Evolution Petroleum Corporation (EPM) has demonstrated its commitment to maximizing shareholder value through strategic acquisitions, disciplined capital allocation, and a focus on sustainable dividend growth. The company's recent moves to expand its asset base and diversify its production mix have positioned it well to navigate the evolving energy landscape and deliver consistent returns to investors.

In the fiscal year ended June 30, 2023, Evolution Petroleum reported annual revenue of $128.5 million and net income of $35.2 million. The company's strong operational performance translated into annual operating cash flow of $51.3 million and free cash flow of $44.3 million, providing ample resources to fund its growth initiatives and shareholder distributions.

The third quarter of fiscal year 2024 was a particularly eventful period for Evolution Petroleum. The company closed the acquisitions of certain non-operated oil and natural gas assets in the SCOOP and STACK plays of the Anadarko Basin, adding approximately 1,550 BOE per day of net production on a pro forma basis. This transaction, along with the company's participation in the development of the Chaveroo oilfield in New Mexico, has significantly expanded Evolution Petroleum's production base and inventory of high-quality drilling locations.

Business Overview

Evolution Petroleum is an independent energy company focused on maximizing returns to shareholders through the ownership and strategic development of onshore oil and natural gas properties in the United States. The company's diversified portfolio includes non-operated interests in the SCOOP and STACK plays of the Anadarko Basin, the Chaveroo oilfield in New Mexico, the Jonah Field in Wyoming, the Williston Basin in North Dakota, the Barnett Shale in Texas, the Hamilton Dome Field in Wyoming, and the Delhi Field in Louisiana.

The company's long-term strategy is to build a resilient and cash-flow-generating asset base that can support its commitment to shareholder returns, including a consistent dividend policy. Evolution Petroleum has paid 42 consecutive quarterly dividends since 2013, demonstrating its ability to generate stable cash flows even in challenging market environments.

SCOOP/STACK Acquisitions

The SCOOP/STACK acquisitions, which closed in February 2024, represent a significant addition to Evolution Petroleum's portfolio. The acquired assets consist of an average net working interest of approximately 3% in 247 producing wells across Blaine, Canadian, Carter, Custer, Dewey, Garvin, Grady, Kingfisher, McClain, Murray, and Stephens counties in Oklahoma. The transaction also included approximately 3,700 net acres with more than 275 associated potential drilling locations.

On a pro forma basis for the third quarter of fiscal year 2024, the SCOOP/STACK assets contributed approximately 1,550 BOE per day of net production, which was essentially flat with the production rate at the effective date of the acquisition. The company has already participated in the drilling and completion of 19 out of the 21 DUCs (drilled but uncompleted) wells acquired in the transaction, and has agreed to participate in an additional 15 gross (0.2 net) new horizontal wells across the acreage, of which 13 are currently in progress.

Chaveroo Oilfield Participation

In addition to the SCOOP/STACK acquisitions, Evolution Petroleum has also made significant strides in the Chaveroo oilfield in New Mexico. In September 2023, the company entered into a Participation Agreement with PEDEVCO to jointly develop a portion of PEDEVCO's Permian Basin property in the Chaveroo oilfield.

The first three wells drilled and completed at Chaveroo have exceeded the company's pre-drill expectations, with gross production peaking at between 300 and 375 BOE per day. On a pro forma basis for the third quarter, the Chaveroo assets contributed approximately 290 BOE per day of net production to Evolution Petroleum.

The company plans to continue its development program at Chaveroo, with the next four wells scheduled to begin drilling in September 2024, followed by an additional six wells starting in April 2025. The Chaveroo oilfield represents a long-life, high-quality asset that is expected to contribute to Evolution Petroleum's dividend coverage for years to come.

Legacy Assets and Production

While the SCOOP/STACK and Chaveroo acquisitions have been the primary drivers of Evolution Petroleum's recent growth, the company's legacy assets continue to perform well and contribute to its overall production and cash flow.

The Jonah Field in Wyoming, which produces natural gas and NGLs, continues to receive a premium over Henry Hub pricing and perform in line with historical decline rates. The Williston Basin assets in North Dakota saw a slight increase in production during the third quarter due to the resolution of some midstream issues experienced in the prior quarter.

The Barnett Shale assets in Texas, however, faced some operational challenges, including compression issues and midstream downtime, which resulted in production declines. The company's operator is working to address these issues and reduce operating expenses in the Barnett Shale.

The Hamilton Dome Field in Wyoming and the Delhi Field in Louisiana also contributed to Evolution Petroleum's production during the quarter, though the Delhi Field experienced some weather-related downtime and rental turbine failures that temporarily impacted oil and NGL production.

Overall, Evolution Petroleum's net production for the third quarter of fiscal year 2024 increased by 14% from the prior quarter to 7,209 BOE per day, with oil production increasing by 27% and natural gas and NGLs each increasing by approximately 10%.

Financials

Evolution Petroleum's financial performance in the third quarter of fiscal year 2024 demonstrated the positive impact of its recent acquisitions and development activities. The company reported total revenues of $23 million, adjusted net income of $1 million, and adjusted EBITDA of $8.5 million.

Despite the continued weakness in natural gas prices, Evolution Petroleum's revenue and EBITDA were higher than the previous quarter, reflecting the contributions from the SCOOP/STACK acquisitions and the Chaveroo drilling program.

The company's capital expenditures for the quarter were $2.6 million, primarily related to the drilling and completion of the three initial wells at Chaveroo. As of March 31, 2024, Evolution Petroleum had $3.1 million in cash on hand and $42.5 million in borrowings on its credit facility.

Shareholder Returns and Hedging

Evolution Petroleum remains committed to its strategy of maximizing total shareholder returns through a combination of dividend payments, share repurchases, and strategic investments in its asset base.

During the third quarter, the company paid a $0.12 per share dividend and declared another $0.12 per share dividend to be paid in June 2024, marking the 42nd and 43rd consecutive quarterly dividends. The company also repurchased approximately $800,000 worth of its shares during the quarter.

To manage commodity price risk, Evolution Petroleum has entered into oil and gas hedges, including fixed-price swaps and costless collars. The company amended its credit facility during the quarter to provide more flexibility in the mix of individual commodities it is required to hedge, allowing it to focus on hedging oil production given the current low natural gas price environment.

Outlook

Looking ahead, Evolution Petroleum remains optimistic about the long-term potential of its diversified asset base and its ability to continue generating stable cash flows to support its dividend and growth initiatives.

The company's recent acquisitions and development activities have expanded its inventory of high-quality drilling locations and increased its exposure to oil production, which is expected to enhance its overall profitability and dividend coverage. However, the company remains cautious about the volatility in natural gas prices and the potential impact on its operations.

Risks and Challenges

Risks facing Evolution Petroleum include commodity price fluctuations, operational challenges at its legacy assets, potential regulatory changes, and the ability of its non-operated partners to successfully execute their development plans. The company's management team is actively monitoring these risks and working to mitigate them through prudent capital allocation and risk management strategies.

Conclusion

Evolution Petroleum's strategic moves to expand its asset base and diversify its production mix have positioned the company well to navigate the evolving energy landscape and deliver consistent returns to shareholders. The SCOOP/STACK acquisitions and the Chaveroo oilfield development have added high-quality, long-life assets to the company's portfolio, enhancing its ability to maintain or increase production at attractive rates of return.

With a strong balance sheet, a disciplined approach to capital allocation, and a commitment to shareholder returns, Evolution Petroleum is poised to continue its track record of creating value for its investors. The company's focus on maximizing total shareholder returns through a combination of dividends, share repurchases, and strategic investments in its asset base makes it an attractive proposition for investors seeking exposure to the energy sector.