2023-09-14 00:51:56 ET
Summary
- Evolution Petroleum's fiscal Q4 results were not good, hurt by lower energy prices and volume declines due to field downtimes.
- The drop in the stock, however, is backward-looking and doesn't take into account the current rebound in energy prices.
- The author is upgrading the stock as the sell-off is overdone and does reflect the current natural gas price rebound taking place.
With shares of Evolution Petroleum ( EPM ) getting crushed after its earnings report, let’s catch up on the stock. My initial write-up can be found here .
Fiscal Q4 Results
For the quarter, EPM saw revenue decrease -57% to $18.2 million. That came in below the $20.3 million analyst consensus.
Crude revenue dropped -40% to $11.0 million, as realized oil prices fell from $106.83 last year to $69.51. Natural gas revenue plunged -73% to $5.0 million, while NGL sales sank -58% to $2.2 million. Realized natural gas price dipped from $7.66 per MCF to $2.44 per McF, while NGL prices dropped to $24.26 a barrel from $49.72 a barrel.
Average daily production fell -13% to 6,484 BOE/D from 7,451 BOE/D. Oil volumes sank -8% to 158 MBbl. Natural gas volumes declined over -15% to 2,044 MMcf, and NGL volumes fell -12.5% to 91 MBbl.
Its largest basin, the Barnett Share, saw production decline -16.5% to 2,791 BOE/D from 3,341 BOE/d, while production for its second largest basin, the Jonah Field, declined nearly -13% from 2,077 BOE/d to 1,813 BOE/d.
Production costs improved to $20.02 per BOE from $25.47 per BOE a year ago.
EPM recorded adjusted EBITDA of $4.7 million, down -78% from $21.7 million. Operating cash flow was -$0.4 million, while free cash flow was -$3.2 million.
Net income for the quarter was $0.2 million, or 0 cents per share. That missed analyst estimates by 7 cents.
The company declared a 12-cent dividend for the quarter. It will be paid on September 29 th to shareholders of record on September 22 nd .
Looking at the balance sheet, the company ended the quarter with zero debt and $11 million in cash.
In my initial write-up on EPM, there were two main risks I identified. One was that oil and natural gas prices would play a big role in the company’s results, especially since it did not have any hedges in place. The fact that energy prices were much lower in FQ4 than a year ago was not a surprise.
The good news is that oil prices are considerably higher currently than the average price that EPM received in FQ4, with WTI prices up about 27.5% from the prices the company realized last quarter. Natural gas prices, meanwhile, nearly hit a two-year high recently, and futures are projecting a nice increase in prices throughout 2024, with September 2024 future prices 20% higher than current prices of around $2.73.
CME Group
The other big risk for EPM was that as a non-operator, it doesn’t have much say in production, and that it is at the mercy of the operators of the assets it has interests in. That certainly played out in FQ4, and the company saw extended downtime and maintenance across multiple fields in the quarter. However, the company does have low-decline reserves, so the decline in production the company saw this quarter should not be the norm and should bounce back in future quarters.
At this point, with the stock seeing a massive sell-off, investors are really looking at old news, and not taking into account the much-improved commodity price outlook and that these extended downtimes will not be the norm.
PEDEVCO Strategic Partnership
In conjunction with its earnings announcement, EPM also announced that it has entered a deal to jointly develop the Chaveroo Field in the Permian with PEDEVCO, where the latter will remain the operator. The deal includes 16,000 acres with an average working interest of 100% and a net revenue interest of 82%.
EPM will farm-in an average of 50% working interest in future horizontal drilling locations on a block-by-block basis. The company will pay PED a fixed price per net acre. The acre has 12 development blocks with up to nine drilling locations for each block. It will fund its portion of the initial two blocks, covering 9 drilling locations once the agreement is closed.
The Chaveroo Field has an estimated 700 million barrels in place, of which less than 5% have been recovered. PED said the agreement will allow it to more aggressively develop the field while pursuing growth opportunities in the DJ Basin.
In a statement , EPM CEO Kelly Loyd said:
“There will be times when the most accretive acquisitions are in the ground and times when they are in the market; today’s announcement puts us in a position to thrive in either environment. This view remains critical as we continue to evaluate and execute opportunities that prudently grow the business on a risk-adjusted basis and provide superior through-cycle returns. In the past, we have primarily grown our business through PDP acquisitions, and we expect this trend will continue. However, with our new strategic partnership with PEDEVCO, we can now more easily provide superior returns to our shareholders when the acquisition environment is out of favor. In short, we view today’s announcement as another important step in our continued corporate evolution, and we appreciate the ongoing support of our shareholders and business partners.”
This is an interesting deal for EPM, which has traditionally bought interests in low-decline producing assets. With this agreement, it is buying an interest in an oil growth asset that needs to be developed. This can add some juice to its production growth in one of the best basins in the U.S. Terms of the agreement were not stated, though, so we’ll have to wait and see how well the deal plays out.
Valuation
EPM trades at about 5x EBITDA based on fiscal year 2024 (ending June) analyst estimates of $41 million. Of course, the price of natural gas and oil can change the actual results immensely, and based on current prices and normal production the current consensus looks light in my view.
From a P/E perspective, it trades at just under 8x the 2024 consensus of 85 cents.
The stock trade at a higher valuation has most small-cap E&Ps, but lower than larger independent E&Ps. It has some cost advantages as a non-operator while smaller E&Ps don't have the scale to absorb higher service costs. However, larger E&P can control their own destiny and have more scale to absorb service costs.
Conclusion
The approximately -25% haircut in EPM’s shares is way overdone in my view. While the quarter wasn’t very good, hurt by low commodity prices and lower production due to maintenance issues, those issues are backward-looking. Energy prices are currently much higher today. Oil prices have jumped considerably, while nat gas prices are up and nat gas futures point to a nice rebound in 2024.
EPM’s production should also bounce back once the downtime and maintenance issues are resolved, as it has low decline reserves that wouldn’t normally see these types of production declines. Meanwhile, its deal with PEV adds a bit of production growth into the mix for the company.
With a still pristine balance sheet, EPM overall remains in good shape. I’d take advantage of this sell-off and will up my rating to “Strong Buy.” I remain bullish on natural gas prices and EPM now looks like a strong candidate to benefit exponentially as natural gas prices continue to rebound.
For further details see:
Evolution Petroleum: Upgrading To 'Strong Buy' As Sell-Off Is Overdone And Backward-Looking