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Evolution Petroleum First Quarter 2022 Results

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   |    Friday,May 13,2022

Evolution Petroleum reported its first quarter 2022 results.

On May 4, 2022 Evolution also declared a quarterly cash dividend of $0.10 per common share for the fiscal 2022 fourth quarter payable June 30, 2022 to holders of record as of June 15, 2022.

Key Q3 Fiscal 2022 Highlights:

• Produced 5,579 net barrels of oil equivalent per day ("BOEPD") during the current quarter;
• Generated revenue of $25.7 million and net income of $5.7 million;
• Generated adjusted EBITDA ⁽¹⁾ of $12.3 million;
• Paid a cash dividend of $0.10 per common share, marking the Company's 34 ^th consecutive quarter of paying a dividend and totaling approximately $83 million since inception;
• Funded all operations, development capital expenditures, and cash dividends out of operating cash flow;
• Maintained a strong financial position with low leverage

Acquisitions:

• Completed the acquisition of oil weighted, non-operated oil and natural gas properties located in the Williston Basin in North Dakota on January 14, 2022

• Executed a definitive agreement to acquire and closed on April 1, 2022 the acquisition of natural gas weighted, non-operated oil and natural gas properties in the Jonah Field in Sublette County, Wyoming

CEO Jason Brown commented: "We are pleased with the continued improvements in operational and financial performances during the third quarter of fiscal 2022. The quarter was highlighted by a 13% increase in production and a 20% increase in adjusted EBITDA from the prior quarter reflecting both a partial quarter of production from our Williston acquisition and improved oil price realizations. The next quarter ending June 30, 2022 should show further improvements due to realizing a full quarter of performance from both the Williston acquisition and inclusion of the Jonah Field acquisition closed in April, assuming a continued stable commodity price environment. This will be somewhat offset by hedges on a small portion of our pro forma production through March of 2023 as required under our credit facility. The addition of the Williston and Jonah Field reserves and improvements in forward commodity price curves have subsequently eliminated the requirement to extend the hedges. Furthermore, improved pricing is encouraging our operators to increase production maintenance and enhancement operations as we continue to collaborate closely with them to identify and execute on development opportunities that provide attractive returns on investment."

Mr. Brown concluded, "The new acquisitions further diversify the Company's product mix and geographic footprint within attractive commodity and regulatory markets, while adding substantial and largely controlled opportunities to invest in low-risk, organic development opportunities with our operating partners. Most importantly, the acquisitions are accretive to cash flow in support of our objective to return consistent and substantive dividends to shareholders, particularly since the acquisitions were based on significantly lower commodity prices than realized in the current quarter and observed in the current forward curve. We look forward to continued sustainability and further growth in our dividend payout as appropriate as we look to substantially reduce our debt in the near term. The Company will continue to evaluate accretive acquisitions as well as low risk, high potential return development drilling opportunities."

Dividend Declaration

On May 4, 2022 the Board of Directors declared a cash dividend of $0.10 per share of common stock, which will be paid on June 30, 2022 to common stockholders of record on June 15, 2022. This will be the 35 ^th consecutive quarterly cash dividend on the common stock, which has been paid since the quarter ended December 31, 2013. To date, the Company has paid approximately $83 million, or $2.51 per share, back to stockholders as cash dividends. Maintaining and ultimately growing the common stock dividend remains a Company priority.

Results Overview

Evolution reported total production for the third quarter of fiscal 2022 of 5,579 BOEPD, comprising 1,810 barrels per day ("BOPD") of oil, 15,874 thousand cubic feet per day ("MCFPD)" (2,646 BOEPD) of natural gas and 1,123 BOEPD of natural gas liquids ("NGLs").

• The increase over the prior quarter in oil production was primarily due to the closing of the Williston Basin Acquisition on January 14, 2022. The increase was partially offset by approximately 200 BOPD in production received in the prior quarter due to past royalties owed to Evolution from overriding royalty interests in two wells located in the Giddings Field in Burleson County, Texas.
• Net natural gas production of 15,874 MCFPD decreased 20% from the prior quarter. Consistent with the prior quarter, essentially all of the Company's natural gas production in the current quarter was generated from the Barnett Shale properties. The decrease is primarily attributable to the positive impact from a change in estimate recorded in the prior quarter related to the operator's election to reject ethane. Excluding this adjustment, prior quarter natural gas production would have been approximately 16,500 MCFPD.
• NGL production of 1,123 BOEPD increased from the prior quarter, which was negatively impacted by downward changes in estimates for NGL volumes at our Barnett Shale properties resulting from the election by the operator to reject ethane production in order to maximize overall field cash flows. Excluding these adjustments, NGL production for the prior quarter would have been approximately 975 BOEPD. Also contributing to the increase was the production added from the Williston Basin Acquisition and improved run time at the Delhi NGL plant.

Evolution reported $25.7 million of total revenue for the third quarter of fiscal 2022, an increase of over 15% from the prior quarter, which benefited from $1.1 million of past royalties (see above) and 236% over the year-ago quarter. Oil revenue increased to $14.9 million due to an 8% increase in sales volumes and a 30% increase in realized commodity price relative to the prior quarter. Natural gas revenue in the current quarter was $6.1 million, which was 34% lower than the prior quarter. The decrease from the prior quarter was primarily due to the positive impact of the previously discussed changes in estimates recorded during the prior quarter that were related to the operator in the Barnett Shale electing to reject ethane. Excluding this adjustment, natural gas revenues in the prior quarter would have been approximately $8.5 million. Also, contributing to the decline in natural gas revenues from the prior quarter was a 16% decrease in the realized price of natural gas. NGL revenue increased 84% to $4.7 million substantially due to increased production in the Barnett Shale due to the aforementioned change in estimates. Excluding this adjustment, NGL revenue would have been approximately $3.7 million in the prior quarter.

Lease operating costs increased to $12.1 million compared to $10.7 million in the prior quarter. This increase was primarily due to a $1.0 million increase in other lease operating costs reflecting incorporation of the Williston Basin assets as of January 14, 2022 and $0.4 million in higher CO ₂ costs at Delhi compared to the prior quarter due to higher purchased CO ₂ volumes and an increase in CO ₂ cost per MCF as the CO ₂ purchase price is based on oil pricing.

Depletion, depreciation, and amortization ("DD&A") expense increased to $1.7 million from $1.2 million for the prior quarter. On a per BOE basis, the Company's DD&A rate increased to $3.19 from $2.45 in the prior quarter primarily due to an increase in oil and natural gas reserves associated with the Williston Basin Acquisition.

The Company's general and administrative expenses decreased 17% to $1.5 million for the current quarter from $1.8 million in the prior quarter. The decrease was primarily due to lower consulting, legal, and compensation costs in the current period.

Net income for the current quarter was $5.7 million, or $0.17 per diluted share, versus $6.8 million, or $0.20 per diluted share, in the prior quarter. The decrease in net income was primarily attributable to a $2.4 million unrealized loss on commodity contracts related to the mark-to-market value of hedges. Adjusted net income for the third quarter, excluding selected items, (see "Non-GAAP Information" section later for a reconciliation of the GAAP to Non-GAAP metric) was $7.7 million, or $0.23 per diluted share. During the quarter, the Company entered into hedges on a small portion of its production as required by its lender under its revolving credit facility. This decrease was partially offset by higher revenues attributable to higher commodity prices and an increase in production. The average realized price per barrel of oil equivalent increased 4.5% to $51.16 per BOE compared to $48.98 per BOE in the prior quarter. This increase was primarily due to a 30% increase in realized crude oil prices from $70.29 per barrel in the prior quarter to $91.28 per barrel in the current quarter.

Operations Update

Net production at Delhi in the current quarter was 112,494 BOE, a 4% increase compared to 108,245 BOE in the prior quarter. Contributing to the sequential increase was NGL production that was 57% higher, primarily due downtime at the NGL plant in the prior quarter to replace a turbine and cold inlet temperatures at the NGL plant that reduced flow rates. Oil production continues to be negatively affected by the nine-month suspension of CO ₂ purchases during 2020 due to repairs of the third-party owned and operated purchase supply line that lowered reservoir pressure. CO ₂ purchases increased in the current quarter which assisted in arresting the production decline and restoring some of the reservoir pressure previously lost. However, reservoir pressure has yet to reach levels prior to the suspension, which is projected to increase oil production when achieved.

The average oil price per barrel realized by Evolution at the Delhi Field during the third quarter of fiscal 2022 was $94.76 compared to $75.37 during the prior quarter, an increase of 26%. The average realized NGL price per barrel was $54.83 compared to $44.23 during the prior quarter, an increase of 24%.

Hamilton Dome production volumes decreased 2% to 37,312 barrels in the current quarter compared to 38,021 barrels in the prior quarter primarily due to fewer overall days in the current quarter. The operator of the Hamilton Dome properties continues to perform opportunistic workovers in the field as commodity prices remain strong.

The average oil price per barrel realized by Evolution at Hamilton Dome during the current quarter was $81.84 compared to $64.59 during the prior quarter, an increase of 27%. Production from the field is transported by pipeline to customers and is priced on the Western Canadian Select (WCS) index, which generally trades at a discount to West Texas Intermediate ("WTI"); Evolution receives a bonus to the WCS index.

Net production of the Barnett Shale properties was 307,381 BOE for the current quarter versus 285,761 BOE in the prior quarter, an increase of 8%. As previously discussed, production in the prior quarter was impacted by the operator's financial decision to maximize overall field cash flow. This resulted in production mix adjustments due to rejecting ethane in order to capitalize on higher natural gas prices and drive increased total cash flow in the first six months of fiscal 2022, which resulted in a change in estimate during the prior quarter.

The average natural gas price per MCF realized by Evolution at Barnett Shale during the current quarter was $4.25 compared to $5.05 during the prior quarter, a decrease of 16%.

As previously discussed, the Company closed on the Williston Basin Acquisition on January 14, 2022. Net production of the Williston Basin assets during the partial quarter was 43,510 BOE in the current quarter, including 36,153 barrels of oil. The average oil price realized by Evolution at Williston Basin was $93.32 in the current quarter.

Balance Sheet, Capital Spending and Liquidity

As of March 31, 2022, cash and cash equivalents totaled $13.4 million. Evolution had $20.0 million of debt outstanding under its revolving credit facility and total liquidity of $43.4 million. During the third quarter of fiscal 2022, the Company fully funded operations, development capital expenditures, and cash dividends through cash generated from operations and its working capital position, and expects the same for the remainder of fiscal 2022. The increase in borrowings from $4.0 million at December 31, 2021 was due to funding the closing of the Williston Basin Acquisition in January. Evolution expects to manage near-term development activities for its properties with cash flows from operating activities and existing working capital.

Subsequent to the quarter on April 1, 2022, the Company closed the Jonah Field Acquisition with funding provided by cash on hand and $17.0 million additional borrowings under the revolving $50 million credit facility. After the close of the acquisition, Evolution had $37.0 million of borrowings on the revolving credit facility and $13.0 million of borrowing capacity available under its current agreement.

For the three months ended March 31, 2022, Evolution paid $3.4 million in common stock dividends and incurred $0.1 million for capital expenditures and conformance projects. Based on discussions with the operators of the Company's properties, conformance workover projects at Delhi Field are expected to continue and will likely result in additional maintenance capital expenditures, and Hamilton Dome is also expected to incur capital expenditures for continued workover activity and water injection infrastructure upgrades. Additionally, based on discussions with the operator of the Barnett Shale properties, Evolution anticipates incurring capital expenditures for workover projects as there are current plans to run one workover rig continuously throughout calendar year 2022. Also based on discussions with the operator of the Williston Basin assets, the Company expects that material capital expenditures related to workovers, recompletions, and additions of new laterals to select wells will be initiated in early fiscal 2023. Total capital expenditures across the Company's properties are expected to be in the range of $0.5 million to $1.0 million during the remainder of fiscal 2022.