EVOLUTION PETROLEUM CORP [EPM] Filings

10-Q 1 epm-20240331x10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-32942

EVOLUTION PETROLEUM CORPORATION

(Exact name of registrant as specified in its charter)

Nevada

41-1781991

(State or other jurisdiction of
incorporation or organization)

(IRS Employer

Identification No.)

1155 Dairy Ashford Road, Suite 425, Houston, Texas 77079

(Address of principal executive offices and zip code)

(713) 935-0122

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol(s)	Name of Each Exchange On Which Registered
Common Stock, $0.001 par value	EPM	NYSE American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: ☒ No: ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes: ☒ No: ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☐	Accelerated filer	☒	Non-accelerated filer	☐	Smaller reporting company	☒
						Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.). Yes: ☐ No: ☒

At May 3, 2024, 33,357,632 shares of the Registrant’s Common Stock, $0.001 par value per share, were outstanding.

Table of Contents

EVOLUTION PETROLEUM CORPORATION

TABLE OF CONTENTS


Forward-Looking Statements		2
PART I.	FINANCIAL INFORMATION	4
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	4
	Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2024 and June 30, 2023	4
	Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended March 31, 2024 and 2023	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended March 31, 2024 and 2023	6
	Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the three and nine months ended March 31, 2024 and 2023	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures about Market Risks	40
Item 4.	Controls and Procedures	40
PART II. OTHER INFORMATION		41
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	42
	Signatures	43

We use the terms, “EPM,” “Company,” “we,” “us,” and “our” to refer to Evolution Petroleum Corporation, and unless the context otherwise requires, its wholly-owned subsidiaries.

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FORWARD-LOOKING STATEMENTS

This Form 10-Q and the information referenced herein contains forward-looking statements within the meaning of the Private Securities Litigations Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements, except for statements of historical fact, are forward-looking statements. The words “plan,” “expect,” “project,” “estimate,” “may,” “assume,” “believe,” “anticipate,” “intend,” “budget,” “forecast,” “predict” and other similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words or phrases. These statements appear in a number of places and include statements regarding our plans, beliefs or current expectations, including the plans, beliefs and expectations of our officers and directors, which may include, but are not limited to, the following:

●

our expectations of plans, strategies and objectives, including anticipated development activity and capital spending;

●

our capital allocation strategy, capital structure, anticipated sources of funding, growth in long-term shareholder value and ability to preserve balance sheet strength;

●

the benefits of our multi-basin portfolio, including operational and commodity flexibility;

●

our ability to maximize cash flow and the application of excess cash flows to reduce long-term debt, pay dividends and repurchase shares pursuant to our share repurchase program;

●

estimates of our oil, natural gas and natural gas liquids (“NGLs”) production and commodity mix;

●

anticipated oil, natural gas and NGL prices;

●

anticipated drilling and completions activity;

●

estimates of our oil, natural gas and NGL reserves and recoverable quantities;

●

our ability to access credit facilities and other sources of liquidity to meet financial obligations throughout commodity price cycles;

●

limitations on our ability to obtain funding based on environmental, social, and corporate governance (“ESG”) performance;

●

future interest expense;

●

our ability to manage debt and financial ratios, finance growth and comply with financial covenants;

●

the implementation and outcomes of risk management programs, including exposure to commodity price and interest rate fluctuations, the volume of oil and natural gas production hedged, and the markets or physical sales locations hedged;

●

the impact of changes in federal, state, provincial and local, rules and regulations;

●

anticipated compliance with current or proposed environmental requirements, including the costs thereof;

●

the possible impact of greenhouse gas (“GHG”) emissions limitations and renewable energy incentives;

●

adequacy of provisions for abandonment and site reclamation costs;

●

our operational and financial flexibility, discipline and ability to respond to evolving market conditions;

●

the declaration and payment of future dividends and any anticipated repurchase of our outstanding common shares;

●

the adequacy of our provision for taxes and legal claims;

●

our ability to manage cost inflation and expected cost structures, including expected operating, transportation, processing and labor expenses;

●

our competitiveness relative to our peers, including with respect to capital, materials, people, assets and production;

●

oil, natural gas and NGL inventories and global demand for oil, natural gas and NGLs;

●

the outlook of the oil and natural gas industry generally, including impacts from changes to the geopolitical environment;

●

adverse weather events;

●

anticipated staffing levels;

●

anticipated payments related to our commitments, obligations and contingencies, and the ability to satisfy the same; and

●

the possible impact of accounting and tax pronouncements, rule changes and standards.

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Readers are cautioned against unduly relying on forward-looking statements which, by their nature, involve numerous assumptions and are subject to both known and unknown risks and uncertainties (many of which are beyond our control) that may cause actual events or results to differ materially and/or adversely from those expressed or implied, which include, but are not limited to, the following assumptions:

●

future commodity prices and basis differentials;

●

our ability to access credit facilities and shelf prospectuses;

●

assumptions contained in our corporate guidance;

●

the availability of attractive commodity or financial hedges and the enforceability of risk management programs;

●

expectations that counterparties will fulfill their obligations pursuant to gathering, processing, transportation and marketing agreements;

●

access to adequate gathering, transportation, processing and storage facilities;

●

assumed tax, royalty and regulatory regimes;

●

expectations and projections made in light of, and generally consistent with, our historical experience and our perception of historical industry trends; and

●

the other assumptions contained herein.

Readers are cautioned that the assumptions, risks and uncertainties referenced above, and in the other documents incorporated herein by reference (if any), are not exhaustive. Although we believe the expectations represented by our forward-looking statements are reasonable based on the information available to us as of the date such statements are made, forward-looking statements are only predictions and statements of our current beliefs and there can be no assurance that such expectations will prove to be correct.

When considering any forward-looking statement, the reader should keep in mind the risk factors that could cause our actual results to differ materially from those contained in any forward-looking statement. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include the timing and extent of changes in commodity prices for oil, natural gas and NGLs, operating risks and other risk factors as described under the Risk Factors section of our previously filed Annual Report on Form 10-K for the fiscal year ended June 30, 2023, as well as the other disclosures contained herein, therein, and as also may be described from time to time in future reports we file with the Securities and Exchange Commission. There also may be other factors that we cannot anticipate or that are not described in this report, generally because we do not currently perceive them to be material. Such factors could cause results to differ materially from our expectations.

Forward-looking statements speak only as of the date they are made, and we do not undertake to update these statements other than as required by law. Readers are advised, however, to review any further disclosures we make on related subjects in our filings with the Securities and Exchange Commission.

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Part I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

EVOLUTION PETROLEUM CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except share and per share amounts)


	March 31, 2024		June 30, 2023
Assets
Current assets
Cash and cash equivalents	$	3,067	$	11,034
Receivables from crude oil, natural gas, and natural gas liquids revenues		13,368		7,884
Derivative contract assets		347		—
Prepaid expenses and other current assets		6,275		2,277
Total current assets		23,057		21,195
Property and equipment, net of depletion, depreciation, and impairment
Oil and natural gas properties, net—full-cost method of accounting, of which none were excluded from amortization		142,157		105,781

Other assets		1,318		1,341
Total assets	$	166,532	$	128,317
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	8,096	$	5,891
Accrued liabilities and other		5,985		6,027
Derivative contract liabilities		1,410		—
State and federal taxes payable		—		365
Total current liabilities		15,491		12,283
Long term liabilities
Senior secured credit facility		42,500		—
Deferred income taxes		6,927		6,803
Asset retirement obligations		18,079		17,012
Operating lease liability		79		125
Total liabilities		83,076		36,223
Commitments and contingencies (Note 10)
Stockholders' equity
Common stock; par value $0.001; 100,000,000 shares authorized: issued and
outstanding 33,359,854 and 33,247,523 shares as of March 31, 2024
and June 30, 2023, respectively		33		33
Additional paid-in capital		40,652		40,098
Retained earnings		42,771		51,963
Total stockholders' equity		83,456		92,094
Total liabilities and stockholders' equity	$	166,532	$	128,317

See accompanying notes to unaudited condensed consolidated financial statements.

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EVOLUTION PETROLEUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share amounts)


	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2024		2023		2024		2023
Revenues
Crude oil	$	14,538	$	11,799	$	38,913	$	40,062
Natural gas		5,860		21,598		17,943		58,816
Natural gas liquids		2,627		3,470		7,794		11,462
Total revenues		23,025		36,867		64,650		110,340
Operating costs
Lease operating costs		12,624		13,570		36,865		47,727
Depletion, depreciation, and accretion		5,900		3,383		14,760		10,439
General and administrative expenses		2,417		2,267		7,522		7,320
Total operating costs		20,941		19,220		59,147		65,486
Income (loss) from operations		2,084		17,647		5,503		44,854
Other income (expense)
Net gain (loss) on derivative contracts		(1,183)		270		(1,183)		513
Interest and other income		63		13		283		26
Interest expense		(518)		(32)		(584)		(404)
Income (loss) before income taxes		446		17,898		4,019		44,989
Income tax (expense) benefit		(157)		(3,941)		(1,174)		(9,938)
Net income (loss)	$	289	$	13,957	$	2,845	$	35,051
Net income (loss) per common share:
Basic	$	0.01	$	0.42	$	0.09	$	1.04
Diluted	$	0.01	$	0.41	$	0.08	$	1.04
Weighted average number of common shares outstanding:
Basic		32,702		33,013		32,692		33,108
Diluted		32,854		33,156		32,920		33,291

See accompanying notes to unaudited condensed consolidated financial statements.

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EVOLUTION PETROLEUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)


	Nine Months Ended March 31,
	2024		2023
Cash flows from operating activities:
Net income (loss)	$	2,845	$	35,051
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depletion, depreciation, and accretion		14,760		10,439
Stock-based compensation		1,585		1,155
Settlement of asset retirement obligations		(19)		(119)
Deferred income taxes		124		(100)
Unrealized (gain) loss on derivative contracts		1,063		(1,994)
Accrued settlements on derivative contracts		94		(1,130)
Other		—		(3)
Changes in operating assets and liabilities:
Receivables from crude oil, natural gas, and natural gas liquids revenues		(4,734)		16,483
Prepaid expenses and other current assets		(1,425)		(980)
Accounts payable and accrued liabilities		814		(8,146)
State and federal income taxes payable		(365)		1,063
Net cash provided by operating activities		14,742		51,719
Cash flows from investing activities:
Acquisition of oil and natural gas properties		(43,788)		(31)
Capital expenditures for oil and natural gas properties		(8,353)		(4,234)
Net cash used in investing activities		(52,141)		(4,265)
Cash flows from financing activities:
Common stock dividends paid		(12,037)		(12,114)
Common stock repurchases, including stock surrendered for tax withholding		(1,031)		(3,983)
Borrowings under senior secured credit facility		42,500		—
Repayments of senior secured credit facility		—		(21,250)
Net cash (used in) provided by financing activities		29,432		(37,347)
Net increase (decrease) in cash and cash equivalents		(7,967)		10,107
Cash and cash equivalents, beginning of period		11,034		8,280
Cash and cash equivalents, end of period	$	3,067	$	18,387

Supplemental disclosures of cash flow information:
Non-cash investing and financing transactions:
Increase (decrease) in accrued capital expenditures for oil and natural gas properties	$	2,193	$	(141)
Oil and natural gas property costs attributable to the recognition of asset retirement obligations		90		—

See accompanying notes to unaudited condensed consolidated financial statements.

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EVOLUTION PETROLEUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

(In thousands)


				Additional						Total
	Common Stock			Paid-in		Retained		Treasury		Stockholders'
	Shares	Par Value		Capital		Earnings		Stock		Equity
For the Three Months Ended March 31, 2024
Balances at December 31, 2023	33,507	$	34	$	40,920	$	46,485	$	—	$	87,439
Issuance of restricted common stock	5		—		—		—		—		—
Common stock repurchases, including stock surrendered for tax withholding	—		—		—		—		(818)		(818)
Retirements of treasury stock	(152)		(1)		(817)		—		818		—
Stock-based compensation	—		—		549		—		—		549
Net income (loss)	—		—		—		289		—		289
Common stock dividends paid	—		—		—		(4,003)		—		(4,003)
Balances at March 31, 2024	33,360	$	33	$	40,652	$	42,771	$	—	$	83,456

For the Nine Months Ended March 31, 2024
Balances at June 30, 2023	33,248	$	33	$	40,098	$	51,963	$	—	$	92,094
Issuance of restricted common stock	293		1		(1)		—		—		—
Common stock repurchases, including stock surrendered for tax withholding	—		—		—		—		(1,031)		(1,031)
Retirements of treasury stock	(181)		(1)		(1,030)		—		1,031		—
Stock-based compensation	—		—		1,585		—		—		1,585
Net income (loss)	—		—		—		2,845		—		2,845
Common stock dividends paid	—		—		—		(12,037)		—		(12,037)
Balances at March 31, 2024	33,360	$	33	$	40,652	$	42,771	$	—	$	83,456

For the Three Months Ended March 31, 2023
Balances at December 31, 2022	33,808	$	34	$	43,243	$	45,861	$	—	$	89,138
Issuance of restricted common stock	101		—		—		—		—		—
Common stock repurchases, including stock surrendered for tax withholding	—		—		—		—		(3,896)		(3,896)
Retirements of treasury stock	(638)		(1)		(3,895)		—		3,896		—
Stock-based compensation	—		—		453		—		—		453
Net income (loss)	—		—		—		13,957		—		13,957
Common stock dividends paid	—		—		—		(4,029)		—		(4,029)
Balances at March 31, 2023	33,271	$	33	$	39,801	$	55,789	$	—	$	95,623

For the Nine Months Ended March 31, 2023
Balances at June 30, 2022	33,471	$	33	$	42,629	$	32,852	$	—	$	75,514
Issuance of restricted common stock	476		1		(1)		—		—		—
Forfeitures of restricted stock	(26)		—		—		—		—		—
Common stock repurchases, including stock surrendered for tax withholding	—		—		—		—		(3,983)		(3,983)
Retirements of treasury stock	(650)		(1)		(3,982)		—		3,983		—
Stock-based compensation	—		—		1,155		—		—		1,155
Net income (loss)	—		—		—		35,051		—		35,051
Common stock dividends paid	—		—		—		(12,114)		—		(12,114)
Balances at March 31, 2023	33,271	$	33	$	39,801	$	55,789	$	—	$	95,623

See accompanying notes to unaudited condensed consolidated financial statements.

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EVOLUTION PETROLEUM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Financial Statement Presentation

Nature of Operations. Evolution Petroleum Corporation (“Evolution,” and together with its consolidated subsidiaries, the “Company”) is an independent energy company focused on maximizing returns to shareholders through the ownership of and investment in onshore oil and natural gas properties in the United States. The Company’s long-term goal is to maximize total shareholder return from a diversified portfolio of long-life oil and natural gas properties built through acquisitions and through selective development opportunities, production enhancement, and other exploitation efforts on its oil and natural gas properties.

The Company’s oil and natural gas properties consist of non-operated interests in the following areas: the SCOOP and STACK plays of the Anadarko Basin located in central Oklahoma; the Chaveroo oilfield in Chaves and Roosevelt Counties of 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, a secondary recovery field utilizing water injection wells to pressurize the reservoir; the Delhi Holt-Bryant Unit in the Delhi Field in Northeast Louisiana, a CO₂ enhanced oil recovery project; as well as small overriding royalty interests in four onshore Texas wells.

Interim Financial Statements. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and the appropriate rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. All adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the interim periods presented have been included. The interim financial information and notes hereto should be read in conjunction with the Company’s 2023 Annual Report on Form 10-K for the fiscal year ended June 30, 2023, as filed with the SEC on September 13, 2023. The results of operations for interim periods are not necessarily indicative of results to be expected for a full fiscal year. The Company has evaluated events and transactions through the date of issuance of these unaudited condensed consolidated financial statements.

Principles of Consolidation and Reporting. The unaudited condensed consolidated financial statements include the accounts of Evolution Petroleum Corporation and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements for the previous year may be condensed or include certain reclassifications to conform to the current presentation. To conform with the current year presentation, $0.6 million of accrued ad valorem and production taxes at June 30, 2023 are included with “Accrued taxes other than federal and state income tax” instead of “Accrued payables” as disclosed in Note 13, “Additional Financial Statement Information.” This reclassification has no impact on the previously reported unaudited condensed consolidated balance sheets, net income or stockholders’ equity.

Risk and Uncertainties. The Company’s oil and natural gas interests are operated by third-party operators and involve other third-party working interest owners. As a result, the Company has limited ability to influence the operation or future development of such properties. However, the Company is proactive with its third-party operators to review capital projects and related spending and present alternative plans as appropriate.

Oil and Natural Gas Properties. The Company uses the full-cost method of accounting for its investments in oil and natural gas properties. Under this method of accounting, all costs incurred in the acquisition, exploration and development of oil and natural gas properties, including unproductive wells, are capitalized. This includes any internal costs that are directly related to property acquisition, exploration, and development activities but does not include any costs related to production, general corporate overhead, or similar activities. Oil and natural gas properties include costs that are excluded from depletion and amortization, which represent investments in unproved and unevaluated properties and include non-

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EVOLUTION PETROLEUM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

producing leasehold, geologic and geophysical costs associated with leasehold or drilling interests, and exploration drilling costs. These costs are excluded until the project is evaluated and proved reserves are established or impairment is determined.

Use of Estimates. The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities, if any, at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the respective reporting periods. Significant estimates include (a) reserve quantities and estimated future cash flows associated with proved reserves, which may significantly impact depletion expense and potential impairments of oil and natural gas properties, (b) asset retirement obligations, (c) stock-based compensation, (d) fair values of derivative contract assets and liabilities, (e) income taxes and the valuation of deferred income tax assets, (f) commitments and contingencies, and (g) accruals of crude oil, natural gas, and NGL revenues and expenses. The Company analyzes estimates and judgments based on historical experience and various other assumptions and information that are believed to be reasonable. Estimates and assumptions about future events and their effects cannot be predicted with certainty and, accordingly, these estimates may change as additional information is obtained, as new events occur, and as the Company’s environment changes. Actual results may differ from the estimates and assumptions used in the preparation of the Company’s unaudited condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 enhances the transparency of income tax disclosures by expanding the income tax rate reconciliation disclosure and income taxes paid information. ASU 2023-09 also includes certain other amendments to improve the effectiveness of income tax disclosures. ASU 2023-09 is effective for annual periods beginning after December 15, 2024. The Company is currently evaluating ASU 2023-09 and the impact it may have to the Company’s financial position, results of operations, cash flow or disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, and requires the use of a new forward-looking expected loss model that will result in the earlier recognition of allowances for losses. Early adoption is permitted and entities must adopt the amendment using a modified retrospective approach to the first reporting period in which the guidance is effective. For smaller reporting companies, as provided by ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), ASU 2016-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2022. The Company adopted ASU 2016-13 effective July 1, 2023. The adoption did not have a material effect on the Company’s financial position, results of operations, cash flows or disclosures.

Other accounting pronouncements that have recently been issued by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations, cash flows or disclosures.

Note 2. Revenue Recognition

The Company’s revenues are primarily generated from its crude oil, natural gas and NGL production from the SCOOP and STACK plays in central Oklahoma, the Chaveroo oilfield in Chaves and Roosevelt Counties of 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 in Wyoming, and the Delhi Field in Northeast Louisiana. Additionally, an overriding royalty interest retained in a past divestiture of Texas properties provides de minimis revenue. The following table

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EVOLUTION PETROLEUM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

disaggregates the Company’s revenues by major product for the three and nine months ended March 31, 2024 and 2023 (in thousands):


	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2024		2023		2024		2023
Revenues
Crude oil	$	14,538	$	11,799	$	38,913	$	40,062
Natural gas		5,860		21,598		17,943		58,816
Natural gas liquids		2,627		3,470		7,794		11,462
Total revenues	$	23,025	$	36,867	$	64,650	$	110,340

In the Jonah Field, the Company has elected to take its natural gas and NGL working interest production in-kind and markets its NGL production to Enterprise Products Partners L.P. and its natural gas production to different purchasers.

The Company does not take production in-kind at any of its other properties and does not negotiate contracts with customers for such production. The Company recognizes crude oil, natural gas, and NGL production revenue at the point in time when custody and title (“control”) of the product transfers to the customer. The sales of oil and natural gas are made under contracts which the Company’s third-party operators of its wells have negotiated with customers, which typically include variable consideration that is based on pricing tied to local indices and volumes delivered in the current month. The Company typically receives payment from the sale of oil and natural gas production one to two months after delivery.

Judgments made in applying the guidance in ASC 606, Revenue from Contracts with Customers, relate primarily to determining the point in time when control of product transfers to the customer. The Company does not believe that significant judgments are required with respect to the determination of the transaction price, including amounts that represent variable consideration, as volume and price carry a low level of estimation uncertainty given the precision of volumetric measurements and the use of index pricing with predictable differentials. Accordingly, the Company does not consider estimates of variable consideration to be constrained.

The Company’s contractual performance obligations arise upon the production of hydrocarbons from wells in which the Company has an ownership interest. The performance obligations are considered satisfied upon control of produced hydrocarbons transferring to a customer at a specified delivery point. Consideration is allocated to completed performance obligations at the end of an accounting period.

Revenue is recorded in the month when contractual performance obligations are satisfied. However, settlement statements from the purchasers of hydrocarbons and the related cash consideration are received by field operators one to two months before the Company receives payment and documentation from the operator, which is typical in the oil and natural gas industry. As a result, the Company must estimate the amount of production delivered to the customer and the consideration that will ultimately be received for the sale of the product. To estimate accounts receivable from operators’ contracts with customers, the Company uses knowledge of its properties, information from field operators, historical performance, contractual arrangements, index pricing, quality and transportation differentials, and other factors. Because the contractual performance obligations have been satisfied and an unconditional right to consideration exists as of the balance sheet date, the Company recognized amounts due from contracts with field operators as “Receivables from crude oil, natural gas, and natural gas liquids revenues” on the unaudited condensed consolidated balance sheets. Differences between estimates and actual amounts received for product sales are recorded in the month that payments received from purchasers are remitted to the Company by field operators.

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Note 3. Acquisitions

SCOOP/STACK Acquisitions

On February 12, 2024, the Company closed the acquisitions of certain non-operated oil and natural gas assets in the SCOOP and STACK plays in central Oklahoma (the "SCOOP/STACK Acquisitions") from Red Sky Resources III, LLC, Red Sky Resources IV, LLC, and Coriolis Energy Partners I, LLC. After taking into account preliminary customary closing adjustments and an effective date of November 1, 2023, total combined cash consideration for the SCOOP/STACK Acquisitions was approximately $40.5 million, which includes $43.8 million paid at closing less interim purchase price adjustments totaling approximately $3.3 million related to net cash flows received on the properties subsequent to closing. The Company expects to receive the remaining net cash flows from the properties between the effective date of November 1, 2023 and the closing date, at the final post-closing settlement expected to occur during the fourth quarter of fiscal 2024. The Company accounted for these transactions as asset acquisitions and allocated all of the combined purchase price (including $0.2 million of transaction costs) to proved oil and natural gas properties. In addition, the Company recognized $0.1 million in non-cash asset retirement obligations, the estimated net present value of future net retirement costs. The transactions were funded with cash on hand and $42.5 million in borrowings under the Company’s Senior Secured Credit Facility.

The acquired assets consist of an average net working interest of approximately 3%, in 247 producing wells in the SCOOP and STACK plays of the Anadarko Basin in Oklahoma. The acquisitions also include approximately 3,700 net acres with more than 275 associated potential drilling opportunities.

Chaveroo Oilfield Participation Agreement

On September 12, 2023, the Company entered into a Participation Agreement with PEDEVCO for the joint development of a portion of PEDEVCO’s Permian Basin property in the Chaveroo oilfield, located in Chaves and Roosevelt Counties, New Mexico. The Participation Agreement does not include any of PEDEVCO’s existing vertical or horizontal wells.

Upon signing the Participation Agreement, the Company paid total cash consideration of $0.4 million, which includes less than $0.1 million of capitalized transactions costs, in exchange for a 50% working interest share in the existing leases associated with two initial development blocks. As of March 31, 2024, the Company has participated in the drilling and completion of the first development block, consisting of three gross wells (1.5 net wells). Following the completion of the second development block, the Company will have the right, but not the obligation, to elect to participate and acquire a 50% working interest share in additional development blocks at a fixed price of $450 per net acre for up to a total of approximately 16,000 gross acres.

Note 4. Property and Equipment

Property and equipment as of March 31, 2024 and June 30, 2023 consisted of the following (in thousands):


	March 31, 2024		June 30, 2023
Oil and natural gas properties
Property costs subject to amortization	$	247,106	$	197,049
Less: Accumulated depletion, depreciation, and impairment		(104,949)		(91,268)
Oil and natural gas properties, net	$	142,157	$	105,781

The Company uses the full cost method of accounting for its investments in oil and natural gas properties. All costs of acquisition, exploration, and development of oil and natural gas reserves are capitalized as the cost of oil and natural gas properties when incurred. To the extent capitalized costs of evaluated oil and natural gas properties, net of accumulated

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depletion, exceed the discounted future net revenues of proved oil and natural gas reserves, net of deferred taxes, such excess capitalized costs would be charged to expense as a write-down of oil and natural gas properties.

Additionally, the Company assesses all properties classified as unevaluated property on a quarterly basis for possible impairment. The Company assesses properties on an individual basis or as a group, if properties are individually insignificant. The assessment includes consideration of the following factors, among others: intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to depletion and the full cost ceiling test limitation.

Depletion of oil and natural gas properties was $13.7 million and $9.6 million for the nine months ended March 31, 2024 and 2023, respectively. During the nine months ended March 31, 2024 and 2023, the Company incurred development capital expenditures of $9.4 million and $4.4 million, respectively.

At March 31, 2024, the ceiling test value of the Company’s reserves was calculated based on the first-day-of-the-month average for the 12-months ended March 31, 2024 of the West Texas Intermediate (“WTI”) crude oil spot price of $77.64 per barrel and Henry Hub natural gas spot price of $2.44 per MMBtu, adjusted by market differentials by field. The net price per barrel of NGLs was $29.88, which was based on historical differentials to WTI as NGLs do not have any single comparable reference index price. Using these prices, at March 31, 2024 the cost center ceiling was higher than the capitalized costs of oil and natural gas properties and, as a result, no write-down was applicable.

At March 31, 2023, the ceiling test value of the Company’s reserves was calculated based on the first-day-of the month average for the 12-months ended March 31, 2023 of the WTI crude oil spot price of $91.38 per barrel and Henry Hub natural gas spot price of $5.97 per MMBtu, adjusted by market differentials by field. The net price per barrel of NGLs was $47.07, which was based on historical prices received as NGLs do not have any single comparable reference index price. Using these prices, at March 31, 2023 the cost center ceiling was higher than the capitalized costs of oil and natural gas properties and, as a result, no write-down was applicable.

Note 5. Senior Secured Credit Facility

On April 11, 2016, the Company entered into a three-year, senior secured reserve-based credit facility, as amended, (the “Senior Secured Credit Facility”) with MidFirst Bank in an amount up to $50.0 million with a current borrowing base of $50.0 million. On May 5, 2023, the Company entered into the Tenth Amendment to the Senior Secured Credit Facility extending the maturity to April 9, 2026. The Tenth Amendment also replaced the London Interbank Offered Rate ("LIBOR") with the Secured Overnight Financing Rate (“SOFR”) plus a credit spread adjustment of 0.05% to effectively convert SOFR to a LIBOR equivalent and modifies the Margined Collateral Value, as defined in the Ninth Amendment to the Senior Secured Credit Facility, to $95.0 million. The borrowing base will be redetermined semiannually, with the lenders and the Company each having the right to one interim unscheduled redetermination between any two consecutive semi-annual redeterminations. The borrowing base takes into account the estimated value of the Company’s oil and natural gas properties, proved reserves, total indebtedness, and other relevant factors consistent with customary oil and natural gas lending criteria. The Senior Secured Credit Facility carries a commitment fee of 0.25% per annum on the undrawn portion of the borrowing base. Any borrowings under the Senior Secured Credit Facility will bear interest, at the Company’s option, at either SOFR plus 2.80%, which includes a 0.05% credit spread adjustment from LIBOR, subject to a minimum SOFR of 0.50%, or the Prime Rate, as defined under the Senior Secured Credit Facility, plus 1.00%.

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The Company may elect, at its option, to prepay any borrowings outstanding under the Senior Secured Credit Facility without premium or penalty. Amounts outstanding under the Senior Secured Credit Facility are guaranteed by the Company’s direct and indirect subsidiaries and secured by a security interest in substantially all of the properties of the Company and its subsidiaries. Borrowings under the Senior Secured Credit Facility may be used for the acquisition and development of oil and natural gas properties, investments in cash flow generating properties complimentary to the production of oil and natural gas, and for letters of credit or other general corporate purposes.

The Senior Secured Credit Facility contains certain events of default, including non-payment; breaches or representation and warranties; non-compliance with covenants; cross-defaults to material indebtedness; voluntary or involuntary bankruptcy; judgments and change in control. The Senior Secured Credit Facility also contains financial covenants including a requirement that the Company maintain, as of the last day of each fiscal quarter, (i) a maximum total leverage ratio of not more than 3.00 to 1.00, (ii) a current ratio of not less than 1.00 to 1.00, and (iii) a consolidated tangible net worth of not less than $40.0 million, each as defined in the Senior Secured Credit Facility. As of March 31, 2024, the Company had $42.5 million borrowings outstanding under its Senior Secured Credit Facility, resulting in $7.5 million of available borrowing capacity. For the nine months ended March 31, 2024 and 2023, the weighted average interest on borrowings under the Senior Secured Credit Facility was 8.13% and 5.25%, respectively. As of March 31, 2024, the Company is in compliance with the financial covenants under the Senior Secured Credit Facility.

On February 12, 2024, the Company entered into an amendment to the Senior Secured Credit Facility. This amendment required that the Company enter into hedges for the next 12-month period, and on a rolling 12-month basis thereafter, covering expected crude oil and natural gas production from proved developed reserves, calculated separately, equal to a minimum of 40% of expected crude oil production each month, or 25% of expected crude oil and natural gas production each month over that period. The Company has the option to choose whether to hedge 40% of expected crude oil production or 25% of expected crude oil and natural gas production.

On February 7, 2022, the Company entered into the Ninth Amendment to the Senior Secured Credit Facility. This amendment, among other things, modified the definition of utilization percentage related to the required hedging covenant such that for the purposes of determining the amount of future production to hedge, the utilization of the Senior Secured Credit Facility will be based on the Margined Collateral Value, as defined in the agreement, to the extent it exceeds the borrowing base then in effect. This amendment also required the Company to enter into hedges for the next 12-month period ending February 2023, covering 25% of expected crude oil and natural gas production over that period.

On November 9, 2021, the Company entered into the Eighth Amendment to the Senior Secured Credit Facility. This amendment, among other things, increased the borrowing base to $50.0 million and added a hedging covenant whereby the Company must hedge a minimum of 25% to 75% of future production on a rolling 12-month basis when 25% or more of the borrowing base is utilized. The hedging covenant was amended in the subsequent amendments, as discussed above.

Note 6. Income Taxes

The Company files a consolidated federal income tax return in the United States and various combined and separate filings in several state and local jurisdictions.

There were no unrecognized tax benefits, nor any accrued interest or penalties associated with unrecognized tax benefits during the periods presented in the unaudited condensed consolidated financial statements. The Company believes that it has appropriate support for the income tax positions taken and to be taken on the Company’s tax returns and that the accruals for tax liabilities are adequate for all open years based on its assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter. The Company’s federal and state income tax

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returns are open to audit under the statute of limitations for the fiscal years ended June 30, 2020 through June 30, 2023 for federal tax purposes and for the fiscal years ended June 30, 2019 through June 30, 2023 for state tax purposes. To the extent the Company utilizes net operating losses (“NOLs”) generated in earlier years, such earlier years may also be subject to audit.

For nine months ended March 31, 2024, the Company recognized income tax expense of $1.2 million and had an effective tax rate of 29.2% compared to income tax expense of $9.9 million and an effective tax rate of 22.1% for the nine months ended March 31, 2023.

The Company’s effective tax rate will typically differ from the statutory federal rate as a result of state income taxes, primarily in the states of Louisiana, Oklahoma and North Dakota, percentage depletion in excess of basis, and other permanent differences. For both periods, the respective statutory federal tax rate was 21%.

Deferred income taxes primarily represent the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Note 7. Derivatives

The Company is exposed to certain risks relating to its ongoing business operations, including commodity price risk and interest rate risk. In accordance with the Company’s strategy and the requirements under the Senior Secured Credit Facility (as discussed in Note 5, “Senior Secured Credit Facility”), it may hedge or may be required to hedge a varying portion of anticipated oil and natural gas production for future periods. Derivatives are carried at fair value on the unaudited condensed consolidated balance sheets as assets or liabilities, with the changes in the fair value included in the unaudited condensed consolidated statements of operations for the period in which the change occurs. The Company’s hedge strategies and objectives may change significantly as its operational profile changes or as required under the Senior Secured Credit Facility. The Company does not enter into derivative contracts for speculative trading purposes.

It is the Company’s policy to enter into derivative contracts only with counterparties that are creditworthy financial or commodity hedging institutions deemed by management as competent and competitive market makers. As of March 31, 2024, the Company did not post collateral under any of its derivative contracts during the periods in which contracts were open as they were secured under the Company’s Senior Secured Credit Facility.

When the Company utilizes commodity derivative contracts, it expects to enter into deferred premium puts, costless put/call collars and/or fixed-price swaps to hedge a portion of its anticipated future production. A costless collar consists of a sold call, which establishes a maximum price the Company will receive for the volumes under contract, and a purchased put that establishes a minimum price. Fixed-price swaps are designed so that the Company receives or makes payments based on a differential between fixed and variable prices for the volumes under contract. The Company has elected not to designate its open derivative contracts for hedge accounting. Accordingly, the Company records the net change in the mark-to-market valuation of the derivative contracts and all payments and receipts on settled derivative contracts in “Net gain (loss) on derivative contracts” on the unaudited condensed consolidated statements of operations.

All derivative contracts are recorded at fair market value in accordance with ASC 815, Derivatives and Hedging (“ASC 815”) and ASC 820, Fair Value Measurement (“ASC 820”) and included in the unaudited condensed consolidated balance sheets as assets or liabilities. The “Derivative contract assets” and “Derivative contract liabilities” represent the difference between the market commodity prices and the hedged prices for the remaining volumes of production hedges as of March 31, 2024 (the “mark-to-market valuation”).

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The following table summarizes the location and fair value amounts of all derivative contracts in the unaudited condensed consolidated balance sheets as of March 31, 2024 and June 30, 2023 (in thousands):


Derivatives not designated
as hedging contracts	Balance sheet	Derivative Contract Assets				Balance sheet	Derivative Contract Liabilities
under ASC 815	location	March 31, 2024		June 30, 2023		location	March 31, 2024		June 30, 2023
Commodity contracts	Current assets - derivative contract assets	$	347	$	—	Current liabilities - derivative contract liabilities	$	1,410	$	—
Commodity contracts	Other assets - derivative contract assets		—		—	Long term liabilities - derivative contract liabilities		—		—
Total derivatives not designated as hedging contracts under ASC 815		$	347	$	—		$	1,410	$	—

The following table summarizes the location and amounts of the Company’s realized and unrealized gains and losses on derivative contracts in the Company’s unaudited condensed consolidated statements of operations for the three and nine months ended March 31, 2024 and 2023 (in thousands). “Realized gain (loss) on derivative contracts” represents all receipts (payments) on derivative contracts settled during the period. “Unrealized gain (loss) on derivative contracts” represents the net change in the mark-to-market valuation of the derivative contracts.


Derivatives not designated	Location of gain (loss)	Three Months Ended				Nine Months Ended
as hedging contracts	recognized in income on	March 31,				March 31,
under ASC 815	derivative contracts	2024		2023		2024		2023
Commodity contracts:
Realized gain (loss) on derivative contracts	Other income and expenses - net gain (loss) on derivative contracts	$	(120)	$	465	$	(120)	$	(1,481)
Unrealized gain (loss) on derivative contracts	Other income and expenses - net gain (loss) on derivative contracts		(1,063)		(195)		(1,063)		1,994
Total net gain (loss) on derivative contracts		$	(1,183)	$	270	$	(1,183)	$	513

As of March 31, 2024, the Company had the following open crude oil and natural gas derivative contracts:

Weighted Average

Volumes in

Swap Price per

Floor Price per

Ceiling Price per

Period

Instrument

Commodity

MMBTU/BBL

April 2024 - June 2024

Fixed-Price Swap

Crude Oil

24,250

73.41

April 2024 - June 2024

Fixed-Price Swap

Crude Oil

14,467

73.30

April 2024 - June 2024

Put

Crude Oil

38,717

75.00

July 2024 - December 2024

Fixed-Price Swap

Crude Oil

73,558

74.20

July 2024 - December 2024

Collar

Crude Oil

73,558

70.00

77.40

January 2025 - March 2025

Collar

Crude Oil

42,566

68.00

73.77

January 2025 - February 2025

Fixed-Price Swap

Natural Gas

312,286

3.56

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Subsequent to March 31, 2024, the Company entered into the following open crude oil and natural gas derivative contracts:

Weighted Average

Volumes in

Swap Price per

Floor Price per

Ceiling Price per

Period

Instrument

Commodity

MMBTU/BBL

April 2025 - June 2025

Collar

Crude Oil

41,601

65.00

84.00

March 2025 - December 2026

Fixed-Price Swap

Natural Gas

3,170,705

3.60

The Company presents the fair value of its derivative contracts at the gross amounts in the unaudited condensed consolidated balance sheets. The following table shows the potential effects of master netting arrangements on the fair value of the Company’s derivative contracts as of March 31, 2024 and June 30, 2023 (in thousands):


	Derivative Contracts Assets				Derivative Contracts Liabilities
Offsetting of Derivative Assets and Liabilities	March 31, 2024		June 30, 2023		March 31, 2024		June 30, 2023
Gross amounts presented in the Consolidated Balance Sheet	$	347	$	—	$	1,410	$	—
Amounts not offset in the Consolidated Balance Sheet		(347)		—		(347)		—
Net amount	$	—	$	—	$	1,063	$	—

The Company enters into an International Swap Dealers Association Master Agreements (“ISDA”) with each counterparty prior to a derivative contract with such counterparty. The ISDA is a standard contract that governs all derivative contracts entered into between the Company and the respective counterparty. The ISDA allows for offsetting of amounts payable or receivable between the Company and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency.

Note 8. Fair Value Measurement

Accounting guidelines for measuring fair value establish a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement.

The three levels are defined as follows:

Level 1—Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.

Level 2—Other inputs that are observable directly or indirectly, such as quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3—Unobservable inputs for which there are little or no market data and which the Company makes its own assumptions about how market participants would price the assets and liabilities.

Fair Value of Derivative Instruments. The Company’s determination of fair value incorporates not only the credit standing of the counterparties involved in transactions with the Company resulting in receivables on the Company’s unaudited condensed consolidated balance sheets, but also the impact of the Company’s nonperformance risk on its own liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable (Level 1) market

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corroborated (Level 2), or generally unobservable (Level 3). The Company classifies fair value balances based on observability of those inputs.