Q3 2024 Evolution Petroleum Corp Earnings Call

Participants

Brandi Hudson; IR; Evolution Petroleum Corp

Kelly Loyd; President, Chief Executive Officer, Director; Evolution Petroleum Corp

J. Mark Bunch; Chief Operating Officer; Evolution Petroleum Corp

Ryan Stash; Chief Financial Officer, Senior Vice President, Treasurer, Company Secretary; Evolution Petroleum Corp

Donovan Schafer; Analyst; Northland Securities

John White; Analyst; Roth Capital Partners

Bruce Brown; Analyst; Brown Capital

Presentation

Operator

Good morning, everyone, and welcome to the Evolution Petroleum Third Quarter Fiscal Year 2024 earnings release conference call. (Operator Instructions) Also note today's event is being recorded.
At this time, I'd like to turn the floor over to Brandi Hudson, Investor Relations Manager, and please go ahead.

Brandi Hudson

Thank you. Welcome to Evolution Petroleum's fiscal Q3 2024 earnings call. I'm joined by Kelly White, President and Chief Executive Officer, Mark bunch, Chief Operating Officer, and Ryan Stash, Senior Vice President, Chief Financial Officer and Treasurer.
We released our fiscal 2024 third quarter financial results after the market closed yesterday, so please refer to our earnings press release for additional information containing these results. You can access our earnings release in the Investors section of our website. Please note that any statements and information provided in today's call speak only as of today's date, May 8, 2024, and any time-sensitive information may not be accurate at a later date. Our discussion today will contain forward-looking statements of management's beliefs and assumptions based on currently available information. These forward-looking statements are subject to risks, assumptions and uncertainties as described in our SEC filings. Actual results may differ materially from those expected. We undertake no obligation to update any forward-looking statements.
During today's call, we may discuss certain non-GAAP financial measures, including adjusted EBITDA and adjusted net income. Reconciliations of these measures to the closest comparable GAAP measures can be found in our earnings release.
Kelly will begin today's call with some opening comments. Mark will provide an update on our properties and plans as they relate to our ongoing strategy of maximizing shareholder returns. And Ryan will provide a brief overview of our fiscal quarter highlights. After our prepared remarks, the management team will be available to answer any questions.
As a reminder, this conference call is being recorded. If you wish to listen to a webcast replay of today's call, it will be available on the Investors section of our website. With that, I will turn the call over to Kelly.

Kelly Loyd

Thanks, Brandy. During our last quarterly call, we told you that we were working to increase our scale and economic efficiency. We told you that expanding regionally and further diversifying our production base are important goals for us.
Most importantly, we also told you that the point of all this is to increase our cash flow and therefore, either extend our dividend Fairway allow us to increase our dividend or do both with our current asset base and the additions of our recent SCOOP/STACK acquisitions and participation in the operations of Chevreux.
We've come a long way towards achieving what we set out to accomplish and we have done so while keeping our balance sheet in our comfort zone and adding no incremental dilution, in fact, we repurchased shares during the quarter, we added to our producing asset base and our portfolio of drilling locations, we entered into two prolific areas, the Permian Basin and the Anadarko Basin.
We increased our oil production as a percent of sales in fact, this quarter represented a record amount of oil production net to the Company. And by the end of the quarter, we had participated in 35 newly drilled wells or wells in progress 32 in the SCOOP/STACK and three in Chevreux, which represent some of the most economic returns the Company has seen to date evolution today versus evolution a year ago looks very promising.
Our oil production for the fiscal third quarter this year versus last year is up by approximately 19%. Our NGL production is the same and our natural gas production is down by roughly 4%.
These numbers only include about half of the quarter for the SCOOP/STACK acquisitions as the transaction closed on two 12 and less than two thirds of the quarter for the new Chevron wells, as all three wells were only finished being placed on production in early February and ramped up in production as frac fluid was recovered today, we have a much deeper and higher quality inventory of drilling locations versus a year ago with economics that are very compelling.
We believe that with our current inventory of assets we have the firepower to fund our dividend for many years to come with the potential for growth, particularly as natural gas prices recover as expected. And we certainly don't intend to risk.
Now we're always on the lookout for the next highly accretive transaction that will benefit our shareholders from October of 2019 through February of 2020 for Evolution has participated in six major transactions, putting over $119 million to work for our shareholders.
During that time, we've paid down over $41 million of borrowings, while our share count has remained virtually unchanged since we began paying dividends 10 years ago, we have returned over $3.45 per share to shareholders in cash and another $0.26 per share in share repurchases.
These six major transactions have added substantial volumes of proved oil, natural gas and NGLs, all of which gain this exposure into different largely uncorrelated markets, both by product and locations, many of which have recently experienced outsized favorable pricing versus other sales points.
These six major transactions also provide evolution with hundreds of undrilled upside locations operated by proven and experienced teams, we can either choose to participate, non-consent or even sell many of these undeveloped locations, depending on which will bring the most value to our shareholders at the time throughout the years and across many diverse transactions. Our goal remains the same as it has been since 2013.
The year, we paid our first of 42 and counting consecutive dividends. That goal is to maximize total shareholder returns by carefully evaluating every dollar we use to drive dividend payments, share repurchases and replenishing and or growing our cash flow producing asset base, all while avoiding significant dilution or overleveraging our balance sheet.
I'll hand it over to Mark now who will give you an update from an operational standpoint on some of our recent actions supporting our strategy.

J. Mark Bunch

Thanks, Kelly. I will focus on some of our notable items since our listeners can refer to our press release and 10 Q filings for additional details our latest acquisition, SCOOP/STACK is a very exciting add to the company's portfolio. We closed on this acquisition on February 12th on a pro forma basis for third quarter net production rate was approximately 1,550 BOE per day, which was essentially flat with the production rate at the effective date of the acquisition November first, 2023.
Also in the effective date of the acquisition, we acquired over 300 gross drilling locations, 21 of which were decks at the close of the third quarter 19 of the 21 dogs have been placed on production, and we have agreed to participate an additional 15 gross or 0.2 net new horizontal wells across the acreage, of which 13 are currently in progress based on limited information, the completed wells have so far on average exceeded expectations.
Based on current performance, we are confident that SCOOP STACK will be a real value add for the long term at Chevron, we brought our first two wells on production around February first, all three wells. Gross production peaked at between 303 hundred and 75 BOE per day, which is significantly better than our pre-drill estimates. On a pro forma basis for the third quarter, Chevron has produced approximately 290 BOE per day net to our interest in conjunction with the operator.
We are planning through the next four wells beginning in September 2024, followed by another six wells beginning in April 2025. We're very pleased with the results of our drilling program at Shaftesbury and believe we'll continue to support the dividend through a continual drilling program over the next decade.
Again, we would like to highlight that the addition of Chevron SCOOP/STACK, a perfect fits for our evolving strategy of both adding a long life production during commodity price downswings in adding undeveloped locations by making acquisitions through the drill bit.
We knew this is crucial to enhancing our ability to maintain or increase production at an attractive rate of return for years to come as for our legacy properties, we've had a successful third quarter. Jonah Field still receives a premium over Henry Hub pricing since we sell into the West Coast market and continues to perform as expected at its historical decline rate.
The Williston asset production increased slightly due to the one-off grasslands system downtime in the prior quarter. Even though we did experience some downtime due to winter storm in January, the Barnett Shale asset experienced some downtime due to winter storm in January as well. Subsequently, operations were resumed with production back on its historical decline rate. The operator continues to work on ways to reduce operating expenses there.
Hamilton Dome continued to perform very well, even though experienced more downtime, beauty and well workovers than usual at the beginning of the quarter, net production was only slightly down from the previous quarter. At Del high production was affected during the quarter by winter storms that impacted oil production and repeated downtime from rental turbine failures impacting NGL production, both of which were resolved by the end of the quarter.
The CO2 purchase pipeline was taken offline for preventative maintenance at the end of February. The operator anticipates resuming CO2 purchases in June 2024. This will reduce Del high field LOE during this time period. The field continues to inject recycled CO2 which is the bulk of the normal CO2 injection. And we do not anticipate a significant production impact from the temporarily decreased CO2 injection volumes.
The operators also indicated that Dell has expected to be certified as a carbon capture utilization and storage site designated for enhanced oil recovery by the summer. All in all, fiscal Q3 production increased 14% from the prior quarter to 7,209 net BOE per day with oil increasing 27% and natural gas and NGLs each increasing approximately 10% with drilling results and the contribution of the acquisitions more than offsetting normal declines, maintenance and weather-related downtime.
I'll turn it over to Ryan to discuss the highlights of the quarter.

Ryan Stash

Thanks, Mark. As Brady mentioned, earlier, we released our earnings yesterday, which contains more information on our results. My comments will focus mainly on the highlights of the current quarter. This quarter, we had total revenues of $23 million, adjusted net income of $1 million and adjusted EBITDA of $8.5 million. Our financial results demonstrated the positive impact of our SCOOP/STACK acquisitions and Chevron drilling program as revenue and EBITDA were higher than last quarter, despite receiving lower realized prices due to the continued weakness in natural gas.
On the development side, we spent $2.6 million in CapEx, primarily related to the drilling and completion of the three initial wells at Chevron, where we ended the quarter with $3.1 million in cash on hand and borrowings of $42.5 million on our credit facility. Our cash balance and borrowings do not yet include the impact of net cash we expect to receive for the final purchase price adjustment on the SCOOP/STACK acquisitions.
As of March 31st, we recorded an interim settlement receivable of $3.3 million and expect additional cash upon the final settlement set to occur during the fourth fiscal quarter. We continue to expect to remain at or below our leverage target of one times pro forma EBITDA. We entered into oil and gas hedges during the quarter and after the quarter in order to comply with the terms of our credit facility, we also amended our credit facility to give us more flexibility regarding the mix of individual commodities we are required to hedge.
We now have the option to hedge 40% of oil production or 25% of oil and gas production for each individual month. Given the extremely low prices of natural gas throughout calendar year 2024, we are currently only hedging oil production for that period.
We also hedged natural gas beyond the required 12-month period to capitalize on the high prices available in calendar year 2025 and beyond. Our goal for our hedging program will continue to be to reduce downside commodity price risks while maintaining the maximum amount of upside available.
As such, we will continue to monitor the market and may add additional opportunistic hedges on the shareholder return front we paid a $0.12 dividend in March and declared another $0.12 dividend to be paid in June, which will mark our 42nd and 43rd consecutive quarterly dividends and seventh and eighth consecutive dividends at the current level. We also repurchased approximately $800,000 worth of shares during the quarter.
I'll hand it over to Kelly now for closing comments.

Kelly Loyd

Thanks, Sharon. At Evolution, we accomplish our strategy of maximizing total shareholder returns by carefully weighing the use of every dollar we put to work for all our stakeholders, always with an eye towards increasing or extending the runway of our dividend for many years to come.
We have a proven track record of paying dividends with stronger yields than the S&P 500 and our peers returning cash to shareholders of over $3.45 per share over the last 10 years.
We are building our company into one designed to cover our dividend and our capital spending even in challenging times like we see today with natural gas pricing while maintaining ample capacity to return cash to shareholders, we have built and continue to build a diverse, resilient set of assets strategically designed to facilitate and complement our consistent approach to returning cash to shareholders in building this base, our balance sheet has remained rock-solid and we've added no material dilution.
With that, I'll turn it over to the moderator to begin the Q&A session.

Question and Answer Session

Operator

(Operator Instructions) (technical difficulty)

Donovan Schafer

Hey, guys. Thanks for taking the questions. So the first question I want to ask about is so the certification for TAO high and that expectation to happen in summer that sounds more or less like a you know, reiterating a consistent payment that kind of we've heard before in terms of that time line does, was there an incremental step or just sort of it's more of a saying like it's on track and that is still the expectation. And then have you advanced any negotiations or conversations around that with the operator banks don't have.

Kelly Loyd

And so to answer your question, it's really steady as she goes on. The updates are no, they still expected to be in the same timeframe they did. So as far as advancing negotiations and where that's going to shake out and I know we're not there yet.

Donovan Schafer

Okay. And just kind of real quick, I don't know if you have the answer now, but you know, for Phase five for DI because I've had this thought or no speculation or wondering that, that it could sort of nudge Exxon over into having more of a desire to do Phase five because you know that's more pore space conceivably to inject CO2 into DNO and has that come up at all and conversations? And do you know if that requires additional certification or is that just you can expand that project and it's kind of automatic?

Kelly Loyd

So I'll answer I'll answer it this way. We are we certainly think Phase five is a very strong economic project on its own merit. And we hope that that Exxon will come to that conclusion with the additional benefit of having more pore space to inject the CO2. As for additional. I mean, it's within the field. I don't expect it wouldn't be, but I'm actually not sure on that.

Donovan Schafer

Okay. And then turning to shaver through some language jumped out at me in the release saying, you know, and I know you guys have secured these a lot of different locations that you can participate in. So it's not new per se. That's something you've been either you want to do this or I like having it on the table. But in the release, the language you say that your plans are to systematically participate in the remainder.
So beyond, you know, we've got four in June by two and then another six. And then the other company also expects to systematically participate in a future development block building rights now to over 600 additional horizontal well locations in aggregate.
Is that and talking about systematic participation, does that signal or indicate any kind of a flipping of a switch or something where you tend to see later, you know, of course, if things change and you start to get some data, well, results isn't in your real SaaS, but does that kind of indicate you're at a point where you kind of feeling like gee whiz, we're kind of ready to run with us at an appropriate pace now for dividend support and so forth, but just that you want to keep doing these over and over.

Kelly Loyd

Yes, really honestly, is the answer to that is we've got more data. We're more comfortable than we were at, like everything's subject to change. But as of now, we intend to systematically go with it.

Donovan Schafer

So yes, is the answer excited about it so ago, yes. And it. Am I right in kind of picking up on that language like systematic participation is kind of suggesting a feeling or reaction to how things have been going. That's a step forward or a step incremental study? And then I got a toe in the water.

Kelly Loyd

Yes, I'm more confident than a let's wait and see like what maybe we were.

Operator

(Operator Instructions) John White, ROTH Capital.

John White

Good morning and Mona. Yes, good morning and congratulations on closing the SCOOP/STACK and getting your Chevreux wells flowing back. Very nice additions to the portfolio. Wanted to see about additional detail on the SCOOP/STACK, primarily the where's the acreage, what county in the Anadarko Basin is the acreage concentrated in.

Kelly Loyd

So I can answer that or Mark, but I mean, it's in various places throughout the SCOOP/STACK. And I would say it's got a large concentration over in Grady and Garvin. And those are those have kind of been the focus on where most of these these wells in progress are okay.
But I mean, truly, look, it has in a dark excuse me, Blaine Canadian Carter customer doing Garvin, Grady, Kingfisher McLean. Stephen, it's the whole SCOOP/STACK, but the biggest concentration and where the most activity is over there in sort of Grady Garvin right now.

John White

Scott, basically, John, this is Mark by just kind of near where Norman is no high-level. I know we're greedy here and it is driven around their loss. And so it's pretty pretty spread out across across the in America.

Kelly Loyd

But yes, I know you've said it's sort of more concentrated in that Great Eastern Grady kind of area.

John White

But yes, we do have various pieces throughout and is there a concentration of operators or is that pretty diversified too? There's we have a big position with Ventiv and Continental. There's some with the EOG Marathon, Gulfport, there's probably in total somewhere around like realistically around 20 operators that you will end up dealing with. But those are the ones I mentioned are the other major ones.

Kelly Loyd

Those are those are good.

John White

Net add, Alex, on Continental Resources, to our assets. You mentioned it and what is the primary formation being targeted? It mainly like the Woodford, but they also look for the sick, more anything in the Mississippi needed at constant excuse me, the way they pool, there's a pool, larger sections and a lot of times section is pretty good size that they pool.

Kelly Loyd

All right. So six, 40, yet well, actually the a lot of them now are going to be 10,000 foot laterals, so they're actually going to be 1280s.

John White

Okay, thank you. I know you don't give guidance with the initial results from SCOOP STACK and obviously the Chevron group results and is the feeling we should see your percentage of oil cut of total production increase over time Yes, John, we are you can see that because both the both of them are especially Chevron, is really oily and SCOOP/STACK is oilier than our current mix.

J. Mark Bunch

Yes. The only caveat John would just be we obviously control and have more insight into February, timing and drilling in the SCOOP STACK, depending on how gas prices. We could see some areas that have more gas content get drilled, right? Right now, they're focused more on the oil and liquids areas, which makes sense. But there is some gas there, too. Right? So that there's a little bit TBD, depends on what deal operators drill.

John White

Okay. Thanks for the additional detail. I really appreciate it, and I'll pass it back to the operator.

Operator

Bruce Brown, Brown Capital.

Bruce Brown

Good morning, fellas. Thanks for the good work. I just had I know it you've given. No, no real guidance, but I'm just wondering if prices stay right around where they are today for like the next 12 months, which is probably not going to happen, but let's assume it does with your asset-based lending line. Pete, we paid down significantly.

Ryan Stash

Yes. So thanks, Rishi. Obviously, we're not saying guidance that really what we're looking at and to answer your question is a balance of paying down our line versus capital.

Bruce Brown

Right. And one of the big unknowns obviously is how much capital we'll have in the SCOOP/STACK given pricing?

Ryan Stash

Yes, I would say we're generating enough cash to significantly pay down, but we may choose to spend more and reinvest in CapEx and pay the line down a little bit slower, but we're certainly going to remain below our target of one times EBITDA on, as I mentioned, from a cash flow perspective, yes, we're generating plenty of cash to be able to pay down. If we do have capital projects that we think a really attractive that will probably put some capital to as well.

Bruce Brown

And do you have any comment on additional capital projects in the Williston?

Kelly Loyd

Sure. So we are working with the operator, there's foundation. What's interesting is that area is you're talking about drilling new wells. We're actually getting kind of excited. It's starting to get drilled and the activity is moving towards us, um, so we're going to kind of wait and see and look at look how things can move towards us there. So we're getting incrementally more excited about that area as far as other projects within the field. And I think it's just general workovers, Mark?

J. Mark Bunch

Yes, just yes, just general work co-general picks up for us and did some electrification in some areas that will improve efficiency, reduce operating cost. But you don't know no wells planned to be drilled right now, at least like on the lateral. They vary.

Operator

Donovan Schafer, Northland Capital.

Donovan Schafer

Sorry about that. Okay. So talking about organic growth, kind of the levers that you guys have to pull despite we've got the Williston and the SCOOP/STACK. Well, I guess?
Yes, you've got some. And there I can't remember if you're in a position to accelerate on the gas or not, that may not be that, but there's like pubs there and then you've got them, you know, the Chevreux. So the question is, do you feel like there's a need to kind of add any more the organic growth potential?
Yes, you M&A, has that or do you feel like, given your size as a company and kind of what you see from flow funds, CapEx and other things over that over the next say, 12 months or so, do you feel like you're kind of pretty content pretty good. You've got everything we serve need unless something just really opportunistic comes along. And I think you said in the SCOOP/STACK, you've seen more things coming across your desk or more people kind of pitching things. So maybe if there's a great opportunity, but otherwise in terms of what you need in your portfolio for any type of organic growth potential and using using more as a head, you just kind of how you set there now?

Kelly Loyd

Hey, thanks, Donavon this Kelly. So the answer is we had a definite focus to make sure we added that arrow to our quiver, right? And we've said we've come a long way to accomplishing that. But along with everything else, you're never done.
So if the next deal that comes along is pure PDP and it fits wonderfully with our portfolio, then that's that's the that's the deal we're going to do if it's highly accretive for us. If the next one comes along and it does have an organic growth piece, we're certainly going to absolutely consider it.
So again, it's like you said, if it's the right deal and it's really accretive for our shareholders. For sure. It is I would say it's not as much of a push as it might have been prior to these last two acquisitions or partnerships, but it's certainly never off the table.

Donovan Schafer

Okay, that's good. And kind of related to this, I think Mark made the comment with Chevreux and maybe there's also reference to the SCOOP and STACK. But just with those come, the combination of those that's extended and the dividend yield helps the dividend coverage for a decade or more, something like that. And so I'm curious if there's any kind of quantification if you give I mean, I could ask it in the form of like gee whiz.
Could you do a dividend increase or something, but that's, you know, this is sort of everything you can't really comment on. I know you guys place dividend protection first, in any case. So is there any kind of quantification or analysis or a sense? And maybe now is talking about shaver from this kind of systematic participation standpoint, do you have an internal sense of how much how many extra years these have gotten? You are a stress test test case where you say, gee, we think we have the dividend covered as it is for X number of years? Is there any color, anything you there? David, helpful.

Ryan Stash

Yes. I mean so this is Ryan Dimebon. Yes. Look, I mean, I don't think we can comment specifically on, as you mentioned, certain long-term sort of guidance here. But what I will tell you is, you know, obviously you can look at the assets themselves and how much cash flow they bring and you can sort of model out how much we think should remain in the future. So from there, you can obviously see quite a bit of dividend coverage?
You know, I think as we're looking over at least the near term, we're going to generate a good amount of cash flow and we have potential uses, right? One of those is increasing the dividend. However, others are also reinvesting in the business right now that we have this organic growth like we have more capital to put to work and we have in the past, right, whereas in the past, we could have just return it all to shareholders now will probably take some of that capital and put it back into the business to keep sustaining our production level.
So I know I'm not exactly answering your question, but just just highlight, you know that at the Board level, we certainly look at every single dollar we put to work and whether that makes sense to reinvest in the business, buy stock, raise a dividend. Obviously, our goal is to keep it for a sustainable business at our base dividend or better for a long period of time.

Donovan Schafer

And I suppose because you guys Dolle, you characteristically do and significantly less hedging than a lot of other kind of oil and gas companies in practice that all that whole pathway just sort of becomes accelerated with part with upward commodity price cycles.
And is that correct that you would in that situation where you have natural gas recoveries materially or oil pipelines, you know, in some material way that just puts you in a position to kind of double down where you think it makes sense and then add and layer in more assets that give you the kind of number of years of coverage you'd want. But then also at a higher dividend because like you've gotten this almost like a windfall of sorts with what commodity prices may do on the upside to kind of the right way to think about it?

Ryan Stash

Yes. I mean, except that I would say, obviously, we are we're looking out multiple years. So let's take, for instance, when we saw gas not too long ago, run up past five, a $9, right? You saw us actually we help to pay down some of our debt repayment at that point, and we bought back quite a bit of share. So again, the dividend is just one tool.
And so if we were to see if we saw a price recovery that we feel is sustained for a long period of time, then that's one thing. But if it's natural gas, all it takes is really well known as a warm winter to and all bets are off, right? So it's hard to really forecast on gas at a $5 level for a long term. But if we were to get running again here than we could look to, again accelerate debt paydown, we could buy back some additional shares, Tom, even look at acquisition opportunities, right?

Kelly Loyd

So again, it would be all of those things would examine, I mean, just okay to follow on and carry on with where he's going with our base sort of commodity price expectations. We said many times where we think we can absolutely have great dividend coverage for many years to come with something above that. It is it is cash flow with which we will make a prudent decision at the time what to do with it.

Operator

And ladies and gentlemen, once again showing no questions at this time, I'd like to turn the floor back over to management for any closing remarks.

Kelly Loyd

We just want to say thank you all for joining us today. And if you have any further questions, feel free to contact a brandy who's our IR Manager. So thank you very much.

Operator

And ladies and gentlemen, with that, we'll conclude today's conference call. We thank you for joining us may now disconnect your lines.