Randy Keys - CEO

John White - Roth Capital

Thank you for standing by. This is the conference operator. Welcome to the Evolution Petroleum First Quarter Fiscal 2018 Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn the conference over to Randy Keys, CEO. Please go ahead.

Welcome to Evolution Petroleum’s earnings presentation for our fiscal first quarter ended September 30, 2017. We will discuss operating and financial results for the quarter. I am Randy Keys, CEO of Evolution Petroleum. Please note that any statements and information provided today are time-sensitive and may not be accurate at a later date. This presentation contains forward-looking statements of management’s beliefs and assumptions based on currently available information. These forward-looking statements are subject to risks and uncertainties that are described in our filings with the SEC. Actual results may differ materially from those expected. Evolution reported another strong quarter of financial results for the three months ended September 30, 2017. Our net income was $2.1 million on total revenues of $8.5 million, which gave us earnings of $0.06 per common share. If we look back to the same quarter a year ago, the industry was just recovering from the low point of its downturn. Oil prices had come up from levels below $30 per barrel and we are in the range of $45 per barrel. Our revenues in that quarter were $7.6 million and we reported earnings per share of $0.02, after adjustment for final dividend and redemption of our preferred stock. Toward the end of this quarter, we’ve seen prices for crude oil, natural gas liquids and the premium for Light Louisiana Sweet or LLS, all move in the same positive direction. Our outlook for meaningful increases in revenues and cash flows appears very favorable at this point. Last quarter, we announced an increase in our quarterly dividend to $0.075 per common share and we announced the same dividend for this quarter. We’ve now paid 16 consecutive quarterly dividends and have authorized the 17th, payable at the end of December. At our closing stock price yesterday, our dividend yield was 4.3%. Our balance sheet remains very solid and we are well-positioned to continue development of the Delhi Field and also to capitalize on new growth opportunities. During the quarter, we recorded revenues of $8.5 million at an average oil price of just under $47 per barrel. Our total operating costs were $6 million, resulting in income from operations of $2.5 million. Of these costs, our non-cash DD&A expense was $1.5 million and out stock-based compensation was $0.5 million. So, our earnings before interest, taxes and DD&A was $4.5 million. Our tax expense for the quarter was $0.4 million, based on an expected combined state and federal tax rate for the year of 15.4%. Based on our current projections for taxable income for fiscal 2018, we expect to receive a significant benefit from our carryovers of percentage depletion in excess of basis. We received a benefit equal to 34% of these deductions which reduces both our cash and book income taxes. They offset up to 65% of our taxable income in any given year. We have been accumulating these benefits over the past several years and entered the current fiscal year with a carry forward of $7.2 million. At $50 oil prices with our current asset base, we also generate approximately $2.6 million of new percentage depletion benefits per year. Our current forecast shows us utilizing approximately $7.6 million of these deductions in fiscal 2018, ending the year with a carry forward of approximately $2.2 million. This results in a very favorable tax rate and lower cash taxes in the current fiscal year. We reported net income of $2.1 million, which was $0.06 per common share in the quarter. Our average oil price for the quarter was $46.96 per barrel, which was virtually flat with the prior quarter. Our net realized pricing in the Delhi Field has been improving over the past two quarters and our realized price was only $1.24 below the WTI price as quoted on the NYMEX which was $48.20 per barrel. The majority of this improvement results from a significant increase in the premium of Light Louisiana Sweet or LLS over WTI pricing. During most of fiscal 2017, this premium was around $1.67 per barrel. It has now widened dramatically to the $5 to $6 range. We saw a small part of this benefit in the September quarter. However, in October, we actually saw our net realized pricing move from a discount to almost a $1 premium to WTI. And with WTI prices now in the range of $57 per barrel, we are poised to see a very nice improvement in our crude pricing and revenues in the next quarter. Despite lower production in the quarter, our cost per equivalent barrel of production also dropped from $16.67 per barrel to $15.06 per barrel. This brings us closer to our recent trend line and results in a substantial field operating margin of almost $32 per barrel, and this is 68% of revenues. Even at WTI price levels below $50 per barrel for the quarter, the Delhi Field remains solidly profitable. And with a large part of our operating costs relatively fixed, the majority of any commodity price increases will directly increase our operating margin in the field. After seeing a spike in our purchased CO2 in the June quarter to 85 million cubic feet per day, we dropped back to levels more consistent with our prior quarters at 69 million cubic feet per day. This drop in purchased CO2 costs accounted for about $200,000 of our $0.5 million reduction in LOE relative to the prior quarter. We also saw lower costs for power, chemicals and maintenance costs in the current quarter, each of which was over the trend line in June compared to prior quarters. With regard to the $0.5 million of incremental NGL costs, one component of that increase was purchased gas to fuel the electric turbine. Since the plant was operating at less than full capacity, it was not producing enough methane to run the turbine at an optimum rate. And this required us to buy a third-party gas to make up the difference. With the NGL plant now operating at essentially a 100% of capacity, we no longer need to purchase any significant volumes of natural gas. We expect this to be reflected in cost savings in future quarters. Our G&A expenses have come down dramatically over the past five quarters, now that the litigation settlement has been resolved. Our normalized cash G&A is continuing below $1 million per quarter, which is our target. We mentioned in the press release that we had a reduction in our headcount as we continue to streamline our operation in light of our current asset base. This moved our cash G&A cost for the quarter slightly above our target but we expect those costs to come down below $1 million next quarter. Evolution began paying a quarterly cash dividend on common stock in December of 2013 and has now paid 16 consecutive quarterly dividends. Today, we declared our 17th at the current rate of $0.075 per share. Our cumulative return to shareholders now totals over $37 million or $1.13 per common share. Over the past four quarters, we have increased the dividend from $0.05 per share to its current level of $0.075 per share. This is $0.30 per share on an annual basis. Management and the Board remain committed to returning cash to shareholders in the form of a common stock dividend. The Delhi central CO2 processing facility is a very large operation with the new NGL plant located on the western side of the facility. The central facility handles the compression and injection of almost 300 million cubic feet of CO2 per day while also processing the oil and water produced from the field and returning over 200 million cubic feet of recycled CO2 for reinjection into the field. The NGL plant at full capacity is designed to process a 150 million cubic feet of this recycle stream. Our goals with the NGL plant were threefold. First, the plant removes methane and ethane for field use to generate electricity with a gas-powered turbine. Second, it cleans and purifies the CO2 stream, the reinjection into the field which we believe will increase the efficiency of the CO2 flood and ultimately increase oil production. Lastly, the plant generates an additional revenue stream from the production of higher valued natural gas liquids for sale. Our next step in the field will be an eight-well infill drilling program which we expect to kick off in early 2018. As we mentioned in the press release, we may see this program and keep increase to 12 wells which was the original plan. The operator had reduced it to eight last year based more on capital constraints than technical or economic considerations. The NGL plant was commissioned in late December and commenced operations in January of this year. By early February, the plant was producing at about 70% of capacity. Over the next couple of months, we identified certain issues which needed to be fixed in order for the plant to reach full capacity. This is not uncommon with new processing plants with this level of complexity. During the summer, a solution was conceived and engineered which involved a capital modification to the inlet of the main recycle facility. We are pleased to report that this operation which was executed in August, has been successful in bringing the NGL plant to 100% of throughput capacity. This appears to have resolved the issues that were limiting processing volume. The NGL production has also increased to current rate at or above 1,200 barrels of liquids per day. The plant has been producing a very rich mix of liquids. This quarter, we saw the yield of higher value pentanes and heavier liquids increase dramatically. These products which we referred to as C5 and sometimes called natural gasoline, sell at a price very close to WTI, generally 90% or better. In the current quarter, that price was approximately 96% of WTI. And we have also seen improvement in the pricing of our other NGL components. In addition, we made progress in resolving a product quality issue that had led to a reduction in our net pricing. Our net NGL price increased by over 45% from the prior quarter, from $19.31 per barrel to $28.07 per barrel. This resulted from the combination of all three factors; improving market prices, a significant improvement in the yield of higher value products, and progress on meeting the purchaser’s quality specifications. This concludes our review of financial results and operations for the September 2017 quarter. In summary, we reported positive net income of $0.06 per common share, continuing cash dividends on our common stock at the rate of $0.30 per share on an annual basis, an encouraging commodity pricing environment that bodes well for increases in our future revenues and cash flows, and a successful resolution of many of the early challenges with the NGL plant. Since we’ve completed the plant upgrade in August, the NGL plant is now operating at substantially full capacity and efficiency. Our liquidity position remains very strong with working capital of $24.4 million at the end of the quarter, substantially all of which was cash. We paid out $2.5 million in common stock dividends for the quarter. We retired all of our preferred stock and have no debt on the balance sheet. We are in an enviable position to look at new growth opportunities. Thank you very much for your interest in Evolution Petroleum.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from John White with Roth Capital. Please go ahead.

Good morning. Can you hear me okay?

You bet. John, good morning to you. How are you?

Yes. I am good. Nice quarter. And your last couple of remarks on the NGL pricing, certainly, I noticed that you really beat me on realized NGL prices. So, looking forward to that going forward. Also on slide seven of your handout, I noticed the electricity -- Delhi lease operating costs, electricity and power had a big drop from 378,000 to 314,000. Is that due to the getting some power from as a result of the turbine?

We believe part of it is, and frankly we are hopeful that we will see a continuing decline in the next quarter because really the modifications to the NGL plant were not completed until half way through this current quarter. If you look back a little further on the trend line, it’s -- we’re still not dramatically below the typical cost for the field, for the recycle facility. But yes, the answer to your question is, we are hopeful, we will see those power costs continue to go down and we are -- in the daily reports that we get, we are delivering power over to the recycle facility. So, we are offsetting part of the electricity needs of that field right now and have been since this upgrade was completed.

Okay. Well, thanks a lot and congratulations on the financial results.

Thank you, John.

[Operator Instructions]. This concludes the question-and-answer session. I would like to turn the conference back over to Randy Keys for any closing remarks.

Well, thank you very much for participating in this earnings conference call. We did have a very solid financial quarter. And we are excited about the infill drilling program which we think will kickoff shortly after the first of the year. We think that can add some meaningful increases in oil production. So, thank you very much for you interest in Evolution, and have a nice day. Thanks.

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.