Evolution Petroleum's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Evolution Petroleum (EPM)

Q3 2011 Earnings Call

May 12, 2011 10:00 am ET

Executives

Lisa Elliott - Vice President

Robert Herlin - Co-Founder, Chairman, Chief Executive Officer and President

Sterling McDonald - Chief Financial Officer, Vice President and Treasurer

Analysts

Philip McPherson - Global Hunter Securities, LLC

Joel Musante - C. K. Cooper & Company, Inc.

Presentation

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Evolution's Third Quarter of Fiscal Year 2011 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, May 12, 2011. And I'd now like to turn the conference over to Ms. Lisa Elliott of DRG&L. Please go ahead, ma'am.

Lisa Elliott

Thank you, Melissa, and good morning, everyone. We appreciate you joining us for Evolution's quarterly conference call to discuss the results of the third quarter of fiscal 2011 which ended March 31. In a moment, I'll turn the call over to management, but I first have a couple of items to cover. If you'd like to be on the company's email distribution list to receive future news releases, please feel free to let me know. My contact information is in the earnings release that Evolution put out this morning. If you wish to listen to a replay of today's call, it will be available in a few hours and archived for one year via webcast by going to the company's website at www.evolutionpetroleum.com, or via recorded telephone replay until May 19. That dial-in number and passcode can also be found in the earnings release. Information recorded on the call today is valid only as of today, May 12, 2011, and therefore, time-sensitive information may no longer be accurate as of the date of any replay.

Today, management's going to discuss certain topics that may contain forward-looking information which are based on management's beliefs, as well as assumptions made by management and information currently available to them. Forward-looking information include statements regarding expected future drilling results, production and expenses. Although management believes that these expectations reflected in such forward-looking statements are reasonable, they can give no assurance that such expectations will prove to be correct. Such statements are subject to certain risks and uncertainties and assumptions which are listed and described in the company's filings with the Securities and Exchange Commission. If one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may differ materially from those expected. Also, today's call may include discussion of probable or possible reserves or use terms like volume, reserve potential or recoverable reserves. Please note that these estimates are of non-proved reserves or resources that are by their very nature more speculative than estimates of proved resources and reserves, and accordingly, are subject to greater risks.

Now with that, I'd like to turn the call over to Bob Herlin, Evolution's Chief Executive Officer and -- Bob?

Robert Herlin

Thanks, Lisa. Good morning to everyone. We certainly appreciate you joining our call today and spending the time with us. I'll briefly review some key operating results, and Sterling McDonald, our CFO, is here this morning. We'll go over some slides and financial information. Then I'll come back and go over our future plans and then we can take your questions.

Hopefully, you've had a chance to review the earnings release we put out this morning, and you read that we reported strong earnings for the quarter, primarily due to a more than doubling of sales volumes from our Delhi Field project during the fiscal third quarter, as well as higher oil prices. The 113% increase in Delhi sales volumes over the immediate prior quarter to gross average daily rate of 2,003 barrels of oil per day was all -- almost all entirely from Phase 1, which is the smallest phase of the project.

Our net production currently comes from our 7.4% royalty interest, which has a big impact on our bottom line, because it doesn't carry any operating costs. We also don't carry severance tax for the time being due to the project being qualified by the State of Louisiana as a tertiary project. Now although the project is just starting to ramp its production profile, net production has still enabled us to turn the corner on profitability, and we should continue to see our cash flow from Delhi grow and fund our other projects. We're very pleased that Phase 1 at Delhi is continuing to produce ahead of schedule and better than expected.

Please note that the Delhi is still at a very early stage, with about 98% of its production from Phase 1 out of a total of 6 phases, and that didn't include the 4 additional reservoirs that were added to the project reserves last summer are in our probable category. Phase 2 in the remaining phases are about twice the size of Phase I, and we begin CO2 injection for Phase 2 at the end of November -- December of 2010. We expected that, that oil response will occur in the middle of this year. However, just by Phase 1, we achieves early oil response in March of this year, and that did contribute to quarter 3 sales. We should see continued oil sales growth throughout calendar 2011 due to the Phase 2 contributions.

Additionally, Denbury, the field operator, is currently rolling out Phase 3 at Delhi, with first CO2 injection expected during this year and meaningful contribution to sales by 2012. The current schedule provides for one new phase of development essentially about every year until the project is fully installed. And since the Delhi EOR project was initiated in 2006 and first CO2 injection began in 2009, the project has consistently outperformed our expectation. In addition, we are benefiting from higher than originally projected oil prices and premium pricing compared to oilfields in most other states due to the location and ability to transport our sales volumes by pipeline all the way to the refinery.

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