Q2 2024 Evolution Petroleum Corp Earnings Call
Participants
Brandi Hudson; IR; Evolution Petroleum Corp
Kelly Loyd; President & CEO; 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 Capital Markets
John White; Analyst; Roth Capital
Jeffrey Robertson; Analyst; Water Tower Research
Presentation
Operator
Good morning, and welcome to the Evolution Petroleum Second Quarter Fiscal Year 2024 earnings release conference call, our participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star then two. 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, and welcome to Evolution Petroleum's fiscal Q2 2024 earnings call. I'm joined by Kelly Williams, President and Chief Executive Officer, Mark Bunge, 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 seventh, 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, I 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 Investors section of our website.
With that, I will turn the call over to Kelly Thanks, Brandy.
Kelly Loyd
Over the past few years, our industry has evolved and fittingly So his 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 in the 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 Chevron field and two in our Del Highfield. 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 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 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 one-off grassland system being shut down for almost three weeks and downtime of a few wells in November. Currently, the wells and the grassland system are back online, resulting in an average rate for December of more than 500 BOE per day at our Barnett asset. Although only continued to experience issues with some of the gathering facilities, production was not significantly impacted. Our 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 that we expected all these wells to be back online during our fiscal third quarter overall, we can see strong performance from this field at Dell high. 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 Adele high 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.
Joe high production increase 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 earning call, we brought on two new infill wells at Delphi are very, very pleased with the result and hope to see more future proposed locations here in the shaver 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 artificial lift on all three wells. The five or four H. was brought online first and is currently in the process of cleaning it, 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 final two H. and the final 3H very soon. We will provide information on this important project as it becomes available.
Finally, on January fifth, we announced the acquisition of nonoperating working interest in the SCOOP STACK in central Oklahoma with a November first effective date as of the effective date, the assets consist of 231 producing wells with an average 3% working interest producing roughly 1,550 BOEs per day 21 debts to be paid for by the seller and up to 300 gross drilling locations. Currently, 18 deaths have been converted to proved developed producing and two are in process in addition, 12 pads that EPM will pay the CapEx on it and spudded. We have also begun reviewing other joint proposal. So we did shortly after closing this asset is a perfect fit for our evolving strategy, both adding on long-life production based on current commodity pricing during the downswings and adding undeveloped locations by making acquisitions to drillbit. 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.
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 in 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 earnings per share was also negatively impacted by $0.01. We don't expect to see further impacts from these non-recurring ownership adjustment.
On the development side, we spent 3.9 million in CapEx, primarily related to the drilling and completion of the three wells at Chevron, where 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 Chevron 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 six and seven 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 and 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.
Question and Answer Session
Operator
We will now begin the question and answer session. To ask a question. You may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two at this time, we will pause momentarily to assemble the room.
Yes, yes. And our first question will come from Donovan Shafer of Northland Capital. Please go ahead, sir.
Donovan Schafer
Guys, thanks for taking the questions. So Tom, first, just in my own modeling, I made the mistake of giving you additional revenue in the second fiscal quarter and for November and December production from the SCOOP STACK acquisition based on the November first effective date. And that's added 25 million in revenue versus the 21 you reported. And you want to go back and correct for that. It looks like your results are right in line. So just wanted to acknowledge my error there, but 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 RUSS continues to give us any rough sense for what that discount might be? And then kind of related, could you share with us how much you expect you might need to draw on your revolver in order to close the transaction?
So Donovan?
Yes.
Kelly Loyd
Thanks, Colin. And I and I appreciate you mentioning the modeling correction you made. So And honestly, with the way this works is a lot of times, what happens is 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 three companies that we're acquiring actually do accruals. So some of it'll 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. But and when the timing of that comes in will be a little different amongst the entities. So the actual draw may go up and down a little bit between preliminary closing settlement statement and the actual final one, which would be obviously, it takes 60 days for gas production. So it's how many days out there as it went.
And yes, I mean, those are done and we're reviewing the settlement statement now, to be honest. So we feel, as Kelly mentioned, we may not have an answer quite yet for you, unfortunately. But we are still set to close likely next week. And so we'll have a better answer than and it's just going to depend on what revenue they receive versus on 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 some. So there may be a couple of months of production. They're still owed us. So we just may not be as big as the preliminaries is on the final offer that's not you're confusing.
But net-net, when it washes out, I don't think you're number was way off and it could be a little bit either way one or the other.
Okay.
Okay.
Donovan Schafer
And then I wanted to talk about turning to third fiscal quarter. So in mid January, there were some fairly severe winter freeze weather conditions that that hit North Dakota and also Texas and Louisiana. And 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. I think actually at the back end, ammonia is kind of almost shockingly, but it was only I think, for a couple of days, but like statewide Bakken production, Salix 50% for a couple of days because the freeze was so bad and it at the LNG processing, I think or something. So I'm just curious if you can talk through what kind of impacts on those events may have or what we kind of how we should expect that to impact production for SQ. three?
J. Mark Bunch
Gentlemen, thanks for the question. This is Mark bunch and actually this year, the winter storm impacted you're referring to it was it didn't affect us as much as the winter storms have in the past, like at Del high because we had the new heat exchanger in. We didn't have any issues at the plant at all. So you have this great Wilson. There was some shutdown, but it was only for about five days and everything he was brought back online very quickly. So I'd say the reaction time, and that was pretty good at it.
In the Barnett, there was about the same amount of time, but for five days, but everything it came back online real quickly in past years, one of the problems has been in the Barnett as they were unable to get the production back on as fast. But this time it, they got everything back on really quickly. So I'd say this that the effect is fairly minimal.
Okay.
Donovan Schafer
And then I'll just what if I can squeeze in one last question. You guys have relatively lower exposure to the Bakken than, say some of your peers. I mean, there are some there are some pure-play Bakken companies out there and other ones. So you know, so it's a smaller piece of the pie for you guys. All things considered, but it's still relevant. So I wanted to talk about the trends on pipeline in Canada in the past. I've asked some folks about, gee, when this new capacity comes online. Could I could I could it actually improve back in pricing by alleviating some congestion from the Alberta production in Canada?
Yes.
And the answer you 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 that pipeline capacity got delayed. And so you got this like excess Canadian production, that's actually it 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 the at the end of the day once that capacity comes online and that benefit the pricing in the area? And just any color there would be helpful, and I'll take it offline.
Kelly Loyd
Sure. So it is Kelly.
Thanks, Donovan for the question. In the Williston, I think you you've framed it correctly. I think, yes, a lot of people thought the Trans Mountain was supposed to have been on in December. I mean they talked about it for years and there was, I think, a mile and a half section where I think they ran into some First Nations issue which caused a delay. But obviously for some of the larger projects in Canada, it takes a while to ramp them 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 from 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. So with the Canadian market and 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 some people thought four or $5 and impact a barrel of incremental, better differential there. So anyway, we're excited about that.
Okay, thanks, guys.
Operator
Next question comes from John White of Roth Capital please go ahead.
John White
Yes, oh, I'm sorry. Good to see Subaru going. And have you talked about the number of potential locations in connection with that prospect yes, yes, there's right now we have roughly about 80 total locations, not included yet, including the three that we just drilled. They're spread out over. You know, basically the average is kind of close to eight wells, seven or eight wells per year. So it's kind of a a measured drilling program that's quite a bit of potential, it sounds like.
Yes, yes, that's actually the biggest reason why we're so interested in the project because it gives us a lot of running room and the operators like us.
Does it one like race out there and drill everything up in one year. They want to they like to see it brought on slowly. And that kind of fits our capital program.
Right and own this carbon capture designation, is that going to have any positive income tax benefits.
Kelly Loyd
So given that some of them, it's just sticky wicket, 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 from 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. So we I don't know still to be to be researched. I can't think of anything negative that would happening because of it. So I think there's only upside potential with that.
I know a lot of people are still trying to figure it out so you're not alone and Okay, nice quarter and I'll pass it back to the moderator.
Operator
Next question comes from Jeff Robertson of Water Tower Research Please go ahead.
Jeffrey Robertson
Thanks, Kelly. I missed a part of your opening remarks, so I apologize if you addressed this, but I'm curious now with the SCOOP/STACK acquisition on top of the shelf through acquisition. You all now have two 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 and then the dividend?
Kelly Loyd
Sure. Yes, Jeff, thank you, and 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 Chevreux and with the additional the assets from the SCOOP STACK acquisitions in the locations there, plus what's going on with Delphi, right? We've had a couple of wells that we're super encouraged with there and still our Williston pads. What we have now is really some investment portfolio flexibility largely in the past to maintain or increase production. We needed to be in a 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 SCOOP/STACK acquisition. I couldn't be more excited about this purchase, but it also comes with these additional locations and again, the flexibility by flexibility, you may be wondering, look, you're a non-op, what flexibility do you have? Will these locations have value, right? We could. 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 tailor this to fit nicely with our expected CapEx as we go forward. It'll obviously be dynamic, but and again, it's just another sort of really viable tool for us to put to work for the best interest of our shareholders.
Jeffrey Robertson
Thanks to 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 and owners of nonoperated assets are trying to reposition their portfolios.
Kelly Loyd
We do. Yes, we look at them honestly, as you know, Jeff, we 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 in to really have a great return like we expect to get here. So we're constantly evaluating other out there. We just to we're not out of the the accretive acquisition game we never will be here at Evolution, but we are we're excited what we have here.
Very great.
Thank you.
Thank you.
Operator
This concludes our question and answer session. I would like to turn the conference back over to Kelly Boyd for any closing remarks.
Kelly Loyd
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 in the SCOOP/STACK acquisitions, and we expect to close that next week. I think we're going to have some of the strongest production we really ever had, and obviously with what's going on at Chevreux with the exciting drilling program there in the hundreds of low working interest upside, SCOOP/STACK locations and our recent successes at Dell high end in our Williston put Z, we now have some 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.
Operator
The conference has now concluded. Thank you for attending today's presentation, and you may now connect?
Yes, yes.
