EVOLUTION PETROLEUM CORP 10-K

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Executive Overview Liquidity and Capital Resources Results of Operations Critical Accounting Policies Executive Overview General Evolution Petroleum Corporation is an oil and gas company focused on delivering a sustainable dividend yield to its stockholders through the ownership, management, and development of oil and gas properties. In support of that objective, the Company's long-term goal is to build a diversified portfolio of oil and gas assets primarily through acquisitions, while seeking opportunities to maintain and increase production through selective development, production enhancements, and other exploitation efforts on its properties. Our producing assets consist of our interests in the Delhi Holt-Bryant Unit in the Delhi field in Northeast Louisiana, a CO 2 enhanced oil recovery project, and our interests in the Hamilton Dome field located in Hot Springs County, Wyoming, a secondary recovery field utilizing water injection wells to pressurize the reservoir, and overriding royalty interests in two onshore Texas wells. Our interests in the Delhi field consist of a 23.9% working interest, with an associated 19.0% revenue interest and separate overriding royalty and mineral interests of 7.2% yielding a total net revenue interest of 26.2%. The field is operated by Denbury. On November 1, 2019, the Company acquired mineral interests in the Hamilton Dome field consisting of a 23.5% working interest, with an associated 19.7% revenue interest (inclusive of a small overriding royalty interest). The field is operated by Merit, a private oil and gas company, who owns the vast majority of the remaining working interest in Hamilton Dome field. Our acquired interest in this field aligned with the Company's strategy of adding long-lived, low decline reserves expected to be supportive of our dividend over the long-term. Highlights for our Fiscal Year 2020 and Operations Update • Proved oil equivalent reserves at June 30, 2020 were 10.2 MMBOE, a 13% increase from the previous year primarily due to the acquisition of the Hamilton Dome field in November 2019. The Standardized Measure for proved reserves decreased 51% to $62 million , as the acquisition of the Hamilton Dome field was offset by the decrease in the average first day of the month net oil price from $64.54 per barrel of oil and $23.83 per barrel of natural gas liquids at June 30, 2019 to $46.37 per barrel of oil and $9.00 per barrel of natural gas liquids at June 30, 2020. Our proved reserves consist of 80% crude oil and 20% natural gas liquids, 82% are classified as proved developed producing and 18% are proved undeveloped. • We recognized net income of $5.9 million , or $0.18 per diluted common share, our ninth consecutive year of reporting net income. • Returned to shareholders $10.7 million in cash dividends and invested $2.5 million in stock repurchases in fiscal 2020. The Company has paid out to shareholders more than $70 million in cash dividends since inception of the dividend program in December 2013. • Closed the acquisition of non-operated working interest in Hamilton Dome field on November 1, 2019 which included total proved reserves of 1.47 MMBOE as of June 30, 2020 as estimated by D&M, an independent reservoir engineering firm. • Reported $12.4 million of cash flows from operations for the fiscal year ended June 30, 2020. We funded all operations, including $11.8 million of capital spending inclusive of our $9.3 million acquisition of our interest in the Hamilton Dome Field, from internal resources and remain debt free at June 30, 2020. 27 Table of Contents • In order to mitigate the impact of the growing global COVID-19 pandemic on our employees, we continue to follow local stay-at-home orders and remotely work from home with minimal disruptions to our business operations. • We entered into NYMEX WTI oil swaps covering approximately 42,000 barrels per month for the period of April 2020 through December 2020 at a fixed swap price of $32.00 per barrel, recording a loss of $1.4 million at June 30, 2020. Of this amount, $1.9 million were non-cash, unrealized mark-to-market losses as commodity prices improved from those existing at fiscal year-end, offset in part by $0.5 million in realized gains during the fiscal fourth quarter. • We completed remaining capital expenditures for the six-well water curtain program and related infrastructure preceding the planned Delhi Phase V development, which was delayed by the operator until the fourth quarter of 2021. • In July 2020, Denbury Resources announced that it had entered into a restructuring support agreement with certain of its debt holders and filed a pre-packaged voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code in Texas. Denbury Resources is seeking to eliminate $2.1 billion of debt. Denbury subsequently announced on September 3, 2020 that its plan to eliminate $2.1 billion of its bond debt has been confirmed by the court which will substantially reduce its debt and strengthen its balance sheet. Oil & Natural Gas Liquids Reserves (based on SEC average NYMEX WTI oil price of $47.37 per barrel at June 30, 2020) • Proved oil equivalent reserves at June 30, 2020 were 10.2 MMBOE , a 13% increase from the previous year primarily due to the acquisition of the Hamilton Dome field in November 2019. The Standardized Measure for proved reserves decreased 51% to $62 million , reflecting the decrease in the average first day of the month net oil price from $64.54 per barrel of oil and $23.83 per barrel of natural gas liquids at June 30, 2019 to $47.37 per barrel of oil and $9.00 per barrel of natural gas liquids at June 30, 2020. Price decreases are partially offset by the acquisition of the Hamilton Dome field in November 2019. Our proved reserves are 80% crude oil and 20% natural gas liquids, and of these proved reserves, 82% are classified as proved developed and producing and 18% are proved undeveloped. The following table is a summary of our proved reserves as of June 30, 2020 and 2019: Proved 2020 2019 Change Reserves MMBOE 10.2 9.0 13.3 % % Developed 82 % 82 % — % Liquids % 100 % 100 % — % Standardized Measure ($MM) $ 62 $ 127 (51 )% Additional property and project information is included under Item 1 and in Note 6 and Note 21 to our consolidated financial statements in Item 8, and in Exhibit 99.1 of this Form 10-K. Delhi Field Proved reserves volumes totaled 8.7 MMBOE compared to the prior year's 9.0 MMBOE. Year over year, decreased oil prices and temporary curtailment of CO 2 purchases since February 2020 has led to a 0.2 MMBOE, or a 2% negative revision in proved oil reserves. Adjustment of projecting NGL reserves independent of oil production resulted in a 0.6 MMBOE, or 46% positive revision to NGL reserves. Gross production at Delhi in the fourth quarter of fiscal 2020 was 6,082 BOEPD, an 8% decrease compared to 6,597 BOEPD in the third fiscal quarter. Oil production was 4,985 BOPD, an 9% decrease from the third fiscal quarter’s 5,499 BOPD. NGL fourth quarter production of 1,097 BOEPD was virtually flat compared to prior quarter production. Oil production was significantly impacted by materially lower CO 2 purchases when the CO 2 purchase pipeline, upstream of Delhi field, was shut-in for repairs in late February throughout the end of fiscal 2020. The operator has commenced repairs to the pipeline and expects an in service date of October 2020. The loss of CO 2 purchases, coupled with the decline in oil prices, led to the operator electing to freeze non-essential capital projects through the end of fiscal 2020. The average oil price realized by Evolution during the fourth quarter of fiscal 2020 was $23.74 compared to $47.27 during the previous quarter, a decrease of 50%. The average NGL price realized by Evolution during the fourth quarter of fiscal 2020 was $2.11 per barrel compared to $9.56 during the previous quarter, a decrease of 78%. The decline was attributable to the decrease in all realized commodity prices in fiscal fourth quarter. The COVID-19 pandemic, combined with a market share competition between certain members of the OPEC+ member nations, continued to adversely impact demand for commodity products, 28 Table of Contents which caused a global supply/demand imbalance for oil that resulted in extreme volatility in benchmark oil prices, with prices ranging from a low of a negative price of $37.63 per Bbl to a high of $40.46 per Bbl during our fiscal fourth quarter. Although we historically benefit from the premium that Delhi field oil receives selling under Louisiana Light Sweet ("LLS") pricing, as compared to the more widely known West Texas Intermediate ("WTI") price, in the fiscal fourth quarter, the field realized a discount to WTI of $4.26. Oil produced from Delhi field is shipped to market directly by pipeline, the most efficient means of transportation from the field. Our received NGL price for royalty production is burdened by a capital recovery charge, which is mostly offset by our working interest share that is reflected as a reduction in lease operating expense. Our overall lifting costs for the year were $16.50 per BOE, which decreased 14.6% from $19.31 per BOE in the prior year. Gross CO 2 purchase volume rates for the fiscal 2020 averaged 51.9 MMcf per day, compared to 85.2 MMcf per day in the prior year, a 39% decrease due to the Delhi CO 2 purchase pipeline shut-in for repairs. This decrease together with a 14% lower price per mcf resulted in a 48% decrease in CO 2 cost compared to the prior year. Our cost of purchased CO 2 , the largest single component of operating costs at Delhi, is directly tied to the price of oil sold from the Delhi field. Other lease operating expenses for fiscal 2020 decreased 5.6% compared to the prior year, primarily due to lower fuel gas, parts and workover expenses. For fiscal 2020, our gross NGL production was 1,106 BOEPD, which sold at an average price of $9.59 per barrel, compared to prior year gross production of 1,171 BOEPD for which we realized $21.87 per barrel. Production from the NGL plant is transported by truck to a processing plant in East Texas, and therefore bears a material transportation charge. Our current mix of products is very rich containing higher value NGLs, such as pentanes and butane. NGL prices have fallen significantly from a peak in late 2018 in response to worldwide supply and demand. Historically, NGL demand has had a seasonal pattern with prices tending to be higher in the cooler months of the year. Accordingly, the relationship between NGL prices and WTI has fluctuated over time and we expect such volatility to continue in the future. The NGL plant includes an electric turbine that converts methane and part of the ethane processed by the plant into electricity. This turbine generates power primarily for the NGL plant and supplies excess power to the CO 2 recycle facility. The NGL plant is accomplishing its primary objective of removing the lighter, smaller chain hydrocarbons (i.e. methane and ethane), thereby increasing the purity of the CO 2 recycle stream and improving the efficiency of the CO 2 flood throughout the field. Over time, the NGL plant is expected to increase and enhance the recovery of crude oil in the field. The NGL plant is not only providing feedstock to power the electric turbine, it is also producing significant quantities of higher value NGLs to sell to market. Remaining estimated capital expenditures for our proved undeveloped reserves amount to approximately $6.38 per BOE for Phase V. Looking forward, the timing of plans for continued development of the eastern part of the Delhi field are dependent on the operator’s schedule for capital allocation within their portfolio. Development of unquantified volumes is dependent upon the timing of excess capacity within the processing plant and oil price. We continue to believe that this high quality and economically viable project will be executed as planned, subject to oil price volatility. Hamilton Dome At June 30, 2020, we had total proved reserves of 1.5 MMBOE which was entirely comprised of oil as estimated by our independent petroleum engineering firm D&M. Gross oil production at Hamilton Dome in the fourth quarter of fiscal 2020 was 1,642 BOPD, a 29% decrease compared to 2,328 BOPD in the third fiscal quarter quarter primarily due to the operator shutting in uneconomic wells at the extremely low oil price. There were limited capital expenditures in the field during fiscal 2020 due primarily to the decrease in oil prices. Most projects focused on maintenance, but in March 2020, a larger, and more efficient, ESP was installed in the Step Scale 117 which resulted in an increase in average production since completion of 5 BOPD. The average oil price realized by Evolution during the fourth quarter was $16.12 compared to $30.23 during the previous quarter, a decrease of 47% . Production from this field is transported by pipeline to customers in the Western Canadian Select market; prices are discounted from WTI. In the fourth quarter our realized price reflected a $11.88 per barrel discount from the WTI price. For this fiscal year, subsequent to our acquisition, our lifting costs at Hamilton Dome have averaged $28.93 per barrel. 29 Table of Contents Impact of Geopolitical Factors and the COVID-19 Pandemic On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States of America declared a national emergency with respect to COVID-19. The virus has continued to spread in the United States of America and abroad. National, state, and local authorities have recommended social distancing, imposed quarantine and isolation measures, as well as mandatory business closures on large portions of the population. These measures, while intended to protect human life, are expected to have serious adverse impacts on domestic and foreign economies of uncertain severity and duration. The effectiveness of economic stabilization efforts, including government payments to affected citizens and industries, is uncertain. The nature of the COVID-19 pandemic makes it extremely difficult to predict the impact on the Company’s business and operations. However, the likely overall economic impact of the pandemic is viewed as highly negative to the general economy, especially the oil and natural gas industry. During the six months ended June 30, 2020, primarily driven by the COVID-19 pandemic and actions taken by OPEC+, the benchmark price of WTI dropped significantly. Although global outputs can be adjusted to support commodity pricing levels, the Company expects the price of crude oil to remain volatile in the near term. Uncertainty regarding the future actions of foreign oil producers, such as Saudi Arabia and Russia, and the risk that they take actions that will prolong or exacerbate the current over-supply of crude oil is also contributing to the recent decline in oil prices. Currently, all of the Company’s property interests are not operated by the Company and involve other third-party working interest owners. As a result, the Company has limited ability to influence or control the operation or future development of such properties. In light of the current price and economic environment, the Company continues to be proactive with its third-party operators to review spending and alter plans as appropriate. The Company is focused on maintaining its operations and system of controls remotely and has implemented its business continuity plans in order to allow its employees to securely work from home. The Company was able to transition the operation of its business with minimal disruption and to maintain its system of internal controls and procedures. Liquidity and Capital Resources At June 30, 2020, we had $19.7 million in cash and cash equivalents, primarily impacted by the $9.3 million purchase of certain mineral interests in Hamilton Dome field in November 2019, compared to $31.6 million of cash and cash equivalents at June 30, 2019. In addition, the Company has a senior secured reserve-based credit facility (the "Facility") with a maximum capacity of $50 million subject to a borrowing base determined by the lender based on the value of our oil and gas properties. The Facility had a $27 million borrowing base on June 30, 2020. However, our ability to access the borrowing base is also limited by our compliance with certain financial covenants, including a debt service ratio covenant, described below. As a consequence of declining oil prices adversely impacting our EBITDA upon which the debt service ratio is calculated, at June 30, 2020 our borrowings would have been limited to approximately $8 million. There are no borrowings outstanding under the Facility, which matures on April 11, 2021. The Facility is secured by substantially all of the reserves associated with the Delhi field. Any future borrowings bear interest, at the Company's option, at either the London Interbank Offered Rate ("LIBOR") plus 2.75% or the Prime Rate, as defined under the Facility, plus 1.0%. The Facility contains covenants requiring the maintenance of (i) a total leverage ratio of not more than 3.0 to 1.0, (ii) a debt service coverage ratio of not less than 1.1 to 1.0 and (iii) a consolidated tangible net worth of not less than $50.0 million, each as defined in the Facility. The Facility also contains other customary affirmative and negative covenants and events of default. As of June 30, 2020, the Company was in compliance with all covenants contained in the Facility. The Company has historically funded operations through cash from operations and working capital. The primary source of cash is the sale of produced oil and natural gas liquids. A portion of these cash flows is used to fund capital expenditures. The Company expects to manage future development activities in the Delhi field and the limited capital maintenance requirements of the Hamilton Dome field within the boundaries of its operating cash flow and existing working capital. The Company is pursuing new growth opportunities through acquisitions and other transactions. In addition to cash on hand, the Company has limited access to an undrawn borrowing base available under its senior secured credit facility, The Company also has an effective shelf registration statement with the SEC under which the Company may issue up to $500 million of new debt or equity securities. 30 Table of Contents During the fiscal year ended June 30, 2020, the Company funded operations, capital expenditures and cash dividends with cash generated from operations resulting in a decrease of $11.9 million in cash. Uses of cash included the acquisition of the Hamilton Dome field ($9.3 million), cash dividends on common shares ($10.7 million) and repurchasing shares under the buyback program ($2.5 million). As of June 30, 2020, working capital was $21.0 million , a decrease of $9.3 million over working capital of $32.4 million at June 30, 2019. The Board of Directors instituted a cash dividend payable on shares of our common stock in December 2013. The Company has since paid 27 consecutive quarterly dividends. Distribution of a substantial portion of cash flow in excess of operating and capital requirements through cash dividends is a priority of the Company’s financial strategy. However, due to current depressed price environment and a desire to preserve cash to potentially pursue opportunities that will grow dividends over time, the Board of Directors believed it was in the best interest of the Company to reduce its quarterly dividend rate from $0.10 per share to $0.025 per share, effective in the quarter ending June 30, 2020. The reduced dividend rate will continue to reward shareholders with a yield of approximately 3% at current stock price levels. The Company intends to grow dividend levels as appropriate. In May 2015, the Board of Directors approved a share repurchase program covering up to $5 million of the Company’s common stock. The Company monitors its stock price and looks to opportunistically purchase its common stock when market conditions are deemed to be appropriate. During the year ended June 30, 2020, the Company purchased 440,666 shares at an average cost of $5.51 per share bringing its total to $4.0 million to purchase 706,858 common shares at an average price of $5.72 per share. In early March 2020, oil prices declined rapidly. As a consequence of unprecedented commodity price volatility and uncertainty on April 6, 2020, the Company elected to enter into NYMEX WTI oil swaps covering approximately 42,000 barrels per month for the period of April 2020 through December 2020, at a fixed swap price of $32.00 per barrel. The fixed price swap contracts will significantly reduce volatility in the Company's near-term realized oil price and resulting revenues, thus supporting its current business plans and objectives. The Company expects to have sufficient liquidity to meet all its identified cash requirements for at least the next 12 months. Capital Expenditures For the year ended June 30, 2020, we incurred $11.8 million on capital projects consisting of $9.3 million for the acquisition of Hamilton Dome field, $0.9 million for a non-cash asset addition related to Hamilton Dome asset retirement obligations, $1.5 million at the Delhi field (primarily for the NGL plant and completion of the water curtain) and $0.1 million for capital workovers at Hamilton Dome. Based on discussions with the Delhi and Hamilton Dome operators, we expect to continue to perform conformance workover projects and will likely incur additional maintenance capital expenditures, primarily at the Delhi field. Such amounts are not known or approved but we expect such expenditures to be in the range of $0.75 million to $1.0 million over the next 12 months. In addition, we have planned for Delhi Phase V development expenditures of approximately $1.9 million to be incurred in the fourth quarter of our fiscal 2021. Phase V development expenditures are expected to total $8.6 million with $3.7 million to be incurred in fiscal 2022 and the remainder over the next two years. Our proved undeveloped reserves at June 30, 2020 included 1.86 MMBOE of reserves and approximately $8.6 million of future development costs associated with Phase V development in the eastern portion of the field. Such development requires participation by both the operator and the Company. Based on our discussions with the operator, we expect drilling to commence in fiscal 2022, but the timing of Phase V is also dependent, in part, on the field operator's available funds and capital spending plans and priorities within its portfolio of properties. Funding for our anticipated capital expenditures over the next 24 months is expected to be met from cash flows from operations and current working capital. Full Cost Pool Ceiling Test At the year ended June 30, 2020, our capitalized costs of oil and gas properties were below the full cost valuation ceiling; however, we could experience an impairment if current price levels persist or worsen. The trend of lower oil prices reduced the excess, or cushion, of our valuation ceiling over our capitalized costs in the current quarter and may adversely impact our ceiling tests in future quarters. We cannot give assurance that a write-down of capitalized oil and gas properties will not be required in the future. Under the full cost method of accounting, capitalized costs of oil and gas properties, net of accumulated DD&A and related deferred taxes, are limited to the estimated future net cash flows from proved oil and gas reserves, discounted at 10%, plus the lower of cost or fair value of unproved properties, as adjusted for related income tax effects (the valuation “ceiling”). If capitalized costs exceed the full cost ceiling, the excess would be charged to expense as a write-down of oil and gas properties in the quarter in which the excess occurred. The quarterly ceiling test calculation requires that we use the 31 Table of Contents average first day of the month price for our petroleum products during the 12-month period ending with the balance sheet date. The prices used in calculating our ceiling test at June 30, 2020 were $47.37 per barrel of oil and $9.00 per barrel of natural gas liquids. A significant decline from these prices would likely result in a ceiling test impairment charge. Overview of Cash Flow Activities The table below compares a summary of our consolidated statements of cash flows for year ended June 30, 2020 and 2019. June 30, Increases (Decreases) in Cash: 2020 2019 Difference (In Millions) Net cash provided by operating activities $ 12.4 $ 24.1 $ (11.7 ) Net cash used in investing activities (11.1 ) (6.8 ) (4.3 ) Net cash used in financing activities (13.2 ) (13.4 ) 0.2 Change in cash, cash equivalents and restricted cash $ (11.9 ) $ 3.9 $ (15.8 ) Cash provided by operating activities in the current year decreased $11.7 million compared to fiscal 2019. The difference is primarily as the result of decrease in net income of $9.4 million due to lower realized commodity prices together with a $3.2 million increase in cash used by operating assets and liabilities. Enhanced Oil Recovery credits claimed on income tax returns for fiscal 2019, 2018 and 2017 resulted in an income tax refund receivable that contributed to the use of cash by operating activities. Cash used in investing activities decreased $4.3 million primarily due to the acquisition of the Hamilton Dome field in November 2019. The decrease is partially offset by a reduction in capital expenditures in fiscal 2020 due to the decrease in realized commodity prices. Cash used in financing activities remained relatively flat year over year as the reduction in cash used for cash dividends was offset by the Company's common share repurchase program in fiscal 2020. The Company reduced its quarterly dividend rate from $0.10 per share to $0.025 per share for the fourth quarter of fiscal year 2020. The Company spent a total of $2.5 million to purchase 440,666 shares of its common stock at an average price of $5.51. Contractual Obligations and Other Commitments The table below provides estimates of the timing of future payments that, as of June 30, 2020 , we are obligated to make under our contractual obligations and commitments. We expect to fund these contractual obligations with cash on hand and cash generated from operations. Payments Due by Period Total Less than 1 Year 1 - 3 Years 3 - 5 Years More than 5 Years Contractual Obligations AFE purchase commitments in connection with joint interest agreements $ 201,104 $ 201,104 $ — $ — $ — Operating lease 139,268 54,290 84,978 — — Other Obligations Asset retirement obligations 2,588,894 — 65,163 43,442 2,480,289 Total Obligations $ 2,929,266 $ 255,394 $ 150,141 $ 43,442 $ 2,480,289 32 Table of Contents Results of Operations Years Ended June 30, 2020 and 2019 Revenues Compared to the prior fiscal year, fiscal 2020 revenues decreased 31.5% due to 32.1% lower realized commodity prices. The decrease is partially offset by a very slight increase in production volumes. The following table summarizes total production volumes, daily production volumes, average realized prices and revenues: Years Ended June 30, 2020 2019 Variance Variance % Oil and gas production Crude oil revenues $ 28,578,879 $ 40,779,052 $ (12,200,173 ) (29.9 )% NGL revenues 1,018,349 2,449,359 (1,431,010 ) (58.4 )% Natural gas revenues 2,068 1,210 858 70.9 % Total revenues $ 29,599,296 $ 43,229,621 $ (13,630,325 ) (31.5 )% Crude oil volumes (Bbl) 638,464 626,879 11,585 1.8 % NGL volumes (Bbl) 106,159 112,013 (5,854 ) (5.2 )% Natural gas volumes (Mcf) 1,087 459 628 136.8 % Equivalent volumes (BOE) 744,804 738,968 5,836 0.8 % Crude oil (BOPD, net) 1,744 1,717 27 1.6 % NGLs (BOEPD, net) 290 307 (17 ) (5.5 )% Natural gas (BOEPD, net) — 1 (1 ) n.m Equivalent volumes (BOEPD, net) 2,034 2,025 9 0.4 % Crude oil price per Bbl $ 44.76 $ 65.05 $ (20.29 ) (31.2 )% NGL price per Bbl 9.59 21.87 (12.28 ) (56.1 )% Natural gas price per Mcf 1.90 2.64 (0.74 ) (28.0 )% Equivalent price per BOE $ 39.74 $ 58.50 $ (18.76 ) (32.1 )% n. m. Not meaningful. 33 Table of Contents (Gain) Loss on Derivative Contracts Periodically, we utilize commodity derivative financial instruments to reduce our exposure to fluctuations in crude oil prices. This amount represents the (i) (gain) loss related to fair value adjustments on our open, or unrealized, derivative contracts and (ii) (gains) losses on settlements of derivative contracts for positions that have settled or been realized. Years Ended June 30, 2020 2019 Variance Variance % Oil Derivative Contracts Realized (gain) loss on derivatives, net $ (528,139 ) $ — $ (528,139 ) n.m. Unrealized (gain) loss on derivatives 1,911,343 — 1,911,343 n.m. Loss on derivatives $ 1,383,204 $ — $ 1,383,204 n.m. Crude oil price per Bbl (including impact of realized derivatives) $ 45.59 n. m. Not meaningful. Production Costs Production costs (also referred to as lease operating expenses) are presented in two components: (i) CO 2 costs for the Delhi field and (ii) other production costs for both the Delhi and Hamilton Dome fields. The $0.8 million decrease in total production costs was due to a 47.5% decrease in CO 2 costs. The decrease is partially offset by a 31.8% increase in other production costs. Years Ended June 30, 2020 2019 Variance Variance % CO 2 costs (a) $ 3,501,507 $ 6,674,905 $ (3,173,398 ) (47.5 )% Other production costs 10,003,995 7,591,879 2,412,116 31.8 % Total production costs $ 13,505,502 $ 14,266,784 $ (761,282 ) (5.3 )% CO 2 costs per BOE $ 4.70 $ 9.03 $ (4.33 ) (48.0 )% All other production costs per BOE 13.43 10.28 3.15 30.6 % Production costs per BOE $ 18.13 $ 19.31 $ (1.18 ) (6.1 )% (a) Under our contract with the operator, purchased CO 2 is priced at 1% of the realized oil price in the field per Mcf, plus sales taxes and transportation costs as per contract terms. Years Ended June 30, 2020 2019 Variance Variance % CO 2 costs per mcf $ 0.77 $ 0.90 $ (0.13 ) (14.4 )% CO 2 volumes (MMcf per day, gross) 51.9 85.2 (33.3 ) (39.1 )% The $3.2 million decrease in CO 2 costs was due to a 39.1% decrease in rate of purchased volumes together with a 14.4% decrease in price per Mcf associated with the lower realized oil price. The upstream pipeline that supplies CO 2 to the Delhi field was shut-in on February 22, 2020, when a pressure loss was detected. CO 2 purchases were temporarily suspended through our fiscal year-end. CO 2 purchases provide approximately 20% of the injected volumes in the field and the field’s recycle facilities provide the other 80%. The recycle facilities continued to operate as usual during the purchase pipeline suspension. The pipeline is owned and operated by Denbury Resources, and the Company does not have any ownership in the portion of the pipeline under repair. The operator expects the pipeline to be back in service in October 2020. Compared to fiscal 2019, "Other production costs" increased 31.8% primarily due to the acquisition of the Hamilton Dome field in November 2019. The Delhi field's "Other production costs" decreased slightly by 5.6% impacted by cost control measures as a result of lower oil prices. Compared to fiscal 2019, Delhi field costs decreased 15% to $16.50 per BOE of Delhi current year production primarily due to lower CO 2 costs, as discussed above. 34 Table of Contents For fiscal 2020, Hamilton Dome field costs per BOE were $28.93 . Depletion, Depreciation and Amortization ("DD&A") Total DD&A expense was 7.9% lower compared to the same one year-ago period due to an 8.7% decrease in the oil and gas DD&A amortization rate; the volume change between the two periods was very slight. The integration of the Hamilton Dome asset contributed to an overall lower composite DD&A per BOE rate. Years Ended June 30, 2020 2019 Variance Variance % DD&A of proved oil and gas properties $ 5,592,651 $ 6,122,515 $ (529,864 ) (8.7 )% Depreciation of other property and equipment 8,779 15,498 (6,719 ) (43.4 )% Amortization of intangibles 13,564 13,564 — — % Accretion of asset retirement obligations 146,504 101,506 44,998 44.3 % Total DD&A $ 5,761,498 $ 6,253,083 $ (491,585 ) (7.9 )% Oil and gas DD&A per BOE $ 7.51 $ 8.29 $ (0.78 ) (9.4 )% General and Administrative Expenses Total general and administrative expenses for fiscal 2020 increased $0.2 million , or 3.7% , to $5.3 million from the same year-ago period. The increase is primarily due to higher non-cash stock-based compensation of $0.4 million related to new grants associated with the hiring of a new executive officer and increased consulting expense of $0.1 million, partially offset by a decrease of $0.3 million in bonus expense. 35 Table of Contents Other Income and Expenses Other income and expenses (net) decreased due primarily to the non-recurring Enduro transaction breakup fee income received during fiscal 2019. During May 2018, the Company entered into a Purchase and Sale Agreement to acquire, as the "stalking horse" bidder, certain oil and gas assets from an affiliate of Enduro Resource Partners LLC ("Enduro") for a purchase price of $27.5 million, subject to the outcome of Enduro's Chapter 11 process. In the first quarter of 2019, the Company was repaid its deposit together with related earned interest when a higher bidder first emerged in the bidding process. Interest income is lower due to lower invested balances together with declining interest rates. Years Ended June 30, 2020 2019 Variance Variance % Enduro transaction breakup fee — 1,100,000 (1,100,000 ) (100.0 )% Interest and other income 177,418 239,150 (61,732 ) (25.8 )% Interest expense (110,775 ) (116,546 ) 5,771 (5.0 )% Total other income, net $ 66,643 $ 1,222,604 $ (1,155,961 ) (94.5 )% Net Income Net income available to common stockholders for the year ended June 30, 2020 decreased $9.4 million , or 61% , to $5.9 million compared to the last fiscal year. Pre-tax income decreased due to the aforementioned revenue and expense variances. Our income tax provision decreased primarily due to lower pre-tax income as our effective income tax rate was relatively unchanged from the year-ago period. During the current period, we recorded a $2.8 million income tax benefit related to Enhanced Oil Recovery credits claimed on income tax returns for fiscal 2019, 2018 and 2017 . Years Ended June 30, 2020 2019 Variance Variance % Income before income taxes 3,756,076 18,859,427 (15,103,351 ) (80.1 )% Income tax provision (benefit) (2,180,996 ) 3,482,361 (5,663,357 ) (162.6 )% Net income available to common stockholders $ 5,937,072 $ 15,377,066 $ (9,439,994 ) (61.4 )% Income tax provision (benefit) as a percentage of income before income taxes (58 )% 18 % 36 Table of Contents Critical Accounting Policies and Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires that we select certain accounting policies and make estimates and assumptions that affect the reported amounts of the assets, liabilities, and disclosures of contingent assets and liabilities as of the date of the balance sheet as well as the reported amounts of revenues and expenses during the reporting period. These policies, together with our estimates, have a significant effect on our consolidated financial statements. Our significant accounting policies are included in Note 2 to our consolidated statements in Item 8. Following is a discussion of our most critical accounting estimates, judgments, and uncertainties that are inherent in the preparation of our consolidated financial statements. Oil and Natural Gas Properties . Companies engaged in the production of oil and natural gas are required to follow accounting rules that are unique to the oil and gas industry. We apply the full cost accounting method for our oil and natural gas properties as prescribed by SEC Regulation S-X Rule 4-10. Under this method of accounting, the costs of unsuccessful and successful, exploration and development activities are capitalized as properties and equipment. This includes any internal costs that are directly related to property acquisition, exploration, and development activities but does not include any costs related to production, general corporate overhead, or similar activities. Gain or loss on the sale or other disposition of oil and gas properties is not recognized unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves. Oil and natural gas properties include costs that are excluded from costs being depleted or amortized. Oil and natural gas property costs excluded represent investments in unevaluated properties. We exclude these costs until the property has been evaluated. Costs are transferred to the full cost pool as the properties are evaluated. As of June 30, 2020, we had no unevaluated property costs. Oil and natural gas property costs included represent non-producing leasehold, geological and geophysical costs associated with leasehold or drilling interests and exploration drilling costs. . Estimates of Proved Reserves. The estimated quantities of proved oil and natural gas reserves have a significant impact on the underlying financial statements. The estimated quantities of proved reserves are used to calculate depletion expense and the estimated future net cash flows associated with those proved reserves is the basis for determining impairment under the quarterly ceiling test calculation. The process of estimating oil and natural gas reserves is very complex and requires significant decisions in the evaluation of all available geological, geophysical, engineering, and economic data. Estimated reserves are often subject to future revisions, which could be substantial, based on the availability of additional information; this includes reservoir performance, additional development activity, new geological and geophysical data, additional drilling, technological advancements, price changes, and other economic factors. As a result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that the reported reserve estimates prepared by our third party independent engineers represent the most accurate assessments possible, the subjective decisions and variances in available data for the properties make these estimates generally less precise than other estimates included in our financial statements. Material revisions to reserve estimates and/or significant changes in commodity prices could substantially affect our estimated future net cash flows of our proved reserves. These changes could affect our quarterly ceiling test calculation and could significantly affect our depletion rate. A 10% decrease in commodity prices used to determine our proved reserves as of June 30, 2020 would not have resulted in an impairment of our oil and natural gas properties. Holding all other factors constant, a reduction in the Company's proved reserve estimates at June 30, 2020 of 5%, 10% and 15% would affect depreciation, depletion, and amortization expense by approximately $290,000, $612,000, and $970,000, respectively. On December 31, 2008, the SEC issued its final rule on the modernization of reporting oil and gas reserves. The rule allows consideration of new technologies in evaluating reserves, generally limits the designation of proved reserves to those projects forecast to be drilled five years from the initial recognition date of such reserves, allows companies to disclose their probable and possible reserves to investors, requires reporting of oil and gas reserves using an average price based on the previous 12-month unweighted arithmetic average first-day-of-the-month price rather than year-end prices, revises the disclosure requirements for oil and gas operations, and revises accounting for the limitation on capitalized costs for full cost companies. Valuation of Deferred Tax Assets. We make certain estimates and judgments in determining our income tax expense for financial reporting purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities that arise from differences in the timing and recognition of revenue and expense for tax and financial reporting purposes. Our federal and state income tax returns are generally not prepared or filed before the consolidated financial statements are prepared or filed; therefore, we estimate the tax basis of our assets and liabilities at the end of each period as well as the effects of tax rate changes, tax credits, and net operating loss carry backs and carry forwards. Adjustments related to these estimates are recorded in our tax provision in the period in which we file our income tax returns. Further, we must assess the likelihood that we will be able to recover or utilize our deferred tax assets (primarily our net operating loss). If recovery is not likely, we must record a valuation allowance against such deferred tax assets for the amount we would not expect to recover; this would result in an increase to our income tax expense. As of June 30, 2020, we have recorded a valuation allowance for the portion of our net operating loss that is limited by IRS Section 382. 37 Table of Contents Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making the assessment of the ultimate realization of deferred tax assets. Based upon the level of historical taxable income and projections for future taxable income over the periods for which the deferred tax assets are deductible, we believe that it is more likely than not that the Company will realize the benefits of its net deferred tax assets at the time of this report. If our estimates and judgments change regarding our ability to utilize our deferred tax assets, our tax provision would increase in the period it is determined that recovery is not probable. Stock-based Compensation . The fair value and expected vesting period of the Company's market-based awards were determined using a Monte Carlo simulation. This technique uses a geometric Brownian motion model with defined variables and randomly generates values for each variable through multiple trials. Variables include stock price volatility, expected term of the award, the expected risk-free interest rate, and the expected dividend yield of the Company's stock. The risk-free interest rate used is the U.S. Treasury yield for bonds matching the expected term of the award on the date of grant. Vesting of market-based awards is based on the Company's total common stock return compared to a peer group of other companies in our industry with comparable market capitalizations and, for certain awards, the Company's share price attaining a set target. Recent Accounting Pronouncements . Refer to Note 2 to our consolidated financial statements in Item 8. Consolidated Financial Statements and Supplementary Data for discussion of the recent accounting pronouncements issued by the Financial Accounting Standards Board. Off Balance Sheet Arrangements The Company has no off-balance sheet arrangements as of June 30, 2020 .