Good day, ladies and gentlemen, and welcome to the Evolution Petroleum Second Quarter Fiscal 2021 Earnings Release Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Ryan Stash. Sir, the floor is yours.

Thank you. Good afternoon, everyone, and welcome to Evolution Petroleum's earnings call for our second quarter of fiscal year 2021. Today, we'll be discussing operating and financial results for the quarter. Joining us for the call are Jason Brown, President and Chief Executive Officer; and myself, Ryan Stash, Chief Financial Officer of Evolution Petroleum. If you wish to listen to a replay of today's call, it will be available shortly by going to the company's website or via recorded replay until March 6, 2021.

Thank you, Ryan. Good morning, everyone, and thanks for joining us today on Evolution's second quarter fiscal 2021 earnings call. We appreciate your continued interest in and support of our company. I'd like to start by welcoming our new CFO, Ryan Stash, to his first earnings call with Evolution. I would also like to thank him and particularly, David Joe and the rest of the team for their diligent work in making this such a seamless transition. With the company's focus on growing through acquisition opportunities, Ryan brings a nice skilled set of investment banking experience to that effort. We have been encouraged by the recent increase in commodity prices. However, COVID-19 pandemic is not yet in the rearview mirror and continues to disrupt all of us in many ways, which keeps volatility in the price of crude. The delicate balance of supply and demand continues to be uncertain as evidenced by the futures market. While we cannot predict the duration of such volatility, we are welcome -- we are well positioned to weather these times as we've done this past year. We have continued to focus on managing costs and maintaining our balance sheet to protect us and ensure the long-term sustainability that our investors are accustomed to. Although we had recently completed our full credit line determination of $23 million in a three year extension, you may have seen in our last Q that we were somewhat limited in our ability to draw on it due to some covenants related to trailing commodity prices. Ryan wasted no time in adding value to the company by negotiating our sixth amendment with our lender, giving us full access to our credit facility. This, along with our $19 million of cash on hand will primarily serve to support our continued acquisition strategy, which I'll discuss in more detail later on the call.

Thanks, Jason. I'll now share some more details regarding our financial results for the second quarter ended December 31, 2020. Please refer to our press release filed yesterday afternoon for additional information and details for the full fiscal second quarter 2021 and look out for our Form 10-Q to be filed likely later today. Now I'll hit some of the financial highlights for the second quarter. As Jason mentioned, we paid our 29 consecutive quarterly dividend on common shares and increase the next dividend payment by 20% from $0.025 to $0.03 per share. Revenues, as Jason mentioned, increased by 3.1% over the prior quarter to $5.8 million. We generated cash flow in excess of the quarterly dividend before the effects of our hedge payments and ended the quarter with $19 million in cash and no debt. We also amended our credit agreement to incorporate a more flexible current ratio covenant that gives us access to the full borrowing base. In December, the last of our hedges rolled off, which had been adversely impacting our recent results. As Jason mentioned, also, these hedges serve their purpose and protected our balance sheet, but we are the 1,797 BOE per day due to decrease in production in the Delhi field related to the shut-in of the CO2 line, as we've discussed, and a lack of performance capital. As Jason discussed, with the resumption of the CO2 line and increased conformance work, we hope to see production numbers improve gradually over the coming quarters. We are, however, encouraged to see continuing price improvement on the realized prices for NGLs. Realized NGL prices were up 36% this quarter for an average price of $12.36 per BOE. Lease operating expenses increased 25% to $3 million in the second quarter compared to $2.4 million in the prior quarter. This increase is entirely driven by the resumption of the CO2 purchases at Delhi. All of their lease operating costs remained unchanged at $2.4 million. We would, however, expect to see some increases to lease operating expenses at Delhi in the coming quarters, now that the CO2 purchases and conformance workovers have resumed. Due to the depressed oil price environment we experienced in March through May of 2020, our ceiling test for the book value of our properties was adversely affected. Therefore, we recorded a $15.2 million noncash impairment during the quarter as a result of the capitalized cost of oil and gas properties exceeding the full cost valuation ceiling. Further prescribed accounting rules of the full cost method of accounting, quarterly ceiling test is performed and calculated using the trailing 12 months first day of month average prices. The ceiling test impairment was primarily driven by a decrease in this 12-month trailing average price for crude oil used in our ceiling test from $43.63 per barrel in September 30, 2020, to $39.54 per barrel at December 31, 2020.

Thanks, Ryan. As I mentioned before, we continue to invest our time and attention into developing a collaborative working relationship with both of our operators, and they're starting to see fruits from that effort. We just had our annual working interest owners meetings with both operators and are encouraged by their plans for 2021.

Yes. John White, ROTH Capital. First, congratulations to Ryan for joining the team. It's a great move. And congratulations on the dividend increase and your true to your heritage and your management style, you're raising the dividend very cautiously. And in this environment, I think that's a good thing. Could you give us -- is there any additional comments. And I got on the call kind of late, but the amount of -- how do you see the amount of CO2 injection volumes progressing over the rest of the calendar year?

Sure. It's a great question, John. And thanks for the -- we saw the write-up that you did for us as well, covering him. I'm always surprised how well you guys, you and Jeff and many other analysts have us pegged pretty well. So we appreciate the coverage. CO2 has been a constant conversation with Denbury. And they've had some issues at Jackson Dome. They've got three main facilities up there, and it's just kind of everything has been worked over the last few months. So they're kind of making all of the different fields share some CO2. So we'd like to have 85. We'd like to have 95 or 100 right now, but we're limited to about the 75 range. I think that we'll see 75 pretty consistently throughout the spring and the summer. Their repairs are going to be finished before the summer. But in the summer, as you know, with the warmer temperatures, we have a visibility issue with CO2. So it's not the right time to kind of ramp up to what I would call some makeup CO2. I think we would expect that to come on maybe in late September or October when temperatures start to break. And then I think most of the winter next year, we'll see in the 100 to 110 Mcf per day of CO2. It's capable of running about 125, but I don't think we probably will run it that hard. But that should give us all through late '21 and through '22, quite a bit of makeup gas. And I would anticipate that reservoir pressures are going to continue to rise. We'll make up quite a bit. And we've seen some effects already, the softening of the decline. We probably won't give to reservoir pressures to where it was last February for, I would say, at least a year. That doesn't mean that production is going to fall off. We would expect production to climb as it's already kind of softened and arrested. Does that make sense?

Yes. Indeed, that's a very, very nice detail.

Your next question is coming from Jeff Grampp. Please announce your affiliation then pose your question.

It's Jeff Grampp with Northland. Just kind of curious to get an updated number from you guys. And it sounds like from the release and I think in your comments that there's still a little bit of either curtailed or shut-in production on either maybe both assets depending on how you want to characterize that. Is there any way to quantify or kind of get a handle on what's kind of left, if you will, in terms of kind of incremental production that could be added, given kind of the rally in prices and a return to normalized operations?

Yes. It's a good question. Let's start first at Hamilton Dome. It's a little bit easier. We are excited that they're turning on, I think, 11 wells, 4 in January and 6 in -- I'm sorry, 4 in January and 7 in February. It's kind of a guess of where those are going to come on, but they're estimates where the other ones have come on and kind of a risk thing is somewhere in the 100, 110 gross. So what would that be about 5%, 6%. I think we're making about 1,900 and some of the barrels a day there. So that should push us over the 2,000 mark. I think before everything went down, we were in the 23, 50, somewhere around there. So we're not all the way back yet, but that's going to be a nice step towards that goal. So -- and that's going to happen pretty immediately. And the other thing I'd say up there is that the -- we've seen the differentials tighten a little bit through this whole process, which is nice. I think somewhere in the $12 range, all in, off of WTI. So generally, at this time of the year, that tends to blow out, but that's been kind of a nice silver lining to this whole process. I will make one more comment about Hamilton Dome, and that we've seen some recent regulation changes on -- particularly on BLM land and BIA land in terms of permits and drilling, all that kind of stuff. Hamilton Dome is on BLM land, but none of that affects us. It doesn't affect any current operations. We certainly aren't doing any leasing up there or new drill wells. So none of that's affected us. All right. Moving on to Delhi in terms of projects. We were -- as you probably heard in my voice, we were really thrilled to have some conformance projects. There's three that have already been approved, and they will begin pretty quickly. Actually, our technical team, that whole dynamic has changed a little bit. Our technical team invited to meet with their technical team. Sort of we have geologists. We've been doing work there, too, to be part of the process in selecting conformance projects to kind of go back and forth between the two teams and it's really healthy discussion. In fact, we were on the phone for 1.5 hours this morning, talking about an additional two those three, which would make 5 that I think probably are those two are now going to be pushed up for approvals, but that's pretty high probability. So we didn't have any conformance projects in 2020 and none in the second half of 2019 calendar. So I think the last conformance project they did was a month before I started in July of '19. So that's going to be great. So aside from the conformance projects, each of which have their own kind of potential of adding barrels, and we'll be pretty happy about that. In terms of just the normal -- it's not really curtailed at Delhi. It's just the production is down from a lack of pressure support, and that's going to be a slow rise back up. Like I said, we've kind of curtailed it. I think right now, were about 4,400 barrels a day in February 22. So last year, when the CO2 line went down, we -- I think we're at 5,600 barrels a day. So we've got a wedge there that we've got to make up. It's basically a loss from that, the CO2 line being down. I would anticipate it's going to take us probably at least at least a year, maybe 1.5 years to get back to those levels. And it might take some conformance projects to get us there. Hopefully, that's directionally pointing in the right direction. We don't really give guidance. But we're certainly hoping that, that production starts to ease up and then the conformance would add to it as well. So you on the ballpark.

Yes, that's really helpful. And definitely appreciate the federal commentary at Hamilton Dome. That's helpful. Switching over on the acquisition side. Can you maybe just give us maybe a little peeling that onion back a little bit more is bid-ask narrowing, I guess that's kind of my default assumption given what pricing has done, that maybe helps kind of narrow things for buyers and sellers. But conversely, our potential sellers may be feeling a little bit more confident and maybe there could have been some distress that maybe some folks are getting bailed out. Just kind of curious, those kind of playing dynamics and what you're seeing.

Yes. I'll take it first and I'll let Jason follow-up, too. Jeff, I mean, I think we're seeing -- as soon as the first of the year hit, we've seen an increase in sort of volume, if you will, of marketed deals going to coming out and a lot that actually we think fit us pretty well, too. So it's good to see that increase in sort of confidence, if you will, on the seller side. So we are seeing that. That's currently happening out there. As far as bid-ask spread, look, I mean, we're -- obviously, we've seen a few deals you guys have followed just like we have. So things start to loosen up out there. I do think the bid-ask spread is coming in. I think as people get more confident in the forward curve, you're just naturally going to see buyers and sellers come in agreement. I think you have seen some deals of kind of sellers like Earthstone and Warberg taking stock to participate in any sort of upside. So I think that's a trend you're going to continue to see. So northern put out something last night, right? We're relying to some warrant. So I think that's the other trend you're seeing as people being willing to take stock now in this market to kind of ride the -- hopefully, the wave of increases with sentiment and pricing. Jason?

Yes. Sure. We deficit the process, and the bid-ask has been the thing that's really plagued our industry for a long time. I would say, overarchingly, definitely seeing that tighten. We're seeing people that have kind of been kicking the can down the road trying to figure out what to do. And it looks like there's some light peaking through the clouds right now. And we're seeing people motivated to take advantage of that. Because the volatility is still there. The forward curve still goes down in the future, which just represents that people just not quite sure how things are going to shake out with post-COVID and what the economy looks like afterwards. We like the kind of $50 flat range. We think that's a pretty good buying range, which the strip is pretty darn close to that right now. I would say that we took a pretty good swing in the fall, and we got really close. We were there on price. Unfortunately, there were a lot of wellbores and a lot of liability, and the contract was pretty gnarly. And as a public company, we can't get stupid. So there's more than just price that's involved here. But I would say over the last 6 months, we've took a pretty good swing on three, four deals. And some of that is the Board getting comfortable with management's assessment back and forth, and we're starting to get into a groove where we understand where we need to be, and we're all collectively motivated to grow the company, and that's been very good. And that takes a while to build that traction and track record with each other, really. So I feel extremely confident right now. And we're -- I think that we're kind of getting to that place internally with the singular motivation at the right time with some deals coming to us. And like Ryan mentioned, being able to trade some shares, it's all on the table now, and we've kind of universally agreed with our Board and our management. Their cash, at some level, modest level of debt, not more than a turn. And our paper are all on the table to be able to grow the company.

Your next question is coming from Erik Volfing. Please announce your affiliation then pose your question.

This is Eric with Grand Slam. Thanks for taking my question. Congrats on a solid quarter there. So you talked pretty well there about the M&A opportunities, which is really what my question was about. Could you maybe talk a little bit more about at what stage the board gets involved? Is it sort of after you've done preliminary work? Or are they involved quite early? Or are they actually sometimes helping you source? What's their role?

Yes. There's certainly avenues of deal flow. But I think generally, the process is -- we see everything that comes in. You've got to have presence with all the investment banks, all the people, the large, the RBCs and the Jefferies and the larger shops that are doing deals, but also the smaller ones that have popped up that have been doing good work. The Detrings and the Tennant Oaks and those sorts of Energy Net. And we see everything that comes in, we have to move very quickly, and we've got some defined screening tools pretty fast to be able to weed them out. We've been having an investment committee meeting for the last 6 months, once a week, which is unusual. We formed an investment committee about a year ago, but that just shows the dedication the Board has to looking at this. So that process has been quickened, I guess, because the Board is aware of these deals even earlier in the process. Now deals that you would normally want to get pretty far along before you spend a lot of technical time on. I tend to jump the gun on that a little bit, and we do quite a bit of technical work over the holidays as we jumped a gun and got some logs and digitize them. I had petrophysicists correcting all of them to core labs. We're doing pretty solid. I'm very happy with the way the team has come together, doing very, very solid reservoir and geologic and petrophysical work to understand these reservoirs. You've got to stretch a little bit to get something across the goal line. Nobody really wants to sell when these prices are down and their valuations are down. But you can't be stretching on stretched engineering or stretched technical valuations. So we really focus on putting effort in that to make sure that we've -- all of the financials that Ryan is pulling in his model to look at what it does to us corporately and how we would structure capital to be able to get the type of returns we need to support our dividend. All of that standing on very, very firm footing technically, geologically and all the other ways. So that's kind of along the short of the process. And in the last 6 months, the Board has actually been pretty involved all through that process, kind of weekly getting an update of what's going on.

You do have a follow-up question coming from John White.

When you talked about I was going to ask about the conformance projects. But in response to your last bit of commentary with as long as I've known Bob and stretching on the engineering is the last thing I'm going to worry about.

There you go. But -- he and I get along very well on that. We take a hammer and beat it and make sure that we're not missing something. That's what makes this game a little bit difficult because you're always second guessing yourself. But we've got a really good team, and they're -- it's really starting to gel, and that doesn't come easy, putting a team together like that.

Your next question is coming from John Bair. Please announce your affiliation then pose your question.

John Bayer with Sun Wealth Advisors. Jason, Ryan, and I'm sure David is listening. I didn't get a chance on the last call to wish him good luck and congratulations on the retirement.

I'm sure he hears you. You heard my comment in the share. He just went over and above what he needed to do to help in he's still a dear friend of the organization. So a very, very helpful in Ryan, getting them up to speed. It was great.

Yes. I hope I can get down to Houston here for some time. And certainly, try to get a hold of him and gather. So anyway, do want to echo previous callers, congrats on the quarter and the dividend increase, of course, and several of my questions have been answered as far as the CO2 purchases and so forth. But a couple of other questions. Going around to the M&A. You previously indicated looking at some more gas centric acquisition possibilities. Is that still in the mix? Or is it sort of whatever's best that comes along, we're going to grab it? Is that -- does that make sense?

It does. And I would probably reiterate that a little bit. Our gas interest is pretty narrowly focused. There's a lot of things that I like about gas that are very evolution-esque in that it's a long life, it's very low lifting cost and generally, it's very flat. So it has that long life nature that works really well for us. However, gas is super sensitive to midstream marketing, transportation. So it really is in all-in the midstream marketing game. So our efforts, and we're looking at gas projects. In fact, I was looking one this morning. They got to be really close to the -- let's just say the carthage pipeline going up East Texas to get over to Sabine Pass, we would probably look at something in the Barnett in East Texas. You start getting into Oklahoma, you start getting further away. There's just too much transport to get it to anywhere that it's going to be a sustainable market, i.e., an LNG type of market. And I know that's been a little bit deflated right now, but that's the long-term goal for gas. If you get over to Eagle Ford and West Texas and whatnot, there's too much associated gas coming in to compete with over there, and I think you're going to get deflated on price with all the people trying to produce oil and producing the gas as a side product. So does that give you any -- we like about it, but it's got to be pretty special.

Sure. Got it. And then in the past, you mentioned you get a bit of a premium for your Louisiana suite, is that still holding up in that regard?

A really good question, John. No, it's not. It is. In fact, it's a couple of bucks, $1.60 to $2 over. I think we probably anticipate for the next year, at least through '21, probably the first half of '22 is probably going to hang somewhere in the $1.60 to $2 above WTI is what LLS would trade at. That being said, our transport are all-in is about $3.30 to $3.40 off of that price. So right now, we would be about $2 -- $1.50, $2 under WTI net back. So just as a point of reference, we generally have been, I think, last year's reserve report was $1.65 over WTI. So that wouldn't mean that LLS was, what, $5 over WTI. So our net back $3.40 would still have us $1.65 above WTI. So that's been quite a bit of a hit, not only oil price but also the differential. So that you're asking the right question to kind of see what that translates to revenue for us. I think I would anticipate probably our marketing consultants, we work with a company called ARM, pretty well-known here in Houston to kind of look at marketing forecast. I mean, it's probably going to be in that for us, $1.50 realized all-in, after our transport and gathering and everything, $1.50 to $2 under. What do you say, Ryan? Somewhere in there?

Yes, that's right. Obviously, dependent on factors for LLS, as Jason mentioned. I mean, what we pay is fairly -- it's fixed, right, on the transport basis, but we're subject to how LLS moves compared to WTI to the extent that improves, obviously, we're going to see better pricing relative to WTI.

Okay. And then one last quick question. Unfortunately, one of the headwinds that you all face and the industry faces, of course, is ESG. And I'm just wondering, given that these fields are older and so forth. Do you have any issues with or addressing anything in regards to like methane escape and so forth, where that could potentially be an issue down the road as far as higher CapEx that might not be really in the picture right now?

That's a really good question. That's something that our industry, in general, is going to have to face now as seems like the growing tie in the quarter of public opinion is going one way, regardless of where we think a lot of those opinions are practical or not. We -- ourselves and our assets are in pretty favorable situation. So talking about Hamilton dome first. We're just not making any gas up there. So there's not really any VOCs going anywhere. Environmentally, the BLM has got a great relationship and merit runs an absolutely wonderful operation. So I'm not concerned about having to spend a lot of CapEx on things that would make that more environmental friendly. In Delhi, we're actually even in better situation. In Delhi, 30% of the CO2 that we buy comes from industry. So on an annual basis that's removing 750,000 cars from the road, that's fairly substantial. So I know that Denbury is looking at some carbon capture because they've got the infrastructure of CO2. We're getting a little bit of a benefit there being their partner in Delhi. But this was brought up at the Board, and I think we're going to focus some efforts as management, Ryan and I, looking at other ways that we can improve our ESG kind of some policies and anything that we can do to make it better. But overarchingly, we're actually in pretty good shape relative to speaking with other oil companies. And specifically to the question you're asking, which is a really good one. I don't see -- foresee any sort of CapEx spending that would be required to kind of get us to a better place, ESG wise. Ryan, do you agree with that, Ryan?

Yes. No, I absolutely agree. I mean it's definitely a focus at the Board level and no doubt, in the investing community, as you know quite well, just our industry is under the Spotlight right now, and ESG is kind of higher on our list to sort of address here in the near term.

Maybe you ought to change your colors from blue to green and using up all that CO2. And would just suggest as well that maybe on the website or whatever that maybe bring some attention to the fact that you and Denbury are utilizing CO2 and taking it, taking it off the market, so to speak. And just a thought.

You must have a bug in our boardroom, we're reworking our website this month. So -- and it's definitely going to include that now. So yes.

There are no more questions in queue.

All right. That was great. Thank you for your participation today. Please feel free to contact Ryan or myself with any other questions. I look forward to providing you with an update on our next conference call. It should be in early May.

Thank you. Thanks, everyone.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.