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Evolution Petroleum Corporation (EPM). Discussion Materials. Marnie Georges Qianyi (Cathy) Han Jason Mudrock. Tuesday, April 1, 2014. Table of Contents. Section 1 Executive Summary 3 Section 2 Industry Overview 4 Section 3 Company Overview and Positioning 8

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Evolution petroleum corporation epm

Evolution Petroleum Corporation (EPM)

Discussion Materials

Marnie GeorgesQianyi (Cathy) Han

Jason Mudrock

Tuesday, April 1, 2014


Table of contents

Table of Contents

Section 1Executive Summary3

Section 2Industry Overview4

Section 3Company Overview and Positioning8

Section 4Valuation Analysis13

Section 5Questions21


Executive summary

Executive Summary

Marvel Group

  • 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 recommendplacing Evolution Petroleum Corporation on the Watch List so future analysts can evaluate its changing risks and growth strategies


Industry overview

Marvel Group

Section 1

Industry Overview


Industry overview1

Industry Overview

Marvel Group

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

Oil Demand Correlation with Real GDP Growth (1969 – 2008)

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.


Industry overview2

Industry Overview

Marvel Group

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

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.


Porter s five forces

Porter’s Five Forces

Marvel Group

The oil and gas drilling and extraction industry is attractive with the potential for long-term profitability

LOW

MEDIUM

LOW

HIGH

LOW

Sources:

1. Deutsche Bank Markets Research. “Oil & Gas for Beginners.” 25 January 2013.

2. EIA 2014 Report.

3. IBISWorld Industry Reports.


Company overview

Marvel Group

Section 2

Company Overview


Evolution petroleum company epm company overview

Evolution Petroleum Company (EPM) — Company Overview

Marvel Group

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

  • Differentiates through innovative proprietary technology, reliance on unconventional drilling techniques, and exploration of previously uneconomical reserves

  • Management and employees own 21% of shares

  • Market capitalization of $414 million in 2014

MS Lime

Delhi Field

Giddings Field

Customer Relations

Revenue Growth

  • EPM sells commodities so purchasers retain little buying power in the long term


Evolution petroleum corporation epm company overview

Evolution Petroleum Corporation (EPM) — Company Overview

Marvel Group

EPM earns money through Enhanced Oil Recovery, Bypassed Primary Resources, and Unconventional Development.

Bypassed Primary Resources and Unconventional Development

  • Focus on horizontal drilling

  • Mississippi Lime, North Central Oklahoma

  • GARP Artificial Lift Technology

Carbon Dioxide Oil Recovery at Delhi Field

Enhanced Oil Recovery

  • Increase the production and recovery of oil and natural gas

  • Enhanced Oil Recovery from the Holt Bryant Unit in the Delhi Field in Louisiana

    • Purchased in 2003 for $2.8 million

    • Operated by Denbury Resources, Inc.

    • Owns 7.4% interest and 23.9% revisionary interest


Swot analysis

SWOT Analysis

Marvel Group

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.

Sources:

1. Company website.

2. EIA 2014 Outlook.


Recent stock p erformance

Recent Stock Performance


Valuation analysis

Marvel Group

Section 3

Valuation Analysis


Epm wacc calculation

EPM WACC Calculation

Marvel Group

Source: Capital IQ and Consensus Estimates as of 12/31/2011


Epm discounted cash flow analysis

EPM Discounted Cash Flow Analysis

Marvel Group

Source: Capital IQ and Consensus Estimates as of 12/31/2011


Epm sensitivity analysis

EPM Sensitivity Analysis

Marvel Group

Source: Capital IQ and Consensus Estimates as of 12/31/2011


Epm comparables analysis

EPM Comparables Analysis

Marvel Group

Source: Capital IQ and Consensus Estimates as of 12/31/2011


Recent stock p erformance1

Recent Stock Performance


Epm comparables analysis cont

EPM Comparables Analysis Cont.

Marvel Group

Source: Capital IQ and Consensus Estimates as of 12/31/2011


Epm valuation recommendation

EPM Valuation/Recommendation

Marvel Group

Recommendation: Watch List

Source: Capital IQ and Consensus Estimates as of 12/31/2011


Questions

Marvel Group

Section 5

Questions?


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