Evolution Petroleum Corporation (NYSE MKT: EPM) reported operating highlights for the quarter ended December 31, 2012, its second quarter of fiscal 2013 ("Q2-13").
- Earned $1.8 million, or $0.06 per diluted share, an 81% sequential increase
- Increased sales volumes 20% sequentially to 696 net barrels of oil equivalent ("BOE") per day
- Delhi volumes increased 36% over prior quarter to 6,872 gross barrels of oil ("BO") per day (509 net)
- Continued de-watering and de-pressuring our first two Mississippian Lime wells, a necessary prerequisite to achieve expected oil and gas production rates
- Advanced the application of our GARP® technology
Robert Herlin, CEO, said: "We are pleased to report that Delhi production has not only sharply rebounded from the constraints of summer heat, it is also responding to prior year capital expenditures while continuing to outperform our original expectations. Both of our initial Mississippian Lime producers are taking longer to de-water and de-pressure than we originally expected, but both wells have begun to produce small, but increasing amounts of oil and liquids-rich gas. Since other operators in the area have reported similar dewatering results, we remain cautiously optimistic as to our projected reserves and expectations of increased drilling activity in the play later this fiscal year."
Mr. Herlin added: "Our strategy to increase underlying net asset value in a focused manner, without diluting shareholders, is clearly being reflected in our record earnings growth, excluding asset sales. Further growth will be propelled by a major step change, when our 24% working interest at Delhi reverts back to us later this year and begins contributing substantial incremental net cash flow and earnings."
Quarterly Financial Results
Quarterly earnings to common shareholders increased 81% to $1.8 million, or $0.06 per diluted share, compared to $1.0 million, or $0.03 per diluted share in the prior quarter. Net income to common shareholders increased 42% over the year-ago quarter.
Revenues increased 32% to $5.6 million compared to $4.3 million in the prior quarter, and increased 22% compared to the year-ago quarter. The increase over the prior quarter was primarily due to a higher rate of oil production. The increase over the year-ago quarter was due to higher oil production, offset by lower oil and NGL prices, and lower natural gas and NGL volumes.
Lease operating expense increased 33% to $0.4 million compared to the prior quarter due primarily to the addition of wells in our Mississippian Lime project and work-overs in the Giddings Field. Compared to the year ago quarter, lease operating expense was flat. On a BOE basis, lease operating expense during Q2-13 was $6.55 per BOE compared to $5.92 and $7.89 in the sequential and year-ago quarters. General and administrative expense increased 6% over the prior quarter to $1.8 million, and 22% over the year-ago quarter. The increases were primarily due to higher bonus and board fee accruals, noncash stock expense, litigation and other legal expense and transaction costs related to divestments. Results for all periods included significant non-cash stock compensation expense, amounting to 22% of total general and administrative expense in the current quarter and 24% in the year-ago quarter.
Delhi Field, Louisiana
Gross sales volumes at Delhi increased dramatically during the current quarter and averaged 6,872 BO per day (509 net BO per day). Q2-13 volumes were 36% higher than the prior quarter and 39% higher than the year-ago quarter. The increase was due to resumption of normal production with the onset of cooler weather and to response from the capital expenditures in the project during the prior year. The operator is expected to add additional cooling capacity to the plant before summer temperatures return in 2013. Our net sales volumes from Delhi during Q2-13 were solely from our 7.4% royalty interest that bears no operating expense or capital expenditure. We continued to realize a significant premium in oil price that averaged more than $104 per barrel during the quarter, compared to the $90 per barrel we received in our other fields.
Current field production is outperforming the production rate projected in our June 30, 2012 independent reserves report, and we continue to expect that our 24% reversionary working interest will revert to Evolution during the second half of calendar 2013. At reversion, our net revenue interest will more than triple from 7.4% to 26.5%, while our cost bearing working interest will increase from zero to 23.9%. Based on performance, the operator has refocused calendar 2013 capital expenditures to expand the CO2 flood within the previously developed western half of the field in order to better capture the full potential from the reservoirs in that area, before completing the expansion of the CO2 flood in the balance of the eastern half of the field in 2014 and 2015.
Mississippian Lime Project, Oklahoma
Our first two Mississippian Lime wells were completed and hydraulically fractured during Q2-13. The Sneath #1H was placed on production at the end of October and the Hendrickson #1H late in November of 2013. Both wells produced saltwater at rates less than 3,000 barrels per day to begin reducing reservoir pressure and salt water content, a precursor to achieving projected oil and liquids-rich natural gas production. The high volumes of salt water are economically disposed into our joint venture's wholly owned disposal well. Recently, the operator replaced the originally installed down hole pumps with higher capacity pumps to increase salt water production closer to the 10,000 barrel per day rate that other operators in the area have identified as sometimes required. Reservoir pressure in each well has gradually declined and oil and gas production, while currently low, is increasing, suggesting that the wells are steadily depleting reservoir water and pressure, thus liberating oil and natural gas. Our independent reservoir engineer has assigned 112 additional gross drilling locations to our joint venture leasehold, and we plan to resume development pending the results of our first two wells in the play with the expectation of ramping-up our drilling program during the fourth fiscal quarter.
GARP® Technology Commercialization
We installed our GARP® artificial lift technology in the Select Lands #1 joint venture well in the Giddings Field during Q2-13 that, as previously announced, increased production from about 1 BOE per day to approximately 20 BOE per day. We are continuing the commercialization effort for GARP® and have reached tentative agreement to add another joint venture well in Giddings. Discussions for additional GARP® applications in Giddings continue with our joint venture partners, and with various other companies active in other Texas fields. We also recently began a program to acquire abandoned wells, solely for our own account, offering good potential for renewed production utilizing our GARP® technology.
One small sale and one larger sale of noncore assets in the Giddings Field were completed during Q2-13, including most of our non-GARP® production and undeveloped reserves in the Giddings Field. Proceeds included approximately $3.1 million before transaction costs, plus contingent payments based on future drilling activity. The larger sale for $2.8 million was completed December 24th, while the smaller sale was completed in early November. Accordingly, Q2-13 results included most of the production, revenue and operating expense for the divested assets. Had the divestments been completed at the beginning of the quarter, net production in the Giddings Field would have been reduced by 75%, or 125 net BOE per day, to 42 net BOE per day. Similarly, approximately $400,000 of revenue, $145,000 of direct well expense (using the company's average $5.24/BOE depletion rate) and $255,000 of pre-tax well income ($22/BOE) would have been absent in the current quarter's results. The divested properties were high in natural gas and NGL content, averaging 80% of production volumes in the current quarter, and included approximately 350 MBOE of proved developed reserves and 1.8 MMBOE of proved undeveloped reserves as of June 30, 2012. Sale proceeds and staff are already being redeployed to our Mississippian Lime and GARP® projects.
The remaining noncore assets in the Giddings Field are being offered for sale, excluding certain wells in which our GARP® technology has been installed, and excluding our minor royalty and reversionary interests in the Woodbine play in northern Grimes County.
Our first two Mirando Sand oil wells in the Lopez Field in South Texas continue to produce at better than expected rates and a third lease oil well has begun to produce oil. We completed the swap of our oil well and water injector well on our third lease and began production during Q2-13. Although the performance to date has confirmed the project potential and we have numerous additional drilling locations, the long lead time to achieve material economic results in an expansion of the project outside of the Lopez Field has led to a noncore designation.
Capital Expenditures and Liquidity
Capital expenditures during the quarter were $4 million, invested primarily in our Mississippian Lime wells. We now expect that Fiscal 2013 capital expenditures will be reduced by about $3 million due to delayed drilling in the Mississippian Lime project that will carry over into the next year.
At December 31, 2012, we had cash and cash equivalents of $18.0 million compared to $13.1 million as of the end of the first quarter and $14.4 million as of June 30, 2012. Our current working capital of $18.0 million is more than sufficient to meet our projected capital expenditures during the balance of Fiscal 2013 and any likely expansions. We continue to be debt free.