Evolution Petroleum Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2018. The request metadata says “2017 Q3,” but the filing is for fiscal 2018’s third quarter.
Business context
Evolution Petroleum is an independent oil and gas company focused on developing and producing reserves, principally through its interest in the Delhi field. All current-period oil and gas revenue came from Delhi.
Financial performance and liquidity
| Metric | Three months ended March 31, 2018 | Nine months ended March 31, 2018 |
|---|---|---|
| Revenue | $10.25 million; up 7.6% year over year | $29.85 million; up 16.4% |
| Income from operations | $3.66 million | $11.03 million |
| Net income attributable to company | $3.07 million; $0.09 per diluted share | $15.09 million; $0.45 per diluted share |
| Operating cash flow | Not presented for the quarter | $14.52 million, versus $11.35 million |
| Capital expenditures for oil and gas properties | Not presented for the quarter | $1.67 million cash outflow |
Nine-month earnings included an approximately $6.0 million non-cash tax benefit from remeasuring deferred tax liabilities after the Tax Cuts and Jobs Act reduced the federal corporate rate from 34% to 21%. Net income for the comparable 2017 nine-month period was $6.54 million, or $0.16 per diluted share; net income available to common shareholders was $5.29 million after preferred-stock dividends and a deemed dividend. The current period had no preferred-stock deductions.
At March 31, 2018, cash was $27.19 million, working capital was $28.4 million, total assets were $91.69 million, and stockholders’ equity was $76.20 million. There were no borrowings under the credit facility; the borrowing base provided $40 million of availability, and the company reported covenant compliance. The facility matures April 11, 2019. The filing reports no material off-balance-sheet arrangements.
Material changes and operating developments
- Quarterly revenue rose despite lower production: equivalent volumes fell 16.6% year over year to 1,884 BOE per day, while realized equivalent pricing increased 29.1% to $60.44 per BOE. Realized oil price was $63.56 per barrel.
- Abnormally cold January weather caused shut-ins and lost production—approximately seven days of oil and more than 25 days of NGL production. Gross Delhi production returned to normal levels in February and March.
- Quarterly production costs increased 19.5% year over year to $3.36 million; costs per BOE rose 43.4% to $19.82. Higher purchased CO2 costs and lower production volumes contributed. Quarterly G&A increased 44% to $1.84 million, including higher litigation and property-evaluation costs.
- For the nine months, revenue increased 16.4%, while production volumes were nearly flat overall. NGL production rose substantially following the NGL plant’s January 2017 start-up. Production costs increased 23.1% and G&A increased 35% year over year.
- Cash increased $4.16 million during the nine months. Common dividends paid were $8.29 million, and cash used in financing was $8.68 million. The quarterly dividend increased to $0.10 per share; a further $0.10 dividend was declared for payment in June 2018.
Outlook, risks and contingencies
The operator began a 12-well Delhi infill program in late March: five injection wells and seven production wells. The company estimates its net cost at $4.7 million, with most spending expected in the fourth quarter of fiscal 2018 and the remainder in fiscal 2019. The operator expected completion by late July 2018 and first wells online by the end of May. The company also approved $2.8 million of additional fiscal 2018 capital spending for water injection, flowlines and related infrastructure; approximately $0.7 million had been incurred by March 31. Management expected development spending to be funded from operating cash flow and working capital and anticipated beginning Test Site 5 development in calendar 2019, subject partly to infill results and operator plans.
Management said capitalized oil and gas costs were substantially below the full-cost ceiling and it did not then expect a write-down during the remaining fiscal 2018 quarters. A sustained decline in commodity prices could reduce the ceiling-test cushion and lead to a non-cash impairment. Other stated risks include oil and NGL price volatility, operating and weather disruptions, rising service costs, and uncertainty in future demand and prices. The company had no derivative positions at March 31, 2018 and may use derivatives, which could limit gains as well as reduce downside exposure.
A lawsuit alleging improper water disposal was settled and dismissed; the settlement payment was recorded in G&A and paid in April 2018 and was described as immaterial. The filing reports no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no materially affecting changes in internal control over financial reporting.
Important facts for investors to verify
- Confirm the filing period: this is fiscal Q3 2018, not Q3 2017.
- Assess the sustainability of earnings and cash flow apart from the one-time $6.0 million deferred-tax benefit.
- Track Delhi infill well completion, timing of first production, realized volumes, and the estimated $4.7 million net program cost.
- Monitor oil and NGL prices, CO2 and other operating costs, weather-related production interruptions, and full-cost ceiling-test headroom.
- Review dividend sustainability against operating cash flow, planned development spending, and the credit facility’s April 2019 maturity and covenants.