Evolution Petroleum Corporation — Form 10-Q Summary
Business context and reporting period
For the three months ended September 30, 2016, Evolution Petroleum reported its first quarter of fiscal 2017. The company develops oil and gas reserves, with substantially all current revenue generated by its interests in the Delhi field. Its strategy centers on increasing the value of that asset.
Financial and operating performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Revenue | $7.59 million | $7.38 million |
| Income from operations | $2.73 million | $1.85 million |
| Net income attributable to the company | $1.82 million | $3.09 million |
| Net income available to common shareholders | $0.56 million; $0.02 per diluted share | $2.92 million; $0.09 per diluted share |
| Cash from operating activities | $1.47 million | $2.24 million |
| Cash and cash equivalents, quarter-end | $28.24 million | $16.32 million |
Operating margin was approximately 35.9%, compared with 25.0% a year earlier. Total operating costs were $4.87 million, down from $5.53 million. Production costs were $2.34 million, or $13.17 per BOE, versus $2.61 million, or $16.61 per BOE. General and administrative expense declined 27% to $1.24 million. The income tax provision was $0.89 million; the effective tax rate was 33%, compared with 36%.
Net cash used in investing was $5.16 million, including $4.82 million of cash capital expenditures for oil and gas properties. Net cash used in financing was $2.15 million, mainly reflecting common and preferred dividends. Cash declined $5.84 million during the quarter. Working capital was $19.6 million, down from $28.6 million at June 30, primarily because $7.9 million was accrued for the preferred-stock redemption.
Total assets were $92.88 million and total liabilities were $24.59 million at September 30. The company had no borrowings outstanding. Its senior secured credit facility had a $10 million borrowing base, with $10 million available, subject to redetermination; the facility permits borrowing up to $50 million.
Changes versus the comparable period
- Revenue increased 3.6%, as a 13.3% rise in equivalent production volumes more than offset an 8.6% decline in realized price per BOE, to $42.66 from $46.66.
- Delhi gross production averaged 7,371 BOPD, 14.8% above the year-ago quarter and 5.8% above the prior quarter. Company net production averaged 1,935 BOEPD, up 10.9% year over year.
- Net income attributable to the company fell to $1.82 million from $3.09 million. The year-ago quarter included $1.94 million of net derivative gains and a $1.07 million Delhi-field insurance recovery; the current quarter recorded a $14,000 net derivative loss.
- Common-shareholder earnings also reflected a $1.00 million noncash deemed dividend associated with calling the preferred shares for redemption, as well as preferred dividends. The deemed dividend reduced earnings available to common shareholders, not reported net income attributable to the company.
Outlook, commentary, and risks
- The company reported the Delhi NGL plant was essentially complete, with startup scheduled for November 2016 and the first full month of production expected in December. About $23.9 million of the $24.6 million estimated project cost had been incurred; fiscal 2017 final spending was estimated at $3.0–$4.0 million. Management cited projected peak gross proved production of approximately 1,850 barrels of liquids per day over five years.
- Management expected to fund anticipated capital spending from operating cash flow and working capital and preferred to remain debt free. It approved 11 Delhi workover projects totaling about $3.8 million gross, or $0.9 million net to Evolution.
- On September 30, the company called all 317,319 Series A preferred shares for redemption on November 14 at $25 per share plus accrued distributions, for approximately $7.93 million of principal. Management estimated annual preferred-dividend savings of $674,302. On November 7, the board announced an increase in the common quarterly dividend to $0.065 per share, payable December 30, 2016.
- The company held no crude-oil derivatives at quarter-end and reported no subsequent derivative positions. Commodity-price volatility could reduce revenue, cash flow, borrowing capacity, and the full-cost ceiling-test cushion. Management did not expect an oil-and-gas property write-down in the remaining fiscal 2017 quarters, but gave no assurance against future impairment.
- The eastern Delhi development schedule depends partly on the operator’s capital allocation. The company said it continued to consider the development economically viable and probable within the next several years.
- A Louisiana lawsuit concerning alleged historical water disposal remained in discovery. The company denied the claims and considered the likelihood of a material loss remote. Management reported no material change to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Whether the NGL plant started up on schedule, reached expected production, and stayed within its remaining budget.
- Delhi production trends, realized oil prices, CO2 purchase and injection costs, and results from the approved workovers.
- Completion of the preferred-stock redemption and the resulting cash balance and dividend savings; also verify the common-dividend increase and its sustainability.
- Borrowing-base redeterminations and covenant compliance under the credit facility, especially if commodity prices weaken.
- Future full-cost ceiling-test results and the timing of eastern Delhi development.
- Developments in the Louisiana litigation and any resulting financial exposure.