Evolution Petroleum Corporation — Form 10-Q
Reporting period: Three and six months ended December 31, 2018, the second quarter and first half of fiscal 2019. The filing is unaudited. Evolution is an oil and gas company focused on producing properties and dividends; its largest active investment is a 23.9% working interest in the Delhi CO2-enhanced oil recovery project in Louisiana.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Comparable period | Six months ended Dec. 31, 2018 | Comparable period |
|---|---|---|---|---|
| Revenue | $11.05 million | $10.93 million, +1.1% year over year | $23.36 million | $19.33 million, +20.8% year over year |
| Operating income | $4.73 million | $4.83 million | $10.73 million | $7.37 million |
| Net income | $3.90 million; $0.12 diluted EPS | $9.88 million; $0.30 diluted EPS | $9.70 million; $0.29 diluted EPS | $12.02 million; $0.36 diluted EPS |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $14.14 million | $9.10 million |
| Capital expenditures | $1.3 million at Delhi | — | $5.05 million cash outflow for property and equipment | $1.02 million cash outflow |
Quarterly revenue was down 10% sequentially, mainly reflecting lower realized oil and NGL prices. Net production averaged 2,034 BOEPD, down 8.2% year over year but up from 1,992 BOEPD in the prior quarter. For the quarter, realized oil price was $64.37 per barrel and NGL price was $22.46 per BOE. Production costs increased 24.5% year over year to $3.45 million, or $18.45 per BOE, while quarterly G&A fell 24% to $1.26 million.
For the six-month period, higher realized commodity prices drove revenue growth despite a 6.4% decline in production volumes. Operating income rose about 46%; net income fell 19.3% because the prior-year period included a one-time $6.0 million tax benefit from remeasurement of deferred taxes following the Tax Cuts and Jobs Act. The current-period six-month income tax provision was $2.18 million.
Financial position and cash flow
- At December 31, 2018, cash and cash equivalents were $30.00 million; restricted cash was zero. Working capital was $30.8 million, compared with $27.7 million at June 30, 2018.
- Total assets were $96.42 million and total liabilities were $15.73 million. The company had no borrowings under its credit facility and reported no debt outstanding.
- The facility had a $40 million elected commitment and borrowing base available, within a stated maximum capacity of $50 million; it matures April 11, 2021. The company reported compliance with its financial covenants.
- Six-month cash flow: $14.14 million provided by operations, $5.05 million used in investing, and $6.77 million used in financing, including $6.63 million of dividends. Cash increased $2.32 million.
- The company paid $0.10 per share in each of the first two fiscal quarters and declared another $0.10 quarterly dividend, payable March 29, 2019.
Outlook, developments, and risks
- Management expected up to $1.0 million of net capital spending for the remainder of fiscal 2019, mainly for Delhi Phase V infrastructure and workover/conformance projects. Phase V development was anticipated to begin in fiscal 2020, subject to the operator’s plans, funding, and results of the infill program.
- Delhi gross oil production averaged 6,772 BOPD, up 2.8% sequentially; gross NGL production averaged 983 BOEPD, down 2.9%. Six new infill wells were producing, two infill injection wells had begun injecting CO2, and management anticipated additional wells coming online in the quarter ending March 31, 2019.
- The company received a $1.1 million Enduro transaction breakup fee in August 2018 after a higher bidder acquired the assets. Its $2.75 million acquisition deposit was returned in July. The fee increased six-month other income.
- The credit agreement was amended to broaden permitted uses of proceeds, including limited investment in complementary cash-flow-generating assets. Management said it had no specific plans to issue additional equity.
- Key exposures include volatile oil and NGL prices, which affect revenue, cash flow, borrowing capacity, and potential full-cost asset impairments; operating and service-cost inflation; and risks to Delhi production and development timing. Management cited uncertainty in the operator’s 2019 capital plans. No material changes to previously disclosed risk factors, legal proceedings, or off-balance-sheet arrangements were reported.
- The former CEO retired in May 2018; the chairman was serving as Executive Chairman and Interim CEO. The search for a new CEO was expected to conclude in the quarter ending June 30, 2019.
Important facts for investors to verify
- Whether Delhi production gains and planned infill wells translate into sustained net production, particularly given the year-over-year production decline.
- How oil and NGL prices, CO2 costs, and other production costs affect margins and cash generation.
- The operator’s 2019 capital budget and timing, funding, and expected economics of Phase V development.
- Whether operating cash flow and liquidity remain sufficient to fund development spending and the continuing dividend.
- That year-over-year net-income comparisons account for the prior-year $6.0 million non-recurring tax benefit and current-period $1.1 million Enduro breakup fee.