David Joe - SVP, CFO, Treasurer & Corporate Secretary Randall Keys - President & CEO

John White - Roth Capital Partners Bruce Brown - Brown Capital Management

Thank you for standing by. This is the conference operator. Welcome to the Evolution Petroleum Fiscal Third Quarter Earnings Release Conference Call. [Operator Instructions]. I would now like to turn the conference over to David Joe, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Good morning, and thank you for joining and listening to Evolution Petroleum's earnings conference call to discuss operating and financial results for its fiscal third quarter ended March 31, 2018. With me today is Randy Keys, President and Chief Executive Officer. If you wish to listen to a replay of today's call, it will be available shortly by going to the company's website. We have recorded a replay until May 16. Please note that any statements and information provided today are time-sensitive and may not be accurate at a later date. Our discussions today will contain 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 listed and described in our filings with the SEC. Actual results may differ materially from those expected. Since detailed numbers are readily available to everyone in yesterday's news release, this call will focus on key overall results, operations and an update on our plans for the remainder of fiscal 2018 and first half of fiscal 2019. I am now going to turn the call over to Randy Keys, President and CEO.

Thank you, David. Financially, we reported a very good quarter with solid earnings and cash flow. Our balance sheet remains strong with $28 million in positive working capital, most of which is cash, and no debt. And we continue to provide an attractive cash return to shareholders. We've now paid over $40 million in dividends since 2013, a total of $1.31 per share. Operationally, we got off to a bit of a rough start to the quarter, but we've recovered nicely and are now well on our way with the infill drilling program. The Delhi area experienced 12 days in January that were well below freezing and 6 days that were down in the mid-teens. This is unusual for that part of the country. Now our equipment in the field is normally able to handle freezing weather, but a series of small failures combined to shut down the field for several days in January. As we go through the first quarter earnings season, I suspect you will hear of other weather-related impacts on production among our peers. Despite the slow start, we reported over $10 million in revenues for the quarter. While we continue to show steady progress in the Delhi field, the big news for Evolution comes from the oil markets. With sales of crude oil generating over 90% of our revenues, recent increases in WTI and LLS pricing have been a boon for the company. The average WTI price in the March quarter was just under $63 per barrel, but we are now seeing prices above $70 per barrel. This is the first time since the downturn began in November of 2014 that we've seen prices at these levels. The 12-well infill drilling program in the Delhi field is going well. We have drilled 5 wells and completed 2 of the wells so far. The operator has been building out the infrastructure to connect the wells, and we expect to have several of them online by the end of May. The timing of production response from these new wells is a bit uncertain. As we began additional injection of CO2 from the planned 5 injection wells, there is typically a lag before we see a response in production. This delayed response may be shorter in our case since these wells are in the heart of the developed part of the field and are already under CO2 pressure. But we probably won't see a significant production impact in the June quarter. We will expect to see some new production in the September quarter and further gains from there. Capital spending so far this fiscal year has been modest. We only spent about $300,000 of our $4.8 million expected budget for the infill wells in the previous quarter -- in the current quarter. We expect to see spending ramp up in the June quarter based on the progress we're making with the infill drilling program. I'm now going to turn the call back over to David Joe for a recap of our financial results for the quarter ended March 31.

Thanks, Randy. My comments will be limited to a key -- a couple of key financial items in our quarter compared to both the year-ago quarter and prior quarter. Additional details will be available later today when we file our 10-Q. As Randy mentioned earlier, the company continues to be in great financial shape. In the quarter we continued the long trend of consistent financial results with positive free cash flow and the continued buildup of working capital, all the while distributing a quarterly cash dividend. In the current quarter, we ended with $28.4 million of working capital, an increase of almost $1 million from the prior quarter, after paying $3.3 million in common stock dividends. Our cash balance of $27 million makes up 96% of the working capital balance. We generated net income of $3.1 million or $0.09 per share. This compares to $2.3 million or $0.07 per share in the year-ago quarter. Adjusted for noncash G&A expense, earnings per share is $0.10. In the prior quarter, if you exclude the onetime $6 million impact of tax reform, net income is $3.9 million or $0.11 per share. Clearly, the lost production in the field caused by the weather event mentioned earlier, combined with an uptick in operating costs, were key factors in limiting net income in the quarter. Oil and NGL revenues were $10.2 million compared to $9.5 million in the year-ago quarter and $11.1 million in the prior quarter. As Randy mentioned, oil revenues account for in excess of 90% of our total revenues. The outlook for oil prices are continuing its strength and momentum into our fiscal fourth quarter, and we are on track to report record full year revenues. Production costs at Delhi increased about $0.5 million compared to both the year-ago quarter and the prior quarter, primarily due to both higher purchased CO2 volumes and increased CO2 cost, which is directly attributable to higher realized oil prices in the field. Despite this trend, Delhi field margins remained very attractive, and both the operator and Evolution intends to continue with planned field development and investments. Our total G&A expense, inclusive of noncash G&A, was $1.8 million, an increase of $0.6 million and $0.2 million compared to the year-ago quarter and the prior quarter, respectively. This was primarily due to nonrecurring legal expenses in final settlement of legal -- legacy litigation in a matter dating back from 2006. Lastly, the company continues to return cash back to the shareholders as the Board of Directors have declared this week a $0.10 per share cash dividend for the June 30 quarter. As a reminder, we also have in place a share buyback program, which will be utilized when market conditions warrant. In closing, the company remains in excellent financial condition with positive working capital, no outstanding borrowings on our $40 million credit facility and remains debt-free. We believe that our current liquidity, combined with expected operating cash flows, will be more than sufficient to fund the company's anticipated capital needs at Delhi and anticipated dividends for the remainder of fiscal 2018 and into the first half of fiscal 2019. With that, operator, we are ready to take any questions.

[Operator Instructions]. The first question comes from John White of Roth Capital.

You may have already covered it, but did you provide some -- or can you provide some color on the increased CO2 volumes?

Yes. We gave that in the detail of the press release, in one of the schedules, and I'm struggling to find it right now. I believe we were 75.7 million a day for this current -- the most recent quarter, the March quarter, and that compares to 69.7 million on a sequential basis and 66.3 million. So we're up a little bit, about 5 million a day or more. The bigger impact has been the fact that our price for purchased CO2 is directly tied to the oil price. So we've seen -- as the price is going up, we've seen a higher cost for that. As we benefited from the higher oil price, we do give back a little bit of that in the form of higher CO2 costs basically.

Right. And you benefit -- when crude goes down, your LOE goes down for the CO2?

Correct. So it's a small natural hedge on the crude price, and it did make a big difference to us during the downturn.

Do you think CO2 injections continue with these volumes?

They will. And in fact, we'll probably see a temporary increase. As we start to pressure up the field with these new infill wells, we'll need to buy some additional CO2 to basically add to -- fill the tank for those new areas. It's not going to be -- I don't think it's a huge amount because, as I've said earlier, the field -- that area of the field is already under CO2 pressure. But we'll see some increase over the next few months, and we do expect that to taper back off and return to normal levels.

Okay. And so the increase would be experienced over latter part of calendar third quarter and calendar -- first part of calendar fourth quarter?

That's exactly right. Some time -- but broadly defined, some time between now and the end of the year. We'll start some injections as early as May, late May, so we may see some small increase in the current quarter, the June quarter. And then, throughout the balance of the year, we'll see some of that. We've got estimates of that, but they're subject to fairly wide uncertainty. So we just say we know we're going to have to invest in CO2, and that's kind of an implicit cost of this program.

[Operator Instructions]. The next question comes from Bruce Brown of Brown Capital Management.

Everything seems to be going well right now with not having hedged any of your production. I have two quick questions. Are you considering hedging with -- at some point with prices rising nicely now north of $70 on WTI? And secondly, how much production do you believe might have been deferred by the cold weather out of the first quarter?

Okay. To your first question, we have a robust discussion of that at every quarterly board meeting and occasionally, more often than that. We continue to be fairly bullish on prices and -- collectively as a board and have decided not to put on any hedges at this time. We don't have any major financial commitments. We have no debt. Our capital spending is modest. So basically, all we are doing with -- at that point with hedging is just trying to protect the -- or hedge the dividends, and we feel like we've got plenty of cushion there. Our dividend payout ratio is under 50% at current levels. So we don't feel a compelling need or risk there. So I think we look at it as -- I think it benefits our shareholders to retain that upside rather than have us basically sell that call away from them. And so I think, we -- our view is we're going to try to remain lightly or unhedged until such time as we have a change in our circumstances financially that puts on a different need -- puts on a different requirement for us.

And what about the deferral of production due to the cold weather?

Well, yes, it's hard to estimate that. It could be as much as 50,000 barrels on a gross basis, which is really not very much in the big picture with this field. We just -- we were down about 17% year-over-year on our production. So I just look at it as we'll -- we're pretty much back on our normal tracks now, and it was a temporary onetime event that we experienced with that.

[Operator Instructions]. There are no more questions at this time. I'll now hand the call back over to David Joe for any closing remarks.

Thank you again for your participation today, and contact us with any questions you may have. Have a good day.

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