Evolution Petroleum Corporation (EPM)
Discussion Materials
Marnie Georges
Qianyi (Cathy) Han
Jason Mudrock
Tuesday, April 1, 2014
1
Table of Contents
Section 1
Executive Summary
3
Section 2
Industry Overview
4
Section 3
Company Overview and Positioning
8
Section 4
Valuation Analysis
13
Section 5
Questions
21
2
Executive Summary
 The Oil Drilling and Gas Extraction industry will benefit from strong
global demand and rising prices despite high exploration risks
 Evolution Petroleum Corporation (EPM) possesses a solid asset base with
a unique strategy and innovations to pose a competitive advantage
 We value the company at about $9.19 per share
 We recommend placing Evolution Petroleum Corporation on the Watch
List so future analysts can evaluate its changing risks and growth
strategies
3
Section 1
Industry Overview
4
Industry Overview
The oil and gas extraction industry benefits from rising oil and gas prices and strong global demand
Industry Composition
Industry Trends




Oil and gas extraction is a mature, stable market in the
United States
Trends include rising global demand from emerging
economies, increased crude oil output from offshore
drilling, increased natural gas production from new
fields, and pressures from regulations and alternative
energy growth
New technologies have allowed increased exploration
of previously unattainable resources
Price volatility and high capital costs continue to
threaten smaller industry players




The oil and gas drilling and extraction industry is worth
$319.5 billion in the United States
Crude oil makes up 58.4% of the market while natural
gas represents 41.6%
The United States sends 59% of its oil and gas exports
to Canada and 19% to Mexico
Texas, Oklahoma, and Louisiana contain the largest
amount of industry output and revenue in the
continental United States
U.S. Oil & Gas Drilling and Extraction Market Segmentation
1.0%
Oil Demand Correlation with Real GDP Growth (1969 – 2008)
0.7%
Petroleum refining industry
9.3%
Natural gas distribution industry
11.1%
Utilities
Industrial users
18.6%
59.3%
Oil exports
Gas exports
Sources:
1. Deutsche Bank Markets Research. “Oil & Gas for Beginners.” 25 January 2013.
2. Credit Suisse. Oil & Gas Primer. September 2011.
3. IBISWorld Industry Reports.
5
Industry Overview
The oil and gas drilling and extraction industry features regional dispersion and high revenue volatility
Competitive Landscape





Dominant Players in Oil & Gas Drilling and Extraction
Low concentration due to high geographic dispersion
Top four competitors account for 28% of industry
revenue
Economies of scale resulting from large oil and gas
deposits help competitors spread high capital costs
Largest players practice downstream vertical integration
to guarantee buyers
Stringent regulations threaten large and small
competitors and increase capital requirements
8.2%
7.7%
6.1%
5.8%
ConocoPhillips
Chevron Corporation
Royal Dutch Shell PLC
BP PLC
72.2%
Other
U.S. Production of Crude Oil
Price Determinants





Prices remain volatile due to changes in supply and demand
Global economic recovery increases transportation and
industrial energy demands
Different grades of oil (heavy, light) typically attract
different prices with lighter oils earning a premium since
they are easier to refine
Impurities also affect the price of oil with sweet oils, or
those with a low sulfur content, commanding a premium
High barriers to entry result from security and regulation,
capital investments, and the high risks associated with
exploration
Sources:
1. Deutsche Bank Markets Research. “Oil & Gas for Beginners.” 25 January 2013.
2. EIA 2014 Report.
3. IBISWorld Industry Reports.
6
Porter’s Five Forces
The oil and gas drilling and extraction industry is attractive with the potential for long-term profitability
Bargaining
Power of Buyers
• Few available
substitutes
• Price volatility
can deter
buyers
LOW
Bargaining
Power of
Suppliers
• Low
concentration
of industry
players
• Critical
commodity
product
MEDIUM
Entry of New
Competitors
• Economies of
scale
• High capital
requirements
• Stringent
regulations
• High risk and
volatility
LOW
Sources:
1. Deutsche Bank Markets Research. “Oil & Gas for Beginners.” 25 January 2013.
2. EIA 2014 Report.
3. IBISWorld Industry Reports.
Rivalry Among
Existing
Competitors
• Limited oil
fields and gas
reserves
• Smaller firms
may share
buyers
• Larger firms
vertically
integrate
HIGH
Threat of
Substitutes
• Low use of
alternative
energies
• Oil and gas
serve separate
markets
LOW
7
Section 2
Company Overview
8
Evolution Petroleum Company (EPM) — Company Overview
The company has attractive investments and dedicated management that could sustain future growth
Firm Overview
Primary Asset Locations
 EPM is a petroleum company engaged primarily in
acquisition, exploitation and development of properties
for the production of crude oil and natural gas
MS Lime
 Differentiates through innovative proprietary technology,
reliance on unconventional drilling techniques, and
exploration of previously uneconomical reserves
Delhi Field
Giddings Field
 Management and employees own 21% of shares
 Market capitalization of $414 million in 2014
Customer Relations
 EPM sells commodities so purchasers retain little buying
power in the long term
Purchaser
Plains Marketing L.P.
Enterprise Crude Oil LLC
Flint Hills
DCP Midstream, LP
Kinder Morgan
Enervest, LLC
Orion Exploration Partners, LLC
Revenue Growth
2013
90.0%
4.0%
2.0%
1.0%
1.0%
1.0%
1.0%
9
Evolution Petroleum Corporation (EPM) — Company Overview
EPM earns money through Enhanced Oil Recovery, Bypassed Primary Resources, and Unconventional Development.
Enhanced Oil Recovery
Bypassed Primary Resources and Unconventional Development
 Increase the production and recovery of oil and
natural gas
 Focus on horizontal drilling
 Enhanced Oil Recovery from the Holt Bryant Unit in
the Delhi Field in Louisiana
 GARP Artificial Lift Technology
 Mississippi Lime, North Central Oklahoma
 Purchased in 2003 for $2.8 million
 Operated by Denbury Resources, Inc.
 Owns 7.4% interest and 23.9% revisionary
interest
Carbon Dioxide Oil Recovery at Delhi Field
10
SWOT Analysis
Evolution Petroleum Corporation’s reliance on innovative technology and alternative production and exploration
methods differentiate it from the competition and provide a foundation for future growth.
Strengths
Weaknesses
Proprietary GARP Artificial Lift technology and patents
Depends on a few large clients
Rich in assets and proved reserves
Depends on crude oil for revenues
Generates scalable reserves potential at a low unit cost with long-term growth
potential
No presence in growing global markets
Experienced, trained management team with deep experience in innovative oil
and gas exploration and production strategies
Relies on third party operators, marketers, and
technologies
Royalty and interest contracts reduce risk and increase revenues
Light debt use may limit exploration opportunities
Opportunities
Threats
Delhi Field previously produced millions of barrels of oil indicating future
success
Exposure to commodity risk stemming from changing
world prices of oil and gas
GARP technology provides licensing opportunities
Cyclicality of end markets
Increased demand from transportation and industrial sectors
Uncertainties inherent in reserve estimations
Cash reserves can help secure future investment opportunities
Increased competition from large, vertically-integrated
peers
Increased push for domestic energy output could spur demand
Price-elastic, highly competitive environment
Sources:
1. Company website.
2. EIA 2014 Outlook.
11
Recent Stock Performance
12
Section 3
Valuation Analysis
13
EPM WACC Calculation
Captial Structure
Debt
18%
Common Equity
70%
Perferred Equity
12%
100%
WACC
CAPM
Risk Free Rate
Beta
MRP
CAPM
2-Year Return
Annualized
Div Yield
ROE
3.50%
1.28
5%
9.90%
Return on Equity
35.48%
16.40%
3.20%
19.60%
Cost of Equity
Cost of Debt
Cost of Debt
Tax Rate
After-Tax
Cost of PE
Weight
CAPM
ROE
Cost of Equity
9.9%
19.60%
11.84%
Source: Capital IQ and Consensus Estimates as of 12/31/2011
80% WACC
20% Premium
Adj WACC
4.54% (online source)
35.00%
2.95%
Cost of Preferred Equity
8.50% (dividend yield)
WACC
9.84%
0.5%
10.34%
14
EPM Discounted Cash Flow Analysis
EBIT
Tax Expense
Depreciation
$
$
$
$
2014E
12,504,025
(4,418,764)
1,264,843
9,350,104
$
$
$
$
Change in NWC $
CapEx
FCF
$
(322,071) $
(3,320,192)
5,707,841 $
1
WACC
Discounted FCF $
5,172,808 $
Discounted Cash Flow Analysis
2015E
2016E
16,526,333 $ 21,778,393 $
(5,839,278) $ (7,694,018) $
1,373,196 $ 1,490,995 $
12,060,251 $ 15,575,370 $
(1,169,816) $
(3,611,775)
7,278,660 $
2
10.34%
5,978,061 $
2017E
28,631,191
(10,113,972)
1,619,013
20,136,232
$
$
$
$
(3,268,762) $
(2,885,949) $
(1,979,261)
(3,926,620)
(4,267,272)
(4,636,332)
8,379,988 $
12,983,011 $
19,440,194
3
4
5
Terminal Growth
3.50%
Terminal Value
294,023,795.75
6,237,446 $
8,757,765 $
Valuation
$
Shares Outstanding
Implied Price
Source: Capital IQ and Consensus Estimates as of 12/31/2011
2018E
37,567,162
(13,269,478)
1,758,103
26,055,787
$
179,744,183
205,890,264
28,205,467
7.30
15
EPM Sensitivity Analysis
$
7.30
8.34%
9.34%
10.34%
11.34%
12.34%
Senstivity Analysis
2.500%
3.000% 3.500%
9.08
9.88
10.85
7.56
8.12
8.77
6.44
6.84
7.30
5.58
5.88
6.22
4.90
5.13
5.39
Source: Capital IQ and Consensus Estimates as of 12/31/2011
4.000%
12.04
9.54
7.84
6.61
5.69
4.50%
13.54
10.47
8.47
7.06
6.02
16
EPM Comparables Analysis
Comparable Companies Analysis
P/E
Forward P/E EV/Revenue EV/EBITDA
VOC Energy Trust (NYSE:VOC)
8.59
7.18
8.4
8.56
ECA Marcellus Trust I (NYSE:ECT)
5.33
6.56
6.6
5.27
Cross Timbers Royalty Trust (NYSE:CRT)
13.5
13.0
13.38
Enduro Royalty Trust (NYSE:NDRO)
8.59
10.1
8.5
8.60
Hugoton Royalty Trust (NYSE:HGT)
9.34
8.23
8.5
8.83
Synergy Resources Corporation (AMEX:SYRG) 51.5
20.9
13.9
34.99
P/B
2.2
0.67
15.9
0.73
3.21
3.32
MC/Proved
reserves
0.04
0.08
0.02
0.09
0.12
Evolution Petroleum Corp. (AMEX:EPM)
105.3
19.7
18.9
39.52
7.31
0.03
Average
Median
16.14
8.97
10.59
8.23
9.8
8.5
13.27
8.72
4.34
2.71
0.06
0.06
Source: Capital IQ and Consensus Estimates as of 12/31/2011
17
Recent Stock Performance
18
EPM Comparables Analysis Cont.
Implied Price
Mean
Median
P/E
$
3.39 $
1.88
Forward P/E
$
6.78 $
5.26
EV/Revenue
$
7.10 $
6.16
EV/EBITA
$
4.58 $
3.01
P/B
$
7.48 $
4.66
MC/Proved reserves $
26.45 $
27.02
Weight
15%
15%
15%
15%
15%
25%
Weighted Price
Mean
Median
$
0.51 $
0.28
$
1.02 $
0.79
$
1.06 $
0.92
$
0.69 $
0.45
$
1.12 $
0.70
$
6.61 $
6.76
$
11.01 $
9.90
Implied Price $
Source: Capital IQ and Consensus Estimates as of 12/31/2011
10.46
19
EPM Valuation/Recommendation
Implied Price
DCF
$ 7.30
Comps
$ 10.46
Price
$ 9.19
Weight
40%
60%
Recommendation: Watch List
Source: Capital IQ and Consensus Estimates as of 12/31/2011
20
Section 5
Questions?
22