Results for the Quarter Ended December 31, 2015
- Net income to common shareholders was $0.7 million, or $0.02 per share.
- Delhi net production increased to 1,801 barrels of oil per day (“BOPD”), a 6% increase over the prior quarter. Gross production in the field increased to 6,810 BOPD from 6,423 BOPD in the prior quarter.
- Average realized oil price was $39.59 per barrel, down from $46.70 per barrel in the prior quarter, resulting in Delhi revenues of $6.6 million compared to $7.3 million in the prior quarter. Realized hedge gains added $1.3 million, or $7.84 per barrel, which are reported as other income and not included in revenues.
- Delhi lifting costs were $13.44 per barrel, an 18% decrease from $16.37 in the prior quarter, due to lower field costs, lower price of CO2 and reduced volumes of CO2 purchased for the field.
- Separation of our GARP® artificial lift technology operations resulted in a one-time personnel restructuring charge of $0.7 million and non-cash impairments of $0.6 million. The recurring annual overhead cost savings to the Company are estimated to be approximately $1.0 million per year.
- Net working capital remains strong at $13.7 million, and Evolution declared its tenth consecutive quarterly cash dividend on common shares.
Randy Keys, President and CEO, said: “Despite the continuing decline in oil prices, we posted positive net income of $0.02 per common share in the second quarter, our eighth consecutive quarter of positive net income, making Evolution profitable in 19 of the last 20 quarters. Our results for the current quarter benefited from realized and unrealized hedge gains of $1.7 million, but also included $1.3 million of non-recurring personnel restructuring costs and other asset write-downs related to the separation of our GARP® artificial lift technology operations.
“We continue to see very positive trends in both production and operating costs from the Delhi field, with production up 6% and lifting costs per barrel down 18%, as compared to the prior quarter. The lifting cost of $13.44 per barrel is a great indicator of the long-term economic viability of the Delhi field, even in this lower oil price environment. Our balance sheet remains strong and debt-free, and we have continued the payment of cash dividends on common stock at the current rate.”
Delhi Field Operations
Our net margin in the Delhi field was positively impacted by increased production and lower CO2 costs, which partially offset the effect of lower oil prices in the quarter. Gross production of 6,810 BOPD was 6% higher than the average of 6,423 BOPD in the prior quarter and represents a 16% increase over the 5,892 BOPD level from the year-ago quarter. Net production increased to 1,801 BOPD from 1,698 BOPD in the prior quarter, while our average Delhi oil price, excluding derivative settlements, dropped to $39.59 per barrel from $46.70 per barrel in the prior quarter and $70.01 per barrel from a year ago. Our realized hedging gains of $1.3 million added the equivalent of $7.84 per barrel to this lower oil price in the current quarter and $5.55 per barrel in the prior quarter. In October 2015, the Company entered into fixed price swap contracts for 1,100 BOPD (representing approximately 60% of our estimated net production) at a WTI price of $51.45 per barrel for the three month period ending March 31, 2016.
Field operating expenses were $13.44 per barrel, an 18% reduction from levels in the prior quarter, resulting primarily from lower purchased CO2 costs. In the current quarter, our net share of lease operating expenses was approximately $2.2 million, of which $1.0 million was related to CO2 purchases and transportation expenses. Total CO2 costs were down approximately $0.4 million from the prior quarter as a result of both lower oil prices and lower purchased CO2 volumes. Most of our purchased CO2 cost is directly indexed to the oil price received at the Delhi field. It should be noted that our lifting costs in the Delhi field differ from those of the operator based on our contractual costs of purchased CO2 versus the operator’s internal costs and the impact of our royalty interests in the field that bear no capital or lifting costs.
As of December 31, 2015, we had incurred approximately $9.4 million of cumulative capital costs for the NGL plant out of an original commitment of $24.6 million. The pace of spending on the NGL plant has been slower than originally projected by the operator, as they have sought ways to lower plant costs and manage cash expenditures during this period of constrained cash flow and favorable pricing for materials and services associated with the downturn in the industry. We currently believe that our net costs for the project will be below the initial commitment, although the actual costs will not be known until the project is completed. The estimated completion date is now forecast for the fourth calendar quarter of 2016 and the revised timing of capital expenditures will allow us spread them over a longer period than originally forecast. We believe this will result in a net benefit to the Company as we will have more cash flow from the field to fund these expenditures. We further believe it is likely that product prices will improve in 2017 versus 2016, so we will be selling less of our production at current depressed price levels.
When completed, we expect the NGL plant to yield a significant increase in production volumes of heavy natural gas liquids and crude oil, as well as methane to produce a significant part of our power needs in the field. After the NGL plant is online, our capital spending obligations in the Delhi field are expected to be low in the near-term and, therefore, substantially all of our cash flow will be discretionary.
Our litigation against the operator of the Delhi field relating to the June 2013 fluid release event and other matters is currently scheduled for trial in late April 2016. Legal discovery is largely complete and both sides are conducting depositions. Timing and resolution of this matter is subject to uncertainties inherent in the legal process. Our litigation costs were approximately $0.7 million in the current quarter, which represents a $0.5 million increase from the year-ago quarter. Excluding litigation costs, the cash portion of our general and administrative expenses totaled approximately $1.1 million for the current quarter, and we expect our cash G&A costs excluding litigation to be in the range of $0.9 million per quarter subsequent to the separation of GARP® discussed below.
Gas Assisted Rod Pump (GARP®)
Based on a strategic review of our GARP® artificial lift technology operations, we completed the separation and transfer of these operations to a new entity controlled by the inventor of the technology and certain former employees of the Company, effective December 31, 2015. We invested $108,750 in common and preferred stock and retained a minority interest in the new entity, together with a 5% royalty on all future gross revenues derived from the technology. We have the option to convert our preferred stock investment into a larger, non-controlling equity stake in the new entity. Consequently, we have retained substantial upside for our shareholders from the potential future success of the technology, while eliminating our overhead and operating commitments associated with GARP®. We have also retained the right to use the technology in our current wells and any future wells we develop or acquire.
This transaction resulted in a one-time personnel restructuring charge of $0.7 million, along with non-cash asset impairments of approximately $0.6 million. The separation will reduce our overhead costs by an estimated $1.0 million per year and remove our obligation to fund the future capital and operating needs of this operation.
Liquidity and Capital Resources
At December 31, 2015, the Company had total liquidity of $18.7 million, which includes $13.7 million of working capital and $5.0 million of availability on a revolving unsecured credit line. The Company remains debt-free. We believe that current liquidity combined with expected operating cash flows will be sufficient to fund the Company’s capital budget for the remainder of calendar year 2016.
Cash Dividend on Common Stock
The Board of Directors declared a cash dividend of $0.05 per share of common stock, which will be paid on March 31, 2016 to common stockholders of record on March 15, 2016. This is the tenth consecutive payment of cash dividends on common stock, which began at the end of calendar year 2013.
Cash Dividend on Series A Preferred Stock
The Board of Directors declared the February 2016 monthly cash dividend on our perpetual non-convertible 8.5% Series A Cumulative Preferred Stock. The dividend is payable on February 29, 2016 to holders of record at the close of business on February 15, 2016. The payment will be 1/12th of the 8.5% annualized amount, or approximately $0.177083 per share, based on the $25.00 per share liquidation preference.
Expected Tax Treatment of Dividends
Based on our current projections for the fiscal year ending June 30, 2016, we expect both the common stock and preferred stock dividends will be treated as qualified dividend income. We will make a final determination regarding the tax treatment of dividends for the current fiscal year when we report this information to recipients.
As previously announced, Evolution Petroleum will host a conference call on Thursday, February 4, 2016 at 11:00 a.m. Eastern (10:00 a.m. Central) to discuss results. To access the call, please dial 1-855-327-6837 (United States & Canada), 1-631-891-4304 (International).
To listen live or hear a rebroadcast, please go to http://www.evolutionpetroleum.com. A replay will be available one hour after the end of the conference call through February 11, 2016 and will be accessible by calling 1-877-870-5176 (United States) or 1-858-384-5517 (Canada and International) and providing the replay passcode of 117937. The webcast will also be archived on the Company’s website.
About Evolution Petroleum
Evolution Petroleum Corporation develops petroleum reserves and shareholder value by applying conventional and specialized technology to known oil and gas resources, onshore in the United States. Principal assets currently consist of interests in a CO2-EOR project in Louisiana’s Delhi Field. Additional information, including the Company’s annual report on Form 10-K and its quarterly reports on Form 10-Q, is available on its website at www.evolutionpetroleum.com.