Kadant Inc

NYSE:KAI

Good morning, everyone, and welcome to the Evolution Petroleum Fiscal Second Quarter 2025 Earnings Conference. [Operator Instructions] Please also note today's event is being recorded.

At this time, I'd like to turn the call over to Brandi Hudson, the company's Investor Relations manager. Ma'am, please go ahead.

Thank you. Welcome to Evolution Petroleum's Fiscal Second Quarter 2025 Earnings Call. I'm joined today by Kelly Lloyd, President and Chief Executive Officer; Mark Bunch, Chief Operating Officer; and Ryan Stash, Senior Vice President, Chief Financial Officer and Treasurer.

We released our fiscal second quarter 2025 financial results after the market closed yesterday. Please refer to our earnings press release for additional information containing these results. You can access our earnings release in the Investors section of our website. Please note that any statements and information provided in today's call speak only as of today's date, February 12, 2025, and any time-sensitive information may not be accurate at a later date.

Our discussion today will contain forward-looking statements with management's beliefs and assumptions based on currently available information. These forward-looking statements are subject to the risks, assumptions and uncertainties as described in our SEC filings. Actual results may differ materially from those expected. We undertake no obligation to update any forward-looking statements. During today's call, we may discuss certain non-GAAP financial measures, including adjusted EBITDA. Reconciliations of these measures to the closest comparable GAAP measures can be found in our earnings release.

Kelly will begin today's call with opening comments, Mark will provide an update on our properties and plans as they relate to our ongoing strategy of maximizing shareholder returns, and Ryan will provide a brief overview of our fiscal second quarter highlights. After our prepared remarks, the management team will be available to answer any questions. As a reminder, this conference call is being recorded. If you wish to listen to a webcast replay of today's call, it will be available on the Investors section of our website.

With that, I will turn the call over to Kelly.

Thank you, Brandi, and good morning, everyone. Our team continues to execute a disciplined strategy that balances organic growth with high-quality acquisitions, all while maintaining a strong financial foundation. Our ability to adapt to market conditions, capitalize on strategic opportunities and drive consistent returns has been central to our long-term success. As we sit here today, I would describe the outlook for M&A as highly encouraging. We're currently evaluating multiple acquisition opportunities, all of which have the potential to enhance our long-term growth strategy and further improve our cash flow generation right from the get-go. We are seeing opportunities for negotiated transactions across several fronts, all at highly compelling valuations that if we were able to close will be materially accretive.

In the last 5 years, we have invested over $118 million in shareholder capital to grow production by 200% and expand our portfolio with hundreds of high-quality undrilled locations all secured at exceptional value. We take great pride in our track record of acquiring assets at attractive valuations that deliver meaningful cash flow and long-term shareholder returns. And thus, we are confident in our ability to deliver on these initiatives and drive cash flow towards our dividend program for years to come.

The energy market remains dynamic, presenting both challenges and opportunities. While the first half of fiscal year '25 has been marked by significantly lower realized commodity prices versus the same period in fiscal year '24, particularly for natural gas, we are excited about the expectations for the rest of the year. Natural gas prices throughout the futures curve look much more favorable and look to have staying power as the outlook for increased demand only get stronger with expected easing of LNG export restrictions and increased commercial and residential demand for natural gas-fired electricity.

The front month pricing of crude oil has tended to roll month-over-month towards spot pricing. [ Bucking ], the obvious backwardation in the WTI futures curves. With supply and demand remaining fairly tight and threats of increased sanctions and other potential disruptions remaining ever present, we see this trend is likely to continue. All of this makes for a very promising setup for the second half of our fiscal year '25. Despite this volatility, our diversified portfolio continues to demonstrate resilience, allowing us to sustain strong production growth and effectively manage market fluctuations. Our ability to navigate these market conditions through a combination of strategic investments and disciplined capital management remains a key differentiator for Evolution.

Our total production grew 10% year-over-year to 6,935 BOE per day, reflecting strong contributions from our geographically and commodity-type diversified portfolio of long life, low decline producing assets and our organic growth components. This double-digit production growth was in spite of temporary downtime in Williston and Chaveroo, that resulted in approximately 90 BOE per day of deferred production for the quarter. The downtime issues have since been resolved, with rates fully restored by January. In the SCOOP/STACK, which we acquired based on accretive metrics to the then existing production exclusive of any future new drills, has and continues to impress with the results from new wells that have been drilled and/or completed since the acquisition. Our partnership at Chaveroo field with its measured pace is progressing nicely as planned.

With overall well results coming in at or better than expectations and an estimated 300 plus additional gross locations between SCOOP/STACK and Chaveroo, these properties represent the most exciting current components of our organic growth portfolio, which is a crucial component to our more stable proved developed production base in driving future cash flows and feeding the company's dividend machine for many years to come.

We're pleased to announce that this quarter marks our 46th consecutive dividend payment, maintaining our quarterly payout at $0.12 per share for the past 11 quarters. This consistency underscores the strength of our asset base our ability to generate reliable cash flow and our commitment to returning value to shareholders through all market cycles. To date, Evolution has returned approximately $126.6 million or $3.81 per share back to shareholders in common stock dividends. In fiscal Q2, we returned $4.1 million to shareholders through dividends.

Looking ahead, we remain focused on driving long-term shareholder value through disciplined asset acquisitions, strategic drilling expansion and return of capital. Our focus on high-quality, low-decline assets ensure sustainable growth supports our dividend program and positions us to thrive amid commodity price volatility. With a strong portfolio, a history of disciplined capital allocation and a commitment to shareholder value, we are well positioned to continue executing on our strategy for years to come.

With that, I'll turn the call over to our COO, Mark Bunch, to review our operations in more detail. Mark?

Thank you, Kelly, and good morning, everyone. I will focus my remarks on key operational highlights from the quarter and encourage listeners to review our earnings press release and filings for additional details across our asset base. 3 new wells at SCOOP/STACK were brought online during the quarter, adding to the 7 gross wells completed in fiscal Q1 2025. We also agreed to participate in 8 additional horizontal wells positioning us for continued production additions in the region. Since the effective date of the acquisitions, a total of 32 gross wells or 0.5 net wells have commenced first production.

We continue to outperform our type curves as well. Our production in fiscal Q1 was higher than Q2 due in large part to inclusion in Q1 of unaccounted for production related to prior periods. With the ongoing activity at SCOOP/STACK and the Oklahoma statutes that allow operators to delay payment on first production to working interest owners for up to several months. We could have the same thing happen in future quarters on newly drilled wells. However, with many operators, we're able to gain access to near real-time daily production, thus allowing us to account for new well production during the same period.

At Chaveroo, production this quarter was temporarily impacted by gas interference issues in the downhole pumps, which reduced flow rates. The operator resolved the problem inexpensively and production has stabilized back to its forecasted levels. At the beginning of January, we commenced drilling on the 4 new gross wells in our second development block. As of today, we had finished 2 wells out of the 4 and expect to finish drilling the remaining 2 wells by early March. Completions are scheduled to start in April. We have preliminarily agreed to 6 additional horizontal wells in drilling Block 3, which are expected to come online in early fiscal 2026.

At Delhi, CO2 injections resumed during our fiscal second quarter and contributed to our production growth. Following the quarter end, on new producing well was drilled at Test Site V. We're awaiting the results. In the Williston Basin, a compressor failure on a third-party operated gathering system caused temporary downtime for approximately 30 days at the start of fiscal Q2, leading to lower natural gas and NGL sales for the period. Oil volumes were impacted by delays in year-end sales in December, which were subsequently sold in January. Looking ahead, we remain focused on maintaining reliable production optimizing efficiency and ensuring the long value of our Williston assets. At Hamilton Dome, Jonah Field and Barnett, production has performed as expected for the quarter, and we are pleased with the results.

With that, I will turn the call over to our CFO, Ryan Stash, to review our financials in more detail. Ryan?

Thank you, Mark, and good morning, everyone. As Brandi mentioned earlier, we released our earnings yesterday, which contains more information on our results. Now I'd like to go through our fiscal second quarter financial highlights.

In fiscal Q2, we had total revenues of $20.3 million, down 4% year-over-year. The decline in revenues was a result of lower realized commodity prices, which were down approximately 12% year-over-year. However, we were able to largely offset the lower commodity prices with a 10% increase in production volumes due to our SCOOP/STACK acquisitions in February 2024 and subsequent drilling and completion activities as well as new wells at Chaveroo that came online at the same time.

We have continued to add hedges to meet the requirements of our credit facility and protect cash flow. Our ongoing goal for the hedging program continues to be to reduce downside commodity price risk while preserving the maximum potential upside. Accordingly, we will continue to monitor the market and may add additional opportunistic hedges. On the balance sheet, as of December 31, 2024, our cash on hand totaled $11.7 million, providing us with a strong financial position. Borrowings under our credit facility stood at $39.5 million, supporting our ongoing operational and strategic initiatives.

Total liquidity, including cash and borrowing capacity amounted to $22.2 million, ensuring financial flexibility as we continue to execute our growth strategy. We declared a quarterly cash dividend of $0.12 per share payable on March 31, 2025. This marks our 46th consecutive quarterly dividend, underscoring our commitment to returning capital to shareholders and maintaining a stable and reliable dividend policy.

I'll now hand it back over to Kelly for closing comments.

Thanks, Ryan. It should be clear that our strategic initiatives, both through acquisitions and organic development have positioned Evolution for continued success. Our track record of acquiring high-quality, low-decline assets at compelling valuations, expanding our drilling portfolio and maintaining financial strength reinforces our long-term growth trajectory. Looking ahead, we remain focused on disciplined capital allocation, maximizing shareholder returns and sustaining our dividend program. With this approach, we are very confident in our ability to navigate market conditions, execute on strategic opportunities and drive meaningful value for our shareholders well into the future.

With that, I'll turn it over to the operator to begin the Q&A session. Thank you.

[Operator Instructions] And the first question will come from Bobby Brooks with Northland Capital Markets.

I just wanted to ask first, obviously, it seems like M&A is still a top focus for the team, and it seems like the pipeline is really healthy. I just wanted to get a sense of would you guys be comfortable doing multiple transactions at once or maybe it's in a short window of a month or 2 where you guys execute a couple or would you -- or the preference would be to rather space it out? Maybe also if you could just give us a sense of the size of these targets in your pipeline. Are they similar to what you've done in the past or bigger?

Yes. Thanks, Bobby. I appreciate the call. In general, right, I would say most of the things that we are taking a quick look at -- deep look at, frankly, our in line with what we've done in the past, nothing sort of out of bounds on that front for the most part. We generally try to do things on a digestible basis. So if it turned out that doing 1 or 2 in serial sort of back-to-back order made sense from how you finance it all this, and it was very digestible and still highly accretive to our dividend per share -- it would be something absolutely we would consider, but it has to be the right deal and they both have to make sense together if we went that way.

I mean I would just add, Bobby, I mean, if you look back historically, we did our Williston and Jonah deals pretty close within a couple of months of each other, right? So certainly, something we've done in the past and as Kelly said, we will just need to be the right 2 types of deals or multiple deals, but there's certainly a chance we could do that.

Yes, SCOOP/STACK and our Chaveroo partnership, we're very close in timing as well. Again, the cash flows needed for those and received from those will be the main contributing factor.

Got it. And then maybe just -- it seems like the pipeline, it seems that it's just accelerating a bit kind of the opportunities and opportunities set for M&A targets. Could you maybe just discuss a bit as to why that -- and maybe I'm reading into it too much, but it seems like there's an acceleration. Why has that -- could you maybe just give us a sense as to why that is happening from like a macro perspective?

Yes. It's always interesting to tell. You think at this point in time in the commodity cycle, there ought to be a ton of deals going on. And we've seen certain times where there's really nothing out there. Sellers are just expecting some current price to last forever or they're expecting some futures price that -- yes, sure, you'll make money on the [ future for us ], but you'll have to lose money right now to do the deal. Sometimes they just don't line up buyers and sellers' expectations. And we just happen to be at a point right now where we are finding that we can make a reasonable offer, and a buyer will -- a seller will make a reasonable response to it. So again, it just -- it seems like sometimes all the stars line up and sometimes none of them do.

Got it. And then maybe just the last one for me. I think, Mark, you mentioned kind of the dynamic that in the SCOOP/STACK, where there's a bit of a delay that the operator can pay out the non-op guys. But then you said that, that could be in a future -- it could be an impact in the future, but it's balanced off with something else. I don't -- could you just kind of rehash that statement? I wanted to understand kind of what that balance is.

Yes. It basically boils down to knowledge because we -- the problem is we only have a small working interest in most of these wells, say 2%. So we don't have these tight relationships with the operators that we have in our other areas. What's happened sometimes is wells -- we'll participate in wells, but we won't get information about being online until after until we like to get the first check, which might be for like 4 or 5 months of revenue. and we didn't accrue for it because we didn't know or we didn't know the -- we might know it's online, but we might not know the numbers because we couldn't get the information. Now the good news is, going forward, we're getting more available data electronically from operators that participate in the system that we subscribe to. So that probably gets better over time, but occasionally that can still happen. So it's just realizing revenue in a period -- in a quarter that may be after it actually already produced.

Got it. And congrats on the quarter.

And the next question will come from Jeff Gramp with Alliance Global Partners.

I wanted to start first on the SCOOP/STACK side of the business for you guys. You talked about continuing to have some above-average results. Can you give us a sense of any materiality there relative to either type curve or expectations you have for some of these new wells?

Yes, sure thing. So it looks like on average, we're about 10% high on our -- what we're actually -- what's actually occurring is about 10% above our type curve for gas, and we're like pretty much dead on, on oil.

Got it. That's really helpful. And on Chaveroo, so I think you mentioned, Mark, April for completions to begin on these upcoming wells should we expect much of any contribution in fiscal Q4 from those wells? Or I know there's typically a flowback period for those where you don't get much of any oil. So just I guess, trying to level set expectations for what kind of contribution you get this fiscal year, if any, from this?

You're not going to get a lot. You'll maybe like, I don't know, maybe 1.5 months or something like that.

Okay. Great. If I can sneak 1 more, and I don't know if maybe this is for Ryan or whoever else wants to take this. CapEx, I know when you guys came into the fiscal year was budgeted kind of in now like [ 12 to 14 ] range, I think, in that ballpark. Obviously, kind of way underspending that on a run rate basis in the first half of the fiscal year. Is that range still pertinent? Or how should we think about capital spending in the back half of the year?

Yes. I mean it's going to be back half weighted, Jeff, I mean, it's majority of it being, obviously, drilling and completion at Chaveroo. And I think as we mentioned too, and kind of in our remarks in the press release, there's some activity in SCOOP/STACK. So we do have some money budget in SCOOP/STACK, as we said. We've had other AFEs come in that we maybe weren't expecting and some maybe get pushed, but there is some -- we are going to expect some capital there. And then a majority of our drilling and completion costs for Chaveroo, those 4 wells is going to happen in the second half of the year.

But we haven't seen any reason to adjust that overall.

No, the range we still feel comfortable with.

The next question will come from John White with ROTH Capital.

Thanks for all the updates on the call. On the subject of acquisitions, are you concentrating on existing core areas or could we see you open up a new core area with an acquisition?

I would say that some of what we're looking at has a bit of an overlap, and then some of the stuff would be really new core areas. But as you know, well, as a non-op rather than if you were an operator, it would require a whole new team, and you'd have to have a team for new Area X, whereas for a nonop, that doesn't really apply to us. So it's not a G&A bump that would -- you might expect from somebody who's operating in a new area. That's the beauty of us and our model being nonop.

And the next question will come from Jeff Robertson with Water Tower Research.

Mark, on a micro level, the interference you spoke about at Chaveroo, was that on the new wells that have been drilled or was that on existing producing wells?

That was on the 3 producing wells that we have.

From drilling [indiscernible]

Yes.

Does that issue make you think any differently with how you complete or stimulate the upcoming 4 wells.

It doesn't affect the stimulation. On the completion side, it could -- we are looking at different ways to lift it. Say as opposed to doing an ESP, we can try like a jet pump or something like that. But we have to -- we kind of have to figure that out. The nice [ thing ] is we found an inexpensive way to kind of get around the problem if we need to. And we could also -- so we could end up deciding it the best but is still to do ESPs. That work is still left to be done.

And Jeff, I mean, for context, it's a real simple kind of plumbing problem. Lay a line and dump some water down the backside.

And in this particular case, the line was already laid from the facility back to the wells. Anyway, we just had to separate it out so that we could dump water down the backside of each of the wells. It was really inexpensive.

Okay. Kelly or Ryan, the last 2 acquisitions that Evolution completed obviously added some organic growth in both the SCOOP/STACK and Chaveroo. When you think about the profile of the company today, would you like to add inventory? Would you like to add PDP? Would you -- is the best outcome of mix? Can you just talk about at a high level how you think about where the asset base is today and what you'd like to accomplish with incremental acquisitions?

So where we sit today -- I mean, listen, Jeff, the way we looked at it, certainly the way we looked at SCOOP/STACK, we bought that because it was a nice accretive acquisition on PDP, right? Without taking into account all the benefit from all the upside, that was a good deal on PDP. It came with a bunch of upside that, frankly, like Mark mentioned, is performing better than we thought when we acquired it. So I would say we're never going to turn down great opportunities for additional upside. And anything we look at, we like to have some ability to have some upside. However, it is something that we are focusing on now would be immediately cash flow accretive. So whatever we do is going to be high on the PDP front. And again, we'll get that land up as you guys down in New Orleans, I like to say, from additional upside.

If I can ask 1 more Ryan, you talked about the balance sheet. I think you all issued a little bit of equity in the quarter under your ATM program. Can you talk about how you think about financing alternatives between debt and equity for acquisitions at this point?

Yes. So I mean, from a balance sheet perspective and a leverage, we feel we're within kind of our stated target, right, 1x leverage. So I think you can anticipate any acquisition we do, if we added some debt, we would stay within those bounds. And so we're obviously in consultation with our lender and others just to make sure we have availability we would need to consummate an acquisition. [indiscernible] going to be a large acquisition. We obviously have said before, if it's large and accretive and it makes sense, we could look to use potentially some more into the ATM or issuing equity in the market, again, as long as it's accretive to the shareholders and it makes sense from a free cash flow per share, which is obviously what we're really focused on.

This concludes our question-and-answer session. I would like to turn the conference back over to Kelly Lloyd for any closing remarks.

We just want to thank everybody for taking time out of your busy day to join us, and happy to have you here. We are always available for any follow-ups. So thank you again.

And with that, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.