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EPM Evolution Petroleum

Participants
Ryan Stash Senior Vice President, Chief Financial Officer, Treasurer
Jason Brown President, Chief Executive Officer
John White ROTH Capital
David Lock Deutsche Bank
John Bair Ascend Wealth Advisors
Paul Hackett Sidus Investment Management
Call transcript
Operator

Good day, ladies and gentlemen and welcome to the Evolution Petroleum fiscal year-end 2021 earnings release conference call. All lines have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. [Operator Instructions]. At this time, it is my pleasure to turn the floor over to your host, Ryan Stash. Sir, the floor is yours.

Ryan Stash

Thank you. I appreciate it. And good afternoon everyone and welcome to Evolution Petroleum's earnings call for our fourth quarter and fiscal year-end 2021.

Joining us today on the call are Jason Brown, President and Chief Executive Officer and myself, Ryan Stash, Chief Financial Officer of Evolution Petroleum. After I cover the forward-looking statements, Jason will review key highlights along with operational results. Then I will return to provide a more in-depth financial review and Jason will then add some closing comments before we take your question.

If you wish to listen to a replay of today's call, it will be available shortly by going to the company's website or via recorded replay until December 13, 2021. 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 detailed numbers are readily available to everyone in yesterday's earnings release, this call will primarily focus on Evolution's strategy as well has key operational and financial results and how these affects Evolution moving forward. Please note that this conference call is being recorded.

Now let me turn the call over to Jason.

Jason Brown

Thank you Ryan. Good afternoon everyone and thanks for joining us today on Evolution's fourth quarter and fiscal 2021 earnings call. This past year has been an extraordinary one for Evolution with the backdrop of low commodity prices and our primary operator going through bankruptcy restructuring early in our fiscal year to a swift recovery of prices and the substantial acquisition in the second half of our fiscal year, I am pleased with the resilience and the dedication of our team.

Although we are very happy to see commodity prices return to even pre-pandemic level, we do believe the volatility still remains going forward and are cautiously optimistic amid the continued uncertainty of global markets.

We are ready to take advantage of an advantage to diversify our commodity footprint and materially increase out exposure to natural gas through the acquisition of natural gas assets in Barnett Shale.

We are excited about this accretive acquisition and what it does for our company and shareholders moving forward.

As I have stated before, we are interested in and continually evaluate both oil and natural gas deals and are pleased that we were able to add these natural gas reserves to our portfolio.

Given the past year's challenges, we have maintained our commitment to return meaningful value to our shareholders through a consistent dividend program.

We have increased our first quarter dividend for fiscal 2022 to $0.75 per share of common stock, paid on September 2021. This decision is in line with what we have previously stated and is supported by continuing improvement in commodity prices and the additional cash flows generated by the Barnett Shale acquisition. Including first quarter dividend that will be paid on September 30 to shareholders of record as of September 20, Evolution will have paid out over $77 million or $2.34 per share back to shareholders as cash dividends since 2013. Maintaining and ultimately growing our common stock dividend along with achieving disciplined growth through accretive acquisition remain our key priorities moving forward.

As we look to fiscal 2022, I am very excited about the trajectory of Evolution. In the fiscal fourth quarter, our production grew to 4,378 net BOE per day which is an increase of about 156% over the prior quarter, substantially due to the production benefit of the Barnett Shale acquisition that closed in May, even though it only contributed for 55 days of the quarter. We generated $4.7 million in adjusted EBITDA in the fourth quarter, almost doubling the $2.5 million we generated in the third quarter.

Our year-end proved reserves increased 129% to 23.4 million BOE as well.

Although both Delhi and Hamilton Dome had positive reserve revisions net of production, the majority of the increase was due to the acquisition of the non-operated interested in the Barnett shale. It added 48.6 BCF of natural gas, just under five million barrels of natural gas liquids and a small amount of oil. That's a little over 13 MMBOE of long life reserves which is a substantial add of extended support to our dividend program. The SEC pricing used at year end was $49.72 per barrel and $2.46 per MMBTU of natural gas.

You will note, that's quite a bit below the current commodity pricing. Proved SEC reserves for the year-ended 6/30,2021 consisted of approximately 65% of liquids, that's about 36% and crude and 29% NGL and 35% natural gas. At fiscal year-end approximately 92% of proved reserves were classified as proved developed producing and 8% as proved undeveloped.

Turning to our operational highlights at Delhi and Hamilton Dome.

We continue to have good activity in both areas and are seeing field work in new projects pick up due to the uptick in commodity prices.

Our operating partner at Delhi returned to conform its projects in early 2021. Net production at Delhi in the current quarter was 121,911 BOE or approximately 13.40 BOE per day and that's 3% increase over the prior quarter. Purchase Purchased CO2 volumes were up following the pipeline repair and the operator completed several performance projects.

As we discussed last quarter, it will take a while to recover the reservoir pressure and production loss following the CO2 purchase pipeline failure last year. But we are starting to see a trend in the right direction and are pleased with the attention and capital support that Delhi is getting in 2021. In Hamilton Dome, we saw a quarter-over-quarter increase in production of 4% to 36,453 barrels or right at 400 barrels a day, primarily driven by the reactivation of wells that were shut-in during the last quarter.

During fiscal 2021, in response to commodity prices, operator at Hamilton Dome had shut-in a number of wells. At present, all wells that were shut-in, substantially all wells that were shut into due the volatility of pricing have been returned to production. We were very impressed by Merit's responsiveness to the pricing challenge that they faced over the last year. Net production at the Barnett Shale for the fourth quarter of fiscal 2021 was 240,000 BOE, which represents approximately 55 days of production as we closed on the acquisition in the first week of May, 4,364 BOE per day based on 55 days of production. I would like to note this Blackbeard Operating, the primary operator in the Barnett Shale, sold their interest to Diversified Energy in July of 2021.

We will be able to provide more detail on the expected future capital and operational plans of the Barnett once Diversified has finalized their plans upon completion of the transition period. We feel this is an exciting time for Evolution and as we build size and scale through accretive acquisition while continuing to deliver strong operation and financial results that will support our dividend. With that, I will now turn the call back over to Ryan to run through some of our financial highlights. Then I will wrap up the call by speaking briefly about our strategy and outlook on the M&A landscape. Ryan?

Ryan Stash

Thanks Jason. I will now share some more details regarding our financial results for the fourth quarter and fiscal year-ended June 30, 2021. Please refer to our press release from yesterday afternoon for additional information and details, but some of our key highlights include, as Jason had earlier mentioned, we increased our 32nd consecutive quarterly dividend to be paid September 30 to $0.075 per share which is a 50% increase over the prior quarter.

We also paid our 31st consecutive quarterly cash dividend on June 30 at $0.05 per share, which was a 67% increase from the third quarter of fiscal 2021. In May, we closed on the acquisition of the non-operated liquids rich natural gas minerals and working interest in the Barnett Shale for $18.3 million, which is net of preliminary purchase price adjustments.

We expect these final purchase price adjustments to occur in October.

As Jason had also mentioned, adjusted EBITDA increased about 50% in the fiscal fourth quarter to $4.7 million, again primarily driven by production from the Barnett Shale acquisition as well as strong commodity pricing. Total revenues increased approximately 80% over the prior quarter to $13.7 million. Also, we funded all operations, development CapEx and dividends out of operating cash flow and we maintained our strong balance sheet with zero net debt and $5.3 million of cash on hand at June 30, 2021. We ended our fiscal year with a $30 million borrowing base. This, however, does not yet include any impacts for our Barnett acquisition and we are currently working with our lender to redetermine the borrowing base to include the reserves from the Barnett acquisition and incorporate our year-end reserves from Delhi and Hamilton Down. This combination of $5.3 million of cash on hand and $26 dollars of availability under the revolver at our current borrowing base gives us total liquidity of $31.3 million as of June 30. Because of the Barnett Shale acquisition, its overall impact to our results, I am going to focus more on the current quarter results as they are a much better indicator of our financial strength and capabilities moving forward.

As I mentioned, the approximate 80% increase in total revenues for the quarter to $13.7 million from $7.6 million in the prior quarter was primarily due to 56% increase in production to 4,378 BOE per day driven again by the Barnett Shale acquisition but also coupled with the 16% increase in realized oil prices, which averaged $62.30 per barrel for the fourth quarter of fiscal 2021.

Our lease operating expenses increased to $7.6 million in the fourth quarter compared to $3.6 million in the prior quarter. This increase is driven by the Barnett Shale acquisition and also increased CO2 costs due to higher CO2 injection volumes and increased oil prices.

As a reminder, the purchase cost of CO2 is directly tied to oil price. But despite these increases, production costs per BOE decreased 17% to $19.02 compared to the prior quarter. General and administrative expenses were $1.8 million which was consistent with the prior quarter. And net income for the quarter also nearly doubled to $2.2 million or $0.07 per diluted share compared to $1.2 million or $0.04 per diluted share in the previous quarter, again primarily due to the increase in income from operations related to the Barnett Shale.

For the three months ended June 30, 2021, we invested $16.4 million dollars in capital expenditures, consisting of $16 million for the acquisition of the Barnett Shale assets which, as I will remind you, is net of a $2.3 million deposit that we paid in the prior quarter and we also spent $400,000 at Delhi for field capital maintenance. Based on discussions with Delhi and Hamilton Dome operators, we do expect to continue to conformance workover projects and will likely incur additional maintenance CapEx as oil prices remain strong.

As Jason mentioned, the majority of the volumes at Hamilton Dome or substantial majority, I should say, at Hamilton Dome shut-in during the low oil price conditions during calendar year 2020 has been restored and any future reactivation will be considered depending on economics.

For fiscal year 2022, based on discussions with the operators, the company's total capital expenditures for Delhi and Hamilton Dome are expected to be in the range of $1 million to $2 million, primarily consisting of conformance workover and maintenance capital projects. Again, as Jason had mentioned, a capital spending program has not yet been established for the Barnett Shale due to recent sale by Blackbeard Operating to Diversified. Working capital decreased $8.6 million from the prior quarter to $11.5 million and this decrease is primarily attributable to the Barnett Shale acquisition, which I mentioned before had a purchase price of $18.3 million, net of preliminary purchase price adjustments. This now concludes the financial review of results and operations. And with that, I will turn it back over to Jason for his final remarks.

Jason Brown

Thank you Ryan. Reserves and production are not the only additions this year.

We have grown as an organization as well. We added a Controller, Michael Gough, to the team as well as a Senior Financial Analyst, Karen Jensen, as Rod Schultz, our Chief Accounting Officer, retired after nine years of service, we are very grateful to him for his effort in helping the team transition through the year-end and 10-K process. I continue to be impressed with our team that Evolution has. I am feeling encouraged and excited for the year ahead as we begin to evaluate new opportunities for accretive growth and sustainable development We have worked hard to build meaningful relationships with our operating partners and have already begun fostering a dialogue with Diversified Energy who is in the transition process of assuming the majority of operations for our Barnett asset.

We are in communication at several levels within the organization as appropriate for operational and financial processes. And Ryan and I have been pleased with the responsiveness of their upper management through several conversations.

As they get further into their resumption of responsibilities, we will be able to give a little more insight as to capital spending plan. We believe that to be limited to minor workovers and return to production type activities at this point. We remain focused on generating cash flow, returning cash to our shareholders through dividends and evaluating accretive acquisitions that help profitability and sustainability to grow Evolution.

We are seeing an influx of marketed and negotiated transactions lately and are optimistic that we will be able to build upon the successful Barnett Shale acquisition with additional assets over the next fiscal year. I believe that we have proven our ability to source and vet and successfully transact on various opportunities that support this strategy and evidenced by our Barnett Shale acquisition. This acquisition was a significant step for our company to grow in size and scale. We remain focused on adding shareholder value.

Finally, we are excited about the future and believe that Evolution is very well-positioned to grow and return meaningful cash value to shareholders.

We will continue to focus on that bolster our cash flow in the short term without specific biases to any commodities.

We will look to take advantage of our strong financial position and add additional assets that will further grow and diversify the company. Thank you for your continued support and interest in Evolution. With that, I think we are ready to take some questions. Operator, please open up the line for questions.

Operator

[Operator Instructions].

Our first question comes from John White with ROTH Capital. Please state your question.

John White

Good afternoon guys. Congratulations on the very nice results.

Jason Brown

Hi John. Thank you. Thanks for the notes as well. We appreciate those.

John White

Of course. The press release said, CO2 injections at Delhi are 82 million a day. Do you think we will see that increase over the next quarter or two?

Jason Brown

Yes, I do. We actually just had our operational call with Tim Bradley this morning.

As you recall in the past August, in September, generally the warmer months where they are limited in terms of visibility of how much CO2 they can put away. And past year, they have even dropped it below that 82 million.

So holding at the 82 million level, we were pretty pleased with that.

I think that we will be able to kick up once temperatures break a little bit.

I think they are anticipating in October, being able to tick it up in the 90s and maybe as much as a 100 MCF a day.

I think the goal is to try to get it close to the 100 million mark through a substantial part of the winter, again to try to make up some of that reservoir pressure loss that we have talked about.

John White

Yes. That would be nice. The buyer of Blackbeard, Diversified Energy, I would guess, you are pretty pleased with them. I took a look at their presentation. They operate a large number of wells. And it looks like they have a significant footprint in the Appalachia area.

So I would guess they have got experience operating a lot of natural gas flow.

Jason Brown

They do. They also have a substantial position in East Texas. Natural gas is a thing with little cost to operator. We talked to Brad, Ryan and I did, their COO and trying to get a feel for what type of projects that we would be looking at. There are quite a few drilling locations out there and at gas prices where they are now.

Although we didn't underwrite this thing, I think we underwrote it on kind of $2.70 gas to somewhere around there.

We are substantially over that at this point. A lot of those locations would be justifiable. But I think their MO and frankly ours as well, he said it best, that he didn't like to do anything that didn't have more than about six month payout.

So they think in terms of payout, which is great. That's what we think of in terms as well. It's real money that's going to return back to you and then contribute to cash flow.

So, we think we are pretty aligned there.

I think we will be limited to that sort of activity before there's any rigs that are standing up.

So this is going to be workover and return to production type of things.

John White

Okay.

Sounds good. I will pass it on.

Jason Brown

Thanks John.

Ryan Stash

Thanks John.

Operator

Okay.

Our next question comes from David Luck. Please state for questions.

David Lock

Hi guys. How you doing? Jason, congrats on the Barnett deal.

You might have just bought them for the sake of natural gas.

So the question I have --

Jason Brown

It's not bad, David, to get a wind every now and then, right?

David Lock

Hey, we have been waiting 15 years, right?

Jason Brown

That's right.

David Lock

So you said you been seeing more deals recently.

So I was curious just directionally how sort of asks have responded in the last few months to the improvements in commodity prices? And then relatedly, could you just talk about how you evaluate using capital on external acquisitions as opposed to just buying back your own assets with an extremely cheap stock price?

Jason Brown

Yes. It's a good questions.

So let me start kind of from the last going forward in terms of the buyback.

We are pretty thinly traded right now.

I think the vast majority of our owners or our shareholders are long term holders and low turnover holders.

So I think buying back isn't, we think we are undervalued at this point but we also think that we would like to get some more shares out there and grow through some scale.

So I think we have done some buyback programs in the past that have been more defensive. Because we are thinly traded, it didn't take very many shares to kind of arrest some near term volatility in the market.

So we are really looking to grow through accretive acquisitions.

And so to that end, the deal that we have been seeing lately, the ask bid has been tightening a little bit.

I think said another way, it maybe a little more reasonable in the sense that when prices were low, it felt like that might be an opportunity to get deals done, but nobody really wanted to take the markdown. At this point, we are seeing people that are reasonable to take kind of what the current projections are in terms of strip or different buy in acquisition pricing rather than thinking that it's going to double or triple again. When prices were down in the low 40s, nobody really wanted to take the hit hoping the prices are getting back in the 60s. And even though there are some speculating that prices are going to go to 80 or whatever, most people are pretty happy to take the mark. And the thing that's been attractive to us is people looking to do something for a little bit of equity and a little bit of cash, which we have the option of doing.

So they can participate a little bit, which allows them to do something in a way that gives them some potential to participate on any more upside.

So lots of opportunities that are coming our way, like I said, negotiated, which is nice.

So Ryan, do you have any thoughts on that?

Ryan Stash

Yes. I mean, the only thing I would add just to what Jason said on, when you mention buybacks, we sort of think about it as shareholder return, right, return of capital to shareholders.

So we certainly consider the dividend as part of that. And we continually evaluate it at the Board level whether or not it makes sense to pay a dividend or to buy back shares. And Jason mentioned, it's certainly giving the float higher is a big kind of focus of ours. And we do think that our share is undervalued. But we are continually having those conversations.

You can definitely expect us to have shareholder kind of return of capital kind of forefront in our minds.

David Lock

Okay. And if I could just ask an unrelated follow-up, which is, again after a 15 year bear market, I think a lot of people are looking at the natural gas strip and saying, well, hell yes, I will take 450.

So what's the current thinking and strategy on hedging? And what, if anything, would make that change?

Jason Brown

Well, that's also something that we talk about every Board meeting.

We are constantly watching it. We don't like to hedge. And right now, I think you will find a lot of operators are struggling to try to how to present their numbers to the public in both net income and EBITDA, because they want to show if we didn't have the hedges on, we would be making so much more money. Very few of them because they are so largely levered and by extension have to be largely hedged are not receiving the benefit of these high prices right now.

We are unhedged and so we are receiving all of that. That hurts on the downside.

We have only put in two hedges in our history. One was in 2014 when everything collapsed and the other one was a short term in April of 2020 that expired last December. We look at it, but David, it's still pretty backward dated and we would like to be an option to call option on commodity. And I think with zero debt, we feel like we are in a pretty good position to do that. We start taking on a little bit of leverage, there might be a small amount, but I think generally the posture of the Board is that we are not going to be speculative. That's kind of other traders' business and you can lose your share pretty fast if that's not your expertise.

Our expertise is try to make accretive acquisitions and so we will probably stay in that in that fairway. Ryan?

Ryan Stash

Yes. I mean, I think to Jason's point, I mean, you mentioned gas and the curve is so backward dated right now that certainly we don't think it makes sense to go out a number of years in hedging. But like Jason said, if we took on some additional leverage, make an acquisition, we might looked to hedge a portion of that through the period we think it will take to pay off the debt, right, just to kind of preserve the balance sheet, because that's obviously a big selling point for us and something that the Board and Jason and I focus on a lot.

So we might look at that in the short term or short run sort of hedging scenario if we took on some debt.

David Lock

Okay. Thanks. And just one more quick one and maybe it's in the proxy, but I haven't seen it. How do you guys get paid vis-à-vis sort of share price depreciation dividends, growth of the business, et cetera?

Jason Brown

Well, clearly not enough, I guess, is the answer to that.

Okay. It's I think on our long term, I think this last year, our STIP was designed 50% through M&A. The Board felt like a strategic acquisition was the most important thing to us and I think in hindsight, that's what we delivered and they are happy that where we were right on that.

I think there was some part of earnings per share, 25% discretionary on the STIP. LTIP, is a TSR. It's a one-third kind of time vesting, third, third, third and then two-thirds based on a TSR compared to a peer group. And now that's an interesting situation there because finding peers like us that are E&P, that deliver dividend, that are fairly low debt. There's very few companies that don't have any debt and eight years of consistent dividends.

And so what you find there is, some of our peer group, we are kind of in the middle. A lot of them underneath just went bankrupt and some of them above us in this last year have a higher beta with the reserves.

So that's kind of a mixed bag anyway. But essentially it's a quartile thing in terms of a percentage of our shares that vest.

Ryan Stash

Yes. And the one thing on the --

Jason Brown

That the very really long short of it.

Ryan Stash

Just on the proxy.

So we have 120 days after the end of our fiscal year.

So by the end of October, we will have filed our proxy for our upcoming Annual Shareholder Meeting which will be in kind of early December.

So that will have our fiscal year 2022 STIP and LTIP as adopted by the Board.

Jason Brown

I will say one more thing about that and that was what it was last year on the STP. The Board has made a pretty big commitment to us, management, this summer to commitment to ESG. And as I stated in the intercom presentation, I sort of a ignorantly year ago thought the ESG was the health and safety environmental safety. But of course, it's not.

We are coming out with our inaugural, what they call CSR, corporate sustainability report. And the governance nominating committee has advised the comp committee to include ESG as one of our markers as a component of our, Ryan and I's STIP on the entire company.

And so the comp committee has done that.

We haven't come out exactly with what that is, but it will be probably somewhere in the 10% of our bonus dependent on some ESG hurdles.

So I think this just kind of shows the Board's commitment and focus to ESG. And with that corporate sustainability report, you will see in new website that we just rolled out with the sustainability section and we are trying to be responsible, but not like over react too.

We are non operators.

So some of the things we don't have any control over.

And so we are focused on it and we will have that report out somewhere around the proxy time or is that late October?

Ryan Stash

That's right.

We will spin that out.

David Lock

All right. Well, sorry for monopolizing the call. I will turn it over. Thanks for your time.

Jason Brown

Thanks Dave.

Operator

[Operator Instructions].

Our next question comes from John Bair. Please your question.

John Bair

Thank you. Good afternoon, Jason and Ryan.

Jason Brown

Hi John.

John Bair

Thank you for the dividend increase. Always nice. Questions on, are you seeing any tighter spreads between the oil prices you are receiving at Ham Dome versus WTI? Was that West Canadian Select? And also, are you getting pretty good spot prices then for the Delhi production?

Jason Brown

Since the things that happened - go ahead.

John Bair

Go ahead. No, it's fine. Go ahead.

Jason Brown

Yes. Well, you are welcome for the dividend. We appreciate our shareholders in May. I talk to the significant portion as I think that you were one of them as well, most of which we are pleased that we cut the dividend even though everybody really liked the dividend to preserve our cash balance, which we did in May of 202. But it's of course our hope to get that back to some levels. I am not sure that we are going to prudently do that and I think you have seen the Board be able to do that go from $0.025 to $0.03 and then $0.03 to $0.05 and now $0.05 to $0.075.

Now I am not sure that we will go back to $0.10 anytime soon.

We are going to be prudent about that. But I was very pleased and I think that the Board made a good and excellent decision there. Getting on to pricing, we have seen kind of a different thing in both of those areas. Hamilton Dome has tightened and has been very pretty consistent in an unusual way. Normally it blows out in the winter and then tags in the summer. And we saw it to be pretty consistent around the $10 to $11 range. We generally get a bonus of around $1.50 $2 off of that.

So we have been getting sub-$10 differentials in Wyoming, which we have been very happy about.

So in Delhi, it's been the opposite. Brent is still a premium to WTI, but not near the premium as it was last year.

So just for a point of reference, last year in the SEC report, we had the trailing 12-months diff at $1.65 over.

So that was our net realized price.

So that means we have $3.40, which is the transportation cost that is playing roughly.

So then it would be $1.65 plus $3.40.

So that means brent was about $5 averaging over at WTI and that's what it's been in years past. This year has been closer to, I think the trailing 12-months was an average of $2 under, although we have seen that pricing improve over the last four or five months and we feel like going forward, it's going to be closer to the $1.15 under.

So that would actually be $2.40 over. And that's about what brent is trading.

So whatever brent is trading over WTI subtract $3.40 and that's pretty darn close to what we are getting at Delhi. Does that make sense, John?

John Bair

Yes.

Jason Brown

We feel like that tightened spread at Hamilton Dome, we probably will see that. we are hoping, through 2022.

John Bair

Yes. And then as far as Barnett, I don't know how much of a discount you are getting there over these spot prices.

I think yesterday I saw, was it 5.25 or so for October. Do you capture most of that?

Jason Brown

Yes.

So obviously, we are marketing ours under Blackbeard to now Diversified, right. It's going to market it on behalf and they have a longer term contract that's tied to Houston Ship, But it is tied to sort of first day of the month for index.

So if you see a big movement in pricing throughout the month, you may not benefit as much. But for the most part, on a month-to-month basis, as prices have gone up, we will obviously benefit for that Houston Ship Channel price which is generally right around if not a little bit better than Henry Hub.

John Bair

Great. And one last question, have you had any impact, weather-related impact, to operations given the last month of ugly weather down there?

Jason Brown

So we talked to generally about that. Ida had like there's a couple of wells that we because there's a couple were wells that were low lying that shut-in for a couple of days, but there was no damage to the field. And the field itself, they didn't shut down. The plant didn't shut down or anything like that.

So very, very, very minor.

John Bair

That's good to hear. Very good. Well, good quarter and congrats. Nice timing on the purchase and look forward to seeing what you come up with next.

Jason Brown

Thank you sir. Appreciate it.

Ryan Stash

Thank you.

John Bair

Okay. Take care.

Operator

Okay.

Our next question comes from Paul Hackett. Please state your question.

Paul Hackett

Sure.

So I was wondering, the new investors in May.

Jason Brown

Hi Paul

Paul Hackett

That you would admit on the tour.

And so I just wanted to better understand when you were negotiating with Tokyo for the Barnett acquisition, I assume you were doing your due diligence all under Blackbeard's profile and assumptions.

So how soon will you know or be able to dovetail what your expectations are with the new operator? And what could the delta be, positive or negative? Or in other words, how you get a read through on that relative what I assume you did pretty extensively prior to that acquisition? Or did you know at the time that they were going to sell their stake, Blackbeard?

Jason Brown

Yes, we did. It was kind of in parallel. It was a little bit behind our process.

In fact, we looked at, we are not really an operating company, although we looked at potentially making run at that. Diversified has been pretty aggressive. I would say, more qualitative at this point than quantitative. And the qualitative nature of it is that Blackbeard, although very confident operator, they got handed these assets through a combination of several smashcos that NGP, which is their back-end private equity had gone through a number of companies. This was originally through Bluestone which is NGP Company, John Redmond and his crew.

So I think there's some nature of this that Blackbeard's main focus was in the Permian. And again, really sharp guide, but I get the feeling qualitatively that they had this to kind of shepherd over until prices stabilized enough for the NGP to be able to send it out the door, which they did. Diversified is coming into these assets with complete different purpose and underwriting and plan and capital structure. They are publicly traded. They more like us in terms of long term. They give a dividend, like the way they develop assets, are more like us.

So I think qualitatively we are pretty excited they going to focus on squeezing value out of it and we are going to benefit from that. Ryan, any thoughts?

Ryan Stash

Yes, absolutely. I mean, as Jason mentioned, with sort of Blackbeard inheriting the assets while, like Jason said, they are a good operator and we could see in looking at the data they have done some nice things on the cost side. They hadn't really looked at much upside at all returning well to production or doing any workovers whereas Diversified has done a lot of that.

And so that was actually one of the things when we looked at the deal, they have got us a little bit excited is knowing that you had an operator that got hand in an asset that's been going to sell it to someone who really wants to work it.

So that was part of the thing that we looked at.

Paul Hackett

All right. Thank you very much.

Jason Brown

Thanks Paul.

Ryan Stash

Thanks.

Operator

Okay.

Our next question comes from David Lock. Please state your question.

David Lock

Hi guys.

Just a quick Delhi follow-up. How far below peak is that producing right now? And is there any likelihood of it getting back there? And what would the time frame be?

Jason Brown

I would say we are a couple, we are 30% below peak. And the likelihood of getting back there probably will not be for a few years. And I would probably say at this point, probably not all the way back there.

I think the peak was somewhere around 7,000 a day of oil. There are a couple of reasons for that. One, we have had the lack of CO2 during the nine-month period, where we dropped some reservoir pressure.

As John asked before about CO2 levels, we are going to over inject, not over inject but inject more than we have in the past to sort of make up some of that reservoir pressure. We think that's probably, as I have stated before, kind of 12 to 24 month build. it just takes a while you are continuing to pull out oil to overcome that you are producing plus makeup that we lost So I think that's probably rest of the decline.

We also have in play the Test Site 5, which is a further expansion of that area that fits phase and that's been put off for two years. That was supposed to start this past spring. They put up that off at least a couple of years. Oil prices coming back up may bring that in a little sooner, we don't know, but we are not planning on that before 2023. That would have a drilling program of around 12 to 13 wells. And what we have seen in the past with our different phase programs is a substantial kind of arc so that over a three year period, you sort of average much higher.

So I think we have a chance to get certainly north of where we are now and substantially higher. I don't know that we are back into to peak levels that we saw probably two or three years ago. That's my best guess at this point. A lot of variables there, David.

Operator

[Operator Instructions].

Our next question comes from Stephen Mahalik [ph]. Please state your questions.

Unidentified Analyst

Hi guys. I was just wondering if there's any continuing dialogue with Tokyo Gas on those remaining stranded assets left over in the Barnett? I know there's maybe about $5 million left?

Jason Brown

Yes. We definitely have been in touch with those guys.

We are actually still going through our post-closing settlement that will settle up here in October.

I think our intention there was to see if there was some sort of resolution to the dispute there. The parties have put that on hold and I believe they filed a complaint against the operator. But the operator, Diversified, didn't see it was a problem and closed over that.

So I think we are on pause to not get involved until that reaches some sort of resolution.

The other thing is, we didn't agree on a set price to it.

So prices have come up pretty significantly.

I think probably we are not really planning on that at this point.

Unidentified Analyst

Okay. All right. Thank you.

Operator

And it looks like that was the final question.

Jason Brown

Excellent.

Okay. Well, thank you for your participation today. Please feel free to contact us if you have any other questions. We appreciate the continued support of our shareholders and look forward to providing everyone with the further updates on our business and potential targeted growth opportunities on our next earnings conference call in November. Thank you.

Operator

Thank you. This concludes today's conference call. Thank you for your participation.

You may disconnect your lines at this time and have a great day.