Executive Summary / Key Takeaways

• Evolution Petroleum ($EPM) is a differentiated independent E&P focused on acquiring and optimizing low-decline, non-operated assets to generate stable cash flow for its consistent, high-yield dividend.
• Recent strategic acquisitions (SCOOP/STACK, Chaveroo, Tex-Mex) have significantly diversified the portfolio, adding proved reserves and organic growth potential that are outperforming initial expectations.
• The company's core technical approach leverages Enhanced Oil Recovery (EOR) and secondary recovery methods, contributing to low decline rates and stable production profiles that underpin cash flow generation.
• Despite volatile commodity markets, EPM maintains a strong balance sheet, is expanding its credit facility capacity, and employs hedging to protect cash flow and support its dividend policy.
• Management is strategically allocating capital, focusing near-term development on gas-weighted opportunities while pursuing accretive M&A, positioning the company for continued cash flow and shareholder returns.

Setting the Scene: A Unique Approach in the E&P Landscape

In the dynamic and often volatile world of oil and gas exploration and production, Evolution Petroleum Corporation ($EPM) stands apart. Rather than pursuing high-growth, high-decline shale plays requiring aggressive capital programs, EPM has carved out a distinct niche: the disciplined acquisition and optimization of long-life, low-decline, non-operated onshore properties in the United States. This strategy is not merely about accumulating assets; it is fundamentally geared towards maximizing total shareholder return, with a consistent and growing cash dividend as a cornerstone.

EPM's approach is rooted in leveraging proven technical methods, particularly Enhanced Oil Recovery (EOR) and secondary recovery techniques like CO2 flooding and water injection. While not proprietary cutting-edge R&D in the traditional sense, the company's expertise lies in identifying and efficiently managing assets where these methods can maximize recovery from mature fields, resulting in production profiles characterized by lower decline rates compared to typical unconventional wells. This focus on stable, predictable production forms the bedrock of EPM's cash flow generation capabilities.

Positioned as a smaller independent within a landscape dominated by large-cap players like Devon Energy (DVN), EOG Resources (EOG), ConocoPhillips (COP), and Occidental Petroleum (OXY), EPM competes not on scale or rapid production growth, but on financial discipline, operational efficiency in its specific niche, and a compelling return of capital story. While larger peers boast higher gross margins (EOG at 76% TTM vs. EPM's 19.27% TTM) and operating margins (EOG at 35% TTM vs. EPM's 6.09% TTM), reflecting their scale and potentially lower per-unit costs in core areas, EPM differentiates itself with a remarkably conservative balance sheet (0.00 TTM Debt/Equity vs. peers ranging from 0.17 to 0.79) and a significantly higher dividend yield (9.56% TTM vs. peers typically below 5%). This strategic positioning allows EPM to operate effectively in a segment less attractive to larger competitors, mitigating direct head-to-head competition on their terms.

Evolution of the Portfolio: Strategic Acquisitions Drive Diversification

EPM's history is one of strategic adaptation and growth, particularly accelerating its portfolio diversification in recent years. The company initiated its consistent quarterly cash dividend program in December 2013, signaling an early commitment to shareholder returns that has remained central to its identity.

A pivotal period of transformation occurred in fiscal year 2024. Recognizing the challenges posed by volatile natural gas prices, EPM made key moves to balance its portfolio and enhance liquids exposure. In September 2023, the company entered the Chaveroo Field in New Mexico through a Participation Agreement, gaining the right to acquire a 50% working interest in development blocks amenable to horizontal drilling. This was swiftly followed by the significant SCOOPSTACK Acquisitions in February 2024, adding non-operated oil and natural gas assets in Oklahoma's Anadarko Basin for approximately $39.1 million, funded partly by a $42.5 million draw on its credit facility. These transactions were explicitly aimed at adding proved reserves, expanding drilling inventory, and diversifying the commodity mix.

This strategic momentum carried into fiscal year 2025 with the closing of the TexMex Acquisition in April 2025. This $9.0 million acquisition added non-operating working interests in wells primarily in New Mexico and Texas, further expanding EPM's footprint with approximately 440 BOEPD net production (60% oil, 40% gas) based on Q1 2025 averages. This marked EPM's seventh highly accretive acquisition in six years, a period during which the company invested $136 million to grow production by over 3.5 times while consistently returning capital via dividends. These acquisitions are not just about adding volumes; they are about enhancing the low-decline, cash-generative asset base that directly supports the company's financial strategy and dividend sustainability.

Operational Execution and Asset Performance

EPM's portfolio spans diverse basins, each contributing to the overall production profile and cash flow. As a non-operated company, EPM relies on the expertise and execution of third-party operators, a dynamic that requires proactive engagement to manage capital expenditures and operational efficiency.

The SCOOP and STACK plays in Oklahoma, acquired in FY24, have quickly become a key organic growth engine. Operated by experienced companies like Continental Resources (CLR), Ovintiv (OVV), and EOG, these assets contributed a production mix of approximately 50% natural gas, 34% crude oil, and 16% NGLs for the nine months ended March 31, 2025. Management has highlighted that many wells in this area are performing significantly above initial expectations, with actual production exceeding the original acquisition forecast by approximately 20% (Q4 FY24 call) and specific wells performing around 65% above the acquisition type curve (Q1 FY25 call).

The Chaveroo Field in New Mexico, an oil-weighted asset (100% crude oil production for 9M FY25), is operated by PEDEVCO Corp. (PED). EPM has participated in drilling and completing wells here, with early results from the second development block significantly exceeding expectations, coming online at rates approximately 50% higher than projected on average (Q3 FY25 call). This success validates the potential of this asset for organic growth.

The Delhi Field in Louisiana, a CO2-EOR project operated by an Exxon Mobil (XOM) subsidiary, is a prime example of EPM's focus on mature field optimization. While operations have faced temporary disruptions (power outages, compressor downtime, CO2 purchase line maintenance), management recently announced a strategic shift from purchasing CO2 to injecting additional water. This move is expected to be the "most economical way to run the field" (Q3 FY25 call), significantly reducing operating costs by an estimated $400,000-$500,000 per month while maximizing cash flow. The field's certification as a carbon capture, utilization, and storage site for EOR also presents potential future benefits.

Other assets like the Williston Basin (primarily oil), Barnett Shale (primarily gas), Hamilton Dome (oil), and Jonah Field (primarily gas) provide further diversification and contribute stable production and cash flow, demonstrating the resilience of a multi-basin portfolio against localized issues or commodity price fluctuations. For instance, the Barnett Shale delivered consistent cash flow despite brief weather-related downtime, benefiting from improved natural gas and NGL pricing (Q3 FY25 call).

Overall, for the nine months ended March 31, 2025, EPM saw average daily equivalent production increase by 5.7% year-over-year to 7,033 BOEPD, driven by the SCOOP/STACK and Chaveroo additions. While production dipped slightly in Q3 FY25 (down 7.5% YoY to 6,667 BOEPD) due to temporary issues, the underlying trend reflects the positive impact of recent strategic investments.

Financial Strength and Cash Flow Generation

EPM's financial strategy is centered on generating robust cash flow to support its dividend and fund opportunistic growth while maintaining a conservative balance sheet. For the nine months ended March 31, 2025, total revenues were $64.7 million, flat year-over-year, as increased production volumes were offset by a 5.0% decrease in the average realized price per BOE. For the third fiscal quarter ended March 31, 2025, revenues were $22.6 million, down 2.0% year-over-year, with lower production partially offset by a 7.1% increase in average realized price per BOE, notably driven by stronger natural gas and NGL prices.

Operating costs for the nine months ended March 31, 2025, increased in total (Lease Operating Costs up 3% to $37.97 million) but decreased on a per BOE basis ($19.71/BOE, down $0.45/BOE) due to higher production volumes. Gathering, transportation, and other costs increased due to the SCOOP/STACK acquisition, while other lease operating costs decreased primarily due to reduced CO2 purchases at Delhi, partially offset by SCOOP/STACK additions. Depletion expense increased due to a higher depletable base from acquisitions and CapEx. General and administrative expenses per BOE decreased due to higher production.

The company reported net income of $1.9 million for the nine months ended March 31, 2025, compared to $2.8 million in the prior year period. The third fiscal quarter saw a net loss of $2.2 million, significantly impacted by non-cash net unrealized losses on derivative contracts ($3.9 million in Q3 FY25) resulting from mark-to-market valuations based on forward price curves, particularly for natural gas. Adjusted EBITDA for Q3 FY25 was $7.4 million, down from $8.5 million in the prior year quarter, but up 30% from Q2 FY25 due to higher commodity prices.

Crucially, cash flow from operations for the nine months ended March 31, 2025, was strong at $22.6 million, a material increase from $14.7 million in the prior year period, primarily due to favorable changes in the timing of working capital. This operating cash flow is the engine driving EPM's ability to fund its capital program and its dividend.

As of March 31, 2025, EPM held $5.6 million in cash and cash equivalents and had $35.5 million outstanding on its Senior Secured Credit Facility, leaving $14.5 million in available borrowing capacity. The company was in compliance with all financial covenants (maximum total leverage ratio of 3.00 to 1.00, current ratio of not less than 1.00 to 1.00, consolidated tangible net worth of not less than $40 million). Subsequent to quarter end, EPM secured approval to extend the facility's maturity to April 2028 and increase total commitments from $50 million to $65 million by adding a new lender, enhancing its financial flexibility for future growth opportunities.

Competitive Positioning and Differentiated Moat

EPM operates in a competitive U.S. onshore E&P market, but its non-operated, low-decline, cash-flow-focused model provides a distinct competitive positioning. While larger peers like DVN, EOG, COP, and OXY often pursue high-growth, capital-intensive shale plays, EPM targets mature fields and unconventional assets amenable to efficient development and production optimization by experienced third-party operators.

EPM's core technical advantage lies not in proprietary drilling technology, but in the strategic application of proven EOR and secondary recovery methods (like CO2 flooding at Delhi and water injection at Hamilton Dome) and the ability to acquire assets where these techniques, or efficient horizontal drilling by operators (SCOOP/STACK, Chaveroo), yield stable, low-decline production. This contrasts with the steep decline curves often seen in shale, which require continuous, high capital spending to maintain production levels. EPM's low-decline profile translates directly into lower maintenance capital requirements relative to its production base, freeing up cash flow.

Financially, EPM's TTM margins (Gross: 19.27%, Operating: 6.09%) are lower than many larger peers, reflecting the cost structure of mature field operations and potentially less favorable realized pricing compared to premium basin production for some competitors. However, EPM's strength lies in its balance sheet and cash flow efficiency relative to its asset base. Its TTM Debt/Equity of 0.00 is significantly lower than peers, providing superior financial resilience during commodity price downturns. While its TTM Current Ratio of 0.88 indicates some working capital tightness (attributed partly to derivative valuations and payables in the 10-Q), the expected increase in credit facility capacity addresses liquidity needs.

EPM's competitive moat is built on this combination: acquiring undervalued, low-decline assets, benefiting from operator expertise without incurring the full operational overhead and capital intensity, maintaining a fortress balance sheet, and dedicating substantial cash flow to a high dividend yield. This model appeals to a specific investor base seeking income and stability, differentiating EPM from the growth-focused narrative of many E&P companies. The Tex-Mex acquisition valuation of approximately 3.4 times forward adjusted EBITDA based on current strip pricing underscores EPM's ability to source and execute transactions at attractive metrics, a key component of its value creation strategy.

Outlook, Capital Allocation, and Growth Pathways

EPM's outlook is guided by its core principles of disciplined capital allocation, preserving financial flexibility, and sustaining its dividend. Management expects fiscal year 2025 capital expenditures to be in the range of $12.5 million to $14.5 million, excluding potential acquisitions. This budget includes ongoing development at SCOOP/STACK and the drilling and completion of four wells in the second Chaveroo development block.

In response to recent oil price volatility, EPM has demonstrated strategic flexibility by deciding to delay the start of the third Chaveroo development block (an oil-weighted project) to later in fiscal year 2026. This move is intended to preserve near-term cash flow and optimize the timing of development when oil prices may be more favorable, effectively preserving long-term resource value. Concurrently, the company is focusing development activities on gas-weighted opportunities, particularly in the SCOOP/STACK, aligning with the recent strengthening of natural gas prices and the favorable outlook for increased demand.

The recent additions are expected to drive near-term production and cash flow growth. The Tex-Mex acquisition and the four new Chaveroo wells brought online subsequent to the third fiscal quarter are currently contributing over 850 BOEPD net combined and are expected to meaningfully benefit fiscal fourth quarter production and cash flow, particularly with stronger natural gas pricing.

EPM remains active in the M&A market, which management views as encouraging, especially amid oil price volatility. They are actively pursuing opportunities to acquire cash-generative, low-risk assets (both oil-weighted low decline and natural gas properties with favorable hedging potential) at compelling valuations. The expansion of the Senior Secured Credit Facility provides enhanced capacity to fund potential acquisitions.

The sustainability of the quarterly dividend remains a top priority. The declaration of the 47th consecutive dividend ($0.12/share, the 12th consecutive at this level) reflects the Board's confidence in the company's ability to generate strong operating cash flow from its diversified asset base to meet capital requirements, repay debt, and continue returning capital to shareholders.

Key Risks and Mitigation

Despite its disciplined approach, EPM faces inherent risks within the oil and gas industry. Commodity price volatility remains a primary concern, potentially impacting revenues and the economic viability of reserves. Geopolitical instability, regulatory changes (including environmental requirements), and operational risks (such as downtime or equipment failures) also pose challenges.

As a non-operated company, EPM is reliant on its third-party operators for the execution of development plans and the efficient management of its properties. This limits EPM's direct control over timing and operational decisions.

EPM mitigates these risks through several strategies:

• Diversification: A multi-basin, multi-commodity portfolio reduces exposure to localized issues or price swings in a single commodity.
• Hedging: Utilizing commodity derivative contracts helps establish price floors for a portion of anticipated production, providing a degree of cash flow stability. The flexibility to hedge natural gas volumes under the credit facility requirements is a key adaptation to market conditions.
• Financial Strength: A conservative balance sheet and ample liquidity provide resilience during downturns and flexibility for opportunistic moves.
• Proactive Engagement: Working closely with third-party operators helps align objectives and manage capital effectively.

Conclusion

Evolution Petroleum offers investors a differentiated proposition in the E&P sector. Its strategic focus on acquiring and optimizing low-decline, non-operated assets, underpinned by proven EOR and secondary recovery techniques and managed with a conservative balance sheet, creates a stable platform for generating consistent cash flow. This cash flow fuels a long-standing, high-yield dividend, a key differentiator from many growth-focused peers. Recent accretive acquisitions have successfully diversified the portfolio and added promising organic growth potential that is already exceeding expectations. While commodity price volatility and reliance on third-party operators present risks, EPM's disciplined capital allocation, strategic flexibility in development timing, hedging program, and strong financial position are designed to navigate these challenges. As EPM continues to execute its strategy of opportunistic M&A and selective development, leveraging its unique business model, it remains well-positioned to sustain its cash flow generation and continue delivering value to shareholders.