Which can be found under the Investor Relations tab of its corporate homepage. The company's current asset base includes non-operating working interests in producing properties located in seven regions. The newest areas are the Chaveroo Field, which was added in the third quarter of 2023, and in New Mexico, and the SCOOP/STACK in Central Oklahoma, which was acquired in the first quarter of 2024. Both of those assets add an organic growth component to Evolution's asset base. The company's strategy is built on a foundation of producing assets that generate excess cash flow, which can be used to reinvest and grow the underlying business, reduce leverage, and, importantly, return cash to shareholders. With that intro out of the way, Kelly, Ryan, and Mark, I'd like to thank you for joining us today.
Thank you, Jeff. Appreciate it.
Yeah, thanks, Jeff.
As I said, Evolution has added organic investment opportunities to its asset portfolio over the past year in both the Chaveroo Field and the SCOOP/STACK play in Oklahoma. Both those acquisitions added an inventory of undeveloped drilling locations. Kelly, as a bit of a departure, does the addition of organic projects change Evolution's capital allocation priorities in light of your shareholder return framework?
So the way I like to think about it, really, we've consistently emphasized a balanced capital allocation strategy, prioritizing shareholder returns while pursuing growth opportunities. I think the addition of these newer organic growthy kind of projects hasn't fundamentally altered this approach, but really, it's been integrated to enhance our long-term value creation. We've maintained a balanced and opportunistic approach. It includes reinvestment for organic growth, M&A, returning capital to shareholders, and all of this, really, with our focus remaining on our dividend and shareholder return.
Yeah, I'd just add real quick, Jeff. You know, I mean, our mindset hasn't really changed as far as we think about just allocating capital in general. You know, we look at every single dollar, and we put it into the best use that we can for our shareholders at any given time. You know, the projects will come along, and we'll independently review each opportunity and make the best decision at the time based on our assessment, you know, of the returns of the project itself versus any other potential uses of cash.
Does the asset base today with the organic component, does that have any effect on the type of acquisition that you think fits Evolution's model?
So perhaps a little bit, right? Last year, it was important to us that we added to our existing portfolio of organic, you know, drillable, consistent, high-return drilling locations. I think we've done a great job with that. Our focus will always remain on adding the most attractive risk-adjusted properties at that time, given the current market environment, both for acquisitions and for commodities. But right now, I'd say we're probably leaning a little bit more towards currently producing properties versus adding additional inventory of undrilled properties. I mean, like that said, sort of like with our SCOOP/STACK, if we can acquire producing assets that are already more than paying for any additional upside drilling, obviously, that's always on the table for us.
The Chaveroo partnership is a 50/50 partnership with PEDEVCO, and they serve as the operator of the partnership. Was having some control over the timing of capital spending, was that a part of the strategy of Evolution that led Evolution into that deal?
Hey, Jeff, I'll jump in on this one. You know, for Chaveroo, the relationship with the operator is really important because we have a 50% working interest. So one of the things we did when we put the deal together is we made it clear that we were going to be much more involved than normal on a drilling program. And yeah, I'd have to say that working with PEDEVCO has been really good. I mean, they've allowed us to have a seat at the table, and so it's worked out really well for us.
Yeah, look, I agree with Mark. It's really a true partnership, which is important to us because it helps us have some ability to control the timing of CapEx, and we're very comfortable with that, and I think they are as well.
Would you consider other deal structures where Evolution can have a greater influence on capital decisions from a non-operator seat than maybe some of the traditional type non-operator-operator relationships?
That's an interesting question. I mean, look, ultimately, our goal is to ensure that we balance the benefits of any operational influence with our commitment to maintaining our core strategy of maximizing our returns through capital management. So they have to be married together. I think we've consistently emphasized our preference for acquiring non-op and long-life, low-decline assets. However, it's worth noting that we remain flexible in exploring deal structures that align with our overall strategic objective. So having a sizable working interest allows us to develop a more meaningful relationship with our partners versus in, say, SCOOP/STACK, where it's a small working interest, and they sort of pass it down. So if we're going to be larger, it is important for us to matter to them as well as them matter to us, so.
Mark, let's shift gears to performance and the upcoming plans for Chaveroo and SCOOP/STACK. The first three horizontal wells in the Chaveroo field have lived up to your expectations, and I think you're expecting to begin on the next four well package in January. Is there anything you take operationally from the first three wells that you can use on planning purposes for the next group of wells?
Yeah, there is. I mean, you always learn things when you're drilling wells. On the initial three wells, first ones that we had, you know, we had a chance to, like, really kind of get our feet wet on that one, and we developed some really valuable operational insights. And it's going to help us on future development planning, such as drilling with produced water. And, you know, we were hauling water in, and we think we can cut costs by doing produced water. So these wells began production in early February, and they've met and exceeded our pre-deal production estimates. And they've really helped us to understand, I guess, a better understanding of the subsurface geology and reservoir characteristics.
Will the next four wells be drilled in a batch that'll all be drilled and then they'll all be completed so the production essentially from all four wells comes in at one time?
Yeah, that's correct. Development Block 2, we'll drill them all at once, complete them all at once, and they'll be brought on probably not exactly all at once, but really closely.
Will those wells fully develop Block 2, or are those just holding acreage?
No, those will actually fully develop drilling block two. It's a one-section drilling block.
I guess moving, you all have preliminarily agreed to six additional wells in Block 3, and those, I think, drilling on those wells are expected to begin in the third calendar quarter, which will be your first fiscal quarter of 2025. Is the development sequencing in the field a function of growing Chaveroo's cash flows as you move from blocks one to two and basically managing Evolution's capital program?
You know, yeah, that's part of it, but it's also, you know, we would really like to get on a development program out here where we're drilling in spring and drilling and completing in spring and summer. It's just operationally a lot more efficient to do that, and it's easier to control your costs.
When you drill four wells at one time and then six wells at one time, Mark, does that allow you to have some operational efficiencies with your service providers that have a positive impact on your costs?
Oh, it does. It actually cuts the mud cost on a number of services you're going to get, you know, drilling rig, the big ones, drilling rig and fracking, also completion rigs, that kind of stuff.
Do you have any infrastructure upgrades that are needed to accommodate the upcoming drilling?
Yeah, there'll always be on all of these, there'll always be some adjustments to facilities, and it's just going to vary from block to block.
In Oklahoma, in the SCOOP/STACK play, the wells that you've brought on so far that Evolution has participated in have exceeded your initial type curve expectations. What does the performance tell you about how you modeled the play when you were evaluating the acquisition?
I would just say, like, doing evaluations of type curves in SCOOP/STACK is much more difficult than, like, doing it in the Delaware because the geology changes a lot faster, and the phase configuration of the wells changes a lot more than it does in the Delaware. But basically, you know, when you do a type curve, it's just an average of the range of outcomes you expect in an area for a given set of wells. And so far, we think that these, you know, our type curves were reasonable. And based on what we have so far, which is about three months of data, so our averages have been about 65% above our acquisition type curve. Now, we're pleased with that.
Now, we realize that it may drop back down, you know, to be more in line with the type curve, but overall, I mean, we feel that, you know, the type curves that we've done have been adequately representing what's going on. We also, if you look at the PDP stuff that we've done, our PDP performance has been, you know, right on. So we're actually really quite happy with the way we performed against our type curves. Obviously, of course, we hope we still continue to exceed expectations. We don't have any really reason to be really highly aggressive when we're making acquisition buys on our type curves either. So kind of we kind of take a view of, you know, being of moderating our expectations.
But, Jeff, in non-engineer speak, I think, yes, we tend to be a little conservative when modeling these things. I mean, why wouldn't we be, right?
Conservatism is a good attribute when you're adding higher-decline drilling production from new wells.
I could be more into engineering speak if Kelly wanted me to, but then we'd all get bogged down in a bunch of stupid details, so we won't do that.
Mark, how have the costs to drill the wells that you all have participated in and complete compared to what you thought you were getting into?
You have to realize we don't have, you know, we have small interests in most of these wells, so our delay on our costs is kind of, you don't really know the answer for, you know, probably like six months after wells drilled. But so far, it looks like we've done, you know, the wells are coming in that typically at the costs have been AFE down.
I think you all have said on your earnings call last week that you have five more gross wells that you've elected to participate in. Are these wells in the areas where you've seen some outperformance, or are these in some areas that haven't really been drilled since Evolution got involved in the play?
These are going to be new for us. They're in the southeastern part of the SCOOP, and they're going to be in Woodford and Sycamore, but there have been some really good wells drilled down there, so we're actually excited to be drilling, being part of these wells.
Beyond those wells, obviously, most of the E&P companies that have, are going through their budgeting cycle for their calendar 2026. Do you have much visibility into the middle part of next year as to activity levels in this area?
You know, we have typically pretty small working interest in these wells. It's like 2%-3%, kind of more or less. You know, we worked that really hard to get our reserves put together after we actually acquired the project, but we try not to bother the operators too much because we actually want them to talk to us when we actually do call. So we, you know, we absolutely could have more wells in 2025 and 2026 because our information is a little bit stale now. But realistically, you know, we can't really make much of a statement about our fiscal year 2026 just because we are, the information's stale. As we get closer to our fiscal year end, you know, we'll go back and talk to our operators again, and some of them are very helpful.
Some of them are not as helpful just because they're tighter with their information. But, you know, you know, right now we have booked what we think will happen, but we fully expect that there could be more done.
Speaking of fiscal year-end, this year's reserves benefited from Chaveroo and also SCOOP/STACK. Would your expectation be at, especially at Chaveroo, where you do have a higher interest and maybe a little bit more input in the capital program, that you could book additional undeveloped locations at year-end fiscal 2025 like you did last year?
That is definitely possible. We'll make a decision at some point during the year whether we want to buy additional acreage, and if we do, then we would buy that with the thought of booking additional wells on it.
Okay. If we shift gears and look at the Delhi Field, you have a new operator in that field after Exxon purchased Denbury earlier this year. I think Exxon has said they're going to drill three wells at Test Site V later this year. Mark, can you put some more color around what the plans are for Test Site V and how that fits into the overall field operations?
Sure, Jeff. So for the longest time, Test Site V was looked at as a full-on development with adding CO2 injectors and producers. The CapEx was rather large. Well, Denbury, before Exxon actually acquired them, had done a modeling study and determined that there was CO2 present in the Test Site V area. They also have some monitoring wells that showed that. And so they actually modeled that it'd be probably a better idea not to do a full development. It'd just be an extension of the field. We'll be extending it east towards the west side of the township of Delhi. And it's going to be just drilling, producing wells, and/or in some cases, reentering some existing wells and turning them into producers.
Right now, we have signed an AFE for a well that should be drilled, spudded in December, and we fully expect to have two other producers in place by the end of our fiscal year.
So my understanding correctly that you basically think you can recover those reserves by maybe altering the injection pattern to more properly flood that area?
We're not going to be changing the flood pattern in the area. We won't be adding any injectors. There should be enough CO2 over there that we will actually be able to just put producers in, and we expect that if these producers work really well, there might be additional producers that will be put in to help develop the area. The nice thing about this, it's not going to require a lot of facilities upgrades because we're not putting in, you know, a bunch of lines to inject CO2.
I mentioned earlier dividends are obviously a big part of Evolution's shareholder framework, and I think the company just announced its 45th consecutive quarterly dividend of $0.12 for the fiscal second quarter. Yep. How does the addition of Chaveroo and the SCOOP/STACK assets extend the company's dividend visibility?
I'll take this. So they help on an overall company-wide perspective. They really do help the stability of our production and cash flows from the organic growth of these assets. So yes, the corporate decline is going to be the mild low decline, but you can offset that with a little bit of money going into growthy assets. And really, like the growth nature of the development program at Chaveroo, that can help ensure predictable cash generation even as the company continues to evaluate future growth opportunities. So really in both these areas, we think they really strengthen and diversify our asset base, reducing reliance on, you know, any field or any operator. Plus, you know, it actually, especially in, if you think about SCOOP/STACK, it kind of mirrored our overall corporate production, about 55% gas, 30% oil, and the rest liquids.
Just another important market that we wanted to sell in. So look, you got the natural decline of your assets, you got a little bit of a growth profile in Chaveroo, and you can flatten it off with some new drills going on in SCOOP/STACK. So we think this absolutely will enhance and increase our ability to pay the dividend for a long time to come. Yeah. I mean, I would just add that, you know, in the past, we've relied on the acquisition market almost exclusively to, you know, to replace and grow production. So, you know, and it can be fickle, right?
And sometimes the acquisition market is very good, and other times it's not as good. And so this allows us another avenue for growth if we just don't see the kind of acquisitions that we would really like to see.
Kelly, you touched on this a little bit, but the foundation of Evolution was really built on mature producing assets that, as I said earlier, generate excess cash. Yep. When you think about the corporate decline curve and balancing it, I guess you've got organic growth opportunities at Chaveroo and the SCOOP/STACK. You've got the existing asset base and maybe some recompletion and rework opportunities there to help offset natural declines. And then you've got the acquisition market. How do you think about tying all those three things or those three components in together and managing the corporate profile to support your dividend framework and really grow the company?
Sure. So, I mean, again, and you sort of hit the nail on the head, Jeff, and that's exactly why we did it. These are sized, these acquisitions where they're going to take capital, Chaveroo, for instance, versus acquisitions that provide capital solely, right? They're designed to do just that, to manage our corporate decline production curve and not eat up too much capital. I mean, at SCOOP/STACK, this is driven by the fact that it's a relatively small working interest. You know, we have 300-plus locations, but you're never going to get massively outspent or even outspent at all relative to your production because it's such a small working interest. You could get 10 wells, and it's just not going to add up to being a net user of cash flow.
And at Chaveroo, like I said, the way we structured this with our agreement with our partner, it's a measured program, and it's meant to become self-funding very quickly, which is kind of the holy grail in, you know, greenfield development. And this is our plan, and we're both on the same page there. We're not interested in drilling wells as fast as we can. We could ramp up production, then you get on that sort of steep treadmill that a lot of our peers are on, and we don't want to be on that. Our goal is to kind of keep things steady as she goes with our organic growth opportunities, squeeze them in nicely to the rest of our mature low-decline assets.
Now that you have a position in the SCOOP/STACK, have you, and I guess have operated there for eight or nine months, have you seen many opportunities to pick up additional interest in either your existing wells or just in other wells that are being drilled in that area?
Sure. I don't know who best wants to take this, but I can tell you we get calls all the time about little one-offs here and there. Ryan, Mark, I'm sure you guys have as well, right?
Mark, I think you're on mute.
Yeah. We've actually had some that we've looked at, and we haven't actually been able to acquire any of them, but yeah, we get offers quite a bit looking at small interest to add to existing wells that we have or to add it with existing operators that we already have.
Yeah. And keep in mind.
Kind of one of the things.
You know, we look at these on an individual basis, right? We got offered to buy into one, but we, I mean, absolutely, Mark ran the economics and said, "We don't like it," said, "No, we don't want to do that," right? We're not just going to blanket say yes on these things, so. Well, sometimes it's better not to do the bad deal.
For sure.
At the end of the September quarter, Evolution had about $39.5 million drawn on its existing $50 million RBL facility. Ryan, since you're managing the 10-Q and the balance sheet and the RBL, can you talk about how you think about managing the balance sheet and having sufficient capacity to look at the acquisitions that come through the door?
Sure. So, you know, our borrowing base is currently $50 million, as you mentioned, and that's really set more based on our lead bank's capacity and how much they want to lend to any given single entity. But that being said, you know, the asset base itself has additional collateral value beyond that $50 million, right? So it could support more debt than just the $50 million that is sort of self-selected to, you know, especially if we were to add another acquisition, especially, you know, a PDP acquisition that would add further borrowing capacity. You know, we've had conversations with MidFirst as well as other lenders, and we feel there is definitely sufficient capacity in the market. You know, actually, the bank market's gotten a little bit healthier here over the past few months.
So for a company of our size and for what kind of liquidity we would need, we definitely feel comfortable with our ability to go out and increase that, you know, should we need to for another acquisition.
If you found the right acquisition that you needed to think about using, or are there circumstances that the right acquisition would have you all think about issuing equity as a partial funding mechanism?
Yeah. I mean, we certainly considered it, you know, as a public company. And I think we've said that, you know, maintaining a strong balance sheet has always been one of our core principles. And so that's not going to change. And so in order, if there were an acquisition opportunity that we felt was, you know, really accretive, obviously, to the shareholders, we would consider using equity to fund a portion of the acquisition just to maintain the balance sheet strength.
You know, I think, you know, we've had a strong track record, you know, of making accretive acquisitions, and we've always financed them very conservatively to maximize shareholder returns. So, you know, any acquisition we would consider that we might fund with some portion of equity would definitely need to be accretive to the long-term dividend because that's ultimately what matters for us.
Kelly, we've talked a little bit of micro about Chaveroo and SCOOP/STACK with respect to the contribution those assets are making to the asset base. Can you take a step back and maybe summarize how you think the diversity of Evolution's asset base positions the company to grow the underlying business and also to deliver on your shareholder return goals?
Yeah. I absolutely. I think we've spoken a bit ad nauseam about this, but honestly, one of our proudest achievements is our longstanding commitment to returning value to our shareholders through our consistent dividend program, as you mentioned, is the hallmark of our total shareholder focus and we just announced in 12/31 our 45th consecutive dividend at $0.12 a share. We wouldn't be able to do any of this and create these stable returns throughout the varying market conditions without our diversified portfolio of low-decline, high-quality assets that require minimal CapEx to generate steady cash flows. Adding in stuff like the SCOOP/STACK and Chaveroo, what that really does is it further enhances our capacity to sustain these returns, which reinforces our confidence in the strength of our dividend program.
Look, if we want to have a straightforward approach, we don't want to do anything wild, which is going to be real simple. We expand in high-return regions. We maintain strict cost controls, and really, we think about every decision, how can it support our dividend program? I mean, like you said, with this balanced portfolio of both oil, natural gas, and NGLs, we'll be able to continue to thrive under a variety of market conditions. We have stuff that sells to the West Coast. We have stuff now that sells in Central America, and we have stuff that goes down to the Gulf Coast. All these markets are kind of mini micro markets at any given time. One of them can be outperforming, and it was important to us to get that sort of exposure.
And I think we've done a great job of assembling a large well-diversified, both commodity and geographic group of assets that can take advantage of this for us. So, look, we got a long history of doing this, Jeff. You know this. We've successfully executed both on organic and inorganic growth. And as you know, we're going to pursue what's best for our shareholders on a total shareholder return basis.
I think with more than $200 billion of upstream M&A transactions over the last year, 18 months or so, there'll probably be a lot of portfolio rationalization opportunities to keep you all busy with you're evaluating opportunities.
That's right.
Kelly and Mark and Ryan, I want to thank you for taking the time to join us today. We look forward to catching up again on the existing asset base, but also see where the acquisition market takes us in 2026.
Terrific. Thank you, Jeff.
Appreciate it, Jeff.
Thank you.
Bye-bye.
Bye.
Bye.