Evolution Petroleum Corporation (EPM) Earnings Call Transcript

Good day and welcome to the Evolution Petroleum Fiscal First Quarter 2027 Earnings Release Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brandy Hudson, Director of Investor Relations. Please go ahead.

Thank you. Welcome to Evolution Petroleum's Fiscal First Quarter 2027 Earnings Call. I'm joined today 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 First Quarter 2027 financial results after the market closed yesterday. Please refer to our earnings press release for additional information containing these results. You can access our earnings release in the investor section of our website. Please note that any statements and information provided in today's call speak only as of today's date, November 11, 2026, 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 described in our SEC filings. Actual results may differ materially from those expected. We undertake no obligation to update any forward-looking statements. During today's call, we may discuss certain non-GAAP financial measures, including adjusted EBITDA and adjusted net income. Reconciliations to the most directly comparable GAAP measures are included in our earnings release. Kelly will begin with an overview of the quarter and our strategic priorities, Mark will follow with an operational update, and Ryan will review our financial results and liquidity. Kelly will then provide closing comments, and the management team will take your questions. As a reminder, this conference call is being recorded. A webcast replay will be available in the investor section of our website. With that, I will turn the call over to Kelly.

Thank you, Brandy, and good morning, everyone. There's a lot to talk about this morning, and I'm pleased to say most of it reflects real progress on our strategy. During the quarter, we closed on a $16 million Permian minerals acquisition, expanded our Haynesville and Bossier shale royalty position in Louisiana, and after quarter end, we continued our strategy of turning undeveloped acreage into cash. Revenue for the quarter was up 6% from a year ago. Production was slightly up from the fourth quarter. Adjusted EBITDA increased from last quarter. And while net income came in at a loss for the quarter, it was due in large part to hedging losses, most of which were non-cash. Beyond just the quarter's headline numbers, we're very excited about the progress we're seeing across important parts of our business, particularly our mineral and royalty portfolio. September production from our newly acquired Permian interest has already exceeded our acquisition expectations. And new wells in Louisiana are beginning to contribute just as we expected. We bought these assets for both their existing production and their substantial development potential, which is really beginning to deliver. What makes that development particularly valuable to us is how it is funded. Our operating partners bear the drilling and completion costs, and we receive our share of production without having to make those additional capital commitments. We also do not bear lifting expenses on these mineral and royalty interests. That means growth in these assets contributes high-margin cash flow without the CapEx associated with working interest development. As these contributions continue to build, it gives us more capacity to strengthen the balance sheet and further support our dividend. Specifically in the Permian, from the effective date of August 20th through September, production averaged approximately 218 barrels of oil equivalent per day, ahead of the 200 to 210 BOE per day we expected. We have sufficient production data to include the results from 21 of the approximately 27 gross wells that operators brought online between closing and September 30th. That September rate does not yet include production from those roughly 6 additional wells that we know are online. In our fiscal second quarter, we expect to benefit from a full quarter of ownership, production from those 6 wells, and production from new wells that come online during the quarter. Exciting to see this level of activity so soon after closing. Our Louisiana interests offer a similar opportunity. Production from our Haynesville and Bossier royalty interests grew approximately 92% from the fourth quarter as operators brought new wells online, very much in line with our expectations. We added a couple of small bolt-ons during the quarter and have continued adding to the position since quarter end. We've been building this position over time, and we are now seeing this acreage begin to contribute in a meaningful way. We are also looking beyond new production for ways to realize value within the portfolio. We own a great deal of undeveloped acreage with meaningful long-term potential. Like we did in the fourth fiscal quarter when we sold minerals for $3 million that we felt were unlikely to be developed in the next 1 or 2 years, we always consider the best path to bring value forward to today across our portfolio. Whether that's participating in development through working interest, selling longer-term development prospects, or farming out the acreage to a partner, we have many ways to accelerate value. In the right situations, and where the operators align with us, a farm-out of working interest with an override and/or an option to participate can be the most efficient option. It will allow us to bring in cash today and retain an interest in future production with zero CapEx net to us. Following quarter end, we did farm out some undeveloped acreage in the Williston Basin for approximately $2.5 million while retaining a 0.25% overriding royalty interest. This acreage represents roughly 2% of our roughly 40,000-acre position and just a fraction of the 300-plus probable and possible drilling locations that we have identified. We're also in negotiations for further farm-outs of very low or non-currently producing acreage here and in other parts of our portfolio that we hope to be able to report on soon. These agreements are expected to generate cash up front and overrides and possible options to participate. And we intend to apply these proceeds to pay down borrowings on our revolver. That gives us a way to reduce debt while keeping today's production and cash flow fully intact. We expect to find more opportunities like these as we work to strengthen the balance sheet and create value for our shareholders while maintaining future upside. Taken together, these opportunities shape how we're allocating capital. We've already invested in assets that can contribute more as they develop, and our near-term priority is to realize those returns in the quarters and years ahead. With meaningful growth already built into the portfolio, we can be highly selective about new capital and put more of the cash we generate towards strengthening the balance sheet. That approach also supports our dividend. The board has declared a quarterly dividend of 12 cents per share, our 53rd consecutive quarterly payment, and since December 2013, we've returned approximately $156.6 million to shareholders. We think about that commitment over multiple years and across commodity cycles, and the growth underway in our mineral and royalty portfolio strengthens our ability to support it. As we move through fiscal 2027, we're off to a start that really reflects the portfolio we've been building: new production from our Permian and Louisiana interests, value emerging from undeveloped acreage, and a clear path to stronger cash generation. We look forward to updating you on that progress next quarter. With that, I'll turn the call over to Mark for more details on our operations.

Thanks, Kelly. Good morning, everyone. I'll focus on the development activity and operating performance across our portfolio and what we see as we move through fiscal 2027. Overall, first quarter operating performance was up sequentially. Underneath that, the picture varies by area, so let me take them in turn, starting with ScoopStack. At ScoopStack, new well activity continued across both our working interest and mineral and royalty positions. During the quarter, 2 gross wells came online, gross wells were in progress and we elected to participate in 3 additional gross wells. In Louisiana, new wells continue to come online across our Haynesville and Bossier mineral and royalty interests. During the quarter, we acquired approximately $300,000 of additional interest, primarily in undeveloped acreage that third-party operators are actively developing. That activity continues to build our production without requiring us to fund drilling or completion costs. In the Permian, integration is progressing well. As Kelly mentioned, operators moved at least 21 gross wells into producing status between closing and September 30th. With additional wells entering production and a full quarter of ownership, we expect a larger contribution in the second quarter. For now, our Permian and Louisiana volumes are reported within Tex-Mex and other, and as they become more established in our reporting, we plan to present their contributions separately. At Tex-Mex, operating costs declined compared to the year-ago quarter following the change of operator. In the Barnett Shale, we have met with the new operator, whose entire focus is solely on Barnett operations and improving field profitability through operating changes and workover opportunities. At Delhi, oil production was affected by continued compressor downtime during the quarter. Finally, at Chavarru, we continue to work with our partner on the timing of future drilling. We view the development inventory as attractive, particularly in the current price environment, and will provide updates as plans develop. With that, I will turn it over to Ryan.

Thanks, Mark, and good morning. As Brandy mentioned earlier, we issued our earnings release yesterday, which contains more information on our results. For today, I'd like to go through our fiscal first quarter financial highlights. In fiscal Q1, production averaged 6,978 BOE per day, up 1% sequentially and down 5% year-over-year. The lower year-over-year production was due to unplanned downtime at our Delhi and Tex-Mex assets, as well as natural declines across the portfolio. In addition, the prior year period includes flush production from wells brought online at Chavarru Field. These declines were partially offset by development in our ScoopStack asset, as well as mineral acquisitions in the Haynesville, Bossier Shale, and Permian. Total revenues were $22.6 million, down 7% sequentially and up 6% year-over-year. The sequential decrease reflected lower realized oil and NGL prices, partially offset by higher natural gas realizations and increased production. Compared to the year-ago quarter, average realized prices before hedge settlements increased 11%, more than offsetting the decline in production. The net loss for the quarter was $3 million, or 8 cents per diluted share, compared to net income of $4.6 million in fiscal Q4 and net income of $0.8 million, or 2 cents per diluted share, in the year-ago period. The quarter included a $4.1 million unrealized loss on derivative contracts compared to a $5.8 million unrealized gain in fiscal Q4. Excluding selected items, adjusted net loss narrowed to $0.3 million from $0.6 million sequentially, compared to an adjusted net loss of $7.1 million a year ago. Adjusted EBITDA increased sequentially to $6.8 million, driven by lower operating costs as a result of increased mineral and royalty production that helped offset lower revenues. Compared to the prior year quarter, adjusted EBITDA declined from $7.3 million, primarily due to lower production and lower realized natural gas prices. Lease operating costs decreased to $12.4 million compared to $13.1 million in the year-ago quarter. The decrease was primarily driven by lower operating costs at ScoopStack and at Tex-Mex following the change of operator, as well as lower taxes and gathering and transportation costs associated with decreased natural gas prices at Jonah and Barnett. On a per-unit basis, LOE per BOE improved approximately 1% from the year-ago quarter and improved approximately 5% sequentially to $19.25 from $20.35 in fiscal Q4. On the hedging front, we have continued to add hedges to comply with our credit facility covenants. Our ongoing goal remains to reduce commodity price risk and protect cash flow for our shareholder return strategy while preserving the maximum potential upside. This strategy can result in realized and unrealized losses on our hedges in some periods, but benefit us in other periods and provide more predictable and stable cash flows over time. Currently, we have hedged approximately 73% of expected PDP oil production and 76% of expected PDP natural gas production for the remainder of calendar year 2026. For calendar year 2027, we have hedged approximately 72% of expected PDP oil production and 67% of expected PDP natural gas production. Volumes for 100% of our NGL production and development on our asset base remain unhedged to provide upside to commodity pricing. We continue to utilize a mix of swaps and collars to hedge both oil and gas. For the quarter, realized losses on our derivative contracts were $1.3 million compared to realized gains of $0.9 million a year ago. That change reduced adjusted EBITDA by approximately $2.2 million year-over-year. The volumes and prices by instrument and period are included in the hedge schedule in our earnings release. Returning to the balance sheet, cash on hand totaled $3.1 million at September 30th, compared to $6.1 million at June 30th. Borrowings under our credit facility increased during the quarter to $60 million from $56.5 million as a result of the Permian minerals acquisition, with $0.8 million in letters of credit outstanding and a weighted average interest rate of 6.48%. Total liquidity at September 30th, including cash and available borrowing capacity, was approximately $15.3 million. We generated $8.4 million in operating cash flow before changes in working capital during the quarter, compared to $6.5 million in fiscal Q4. Capital expenditures incurred were $0.7 million, and we completed the $16 million Permian minerals acquisition. We also received approximately $12.5 million of net proceeds from our common stock offering and had $3.5 million of net borrowings under our credit facility. Subsequent to quarter end, our borrowing base was redetermined at $70 million, down from the interim $73 million borrowing base established in August to provide liquidity to complete the Permian minerals acquisition, but up from the spring 2026 borrowing base value of $65 million. As of October 20th, availability in this facility was $9.2 million. This does not include approximately $2.5 million in cash received for the closing of the initial Williston farm-out transaction in November or any subsequent farm-out transactions that we're currently pursuing. During the quarter, we paid $4.9 million in common stock dividends. The board has declared a quarterly dividend of $0.12 per share for fiscal Q2 2027, payable December 31st, to shareholders of record on December 15th, marking our 53rd consecutive quarterly payment. As we move through fiscal 2027, our financial priorities remain focused on maintaining liquidity, managing leverage, and deploying capital where we expect attractive returns per share. The growing contribution from our recent mineral and royalty investments that don't require any CapEx, combined with expected farm-out proceeds, support our focus on reducing borrowings while continuing to return capital to shareholders. I'll now hand it back over to Kelly for closing comments.

Thanks, Ryan. As we move through fiscal 2027, our focus is on realizing the returns from the portfolio that we have already built. We're encouraged by the early performance of our recent investments and the opportunity ahead while recognizing that the measure of our progress will be the cash those assets generate for shareholders. We will remain disciplined in how we commit capital, with debt reduction and sustaining our quarterly dividend at the forefront of our decisions. We appreciate your continued support of Evolution and look forward to updating you on our progress. I just want to say thank you and happy Veterans Day to all of our vets out there. With that, I'll turn it back over to the operator to begin the Q&A session. Thank you.

[Operator Instructions] The first question today comes from Jeff Grampp with Northland Capital Markets. Please go ahead.

Hey, morning, guys. Want to start on the Permian. I know it's super early here, but just curious how the performance thus far has been relative to the underwriting model. I know you guys were expecting that asset to grow, and it seems like that's playing out. But just kind of curious how that's tracking in early days. And if you have a rig count on the assets, that would be interesting as well. Thanks.

Hey, so Jeff, it's Mark Bunch. And so far, like, at the rate we're converting, it'd be almost like we'd be converting it around 200 wells per year. So we're actually really quite happy because we actually didn't underwrite on anything, you know, that large. And I'll let Ryan answer that.

To the question about the rig count, yes. So we're still, Jeff, we're still running 8 rigs currently out there. Double Eagle's got 4, Exxon's got 4. The other interesting thing is even since the end of the quarter, we've seen upwards of 30 to 40 permits actually been filed here since the end of the quarter. Diamondback actually filed some new ones on our acreage here in the last couple of weeks, and Apache still got a few out there. So we definitely think even beyond Double Eagle and Exxon, there should be some other guys moving rigs in soon.

Yes, and hey Jeff, this is Kelly. I mean, one of the things, right, we can only want to include production that we actually know, right? So we got information on 21 wells that were converted. We have another 6 that we know are on production, but we didn't have information on, so we couldn't include any results from those. So that 218 could be a little understated, frankly.

Understood. That all sounds really good. I appreciate the details. For my follow-up, kind of a bigger picture question, I guess have a slide in the new deck, I think kind of targeting like 20% pro forma cash flow coming from minerals and royalties, kind of curious like based on this quarter's results or maybe looking forward a couple of quarters like where does that trend over time, given that the royalty stuff seems to be the faster-growing of the asset base today?

Yes, and you sort of put the nail on the head. You said today, right? So as we currently speak, I do think we continue to see some highly accretive opportunities there. So, look, just naturally with a couple of the assets that's growing and a couple having natural declines, it should grow just on its own without us doing anything else. So we do see that growing over time. But also, look, with where we are right now, the competition for dollars to pay down debt—we'll talk to the board about maybe even a share buyback—it gets pretty stiff. So any new acquisition is going to have to look really good.

Yes, Jeff, I don't think, you know, the 20% number, I think, obviously, you still feel good about, and we're probably close to that. You know, obviously, going forward, some of it's going to depend on performance of legacy assets versus drilling pace in the Permian, right? So, we still think kind of that 20% number right now kind of makes sense, but obviously subject to change as we see how the other assets perform.

Understood. I appreciate the time, guys. I'll turn it back.

The next question comes from Jeffrey Robertson with Water Tower Research. Please go ahead.

Thank you. Good morning. Kelly, to follow on your previous discussion, and from a high-level perspective, how much exposure or organic growth exposure do you think the minerals portfolio gives to help offset natural declines on the legacy non-op working interest assets? And, again, with the mineral interest adding volumes at zero CapEx and virtually zero LOE.

Right. Well, if you model it out in a static sense, it gets a large part of the way there. I don't know that it gets all the way there. You know, a lot of it will depend on, you know, are we starting from this level with the legacy assets and the working interest assets and what they produce and how are they going to perform. It's, you know, a couple of the assets didn't perform as we might have wanted. We think we have some real fixes, certainly in the Tex-Mex area. And, you know, with Delhi sort of remains to be seen with more compressors down during the quarter. And so you just don't know what exactly it's going to do from there. But I think, overall, we're pretty excited and it goes a long way towards holding production flat without any additional CapEx.

Yeah, I mean, I think as we've said in the past, given the delta on production from buying royalty assets versus working interest, just what we said today, you could see production decline some, but cash flow is going to remain pretty strong. So obviously depending on the power strip, we do think that the addition of the assets can certainly go a long way to replacing the cash flow loss from decline in our legacy assets.

Yeah. Right. And that's more how we look at it, really, is what is the cash it's going to produce.

On the Williston farm-out, pardon me, did the operator give any indication of their commitment toward drilling the wells that they purchase?

Then yeah, the new operator, yeah, they actually have to have—it's written such that they're required for a drilling commitment. So, yeah, everything's—those wells, as you know, are on their drilling schedule. Jeff, I'm glad you brought that up. I mean, that's something we're really excited about. If you recall, when we first bought this, there were 350-ish plus identified locations that were probable, possible, sticks on a piece of paper, but for the right sort of drilling cost and for the right commodity price environment, those are very real possibilities. And a bigger company with a continuous drilling program that can get these drilled at much more efficient cost than we and our small partner up there, these start to make a whole lot of sense. And we've seen activity, as we mentioned in the past, moving towards us, and it's allowed us to be part of a bigger group here and retain that override as well as get some cash up front. And, you know, I think we alluded to this. We have 40,000 acres in that area. This was 636 acres. And I'm excited to see what comes down the pipe as the activity and results come in and we were talking to others that have approached us. So, and to the point like as we make other deals in the future out here, they'll always have a drilling commitment associated with them, especially if we have like an override, because obviously why would you keep an override if you didn't sell out and have no recourse? So there's always going to be some sort of drilling commitment when you make one of these farm-out deals.

So you can convert long-dated drilling development activity into the mineral and royalty portfolio after they drill the wells and you collect on your overrides?

And also just allows for the fact that we're not completely selling out our acreage. If they, for some reason, like not to drill or perform, then our acreage comes back to us. We just don't want it to disappear. We want it to—we only want it to, you know, become, shall we say, like convert to an override if the case is they actually perform and drill wells.