Evolution Petroleum Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter ended March 31, 2013, with year-to-date results for the nine months ended that date. The request metadata labels the period “2012 Q3,” but the filing covers fiscal 2013 Q3. Comparisons below are to the corresponding 2012 periods unless stated otherwise.
Business context and operating performance
Evolution Petroleum acquires, develops, and exploits U.S. oil and gas properties. Its activities include the Delhi enhanced oil recovery (EOR) project in Louisiana, a non-operated Mississippian Lime joint venture in Oklahoma, and commercialization of its GARP artificial-lift technology.
- Quarter revenue was $6.01 million, up 24%; crude oil accounted for $5.95 million. Net sales were 56,347 BOE, essentially flat, while blended realized revenue per BOE rose 24% to $106.67.
- Quarter net income was $2.40 million, versus $1.47 million. Net income available to common shareholders was $2.23 million, or $0.07 diluted EPS, versus $1.30 million, or $0.04.
- Quarter income from operations was $3.39 million; operating costs were $2.62 million. Management reported field margins of $5.2 million, or $92/BOE, up 35% year over year.
- For the nine months, revenue was $15.95 million, up 19%; net income was $5.52 million, and common-shareholder income was $5.01 million, or $0.16 diluted EPS. The comparable amounts were $13.38 million, $4.04 million, $3.58 million, and $0.11 per diluted share.
Cash flow, liquidity, and capitalization
- Cash provided by operations for the nine months was $9.11 million, versus $7.33 million. Investing activities used $1.37 million, including $4.40 million of cash oil and gas capital expenditures, partly offset by $3.05 million in asset-sale proceeds. Financing activities used $0.47 million, principally for $0.51 million of preferred dividends.
- Cash and cash equivalents were $21.69 million at March 31, 2013, up from $14.43 million at June 30, 2012. Working capital was $21.2 million, compared with $11.7 million.
- Total liabilities were $12.25 million and stockholders’ equity was $52.82 million. The company had no revolving-credit borrowings or letters of credit; $5.0 million of borrowing-base capacity was available. It reported compliance with credit-facility covenants.
- Outstanding Series A preferred stock carries an 8.5% cumulative dividend. The company paid $0.51 million of preferred dividends during the nine-month period.
Material changes and management commentary
- Quarter crude oil volume increased 32% year over year, but NGL and natural gas volumes declined, primarily reflecting the sale of Giddings properties. Total BOE volume was nearly unchanged. Higher crude’s share of sales increased blended revenue per BOE.
- G&A rose 14% for the quarter and 19% year to date. Management cited higher bonus and personnel costs, legal expenses, director fees, franchise taxes, and property-sale transaction costs. Nine-month G&A included $1.14 million of non-cash stock compensation.
- Delhi net royalty-interest sales reached a record 566 barrels per day, up 40% year over year. Management said production exceeded the June 2012 reserve report’s projected level and could accelerate the anticipated late-2013 working-interest reversion. At reversion, the company’s net revenue interest is expected to rise from 7.4% to 26.5%, while its cost-bearing interest would rise from zero to 23.9%; timing is not assured.
- The first two Mississippian Lime producer wells had not achieved targeted oil and gas rates. Management identified their lateral placement, 40–50 feet below reported successful wells, as a possible factor. The company proposed a third evaluation well, expected to spud in summer 2013, and elected after quarter-end to forgo a remaining $1.2 million leasehold payment, reducing its interest in initial undrilled acreage from 45% to 33.9%.
- The fiscal 2013 base plan authorized up to $10 million of capital expenditures; $3.9 million had been incurred through March 31. Management expected some spending to carry into fiscal 2014. It stated anticipated fiscal 2014 maintenance capital, including Delhi post-reversion expenditures, could be funded from existing working capital; additional elective spending would depend on operating cash flow, joint ventures, asset sales, or financing.
Risks, contingencies, and unusual items
- Results are exposed to oil and gas prices, production and operating risks, oilfield-service and materials costs, weather, and demand. The company reported no commodity hedges in place and noted it may use derivatives in the future.
- A Louisiana royalty-rights lawsuit remained unresolved: an appellate court affirmed dismissal on the existing claim but allowed plaintiffs an opportunity to amend. The company sought Louisiana Supreme Court review in May 2013. Management stated it did not expect the legal matters to materially affect financial position or results.
- Other disclosed obligations include $530,037 of future office-lease payments and approximately $663,000 of contingent executive severance obligations. No off-balance-sheet arrangements were reported.
- Management identified no material change in previously disclosed risk factors. Disclosure controls were judged effective as of March 31, 2013, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Mississippian Lime dewatering and the planned third well demonstrate commercial oil and gas production, and how the reduced acreage interest affects potential returns.
- The actual timing and economics of Delhi’s working-interest reversion, including the resulting increase in operating costs and cost-bearing interest.
- How much of the fiscal 2013 capital plan carries into fiscal 2014 and the funding available for maintenance and elective projects.
- Subsequent developments in the Louisiana lawsuit and any change in the company’s assessment of potential exposure.
- Whether GARP commercialization and acquired abandoned-well opportunities generate meaningful installations and cash flow.