evolution petroleum burkenroad report
TRANSCRIPT
November 12, 2014
EVOLUTION PETROLEUM CORPORATION EPM/NYSE
Continuing Coverage: E&P with a Little Extra GARP®
Investment Rating: Market Perform
PRICE: $ 9.11 S&P 500: 2,038.26 DJIA: 17,613.74 RUSSELL 2000: 1,173.32
Evolution operates in tertiary recovery niche of the upstream industry
Firm’s success is dependent on oil prices
Firm maintains conservative financial structure
Continuous Delhi Field enhanced recovery production to drive growth
Delhi field reaches payout status
Future of GARP® has promising commercialization prospects
Our 12‐month target price is $10.00.
Valuation
EPSP/E
CFPSP/CFPS
2014 A$ 0.09101.2x $ 0.2438.6x
2015 E$ 0.6314.4x $ 0.6115.0x
2016 E$ 0.959.6x
$ 1.048.7x
Market Capitalization Stock DataEquity Market Cap (MM): $ 297.74 52‐Week Range: $8.26 ‐ $13.60
Enterprise Value (MM): $ 276.37 12‐Month Stock Performance: ‐23.54%
Shares Outstanding (MM): 32.68 Dividend Yield: 4.39%
Estimated Float (MM): 17.79 Book Value Per Share: $ 1.546‐Mo. Avg. Daily Volume: 895,494 Beta: 0.90
Company Quick View: Success is bubbling up at Evolution Petroleum. Evolution is an independent oil and gas exploration and production company headquartered in Houston, Texas. The Company, founded in 2003, primarily focuses on exploiting underdeveloped oil and natural gas resources utilizing advanced proprietary technology. It primarily holds interests in the Holt Bryant Unit Delhi Field in Northeast Louisiana and also holds interests in the Giddings Field in Central Texas. Company Website: www.evolutionpetroleum.com
Analysts: Investment Research Manager: Avery Golombek Tolga Erman Jonathan Afra Aaron Mandel Lambert Odeh
The BURKENROAD REPORTS are produced solely as a part of an educational program of Tulane University's Freeman School of Business. The reports are not investment advice and you should not and may not rely on them in making any investment decision. You should consult an investment professional and/or conduct your own primary research regarding any potential investment.
Wall Street's Farm Team
BURK
ENRO
AD R
EPO
RTS
4/1/13 4:47 PM
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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Figure 1: 5‐year Stock Price Performance
Source: Bloomberg November 16, 2014
INVESTMENT SUMMARY
We give Evolution Petroleum a rating of Market Perform with a 12‐month target price of $10.00. To reach this target price we used the present value of estimated future oil and gas returns, net of estimated direct expenses, discounted at an annual rate of 10%. Evolution is a petroleum exploration and production (E&P) company that focuses on underdeveloped onshore oil fields.
Evolution will continue to realize steady cash flows from the Delhi field, its sole significant revenue producing asset. Delhi proved and probable reserve volumes have grown 8%, to 22.6 million barrels of oil and the field has a reserve life index of approximately 18 years. Future strategy is to increase free cash flow from the Delhi Field, commercialize its Gas Assisted Rod Pump (GARP®), and increase shareholder returns. The reversionary interest agreement with Denbury Resources reached its payout during October, 2014.
Additionally, Evolution continues to focus business efforts on the commercialization of its GARP® technology. After the Company’s divestment of most non‐GARP® operated properties, Evolution underwent a substantial restructuring. Several management changes occurred, including the appointment of top management to GARP® related positions and a reduction in engineering staff. As such, Evolution’s unlevered financial structure, risk‐averse operations, significant cash flow, and near‐maximum Delhi production make it an attractive option for acquisition.
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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Table 1: Historical Burkenroad Ratings and Prices
Date Rating Price*
03/17/14 Market Perform $14.00
03/28/13 Market Outperform $13.00
04/05/12 Market Outperform $14.00
03/25/11 Market Outperform $14.00
04/14/10 Market Outperform $11.05
*Price at time of report date
INVESTMENT THESIS
We have established a 12‐month target price of $10.00 and a rating of Market Perform.
Evolution operates in tertiary recovery niche of the upstream industry
Evolution Petroleum operates within a specific niche of the oil exploration and production (E&P) industry. The Company focuses on tertiary oil production and does not engage in the exploration of reservoirs, which requires large capital expenditures and can be highly speculative. Specifically, Evolution’s operations utilize a highly specialized proprietary technology to enable tertiary recovery. The Company implements horizontal drilling and artificial lifts to increase the useful life of wells and enhance petroleum recovery from previously productive yet underdeveloped formations.
Firm’s success is dependent on oil prices
Evolution’s financial success is largely dependent on the market price of oil. Energy prices can be volatile in the short term because of geopolitical and economic uncertainties. This volatility impacts Evolution’s market price because oil is the firm’s main generator of revenues. Additionally, Evolution has refrained from implementing any hedges on its oil production, making the firm even more vulnerable to a price drop in oil.
Continuous Delhi Field enhanced recovery production to drive growth
Currently, the Delhi Field is Evolution’s main asset. Purchased in 2003, the Delhi Field encountered some stoppages around the end of 2013 but has since stabilized. Enhanced recovery well production remains steady and recent annual performance has met expectations.
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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Delhi proved and probable reserve volumes have grown 8%, to 22.6 million barrels of oil. The Delhi field has a reserve life index of approximately 18 years. Evolution will rely heavily on the continued success of the well for the next 18 years because the firm is not actively seeking new projects.
Delhi Field reaches payout status
In 2006, Evolution Petroleum entered into an agreement with Denbury Resources to redevelop the Delhi Field. The agreement dictated a revenue sharing arrangement where Evolution assumes none of the cost and receives a portion of the revenue until Denbury receives its full investment, plus any predetermined amount of return. Evolution received a 7.4% royalty interest from all gross revenues and paid no capital or operating expenses. The terms of the agreement are beneficial to Evolution because they allow the Company to generate significant revenue, while Denbury maintains the well. Denbury pays the majority of costs for the Delhi Field, resulting in expected post‐reversionary cash flows for Evolution considerably greater than net capital expenditures. The 23.9% reversionary working interest in the field activated during October, 2014. This revision is expected to result in an approximate 360% increase in yearly revenue.
Future of GARP® has promising commercialization prospects
As of December 2013, management completed a corporate restructuring initiative, which included: its divestment of all non‐Gas Assisted Rod Pump (GARP®) operated properties, compensation for engineering‐related employees to leave the Company, and the appointment of several C‐Suite members to lead the commercialization of GARP®. Evolution’s proprietary and patented GARP® technology is at the forefront of Evolution’s business plan.
GARP® technology requires relatively minimal capital investment to commercialize and offers considerable growth potential. Compared to the fourth quarter ended June 2013, revenue from previous GARP® installations grew by 64% and daily sales volumes increased 201%. Recently, Evolution has installed three GARP® wells, which will contribute to revenue growth in 2015. In recent commercialization efforts, management sought to educate industry professionals about GARP® in an effort to increase implementation of the technology. As a result of these efforts, two additional wells are scheduled to implement the technology in the coming months.
Future cash flows structures from GARP® technology remain in the planning stages. Management expects to provide forthcoming installations on a fee basis but is considering alternative business structures. One consideration is assuming all capital expenditures for GARP® installation on additional wells, in exchange for compensation on a production basis.
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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Firm maintains conservative financial structure
Evolution is an attractive company because of the firm’s unlevered financial structure, risk‐averse operations, and significant cash flow. First, the Company’s capital structure of maintaining zero‐debt minimizes bankruptcy risk. Furthermore, Evolution invests in projects that do not involve large capital expenditures and evades speculative decisions. As a result, Evolution is able to offer higher return on invested capital. Management built Evolution on this platform, making the firm an attractive asset for other companies.
VALUATION
Our analyst team gives Evolution Petroleum a Market Perform rating. Our 12‐month target stock price projection is $10.00. We used the present value of estimated future oil and gas returns, net of estimated direct expenses, discounted at an annual rate of 10% over seven years.
PV‐10
The PV‐10 model is a standard valuation measure for the exploration & production industry. This model takes the present value of cash flows from production, net of operating expenses, discounted at the annual 10% industry standard.
Our PV‐10 model uses two sources to determine projections of prices and productions. The Burkenroad price deck is used to determine future prices of oil and production estimates are calculated based upon information supplied by the Company. The Burkenroad price deck is determined by the NYMEX West Texas Intermediate futures contract prices combined with the U.S. Energy Information Administration (EIA) Short‐Term Outlook forecasts and the EIA Annual Energy Outlook to derive long‐term prices of oil, natural gas, and natural gas liquids. After calculating cash flows, we discounted by 10% to arrive at a rounded price of $10.00.
INDUSTRY ANALYSIS
Companies operating in the petroleum industry explore, extract, refine, and transport petroleum products. The three main sectors in this industry are upstream, midstream, and downstream. Upstream companies explore, extract, or produce oil and natural gas liquids (NGL). Midstream companies transport, store, and serve as the middle man between upstream and downstream companies. The downstream companies refine the products and sell them to end users.
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Major companies in the industry include Royal Dutch Shell, ExxonMobil, Chevron, and British Petroleum. These companies are well‐integrated and operate in all three sectors. Evolution Petroleum is an upstream company because the majority of its revenues come from extraction.
Extraction & Production Industry
The U.S. oil drilling and gas extraction industry had revenues of $393.3 billion in 2013 and analysts expect that figure to grow by 3.6 % to $407.7 billion in 2014. Expected growth rates for crude oil and NGL production in 2014 are 13% and 10%, respectively. The International Energy Agency forecasts that the U.S. will lead the world in oil production by 2017 and has the potential to be a net oil exporter, dependent on the regulatory environment. Favorable sector forecasts are a result of improvements in industry technology and techniques, a reduction in U.S. dependence on foreign oil, and the generally positive movements of key industry drivers.
Key Drivers of the Oil and Gas industry:
• Price of crude oil
• Price of natural gas
• Regulations in the Petrochemical Manufacturing industry
• Total global vehicle miles
• Trade‐weighted index
In October 2014, the International Monetary Fund forecasted the average 2015 price of oil to be $99.36 per barrel. Similarly, the U.S. Department of Energy expects the price of NGLs to increase an average of 2.6% annually through 2019. According to Bureau of Transportation statistics, total global vehicle miles are projected to be 3.13 trillion in 2015. International crude oil prices continued on a downward trajectory from September through November 2014, falling under $100 per barrel (bbl) for the first time since June 2012. In October 2014, Goldman Sachs forecasted oil prices would fall to $70 in 2015. The value and stock price of exploration and production (E&P) companies are correlated with changing oil and NGL prices. Additionally, the industry is subject to numerous Federal and state‐level regulations and changing laws could significantly impact E&P companies in the future.
Macroeconomic Trends
Global economic and political factors affect product prices. An example is the Organization of Petroleum Exporting Countries (OPEC) which consists of 12 countries holding substantial oil exports. OPEC leverages political ties to control product prices. In October 1973, the organization established a trade embargo which heavily impacted prices.
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In October 2014, oil prices dropped to $80 per barrel, caused in part by OPEC selling their oil at a discount and other global instabilities.
Natural Gas Prices Align with Supply and Weather
A boom in shale gas production is currently occurring in the U.S. as a result of recent innovations in drilling methods. These drilling techniques have led to a great increase in production of natural gas. The increase in supply has resulted in a decrease in price over the past several months. The Energy Information Agency (EIA) expects that natural gas production will grow by an annual rate of 5.3% in 2014.
Another determining component of natural gas prices are weather conditions. In January 2014, a harsh winter led natural gas prices to exceed $5.00 per thousand cubic feet (Mcf). Goldman Sachs recently reported a conservative outlook forecasting that Henry Hub gas prices will range between $4.00‐$4.50/Million British Thermal Unit (MMBtu) through 2018.
Liquefied natural gas (LNG) exports may provide a solution to the current oversupply problem. Potential consumers of LNG include South American countries. However, long‐distance transportation would require substantial capital investments. The EIA expects the U.S. to be a net exporter in 2015.
Developing Economies
In recent years, petroleum consumption in developing countries has increased. The figure below illustrates how much of the growth in world energy use is expected to come from countries outside of the Organization of Cooperation and Development (OCED). The OCED includes 34 member countries that are considered, “advanced.” While energy consumption in OECD nations is expected to remain stagnant over the next 25 years, consumption is expected to continually increase in non‐OCED nations (see Figure 2).
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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Figure 2: Projected World Energy Consumption in Quadrillion Btus
Source: EIA, International Energy Outlook 2014
Oil Prices Are Dependent on Numerous Conditions
Volatility in oil prices stem from geopolitics, economic uncertainties, government action, and climate. In the short term, prices may be volatile due to supply and demand disruptions. As of August 2014, the EIA increased its forecasts for next year’s oil prices. The two primary benchmarks for oil prices are West Texas Intermediate (WTI) and Brent. WTI oil forecasts for 2015 average $90.55, down from October’s estimate of $95.17. Brent oil is projected to rise from $104.92 to $105.
In addition, Petroleum product prices face potential disruption when major suppliers are in areas of political unrest. The Strait of Hormuz accounts for 20% of global oil flow on a daily basis; the Strait processed about 17 million barrels per day (bbl/d) in 2011. This key transportation hub faces security issues, which could impact the shipment of oil and influence product prices.
Ever‐changing Regulatory Environment
Government regulations play an important role in the oil and natural gas industry. Laws and regulations change over time due to a variety of factors including the political landscape and environmental consequences of extraction and consumption of fossil fuels. Although future regulations could threaten the profitability of E&P companies, the states which the Company operates in, Texas and Louisiana, promote the growth of the oil and gas industry through taxation incentives.
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The legislative issue of most concern for E&P companies today is hydraulic fracturing. Recently, the Environmental Protective Agency (EPA) ruled that hydraulically fractured gas wells may continue to flare byproducts until January 1, 2015. Upon that date, companies must capture 95% of the volatile organic compounds emitted annually by their wells or face fines. This has a significant impact on the daily operations of E&P companies.
Customers
The customer base of upstream companies is predominantly comprised of two groups: midstream and downstream companies. E&P companies acts as the supplier of the raw commodity. Midstream companies enable product transportation while downstream companies facilitate the refining and finishing of petroleum products. Evolution’s customers also include other E&P companies that lease out Evolution Petroleum’s proprietary Gas Assisted Rod Pump (GARP®) technology.
Evolution receives an overwhelming majority of its revenue from a single customer. In fiscal year 2014, Plains Marketing LP, a midstream company, accounted for 96% of Evolution Petroleum’s revenues. However, Evolution’s business risk regarding Plain Marketing is minimal since the Company’s main product offering, Louisiana Light Sweet Oil, is considered highly desirable.
Competitors
Competitors within the oil and natural gas industry focus on two main tasks: the acquisition of oil prospects and acreage, and the successful retrieval of oil and natural gas. Evolution Petroleum competes with a large range of E&P companies spanning small market capitalization firms to some of the largest companies in the world. Evolution Petroleum and companies of similar size face a disadvantage to larger companies who have more extensive staffs and larger capital resources. Larger companies with higher monetary and human capital can afford to do more tasks in‐house and minimize outsourcing. Though outsourcing can minimize liabilities, larger companies have the ability to increase efficiency by monitoring their operations more closely. Furthermore, larger companies that conduct all their operations themselves can realize additional revenues that they would otherwise have to share with partnered firms. Because of its limited resources and conservative management approach, Evolution prefers to share revenues with contracted partners.
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Minimal Threat of New Entrants
The threat of companies entering the E&P industry is minimal. The largest barrier for potential entrants is the high capital expenditures necessary to compete in the industry. Particularly, entrants must fund the process of finding reserves, drilling profitable wells, buying licenses, implementing advancing technology, and transporting the product. The capital‐intensive environment and number of established firms make the threat of entry low.
On top of capital requirements, companies in the E&P industry must attract talented and experienced human capital. Many firms have engineers, geophysicists, and other professionals capable of providing field expertise and knowledge. Such experts are able to approximate the expenditure and profitability of projects.
Bargaining Power of Suppliers
Suppliers for E&P companies provide field services and equipment for exploration activities. The large amount of service providers for E&P weakens supplier bargaining power due to competitive market pricing. Firms which focus on providing services for secondary and tertiary recovery companies, such as Evolution, have higher bargaining power than suppliers for regular E&P companies. Evolution uses horizontal drills and hydraulic fracturing machines. These structures are more expensive and difficult to maintain than regular wells. Therefore, these specialized suppliers have the capability to negotiate prices more than suppliers of traditional E&P companies.
Bargaining Power of Buyers
Market prices for crude oil and natural gas determine the bargaining power of buyers. This bargaining power is low because the market is independently volatile. However, quality of raw product gives buyers some bargaining power. Oil density and sulfur content are the determining factors of product quality. Oil that contains more sulfur and is more dense is less favorable. Buyers will demand lower prices for lower quality to compensate for the capital expenditures incurred during the refining process. Based on quality, Evolution receives a premium on its Delhi Louisiana Light Sweet oil.
ABOUT EVOLUTION
Evolution Petroleum Corporation (EPM/NYSE) is a petroleum recovery and production company focused on extracting oil and gas resources from underdeveloped onshore sites. The Company maintains rights and operates in underdeveloped onshore fields in Texas, Louisiana, and Oklahoma. Evolution Petroleum is headquartered in Houston, Texas and employs eleven full‐time staff, not including contract personnel, and outsourced service providers.
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History
In 2003, Evolution Petroleum incorporated under the name Natural Gas Systems (NGS). The Company went public in 2004 through a reverse merger with Reality Interactive, a high‐technology industrial company. Reality ceased operations and merged into a wholly owned subsidiary with NGS. The Company changed its name to Evolution Petroleum Corporation in July 2006 to convey its business model and to distinguish it from other companies traded on the New York Stock Exchange.
Products Offered by Evolution
Evolution implements specialized technology to recover oil and natural gas products through tertiary enhanced oil recovery (EOR).
Enhanced Oil Recovery
Evolution Petroleum implements EOR to maximize oil production from partially depleted wells. The Company uses CO2 flood technology that injects CO2 into a reservoir. EOR seeks to minimize viscosity and surface tension by flooding fossil fuels to the top of wells for simpler recovery. This form of EOR is a common and inexpensive tertiary extraction method. The Company’s main form of EOR is its Gas Assisted Rod Pump (GARP®) technology.
Invented by an Evolution employee, GARP® is an artificial lift technology which extends the useful life of vertical and horizontal wells. The technology reestablishes economic production by harvesting the additional reserves at the end of a horizontal well’s lifespan and increasing pressure in the heel of the well. GARP®’s technique combines existing well rod pumps with the injection of C02 gas at the bottom of the well to harvest product (see Figure 3).
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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Figure 3: GARP® Diagram
Source: GARP®lift.com
The technology offers an additional 15 to 35% of recovery production and limits costs to an average of $25 per barrel of oil equivalent (BOE). The technology is being made available through two pricing models, risk sharing or fixed fee models. The risk sharing model reduces capital expenditure requirements but requires a split of production profits.
During fiscal 2014, Evolution entered a commercial agreement to install GARP®® technology in a minimum of five wells. At the end of fiscal year 2014, three installations were increasing production. The GARP® service agreement includes direct licensing of the technology, required proprietary tools, and assistance in installation. The Company is in discussions with multiple industry operators to expand the business to other fields during fiscal year 2015. Upon continued success and industry acceptance, GARP® technology may be beneficial to a large number of firms that hold late stage horizontal and vertical wells.
Locations of Operation
The Delhi Field
The Company’s most significant asset are mineral interests in the Delhi Field (see Figure 3). The field, located in northeastern Louisiana, has produced approximately 190 million barrels of oil through primary and secondary recovery operations since its discovery in the mid‐1940’s. The Company purchased the field in 2003 for $2.8 million dollars amidst minimal production coming from the field.
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In 2006, Evolution entered into a reversionary interest agreement with Denbury Resources, making them the sole operator in the field. The terms of this agreement state that Evolution would maintain a 7.4% mineral royalty interest until Denbury received revenues of $200 million. At this point in time, Evolution’s royalty would increase to 26.5% while their working interest would increase to 23.9%. This payout was anticipated to occur at an earlier point; however, an environmental event in the well and subsequent lawsuit between the companies have delayed the activation to late 2014.
Considering the revenue significance of this asset, the Company plans to further develop the Delhi Field (see Figure 4). Evolution is installing a processing plant that recycles gas to recover methane and natural gas liquids (NGLs). Evolution also has plans to develop the eastern half of the Delhi Field. With a $47 million investment, the Company expects to increase barrel per day production.
Figure 4: Delhi Field Expansion
Source: Independent Petroleum Association of America Oil & Gas Investment Symposium
Giddings Field
Evolution installed GARP® technology in wells within the Giddings Field with active success. The Company installed the two wells in 2014 and will receive 25% of the profits from those wells. There is a substantial portfolio of potential candidates for GARP® who may benefit from the innovative technology and these two prospective wells are primary indicators of its potential.
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Figure 5: Map of Evolution’s Properties
Source: Evolution Petroleum Investor Presentation
Strategy
Evolution maximizes the extraction of petroleum resources by applying innovative engineering strategies and by generating free cash flow from the Delhi Field, its one foundational asset. The staff is fully aligned with shareholders and hold a 27.85% financial stake in the Company. Evolution continues to payout the earnings from the Delhi Field and seeks to build value per share, demonstrated by a ten cent dividend yield for the past four quarters. Although currently an insignificant percentage of revenues, the Company expects to expand GARP® into the leading tertiary recovery service of the oil and gas industry (see Figure 5). Management’s ultimate goal is to spin the technology off into a separate company.
Competitors
Evolution Petroleum’s main competition are independent on‐shore Exploration and Production (E&P) companies with similar market capitalizations. The Company’s current direct competitors are Approach Resources, Denbury Resources, Royale Energy, Saratoga Resources, and Yuma Energy. A current focus among Evolution’s peers is to maximize the withdrawal of profitable oil and gas reserves rather than exploring for new opportunities.
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Latest Developments
GARP® Gains Recognition
A major development in the E&P industry, specifically related to Evolution, is the implementation of GARP® technology in wells. This year, GARP® received the 2014 Exploration and Production Special Meritorius Award for Engineering Innovation. The patented technology was recognized as an innovative, sustainable, and practical solution to improving the efficiency and profitability of tertiary recovery wells.
Delhi Leak and Litigation
In June 2013, Denbury resources discovered an underground fluid release in the Delhi Field. Denbury suspended operational activities in the leak area, lowering pressure and oil production in wells within affected areas. This impacted the predicted timing of the additional royalty payout outlined in the reversionary agreement. Denbury disclosed a gross $120 million of additional costs before insurance reimbursement. The combination of effects lowered Evolution’s present value of proved reserves, subsequently increasing probable reserves. As a result, the working interest change was delayed into late 2014. Evolution is currently entering the discovery phases of a lawsuit against Denbury to enforce the agreement made in 2006.
October 2014 Oil Volatility
Current market conditions directly impact Evolution’s stock price because oil is the firm’s main generator of revenue and the price of oil recently declined to four‐year lows. This decrease in price was due to several factors, including Saudi Arabian producers selling product at a discount. On October 27th, 2014, Goldman Sachs forecasted oil prices would fall further to $70 in 2015. With the value of oil products uncertain, Evolution’s market price dropped nearly 20% within a six‐week span.
PEER ANALYSIS
Evolution Petroleum’s business strategy is unique within the upstream industry as the Company solely focuses on production. Because Evolution only invests in previously developed oil wells, the Company does not participate in speculative projects. The selection of peer companies within the upstream sector shown in Table 2 is based on a combination of factors including: market capitalization, business operations, geographic location, and petroleum products.
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Table 2: Peer Comparison
Company Ticker Market
Capitalization P/E P/BV
EV/ EBITDA
D/E ROE Div. Yield
Proved Reserves (MBOE)
Evolution Petroleum
EPM 299.40MM 101.44 1.591 40.99 0% 6.7% 4.38% 13,289
Approach Resources
AREX 549.20MM 22.6 1.65 7.07 35.19% 10.5% N/A 114,700
Denbury Resources
DNR 5,110 MM 26.18 .98 8.58 63.02% 3.77% 1.7% 468,300
Royale Energy ROYL 43.44M 41.64 134.67 N/A 178.9% 4.3% N/A 652,371
Saratoga Resources
SARA 32.85MM 0.23 1.591 7.62 62.06% 5.48% N/A 17,200
Yuma Energy YUMA 301.28MM 171.67 2.16 N/A 0% 1.45% N/A 449
Peer Average 1,207MM 52.46 28.21 7.76 68% 5.1% 1.7% 250,604
Source: Bloomberg October 2014
Evolution Petroleum has a price to earnings ratio of 104.44x and a return on equity of 6.7%, the second highest among its peers in both categories. The high price to earnings (P/E) ratio is testament to investor’s beliefs in the Company’s growth prospects. Evolution also has the highest enterprise value to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio and the highest dividend yield among its peers, 40.99x and 4.38%, respectively. The majority of Evolution’s peers carry debt with an average debt‐to‐equity ratio of 68%, but Evolution, like its peer Yuma, carries no debt.
Approach Resources Inc. (AREX/NASDAQ)
Approach Resources is a small cap energy company from Fort Worth, Texas. The company engages in the acquisition, exploration, development, and production of unconventional oil and gas reserves in west and east Texas. Similar to Evolution, Approach focuses on low‐cost, unconventional techniques, which reduces risks and improves margins. With a market capitalization of $549.18 million, Approach is approximately double the size of Evolution. Unlike Evolution, Approach continues to explore by drilling 16 new wells during the second fiscal quarter of 2014. Approach operates 741 producing wells.
Denbury Resources Inc. (DNR/NYSE)
Denbury Resources Inc. is an oil and natural gas company headquartered in Plano, Texas. The firm operates in two areas: the Rocky Mountains and the Gulf Coast. In relation to Evolution, Denbury is both a direct competitor and contracted operator. Similar to Evolution, Denbury specializes in Enhanced Oil Recovery (EOR), which is a form of tertiary recovery. Furthermore, EOR uses CO2 technology to extract undeveloped petroleum reserves. Denbury and Evolution have a joint venture in the Delhi Field, Evolution’s main producing field.
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Although Denbury and Evolution operate similarly, Denbury operates on a larger scale with a market capitalization of $5.11 billion. On December 31, 2013, proved oil and natural gas reserves were 468 million barrels of oil equivalent (MMBOE).
Royale Energy, Inc. (ROYL/NYSE)
Royale Energy, Inc. is an oil and natural gas producer headquartered in San Diego, California. Compared to Evolution Petroleum, Royale has half as many outstanding shares with 14.9 million shares and one‐sixth the market capitalization at $38.85 million. At the end of 2013, Royale had 19 full‐time employees. The Company engages in three lines of business: drilling of exploratory wells, acquiring lease interests and proved reserves, and producing hydrocarbon products for distribution. The company mainly focuses on primary and secondary recovery of oil and natural gas. Operations are predominantly in Northern California but the Company also pursues lease interests in Utah, Louisiana, Texas, Oklahoma, and Alaska. The company has 652,371 MMBOE in proved reserves.
Saratoga Resources Inc. (SARA/NYSE)
Saratoga Resources is an oil and natural gas company engaged in the acquisition, development, exploitation, and production of natural gas and crude oil properties in southern Louisiana and the Gulf of Mexico shelf. The Houston‐based company has a total 52,103 acres under leases and engages in numerous low‐risk opportunities. The company has 86 total producing wells but will increase production with a recent purchase of 20,000 acres in the Central Gulf of Mexico.
Yuma Energy Inc. (YUMA/NYSE)
Yuma Energy is an oil and gas company headquartered in Houston, Texas with 27 employees. Yuma focuses on exploration and development of unconventional and conventional oil and gas, targeting the gulf coast and California. Yuma recently finalized a merger with Pyramid Oil Company increasing projected cash flows and production. Unlike Evolution, Yuma uses 3‐D seismic surveys to identify high‐impact, deep‐onshore prospects located beneath known producing trends. This method classifies all of Yuma’s production as primary recovery. Yuma has developing assets in the Bakken in North Dakota, an unconventional liquids rich resource play.
MANAGEMENT PERFORMANCE AND BACKGROUND
Evolution Petroleum’s skilled management team has an average of 25 years’ experience in the industry, specifically in petroleum engineering and energy financial management.
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Management’s conservative style is demonstrated by the firm’s zero debt capital structure and the Company’s commitment to projects with proven profitability. Evolution employees own 27.85% of shares outstanding in the Company. Evolution’s management are invested in the Company’s future and are aligned with the interests of shareholders.
Return on Invested Capital
Return on Invested Capital (ROIC) is a measurement of how well a company uses capital to generate returns. A lower ROIC means a company is not efficiently using its capital to generate returns while a higher multiple shows a company is more profitable with its capital. When analyzing ROIC, capital structure must be considered since a company’s financing can significantly alter ROIC figures.
ROIC is often an ideal ratio for analyzing oil and gas companies that invest large amounts of capital to fund new drilling efforts. Unlike its competitors, Evolution does not participate in new drilling efforts. Instead, Evolution enters partnerships to minimize capital expenditures. Thus, the Company’s ROIC is inflated. Table 3 compares Evolution’s ROIC to the ROIC of its peers from years 2011 to 2013.
Table 3: Return On Invested Capital
Company 2013 ROIC 2012 ROIC 2011 ROIC
Evolution Petroleum 13.15% 12.85% (.74)%
Approach Resources 9.58% 1.51% 2.24%
Denbury Resources 6.06% 8.37% 9.52%
Royale Energy 274.65% (191.60)% (32.27)%
Saratoga Resources (5.80)% 4.08% 22.37%
Yuma Energy 1.45% 7.56% 11.72%
Peer Average 57.19% (42.90)% 2.72%
Source: Thomson One October 2014
Robert Herlin Chairman of the Board, Chief Executive Officer (59)
Robert Herlin has served as Chief Executive Officer of Evolution Petroleum since 2003 and as Chairman of the Board since 2010. With over 30 years in the petroleum industry, Mr. Herlin has engineering, energy, and finance experience. He oversees all financial, strategic, and operational activities. Herlin obtained his Masters of Business Administration (MBA) from Harvard University after obtaining Bachelor of Science (BS) and Master of Engineering (ME) degrees in chemical engineering from Rice University.
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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Randall Keys President, Chief Accounting Officer, Chief Financial Officer (54)
Randall Keys has been with Evolution since January 2014 and became President in September 2014. Mr. Keys has 28 years of experience in financial management of small‐cap public petroleum companies. He directs daily operations of the Company and manages marketing for the NGS Technologies subsidiary that is commercializing the Company’s GARP® technology. He obtained BS and ME degrees in chemical engineering from Rice University and an MBA from Harvard University.
Daryl Mazzanti Vice President of Operations (52)
Daryl Mazzanti joined Evolution in 2005 to administer its oil and gas field operations. Mazzanti holds over 20 years of oil and gas operations experience and has managed operations for several petroleum companies. Prior to Evolution, Mazzanti managed Andarko Petroleum’s U.S. business development by overseeing operations at Andarko’s Austin Chalk site. Mazzanti takes a leading position in Evolution’s lateral drilling and lifting by facilitating the commercialization of GARP®. Mazzanti holds a BS degree in petroleum engineering from the University of Oklahoma.
David Joe Vice President, Chief Administrative Officer, Controller, Corporate Secretary (49)
David Joe became a part of Evolution in mid‐2005 to facilitate the reporting of Evolution’s financial activity. Previously, Joe was a Client Manager for P2 Energy Solutions, providing outsourced accounting services to the petroleum industry. Joe coordinates Evolution’s accounting services, financial activity, and corporate audits. Joe holds over 20 years of experience in oil and gas accounting. Joe received a Bachelor of Business Administration (BBA) in accounting from the University of Texas at Austin and is a Certified Accredited Petroleum Accountant.
Board of Directors
The current Evolution Petroleum board of directors holds over 100 years of combined experience in the oil and gas industry. The five members have held leadership positions in other petroleum firms and hold large equity stakes in the Company (see Table 4).
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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Table 4: Evolution’s Board of Directors
Board Member Board Position Professional Affiliation
Robert Herlin Chairman CEO of Evolution
Edward DiPaolo Lead Director & Chairman of Nominating/Governance
Senior Adviser for Duff & Phelps Securities
Gene G. Stoever Chairman of Audit Committee Retired Audit Partner KPMG
William E. Dozier Chairman of Compensation Committee Independent oil and gas Consultant
Kelly Loyd Member of the Compensation Committee, Member of the Nominating and Corporate Governance Committee
Manager at JVL Advisors
Source: Thompson One October 12, 2014
SHAREHOLDER ANALYSIS
As of September 10, 2014, Evolution Petroleum had 32,793,414 shares outstanding. Evolution’s shareholders are primarily value investors. Institutional investors held the majority of Evolution stock, approximately 72%, as of October 10, 2014. Insider investors held the remaining 27.85%.
Investor Analysis
The total number of shares held by the top‐ten investors is 17,997,139 shares outstanding, or a 54.99% equity stake in Evolution. JVL Advisors is the largest institutional holder with 10.4% of outstanding shares. Eric McAfee, the second largest stockholder and a member of Evolution’s board, owns 8.59% of outstanding shares.
The categorical breakdown of Evolution Petroleum owners, as of October 10, 2014, is as follows (see Table 5): 64.41% are investment advisors, 26.84% are individual investors, and 7.70% are hedge fund managers. Table 5 shows the investment styles of the firms that own Evolution Petroleum’s shares, with hedge funds comprising 21.1% and Growth at Reasonable Price investors comprising 15.05%. Approximately 98% of Evolution’s investors are located in the U.S.
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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Table 5 ‐ Investment Styles of Investors
Investment Style Investors Outstanding Shares Shares
Hedge Fund 21 21.10% 6,919,569
Growth at Reasonable Price 19 15.05% 4,935,903
Deep Value 9 11.47% 3,760,793
Core Value 15 10.58% 3,470,382
Core Growth 26 8.87% 2,910,403
Index 19 6.76% 2,215,674
Broker‐Dealer 14 1.79% 586,918
Aggressive Growth 3 0.36% 118,911
Source: Thompson One October 10, 2014
Institutional Holdings
Total institutional holdings have increased from 58% at the beginning of fiscal 2014 to 72% as of October 2014. There have been eight self‐offs by institutional investors in the last 12 months; however, the ownership of institutional investors has increased. The largest sell offs were 325,610 shares by Reinhart Partners and 315,633 shares by Nantahala Capital Management. Table 6 shows the largest institutional shareholders as of March 27, 2014. JVL Advisors is the largest institutional shareholder with 10.4% of shares outstanding. River Road Asset Management is the second largest institutional shareholder with 5.57% of shares outstanding.
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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Table 6 ‐ Top Institutional Holders
Top Institutional Holders Shares Outstanding Shares
JVL Advisors, L.L.C. 3,392,276 10.40%
River Road Asset Management, LLC 1,826,832 5.57%
Wellington Management, LLC 1,730,617 5.28%
Neuberger Berman Group, LLC 1,465,050 4.47%
Thomson Horstmann & Bryant, Inc. 1,024,421 3.14%
Brandywine Global Investment Management, LLC 920,762 2.82%
Kennedy Capital Management, Inc. 808,601 2.48%
Lazard Asset Management LLC 787,900 2.42%
Nantahala Capital Management, LLC 713,213 2.19%
Cortina Asset Management, LLC 626,797 1.92%
Source: Bloomberg October 10, 2014
Insider Holdings
Total insider holdings amount to 27.85% of shares outstanding as of October 10, 2014. Table 7 shows the largest insider shareholders ordered by total amount of shares. Eric McAfee is the largest insider shareholder with 8.59% of all shares outstanding. Insider positions have increased 2.25% over the last 12 months. The largest recent purchases by insiders were Scott Bedford increasing his position by 400,000 shares in October of 2013, and Sterling McDonald increasing his position by 350,175 shares in January of 2014.
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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Table 7 ‐ Top Insider Holders
Top Insider Holders Shares Outstanding Shares
McAfee, Eric A 2,816,902 8.59%
Bedford, Scott 2,369,510 7.23%
Herlin, Robert S 1,642,165 5.01%
McDonald, Sterling H 759,935 2.32%
Mazzanti, Daryl V 695,676 2.12%
Davidson, Joe 253,968 0.77%
DiPaolo, Edward 186,010 0.57%
Stoever, Gene 168,839 0.51%
Dozier, William E 111,397 0.34%
Keys, Randall D 99,394 0.30%
Source: Bloomberg October 10, 2014
RISK ANALYSIS AND INVESTMENT CAVEATS
As a small Exploration and Production (E&P) company, Evolution Petroleum faces risks which are common among companies in the oil and gas industry. The inherent operational, financial, and regulatory risks can have significant impact on short‐term and long‐term capital expenditures, production, cash, and revenues.
Operational Risks
Competition for Resources
E&P companies, such as Evolution, seek to grow operations by acquiring additional reserves. The amount of production in a well decreases over its lifespan. Therefore, E&P companies must obtain additional wells with proven reserves to grow production. Evolution faces growth challenges since larger firms are able to allocate more capital towards expansion. Considering Evolution’s is a small company with a capital structure of no debt, it may be challenging to compete with firms that have more cash available.
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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Evolution’s Dependency on Key Personnel
Evolution is comprised of only nine highly‐skilled employees who contribute to the daily functions of the corporation. Evolution’s management is responsible for facilitating deals, guiding operations, and obtaining capital. The Company could face major operational consequences from the loss of key personnel.
Present Risks of the Delhi Field
The Delhi Field, located in northern Louisiana, is Evolution’s most significant asset and accounts for 90% of overall Firm production. Any unexpected issues within the Field could impact the Firm significantly. An example of such an issue is the June 2013 fluids leak. Additionally, Evolution’s current litigation with the Delhi Field operator could hinder future production and disrupt the reversionary working interest agreement.
Similarly, Evolution is reliant on its operator, Denbury Resources. Because Denbury conducts all processes in the field, Evolution does not manage the daily operations of its main source of revenue. Considering Evolution’s lack of control and undiversified asset portfolio, the Firm is left vulnerable.
Commodity Market Volatility
Oil and natural gas prices directly impact Evolution’s profitability. For oil and gas companies, future revenues, cash flows, and growth rates are dependent on product prices. For E&P companies to stay profitable, well economics must be efficient. A financially viable project requires that extracted product values exceed production costs. In October 2014, the drop in commodity prices directly impacted the stock price for many E&P companies. As of October 15, 2014, Evolution’s stock price had dropped by nearly 20% from the beginning of the month. E&P companies can minimize this risk through hedging strategies. However, Evolution does not hedge production, making the Company more vulnerable to price decreases than many of its peers.
Minimal Customer Base
Evolution relies on product transporters to maintain established contracts. Product transporters are midstream companies which deliver crude oil and natural gas to the downstream portion of the business. Plains Marketing, a mid‐stream company, accounts for 90% of revenues and is Evolution’s primary customer. The continued partnership between Plains Marketing and Evolution is important for stable future revenues.
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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Estimation of Reserves
For E&P companies, a primary concern is the calculation of crude oil and natural gas production because production directly impacts company value. This estimation depends on many variables, including the engineering methods, field geography, and surrounding field performance. Consistent with industry practices, Evolution consults independent third parties when selecting fields for operation. Forecasts from reservoir engineers are susceptible to error and, as a result, actual production may be substantially different than projections.
Ongoing Concerns of Tertiary Recovery
Evolution acquires petroleum products through tertiary recovery. This method of recovery harvests leftover product in partially depleted reservoirs. All E&P companies with tertiary recovery face several uncontrollable risks, including weather conditions, changing reservoir pressures, and other unfavorable drilling conditions. For example, the Delhi Field’s production slowed in the summer of 2012 because of extremely high temperatures and the associated cost of cooling the processing facility. All E&P companies face similar risks.
Uncertain Commercialization of GARP®
Evolution’s patented technology, Gas Assisted Rod Pump (GARP®), could potentially offer extended life for many horizontal and vertical wells. The Company is attempting to commercialize the technology. As such, Evolution has installed the technology in wells hoping successful results will build industry reputability. However, the technology has not been recognized as an industry‐wide form of tertiary recovery due to minimal trial runs and uncertain results.
Regulatory Risks
Government Regulations Can Potentially Change
The political environment concerning oil and gas extraction and production is heavily regulated. Various federal and state governments regulate Evolution’s business operations for environmental, financial, and operational reasons. Changes in legislation could increase operating costs, negatively impacting Evolution. Additionally, the Environmental Protection Agency (EPA) requires E&P companies to monitor and report annual greenhouse emissions. As such, stricter regulations and production limits could force Evolution to change its production process.
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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EPA Regulations Provide Incentive to Innovate and Upgrade Technology
EPA policies frequently change as a result of evolving legislation. The E&P industry is heavily regulated for the prevention of environmental damage. A recent policy change affecting E&P companies is the requirement to reduce emissions from storage tanks, flares, and coking units. Also, the EPA requires the active monitoring of benzene and is eliminating all emission limit exemptions during periods of well startups, shutdowns, and malfunctions. The oil and gas industry must continually comply with the EPA’s changing regulations and incur associated costs.
Another regulation imposed by the EPA is for the necessary capture of volatile organic compounds, air toxins, and methane from natural gas wells. After January 1, 2015, all extraction companies will be required to trap and store these toxic gases. Companies will be fined for failing to capture these gases, resulting in additional expenditures. In response to these new requirements, Evolution has decided to construct a gas recycling plant to recover methane, natural gas liquids (NGLs), and waterflood.
FINANCIAL RISKS
Leverage Risk Analysis
Leverage ratios measure a company’s debt in relation to its equity. These metrics show how companies finance their operations and meet their financial obligations. Table 8 uses the debt‐to‐equity ratio, debt ratio, and the interest coverage ratio to show the leverage comparison between Evolution and its peer group. Companies that have a low debt‐to‐equity and debt ratio are financed with less debt. A higher interest coverage ratio shows a company better positioned to pay future interest payments. Evolution has a zero debt capital structure, resulting in zero debt to equity and debt ratios. The Company’s interest coverage ratio is higher than all of its peers because it is unlevered.
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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Table 8: Leverage Ratios Comparisons
Company Debt to Equity Ratio Debt Ratio Interest Coverage Ratio
Evolution Petroleum 0 0 98.728
Approach Resources 35.187 26.028 3.021
Denbury Resources 62.187 38.343 3.934
Royale Energy 151.192 60.189 (4.360)
Saratoga Resources 479.103 82.732 0.2796
Yuma Energy 0 0 0
Peer Average 145.53 41.46 .57
Source: Bloomberg October 16, 2014
Liquidity Risk Analysis
A company’s liquidity ratio measures how quickly it can pay off its short‐term debts with its current assets. The higher the liquidity, the greater a company’s ability to pay off its debt. In Table 9, we use all three ratios to compare Evolution to its peer group. Evolution's liquidity ratios surpass its peers since it is unlevered.
Table 9: Liquidity Ratios Comparisons
Company Current Ratio Quick Ratio Cash Ratio
Evolution Petroleum 8.77 8.47 7.98
Approach Resources 1.07 0.97 0.70
Denbury Resources 0.61 0.13 0.02
Royale Energy 0.66 0.57 0.43
Saratoga Resources 2.01 1.95 1.62
Yuma Energy 4.79 3.71 3.46
Peer Average 1.83 1.47 1.24
Source: Bloomberg October 16, 2014
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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FINANCIAL PERFORMANCE AND PROJECTIONS
Evolution’s financial performance and projections are based on our team’s assumptions about the volatile energy market and the Company’s future production from the Delhi Field. We forecast Evolution’s 12‐month stock price to be $10.00. To arrive at this price, we accounted for the recent significant drop in oil price in our energy forecast. We also assumed that production from Delhi will remain consistent with typical tertiary well production and peak in 2023. Additionally, we accounted for an increase in revenues due to the reversionary working interest activation in November, 2014. Lastly, considering the potential to commercialize its Gas Assisted Rod Pump (GARP®) technology, we have forecasted a 20% increase in GARP® revenues per year.
Commodity Prices
Our research team utilized publically available data from the NYMEX West Texas Intermediate (WTI) futures contract prices as of October 13, 2014 combined with U.S. Energy Information Administration (EIA) Short‐Term Outlook forecasts as of October 6, 2014, and the EIA Annual Energy Outlook as of May 7, 2014 to derive long‐term prices of oil, natural gas, and natural gas liquids (NGL). Using these 11‐year price curves, we forecast that the price of Evolution’s Louisiana Light Sweet crude oil will rise from $88.28 to $131.78 in 2025. Additionally, we forecasted that the spread between the WTI and Louisiana Light Sweet Crude will narrow to a point where the difference is minimal by 2020. We expect natural gas prices to increase to $6.45 by 2025 and NGL prices to increase to $46.86 by 2025.
Operating Activity
We predict that production from the Delhi Field will remain consistent with typical tertiary well production. In 2023, we forecasted well production to peak at 730,000 barrels of oil (Bls) and 1,403,846 barrels of oil equivalent (boe). The reversionary working interest agreement with Denbury came into effect in November 2014. The Company now receives 26.5% of operating revenue from the well while incurring 23.9% of operating costs. Lastly, we forecasted revenues from GARP® to increase 20% per year reaching $3.5 million in 2024.
Investing Activity
We believe Evolution’s management team will continue to take a conservative approach to investing decisions. As such, we forecast Evolution’s cost of production to be $9 per boe at the Delhi Field’s peak in 2023. Also, we predict investment activities in expanding GARP® will grow alongside increasing revenues to $2.2 million for the year 2024.
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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Financing Activity
Management maintains a zero debt capital structure and our team is confident that this conservative approach will persist into the future. We believe the Company will utilize internal cash flows from the Delhi field to fund capital expenditures for the field as well as the expansion of GARP®.
SITE VISIT
On October 24, 2014, our Burkenroad analyst team traveled to Evolution Petroleum’s headquarters in Houston, Texas to meet with management. Randall Keys, Chief Financial Officer, and David Joe, Controller, spoke with us about the Company’s restructuring of operations, financial strategies, and near‐future goals. Mr. Keys emphasized that Evolution will continue to payout a majority of its earnings from the Delhi field in the form of dividends. Additionally, the Company intends on expanding Gas Assisted Rod Pump (GARP®) into the leading tertiary recovery service of the oil and gas industry.
The recent drop in oil prices has slightly shifted the focus away from expanding projects to harvesting current operations. This transition will contribute to GARP®’s potential as the product enables efficient harvesting of fields. The slow‐to‐change oil and gas industry is hesitant to fully integrate the technology. However, a prospective tipping point exists if a Master Limited Partnership (MLP) implements GARP® on the majority of its wells. Evolution’s management believes that many companies would integrate the technology after adoption by an MLP. A large opportunity base for GARP® technology is the 15,000 domestic horizontal wells drilled annually since 2010.
Management considers debt unnecessary and plans to maintain a conservative financial structure. However, management does not hedge its product because of the cap hedging places on profits. Given that Evolution Petroleum has no debt and limited capital expenditures, we think that the Company can afford to remain unhedged in the long‐term.
Mr. Keys further explained that the Delhi Field and GARP® technology will remain Evolution’s two core assets. Evolution’s break‐even price for oil production in the Delhi field is $25 per barrel. The Company’s severance tax holiday for the Delhi field will exist until 2021, contributing to the Company’s predominant source of revenue. Mr. Keys also discussed how the recent drop in oil price may unearth potential availabilities of acquiring additional low risk mineral interests; however, Evolution will likely not take advantage of such opportunities and instead, continue turning free cash flows into increasing dividend yield.
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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We concluded our conversation by discussing the Company’s advertising techniques for GARP®. Management has been actively attending industry tradeshows, outreaching to prospective clients, and hosting “lunch and learns”.
Site Visit Photo
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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INDEPENDENT OUTSIDE RESEARCH
In order to complement our research on Evolution Petroleum, we spoke with exploration and production (E&P) industry experts and analysts. The general consensus on Evolution has been positive, though there are significant concerns related to the Company’s growth potential. They believe that the Company’s small size, lack of oil hedge activity, and zero debt capital structure limit its ability to grow and be more profitable.
Anas Bennisse, who covers Evolution Petroleum at Sidoti & Company, believes that Evolution’s partnership with Denbury in the Delhi Field has contributed substantial business risk to Evolution. Mr. Bennisse mentioned that the June 2013 Delhi fluids leak and subsequent production decline was one of Denbury’s many undesirable well events. Due to the fluids leak, Evolution’s total revenues decreased 20% in 2014 compared to the prior year. Evolution has had minimal control and influence in the operations of the one well which essentially accounts for total revenues. Still, Evolution will benefit from the activation of the reversionary working interest agreement because management will have a much more active role in well operations.
Despite management’s shift towards Gas Assisted Rod Pump (GARP®) as its primary growth focus, Anas classifies GARP® as a functional technology that is exclusively implemented in old and unpredictable wells. This speculative venture has yet to prove to be a viable growth strategy, with a slow industry adoption rate, costs upwards of $140,000, and a 50% chance of commercial well production success.
Throughout our research we consulted SEC filings, Bloomberg, Thomson One, EDGAR filings, Seeking Alpha, Evolution’s website, peer and competitor websites, investor presentations, conference calls, the Energy Information Administration’s website, and other analyst reports.
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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ANOTHER WAY TO LOOK AT IT
ALTMAN Z‐SCORE
In 1968, Edward Altman, a finance professor at New York University Stern, developed a metric called the Altman Z‐Score. This formula provides a standardized measurement used to predict the probability that a firm will go bankrupt within the next two years. The analysis evaluates corporate credit risk based on five financial ratios: working capital/total assets, retained earnings/total assets, earnings before interest and taxes (EBIT)/total assets, market value of equity/book value of total liabilities, and sales/total assets. Companies which score less than 1.81 fall in the “distress” zone and have a high risk of bankruptcy. Scores between 1.81 and 2.99 are in the “grey” zone. An Altman Z‐Score greater than 2.99 indicates a company is currently financially sound.
Evolution’s Z‐Score of 17.73 indicates the Company has an extremely low chance of bankruptcy. Four of Evolution's five peers fall into the distressed range, and are in danger of going bankrupt. Evolution's comparably high Z‐Score is attributable to its zero debt structure.
Table 10: Z‐Score Comparison
Company Ticker Altman Z‐Score
Evolution Petroleum EPM 17.73
Yuma Energy YUMA 5.82
Approach Resources AREX 1.50
Denbury Resources DNR 1.26
Saratoga Resources SARA .32
Royale Energy ROYL (2.30)
Peer Average 1.32
Source: Bloomberg November 3, 2014
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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PETER LYNCH EARNINGS MULTIPLE VALUATION
In his best‐selling book, One Up On Wall Street, Peter Lynch writes about a powerful charting tool which greatly simplified his investment decisions. Deemed the "Peter Lynch chart," the graph plots the price of a stock against its "earnings line," a theoretical price equal to 15 times the company’s earnings per share.
When a stock traded well below the earnings line, he would buy. When it rose above it, he would sell. The chart below demonstrates the earnings to price (EPS) relationship for Evolution Petroleum over the past ten years.
At the current price of $9.14, Evolution is trading 114.25 times earnings, Peter lynch would not invest in the company at this time.
Figure 6: Evolution’s 5‐Year Stock Price and 15 Times Multiple EPS
Source: Bloomberg November 2014
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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WWBD? What Would Ben (Graham) Do?
Ben Graham, the father of value investing, invented a form of analysis which identifies stocks undervalued by the market. His fundamental equity analysis requires a stock to pass eight hurdles. The first six hurdles determine whether or not the stock is underpriced, while the remaining two focus on potential growth of the stock. To be considered an attractive investment to Graham, the stock must pass at least four of the eight hurdles.
Evolution Petroleum passes four of Ben Graham’s eight hurdles. The company has a dividend yield which is higher than one half the current yield on a 10‐year Treasury note, total debt less than book value, a current ratio higher than two, and a higher than 7% growth in earnings over the past five years. Therefore, as shown in Figure 6, Ben Graham would consider the possibility of investing in Evolution.
Figure 7: Ben Graham Analysis
Evolution Petroleum Corp. (EPM) BURKENROAD REPORTS (www.burkenroad.org) November 12, 2014
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Earnings per share (ttm) 0.08$ Price: 9.14$
Earnings to Price Yield 0.88%
10 Year Treasury (2X) 4.74%
P/E ratio as of 9/30/10 (64.4)
P/E ratio as of 9/30/11 170.5
P/E ratio as of 9/30/12 55.7
P/E ratio as of 9/30/13 54.4
P/E ratio as of 9/30/14 131.1
Current P/E Ratio 113.6
Dividends per share (ttm) 0.41$ Price: 9.14$
Dividend Yield 4.46%
1/2 Yield on 10 Year Treasury 1.19%
Stock Price 9.14$
Book Value per share as of 9/30/14 1.67$
150% of book Value per share as of 9/30/14 2.51$
Interest‐bearing debt as of 9/30/14 ‐$
Book value as of 9/30/14 62,075,853$
Current assets as of 9/30/14 62,075,853$
Current liabilities as of 9/30/14 11,792,070$
Current ratio as of 9/30/14 5.3
EPS for year ended 9/30/14 0.07$
EPS for year ended 9/30/13 0.20$
EPS for year ended 9/30/12 0.14$
EPS for year ended 9/30/11 0.04$
EPS for year ended 9/30/10 (0.09)$
EPS for year ended 9/30/14 0.07$ ‐65%
EPS for year ended 9/30/13 0.20$ 43%
EPS for year ended 9/30/12 0.14$ 250%
EPS for year ended 9/30/11 0.04$ ‐144%
EPS for year ended 9/30/10 (0.09)$
Stock price data as of November 12, 2014
No
EVOLUTION PETROLEUM CORPORATION (EPM)
Ben Graham Analysis
Hurdle # 1: An Earnings to Price Yield of 2X the Yield on 10 Year Treasury
No
Hurdle # 2: A P/E Ratio Down to 1/2 of the Stocks Highest in 5 Yrs
No
Hurdle # 3: A Dividend Yield of 1/2 the Yield on 10 Year Treasury
Yes
Hurdle # 4: A Stock Price less than 1.5 BV
No
Hurdle # 5: Total Debt less than Book Value
Yes
Hurdle # 6: Current Ratio of Two or More
Yes
Hurdle # 7: Earnings Growth of 7% or Higher over past 5 years
Yes
Hurdle # 8: Stability in Growth of Earnings
Evolution Petroleum (EP
M)
BURKEN
ROAD REP
ORTS (www.burkenroad
.org)
November 12, 2014
36
EVOLU
TION
PETROLEUM
CORPORATION
(EPM)
Annual
and Quarterly Earnings
Revenues:
Crude oil
Artifical
lift
technology
Other P
roperties
Natural gas
liquids
2012 A
13,729,147
$
132,344
2,685,924
620,187
2013 A
18,555,517
$
375,063
1,755,821
253,167
2014
A30‐Sep A
31‐Dec
E31‐M
ar E
30‐Jun E
2015 E
30‐Sep
E31‐Dec E
31‐M
ar E
30‐Jun E
2016 E
16,699,604
$
3,868,602
$
9,350,014
$
12,195,671
$
12,331,178
$
37,745,465
$
13,352,607
$
13,352,607
$
13,062,333
$
13,207,470
$
52,975,018
$
623,332
115,856
187,000
187,000
187,000
676,855
203,056
203,056
203,056
203,056
812,226
141,510
20,369
20,369
5,092
5,092
5,092
5,092
20
,369
115,172
1,819,281
1,779,732
1,799,506
5,398,519
1,960,769
1,960,769
1,918,143
1,939
,456
7,779,137
2015 E
2016 E
Natural gas
To
tal revenues
Operating costs
Artificial lift technology
794,436
17,962,038
124,703
410,352
21,349,920
390,238
93,890
1,643,798
1,608,063
1,625,931
4,877,792
1,852,900
1,852,900
1,812,619
1,832
,760
7,351,179
17,673,508
4,004,827
13,000,093
15,770,465
15,943,615
48,719,000
17,374,425
17,374
,425
17,001,245
17,187,835
68,937
,929
609,221
197,360
197,360
197,360
197,360
789,440
203,281
203,281
203,281
203,281
813,123
Production costs Delhi
Production costs ‐ o
ther p
roperties
1,650,296
1,390,500
1,651,611
1,862,815
1,952,692
5,467,117
2,091,426
2,080,895
2,005,053
2,058
,564
8,235,938
584,352
88,022
88,022
Production ta
xes
51,908
58,110
60,460
170,478
64,274
63,474
60,705
61,861
250,314
Dep
reciation, depletion and amortization
Accretion of a
sset retiremen
t obligations
Restructuring Charges
1,136,974
77
,505
1,300,207
72,312
1,228,685
369,350
412,903
465,704
488,173
1,736,129
548,999
546,235
526,326
540,373
2,161,934
41,626
4,636
2,352
2,127
1,902
11,017
1,679
1,456
1,235
1,015
5,385
1,293,186
Gen
eral
and administrative expen
ses
6,143,286
7,495,309
8,388,291
1,504,593
1,515,877
1,527,247
1,538,701
6,086,418
1,550,241
1,561,868
1,573,582
1,585
,384
6,271,075
To
tal operating costs
Income (loss) from
operations
9,132,764
8,829,274
10,648,566
10,701,354
12,145,361
2,163,961
3,832,010
4,113,361
4,239,288
14,348,620
4,459,900
4,457,209
4,370,182
4,450
,478
17,737
,769
5,528,147
1,840,866
9,168,083
11,657,104
11,704,327
34,370,379
12,914,525
12,917
,216
12,631,062
12,737,357
51,200
,160
Interest
expen
se
Interest
income
Deferred
loan
cost
amortization and bank fees
Net income (loss) b
efore
income taxes (ebt)
Income ta
x ben
efit
(provision)
Net income (loss) a
ttributable
to th
e Company
Dividends on Preferred Stock
Net income (loss) a
ttributable
to common shareh
olders
Net income (loss) p
er share of common stock:
Ba sic
Diluted
Average
shares
outstanding:
Basic
Diluted
9,355
(5,577)
8,833,052
(3,700,922)
5,132,130
630,391
4,501,739
$
0.17
$
0.14
$
27,784,298
31,609,929
(65,745)
22,580
10,658,189
(4,029,761
)
6,628,428
674,302
5,
954,126
$
0.21
$
0.19
$
28,205,467
31,975,131
(69,092)
(18,460)
(16,500)
(16,500)
(16,500)
(67,960)
(16,500)
(16,500)
(16,500)
(16,500)
(66,000)
30,256
12,763
6,410
3,306
4,297
26,776
5,530
6,851
8,355
9,835
30
,570
5,489,311
1,835,169
9,157,993
11,643,910
11,692,124
34,329,196
12,903,555
12,907
,567
12,622,917
12,730,692
51,164
,730
(1,891,998)
(706,159)
(3,461,721)
(4,401,398)
(4,419,623)
(12,988,901)
(4,877,544)
(4,879,060)
(4,771,463)
(4,812,201)
(19,340,268)
3,597,313
1,129,010
5,696,272
7,242,512
7,272,501
21,340,294
8,026,011
8,028,506
7,851,455
7,918
,490
31,824
,462
674,302
168,576
168,576
168,576
168,576
674,304
168,576
168,576
168,576
168,576
674,304
2,923,011
$
960,434
$
5,527,696
$
7,073,936
$
7,103,925
$
20,665,990
$
7,857,435
$
7,859,930
$
7,682,879
$
7,749,914
$
31,150,158
$
0.09
$
0.03
$
0.17
$
0.22
$
0.22
$
0.63
$
0.24
$
0.24
$
0.24
$
0.24
$
0.95
$
0.09
$
0.03
$
0.17
$
0.22
$
0.22
$
0.63
$
0.24
$
0.24
$
0.23
$
0.24
$
0.95
$
30,895,832
32,682,401
32,574,059
32,594,111
32,614,292
32,624,414
32,634,596
32,655
,019
32,675,500
32,695,980
32,706
,220
32,564,067
32,826,250
32,724,059
32,744,111
32,764,292
32,774,414
32,784,596
32,805
,019
32,825,500
32,845,980
32,856
,220
SELECTED
COMMON‐SIZE AMOUNTS
Production costs ‐ o
ther p
roperties
Production ta
xes
Dep
reciation, depletion and amortization
9.19%
0.00%
6.33%
6.51%
0.00%
6.09%
3.31%
2.20%
0.00%
0.00%
0.00%
0.18%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.40%
0.37%
0.38%
0.35%
0.37%
0.37%
0.36%
0.36%
0.36%
6.95%
9.22%
3.18%
2.95%
3.06%
3.56%
3.16%
3.14%
3.10%
3.14%
3.14%
Gen
eral
and administrative expen
ses
34.20%
35.11%
47.46%
37.57%
11.66%
9.68%
9.65%
12.49%
8.92%
8.99%
9.26%
9.22%
9.10%
Income (loss) from
operations
49.16%
50.12%
31.28%
45.97%
70.52%
73.92%
73.41%
70.55%
74.33%
74.35%
74.29%
74.11%
74.27%
Net income (loss) b
efore
income taxes (ebt)
49.18%
49.92%
31.06%
45.82%
70.45%
73.83%
73.33%
70.46%
74.27%
74.29%
74.25%
74.07%
74.22%
Net income (loss) a
ttributable
to common shareh
olders
YEAR
TO
YEA
R CHANGE
Total revenues
Production costs ‐ o
ther p
roperties
Production ta
xes
Dep
reciation, depletion and amortization
Accretion of a
sset retiremen
t obligations
Gen
eral
and administrative expen
ses
Total operating costs
Income (loss) from
operations
25.06%
467.47%
373.86%
n/a
456.96%
366.93%
351.96%
367.18%
629.45%
27.89%
18.86%
‐15.74%
n/a
14.36%
‐6.70%
22.01%
16.60%
21.20%
16.54%
23.98%
42.52%
44.86%
44.56%
42.42%
45.22%
45.24%
45.19%
45.09%
45.19%
‐17.22%
‐13.57%
195.98%
263
.63%
269.88%
175.66%
333
.84%
33.65%
7.80%
7.80%
41.50%
‐57.98%
‐78.52%
n/a
n/a
n/a
‐84.94%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
298.31%
600
.88%
‐303.39%
n/a
n/a
22.28%
4.47%
2.32%
46.83%
‐5.50%
19.27%
26.21%
49.35%
74.33%
41.30%
48.64%
32.29%
13.02%
10.69%
24.53%
‐42.44%
‐64.14%
‐81.06%
‐77.92%
‐71.39%
‐73.53%
‐63.79%
‐38.07%
‐41.92%
‐46.65%
‐51.12%
11.91%
‐22.00%
‐42.63%
‐33.72%
1.71%
‐27.44%
3.03%
3.03%
3.03%
3.03%
3.03%
14.06%
‐18.95%
‐15.79%
38.06%
117.88%
18.14%
106
.10%
16.32%
6.24%
4.98%
23.62%
‐48.34%
‐6.26%
‐5899.10%
758
.70%
394.94%
521.73%
601
.55%
40.89%
8.36%
8.83%
48.97%
Other:
Production ‐ oil (bbls) D
elhi royalty
Production ‐ oil (bbls) including Delhi royalty
Production ‐ NGLs
(bbls)
Production ‐ gas (m
cf)
Production in
equivalent u
nits including Delhi royalty production (B
OE)
Daily
production ra
te (B
OE/d)
136,075
151,081
12,611
266,777
208,155
570.29
180,658
196,379
7,272
139,006
226,819
621.42
164,224
37,687
103,560
135,646
140,069
408,531
144,631
144,519
140,863
142,381
571,026
169,745
38,543
105,913
138,729
143,253
417,816
147,919
147,804
144,065
145,617
584,004
3,460
59,963
58,737
58,788
173,252
62,966
62,926
60,951
61,609
247,114
26,105
420,409
400,016
436,665
1,228,663
487,605
466,725
425,498
443,767
1,750,281
177,556
38,543
235,944
264,135
274,818
795,844
292,152
288,517
275,932
281,187
1,122,831
486
.45
418.95
2,564.61
2,934.84
3,019.98
2,180.40
3,175.57
3,136.06
3,032.22
3,089.97
3,076.25
Oil %
of p
roduction
NGL %
of p
roduction
Gas
% of p
roduction
72.58%
6.06%
21.36%
44.89%
52.52%
52.13%
52.50%
50.63%
51.23%
52.21%
51.79%
52.01%
25.41%
22.24%
21.39%
21.77%
21.55%
21.81%
22.09%
21.91%
22.01%
29.70%
25.24%
26.48%
25.73%
27.82%
26.96%
25.70%
26.30%
25.98%
Operating cost
per B
OE including Delhi production
Operating cost
per B
OE excluding Delhi production
22.90
$
30.12
$
7.00
$
7.05
$
7.11
$
7.11
$
7.16
$
7.21
$
7.27
$
7.32
$
7.32
$
43.83
$
102.77
$
0.23
$
Dep
reciation, depletion and amortization ra
te7.10
$
10.83
$
13.83
$
14.52
$
1.75
$
1.76
$
1.78
$
1.87
$
1.88
$
1.89
$
1.91
$
1.92
$
2.02
$
Burken
road
oil price
forecast
Burken
road
gas
price
forecast
Natural gas
liquids price
forecast
100.37
$
88.28
$
87.91
$
86.08
$
90.34
$
90.27
$
90.34
$
90
.67
$
90.70
$
90.71
$
3.60
$
3.91
$
4.02
$
3.72
$
3.97
$
3.80
$
3.97
$
4.26
$
4.13
$
4.20
$
32.00
$
30.34
$
30.30
$
30.61
$
31.16
$
31.14
$
31.16
$
31
.47
$
31.48
$
31.48
$
Evolution Petroleum (EP
M)
BURKEN
ROAD REP
ORTS (www.burkenroad
.org)
November 12, 2014
37
EVOLU
TION
PETROLEUM
CORPORATION
(EPM)
Annual
and Quarterly Balance
Sheets
Current a
ssets
Cash and cash equivalents
Certificates of d
eposit
30‐Jun‐12 A
14,428,548
$
250,000
30‐Jun‐13 A
24,928,585
$
250,000
30‐Jun‐14 A
30‐Sep A
31‐Dec
E31‐M
ar E
30‐Jun E
30‐Jun‐15 E
30‐Sep
E31‐Dec E
31‐M
ar E
30‐Jun E
30‐Jun‐16 E
23,940,514
$
21,368,144
$
11,019,199
$
14,323,126
$
18,432,397
$
18,432,397
$
22,835,60
0$
27,849,402
$
32,782
,611
$
37,563,761
$
37,563,761
$
2015 E
2016 E
Oil and natural gas
sales receivable
Joint interest
partner
receivab
le
1,343,347
96,151
1,632,853
49,063
1,456,146
1,26
8,122
4,513,301
5,415,591
5,475,051
5,475,051
6,098
,979
6,031,957
5,838,242
5,902,317
5,902,317
Income tax receivable
92,885
281,970
Other receivables
190
918
1,066
23,524
23,524
23,524
23,524
23,524
23,524
23,524
23,524
23,524
23,524
Deferred
tax asset
Prepaid expen
ses and other
current a
ssets
Total curren
t assets
Oil and natural gas
properties,
net
Other p
roperty
and equipment,
net
Total property and equipment,
net
Advances to
joint interest
operating partner
325,235
233,433
16,769,789
40,476,172
92,271
40,568,443
1,366,921
26,133
266,554
27,436,076
38,789,032
52,217
38,841,249
26,059
159,624
159,624
156,033
152
,442
148,851
148,851
145,260
141,669
138,078
134,488
134,488
747,453
632,706
637,451
642
,232
647,049
647,049
651,902
656,791
661,717
666,680
666,680
26,304,803
23,452
,120
16,349,508
20,556,915
24,726,872
24,726,872
29,755,26
5
34,703,343
39,444,172
44,290,769
44,290,769
37,822,070
37,651
,450
37,241,360
36,778,469
36,293,108
36,293,108
35,746,92
1
35,203,499
34,679,985
34,142,424
34,142,424
424,827
444,942
444,942
444
,942
444,942
444,942
444,942
444,942
444,942
444,942
444,942
38,246,897
38,096
,392
37,686,302
37,223,411
36,738,050
36,738,050
36,191,86
3
35,648,441
35,124,927
34,587,366
34,587,366
Other a
ssets
Total assets
Current liabilities
Accounts
payable
Joint Interest
advances
Accrued payroll
Royalties payable
250,333
58,955,486
$
407,570
$
3,217,975
1,005,624
294,013
252,912
66,556,296
$
642
,018
$
127,081
1,385,494
91,427
464,052
527,341
527,341
527
,341
527,341
527,341
527,341
527,341
527,341
527,341
527,341
65,015,752
$
62,075,853
$
54,563,151
$
58,307,667
$
61,992,263
$
61,992,263
$
66,474,47
0$
70,879,125
$
75,096
,440
$
79,405,477
$
79,405,477
$
441,722
$
611,547
$
811,188
$
811,347
$
818,39
9$
818,399
$
844,604
$
840,915
$
836,344
$
842,964
$
842,964
$
874,013
363,811
366
,539
369,288
369,288
372,058
374,848
377,660
380,492
380,492
444,933
539
,750
545,676
545,676
594,646
594,646
581,874
588,260
588,260
State ta
xes payab
le91,967
233,548
44,173
44,173
44,173
44,173
44,173
44,173
44,173
44,173
44,173
44,173
Other curren
t liabilities
Total curren
t liabilities
Deferred
income taxes
71,768
5,088,917
6,205,093
153,182
2,632,750
8,418,969
2,558,004
2,999,726
1,52
9,733
1,664,104
1,761,809
1,777,537
1,777,537
1,855
,481
1,854,582
1,840,051
1,855,889
1,855,889
9,897,272
10,021
,875
9,912,719
9,789,509
9,660,318
9,660,318
9,514
,937
9,370,292
9,230,945
9,087,860
9,087,860
Asset retirem
ent o
bligations
968,677
615,551
205,512
209,028
189,035
169
,094
149,221
149,221
129,451
109,786
90,213
70,742
70,742
Deferred
rent
Total liabilities
Stockholders' equity:
70,011
12,332,698
52,865
11,720,135
35,720
31,434
40,000
40,000
40,000
40,000
40,000
40,000
40,000
40,000
40,000
13,138,230
11,792
,070
11,805,858
11,760,413
11,627,076
11,627,076
11,539,87
0
11,374,659
11,201,209
11,054,492
11,054,492
Common stock, par
value $0.001
Preferred stock
par
value $0.001
Additional
paid‐in cap
ital
Retained earnings
(deficit)
28,670
317
29,416,914
18,058,909
29,410
317
31,813,239
24,013,035
32,615
32,797
32,584
32,604
32,624
32,624
32,645
32,665
32,686
32,706
32,706
317
317
317
317
31
7
317
317
317
317
317
317
34,632,377
35,357
,362
35,333,012
35,308,429
35,283,846
35,283,846
35,259,26
3
35,234,680
35,210,097
35,185,514
35,185,514
17,212,213
14,893
,307
7,391,379
11,205,904
15,048,400
15,048,400
19,642,37
5
24,236,803
28,652,132
33,132,448
33,132,448
Treasury
stock
Total stockholders' equity
Total liabilities an
d stockholders' equity
(882,022
)
4
6,622,788
58,955,486
$
(1,019,840)
54,836,161
66,556,296
$
51,877,522
50,283
,783
42,757,292
46,547,254
50,365,187
50,365,187
54,934,60
0
59,504,466
63,895,232
68,350,985
68,350,985
65,015,752
$
62,075,853
$
54,563,151
$
58,307,667
$
61,992,263
$
61,992,263
$
66,474,47
0$
70,879,125
$
75,096
,440
$
79,405,477
$
79,405,477
$
SELECTED
COMMON
SIZE BALANCE SH
EET
AMOUNTS
(% of revenues)
Receivab
les
Oil and natural gas
sales receivable
7.48%
7.65%
8.24%
135.23%
34.72%
34.34%
34.34%
11.24%
35.10%
34.72%
34.34%
34.34%
8.56%
Prepaid expen
ses and other
current a
ssets
1.30%
1.25%
4.23%
15.80%
4.90%
4.07%
4.06%
1.33%
3.75%
3.78%
3.89%
3.88%
0.97%
Oil and natural gas
properties,
net
225.34%
181.68%
214.00%
940.15%
286.47%
233.21%
227.63%
74.49%
205.74%
202.62%
203.98%
198
.64%
49.53%
Accounts
payable
Accrued payroll
Royalties payable
2.27%
5.60%
1.64%
3.01%
6.49%
0.43%
2.50%
15.27%
6.24%
5.14%
5.13%
1.68%
4.86%
4.84%
4.92%
4.90%
1.22%
0.00%
21.82%
2.80%
2.32%
2.32%
0.76%
2.14%
2.16%
2.22%
2.21%
0.55%
0.00%
0.00%
3.42%
3.42%
3.42%
1.12%
3.42%
3.42%
3.42%
3.42%
0.85%
Asset retirem
ent o
bligations
5.39%
2.88%
1.16%
5.22%
1.45%
1.07%
0.94%
0.31%
0.75%
0.63%
0.53%
0.41%
0.10%
Deferred
rent
0.39%
0.25%
0.20%
0.78%
0.31%
0.25%
0.25%
0.08%
0.23%
0.23%
0.24%
0.23%
0.06%
SELECTED
COMMON
SIZE BALANCE SH
EET
AMOUNTS
(% of total assets)
Total curren
t assets
28.44%
41.22%
40.46%
37.78%
29.96%
35.26%
39.89%
39.89%
44.76%
48.96%
52.52%
55.78%
55.78%
Total property and equipment,
net
Other a
ssets
68.81%
0.42%
58.36%
0.38%
58.83%
61.37%
69.07%
63.84%
59.26%
59.26%
54.44%
50.29%
46.77%
43.56%
43.56%
0.71%
0.85%
0.97%
0.90%
0.85%
0.85%
0.79%
0.74%
0.70%
0.66%
0.66%
Total curren
t liabilities
Deferred
income taxes
Asset retirem
ent o
bligations
8.63%
10.53%
1.64%
3.96%
12.65%
0.92%
4.61%
2.46%
3.05%
3.02%
2.87%
2.87%
2.79%
2.62%
2.45%
2.34%
2.34%
15.22%
16.14%
18.17%
16.79%
15.58%
15.58%
14.31%
13.22%
12.29%
11.44%
11.44%
0.32%
0.34%
0.35%
0.29%
0.24%
0.24%
0.19%
0.15%
0.12%
0.09%
0.09%
Deferred
rent
Total stockholders' equity
0.12%
79.08%
0.08%
82.39%
0.05%
0.05%
0.07%
0.07%
0.06%
0.06%
0.06%
0.06%
0.05%
0.05%
0.05%
79.79%
81.00%
78.36%
79.83%
81.24%
81.24%
82.64%
83.95%
85.08%
86.08%
86.08%
Evolution Petroleum (EP
M)
BURKEN
ROAD REP
ORTS (www.burkenroad
.org)
November 12, 2014
38
EVOLU
TION
PETROLEUM
CORPORATION
(EPM)
Annual
and Quarterly Statemen
ts of C
ash Flows
In th
ousands
Cash flows from
operating activities:
Net income (loss)
Adjustmen
ts:
201
2 A
5,132
,130
$
2013 A
6,628,428
$
2014
A30‐Sep A
31‐Dec
E31‐M
ar E
30‐Jun E
2015 E
30‐Sep
E31‐Dec E
31‐M
ar E
30‐Jun E
2016 E
3,597,313
$
1,129,010
$
5,696,272
$
7,242
,512
$
7,272,501
$
21,340,294
$
8,026
,011
$
8,028,506
$
7,851,455
$
7,918,490
$
31,824,462
$
2016 E
2015 E
Dep
reciation, depletion and amortization
Stock‐based compen
sation
Stock‐based compen
sation related
to restructuring
1,150,454
1,475,995
1,341,055
1,531,745
1,272,778
38
1,509
412,903
465
,704
488,173
1,748,288
548,999
546,235
526,326
540,373
2,161,934
1,352,322
24
3,337
350,000
350
,000
350,000
1,293,337
350,000
350,000
350,000
350,000
1,400,000
376,365
Accretion of a
sset retirem
ent o
bligations
77,505
72,312
41,626
4,636
2,352
2,127
1,90
2
11,017
1,679
1,456
1,235
1,015
5,385
Settlemen
t of a
sset retirem
ent o
bligations
(61,936)
(90,531)
(315
,952)
(226,008)
(22,345
)
(22,067)
(21,776)
(292,19
6)
(21,448)
(21,122)
(20,808)
(20,48
5)
(83,864)
Deferred
ren
t
Deferred
income taxes
(15,401)
2,549,592
(17,146)
2,512,978
(17,145)
(4,286)
8,566
4,280
1,344,812
12
4,603
(105,565)
(119,619)
(125,600)
(226,18
1)
(141,790)
(141,055)
(135,755)
(139,494)
(558,095
)
Chan
ges in
assets an
d liab
ilities:
Receivab
les from
oil an
d natural gas
sales
Receivab
les from
income taxes an
d other
Due from
joint interest
216,057
(64,194)
139,705
(289,506)
(189,813)
(9,947)
176,707
188,024
(3,245,179)
(902,291)
(59,460)
(4,018,905)
(623,928)
67,022
193,715
(64,07
5)
(427,266
)
281,822
(22,458)
(22,458)
49,063
Prepaid expen
ses and other
current a
ssets
Accounts
payable
and accrued expen
ses
Royalties payable
(165,581
)
379,873
(448,638
)
(33,121)
538,057
(202,586)
(480
,899)
11
4,747
(4,745)
(4,781)
(4,817)
100,404
(4,853
)
(4,889)
(4,926)
(4,963)
(19,631)
663,645
(1,345
,875)
(310,562)
2,888
9,80
1
(1,643,747)
28,974
(899)
(1,759)
9,452
35,769
444,933
94,817
5,92
6
545,676
48,970
(12,772)
6,386
42,584
Income taxes payab
le
Net cash provided
by (used in) o
perating activities
Cash flow
from
investing activities:
Net p
roceed
s from
the sale
of the Tu
llos Assets
Developmen
t of o
il and natural gas
properties
Acquisitions of o
il and natural gas
properties
Proceeds from
other
asset
sales
Capital
expen
ditures for other
equipmen
t
Advances to
joint v
enture
operating partner
9,845
10,375,406
799,610
(3,291,921)
(3,768,162)
(61,176)
(224,206
)
141,581
11,933,506
(4,163,080)
(755,194)
3,479,976
(233
,548)
44,173
44,173
8,108,909
63
1,412
3,226,630
7,109,289
7,916,652
18,883,983
8,212
,614
8,825,255
8,746,710
8,596,699
34,381,278
(966
,931)
(2,813)
(2,813)
(2,813)
(8,438)
(2,813
)
(2,813)
(2,813)
(2,813)
(11,250)
(59,315)
(1,136)
(1,136)
542,347
(312
,890)
(156,798)
(156,79
8)
Maturities of certificates of d
eposit
Other assets
Net cash used in
investing activities
Cash flow
from
financing activities:
(35,056)
(6,580,911)
(32,160)
(1,470,458)
250,000
(202
,017)
(55,046)
(55,046)
(748
,806)
(212,980)
(2,813)
(2,813)
(2,813)
(221,41
8)
(2,813
)
(2,813)
(2,813)
(2,813)
(11,250)
Proceeds from
issuan
ce of common stock
Proceeds from
issuan
ce of restricted
stock
Proceeds from
the exercise
of stock
options
Proceeds from
issuan
ce of p
referred
stock, net
Purchase of treasury
stock
6,930,535
32
70,719
(137,818)
3,252,801
25,437
25,437
25,437
76,312
25,437
25,437
25,437
25,437
101,749
(1,655,251)
(55,452)
(400,000)
(400,000)
(400,000)
(1,255,452)
(400,000)
(400,000)
(400,000)
(400,000)
(1,600,000)
Windfall tax ben
efit
Common stock
dividen
ds paid
Preferred stock
dividends paid
Deferred
loan
costs
Tax ben
efits
related to
stock‐based compen
station
Other
Net cash provided
by (used in) financing activities
Net increase
(decrease)
in cash and cash equivalen
ts
Cash and cash equivalents
at b
eginning of p
eriod
Cash and cash equivalents
at e
nd of p
eriod
249,728
(630,391
)
(163,257
)
6,386,615
10,181,110
4,247,438
14,428,548
794,569
(674,302)
(16,211)
36,989
10,500,037
14,428,548
24,928,585
(9,723,833)
(3,279
,341)
(13,029,624)
(3,259,411)
(3,261,429)
(22,829,805)
(3,263,460)
(3,265,502)
(3,267,550
)
(3,269,598)
(13,066,110)
(674
,302)
(168,575)
(168,576)
(168,576)
(168,576)
(674,30
3)
(168,576)
(168,576)
(168,576)
(168,576)
(674,304
)
(63,535)
(24,716)
(24,716)
509,096
537,282
537,282
6,850
(8,348,174)
(2,990
,802)
(13,572,762)
(3,802,550)
(3,804,568)
(24,170,682)
(3,806,598)
(3,808,641)
(3,810,689
)
(3,812,737)
(15,238,664)
(988
,071)
(2,572
,370)
(10,348,945)
3,303,927
4,109,271
(5,508,117)
4,403
,203
5,013,801
4,933,209
4,781,150
19,131,364
24,928,585
23,940
,514
21,368,144
11,019,199
14,323,126
23,940,514
18,432,39
7
22,835,600
27,849,402
32,782,611
18,432,397
23,940,514
21,368
,144
11,019,199
14,323,126
18,432,397
18,432,397
22,835,60
0
27,849,402
32,782,611
37,563,761
37,563,761
Operating cash
flow
per
share
excluding working capital
changes
Operating cash
flow
per
share
including working capital
changes
0.33
$
0.33
$
0.36
$
0.37
$
0.24
$
0.06
$
0.09
$
0.21
$
0.24
$
0.61
$
0.25
$
0.27
$
0.27
$
0.26
$
1.04
$
0.25
$
0.02
$
0.10
$
0.22
$
0.24
$
0.58
$
0.25
$
0.27
$
0.27
$
0.26
$
1.05
$
Evolution Petroleum (EP
M)
BURKEN
ROAD REP
ORTS (www.burkenroad
.org)
November 12, 2014
39
EVOLU
TION
PETROLEUM
CORPORATION
Ratios
For the period ended
Productivity Ratios
Receivables turnover
(EPM)
2012 A
13.37
2013 A
14.35
2014 A
30‐Sep A
31‐Dec E
31‐M
ar E
30‐Jun E
2015 E
30‐Sep
E31‐Dec E
31‐M
ar E
30‐Jun E
2016 E
11.44
1.17
2.62
3.18
2.93
14.06
3.00
2.86
2.86
2.93
12.12
2016 E
2015 E
Working capital
turnover
1.54
1.17
0.73
0.18
0.71
0.94
0.76
2.11
0.68
0.57
0.48
0.43
2.11
Net fixed
asset turnover
0.44
0.54
0.46
0.11
0.35
0.43
0.44
1.31
0.48
0.49
0.49
0.50
1.96
Net fixed
asset turnover (production)
0.01
0.01
0.00
0.00
0.01
0.01
0.01
0.02
0.01
0.01
0.01
0.01
0.03
Total asset turnover
0.30
0.34
0.27
0.06
0.22
0.28
0.27
0.77
0.27
0.25
0.23
0.22
0.98
# of d
ays Sales in
accounts
receivable
27
28
30
122
32
32
32
41
32
32
32
32
31
# of d
ays Costs in
operating payables
47
47
47
84
68
68
68
47
68
68
68
68
47
Liquidity Measures
Curren
t ratio
3.30
10.42
8.77
15.33
9.82
11.67
13.91
13.91
16.04
18.71
21.44
23.86
23.86
Quick ratio
3.15
10.18
8.47
17.52
9.35
11.22
13.46
13.46
15.61
18.28
21.00
23.43
23.43
Cash ra
tio
3.10
10.09
8.47
17.52
9.35
11.22
13.46
13.46
15.61
18.28
21.00
23.43
23.43
Cash flow
from
operations ratio
2.04
4.53
2.70
0.41
1.94
4.04
4.45
10.62
4.43
4.76
4.75
4.63
18.53
Working capital
11,680,872
24,803,326
23,305,077
21,922,387
14,685,403
18,795,106
22,949,335
22,949,335
27,899,784
32,848,761
37,604,121
42,434,880
42,434,880
Financial
Risk (Leverage) R
atios
Total deb
t/equity ratio
0.26
0.21
0.25
0.23
0.28
0.25
0.23
0.23
0.21
0.19
0.18
0.16
0.16
Total LT debt/equity ratio
0.16
0.17
0.20
0.20
0.24
0.21
0.20
0.20
0.18
0.16
0.15
0.13
0.13
Total deb
t ratio
0.21
0.18
0.20
0.19
0.22
0.20
0.19
0.19
0.17
0.16
0.15
0.14
0.14
Profitability/Valuation M
easures
Operating profit m
argin
49.16%
50.12%
31.28%
45.97%
70.52%
73.92%
73.41%
70.55%
74.33%
74.35%
74.29%
74.11%
74.27%
Return
on assets
7.64%
9.49%
4.44%
1.51%
9.48%
12.53%
11.81%
32.54%
12.23%
11.44%
10.53%
10.03%
44.06%
Return
on equity
9.66%
11.74%
5.48%
1.88%
11.88%
15.84%
14.66%
40.43%
14.92%
13.74%
12.45%
11.72%
52.48%
EBITDA
margin
55.49%
56.21%
38.23%
55.19%
73.70%
76.87%
76.47%
74.11%
77.49%
77.49%
77.39%
77.25%
77.41%
EBITDA/Assets
16.90%
19.12%
10.27%
3.48%
16.43%
21.48%
20.27%
56.86%
20.96%
19.60%
18.03%
17.19%
75.48%
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BURKENROADREPORTSRATINGSYSTEMMARKETOUTPERFORM:Thisratingindicatesthatwebelieveforcesareinplacethatwouldenablethiscompany'sstocktoproducereturnsinexcessofthestockmarketaveragesoverthenext12months.MARKETPERFORM:Thisratingindicatesthatwebelievetheinvestmentreturnsfromthiscompany'sstockwillbeinlinewiththoseproducedbythestockmarketaveragesoverthenext12months.MARKETUNDERPERFORM:Thisratingindicatesthatwhilethisinvestmentmayhavepositiveattributes,webelieveaninvestmentinthiscompanywillproducesubparreturnsoverthenext12months.BURKENROADREPORTSCALCULATIONS
CPFSiscalculatedusingoperatingcashflowsexcludingworkingcapitalchanges. AllamountsareasofthedateofthereportasreportedbyBloombergorYahooFinanceunless
otherwisenoted.BetasarecollectedfromBloomberg. Enterprisevalueisbasedontheequitymarketcapasofthereportdate,adjustedforlong‐
termdebt,cash,&short‐terminvestmentsreportedonthemostrecentquarterlyreportdate. 12‐monthStockPerformanceiscalculatedusinganendingpriceasofthereportdate.
Thestockperformanceincludesthe12‐monthdividendyield.
2014‐2015COVERAGEUNIVERSEAmerisafeInc.(AMSF)BristowGroupInc.(BRS)TheFirstBancshares(FBMS)CalIonPetroleumCompany(CPE)Cal‐MaineFoodsInc.(CALM)CarboCeramicsInc.(CRR)CashAmericaInternationalInc.(CSH)Conn'sInc.(CONN)CrownCraftsInc.(CRWS)CyberonicsIncorporated(CYBX)DenburyResourcesInc.(DNR)EastGroupPropertiesInc.(EGP)EraGroupInc.(ERA)EvolutionPetroleumCorp.(EPM)Globalstar(GSAT)GulfIslandFabricationInc.(GIFI)HibbettSports(HIBB)HornbeckOffshoreServicesInc.(HOS)IBERIABANKCorp.(IBKC)IONGeophysicalCorp.(IO)
KeyEnergyServices(KEG)MarineProductsCorp.(MPX)MidSouthBancorpInc.(MSL)NewparkResourcesInc.(NR)PetroQuestEnergyInc.(PQ)PopeyesLouisianaKitchen(PLKI)PoolCorporation(POOL)PowellIndustriesInc.(POWL)RollinsIncorporated(ROL)RPCIncorporated(RES)Ruth’sHospitalityGroupInc.(RUTH)SandersonFarmsInc.(SAFM)SEACORHoldingsInc.(CKH)SharpsComplianceInc.(SMED)StoneEnergyCorp.(SGY)SunocoLP(SUN)SuperiorEnergyServicesInc.(SPN)TeamIncorporated(TISI)VaalcoEnergyInc.(EGY)WillbrosGroupInc.(WG)
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JERRYDICOLODAVIDDOWTYELLIOTTEDWARDSAssociateDirectorsofResearch
BURKENROADREPORTSTulaneUniversityNewOrleans,LA70118‐5669(504)862‐8489(504)865‐5430Fax
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