Good day, ladies and gentlemen, and welcome to your Evolution Petroleum Third Quarter Fiscal 2020 Earnings Release Conference Call. [Operator instructions] At this time, it is my pleasure to turn the floor over to David Joe, Chief Financial Officer. Sir, the floor is yours.

Thank you, and good afternoon, and welcome to Evolution Petroleum’s earnings call for our fiscal third quarter ended March 31, 2020. We will discuss today operating and financial results for the quarter. I am David Joe, Chief Financial Officer of Evolution. And joining me on the call today is Jason Brown, President and Chief Executive Officer. If you would wish to listen to a replay of today’s call, it will be available shortly by going to the company’s website for a recorded replay until June 7, 2020. Please note that any statements and information provided today are time sensitive and may not be accurate at a later date. Our discussion today will contain forward-looking statements of management’s beliefs and assumptions based on currently available information. These forward-looking statements are subject to risks and uncertainties that are listed and described in our filings with the SEC. Actual results may differ materially from those expected. Since numbers are readily available to everyone in yesterday’s news release, this call will primarily focus on key results, the volatility in oil prices and how that affects the company, COVID-19 and our typical update on operations and on plans for the remainder of fiscal 2020, including capital spending. I would now like to welcome Jason Brown on the call.

Thank you, David. Good morning, everyone, and again, thank you for joining us today for Evolution’s third quarter fiscal 2020 earnings call. I’m speaking with you today in a dramatically different environment than last quarter. As you all know, in early March, crude 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. With regard to COVID-19, first, I would like to say that I hope all of you are staying safe during this pandemic and wish you continued good health. Second, I would like to take this opportunity to thank my employees, Board members and partners for their ongoing dedication to this company. They have acted quickly and remained diligent during these trying times. Particularly, while many are balancing additional responsibilities with their families due to closures of schools and day cares and other adjustments to everyday life. Like all of you, we have spent the last two months adjusting our business and home life to the impact of COVID-19. Early in February 2020, the company began preparing for potential impacts on its business, focusing on the company’s ability to maintain its operations and system of controls remotely. I’m happy to share that we were maximizing our remote wherever possible, and our employees are effectively collaborating virtually. Given the small size and nature of our company, it was a fairly seamless transition to our operation and one that we were able to do and continue to be fully functional. Over the years, our company has been able to withstand the impacts of economic slowdowns, sudden or extended period of volatility in commodity prices within the oil and gas industry and global disruptions. Unfortunately, we have never had to operate in…

Thank you, Jason. I also would like to reiterate that I hope you and your families remain safe and well during these challenging times. I will share some additional highlights of our financial results for our fiscal third quarter ended March 31. However, please refer to our press release yesterday for additional information and details for the full fiscal third quarter and look out for our Form 10-Q to be filed shortly. In the quarter, the company generated net income of $3.7 million, as Jason noted, marking a long consecutive streak of positive reported net income. Inclusive of a one-time $2.8 million income tax benefit related to enhanced oil recovery tax credits. The company generated cash flows from operating activities of $4.1 million in the quarter. The company also paid its 26th consecutive quarterly cash dividend and declared the next dividend. The company maintained a strong balance sheet with $20.7 million in cash on hand and an undrawn credit facility and no debt. And lastly, the company entered into NYMEX WTI oil swaps, covering a large portion of our production for the next eight months at a fixed price of $32 per barrel. Diving into a little more details. Total revenues were $7.7 million for the quarter, which generated $3.8 million in income from operations. Lower average realized oil prices was the primary driver of the decline in revenues when compared to the prior quarter, and to a lesser extent, lower sales volumes at Delhi, offset by a full quarter of Hamilton Dome production due to the effective date of the acquisition in the prior quarter. Delhi’s average oil price was down 15% to about $47 per barrel. This is inclusive of an LLS premium in the quarter of about $1.49, offset by one last month of temporary trucking charges…

Thanks, David. The company remains well-positioned to weather the current and future market conditions while maintaining a strong financial position to capitalize on new growth opportunities that will contribute to our ultimate goal of providing return for our shareholders. The company is working with its operating partners to review lifting cost on a well-by-well basis, basing shut-in decisions on wells with low or temporarily negative netbacks while retaining the operating flexibility to return wells to service as realized prices improve. The company is continuing to monitor the oil price environment and is working with its operators to plan accordingly for various scenarios. We believe the current weakness in oil and gas prices presents an opportunity to acquire long-life production with upside potential at a very attractive price for BOE. I think it also validates Evolution’s prudent decisions over recent years to retain substantial liquidity with little to no debt. It will provide diversity, long-term sustainability and support and grow our dividend. Evolution is uniquely positioned to pursue growth opportunities. We will look to take advantage where the market allows us to evaluate asset acquisition opportunities that will further grow the company. With that, I think we’re ready to take questions. Operator, will you please open the line for questions?

Thank you. [Operator Instructions] And we’ll take our first question from Jeff Grampp with Northland. Please go ahead.

Good morning, guys, or should I say afternoon.

Hey, Jeff.

Good afternoon, Jeff.

I was curious given – and I’m sure things are fluid and probably hard to get exact handle on. But production over the next couple of quarters, understanding that there are some real-time decisions on shutting in particular wells, probably on both of your assets, and then there is some reduced CO2 volumes with the pipeline. So any kind of ballpark, high-level commentary you can kind of give us in regards to production expectations? Or maybe what kind of magnitude in terms of shut-ins you guys are seeing in the field.

Well, Jeff, we generally don’t give guidance. I think we’ve seen a little bit of a hit so far between Delhi CO2 and the pipeline issues and, basically, the lack of conformance. We’ve been very successful over the last few years, flattening the natural decline. Natural decline there is probably in the eight-ish percent range. And Denbury has been very successful flattening that decline to zero or even negative decline, an increase in production. So without that conformance, I think that kind of tells you where that’s going to be naturally. The CO2 is probably another bit of a hit. So I think collectively, between those two net, to us, maybe about 100 barrels to 150 barrels a day. And in Ham Dome, we’re really pleased with that acquisition. No acquisitions look good in this price environment, but we just couldn’t be happier with that operator. They put together an excellent team up there. They’ve been going through, and they’re dialing back production a little bit on some of the wells that don’t make sense. It’s a little bit different operational issue up there. Most of the wells being pumped, they’ve had electricians looking at the actual power usage well by well, doing very detailed analysis because power is one of the largest expenses up there. So right now, I think, we probably shut in about 30% to 40% of our production in Ham Dome, which is about 8% of our overall production for the company. So it’s less significant, but the goal there is to kind of get to a cash flow neutral situation even at $10 realized prices. So we’re happy with both operators in this time. One of the lowest lifting cost fields for Denbury. So we don’t anticipate any substantial cutbacks or shut-ins. There’s no intentional shut-ins at Denbury. In both situations, we’ve got no indication from either operator that any of the midstream partners have talked about curtailment or shut-in. So there is a difference between curtailment and shut-in. Shut-in is choosing to do that based on the economics of individual wells. Curtailment would be a midstream, saying we can’t take your oil, which is happening in some cases, neither which our fields are having that issue. So I think that’s probably as close as I can get to answering that. I think, roughly, we’re about probably 10% to 12% down right now.

Got it. That’s perfect. My follow-up, kind of a little bit of a housekeeping or clarification. On the CO2 volumes and how the contract is structured with Denbury, with the pipeline effectively shut in, in the near term, does the CO2 volumes that you guys report on your financials? Does that go to zero? Or does the recycled volumes kind of count toward the injection that you guys effectively pay for through your financial statements?

Yeah, Jeff. This is David. So that CO2 number that’s advertised in our results of operation, that’s a purchased CO2 volume, not a recycled volume. So, yeah, in the current quarter, we have a lower number because in the current quarter, we did have some purchase volumes up to the point of pipeline shut-in, which is around February 22. So yes, it’s a zero in March, and then so far, in April.

That make sense. We were purchasing about 83 million a day in January and most of February and then zero in March. So we’re not purchasing anything right now, which has turned out to be a little bit of serendipity. It’s a tremendous savings. If you think about the – for us, we purchased about net Evolution of about 20 million cubic feet a day, and that’s ballpark between the conformance and the purchase of CO2, both of which are kind of on hold right now of our $19 of lifting cost. It makes up about $9 of it. So with no CO2 purchases, we’re still cycling the 300 million a day – injecting 300 million a day of recycled. That’s still fully functional, but just not adding the additional 80 million. So you’ve seen a little bit of pressure support drop off, but not the full 380. But it doesn’t even remotely compare to the cost savings at these prices. So we’re kind of okay with that right now.

Yeah. No, that’s a nice embedded hedge to have. So I appreciate the clarification there, and I’ll let someone else hop in.

Thanks, Jeff.

And next we’ll take a question from John White with ROTH. Please go ahead.

Good afternoon, guys.

Hey, John.

Good afternoon, John. Thanks for the write-up on Monday. We read that. We appreciate that.

Well, I’m glad you read it. And as I wrote in that note, I anticipated you to suspend the dividend in its entirety. So you surprised me by paying a dividend. Although it was reduced, you paid a dividend. And I think it reflects the confidence you have in your balance sheet and your cash flow.

It does. We also were able to put in a hedge, and the Board, we’re just so committed to that dividend and returning value to our shareholders, and we have shareholders that have us in dividend fund. It’s just an important part of our brand and our commitment, and we’re very proud of it. We’ve had to lower before back in 2015, 2016, from other situation in price reduction or prices had dropped to, I think, 57% at the time. And it was down from $0.10 down to $0.05 a quarter, I think, for six quarters or so and then quickly ramped it back up to $0.10. So we’re pretty committed to the $0.10 a quarter, but only if it’s prudent. And I think in this situation, we’re really excited about the potential of M&A opportunities, but still being able to deliver a quarter. I think these prices are still a decent yield. It’s still rewarding shareholders and our target is kind of to preserve our cash. We felt like we could do that.

I think you struck a nice balance there, so that’s good.

Thank you.

David, I missed – it’s a nice – although, it’s one time, that tax that enhanced oil tax benefit is nice, and I missed your comment. When did you start working on that?

It was November, December of last year we started doing some work on that.

Of 2019?

Yes.

Okay. Well, thanks a lot, and I appreciate you taking my question.

Thanks, John.

Thanks, John.

Operator, we’ll take the next question, if there is one. Please hold, I’ve got a note from the operator that her line looks like it dropped.

I think we have a couple more questions. If everyone will just bear with us. The operator got dropped and is now logging back on.

I do apologize. I’m so sorry. I’m back. And our next question comes from Bhakti Pavani with Alliance Global Partners. Please go ahead.

Good morning, guys. Thank you for taking my question.

Hey, Bhakti.

Most of my questions have been asked, but just curious on the dividend. It’s nice to see that you are continuing to pay dividend at this time. Just was wondering, when do you expect or at what oil price would you expect to go back up, in your dividend payment, up to your previous levels?

Well, it’s kind of hard to say. It’s more of a feel of when we can sustain it for a while. We don’t want to just go back up and then have to go back down again. So I think that generally, we’re kind of fully cash flow positive, including the dividend around the $42 range. So our lifting costs are – when prices of oil, it kind of varies a little bit. When prices were $50, our CO2 prices were a little bit higher. And like David said, our lifting costs went from – with prices going down, went from $21 down to $19, and we expect them to be sub-$15 right now. So I think this is just a prudent decision with the tremendous amount of uncertainty. It’s our strong desire to get back there as soon as possible. So, hopefully, this is just a few quarters, and we can all bounce back from this and ramp-up demand, but we had to be prepared to endure a few quarters.

Okay. That’s great color. Just one more on the M&A front. I know it’s not a very good time to be in the market of selling assets, but have you seen any kind of lucrative opportunities open up, given you have a healthy balance sheet, plus the credit facility? Are you seeing anything in the market that’s lucrative enough?

What we need is their prices to start to stabilize. The volatility has just been something that nobody’s ever seen. So even if they stabilize in the $30 range for a while, people will then start trading. Nobody is going to really do a deal until there can be some valuation put on something, even if they’re hurting. We’re starting to see some bankruptcies. We’re getting inbound calls from industry contacts, even on smaller situations where creditors are being forced to make some decisions and maybe step in, and we want to be a solution for that. So we’re seeing some conversations. I think, probably, those will get kinetic in the more three- to four-month range rather than the three- to four-week range, if that’s a decent perspective.

That’s fair enough. Thank you very much, guys. That’s it for my side.

Thank you. Excellent.

[Operator Instructions] And next we’ll go to John Bair with Ascend Wealth Advisors.

Thank you. I was going to ask some questions about M&A, whether or not you’re being approached actively right now. But given the environment, I think you addressed it pretty well. The prices need to kind of stabilize. People probably are trying to figure out how to hang in there right now. But, nonetheless, I am curious whether or not you are getting frequent inbound calls and whether or not there are some opportunities in Hamilton Dome. If I recall, you had previously indicated, there might be a potential to pick up more interest in that particular area, unless I’m wrong on that?

Certainly. We’re definitely getting inbound calls in a number of different situations. So I’m interested in taking back stock, which would be interesting to us. Probably, the Board doesn’t feel like at this point, that’s a little too expensive in terms of what we feel like, we’re undervalued at this point. But at some point, it makes sense maybe to do a little bit of that between cash and our undrawn revolver. We feel like we’re poised to be able to take advantage of those opportunities. In terms of Ham Dome, I think that’s a real possibility. We’d love to have some more of it. We’re very pleased with that acquisition. I think our shareholders are going to be very pleased with that acquisition. And all through the 2020s and 2035, when it’s supporting our dividend 15, 20 years from now. It’s such a long life field. We’d love to have some more of it. But that being said, they’re not motivated to sell in this type of price environment. And it’s a little tricky right now, John, with how do you do a deal because not many things are even cash flow positive. So can you buy something and kind of remain neutral for a while or cash flow breakeven and then collect those reserves for later. I think we’re all just kind of scratching our head, trying to figure out how to make a deal, but we’re pretty confident we’ll be able to get something here pretty soon.

Okay. And then with regards to the hedge, I guess, obviously, that’s good through the end of this year. At what point would you consider laying on some more hedges? Again, I realize it’s price dependent, but kind of the scenario that you would see with stable prices? I mean, obviously, if things are rebounding a little more strongly than what’s perceived to be likely to happen. So many unknowns out there as far as economic recovery and so forth, but kind of your thought process on what would cause you to consider laying on some more hedges, say, in 2021?

It’s a really good question. It’s one that we’re watching very closely. I guess the main thought that I would want to extend there is that we think of hedges as an insurance or more of a defensive policy rather than one of speculation. So I think the Board feels at this point, getting too far into 2021 starts to be a little more speculation. I think we feel like we’ve got some time to look at that. We just don’t know which way this thing is going to go. If things start to ramp up, obviously, everybody is kind of biting at the bit to get back to it and restart the economy. And there is a lot of motivation that way, but everybody has to also be prudent. And is there a potential second wave? I think we believe that it’s going to take a while to get demand back up to where it was. We have seen very positive reductions from producers that’s happening faster than people have predicted. So that’s going to be good to get a balance. The tremendous amount of statement, there’s just so many factors there. But it’s got to get to back up to demand, and then once it gets back up to demand, it’s got to cut through and demand has to outpace production long enough to burn through all of the storage. And it feels like that’s probably going to be at least through the first half of 2021. So we’re definitely eyeballing 2021, but we feel like it’s just a bit speculative at this point.

I didn’t mean to imply that you would be currently looking to lay on hedges in 2021, but as we get deeper through this year, kind of at what point. And I didn’t mean to imply that you were looking at it from a speculative standpoint at all. I realized it is more of a defensive measure. But, yeah, I was just kind of curious kind of at what point you might or what conditions might be that you would consider doing that as the year goes on? So it’s kind of a wild question. It’s a wild question. So many variables out there right now.

As I mentioned before with Bhakti’s question. $32, the reason we saw an opportunity there to set in that price for a substantial portion of our production is, we’re kind of healthy. We don’t have the full access to be paying the full dividend at $32 a barrel, but we’re not hemorrhaging a bunch of money, and we’re able to protect our financial strength. So that’s going to be a deep part of the consideration. If we start looking at 2021, and the Board’s got until September at our next Board meeting, and that will be when we file our K at our fiscal year-end. And sorry, I think we would probably want to be looking pretty heavy at that point and maybe sometime before then. Again, with that eye of a defensive posture for 2021, if we could be somewhere there where we could support this quarter, $0.025 dividend, quarterly dividend and preserve our cash. But, hopefully, we’ll be into new assets at that point, and it will be a whole new picture. So we have a lot of things to consider.

Well, I would imagine also, there’s some aspect as to your Denbury and what their potential activation or activity could be in further developing Delhi. And, obviously, that’s a whole different ball game there. So anyways...

Well, Chris, we’re not going to speculate about what’s going on with them. We have a great relationship with them. And their management has expressed to me, and I know that they’re cutting back on some of their production, but they’re hedged pretty well through the rest of the year. And they’ve indicated that Delhi is one of their lowest lifting cost fields, so it’s not going to be the one that’s cut back. So that’s good news for us.

No. But I meant it from the standpoint of developing further areas there. That line being with potential, but have been deferred, yeah.

Push back to 2021, again. And we saw a little bit of that. But now, as David said, production went up a little bit even though Delhi went down, and that’s kind of the point of Ham Dome filling in some of that wedge, and we hope to continue to add to that.

Very good. Thank you for taking my questions, and you all be safe. Stay healthy.

Appreciate it.

Yes.

[Operator instructions] And we’ll move next to Rich Howard with Boiling Point. Please go ahead.

Hi, Jason.

Hi, Rich.

Could you give us an indication with December crude, WTI, at around $30? Have we basically locked in the rest of this year at about where it will be in the June quarter, regardless of the crude price?

Yeah. We locked in like 1,400 barrels a day for the – it’s a financial hedge, though. So we are going to get – right now, the forecast of oil is like you said, $30 in December. There is a forward curve. So that would have us in the money, per se, on hedge for the entire balance of the year for 1,400 barrels a day, which is a substantial portion of our oil production. We’ll be getting the difference between WTI and $32 is a make up. So effectively, we’ll be getting $32 a barrel, regardless of what the price of oil is for the remainder of 2020.

The point I was trying to get at is, our chance to really improve the situation for the company doesn’t come until 2021 with a higher oil price. Is that correct?

That’s right.

Yes. Well, I’m happy with that. That’s fine. Thank you very much.

Yes Okay. Great.

And with no further questions, I’ll turn it back over to Jason Brown for any closing remarks.

Well, thank you for your participation on today’s call. Please feel free to contact me or David with any other questions. I look forward to providing you with an update in September. Thanks, everyone.

And that conclude today's teleconference. You may now disconnect your lines and have a great day.