evolution petroleum burkenroad report

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.


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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




*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.


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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.


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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).


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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).


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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.


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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).


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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.


21

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.


22

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.


23

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%


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.


24

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.


25

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.


26

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.


27

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


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



28

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.


29

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.


30

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


31

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.


32

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


33

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


34

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


35

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 9/30/10 (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


ther p

roperties

Production ta

xes

Dep


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


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


ther p

roperties

Production ta

xes

Dep


Accretion of a

sset retiremen

t obligations

Gen

eral


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

$


M)

BURKEN

ROAD REP


.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%


M)

BURKEN

ROAD REP


.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


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


at b

eginning of p

eriod


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

$


M)

BURKEN

ROAD REP


.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%

THIS PAGE LEFT INTENTIONALLY BLANK

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)

PETERRICCHIUTIDirectorofResearchFounderofBurkenroadReportsPeter.Ricchiuti@tulane.eduANTHONYWOODSeniorDirectorofAccountingAwood11@tulane.edu

JERRYDICOLODAVIDDOWTYELLIOTTEDWARDSAssociateDirectorsofResearch

BURKENROADREPORTSTulaneUniversityNewOrleans,LA70118‐5669(504)862‐8489(504)865‐5430Fax

To receive complete reports on any of the companies we follow, contact:Peter Ricchiuti, Founder & Director of Research

Tulane UniversityFreeman School of BusinessBURKENROAD REPORTS

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Named in honor of William B. Burkenroad Jr., an alumnus and a longtime supporter of Tulane’s business school, and funded through contributions from his family and friends, BURKENROAD REPORTS is a nationally recognized program, publishing objective, investment research reports on public companies in our region. Students at Tulane University’s Freeman School of Business prepare these reports.Alumni of the BURKENROAD REPORTS program are employed at a number of highly respected financial institutions including:ABN AMRO Bank · Aegis Value Fund · Invesco/AIM Capital Management · Alpha Omega Capital Partners · American General Investment Management · Ameriprise Financial · Atlas Capital · Banc of America Securities · Bank of Montreal · Bancomer · Barclays Capital · Barings PLC · Bearing Point · Bessemer Trust · Black Gold Capital· Bloomberg · Brookfield Asset Management · Brown Brothers Harriman Capital · Blackrock Financial Management · Boston Consulting Group · Buckingham Research · California Board of Regents · Cambridge Associates· Canaccord Genuity · Cantor Fitzgerald · Chaffe & Associates · Citadel Investment Group · Citibank · Citigroup Private Bank · City National Bank · Cornerstone Resources · Credit Suisse · D. A. Davidson & Co. · Deutsche Banc · Duquesne Capital Management · Equitas Capital Advisors· Factset Research · Financial Models · First Albany · Fiduciary Trust · Fitch Investors Services · Forex Trading · Franklin Templeton · Friedman Billings Ramsay · Fulcrum Global Partners · Gintel Asset Management · Global Hunter Securities · Goldman Sachs · Grosever Funds · Gruntal & Co. · Guggenheim Securities , LLC · Hancock Investment Services · Healthcare Markets Group · Capital One Southcoast · Howard Weil Labouisse Friedrichs · IBERIABANK Capital Markets · J.P. Morgan Securities · Janney Montgomery Scott · Jefferies & Co. · Johnson Rice & Co. · KBC Financial · KDI Capital Partners · Key Investments · Keystone Investments · Legacy Capital · Liberty Mutual · Lowenhaupt Global Advisors · Mackay Shields · Manulife/John Hancock Investments · Marsh & McLennan · Mercer Partners · Merrill Lynch · Miramar Asset Management · Moodys Investor Services · Morgan Keegan · Morgan Stanley · New York Stock Exchange · Perkins Wolf McDonnell · Piper Jaffray & Co. · Professional Advisory Services · Quarterdeck Investment Services · RBC · Raymond James · Restoration Capital · Rice Voelker, LLC · Royal Bank of Scotland· Sandler O'Neill & Partners · Sanford Bernstein & Co. · Scotia Capital · Scottrade · Second City Trading LLC · Sequent Energy · Sidoti & Co · Simmons & Co. · Southwest Securities · Stephens & Co. · Sterne Agee · Stewart Capital LLC · Stifel Nicolaus · Sun-Trust Capital Markets · Susquehanna Investment Group · Thomas Weisel Partners · TD Waterhouse Securities · Texas Employee Retirement System · Texas Teachers Retirement System · ThirtyNorth Investments · Thornburg Investment Management · Tivoli Partners · Tudor Pickering & Co. · Tulane University Endowment Fund · Turner Investment Partners · UBS · Value Line Investments · Vaughan Nelson Investment Management · Wells Fargo Capital Management · Whitney National Bank · William Blair & Co. · Zephyr Management

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