Evolution Petroleum Announces Acquisition of Non-operated Oil and Gas Assets

Rhea-AI Summary

Evolution Petroleum Corporation (NYSE American: EPM) has announced the acquisition of non-operated oil and natural gas assets in central Oklahoma for $43.5 million. The assets include 230 producing wells with a production of approximately 1,550 barrels of oil equivalent per day and significant upside potential. The acquisitions are expected to be self-funding and highly accretive to key valuation metrics. The company aims to generate significant free cash flow and extend dividend capacity.

Insights

Financial Analyst

The acquisition by Evolution Petroleum Corporation of non-operated oil and natural gas assets in the SCOOP and STACK plays represents a strategic move that is highly accretive to the company's valuation metrics. The transaction, valued at $43.5 million, is anticipated to enhance key financial ratios such as Total Enterprise Value to Earnings Before Interest, Taxes, Depreciation and Amortization (TEV/EBITDA), Earnings Per Share (EPS) and Cash Flow Per Share (CFPS). The addition of approximately 1,550 barrels of oil equivalent per day (BOEPD) from these assets could significantly increase Evolution's production capacity and revenue streams.

Notably, the financing method for this acquisition, utilizing cash on hand and borrowings, indicates a strong liquidity position and a well-managed capital structure. The expectation that the acquisitions and associated development drilling will be self-funding and incrementally cash flow positive is particularly important for investors, as it suggests a sustainable growth model that may not require further capital raises in the near term. Furthermore, the transaction's potential to support and possibly enhance the company's quarterly dividend is an attractive proposition for shareholders seeking regular income.

Given the current commodity pricing environment, the timing of the acquisition could position Evolution favorably if there is an upswing in the commodity price cycle. This strategic diversification into a world-class producing basin with established infrastructure and markets could mitigate risks associated with single-basin exposure and provide a more stable platform for growth.

Market Research Analyst

The SCOOP (South Central Oklahoma Oil Province) and STACK (Sooner Trend Anadarko Basin Canadian and Kingfisher Counties) plays are prolific oil and gas regions that have attracted significant industry investment due to their rich resource potential. Evolution's acquisition of assets in these plays is indicative of the company's strategic intent to secure a foothold in areas with proven reserves and existing infrastructure. The mention of 'best-in-class operators' such as Continental, Ovintiv, EOG, Marathon and Gulfport suggests that Evolution is partnering with experienced entities, potentially reducing operational risks and enhancing the efficiency of the acquired assets.

The acquisition's impact on Evolution's asset diversification is notable, as it shifts the company's portfolio towards a more balanced mix of oil, natural gas liquids and natural gas. This commodity mix is essential in hedging against price volatility in the energy markets. The transaction also provides access to over 300 undeveloped locations, which could represent a significant reserve growth opportunity and a robust pipeline for future development, subject to commodity price movements and capital allocation decisions.

Energy Sector Analyst

The strategic acquisition of non-operated oil and gas assets by Evolution Petroleum Corporation underscores the company's growth trajectory within the energy sector, particularly in the unconventional resource plays of the Anadarko Basin. The emphasis on the assets' Proved Developed Producing (PDP) status is crucial, as it indicates that the wells are already in production, which typically entails lower risk and provides immediate cash flow compared to undeveloped wells.

Furthermore, the assertion that the acquisitions are highly accretive to valuation metrics suggests that the transaction could lead to an immediate increase in the company's intrinsic value. The acquisition's self-funding nature and the incremental cash flow it is expected to generate are positive indicators of the company's operational and financial discipline, potentially leading to a re-rating of the stock by the market.

However, it is important to monitor the integration of these assets and the actual performance post-acquisition, as discrepancies between expected and actual production or costs can affect the projected accretive impact. Additionally, the industry's shift towards energy transition and the increasing scrutiny on carbon emissions could influence the long-term value proposition of such hydrocarbon-focused investments.

HOUSTON, Jan. 09, 2024 (GLOBE NEWSWIRE) -- Evolution Petroleum Corporation (NYSE American: EPM) ("Evolution" or the “Company”) announced today that it has entered into definitive agreements to acquire non-operated oil and natural gas assets in the SCOOP and STACK plays in central Oklahoma (the "Acquisitions") from Red Sky Resources III, LLC, Red Sky Resources IV, LLC, and Coriolis Energy Partners I, LLC. The combined purchase price of the Acquisitions is $43.5 million in cash, subject to customary closing adjustments, with an effective date of November 1, 2023, and an expected closing date in mid-February during the Company’s third quarter of fiscal 2024. Evolution expects to fund the acquisition with cash on hand and borrowings from EPM’s revolving credit facility.

Acquisition Highlights

• Production of approximately 1,550 barrels of oil equivalent per day (“BOEPD”) and commodity mix of 42% oil, 15% natural gas liquids, and 43% natural gas as of the effective date.
• Approximately 230 producing wells (average working interest of ~3%) in the SCOOP and STACK plays of the Anadarko Basin in Blaine, Canadian, Carter, Custer, Dewey, Garvin, Grady, Kingfisher, McClain, and Stephens counties, Oklahoma.
• Significant upside associated with approximately 3,700 net acres in the SCOOP and STACK plays with more than 300 gross undeveloped locations, with an average working interest of approximately 3%.
• Highly accretive to key valuation metrics, including TEV/EBITDA, EPS, and CFPS.
• Acquisitions and associated development drilling expected to be self-funding and generate incremental cash flow to further support the Company's quarterly dividend while adding minimal additional overhead.
• As of the effective date, there were 22 gross wells in process, 21 of which were drilled but uncompleted (“DUC”) to be paid through completion by the Seller. As of today, 13 of these DUCs have been completed and are producing.
• Assets managed by best-in-class operators, including Continental, Ovintiv, EOG, Marathon, and Gulfport.
  

Management Comments

Kelly Loyd, President and Chief Executive Officer, commented, “We are pleased to announce these Acquisitions, which together equal the largest transaction in Evolution's history. This is a significant achievement for our Company and demonstrates our ability to successfully procure high-quality assets in a core basin with best-in-class operating parties. The strategic addition of these non-operated assets to our increasingly diversified portfolio is a testament to our prudence in growing our business for the long-term benefit of our shareholders. The asset's high-quality, proved developed producing base (“PDP”) and long-dated inventory have the potential to generate significant free cash flow, contribute to higher per-share profits, and extend and potentially enhance our dividend capacity. Evolution has a proven track record of executing its strategy of buying long-life production based on current commodity pricing during the downswings with the potential for significant upside associated with an upswing in the commodity price cycle.”

Mr. Loyd continued, “In addition to the roughly 1,550 BOEPD of production, these transactions further our strategy of “making acquisitions through the drill bit” which was emphasized in our Permian drilling partnership in Chaveroo. We view this as crucial to enhancing our ability to accretively maintain or increase production at an attractive rate of return outside of making acquisitions. Importantly, these Acquisitions are more than self-funding, meaning they are expected to generate sufficient free cash flow to both participate in future wells and to contribute excess free cash flow back to the Company to be used for dividends, debt repayment, and other corporate uses.”

Mr. Loyd added, “These Acquisitions continue our strategy to diversify our asset base within targeted areas and give us exposure to another world-class producing basin with ample takeaway and processing infrastructure and well-established end sales markets. They also greatly diversify our portfolio classification by adding not just PDP wells but also low working interest exposure to more than 300 gross, high-quality undeveloped locations. We are excited about the potential of these Acquisitions and the opportunities they present for our continued growth and success.”

Transaction Consideration and Capital Available

Evolution expects to fund the transactions from cash on hand and borrowings from the Company's senior credit facility with MidFirst Bank. As of December 31, 2023, and prior to the transaction, the Company had approximately $8 million in cash on hand and had no outstanding borrowings under the credit facility. The Company estimates that net debt after giving effect to the Transaction will be within the Company's targeted leverage ratio of one-times pro forma Adjusted EBITDA¹.

Investor Presentation

Evolution plans to post a presentation highlighting additional details of the Acquisitions on the Company's website this evening: www.evolutionpetroleum.com.

About Evolution Petroleum

Evolution Petroleum Corporation is an independent energy company focused on maximizing total shareholder returns through the ownership of and investment in onshore oil and natural gas properties in the U.S. The Company aims to build and maintain a diversified portfolio of long-life oil and natural gas properties through acquisitions, selective development opportunities, production enhancements, and other exploitation efforts. Properties include non-operated interests in the following areas: the Chaveroo Oilfield located in Chaves and Roosevelt Counties, New Mexico; the Jonah Field in Sublette County, Wyoming; the Williston Basin in North Dakota; the Barnett Shale located in North Texas; the Hamilton Dome Field located in Hot Springs County, Wyoming; the Delhi Holt-Bryant Unit in the Delhi Field in Northeast Louisiana; as well as small overriding royalty interests in four onshore Texas wells. Visit www.evolutionpetroleum.com for more information.

Cautionary Statement

All forward-looking statements contained in this press release regarding the Company's current expectations, potential results, and future plans and objectives involve a wide range of risks and uncertainties. Statements herein using words such as “believe,” “expect,” “plans,” “outlook,” “should,” “will,” and words of similar meaning are forward-looking statements. Although the Company’s expectations are based on business, engineering, geological, financial, and operating assumptions that it believes to be reasonable, many factors could cause actual results to differ materially from its expectations and can give no assurance that its goals will be achieved. These factors and others are detailed under the heading "Risk Factors" and elsewhere in our periodic documents filed with the Securities and Exchange Commission. The Company undertakes no obligation to update any forward-looking statement.

Investor Relations
(713) 935-0122
info@evolutionpetroleum.com

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¹⁾ _{Adjusted EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortization and is a non-GAAP financial measure. The Company defines Adjusted EBITDA as net income (loss) plus interest expense, income tax expense (benefit), depreciation, depletion and amortization (DD&A), stock-based compensation, other amortization and accretion, ceiling test impairment and other impairments, unrealized loss (gain) on change in fair value of derivatives, and other non-cash expense (income) items.}

FAQ

What did Evolution Petroleum Corporation announce?

Evolution Petroleum Corporation announced the acquisition of non-operated oil and natural gas assets in the SCOOP and STACK plays in central Oklahoma.

What is the combined purchase price of the acquisitions?

The combined purchase price of the acquisitions is $43.5 million in cash.

What is the production capacity of the acquired assets?

The assets have a production of approximately 1,550 barrels of oil equivalent per day with a commodity mix of 42% oil, 15% natural gas liquids, and 43% natural gas.

How is the acquisition being funded?

Evolution expects to fund the acquisition with cash on hand and borrowings from EPM’s revolving credit facility.

What is the expected closing date of the acquisitions?

The expected closing date is in mid-February during the Company’s third quarter of fiscal 2024.

What is the strategic significance of the acquisitions?

The acquisitions are expected to be self-funding and highly accretive to key valuation metrics, aiming to generate significant free cash flow and extend dividend capacity.

Who are the operators of the acquired assets?

The assets are managed by best-in-class operators, including Continental, Ovintiv, EOG, Marathon, and Gulfport.

What is the strategic vision behind the acquisitions?

The acquisitions are part of Evolution Petroleum Corporation's strategy to diversify its asset base within targeted areas and give exposure to another world-class producing basin with ample takeaway and processing infrastructure.