Evolution Petroleum Corporation (AMEX:EPM) Q2 2024 Earnings Call Transcript
Evolution Petroleum Corporation (AMEX:EPM) Q2 2024 Earnings Call Transcript February 7, 2024
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Operator: Good morning and welcome to the Evolution Petroleum Second Quarter Fiscal Year 2024 Earnings Release Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Brandi Hudson, Investor Relations Manager. Please go ahead.
Brandi Hudson: Thank you. Welcome to Evolution Petroleum's fiscal Q2, 2024 earnings call. I'm joined by Kelly Lloyd, 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 second quarter financial results after the market closed yesterday. Please refer to our earnings press release, for additional information concerning 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, February 7, 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 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. 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. If you wish to listen to a webcast replay of today's call, it will be available on the Investor section of our website. With that, I will turn the call over to Kelly.
Kelly Loyd: Thanks, Brandi. 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 and 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. 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 SCOOP/STACK. Evolution will have 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 $3.33 per share, to shareholders in cash and another $0.24 per share in share repurchases. These six 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 six major transactions also provide Evolution with hundreds 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 three producing wells in the Chaveroo field and two 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. 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 deletion, 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.
Mark Bunch: 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 three weeks and down time of a few wells in November. Currently, the wells and the Grassland System are back online, resulting in average rate for December of more than 500 BOE per day. At our Barnett asset, although inlet continued to experience 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. 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 third quarter.
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. Delhi production increased, despite more downtime than expected at the NGL plant. The heat exchanger installed last year performed very well, during the recent pull of war-tank 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 two new infill wells at Delhi and are very pleased with the results, and hope to see more future proposed locations. In the Chaveroo field, we were 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 artificial lift on all three wells. The 504H was brought online first and is currently in the process of cleaning up. Even though it is early in the cleanup process, we are 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 SCOOP/STACK in Central Oklahoma with a November 1 effective date. As of the effective date, the assets consist of 231 producing wells with an average 3% working interest producing roughly 1,550 BOE per day. 21 ducts to be paid for by their seller, and up to 300 gross drilling locations. Currently, 18 ducts have been converted to approved, developed producing and two are in process. In addition, 12 puds that the EPM will pay the CapEx on have been sputted. We have also begun reviewing other drilling proposals so 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 business.
We view this as crucial to enhancing our ability to credibly 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.
Ryan Stash: Thanks Mark. As Brandi 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 $21 million, net income of $1 million and adjusted EBITDA of $6.8 million. Negatively impacting this quarter, were approximately $500,000 adjustments related to ownership updates, received from the operator over 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. 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 $3.9 million in CapEx, primarily related to the drilling and completion of the three wells at Chaveroo. We ended the quarter with liquidity of $58.5 million, between cash on hand and an undrawn $50 million credit facility. Going forward, we expect to use borrowings under our credit facility, to close on our SCOOP/STACK acquisitions and for working capital needs related to the acquisition and timing of capital expenditures in our Chaveroo asset and SCOOP/STACK acquisition. We plan to remain below our leverage target of one times pro forma EBITDA. 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 SCOOP/STACK 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 and declared another $0.12 dividend to be paid in March, which will mark our 41st and 42nd consecutive quarterly dividends and 6th and 7th consecutive dividends at the current level. I'll hand it over to Kelly now for closing comments.
Kelly Loyd: 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, or 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&P 500 and our peers, returning cash to shareholders of over $3.33 per share over the last 10 years. 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. With that, I'll turn it over to the moderator to begin the Q&A session. Thank you very much.
Operator: [Operator Instructions] And our first question will come from Donovan Schafer of Northland Capital. Please go ahead.
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