Evolution Petroleum Q2 2024 Earnings Call Transcript

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February 7, 2024

There are 11 speakers on the call.

Operator

Good morning, and welcome to the Evolution Petroleum Second Quarter Fiscal Year 20 24 Earnings Release Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Brandy Hudson, Investor Relations Manager. Please go ahead.

Speaker 1

Thank you. Welcome to Evolution Petroleum's Fiscal Q2 twenty twenty four Earnings Call. I'm joined by Kelly Lloyd, President and Chief Executive Officer Mark Bunch, Chief Operating Officer and Ryan Stach, Senior Vice President, Chief Financial Officer and Treasurer. We released our fiscal 2024 Second Quarter Financial Results 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, February 7, 2024 and any time sensitive information may not be accurate at a later date.

Speaker 1

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 the 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 statement. During today's call, we may discuss certain non GAAP financial measures, including adjusted EBITDA and adjusted net income.

Speaker 1

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 review 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.

Speaker 1

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.

Speaker 2

Thanks, Brandy. Over the past few years, our industry has evolved and fittingly, so has evolution. The need for increased scale and economic efficiency has become more and more obvious. With the breakdown of the price correlation among commodities In the outsized effect of regionalized pricing, having exposure to multiple commodities in multiple markets has proven superior to the pure play single basin, single commodity strategy of the past. Similarly, The shortening and the heightening of the commodity price cycle has increased the urgency of adding investment flexibility to portfolios.

Speaker 2

Being able to nimbly make accretive acquisitions and having an organic growth component to protect and enhance our dividend and share valuation while commodity price volatility remains elevated has become crucial. From October of 2019 through February of 2024, with the expected close of our latest three acquisitions, Collectively, we call this the SCOOPSTACK. Evolution will have participated in 6 major transactions, putting over $119,000,000 to work for our shareholders. During that time, we've paid down over 41,000,000 of borrowings, while our share count has remained virtually unchanged. Since we began paying dividends 10 years ago, We have returned over $3.33 per share to shareholders in cash and another $0.24 per share in share repurchases.

Speaker 2

These 6 major transactions have added oil, natural gas and NGLs, all of which gain us exposure into different, Largely uncorrelated markets, both by product and locations, many of which recently have experienced outsized favorable pricing versus other sales points. These 6 major transactions also provide Evolution with 100 of undrilled upside locations. We can either choose to participate in or sell many of these undeveloped locations, depending on which will bring the most value to our shareholders at the time. As an example, we have already drilled 3 producing wells in the Shabaru field and 2 in our Delhi field. So while our methods to execute our strategy have evolved and will continue to be enhanced, Our goal remains the same as it has been since 2013, the year we paid our first of 41 and counting consecutive dividends.

Speaker 2

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 over leveraging 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.

Speaker 3

Thanks, Kelly. I won't bother to repeat what you read in the press release and we'll just focus on notable items. For our Williston Basin assets, production was impacted by reduced gas sales due to the ONEOK Grassland System being shut down for almost 3 weeks and downtime of a few wells in November. Currently, the wells and the Grasslands system are back online, resulting in an average rate for December of more than 500 BOE per day. At our Barnett asset, although EnLink continued to issues with some of the gathering facilities, production was not significantly impacted and production for the Barnett has flattened back to its normal historical decline rate.

Speaker 3

At the Hamilton Dome field, our current quarter production was affected somewhat by well work, but we expected all these wells to be back online during our fiscal Q3. Overall, we can see strong performance from this field. At Delhi, The ongoing transition from Denbury to Exxon as field operator has felt largely seamless to us. We continue to believe Exxon's priorities align with ours and that Delhi will be a certified carbon capture utilization storage site Designated for enhanced oil recovery, with this process expected to become official coinciding with the end of our fiscal year. We will provide updates on this when appropriate.

Speaker 3

Delhi production increased despite more downtime than expected at the NGL plant. The heat exchanger installed last year performed very well during the recent polar vortex that hit Northern Louisiana, and we did not experience any cold weather interruptions at the plant. As mentioned on the last earnings call, we brought on 2 new infill wells at Delhi and are very, very pleased with the results and hope to see more future proposed locations here. In the Shavarou field, we're pleased to announce we drilled, fracked and modified existing facilities for our first three wells before the end of the second quarter. In February, we finished drilling out the plugs and installing lift on all three wells.

Speaker 3

The 504H was bought online first and is currently in the process of cleaning up. Even though it's early in the cleanup process, we're encouraged by its performance. After some additional minor facility modifications, We expect to begin producing the 502H and the 503H very soon. We will provide information on this important project as it becomes available. Finally, on January 5, we announced the acquisition of non operating working interest in the SCOOPSTACK in Central Oklahoma with a November 1 effective date.

Speaker 3

As of the effective date, the assets consist of 231 producing wells With an average 3% working interest producing roughly 15.50 BOE per day, 21 DUCs to be paid for by their seller and up to 300 gross drilling locations. Currently, 18 DUCs have been converted to proved developed producing and 2 are in process. In addition, 12 PUDs that EPM will pay the CapEx on have been spudded. We have also begun reviewing other drilling proposals that we do shortly after closing. This asset is a perfect fit for our evolving strategy of both adding on long life production based on current commodity pricing during the downswings and adding undeveloped locations by making acquisitions through the drill bit.

Speaker 3

We view this as crucial to enhancing our ability to accretively maintain or increase production at an attractive rate of return for years to come. I'll turn it over to Ryan to discuss the highlights of the quarter.

Speaker 4

Thanks, Mark. As Brandy 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 CAD21 1,000,000, net income of CAD1 1,000,000 and adjusted EBITDA of $6,800,000 Negatively impacting this quarter were approximately $500,000 adjustments related to ownership updates received from the operator of our Barnett properties covering a 22 month period beginning in September 2021. These adjustments affected the top line and therefore reduced revenue, net income before taxes and adjusted EBITDA each by approximately 500,000.

Speaker 4

Earnings per share was also negatively impacted by $0.01 We don't expect to see further impacts from these non recurring ownership adjustments. On the development side, we spent $3,900,000 in CapEx primarily related to the drilling and completion of the 3 wells at Chavarria. We ended the quarter with liquidity of $58,500,000 between cash on hand and an undrawn $50,000,000 credit facility. Going forward, we expect to use borrowings under our credit facility to close on our SCOOPSTACK acquisitions and for working capital needs related to the acquisition and timing of capital expenditures in our Chevreux asset and Scoop Stack acquisition. We plan to remain below our leverage target of 1x pro form a EBITDA.

Speaker 4

We entered into oil hedges at the end of January during a brief uptick in prices and plan to enter into additional hedges To fully comply with the terms of our credit facility, we expect to be required to hedge 25% of our oil and gas production on a rolling 12 month basis once we complete the SCOOPSTACK acquisitions. However, depending on the hedging terms available, we may consider hedging beyond 12 months to capitalize on contango structures such as is currently available in the natural gas market. Our goal for our hedging program will continue to be to reduce downside commodity price risks while maintaining the maximum amount of upside available. On the shareholder return front, we paid a $0.12 dividend in December declared another $0.12 dividend to be paid in March, which will mark our 41st 42nd consecutive quarterly dividends and 6th 7th consecutive dividends at the current level. I'll hand it over to Kelly now for closing comments.

Speaker 2

Thanks, Ryan. 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 of our stakeholders, always with an eye towards increasing We're extending the runway of our dividend for many years to come. We have a track record of paying dividends with stronger yields than the S and P We are building our company into one which can cover our dividend and our capital spending in a much lower commodity price environment like we see today, 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 had no material dilution.

Speaker 2

With that, I'll turn it over to the moderator to begin the Q and A session. Thank you very much.

Operator

And our first question will come from Donovan Shafer of Northland Capital.

Speaker 5

So First, just in my own modeling, I made the mistake of giving you additional revenue in the 2nd fiscal quarter for November December production from the SCOOPSTACK acquisition based on the November 1 effective date. That's why I had you at $25,000,000 in revenue versus the 21 year reported. And when I go back and correct for that, it looks like your results are right in line. So I just want to acknowledge my error there. But now that it's clear that you'll be accounting for this incremental production as a discount to the purchase price when you do close, Do you have any rough can you give us any rough sense for what that discount might be?

Speaker 5

And kind of related, you share with us how much you expect you might need to draw on your revolver in order to close the transaction?

Speaker 6

So Donovan, yes, thanks for calling and I appreciate you mentioning the modeling correction you made. So honestly, the way this works is a lot of times what happens is if the companies that you're acquiring accrue, right, then you can do a preliminary settlement statement and then later on you sort of true it up with the finals. Not all of the 3 companies that we're acquiring actually do accruals. So some of it will sort of be real time coming in. So I mean, ultimately, we have a very solid estimate for what the reduced purchase price will be.

Speaker 6

But when the timing of that comes in, it will be a little different amongst the entities. So The actual draw, it may go up and down a little bit between preliminary closing settlement statement and the actual final one, Which would be, I mean, it takes 60 days for gas production. So it's how many days out there is it, Ryan?

Speaker 7

Yes. I mean, look, so Don, We're reviewing the settlement statement now, to be honest. So as Kelly mentioned, we may not have an answer is the month, it's generally going to be 60 day lag for all their operators. So if you're looking at Sitting here in February through the end of January, they probably would have only gotten through November production. So there may be couple of months of production, they're still Otis.

Speaker 7

So adjustment may not be as big as in the preliminary as it

Speaker 6

is on the final. Hopefully, that's not Too confusing, but But net net, when it washes out, I don't think your number was way off. It could be a little bit either way, one way or the other.

Speaker 5

Okay. Okay. And then I want to talk about turning to 3rd fiscal quarter. So In mid January, there were some fairly severe winter freeze weather conditions that hit North Dakota and also Texas and Louisiana. I don't think they were as extreme as some maybe we've seen in the past, but there were Reuters and some other outlets talking about impacts.

Speaker 5

I think actually the Bakken Kind of almost shockingly, but it was only I think for a couple of days, but like statewide Bakken production fell like 50% for a couple of days because the freeze was so bad and impacted the LNG processing, I think, or something. So, I'm just curious If you can talk through what kind of impacts those events may have or what we kind of how we should expect that to impact production for FQ3?

Speaker 8

Hey, Donovan, thanks for the question. This is Mark Bunch. And Actually, this year, the winter storm that you're referring to was it didn't affect us as much as the winter storms have in the past. Like at Delhi, because we had the new heat exchanger in, we didn't have any issues with the plant at all. So that was great.

Speaker 8

At Williston, there was some down, but it was only for about 5 days. And everything came was brought back online very quickly. So I'd say the reaction time on that was pretty good. And then in the Barnett, there was about the same amount of time, about 4 or 5 days, but everything came back online In past years, one

Speaker 9

of the problems that has been in

Speaker 8

the Barnett is they were unable to get production back on as fast. But this time, they Got everything back on really quickly. So I'd say this the effect is fairly minimal.

Speaker 5

Okay. And then I'll just if I can squeeze in one last question. You guys have relatively lower exposure to the Bakken. I didn't say some of your peers. I mean, there are some pure play blocking companies out there and other ones that So it's a smaller piece of the pie for you guys all things considered, but it's still relevant.

Speaker 5

So I want to talk about the TransNom pipeline In Canada, in the past, I've asked some folks about, gee, when this new capacity comes online, Could it actually improve Bakken pricing by alleviating some congestion from the Alberta production in Canada? And the answer I usually got was like, no, we don't really think that's going to have any kind of impact or positive impact for us. But now we're seeing sort of just the opposite where that capacity was expected to come online. So the producers in Alberta started ramping production, But then that pipeline capacity got delayed and so you got this like excess Canadian production that's actually seems like it puts some downward pressure on the regional pricing in North Dakota. So I'm just curious, can you talk about those impacts As you guys are seeing them and how you expect it to unfold going forward, do you think this is a case where things would just normalize back to whatever the historical discount was for crude production in that region or Do we actually get at the end of the day, once the capacity comes online and that benefit the pricing in the area?

Speaker 5

Just any color there would be helpful. I'll take the rest offline.

Speaker 6

Sure. So this is Kelly. Thanks, Donovan, for the question. In the Williston, I think you've framed it correctly. I think A lot of people thought that Trans Mountain was supposed to have been on in December.

Speaker 6

I mean, they talked about it for years, then there was, I think, 1.5 mile section where I think they ran into some First Nations issue, which caused a delay. But obviously, for some of these larger projects in Canada, it takes a while to ramp up. So people had been ramping up production in expectation that the Trans Mountain would be on in December. So you have seen increased flows going into that area with really nowhere to go. So yes, our Williston differential was affected this quarter a little bit versus past quarters.

Speaker 6

I think it was a couple of bucks a barrel. We do expect As Trans Mountain comes on, which I think will be June, that should alleviate that issue. And then the other effect that Trans Mountain should have for us would be on our Hamilton Dome property. Again, the oil from Canada with really not a whole lot of place to go. Hamilton Dome trades on WCS, Western Canadian Select.

Speaker 6

So with the Canadian market in Trans Mountain opening up and being able to move oil east and throughout the system versus having to go down towards our system, It should absolutely, we think it will have a positive effect on the differentials for Hamilton Dome. I read somewhere as much as people thought $4 or $5 a barrel of incremental better differential there. So anyway, we're excited about that.

Speaker 5

Okay. Thanks guys.

Operator

The next question comes from John White of ROTH Capital. Please go ahead.

Speaker 10

Good morning, everyone.

Speaker 6

Good morning, John.

Speaker 10

Yes. So it's Good to see Chaburu going well. Have you talked about The number of potential locations in connection with that prospect?

Speaker 8

Yes. Right now, we have roughly about 80 total locations, not including including the 3 that we just drilled. They're spread out over Basically, the average is kind of close to 8 wells, 7 or 8 wells per year. So it's kind of a measured drilling program.

Speaker 10

That's quite a bit of potential at the SoundCloud.

Speaker 8

Yes, yes. That's actually the biggest reason why we were so interested in the project because It gives us a lot of running room and the operators like us doesn't want to like race out there and drill everything up in 1 year. They want to they'd like to see it brought on slowly and that kind of fits our capital program.

Speaker 10

Right. And on this carbon capture designation, is that going to have any positive income tax benefits?

Speaker 6

So John, that's something it's a sticky wicked as they say across the pond. We're trying to figure it out. And we have some time. We don't expect this to happen until the end of June is what they're telling us. Either it will have a direct impact to us Or more likely, what will happen is it will affect the price of CO2 that we get there.

Speaker 6

So I don't know, still to be researched. I can't think of anything negative that would happen because of it. So I think there's only upside potential with that.

Speaker 10

I know a lot of people are still trying to figure it out, so you're not alone. Okay, nice quarter and I'll pass it back to the moderator.

Speaker 6

Great. Thanks, Joe. Thanks, John. Hey, John.

Operator

The next question comes from Jeff Robertson of Water Tower Research. Please go ahead.

Speaker 9

Thanks. Kelly, I missed your opening remarks, so I apologize if you addressed this. But I'm curious now with the SCOOPSTACK acquisition On top of the Charburu acquisition, you all now have 2 assets where you have some influence perhaps on controlling your own capital outlays. I'm just wondering how that fits into your overall strategy of allocating capital between Some of the non op assets that you all have traditionally focused on versus having some control over maybe trying to encourage drilling activity on these new assets and then the obvious choices of leverage reduction in the dividend?

Speaker 6

Sure. Yes, Jeff. Thanks for asking. And I would say what really the takeaway, what's different, right? Well, Now with what we've got going on at Chaburu and with the additional assets from the SCOOPSTACK acquisitions in the locations there, plus what's going on with Delhi, right?

Speaker 6

We've had a couple of wells that we're super encouraged with their and still our Williston PUDs. What we have now is really some investment portfolio flexibility. Largely in the past, to maintain or increase production, we needed to be in an acquisition market that had more favorable trade wins, which by the way, we have a terrific record of doing that. And we honestly on the PDP side With our SCOOPSTACK acquisition, I couldn't be more excited about this purchase, but it also comes with these additional locations. Again, the flexibility by flexibility, you may be wondering, look, you're a non op, what flexibility do you have?

Speaker 6

Well, these locations have value, right? We can drill them, we can sell them, but there's a whole lot of options there. So what we're going to do, we'll this to fit nicely with our expected CapEx as we go forward. It will obviously be dynamic, but Again, it's just another sort of really viable tool for us to put to work for the best interest of our shareholders.

Speaker 9

Thanks. Do you see more opportunities like the Scoop Stack acquisition where Either because of some of the consolidation that's taken place in the industry, owners of non operated assets are trying to reposition their portfolios?

Speaker 6

We do, yes. We look at them honestly, as you know, Jeff, as we've spoken in the past, we look at these sort of acquisitions a lot. And it doesn't always come together with the kind of pricing you need to really have a great return like we expect to get here. So we're constantly evaluating the other out there. We just We're not out of the accretive acquisition game.

Speaker 6

We never will be here at Evolution. But We're excited with what we have here, Barry.

Speaker 9

Great. Thank you.

Speaker 5

Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Kelly Lloyd for any closing remarks.

Speaker 6

Thank you. Just a quick one. I mean, I'll tell you, here at Evolution, we're really excited about what we have going on. The Stack acquisitions that we expect to close next week, I think we're going to have some of the strongest production we've really ever had. And obviously, with what's going on at Jabiru with the exciting drilling program there and the hundreds of low working interest upside SCOOPSTACK locations and our recent successes at Delhi and our Williston PUDs.

Speaker 6

We now have really significant investment flexibility. Plus, we've got this fantastic team here, which I would be remiss in not mentioning now has Kelly Beatty as our Chief Accounting Officer. So, yes, we're happy here and I appreciate everyone joining us on the call today.

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Key Takeaways

  • Since October 2019, Evolution has invested over $119 million in six major transactions culminating in the SCOOPSTACK acquisition, which adds 231 producing wells, roughly 300 gross drilling locations, and over 100 undrilled upside sites across multiple basins and commodities.
  • In Q2 FY24, the company reported total revenues of $21.1 million, net income of $1 million, and adjusted EBITDA of $6.8 million, ended with $58.5 million in liquidity, and plans to fund the SCOOPSTACK close while maintaining leverage below 1× pro forma EBITDA.
  • Operationally, temporary disruptions in the Williston Basin, Barnett and Hamilton Dome were resolved with production normalizing, and early results from three drilling-and-completion wells at Chavarria and two infill wells at Delhi are encouraging amid a seamless transition to Exxon as Delhi operator and an expected carbon capture site designation by fiscal year end.
  • Evolution sustained its capital return focus, declaring a $0.12 quarterly dividend for the 42nd consecutive quarter and having returned over $3.33 per share in dividends plus $0.24 per share in buybacks since inception without material share dilution.
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Earnings Conference Call
Evolution Petroleum Q2 2024
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