Evolution Petroleum Corporation — Form 10-Q Summary
Reporting period: Three months ended September 30, 2013, the company’s first quarter of fiscal 2014. The filing is unaudited. Evolution Petroleum acquires, exploits, and develops U.S. oil and gas properties, with operations including the Delhi enhanced oil recovery (EOR) project, GARP® installations, and interests in the Mississippi Lime.
Financial results
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $4.63 million | $4.29 million | +8% |
| Income from operations | $1.96 million | $1.93 million | +2% |
| Net income | $1.47 million | $1.16 million | +27% |
| Net income available to common shareholders | $1.30 million | $0.99 million | +32% |
| Diluted EPS | $0.04 | $0.03 | Increased |
| Operating cash flow | $1.56 million | $1.62 million | Down slightly |
Crude oil revenue rose 15% to $4.59 million, while NGL and natural gas revenues declined sharply. Sales volumes fell 18% to 43,643 BOE, primarily reflecting prior-year property divestitures; the higher average realized price of $106.17/BOE, up 32%, more than offset the volume decline. Crude oil averaged $109.80/barrel. Field margin was $89/BOE versus $68/BOE a year earlier.
Operating costs increased to $2.67 million from $2.36 million. Lease operating expense was $409,847, up 30%; G&A was $1.93 million, up 13%, including $373,438 of non-cash stock compensation. The income tax provision fell to $482,636 from $760,218; the effective tax rate was 24.7% versus 39.6%.
Cash and cash equivalents were $25.68 million at September 30, compared with $24.93 million at June 30. Working capital was $25.9 million. Investing activities used $0.53 million, including $0.54 million of property development spending; financing activities used $0.28 million, mainly preferred dividends and employee share withholding. The company had no credit-facility borrowings or letters of credit and $5 million of borrowing-base availability. Total liabilities were $10.95 million, including $8.49 million of deferred tax liabilities. The 8.5% Series A preferred stock had a $7.93 million liquidation preference.
Material changes and operating developments
- Delhi net EOR production was 438 BOPD, down 18% sequentially and up 17% year over year. A June 2013 fluid release led to reduced CO₂ injection in part of the field and temporarily lower production. The operator reported remediation was nearly complete and expected injection to resume in the quarter ending December 31, 2013.
- The company’s Delhi interest was a 7.4% royalty interest; a future reversion could increase its revenue interest to 26.5% and its cost-bearing interest to 23.9%. The timing depends on payout. The company disputes the operator’s treatment of environmental costs and says it is evaluating alternatives.
- Mississippi Lime recompletions had marginal results; the company was evaluating a further test and had allocated no additional drilling capital there.
- A GARP® installation in the Giddings Field restored a well to approximately 2–13 BOPD and 1–10 MCFD. The company was working to finalize a larger installation agreement. It also reached a tentative agreement to divest Lopez Field interests.
- Common shares outstanding were 28,599,669 at September 30. The company retired treasury shares during the quarter and withheld 10,222 employee shares to satisfy payroll taxes.
Outlook, risks, and contingencies
- The company expected to fund its remaining fiscal 2014 capital plan, projected at $18 million, from working capital and internally generated cash. Up to $17 million was contemplated for Delhi, subject to working-interest reversion timing and spending; GARP® spending was estimated at $1–$3 million, depending on agreements.
- Management was evaluating possible returns of cash to shareholders through dividends and/or share repurchases; no amount or timing was established. The filing provides no formal earnings guidance.
- Management cited commodity-price volatility, demand and economic uncertainty, operating and service-cost pressures, and potentially higher operating costs if Delhi working-interest production increases. The company reported no commodity hedges outstanding.
- A subsequent-event disclosure says the company initiated a business refocus toward GARP® development during fiscal Q2, with a shift toward sales and marketing. It expected to record a restructuring charge in the quarter ending December 31, 2013; the amount was not yet determined.
- The Delhi environmental-cost and payout dispute remained unresolved. Legal proceedings included royalty-interest litigation and a lease dispute; the company reported favorable or partial dismissals in certain cases and a settlement in the Garcia matter. It stated that risk of loss in the Jones matter was remote based on counsel’s advice.
- Other commitments included $450,531 of future office lease payments and approximately $692,000 of contingent severance obligations under officer employment contracts. The company reported compliance with credit covenants and effective disclosure controls.
Important facts for investors to verify
- Delhi remediation status, resumed CO₂ injection, production recovery, and the impact on payout and working-interest reversion.
- Resolution of the operator dispute over environmental costs and whether those charges affect payout timing.
- Execution, economics, and capital requirements of the proposed GARP® expansion agreements and the stated fiscal 2014 capital plan.
- The eventual restructuring charge and its effect on costs and the company’s GARP® strategy.
- Changes in oil prices, production volumes, operating costs, and any developments in the disclosed litigation and contingencies.