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EPM > SEC Filings for EPM > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for EVOLUTION PETROLEUM CORP

Form 10-Q for EVOLUTION PETROLEUM CORP


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto contained herein and in our Annual Report on Form 10-K for the year ended June 30, 2012 (the "Form 10-K"), along with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Form 10-K. Any terms used but not defined herein have the same meaning given to them in the Form 10-K.

This Form 10-Q and the information referenced herein contain forward-looking statements within the meaning of the Private Securities Litigations Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words "plan," "expect," "project," "estimate," "assume," "believe," "anticipate," "intend," "budget," "forecast," "predict" and other similar expressions are intended to identify forward-looking statements. These statements appear in a number of places and include statements regarding our plans, beliefs or current expectations, including the plans, beliefs and expectations of our officers and directors. When considering any forward-looking statement, you should keep in mind the risk factors that could cause our actual results to differ materially from those contained in any forward-looking statement. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include the timing and extent of changes in commodity prices for oil and natural gas, operating risks and other risk factors as described in our 2012 Annual Report on Form 10-K for the year ended June 30, 2012 as filed with the Securities and Exchange Commission. Furthermore, the assumptions that support our forward-looking statements are based upon information that is currently available and is subject to change. We specifically disclaim


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all responsibility to publicly update any information contained in a forward-looking statement or any forward-looking statement in its entirety and therefore disclaim any resulting liability for potentially related damages. All forward-looking statements attributable to Evolution Petroleum Corporation are expressly qualified in their entirety by this cautionary statement.

We use the terms, "EPM," "Company," "we," "us" and "our" to refer to Evolution Petroleum Corporation.

Executive Overview

General

We are a petroleum company engaged primarily in the acquisition, exploitation and development of properties for the production of crude oil and natural gas, onshore in the United States. We acquire known, underdeveloped oil and natural gas resources and exploit them through the application of capital, sound engineering and modern technology to increase production, ultimate recoveries, or both.

We are focused on increasing underlying net asset values on a per share basis. In doing so, we depend on a conservative capital structure, allowing us to maintain financial control of our assets for the benefit of our shareholders, including approximately 24% beneficially owned by all of our directors, officers and employees.

Our strategy is intended to generate scalable, low unit cost, development and re-development opportunities that minimize or eliminate exploration risks. These opportunities involve the application of modern technology, our own proprietary technology and our specific expertise in overlooked areas of the United States.

The assets we exploit currently fit into three types of project opportunities:

† Enhanced Oil Recovery (EOR),

† Bypassed Primary Resources, and

† Unconventional Reservoir Development.

We expect to fund our base fiscal 2013 development plan from working capital, with any increases to the base plan funded out of working capital, net cash flows from our properties in the Giddings and Delhi Fields and appropriate financing vehicles, including possible additional issuances of our Series A perpetual non-convertible preferred stock.

Highlights for our First Quarter Fiscal 2013 and Project Update

"Q1-13" & "current quarter" is the three months ended September 30, 2012, the company's 1st quarter of fiscal 2013.

"Q4-12" & "prior quarter" is the three months ended June 30, 2012, the company's 4th quarter of fiscal 2012.

"Q1-12" & "year-ago quarter" is the three months ended September 30, 2011, the company's 1st quarter of fiscal 2012.

Operations

† Q1-13 net income available to common shareholders increased 6.9% sequentially to $1.0 million compared to $0.9 million in the prior quarter and slightly declined 2.4% from $1.0 million in the year-ago quarter. Sequentially, lower field margins were offset by lower income taxes and slightly better BOE volumes. The lower margin, as described below, reflects decreased average product prices partially offset by lower LOE.

† Current quarter revenue decreased 6.3% sequentially to $4.3 million from $4.6 million in the prior quarter, while increasing 10.5% from $3.9 million in the year-ago quarter. The sequential decline primarily reflects lower Delhi revenue partially offset by higher natural gas revenue. The increase from the year-ago quarter is due to higher Delhi revenue partially offset by decreases in NGL and natural gas revenues.

† Crude oil and NGL volumes accounted for 80% of volumes and 96% of revenues during Q1-13 compared sequentially to 81% of volume and 97% of revenues in the prior quarter, while the year-ago quarter volumes were 78% of volume and 94% of revenue. Total liquids volumes declined sequentially 0.6% while increasing 16% compared to the year-ago quarter. Delhi oil volumes decreased 3% from the prior quarter and increased 15% compared


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to the year-ago quarter. Current quarter Delhi production was impacted by the operator temporarily restricting production. Natural gas volumes, all in Giddings, also increased 13% sequentially, and increased 14% over the year-ago quarter due to improved performance of wells and prior quarter workovers.

† The blended product price we received in Q1-13 decreased sequentially to $80.30 per BOE from $86.91 in the prior quarter, while declining from $83.01 in the year-ago quarter. Current quarter oil prices declined 6% sequentially to $102.49 and decreased 2% compared to the year-ago quarter. Our average oil price reflects the large proportion of sales from Delhi that received favorable Louisiana Light Sweet pricing. NGL prices decreased 15% sequentially and 34% from the year-ago quarter to $35.38, while natural gas prices increased 19% sequentially and decreased 38% from the year-ago quarter to $2.53.

† Field margin declined to $68 per BOE compared to $73 in the prior quarter and the year-ago quarter. Compared to the prior quarter, lower revenue per BOE was partially offset by reduced LOE and slightly lower DD&A per BOE. LOE decreased primarily due to reduced salt water disposal costs at Giddings Field, resolved water injection issues at Lopez Field and decreased parts and supplies expenses for both fields. The lower field margin compared to the year ago quarter reflects lower revenue per BOE together with higher LOE and DD&A rates.

Projects

Delhi EOR Project

† Production in our enhanced oil recovery project temporarily decreased 3% sequentially and increased 15% over the year-ago quarter to 5,057 gross BOPD (374 BOPD net to our 7.4% royalty interest). The current quarter included two months of production restricted by the operator due to process cooling limitations, compared to only one month of restricted production during the prior quarter. Production restrictions were lifted during September and production returned to previous unrestricted levels. Peak gross production is forecasted by our independent reservoir engineer to steadily increase to approximately 11,800 BOPD by late 2017. Our working interest reversion that is forecasted to occur in late calendar 2013 will more than triple our revenue interest from 7.4% to 26.5%, while our cost bearing interest increases from 0% to 23.9%.

† Realized oil prices at Delhi decreased 6% sequentially and 2% from the year-ago quarter to $103.78 per BO. Realized prices were $110.09 per BO in the previous quarter and $105.78 in the year-ago quarter.

† Extension of the project into the eastern half of the field continued with $24 million gross expenditures made by the operator during the current quarter and over $60 million gross expenditures so far in calendar 2012 none of which is required to be funded by us. Proved oil reserves net to our interest were already 68% developed and probable reserves were 46% developed at our recent fiscal yearend, based on our independent engineer's June 30, 2012 report as filed in our 2012 Form 10-K.

Mississippi Lime

† The operator completed the drilling of our first two Mississippian Lime wells in Kay County, OK - the Sneath with our 45% working interest and the Hendrickson with our 36.6% working interest. These two wells are the first of 114 gross probable drilling locations assigned in the independent engineer's report of June 30, 2012, as filed with our most recent Form 10-K. As previously reported, the operator drilled and completed a salt water disposal well in the previous quarter.

† The Sneath well was hydraulically fractured in 12 stages and completed in late October in approximately 3,100' of lateral section and subsequently was put on production to begin removing injected and reservoir water to permit oil and gas production. The Mississippian Lime typically requires partial depressuring to allow oil and gas to mobilize into the well bore.

† The Hendrickson well was hydraulically fractured in 10 stages and completed in early November in approximately 4,000' of lateral section with production operations expected to begin shortly.

† We are evaluating the eastern portion of the play to expand our footprint.


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GARP® (Gas Assisted Rod Pump)

† We completed the commercial installation of GARP® in a fourth well in the Iola Field in Grimes County, Texas. The well was restored from no production to a rate of approximately 5 BOPD and 90 MCFD of liquids rich natural gas that is being processed for NGL.

† Our three previous commercial installations of GARP® continue performing well. As of early November, our four installations are producing 55-60 BOEPD gross (27-30 BOEPD net).

Lopez Field (South Texas)

† We expanded our salt water disposal capacity on one lease to allow a consistent water disposal rate that has increased our steady oil production rate to approximately 8 BOPD from our Garcia #1, the first oil well we drilled in the Lopez Field.

† Our second drilled oil well continues to steadily produce more than 15 BOPD, a higher rate than originally expected or that is projected in our reserve report.

† We received our permit to begin producing our third drilled oil well, have put the well on production and are currently dewatering.

† We continue to evaluate the long term potential of our South Texas project compared to other projects in our portfolio as to scale, profitability and timing.

Giddings Field (Central Texas)

† Giddings daily production increased 12% sequentially and 11% over the year-ago quarter to 194 net BOEPD. A portion of the increase from 173 BOED in the prior quarter and from 175 net BOED in the year-ago quarter was from new GARP® production. All of our non-GARP® wells in the Giddings Field are in their stable decline phase.

† We have entered into agreements in principle to divest portions of our Giddings assets in order to better focus our resources on the Mississippian Lime and GARP® projects that offer substantially more potential.

Liquidity and Capital Resources

At September 30, 2012, our working capital was $12.8 million, compared to working capital of $11.7 million at June 30, 2012. The $1.1 million increase in working capital since June 30, 2012 was due primarily to decreases of $1.9 million in payables to our joint venture partner in the Mississipian Lime play, and $0.7 million of accrued compensation, partially offset by a cash decrease of $ 1.3 million.

Cash Flows from Operating Activities

For the three months ended September 30, 2012, cash flows provided by operating activities were $1.6 million, reflecting $2.4 million provided by operations before $0.8 million was used in working capital. Of the $2.4 million provided before working capital changes, $1.2 million was due to net income and $1.2 million was due primarily to non-cash expenses.

For the three months ended September 30, 2011, $1.9 million of cash flows was provided by operating activities, reflecting $2.2 million provided by operations before $0.3 million was used in working capital. Of the $2.2 million provided before working capital changes, $1.1 million was due to net income and $1.1 million was attributable primarily to non-cash expenses.

Cash Flows from Investing Activities

Cash paid for oil and gas capital expenditures during the three ended September 30, 2012 was $2.6 million. Development activities were predominantly in the Mississippi Lime, where one salt water disposal well and one producer well were completed and a second producer well spudded with completion expected in our next fiscal quarter. In Giddings, expenditures were centered on installing GARP® on a fourth well.

Cash paid for oil and gas capital expenditures during the three months ended September 30, 2011, was $0.5 million with expenditures primarily divided between our Giddings and Lopez fields.

Oil and gas capital expenditures incurred were $2.1 million and $0.4 million, respectively, for the three months ended September 30, 2012 and 2011. These amounts can be reconciled to cash capital expenditures on their respective cash flow statements by adjusting


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them for changes in accounts payable and amounts owed to joint venture partners for capital expenditures as represented in the supplemental information.

Cash Flows from Financing Activities

In the three months ended September 30, 2012, we paid preferred dividends of $0.2 million.

During the three months ended September 30, 2011, we received $6.1 million of net proceeds from the issuance of 282,255 shares of our 8.5% Series A perpetual preferred stock after all offering costs and we paid $0.1 million of dividends thereon.

Capital Budget

Our approved fiscal 2013 Base Plan provides for up to $10 million of capital expenditures, the remaining balance of which can be funded from our existing working capital of $12.8 million at September 30, 2012. We expect to fund any increases over the fiscal 2013 Base Plan out of working capital, internally generated funds from operations, joint ventures, project financing, selective divestments of noncore assets or other appropriate financings, including possible additional issuances of our Series A perpetual non-convertible preferred stock.

Results of Operations

Three month period ended September 30, 2012 and 2011

The following table sets forth certain financial information with respect to our oil and natural gas operations:

                                          Three Months Ended
                                            September 30,                           %
                                         2012           2011        Variance      Change

Sales Volumes, net to the Company:

Crude oil (Bbl)                            39,082         33,160        5,922        17.9 %

NGLs (Bbl)                                  3,381          3,522         (141 )      (4.0 )%

Natural gas (Mcf)                          65,869         60,707        5,162         8.5 %
Crude oil, NGLs and natural gas
(BOE)                                      53,441         46,800        6,641        14.2 %

Revenue data:

Crude oil                             $ 4,005,422    $ 3,448,595    $ 556,827        16.1 %

NGLs                                      119,611        188,455      (68,844 )     (36.5 )%

Natural gas                               166,513        247,806      (81,293 )     (32.8 )%
Total revenues                        $ 4,291,546    $ 3,884,856    $ 406,690        10.5 %

Average price:
Crude oil (per Bbl)                   $    102.49    $    104.00    $   (1.51 )      (1.5 )%
NGLs (per Bbl)                              35.38          53.51       (18.13 )     (33.9 )%
Natural gas (per Mcf)                        2.53           4.08        (1.55 )     (38.0 )%
Crude oil, NGLs and natural gas
(per BOE)                             $     80.30    $     83.01    $   (2.71 )      (3.3 )%

Expenses (per BOE)
Lease operating expenses and
production taxes                      $      6.32    $      4.64    $    1.68        36.2 %
Depletion expense on oil and
natural gas properties (a)            $      5.33    $      4.89    $    0.44         9.0 %



(a) Excludes depreciation of office equipment, furniture and fixtures, and other assets of $12,249 and $7,829, for the three months ended September 30, 2012 and 2011, respectively.


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Net Income Available to Common Shareholders. For the three months ended September 30, 2012, we generated net income of $990,951, or $0.03 per diluted share, (which includes $353,790 of non-cash stock-based compensation expense) on total oil and natural gas revenues of $4,291,546. This compares to a net income of $1,015,683, or $0.03 per diluted share, (which includes $416,695 of non-cash stock-based compensation expense) on total oil and natural gas revenues of $3,884,856 for the year-ago quarter. Increased revenue and lower income tax expenses were offset by higher operating expenses. Additional details of the components of net income are explained in greater detail below.

Sales Volumes. Crude oil, NGLs, and natural gas sales volumes, net to our interest, for the three months ended September 30, 2012 increased 14% to 53,441 BOE's compared to 46,800 BOE's for the year-ago quarter. This 6,641 volume increase primarily reflects production and sales volumes increases in Delhi, Giddings, and South Texas fields, partially offset by a decrease in our Woodford properties which have been shut in. Our crude oil sales volumes for the current quarter include 34,453 from our interests in Delhi and 4,629 barrels from the Giddings and Lopez fields. Our crude oil sales volumes for the year-ago quarter included 29,947 barrels from our interests in Delhi and 3,213 barrels from our properties in the Giddings and Lopez fields. Our NGL volumes for the three months ended September 30, 2012 and 2011, all from the Giddings Field, and declined 4% to 3,381 barrels. Current quarter natural gas volumes, virtually all produced at Giddings, increased 9% to 65,869 mcf from 60,717 in the year-ago quarter. For the current quarter, there was no gas production from our now shut in Woodford properties that produced 2,793 mcf during the year-ago quarter.

Petroleum Revenues. Crude oil, NGLs and natural gas revenues totaling $4.3 million for the current quarter increased $0.4 million, or 11%, from $3.9 million in the year-ago quarter due to 14% higher sales volumes partially offset by a 3.3% price decline. Prices per BOE were $80.30 and $83.01, respectively, for the current and year-ago quarter.

Lease Operating Expenses (including production severance taxes). Lease operating expenses and production taxes for the current quarter increased $120,590, or 56%, to $337,542 compared to the year-ago quarter. Of this increase approximately $63,000 for Giddings and $36,000 for Lopez are primarily attributable to seven wells brought on line subsequent to the year-ago quarter. The remainder of variance primarily is due to higher maintenance and repairs for previously existing wells. Lease operating expense and production tax per barrel of oil equivalent increased 36% from $4.64 per BOE during year-ago quarter to $6.32 per BOE current quarter.

General and Administrative Expenses ("G&A"). G&A expenses increased 21% from $1.7 million during the three months ended September 30, 2012 from $1.4 million in the year-ago quarter. The increase was due primarily to a higher bonus accrual, legal expenses, and public company expenses, partially offset by lower stock compensation expense. Stock-based compensation was $353,790 (21% of total G&A) for the current quarter compared to $416,695 (30% of total G&A) for the year-ago quarter. Non-cash stock-based compensation is an integral part of total staff compensation utilized to recruit quality staff from other, more established companies and retain staff and, as a result, likely will continue to be a significant component of our G&A costs.

Depreciation, Depletion & Amortization Expense ("DD&A"). DD&A increased by 25% to $296,917 for the three months ended September 30, 2012, compared to $236,891 for the year-ago quarter. This change was principally due to an 9% increase in depletion rate from $4.89 per BOE in the year-ago quarter to $5.33 in the current quarter together with volume growth of 14% as described above.

Inflation. Although the general inflation rate in the United States, as measured by the Consumer Price Index and the Producer Price Index, has been relatively low in recent years, the oil and gas industry has experienced unusually volatile price movements in commodity prices, vendor goods and oilfield services. Prices for drilling and oilfield services, oilfield equipment, tubulars, labor, expertise and other services greatly impact our lease operating expenses and our capital expenditures. During fiscal 2012, we saw material increases in certain oil field services and materials. Product prices, operating costs and development costs may not always move in tandem.

Known Trends and Uncertainties. General worldwide economic conditions continue to be uncertain and volatile. Concerns over uncertain future economic growth are affecting numerous industries, companies, as well as consumers, which impact demand for crude oil and natural gas. If demand decreases in the future, it may put downward pressure on crude oil and natural gas prices, thereby lowering our revenues and working capital going forward. In addition, our lease operating expenses and their percentage of our revenues are likely to increase as our working interest production increases at our Mississippian Lime Play, reversion of our back-interest at Delhi or other additions to our working interest production that would dilute extraordinary margins we have enjoyed from our mineral and overriding royalty interests at Delhi.

Seasonality. Our business is generally not directly seasonal, except for instances when weather conditions may adversely affect access to our properties or delivery of our petroleum products. Although we do not generally modify our production for changes in market demand, we do experience seasonality in the product prices we receive, driven by summer cooling and driving, winter heating, and extremes in seasonal weather including hurricanes that may substantially affect oil and natural gas production and imports.


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Off Balance Sheet Arrangements

The Company has no off-balance sheet arrangements to report during the quarter ending September 30, 2012.

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