EVOLUTION PETROLEUM CORP quarterly report, Q2 FY2013

Evolution Petroleum Corporation — Form 10-Q

Business context and period. Independent U.S. oil and gas company focused on acquiring and developing known resources. This report covers the quarter and six months ended December 31, 2012—fiscal 2013 Q2—and is unaudited. The company’s key operating areas and projects included the Delhi enhanced oil recovery (EOR) project in Louisiana, the Mississippian Lime in Oklahoma, and GARP artificial-lift technology.

Financial performance

Metric	Three months ended Dec. 31, 2012	Year-ago quarter	Six months ended Dec. 31, 2012	Year-ago six months
Revenue	$5.65 million	$4.65 million	$9.94 million	$8.53 million
Net income	$1.96 million	$1.43 million	$3.12 million	$2.57 million
Net income available to common shareholders	$1.79 million; diluted EPS $0.06	$1.26 million; diluted EPS $0.04	$2.78 million; diluted EPS $0.09	$2.28 million; diluted EPS $0.07
Income from operations	$3.02 million	$2.43 million	$4.96 million	$4.44 million
Operating cash flow	Not presented for the quarter	$4.96 million	$4.30 million

• Quarterly sales volume rose 22% to 64,016 BOE; crude oil volume increased 39%. Revenue increased 22%, mainly from higher oil volumes, while average revenue per BOE edged down 0.7% to $88.23.
• For the six-month period, sales volume increased 19% to 117,457 BOE and revenue rose 17%, while average revenue per BOE fell 1.7% to $84.62.
• Quarterly field margins were reported at $4.8 million, up 33% sequentially and 24% year over year; margin per BOE was $76, up 11% sequentially and 1% year over year. Management’s field-margin definition is not detailed in the provided filing text.
• Quarterly G&A increased 22% to $1.82 million; six-month G&A increased 22% to $3.52 million. Higher personnel, legal, director, consulting, and transaction costs contributed. Stock-based compensation was $393,579 for the quarter and $747,369 for six months.

Financial position and liquidity

• At December 31, cash and cash equivalents were $18.03 million; working capital was approximately $18.0 million, up from $11.7 million at June 30, 2012.
• Total assets were $61.50 million and total liabilities $11.37 million. Current liabilities were $2.94 million. The filing reports no borrowings under the unsecured revolving credit facility; its available borrowing base was $5.0 million, within a facility of up to $50 million. The company said it was in covenant compliance.
• Six-month operating cash flow was $4.96 million. Investing activities used $0.98 million, including $4.01 million of oil and gas capital spending and $3.05 million of asset-sale proceeds. Financing activities used $0.37 million, principally preferred dividends.
• The company has 8.5% Series A cumulative preferred stock, with a $25 liquidation preference per share; six-month dividends paid were $337,151. No preferred shares were issued in the period.

Material changes, outlook, and risks

• Two Giddings Field asset sales generated approximately $3.1 million before transaction costs, with buyers assuming abandonment liabilities. Management said it was selling noncore assets to focus resources on Mississippian Lime and GARP projects; further non-GARP Giddings assets were being offered for sale. The sold properties included proved reserves, and the filing notes possible contingent payments tied to future drilling.
• Delhi net sales reached a record 509 BOPD, up 36% sequentially and 39% year over year, supported by expanded CO₂ injection and restored production. Management said strong production could affect the reserve-report estimate for the working-interest reversion, previously projected for late 2013. At reversion, its net revenue interest is expected to rise from 7.4% to 26.5%, while its cost-bearing interest rises from 0% to 23.9%.
• The first two horizontal Mississippian Lime producer wells were in dewatering and pressure-reduction phases, with small but generally increasing hydrocarbon production. Management described the early results as encouraging but not conclusive, and expected to delay further drilling pending results; significant development drilling was projected for fiscal 2014.
• The approved fiscal 2013 base capital plan provided for up to $10 million. Management expected some spending to carry into fiscal 2014 and said the remaining fiscal 2013 plan could be funded from working capital. Potential funding for spending above the plan included operating cash flow, joint ventures, asset sales, project financing, or additional preferred-stock issuance. No production or earnings guidance was provided.
• Key stated risks include oil and gas price volatility, operating and development costs, uncertain demand, weather-related disruptions, and execution and production uncertainty in the Mississippian Lime. Management also noted that working-interest growth could raise operating expenses and reduce the unusually high margins from Delhi royalty interests.
• Other obligations include a $569,789 office lease commitment and approximately $663,000 of contingent executive severance obligations. The filing reported no material change in previously disclosed risk factors, no material developments in existing legal proceedings, and no off-balance-sheet arrangements.

Important facts for investors to verify

• Whether Mississippian Lime wells progress from dewatering to commercial hydrocarbon production, and how that affects the timing and scale of fiscal 2014 drilling.
• Delhi production, the timing and economics of working-interest reversion, and whether the reserve outlook changes.
• Results of remaining Giddings asset sales, including contingent consideration, and how proceeds are redeployed.
• Capital spending versus the $10 million fiscal 2013 base plan, liquidity needs, and any use of the revolving facility or additional preferred financing.
• Commodity-price and cost trends, including the impact of lower realized NGL and natural gas prices and rising project expenses.