Business context and reporting period
Evolution Petroleum Corporation is an independent oil and gas company focused primarily on developing and producing reserves, with substantially all current revenue tied to its Delhi field in Louisiana. This Form 10-Q covers the quarter ended December 31, 2016—the second quarter of fiscal 2017—and the six-month period then ended. The statements are unaudited.
Financial and operating results
| Metric | Three months ended Dec. 31, 2016 | Prior-year quarter | Six months ended Dec. 31, 2016 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $8.53 million | $6.62 million | $16.12 million | $14.00 million |
| Operating income (loss) | $3.68 million | $(0.45) million | $6.40 million | $1.39 million |
| Net income attributable to the Company | $2.31 million | $0.82 million | $4.12 million | $3.92 million |
| Net income available to common shareholders | $2.31 million | $0.65 million | $2.87 million | $3.58 million |
| Diluted EPS | $0.07 | $0.02 | $0.09 | $0.11 |
| Operating cash flow | Not provided for the quarter | $5.85 million | $4.51 million |
- Quarterly revenue rose about 29.9% year over year, reflecting higher oil volumes and prices. Net production averaged 1,987 BOE per day, up 10.2%; realized oil price was $46.66 per barrel, up 17.9%.
- Six-month revenue rose 16.0%. Net income available to common shareholders declined despite higher revenue, primarily because the prior-year period included larger derivative gains and a $1.07 million Delhi insurance recovery, while the current period included a $1.00 million deemed dividend on preferred-share redemption.
- Operating margin was approximately 43% for the quarter versus a loss in the year-ago quarter; six-month operating margin was approximately 40% versus 10%. Production costs were $12.54 per BOE in the quarter and $12.85 per BOE for six months, compared with $13.44 and $14.98, respectively, in the comparable periods.
- Cash and equivalents were $19.16 million at December 31, 2016, versus $34.08 million at June 30, 2016. Working capital was $18.6 million. Total liabilities were $18.50 million, including $13.44 million of deferred taxes; no borrowings were outstanding under the credit facility.
- Six-month investing cash outflow was $8.33 million, including $7.98 million of oil and gas property capital expenditures. Financing cash outflow was $12.45 million, including the $7.93 million preferred-stock redemption and $3.80 million of common dividends.
Material changes and unusual items
- The company redeemed all 317,319 shares of its 8.5% Series A preferred stock on November 14, 2016 for approximately $7.93 million, plus accrued distributions. The redemption eliminated the preferred dividend obligation; the company recorded a $1.00 million deemed dividend in the six-month period.
- Delhi gross production averaged 7,580 barrels per day, up 2.8% sequentially and 11.3% year over year, attributed mainly to conformance and production-enhancement work. The NGL plant began operating in late December; first NGL sales occurred in mid-January 2017.
- The company had no crude-oil derivative positions at December 31, 2016. Six-month derivative results were a $14,000 loss, compared with a $3.60 million gain in the prior-year period.
- The company early adopted new accounting guidance on deferred-tax classification and share-based compensation. Management said the adoption had no material financial-statement impact other than the disclosed tax effects and presentation changes.
Outlook, risks and contingencies
- Management expected full NGL-plant production in fiscal Q3 2017 after an optimization period. It reported approximately $26 million of cumulative plant investment and said substantially all plant costs had been incurred.
- Remaining fiscal 2017 capital spending was expected to be less than $1 million. For fiscal 2018, the company identified a potential infill program of up to five CO2 injection wells and seven production wells; Phase Five expansion was expected in calendar 2018. These plans depend on project execution and capital allocation.
- Management anticipated funding planned Delhi investment from operating cash flow and working capital. It raised the common quarterly dividend to $0.065 in December 2016 and announced a further increase to $0.07 payable in March 2017; the Board said it would revisit the dividend based on field results, development timing and oil prices.
- The $10 million borrowing base under the $50 million maximum senior secured facility was reaffirmed in November 2016; the next redetermination was scheduled for May 2017. Commodity-price volatility could reduce liquidity, borrowing capacity, cash flow and property values. Management reported a ceiling-test cushion at December 31 but cautioned that sustained lower oil prices could cause a future impairment.
- A Louisiana lawsuit concerning alleged historical water disposal remained pending against the company and a subsidiary; trial was scheduled for late November 2017. Management, based on counsel’s advice, considered the likelihood of a material loss remote. The company also disclosed routine claims and contingencies.
Important facts for investors to verify
- Whether NGL-plant ramp-up achieved expected production and sales levels after the quarter, and the resulting effect on Delhi production, costs and cash flow.
- Actual spending, timing and economics of the proposed infill wells and Phase Five development, including operator plans and capital allocation.
- Oil-price sensitivity, the next borrowing-base redetermination, and the extent of the full-cost ceiling-test cushion under updated prices and reserve estimates.
- Sustainability of the increased common dividend relative to operating cash flow, capital requirements and liquidity after the preferred redemption.
- Any material developments in the pending Louisiana litigation; management assessed potential material loss as remote.