Evolution Petroleum Corporation — Form 10-Q
Business context and reporting period. Evolution Petroleum is an independent oil and gas company focused on developing and redeveloping known resources, including its Delhi enhanced oil recovery (EOR) interest and GARP® artificial-lift technology. This filing covers the quarter ended December 31, 2013, the company’s second quarter of fiscal 2014, and the six months then ended; it is not calendar-year 2013 Q2.
Financial results and position
- Quarter: Revenue was $4.39 million, down 22% from $5.65 million a year earlier. Consolidated net loss was $409,000; net loss available to common shareholders was $577,000, or $0.02 per share, compared with common income of $1.79 million, or $0.06 per share, a year earlier.
- Six months: Revenue was $9.03 million, down 9% year over year. Net income was $1.06 million; income available to common shareholders was $726,000, or $0.03 basic and $0.02 diluted per share, versus $2.78 million, or $0.10 basic and $0.09 diluted.
- Costs and operating performance: Quarterly G&A was $2.64 million versus $1.82 million; it included a $1.33 million restructuring charge and approximately $0.8 million of other nonrecurring charges associated with restructuring and option exercises. Quarterly lease operating expense and production taxes together fell 46% to $237,000. Oil, NGL and gas sales volume fell 27% to 46,898 BOE; realized revenue per BOE increased 6% to $93.66. Six-month DD&A was $637,000, with depletion of $6.86 per BOE versus $5.28.
- Cash flow and liquidity: Six-month operating cash flow was $2.83 million, down from $4.96 million. Investing activities used $328,000, including $857,000 of oil and gas capital spending and $544,000 of asset-sale proceeds. Financing activities used $1.88 million, including $3.21 million of common dividends and $337,000 of preferred dividends. Cash was $25.54 million at December 31; working capital was $25.2 million.
- Debt and equity: The company reported no borrowings or letters of credit under its unsecured credit facility, with $5 million of borrowing-base availability; it was in covenant compliance. The facility’s stated maximum is $50 million, subject to borrowing-base limits. Total liabilities were $11.74 million, including $8.75 million of deferred income taxes. Stockholders’ equity was $54.83 million.
Changes, outlook and material matters
- Management attributed lower year-over-year revenue mainly to reduced volumes, including previously divested Giddings properties and lower Delhi production; higher oil revenue per BOE partly offset the volume decline. Delhi production rose 6% sequentially as CO2 injection resumed in part of the field following remediation work.
- A November 2013 restructuring reduced the workforce by 27% and refocused resources on Delhi EOR, GARP commercialization and shareholder distributions. Management said recurring G&A should decline by approximately $1.4 million. The $1.33 million restructuring charge included about $376,000 of noncash accelerated stock compensation.
- Management expected to fund the remaining fiscal 2014 capital plan with working capital and internally generated funds. The plan included up to $17 million for Delhi, dependent on the timing of the company’s working-interest reversion and spending pace, and approximately $1 million for GARP. No further Mississippi Lime drilling was then budgeted. The total capital plan was not specified.
- The company began a common dividend policy and paid $3.21 million in common dividends during the six-month period. Management stated its intention to make further regular distributions consistent with expected improving Delhi cash flows; future amounts are not specified. Dividends paid through fiscal year-end were expected to be treated as return of capital for tax purposes, rather than taxable dividend income.
- Management expected approximately $0.7 million of option-exercise proceeds and a roughly $0.7 million pretax charge related to an executive retirement in the March 2014 quarter. It also expected a temporary increase in its book tax rate because option-related tax deductions defer percentage-depletion deductions. The filing describes approximately $31.2 million of option deductions and a potential $10.6 million tax benefit, subject to the stated tax treatment.
- A dispute with the Delhi operator concerns environmental-event costs, indemnification, payout calculations and other alleged breaches of 2006 agreements. The company sued the operator seeking declaratory relief and damages. Management said the dispute may delay the reversion of its Delhi working interest; the projected reversion in calendar 2014 would increase revenue interest to more than 26.5% and cost-bearing interest to 23.9%, but timing and outcome are uncertain.
- Other disclosed contingencies include royalty-related litigation and a claim concerning disposal of off-lease water. The company reported no material change to previously disclosed risk factors, no off-balance-sheet arrangements and effective disclosure controls. Commodity prices, operating risks, environmental matters and the Delhi dispute remain relevant uncertainties.
Important facts for investors to verify
- Whether Delhi remediation is complete, the operator’s treatment of disputed charges and indemnity, and the timing and economics of the working-interest reversion.
- Whether Delhi production, oil pricing and cash flows support the proposed capital spending and ongoing common dividends.
- Whether management achieves the stated recurring G&A savings and how the executive retirement and other restructuring-related costs affect subsequent quarters.
- The actual tax impact and timing of option-related deductions, windfall tax benefits and deferred percentage-depletion deductions.
- Performance and economics of the GARP installations, including the subsequent ten-well agreement and the operator’s option on the second five wells.
- Developments in the disclosed litigation and environmental matters, as well as compliance with credit-facility covenants.