue per BOE was $99.03, down 7%. Nine-month volumes declined 23% to 134,335 BOE, while realized revenue per BOE increased 8% to $99.48. Lower Delhi output and prior asset sales contributed to volume declines.
At March 31, 2014, cash and cash equivalents were $24.88 million, working capital was $24.2 million, and total assets were $65.89 million. Total liabilities were $12.84 million. The company had no borrowings or letters of credit under its unsecured revolving facility; its available borrowing base was $5 million. Preferred stock has an 8.5% cumulative dividend and a $7.93 million liquidation preference. The company paid $6.46 million of common dividends and $0.51 million of preferred dividends during the nine-month period.
Nine-month investing cash outflow was $0.39 million, including $0.99 million of oil and gas capital expenditures, partly offset by asset-sale proceeds and a certificate-of-deposit maturity. Financing cash outflow was $5.32 million. No guidance for full-year earnings or production was provided.
Material changes and unusual items
- Quarterly general and administrative expense rose to $2.30 million from $1.78 million, including a $0.6 million one-time charge related to the former CFO’s retirement. Nine-month G&A was $6.88 million, up from $5.30 million.
- The nine-month period included $1.33 million of restructuring charges following a workforce and business-focus change announced in November 2013. Remaining accrued restructuring costs were $0.74 million at March 31.
- Delhi production was 457 BOPD net to the company’s 7.4% royalty interest, essentially flat sequentially but down 19% year over year. Remediation following a June 2013 fluids release and reduced CO₂ injection affected production; the operator reported remediation work completed and resumed incremental injection, with water injection substituted near the affected well.
- The company transferred its remaining $4.4 million of unevaluated Mississippi Lime properties into the full-cost pool during the quarter. It said no further development was under consideration there and it was evaluating options, including divestment.
Outlook, risks and contingencies
Management expected the first production from the initial GARP® installations under a new 10-well agreement in fiscal Q4 2014; the customer had begun installing the first five wells after quarter-end. The operator may terminate the second five installations based on the first five’s performance. The first three existing commercial installations were performing as expected, while one faced fines-related pump-cleaning costs.
Management expected the Delhi working-interest reversion during fiscal 2015. Reversion would increase the company’s revenue interest from 7.4% to about 26.5%, while also creating a 23.9% cost-bearing interest. The filing estimated a fiscal 2015 capital budget of $22–30 million, dependent on operator spending and reversion timing; funding was expected from working capital and operating cash flow. Management was discussing converting the existing revolver into a senior secured facility with capacity up to $30 million; this was not a completed financing.
A major contingency is the dispute with Delhi operator Denbury. The company alleges improper payout-account charges, disputed treatment of remediation and processing-plant costs, failure to indemnify it for environmental impacts, and delayed working-interest reversion. Denbury filed counterclaims. The company’s other disclosed proceedings include royalty-related litigation and a claim concerning historic water disposal. Commodity prices, operating risks, future Delhi production and development costs are material uncertainties. Management reported disclosure controls effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress and outcome of the Denbury litigation, indemnity dispute, payout-account claims, and timing of Delhi working-interest reversion.
- Whether Delhi production recovers after remediation, and the actual effects of the revised injection plan and planned gas-processing plant.
- Commercial performance, installation costs, and customer continuation decisions for the GARP® wells.
- Actual capital requirements and liquidity available for Delhi reversion and fiscal 2015 spending, including the status and terms of any expanded credit facility.
- The causes and sustainability of lower revenue and earnings, including production volumes, realized prices, and nonrecurring expenses; also verify the expected tax treatment of fiscal 2014 dividends as return of capital.