EVOLUTION PETROLEUM CORPORATION Executive Overview
Liquidity and Capital Resources Results of Operations Critical Accounting Policies and Estimates Commonly Used Terms "Current quarter" refers to the three months endedMarch 31, 2021 , the Company's third quarter of fiscal 2021. "Prior quarter" refers to the three months endedDecember 31, 2020 , the Company's second quarter of fiscal 2021. "Year-ago quarter" refers to the three months endedMarch 31, 2020 , the Company's third quarter of fiscal 2020. Executive Overview
General
Evolution Petroleum Corporation is an oil and gas company focused on delivering a sustainable dividend yield to its stockholders through the ownership, management, and development of oil and gas properties. In support of that objective, the Company's long-term goal is to build a diversified portfolio of oil and gas assets primarily through acquisitions, while seeking opportunities to maintain and increase production through selective development, production enhancement, and other exploitation efforts on its properties. We are committed to exceptional safety, health, and environmental stewardship; supporting the professional development of our team of employees and contractors; making a positive difference in the communities where we live and work; and transparency in reporting on our progress in these areas. Our Board of Directors will have oversight of, among other things, the development and implementation of the Company's environmental, social and governance policies, and programs and initiatives. Our producing assets consist of our interests in the Delhi Holt-Bryant Unit in theDelhi field inNortheast Louisiana , a CO2 enhanced oil recovery project, our interests in the Hamilton Dome field located inHot Springs County, Wyoming , a secondary recovery field utilizing water injection wells to pressurize the reservoir, and overriding royalty interests in two onshoreTexas wells. Our interests in theDelhi field consist of a 23.9% working interest, with an associated 19.0% revenue interest and separate overriding royalty and mineral interests of 7.2% yielding a total net revenue interest of 26.2%. The field is operated byDenbury Onshore LLC , a subsidiary of Denbury Resources, Inc. OnNovember 1, 2019 , the Company acquired interests in the Hamilton Dome field consisting of a 23.5% working interest, with an associated 19.7% revenue interest (inclusive of a small overriding royalty interest). The field is operated byMerit Energy Company ("Merit"), a private oil and gas company, that owns the vast majority of the remaining working interest inHamilton Dome field. OnMay 7, 2021 , the Company closed on substantially all of the acquisition of an approximate 17% working interest and a 14% revenue interest in non-operated oil and gas assets in theBarnett Shale from Tokyo Gas Americas for$18.2 million , net of preliminary purchase price adjustments. Refer to Note 17 - Subsequent Events for more details.
Highlights for our Third Quarter of Fiscal 2021 and Operations Update
•Declared an increased 30th consecutive quarterly cash dividend on common shares of$0.05 per share, payable onJune 30, 2021 , representing a 67% increase from the prior quarter. •Closed on substantially all of the acquisition of non-operated oil and gas assets in theBarnett Shale for$18.2 million , net of preliminary purchase price adjustments, onMay 7, 2021 . •Total revenues increased by 32.4% over the prior quarter to$7.6 million . •Generated cash flow in excess of quarterly dividend and ended the quarter with$17.0 million in cash and no debt. 16 -------------------------------------------------------------------------------- Table of Contents •Completed Spring redetermination of the credit facility and increased the borrowing base to$30 million , excluding Tokyo Gas acquisition impacts. Overview In earlyMarch 2020 , crude oil prices declined sharply as a result of multiple significant factors impacting supply and demand in the global oil and natural gas markets, including a global pandemic caused by COVID-19. Realized oil prices have recently rebounded, although they remain volatile. The Company expects the price of crude oil to continue to be volatile as evidenced by the futures market. We cannot predict the duration of such volatility nor the current supply-demand imbalance, but must be prepared for crude oil prices to remain volatile for an extended period and for the potential effects on our business, financial condition, results of operations, and cash flows. Gross oil production for the Company averaged approximately 6,098 BOPD during the quarter, a 3.4% decrease from the prior quarter primarily due to lowerDelhi oil production as a result of the severe cold weather inFebruary 2021 , as well as the lingering impact of the suspension of CO2 purchases due to previously announced pipeline repairs, from late February through the end ofOctober 2020 , and the deferral of field conformance capital expenditures. CO2 purchases atDelhi resumed onOctober 26, 2020 at a rate of 65 MMcf per day, approximately 76% of the level prior to the shut-in due to other supply constraints that are expected to be resolved during the first half of our fiscal 2022. CO2 purchases provide approximately 20% of the injected volumes in the field and the field's recycle facilities provide the other 80%.
Gross NGL production for the quarter was approximately 911 BOEPD, a 12.0%
decrease from the prior quarter. The decrease is primarily due to the severe
cold weather in
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 , or$0.38 per diluted share, in the prior quarter. The increase in the Company's net income was primarily impacted by the full cost ceiling impairment recorded atDecember 31, 2020 driven by the severe decline in oil prices during the twelve months endedDecember 31, 2020 as well as the 37.8% increase in the Company's average realized price per barrel of oil for three months endedMarch 31, 2021 .
These items, and others, are further discussed below.
Additional property and project information is included under Item 1. Business, Item 2. Properties, Notes to the Financial Statements and Exhibit 99.1 of our Form 10-K for the year endedJune 30, 2020 . Full Cost Pool Ceiling Test and Impairment AtMarch 31, 2021 , the ceiling test value of the Company's reserves was calculated based on the first-day-of-the-month average for the 12-months endedMarch 31, 2021 of the WTI crude oil spot price of$39.95 per barrel, adjusted by market differentials by field. The net price per barrel of NGLs was$8.39 , which does not have any single comparable reference index price. The NGL price was based on historical prices received. Using these prices, the Company's net book value of oil and natural gas properties atMarch 31, 2021 did not exceed the current ceiling. AtDecember 31, 2020 , we recorded a$15.2 million impairment as a result of our capitalized costs of oil and gas properties exceeding the full cost valuation ceiling. The ceiling test impairment was primarily driven by a decrease in the 12-month trailing average price for crude oil used in the ceiling test calculation, from$43.63 per barrel atSeptember 30, 2020 to$39.54 per barrel atDecember 31, 2020 as well as reduced oil differentials. AtSeptember 30, 2020 , the Company recorded a$9.6 million ceiling test impairment charge. The ceiling test impairment was driven by a decrease in the first-day-of-the-month average price for crude oil used in the ceiling test calculation, from$47.37 per barrel atJune 30, 2020 to$43.63 per barrel atSeptember 30, 2020 together with adverse changes in differentials received in theDelhi field. The first-day-of-the-month average oil price as ofSeptember 30, 2020 was heavily influenced by the extremely low oil prices realized in March through May of 2020 combined with the roll off of high oil prices during the quarter endedSeptember 30, 2019 . Under the full cost method of accounting, capitalized costs of oil and gas properties, net of accumulated DD&A and related deferred taxes, are limited to the estimated future net cash flows from proved oil and gas reserves, discounted at 10%, plus the lower of cost or fair value of unproved properties included in the amortization base, plus the cost of unproved properties excluded from amortization, as adjusted for related income tax effects (the valuation "ceiling"). If capitalized costs exceed the full cost ceiling, the excess would be charged to expense as a write-down of oil and gas properties in the quarter in which the excess occurred. The quarterly ceiling test calculation requires that we use the average first day of the month price for our petroleum products during the 12-month period ending with the balance sheet date. 17 -------------------------------------------------------------------------------- Table of Contents Impact of the COVID-19 Pandemic and Geopolitical Factors OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a pandemic, and onMarch 13, 2020 ,the United States of America declared a national emergency with respect to COVID-19. The virus has continued to spread inthe United States of America and abroad. National, state, and local authorities have recommended social distancing, imposed quarantine and isolation measures, as well as mandatory business closures on large portions of the population. These measures, while intended to protect human life, are expected to have serious adverse impacts on domestic and foreign economies of uncertain severity and duration. The effectiveness of economic stabilization efforts, including government payments to affected citizens and industries, is uncertain. The nature of the COVID-19 pandemic continues to make it extremely difficult to predict the continuing impact on the Company's business and operations. However, the overall economic impact of the pandemic is viewed as highly negative to the general economy, especially the oil and natural gas industry. In 2020, primarily driven by the COVID-19 pandemic and actions taken by OPEC+, the benchmark price of WTI dropped significantly. However, during the first quarter of calendar 2021, expectations surrounding the demand for oil and natural gas combined with moderated supply increases have stimulated a rise in oil and natural gas prices. The Company expects the price of crude oil to remain volatile as evidenced by the continued volatility in the futures market. In addition, future legislative or regulatory changes as a result ofthe United States election in 2020 may result in increased costs and decreased revenues, cash flows, and liquidity. Companies that operate wells in which we own a working interest are subject to extensive federal regulation. The Company, as a working interest owner, is therefore indirectly subject to these same regulations. New or changed laws and regulations could have a material adverse effect on our business. The recentU. S Department of Interior policy pausing new oil and gas leasing and the issuance of drilling permits on public lands does not impact ourWyoming Hamilton Dome interests as our reserves are solely proved developed producing and there are no drilling prospects. Currently, the Company's property interests are not operated by the Company and involve other third-party working interest owners. As a result, the Company has limited ability to influence or control the operation or future development of such properties. In light of the current price and economic environment, the Company continues to be proactive with its third-party operators to review spending and alter plans as appropriate. The Company is focused on maintaining its operations and system of controls remotely and has implemented its business continuity plans in order to allow its employees to securely work from home. The Company was able to transition the operation of its business with minimal disruption and to maintain its system of internal controls and procedures. Liquidity and Capital Resources AtMarch 31, 2021 , the Company had$17.0 million in cash and cash equivalents, compared to$19.7 million of cash and cash equivalents atJune 30, 2020 , which does not include the$2.3 million deposit related to the Tokyo Gas Americas acquisition that was applied against the$18.2 million purchase price funded using primarily cash and modest borrowings. In addition, the Company has a senior secured reserve-based credit facility (the "Facility") with a maximum capacity of$50 million subject to a borrowing base determined by the lender based on the value of our oil and gas properties. As ofMarch 31, 2021 , there were no borrowings outstanding under the Facility, which matures onApril 9, 2024 . The Facility is secured by substantially all of the Company's assets. Effective as ofNovember 2, 2020 , the Company completed its annual Fall redetermination, and extended the facility an additional three years. As expected from the lower oil price environment, the redetermination of the borrowing base resulted in a decrease from$27 million to$23 million . OnMarch 30, 2021 , the Company completed its Spring redetermination of the Facility, resulting in a borrowing base increase to$30 million . The borrowing base does not yet include any portion of the Tokyo Gas Americas properties. Any future borrowings bear interest, at the Company's option, at either the London Interbank Offered Rate ("LIBOR") plus 2.75%, subject to a LIBOR minimum of 0.25%, or the Prime Rate, as defined under the Facility, plus 1.0%. The Facility contains covenants requiring the maintenance of (i) a total leverage ratio of not more than 3.0 to 1.0, (ii) a current ratio of not less than 1.0 to 1.0, and (iii) a consolidated tangible net worth of not less than$50 million , each as defined in the Facility. The Facility also contains other customary affirmative and negative covenants and events of default. As ofMarch 31, 2021 , the Company was in compliance with all covenants contained in the Facility. The Company has historically funded operations through cash from operations and working capital. The primary source of cash is the sale of produced oil and natural gas liquids. A portion of these cash flows is used to fund capital expenditures. The 18 -------------------------------------------------------------------------------- Table of Contents Company expects to manage future development activities in theDelhi field and the limited capital maintenance requirements of the Hamilton Dome field within the boundaries of its operating cash flow and existing working capital. The Company is pursuing new growth opportunities through acquisitions and other transactions. In addition to cash on hand, the Company has access to an undrawn borrowing base available under its senior secured credit facility which is subject to the Company's financial covenants. The Company also has an effective shelf registration statement with theSEC under which the Company may issue up to$500 million of new debt or equity securities. The Board of Directors instituted a cash dividend on common stock inDecember 2013 . The Company has since paid 30th consecutive quarterly dividends. Distribution of a substantial portion of free cash flow in excess of operating and capital requirements through cash dividends remains a priority of the Company's financial strategy, and it is the Company's long-term goal to increase dividends over time, as appropriate. During the industry downturn at the time, the Board of Directors adjusted the quarterly dividend rate from$0.10 per share to$0.025 per share, effective in the quarter endingJune 30, 2020 . The reduction in the dividend rate allowed the Company to conserve cash for additional financial flexibility while continuing to reward shareholders with a yield of approximately 3% at current stock price levels. OnFebruary 2, 2021 , considering an improving industry outlook, the Board of Directors increased the dividend rate from$0.025 per share to$0.03 per share effective in the quarter endedMarch 31, 2021 . OnMay 7 , the Board of Directors further increased the dividend rate to$0.05 per share effective in the quarter endedJune 30, 2021 due to improved industry conditions and the Tokyo Gas Americas acquisition. As in the past, the Company intends to consider higher dividend levels as warranted by industry conditions and any future accretive acquisitions. InMay 2015 , the Board of Directors approved a share repurchase program covering up to$5 million of the Company's common stock. The Company monitors its stock price and looks to opportunistically purchase its common stock when market conditions are deemed to be appropriate. During the nine months endedMarch 31, 2021 , there were no shares purchased by the Company and approximately$1.0 million remains available under the program for future share purchases. In earlyMarch 2020 , oil prices declined rapidly resulting in lower operating cash flows and two quarterly impairments in oil and gas property book values. Despite the significant decline in oil prices, the Company was able to utilize primarily operating cash flow along with some of its cash on hand to maintain its dividend policy while meeting capital expenditures without drawing on its senior secured credit facility and remains positioned to take advantage of any accretive opportunities due to the Company's cash on hand as well as its borrowings available under its undrawn senior secured credit facility. Additionally, the Company has no long-term service contracts or drilling commitments and is no longer subject to the derivative positions entered into inApril 2020 that turned negative inJune 2020 . The Company expects to have sufficient liquidity to meet all its identified cash requirements for at least the next 12 months. During the nine months endedMarch 31, 2021 , the Company funded operations, capital expenditures, and cash dividends with cash generated from operations and cash on hand. As ofMarch 31, 2021 , working capital remained flat at$20.1 million compared toJune 30, 2020 . The Company was able to maintain its balance sheet and generate positive operating cash flows for the three months endedMarch 31, 2021 as a result of various cost cutting initiatives. Capital Expenditures For the nine months endedMarch 31, 2021 , we incurred$0.3 million forDelhi field capital maintenance and plugging activities. Based on discussions with theDelhi andHamilton Dome operators, we expect to resume conformance workover projects and will likely incur additional maintenance capital expenditures as oil prices recover. The Hamilton Dome operator expects to restore volumes shut-in due to low oil prices as conditions improve in the market. Such amounts for workover projects at the two fields are not known or approved but are expected to be in the range of$0.25 million to$0.5 million for the remaining three months of fiscal 2021. For fiscal 2022, based on discussions with the operators, the Company's capital expenditures are expected to be in the range of$1.25 million to$2.0 million , primarily consisting of conformance workover and maintenance capital projects. Our proved undeveloped reserves atJune 30, 2020 included 1.86 MMBOE of reserves and approximately$8.6 million of future development costs associated with Phase V development in the eastern portion of theDelhi field. Such development requires participation by both the operator and the Company, and is also dependent, in part, on the field operator's available funds, capital spending plans, and priorities within its portfolio of properties. In light of the current oil price volatility, theDelhi field operator has decided to delay the Phase V development project for twelve to twenty-four months. We believe Phase V is economic at today's prices and continue to include it in proved undeveloped reserves. We plan to continue discussions with the operator and look forward to the development of Phase V now expected to begin in calendar year 2022 or 2023. OnMay 7, 2021 , the Company closed on substantially all of the acquisition of an approximate 17% working interest and a 14% revenue interest in non-operated oil and gas assets in theBarnett Shale from Tokyo Gas Americas for$18.2 million , net of 19 -------------------------------------------------------------------------------- Table of Contents preliminary purchase price adjustments. This acquisition was funded with cash on hand, plus modest borrowings under the Company's existing bank facility. For the remainder of fiscal 2021, we expect our Barnett capital expenditures will be up to$0.25 million and range from$0 to$0.5 million for fiscal 2022. Funding for our anticipated capital expenditures over the next 12 months is expected to be met from cash flows from operations and current working capital. Cash Flow Activities Cash provided by operating activities in the current period decreased$9.7 million compared to the same year-ago period due to a$26.9 million decrease in cash provided by net income together with a$15.3 million increase in cash provided by non-cash expenses, and a$2.0 million increase in cash provided from current operating assets and liabilities. Cash used in investing activities decreased$8.2 million due to the$9.3 million prior period purchase of the Hamilton Dome property and to lowerDelhi field expenditures of$1.2 million . During the nine months endedMarch 31, 2021 , the$9.7 million decrease in cash used by financing activities was due to a$7.3 million decrease in dividends and a$2.5 million decrease in common share repurchases impacted by prior period repurchases under the buyback program. 20
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Results of Operations
Three Months Ended March 31, 2021 and 2020Revenues
Compared to the corresponding year-ago quarter, current quarter revenues decreased 1.0% primarily due to a 22.8% decrease in production partially offset by a 28.2% increase in the Company's realized equivalent price per BOE. The natural decline of theDelhi field has been temporarily increased by the shut-in of the CO2 supply pipeline from lateFebruary 2020 through the end ofOctober 2020 as discussed in "Lease Operating Costs" below, as well as a suspension of field conformance capital expenditures. Purchased CO2 is necessary to maintain reservoir pressure and therefore achieve normal field performance. The shut-in of purchased CO2 volumes resulted in a decline in reservoir pressure and a temporary exacerbated production decline. The resumption of CO2 purchases during the current quarter is expected to gradually restore reservoir pressure and lead to a gradual increase in oil production rates. Also contributing to the decrease in the current quarter was the loss of production associated with the severe Winter storm inFebruary 2021 . The Company's average realized oil price was higher primarily due to the recovery of WTI pricing in 2021, as the demand for oil has begun to recover primarily as a result of the roll-out of the COVID -19 vaccine and concerns surrounding the perceived surplus of oil supplies has begun to retract. The following table summarizes total production volumes, daily production volumes, average realized prices and revenues for the three months endedMarch 31, 2021 and 2020: Three Months Ended March 31, 2021 2020 Variance Variance % Oil and gas production Crude oil revenues$ 7,076,965 $ 7,461,823 $ (384,858) (5.2) % NGL revenues 558,642 250,476 308,166 123.0 % Natural gas revenues 141 320 (179) (55.9) % Total revenues$ 7,635,748 $ 7,712,619 $ (76,871) (1.0) % Crude oil volumes (Bbl) 132,230 172,901 (40,671) (23.5) % NGL volumes (Bbl) 21,497 26,206 (4,709) (18.0) % Natural gas volumes (Mcf) 60 223 (163) (73.1) % Equivalent volumes (BOE) 153,737 199,144 (45,407) (22.8) % Crude oil (BOPD, net) 1,469 1,879 (410) (21.8) % NGLs (BOEPD, net) 239 285 (46) (16.1) % Natural gas (BOEPD, net) - - - n.m. Equivalent volumes (BOEPD, net) 1,708 2,164 (456) (21.1) % Crude oil price per Bbl $ 53.52$ 43.16 $ 10.36 24.0 % NGL price per Bbl 25.99 9.56 16.43 171.9 % Natural gas price per Mcf 2.35 1.43 0.92 n.m. Equivalent price per BOE $ 49.67$ 38.73 $ 10.94 28.2 % n. m. Not meaningful. 21
-------------------------------------------------------------------------------- Table of Contents Lease Operating Costs Lease operating costs are presented in two components: CO2 costs for theDelhi field and other lease operating costs for both theDelhi andHamilton Dome fields. Three Months Ended March 31, 2021 2020 Variance Variance % CO2 costs (a)$ 985,931 $ 806,527 $ 179,404 22.2 % Other lease operating costs 2,620,580 3,089,017 (468,437) (15.2) % Total lease operating costs$ 3,606,511 $ 3,895,544 $ (289,033) (7.4) % CO2 costs per BOE $ 6.41$ 4.05 $ 2.36 58.3 % All other lease operating costs per BOE 17.05 15.51 1.54 9.9 % Lease operating costs per BOE $ 23.46$ 19.56 $ 3.90 19.9 %
(a) Under our contract with the
Three Months Ended March 31,
2021 2020 Variance Variance %
CO2 costs per mcf $ 0.71 $ 0.69 $ 0.02 2.9 %
CO2 volumes (MMcf per day, gross) 64.5 53.9 10.6 19.7 %
Compared to the year-ago quarter, CO2 costs increased $0.2 million to $1.0
million compared to $0.8 million in 2020. The approximate $0.2 million increase
was due to the 18.4% increase in purchased mcf volumes as well as the increase
in the realized oil price in the Delhi field.
Compared to the year-ago quarter, "Other lease operating costs" decreased by
$0.5 million primarily due to a reduction in conformance activities in the
current year as a result of lower oil prices in the first half of fiscal 2021.
On a total cost per BOE basis, Delhi field costs increased 23.4% to $21.52 per
BOE in the current quarter, primarily due to a 62.5% increase in CO2 cost per
BOE together with a 7.1% increase in other lease operating costs per BOE,
resulting from 24.7% lower barrel equivalent production.
Hamilton Dome field costs per BOE was $30.01 in the current quarter compared to
$27.55 in the year-ago quarter.
Depletion, Depreciation, and Amortization ("DD&A")
Total DD&A expense was 23.5% lower compared to the same year-ago quarter due to
a 26.6% decrease in the oil and gas DD&A amortization primarily attributable to
the 22.8% decrease in equivalent barrel volumes compared to the year-ago
quarter. On a per BOE basis, the Company's oil and gas DD&A rate decreased 2.2%
. The decrease on a per BOE basis was primarily driven by the full cost ceiling
test impairments recorded during the quarters ended December 31, 2020 and
September 30, 2020 , which lower the depreciable assets base, partially offset by
the decrease in the Company's oil and gas reserves due to the decline in oil
prices, thereby reducing the number of units of production to which cost is
allocated,.
Three Months Ended March 31,
2021 2020 Variance Variance %
DD&A of proved oil and gas properties $ 1,020,810 $ 1,352,203 $ (331,393) (24.5) %
Depreciation of other property and equipment 1,810 2,465 (655) (26.6) %
Amortization of intangibles 3,391 3,391 - - %
Accretion of asset retirement obligations 44,956 41,422 3,534 8.5 %
Total DD&A $ 1,070,967 $ 1,399,481 $ (328,514) (23.5) %
Oil and gas DD&A rate per BOE $ 6.64 $ 6.79 $ (0.15) (2.2) %
22
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Table of Contents
Impairment of Well Lift Inc. - Related Expenses
Our royalty rights and investment in Well Lift, Inc. resulted from the
separation of our artificial lift technology operations in December 2015 . We
conveyed our patents and other intellectual property to WLI and retained a 5%
royalty on future gross revenues associated with the technology. We own 17.5%
and 100% of the preferred stock of the common stock of WLI and account for our
investment in this private company at cost less impairment, if any, plus or
minus changes resulting from observable price changes in orderly transactions
for the identical or a similar investment of the same issuer, if such were to
occur. The Company evaluates the investment for impairment when it identifies
any events or changes in circumstances that might have a significant adverse
effect on the fair value of the investment. At March 31, 2021 , we reviewed our
investment in WLI for potential impairment and, as a result, recorded an
impairment expense of $0.1 million . This impairment charge was recorded based on
a variety of factors including the lack of activity associated with this
technology as well as the continued reduction in drilling activities across the
industry.
General and Administrative Expenses
For the three months ended March 31, 2021 , general and administrative expenses
of $1.8 million increased $0.4 million , or 25.0%, compared to the year-ago
quarter, primarily due to approximately $0.4 million of higher
acquisition-related legal and tax expenses.
Other Income and Expenses
Other income and expense (net) decreased primarily due to lower interest income.
Three Months Ended March 31,
2021 2020 Variance Variance %
Interest and other income $ 9,223 $ 41,186 $ (31,963) (77.6) %
Interest expense (18,686) (29,067) 10,381 (35.7) %
Total other income (expense), net $ (9,463) $ 12,119 $ (21,582) (178.1) %
Net Income
Net income attributable to common stockholders for the three months ended March
31, 2021 decreased $2.5 million to $1.2 million compared to the same year-ago
quarter. Pre-tax income decreased due to the aforementioned revenue and expense
variances. Our income tax provision increased primarily due to lower pre-tax
income as well as a decrease in our effective tax rate due to the recording of a
$2.8 million income tax benefit related to Enhanced Oil Recovery credits claimed
on income tax returns for fiscal 2019, 2018 and 2017.
Three Months Ended
2021 2020 Variance Variance %
Income (loss) before income taxes $ 971,142 $ 963,933 $ 7,209 0.7 %
Income tax provision (benefit) (219,859) (2,746,226) 2,526,367 (92.0) %
Net income (loss) attributable to common
stockholders $ 1,191,001 $ 3,710,159 $ (2,519,158) (67.9) %
Income tax provision (benefit) as percentage of
income (loss) before income taxes (22.6) % (284.9) %
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Results of Operations
Nine Months Ended March 31, 2021 and 2020Revenues
Compared to the corresponding nine months endedMarch 31, 2020 , current period revenues decreased 27.6% primarily due to 15.5% decrease in the Company's realized equivalent price per BOE together with a 14.3% decrease in production as the increase in volume due to theNovember 1, 2019 Hamilton Dome acquisition was offset by a volume decrease at theDelhi field. The natural decline of theDelhi field has been temporarily increased by the shut-in of the CO2 supply pipeline from lateFebruary 2020 through the end ofOctober 2020 as discussed in "Lease Operating Costs" below, as well as a suspension of field conformance capital expenditures. Purchased CO2 is necessary to maintain reservoir pressure and therefore achieve normal field performance. The shut-in of purchased CO2 volumes resulted in a decline in reservoir pressure that temporarily exacerbated the production decline. The resumption of CO2 purchases during the current period is expected to gradually restore reservoir pressure and lead to a gradual increase in oil production rates. The Company's average realized oil price was lower primarily due to the decline in WTI pricing combined with an increased differential relative to WTI. The Company'sHamilton Dome production typically trades at a discount to WTI due to its specific gravity and sulfur content. Reflecting excess market supply, current periodDelhi field production sold at a discount to WTI compared to a premium in the year-ago period. The following table summarizes total production volumes, daily production volumes, average realized prices and revenues for the nine months endedMarch 31, 2021 and 2020: Nine Months Ended March 31, 2021 2020 Variance Variance %
Oil and gas production
Crude oil revenues$ 17,918,909 $ 25,281,564 $ (7,362,655) (29.1) % NGL revenues 1,079,868 963,054 116,814 12.1 % Natural gas revenues 499 1,831 (1,332) (72.7) % Total revenues$ 18,999,276 $ 26,246,449 $ (7,247,173) (27.6) % Crude oil volumes (Bbl) 418,587 490,125 (71,538) (14.6) % NGL volumes (Bbl) 69,916 79,982 (10,066) (12.6) % Natural gas volumes (Mcf) 275 935 (660) (70.6) % Equivalent volumes (BOE) 488,549 570,263 (81,714) (14.3) % Crude oil (BOPD, net) 1,528 1,782 (254) (14.3) % NGLs (BOEPD, net) 255 291 (36) (12.4) % Natural gas (BOEPD, net) - 1 (1) n.m. Equivalent volumes (BOEPD, net) 1,783 2,074 (291) (14.0) % Crude oil price per Bbl $ 42.81$ 51.58 $ (8.77) (17.0) % NGL price per Bbl 15.45 12.04 3.41 28.3 % Natural gas price per Mcf 1.81 1.96 (0.15) (7.7) % Equivalent price per BOE $ 38.89$ 46.03 $ (7.14) (15.5) % n. m. Not meaningful. 24
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Net (Gain) Loss on Derivative Contracts
Periodically, we utilize commodity derivative financial instruments to reduce
our exposure to fluctuations in crude oil prices. This amount represents the (i)
(gain) loss related to fair value adjustments on our open, or unrealized,
derivative contracts, and (ii) (gains) losses on settlements of derivative
contracts for positions that have settled or been realized.
Nine Months Ended March 31,
2021 2020 Variance Variance %
Oil Derivative Contracts
Realized (gain) loss on derivatives, net $ 2,525,988 $ - $ 2,525,988 n.m.
Unrealized (gain) loss on derivatives (1,911,343) - (1,911,343) n.m.
Net (gain) loss on derivatives contracts $ 614,645 $ - $ 614,645 n.m.
Crude oil price per Bbl (including impact of
realized derivatives) $ 36.78
n. m. Not meaningful.
Lease Operating Costs
Lease operating costs are presented in two components: CO2 costs for the Delhi
field and other lease operating costs for both the Delhi and Hamilton Dome
fields.
Nine Months Ended March 31,
2021 2020 Variance Variance %
CO2 costs (a) $ 1,605,818 $ 3,501,507 $ (1,895,689) (54.1) %
Other lease operating costs 7,404,030 7,718,731 (314,701) (4.1) %
Total lease operating costs $ 9,009,848 $ 11,220,238 $ (2,210,390) (19.7) %
CO2 costs per BOE $ 3.29 $ 6.14 $ (2.85) (46.4) %
All other lease operating costs per BOE 15.15 13.54 1.61 11.9 %
Lease operating costs per BOE $ 18.44 $ 19.68 $ (1.24) (6.3) %
(a) Under our contract with the
Nine Months Ended March 31,
2021 2020 Variance Variance %
CO2 costs per mcf $ 0.64 $ 0.77 $ (0.13) (16.9) %
CO2 volumes (MMcf per day, gross) 38.3 69.1 (30.8) (44.6) %
Compared to the prior year period, CO2 costs declined $1.9 million . The pipeline
that supplies CO2 to the Delhi field was shut in on February 22, 2020 when a
pressure loss was detected, and subsequently, CO2 purchases were temporarily
suspended. CO2 purchases historically provide approximately 20% of the injected
volumes in the field and the field's recycle facilities provide the other
80%. The recycle facilities continue to operate as usual. The pipeline is owned
and operated by Denbury Resources, and the Company does not have any ownership
in the portion of the pipeline under repair, which is upstream of the Delhi
field.
Compared to the prior year period, "Other lease operating costs" decreased by
$0.3 million primarily due to a reduction in conformance activities in the
current year as a result of lower oil prices partially offset by the Hamilton
Dome field acquired on November 1, 2019 , whereas during the year-ago period the
Company did not have any ownership in the Hamilton Dome field for the entire
period. The Delhi field's "Other lease operating costs" were $1.1 million lower
compared to the year-ago period primarily due to lower workover, labor, and
chemical expenses.
On a total cost per BOE basis, Delhi field costs decreased 12.4% to $15.98 per
BOE in the current period, primarily due to a 39.8% decline in CO2 cost per BOE,
partially offset by a 4.6% increase in other lease operating costs per BOE.
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Hamilton Dome field costs per BOE was $27.29 for the nine months ended March 31,
2021 compared to $30.22 for the nine months ended March 31, 2020 . The decrease
on a per BOE basis is primarily due to a reduction in workover activities in the
current year as a result of lower oil prices.
Depletion, Depreciation, and Amortization ("DD&A")
Total DD&A expense was 10.9% lower compared to the nine months ended March 31,
2020 primarily due to an 11.9% decrease in the oil and gas DD&A amortization
attributable to the 14.3% decrease in equivalent barrel volumes compared to the
prior year. On a per BOE basis, the Company's oil and gas DD&A rate increased
2.9% primarily as result of the acquisition of Hamilton Dome in November 2019
partially offset by full cost ceiling test impairment recorded during the
quarters ended December 31, 2020 and September 30, 2020 .
Nine Months Ended
2021 2020 Variance Variance %
DD&A of proved oil and gas properties $ 3,691,611 $ 4,189,290 $ (497,679) (11.9) %
Depreciation of other property and equipment 5,430 6,969 (1,539) (22.1) %
Amortization of intangibles 10,173 10,173 - - %
Accretion of asset retirement obligations 132,809 103,852 28,957 27.9 %
Total DD&A $ 3,840,023 $ 4,310,284 $ (470,261) (10.9) %
Oil and gas DD&A rate per BOE $ 7.56 $ 7.35 $ 0.21 2.9 %
Proved Property Impairment
The Company recorded a proved property impairment of $24.8 million during the
nine months ended March 31, 2021 primarily as a result of the decline in the
price of oil over the past twelve months. The Company utilizes the full cost
method of accounting for its oil and gas properties under the full cost method
of accounting, capitalized costs of oil and gas properties, net of accumulated
DD&A and related deferred taxes, are limited to the estimated future net cash
flows from proved oil and gas reserves, discounted at 10%, plus the lower of
cost or fair value of unproved properties included in the amortization base,
plus the cost of unproved properties excluded from amortization, as adjusted for
related income tax effects (the valuation "ceiling").
Impairment of Well Lift Inc. - Related Expenses
Our royalty rights and investment in Well Lift, Inc. resulted from the
separation of our artificial lift technology operations in December 2015 . We
conveyed our patents and other intellectual property to WLI and retained a 5%
royalty on future gross revenues associated with the technology. We own 17.5% of
the common stock and 100% of the preferred stock of WLI and account for our
investment in this private company at cost less impairment, if any, plus or
minus changes resulting from observable price changes in orderly transactions
for the identical or a similar investment of the same issuer, if such were to
occur. The Company evaluates the investment for impairment when it identifies
any events or changes in circumstances that might have a significant adverse
effect on the fair value of the investment. At March 31, 2021 , we reviewed our
investment in WLI for potential impairment and, as a result, recorded an
impairment expense of $0.1 million . This impairment charge was recorded based on
a variety of factors including the lack of activity associated with this
technology as well as the continued reduction in drilling activities across the
industry.
General and Administrative Expenses
For the nine months ended March 31, 2021 , expenses of $5.0 million increased
$0.7 million , or 16.9%, compared to the nine months ended March 31, 2020 ,
primarily due to approximately $0.4 million of higher acquisition-related legal
and tax expenses, $0.2 million of salary and benefits and $0.1 million of
consulting expense. The two latter expense increases reflect accrued retirement
expense for the Company's former Chief Financial Officer and expenses related to
the hiring of his successor.
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Other Income and Expenses
Other income and expense (net) decreased due primarily lower interest income.
Nine Months Ended March 31,
2021 2020 Variance Variance %
Interest and other income $ 34,866 $ 160,256 $ (125,390) (78.2) %
Interest expense (60,340) (87,757) 27,417 (31.2) %
Total other income (expense), net $ (25,474) $ 72,499 $ (97,973) (135.1) %
Net Income (Loss)
Net income (loss) attributable to common stockholders for the nine months ended
March 31, 2021 decreased $26.9 million to $18.7 million compared to the nine
months ended March 31, 2020 . Pre-tax income decreased due to the aforementioned
revenue and expense variances. Our income tax provision decreased primarily due
to lower pre-tax income as well as an increase in our effective tax rate
primarily due to depletion in excess of basis deduction and the recording of a
$2.8 million income tax benefit related to Enhanced Oil Recovery credits claimed
on income tax returns for fiscal 2019, 2018 and 2017 during the nine months
ended March 31, 2020 .
Nine Months Ended March 31,
2021 2020 Variance Variance %
Income (loss) before income taxes $ (24,384,855) $ 6,548,096 $ (30,932,951) (472.4) %
Income tax provision (benefit) (5,730,701) (1,719,801) (4,010,900) 233.2 %
Net income (loss) attributable to common
stockholders $ (18,654,154) $ 8,267,897 $ (26,922,051) (325.6) %
Income tax provision (benefit) as percentage of 23.5 % (26.3) %
income (loss) before income taxes
Critical Accounting Policies and Estimates
See our Critical Accounting Policies and Estimates as disclosed within Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in the 2020 Form 10-K. For recently adopted and recently issued
accounting pronouncements from the Financial Accounting Standards Board , please
see Note 2 - Summary of Significant Accounting Policies herein.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Information about market risks for the nine months ended March 31, 2021 , did not
change materially from the disclosures in Item 7A of our Annual Report on
Form 10-K for the year ended June 30, 2020 .
Derivative Instruments and Hedging Activity
We are exposed to various risks, including energy commodity price risk, such as
price differentials between the NYMEX commodity price and the index price at the
location where our production is sold. When oil, natural gas, and natural gas
liquids prices decline significantly, our ability to finance our capital budget
and operations may be adversely impacted. We expect energy prices to remain
volatile and unpredictable, therefore we monitor commodity prices to identify
the potential need for the use of derivative financial instruments to provide
partial protection against declines in oil prices. We do not enter into
derivative contracts for speculative trading purposes.
We are exposed to market risk on our open derivative contracts related to
potential non-performance by our counterparties. It is our policy to enter into
derivative contracts only with counterparties that are creditworthy institutions
deemed by management as competitive market makers. As of March 31, 2021 , we did
not have any remaining open derivative contracts. We account for our derivative
activities under the provisions of ASC 815, Derivatives and Hedging, ("ASC
815"). ASC 815 establishes accounting and reporting that every derivative
instrument be recorded on the balance sheet as either an asset or liability
measured at fair value. See Note 15 - Derivatives to our unaudited consolidated
condensed financial statements for more details.
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Interest Rate Risk
We are exposed to changes in interest rates. Changes in interest rates affect
the interest earned on our cash and cash equivalents. Under our current
policies, we do not use interest rate derivative instruments to manage exposure
to interest rate changes.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized, and reported within the time periods specified in the
SEC's rules and forms and that such information is accumulated and communicated
to this Company's management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow for timely decisions regarding
required disclosure.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the
supervision and with the participation of the Company's management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(c) and 15d-15(e)) as of the end of the quarter
covered by this report. In designing and evaluating our disclosure controls and
procedures, our management recognizes that controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving desired control objectives. Based on the foregoing, our Chief
Executive Officer and Chief Financial Officer concluded that as of March 31,
2021 our disclosure controls and procedures are effective in ensuring that the
information required to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the SEC rules and forms.
Under the supervision and with the participation of the Company's management,
including its Chief Executive Officer and Chief Financial Officer, during the
quarter ended March 31, 2021 , we have determined there have been no changes in
our internal controls over financial reporting that have materially affected, or
are reasonably likely to materially affect, our internal controls over financial
reporting.
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