Evolution Petroleum (EPM) - 2021 Q3 - Quarterly Report

Forward-Looking Statements This section outlines the inherent risks and uncertainties associated with forward-looking statements - Forward-looking statements are subject to risks, including commodity price changes and operating risks, and are not guarantees of future results[8] - The company does not undertake to update these statements other than as required by law[9] Part I. Financial Information This part contains the unaudited financial statements and management's analysis of financial performance Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements and accompanying notes for the period Unaudited Consolidated Condensed Balance Sheets This statement details the company's assets, liabilities, and stockholders' equity at the end of the period Consolidated Condensed Balance Sheet Highlights | Metric | March 31, 2021 | June 30, 2020 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $64,868,777 | $92,138,236 | $(27,269,459) | | Total Liabilities | $11,134,038 | $18,013,754 | $(6,879,716) | | Total Stockholders' Equity | $53,734,739 | $74,124,482 | $(20,389,743) | | Cash and cash equivalents | $17,039,538 | $19,662,528 | $(2,622,990) | | Oil and natural gas properties, net | $38,306,301 | $66,512,281 | $(28,205,980) | | Retained earnings | $11,479,592 | $32,800,080 | $(21,320,488) | Unaudited Consolidated Condensed Statements of Operations This statement presents the company's revenues, costs, and resulting net income or loss over the period Consolidated Condensed Statements of Operations (Three Months Ended March 31) | Metric | 2021 | 2020 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $7,635,748 | $7,712,619 | $(76,871) | (1.0)% | | Total Operating Costs | $6,655,143 | $6,760,805 | $(105,662) | (1.6)% | | Income (loss) from operations | $980,605 | $951,814 | $28,791 | 3.0% | | Net income (loss) | $1,191,001 | $3,710,159 | $(2,519,158) | (67.9)% | | Basic EPS | $0.04 | $0.11 | $(0.07) | (63.6)% | Consolidated Condensed Statements of Operations (Nine Months Ended March 31) | Metric | 2021 | 2020 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $18,999,276 | $26,246,449 | $(7,247,173) | (27.6)% | | Total Operating Costs | $43,358,657 | $19,770,852 | $23,587,805 | 119.3% | | Income (loss) from operations | $(24,359,381) | $6,475,597 | $(30,834,978) | (476.2)% | | Net income (loss) | $(18,654,154) | $8,267,897 | $(26,922,051) | (325.6)% | | Basic EPS | $(0.56) | $0.25 | $(0.81) | (324.0)% | - Nine months ended March 31, 2021, included a $24.8 million impairment of proved property and a $0.6 million net loss on derivative contracts, which significantly impacted the net loss[15] Unaudited Consolidated Condensed Statements of Cash Flows This statement reports the cash generated and used by operating, investing, and financing activities Consolidated Condensed Statements of Cash Flows (Nine Months Ended March 31) | Metric | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $2,559,382 | $12,233,464 | $(9,674,082) | | Net cash used in investing activities | $(2,508,690) | $(10,692,565) | $8,183,875 | | Net cash used in financing activities | $(2,673,682) | $(12,400,198) | $9,726,516 | | Net decrease in cash and cash equivalents | $(2,622,990) | $(10,859,299) | $8,236,309 | | Cash and cash equivalents, end of period | $17,039,538 | $20,693,234 | $(3,653,696) | - Operating cash flow was impacted by a net loss of $(18.7) million in 2021, compared to net income of $8.3 million in 2020[19] - Investing activities in 2020 included a $9.3 million acquisition of oil and natural gas properties, which was absent in 2021[19] Unaudited Consolidated Condensed Statements of Changes in Stockholders' Equity This statement details the changes in the company's equity accounts over the reporting period Changes in Stockholders' Equity (Nine Months Ended March 31, 2021) | Metric | June 30, 2020 Balance | March 31, 2021 Balance | Change | | :--- | :--- | :--- | :--- | | Total Stockholders' Equity | $74,124,482 | $53,734,739 | $(20,389,743) | | Retained Earnings | $32,800,080 | $11,479,592 | $(21,320,488) | | Additional Paid-in Capital | $41,291,446 | $42,221,640 | $930,194 | | Net loss attributable to common stockholders | N/A | $(18,654,154) | $(18,654,154) | | Common stock cash dividends | N/A | $(2,666,334) | $(2,666,334) | - Stock-based compensation contributed $938,093 to additional paid-in capital for the nine months ended March 31, 2021[21] Notes to Unaudited Consolidated Condensed Financial Statements These notes provide detailed disclosures and explanations of the company's accounting policies and financial results Note 1 — Organization and Basis of Preparation This note describes the company's business operations and the basis for preparing the financial statements - The company's core business is oil and gas property ownership, management, and development, aiming for a sustainable dividend yield[26] - Primary producing assets include interests in the Delhi Holt-Bryant Unit (CO2 EOR) and Hamilton Dome field (water injection), plus overriding royalty interests in Texas[27] - Significant estimates in financial statements include reserve quantities, asset retirement obligations, stock-based compensation, derivative fair values, and income taxes[29] Note 2 — Summary of Significant Accounting Policies This note outlines the significant accounting policies applied in the financial statements - The company prospectively adopted ASU 2019-12 (Income Taxes) effective October 1, 2020, with no impact on condensed financial statements[31][33] - ASU 2016-13 (Credit Losses) is effective for smaller reporting companies after December 15, 2022, and is not expected to materially affect consolidated financial statements[34] Note 3 — Revenue Recognition This note details the principles for recognizing revenue from contracts with customers Total Revenues (Three and Nine Months Ended March 31) | Revenue Type | 3 Months 2021 | 3 Months 2020 | 9 Months 2021 | 9 Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Crude oil | $7,076,965 | $7,461,823 | $17,918,909 | $25,281,564 | | Natural gas liquids | $558,642 | $250,476 | $1,079,868 | $963,054 | | Natural gas | $141 | $320 | $499 | $1,831 | | Total revenues | $7,635,748 | $7,712,619 | $18,999,276 | $26,246,449 | - The company is a non-operator and recognizes revenue when custody and title transfer to the customer, with post-production expenses embedded in the price[35] - Receivables from oil and gas sales were $3.5 million at March 31, 2021, up from $1.9 million at June 30, 2020, due to the lag between revenue recognition and cash receipt[38][40] Note 4 — Prepaid Expenses and Other Current Assets This note provides a breakdown of prepaid expenses and other current assets Prepaid Expenses and Other Current Assets | Category | March 31, 2021 | June 30, 2020 | | :--- | :--- | :--- | | Prepaid insurance | $52,727 | $289,999 | | Prepaid federal and state income taxes | $281,713 | $86,208 | | Total prepaid expenses and other current assets | $488,697 | $491,686 | Note 5 — Property and Equipment This note details the components of property and equipment and related impairments Property and Equipment, Net | Category | March 31, 2021 | June 30, 2020 | Change | | :--- | :--- | :--- | :--- | | Oil and natural gas properties, net | $38,306,301 | $66,512,281 | $(28,205,980) | | Total property and equipment, net | $38,318,510 | $66,529,920 | $(28,211,410) | - The company recorded a $15.2 million ceiling test impairment at December 31, 2020, and a $9.6 million impairment at September 30, 2020, driven by decreases in the 12-month average crude oil price[47][49] - Subsequent to the quarter, the company closed on an $18.2 million acquisition of non-operated oil and gas assets in the Barnett Shale[43][51] Note 7 — Accrued Liabilities and Other This note provides a breakdown of accrued liabilities and other obligations Accrued Liabilities and Other | Category | March 31, 2021 | June 30, 2020 | | :--- | :--- | :--- | | Accrued incentive and other compensation | $369,448 | $176,636 | | Accrued retirement costs | $131,965 | $0 | | Payable for settled derivatives | $0 | $265,188 | | Total accrued liabilities and other | $766,814 | $716,648 | Note 8 — Asset Retirement Obligations This note details the changes and composition of asset retirement obligations Asset Retirement Obligations Reconciliation | Metric | March 31, 2021 | June 30, 2020 | | :--- | :--- | :--- | | Beginning of period | $2,588,894 | $1,610,845 | | Liabilities incurred | $0 | $944,278 | | Liabilities settled | $(99,231) | $(86,592) | | Accretion of discount | $132,809 | $146,504 | | Revision of previous estimates | $91,430 | $(26,141) | | End of period | $2,713,902 | $2,588,894 | - Upward revisions for two difficult-to-plug Delhi field wells contributed $91,430 to the increase in obligations[55] Note 9 — Stockholders' Equity This note provides information on common stock, dividends, and share repurchase programs - Common stock outstanding was 33,507,452 shares as of March 31, 2021[56] Common Stock Cash Dividends Paid | Period | 2021 | 2020 | Change | Change % | | :--- | :--- | :--- | :--- | :--- | | Nine months ended March 31 | $2,666,334 | $9,916,841 | $(7,250,507) | (73.1)% | | Third quarter ended March 31 (per share) | $0.03 | $0.10 | $(0.07) | (70.0)% | - The share repurchase program has $1.0 million remaining, with no shares repurchased under the program during the nine months ended March 31, 2021[58][133] Note 10 — Stock-Based Incentive Plan This note describes the company's equity incentive plan and related compensation expenses - The 2016 Equity Incentive Plan was amended to increase available shares by 2,500,000, with 2,213,794 shares remaining for grant[61] - For the nine months ended March 31, 2021, non-cash stock-based compensation expenses were $938,093, compared to $926,794 in the prior year[71] Unvested Restricted Stock at March 31, 2021 | Award Type | Number of Restricted Shares | Weighted Average Grant-Date Fair Value | | :--- | :--- | :--- | | Service-based awards | 365,552 | $3.50 | | Market-based awards | 320,533 | $3.38 | | Total Unvested | 686,085 | $3.44 | Note 11 — Income Taxes This note details the components of the income tax provision and the effective tax rate Income Tax Provision (Benefit) and Effective Tax Rate (Nine Months Ended March 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Income tax provision (benefit) | $(5,730,701) | $(1,719,801) | | Effective tax rate | 23.5% | 26.3% | - The company had a $3.1 million receivable for income tax refunds related to Enhanced Oil Recovery credits for fiscal years 2017 and 2018[74] Note 12 — Earnings (Loss) per Common Share This note presents the calculation of basic and diluted earnings per share Earnings (Loss) per Common Share (Three and Nine Months Ended March 31) | Metric | 3 Months 2021 | 3 Months 2020 | 9 Months 2021 | 9 Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $1,191,001 | $3,710,159 | $(18,654,154) | $8,267,897 | | Basic EPS | $0.04 | $0.11 | $(0.56) | $0.25 | | Diluted EPS | $0.04 | $0.11 | $(0.56) | $0.25 | Note 13 — Senior Secured Credit Agreement This note describes the terms, conditions, and status of the company's credit facility - The borrowing base of the senior secured credit facility increased to $30 million as of March 30, 2021, from $23 million in November 2020[81][127] - The facility matures on April 9, 2024, and had no outstanding borrowings at March 31, 2021[80][82][126] - The company was in compliance with all financial covenants, including a maximum total leverage ratio of 3.00 to 1.00, a current ratio of 1.00 to 1.00, and a consolidated tangible net worth of not less than $50 million[84][128] Note 14 — Commitments and Contingencies This note discloses potential obligations and legal matters that may impact the company - The company discloses material losses if reasonably possible and accrues them if probable and estimable[86] - Legal defense costs are expensed as incurred[86] Note 15 – Derivatives This note provides information on the company's use of derivative instruments for hedging - The company had no open derivative contracts as of March 31, 2021[87][95] Net Loss on Derivative Contracts (Nine Months Ended March 31, 2021) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Realized loss | $2,525,988 | $0 | | Unrealized gain | $(1,911,343) | $0 | | Net loss on derivative contracts | $614,645 | $0 | Note 16 – Fair Value Measurement This note explains how the company measures and categorizes assets and liabilities at fair value - Fair value measurements are categorized into a three-level hierarchy based on input observability[91][92][93] - Asset retirement obligations are calculated using discounted future cash flows with significant Level 3 (unobservable) inputs[96] - No open positions or transfers between fair value hierarchy levels occurred at March 31, 2021[95] Note 17 – Subsequent Events This note discloses significant events that occurred after the balance sheet date - On May 7, 2021, the company acquired Barnett Shale assets for $18.2 million, funded by cash and credit facility[97] - On May 6, 2021, a quarterly cash dividend of $0.05 per share was declared, representing a 67% increase from the prior quarter[98][105] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, liquidity, and operational results, highlighting commodity price impacts and acquisitions Executive Overview This overview summarizes recent performance, strategic initiatives, and market conditions - The company's long-term goal is to build a diversified portfolio of oil and gas assets primarily through acquisitions[102] - Declared an increased 30th consecutive quarterly cash dividend of $0.05 per share, a 67% increase from the prior quarter[105] - Closed on substantially all of the acquisition of non-operated oil and gas assets in the Barnett Shale for $18.2 million on May 7, 2021[105] - Total revenues increased by 32.4% over the prior quarter to $7.6 million[105] - Completed Spring redetermination of the credit facility, increasing the borrowing base to $30 million[108] - The company recorded quarterly net income of $1.2 million, or $0.04 per diluted share, compared to a net loss of $12.7 million in the prior quarter, driven by higher oil prices and absence of impairment[111] - The company recorded a $15.2 million ceiling test impairment at December 31, 2020, and a $9.6 million impairment at September 30, 2020, due to declining crude oil prices[114][115] - The COVID-19 pandemic and OPEC+ actions led to significant crude oil price declines in 2020, but prices rebounded in Q1 2021[119] Liquidity and Capital Resources This section analyzes the company's cash flows, credit facilities, and capital expenditure plans - Cash and cash equivalents were $17.0 million at March 31, 2021, down from $19.7 million at June 30, 2020[124] - The senior secured credit facility has a $30 million borrowing base and no outstanding borrowings as of March 31, 2021[126][127] - The company increased its quarterly dividend rate to $0.03 per share for Q3 FY2021 and further to $0.05 per share for Q4 FY2021, reflecting improved industry outlook and the Tokyo Gas Americas acquisition[132] - Capital expenditures for the nine months ended March 31, 2021, were $0.3 million for Delhi field maintenance; expected capital expenditures for the remainder of fiscal 2021 are $0.25-$0.5 million, and $1.25-$2.0 million for fiscal 2022[136] - The Phase V development project in the Delhi field, with $8.6 million in future development costs, is delayed to calendar year 2022 or 2023 due to oil price volatility[137] - Cash provided by operating activities decreased by $9.7 million for the nine months ended March 31, 2021, compared to the prior year, primarily due to a decrease in net income[140] Results of Operations This section provides a detailed comparison of operating results for the current and prior-year periods Three Months Ended March 31, 2021 and 2020 This subsection compares financial results for the three-month period ending March 31, 2021, versus 2020 Production Volumes and Prices (Three Months Ended March 31) | Metric | 2021 | 2020 | Variance % | | :--- | :--- | :--- | :--- | | Total revenues | $7,635,748 | $7,712,619 | (1.0)% | | Equivalent volumes (BOE) | 153,737 | 199,144 | (22.8)% | | Equivalent price per BOE | $49.67 | $38.73 | 28.2% | | Crude oil price per Bbl | $53.52 | $43.16 | 24.0% | | NGL price per Bbl | $25.99 | $9.56 | 171.9% | - Production decline was attributed to the CO2 supply pipeline shut-in (Feb-Oct 2020), deferred capital expenditures, and severe cold weather in February 2021[144] Lease Operating Costs (Three Months Ended March 31) | Metric | 2021 | 2020 | Variance % | | :--- | :--- | :--- | :--- | | Total lease operating costs | $3,606,511 | $3,895,544 | (7.4)% | | Lease operating costs per BOE | $23.46 | $19.56 | 19.9% | | CO2 costs per BOE | $6.41 | $4.05 | 58.3% | - DD&A expense decreased by 23.5% due to lower equivalent barrel volumes and prior full cost ceiling test impairments reducing the depreciable asset base[148][149] - General and administrative expenses increased by 25.0% to $1.8 million, primarily due to $0.4 million in acquisition-related legal and tax expenses[152] - Net income decreased by 67.9% to $1.2 million, impacted by lower pre-tax income and a higher income tax provision[154] Nine Months Ended March 31, 2021 and 2020 This subsection compares financial results for the nine-month period ending March 31, 2021, versus 2020 Production Volumes and Prices (Nine Months Ended March 31) | Metric | 2021 | 2020 | Variance % | | :--- | :--- | :--- | :--- | | Total revenues | $18,999,276 | $26,246,449 | (27.6)% | | Equivalent volumes (BOE) | 488,549 | 570,263 | (14.3)% | | Equivalent price per BOE | $38.89 | $46.03 | (15.5)% | | Crude oil price per Bbl | $42.81 | $51.58 | (17.0)% | - Production decline was due to the Delhi field's natural decline exacerbated by the CO2 supply pipeline shut-in, partially offset by the Hamilton Dome acquisition[157] - A proved property impairment of $24.8 million was recorded due to the decline in oil prices over the past twelve months[165] Net (Gain) Loss on Derivative Contracts (Nine Months Ended March 31) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Net (gain) loss on derivatives contracts | $614,645 | $0 | Lease Operating Costs (Nine Months Ended March 31) | Metric | 2021 | 2020 | Variance % | | :--- | :--- | :--- | :--- | | Total lease operating costs | $9,009,848 | $11,220,238 | (19.7)% | | CO2 costs | $1,605,818 | $3,501,507 | (54.1)% | | CO2 volumes (MMcf per day, gross) | 38.3 | 69.1 | (44.6)% | - DD&A expense decreased by 10.9% due to lower equivalent barrel volumes, partially offset by the Hamilton Dome acquisition and prior full cost ceiling test impairments[164] - General and administrative expenses increased by 16.9% to $5.0 million, primarily due to acquisition-related legal/tax expenses, salary/benefits, and consulting expenses[167] - Net loss attributable to common stockholders was $18.7 million, a $26.9 million decrease from the prior year's net income[170][171] Critical Accounting Policies and Estimates This section references the key accounting policies and estimates crucial to the financial statements - Critical accounting policies and estimates are detailed in the 2020 Form 10-K[173] - Recently adopted and issued accounting pronouncements are discussed in Note 2[173] Item 3. Quantitative and Qualitative Disclosures about Market Risks This section describes the company's exposure to market risks, primarily from commodity prices and interest rates - The company is exposed to energy commodity price risk, including price differentials, and monitors prices for potential hedging[175] - No open derivative contracts existed as of March 31, 2021[176] - The company is exposed to interest rate risk on cash and cash equivalents but does not use interest rate derivative instruments[178] Item 4. Controls and Procedures This section reports on the effectiveness of the company's disclosure controls and internal financial reporting controls - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2021[180] - No material changes in internal controls over financial reporting occurred during the quarter ended March 31, 2021[181] Part II. Other Information This part provides other required information, including legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings This section discloses any material pending legal proceedings - No legal proceedings were reported[183] Item 1A. Risk Factors This section details new and updated risk factors, particularly those related to climate change - New risk factors include concerns regarding climate change, leading to potential regulatory, political, litigation, and financial risks[184] - Climate change risks could result in increased operating/compliance costs, limits on production areas, reduced demand for oil/gas, and difficulties in accessing capital markets[184][187] - Governmental and public concern over climate change has led to proposals like banning hydraulic fracturing and new leases on public lands, and increased litigation against oil and gas companies[186] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on stock repurchases and unregistered sales of equity securities - No common stock was purchased under the share repurchase program during the quarter ended March 31, 2021[188] - No shares were surrendered by employees for payroll tax withholding from restricted stock vesting during the quarter[188] Item 3. Defaults Upon Senior Securities This section discloses any defaults on senior securities - Not applicable[188] Item 4. Mine Safety Disclosures This section provides mine safety disclosures if applicable - Not applicable[189] Item 5. Other Information This section includes any other information not previously reported - None[190] Item 6. Exhibits This section lists all exhibits filed as part of the report - Exhibits include amendments to the Purchase and Sale Agreement for the Barnett Shale acquisition[192] - Certifications from the Chief Executive Officer and Chief Financial Officer are included[192]