10-Q 1 epm-20231231x10q.htm 10-Q
0001006655--06-302024Q23324752333506794600000P1MP1MP4YP3YP4YP4Y2024-02-012024-06-30false0001006655us-gaap:TreasuryStockCommonMember2023-10-012023-12-310001006655us-gaap:TreasuryStockCommonMember2023-07-012023-12-310001006655us-gaap:TreasuryStockCommonMember2022-10-012022-12-310001006655us-gaap:TreasuryStockCommonMember2022-07-012022-12-310001006655epm:ShareRepurchaseProgram2023Member2023-11-012023-12-310001006655epm:ShareRepurchaseProgram2022Member2022-09-082022-09-080001006655epm:ShareRepurchaseProgram2023Member2023-12-310001006655epm:ShareRepurchaseProgram2022Member2022-09-080001006655us-gaap:CommonStockMember2023-10-012023-12-310001006655us-gaap:CommonStockMember2023-07-012023-12-310001006655us-gaap:CommonStockMember2022-10-012022-12-310001006655us-gaap:CommonStockMember2022-07-012022-12-310001006655us-gaap:RetainedEarningsMember2023-12-310001006655us-gaap:AdditionalPaidInCapitalMember2023-12-310001006655us-gaap:RetainedEarningsMember2023-09-300001006655us-gaap:AdditionalPaidInCapitalMember2023-09-3000010066552023-09-300001006655us-gaap:RetainedEarningsMember2023-06-300001006655us-gaap:AdditionalPaidInCapitalMember2023-06-300001006655us-gaap:RetainedEarningsMember2022-12-310001006655us-gaap:AdditionalPaidInCapitalMember2022-12-310001006655us-gaap:RetainedEarningsMember2022-09-300001006655us-gaap:AdditionalPaidInCapitalMember2022-09-3000010066552022-09-300001006655us-gaap:RetainedEarningsMember2022-06-300001006655us-gaap:AdditionalPaidInCapitalMember2022-06-300001006655us-gaap:CommonStockMember2023-12-310001006655us-gaap:CommonStockMember2023-09-300001006655us-gaap:CommonStockMember2023-06-300001006655us-gaap:CommonStockMember2022-12-310001006655us-gaap:CommonStockMember2022-09-300001006655us-gaap:CommonStockMember2022-06-300001006655epm:A2016EquityIncentivePlanMember2023-06-300001006655epm:A2016EquityIncentivePlanMember2023-12-310001006655srt:MinimumMember2022-07-012022-12-310001006655srt:MaximumMember2022-07-012022-12-310001006655srt:MaximumMemberepm:RestrictedStockPerformanceBasedMember2023-07-012023-12-310001006655epm:RestrictedstocktimevestedMember2023-12-310001006655epm:RestrictedStockPerformanceBasedMember2023-12-310001006655epm:RestrictedstocktimevestedMemberus-gaap:ShareBasedPaymentArrangementEmployeeMember2023-07-012023-12-310001006655epm:RestrictedStockPerformanceBasedMemberus-gaap:ShareBasedPaymentArrangementEmployeeMember2023-07-012023-12-310001006655epm:RestrictedstocktimevestedMember2023-07-012023-12-310001006655epm:RestrictedStockPerformanceBasedMember2023-07-012023-12-310001006655epm:RestrictedStockAndContingentRestrictedStockMember2023-07-012023-12-310001006655epm:RestrictedstocktimevestedMember2022-07-012022-12-310001006655epm:RestrictedStockPerformanceBasedMember2022-07-012022-12-310001006655epm:RestrictedStockAndContingentRestrictedStockMember2022-07-012022-12-310001006655srt:MinimumMemberepm:RestrictedstocktimevestedMember2023-07-012023-12-310001006655srt:MaximumMemberepm:RestrictedstocktimevestedMember2023-07-012023-12-310001006655srt:DirectorMember2023-07-012023-12-310001006655epm:RestrictedStockMarketBasedMember2023-07-012023-12-310001006655srt:NaturalGasReservesMember2023-10-012023-12-310001006655srt:NaturalGasLiquidsReservesMember2023-10-012023-12-310001006655srt:CrudeOilMember2023-10-012023-12-310001006655srt:NaturalGasReservesMember2023-07-012023-12-310001006655srt:NaturalGasLiquidsReservesMember2023-07-012023-12-310001006655srt:CrudeOilMember2023-07-012023-12-310001006655srt:NaturalGasReservesMember2022-10-012022-12-310001006655srt:NaturalGasLiquidsReservesMember2022-10-012022-12-310001006655srt:CrudeOilMember2022-10-012022-12-310001006655srt:NaturalGasReservesMember2022-07-012022-12-310001006655srt:NaturalGasLiquidsReservesMember2022-07-012022-12-310001006655srt:CrudeOilMember2022-07-012022-12-3100010066552013-12-012023-12-310001006655us-gaap:RevolvingCreditFacilityMemberepm:SeniorSecuredReserveBasedCreditFacilityMemberus-gaap:LineOfCreditMember2023-05-052023-05-050001006655us-gaap:RevolvingCreditFacilityMemberepm:SeniorSecuredReserveBasedCreditFacilityMemberus-gaap:LineOfCreditMember2023-12-310001006655us-gaap:RevolvingCreditFacilityMemberepm:SeniorSecuredReserveBasedCreditFacilityMemberus-gaap:LineOfCreditMember2023-07-012023-12-3100010066552023-09-122023-09-120001006655us-gaap:RestrictedStockMember2023-12-310001006655epm:ContingentRestrictedStockGrantsMember2023-12-310001006655us-gaap:RestrictedStockMember2023-06-300001006655epm:ContingentRestrictedStockGrantsMember2023-06-300001006655us-gaap:RestrictedStockMember2023-07-012023-12-310001006655epm:ContingentRestrictedStockGrantsMember2023-07-012023-12-310001006655us-gaap:RestrictedStockMember2022-07-012023-06-300001006655epm:ContingentRestrictedStockGrantsMember2022-07-012023-06-300001006655us-gaap:RetainedEarningsMember2023-10-012023-12-310001006655us-gaap:RetainedEarningsMember2023-07-012023-12-310001006655us-gaap:RetainedEarningsMember2022-10-012022-12-310001006655us-gaap:RetainedEarningsMember2022-07-012022-12-310001006655srt:CrudeOilMemberepm:CrudeOilFixedPriceSwapPositionsMemberus-gaap:SubsequentEventMember2024-01-300001006655srt:CrudeOilMemberepm:CrudeOilPutPositionsMemberus-gaap:SubsequentEventMember2024-01-300001006655srt:CrudeOilMemberus-gaap:EnergyRelatedDerivativeMemberus-gaap:SubsequentEventMember2024-01-302024-01-300001006655us-gaap:RevolvingCreditFacilityMemberepm:SeniorSecuredReserveBasedCreditFacilityMemberus-gaap:LineOfCreditMember2016-04-112016-04-110001006655us-gaap:RevolvingCreditFacilityMemberepm:SeniorSecuredReserveBasedCreditFacilityMemberus-gaap:LineOfCreditMemberus-gaap:PrimeRateMember2016-04-112016-04-110001006655us-gaap:SubsequentEventMember2024-02-052024-02-0500010066552023-07-012023-09-3000010066552022-07-012022-09-3000010066552022-12-3100010066552022-06-300001006655us-gaap:RestrictedStockUnitsRSUMember2023-10-012023-12-310001006655us-gaap:RestrictedStockUnitsRSUMember2023-07-012023-12-310001006655us-gaap:RestrictedStockUnitsRSUMember2022-10-012022-12-310001006655us-gaap:RestrictedStockUnitsRSUMember2022-07-012022-12-310001006655us-gaap:AdditionalPaidInCapitalMember2023-10-012023-12-310001006655us-gaap:AdditionalPaidInCapitalMember2023-07-012023-12-310001006655us-gaap:AdditionalPaidInCapitalMember2022-10-012022-12-310001006655us-gaap:AdditionalPaidInCapitalMember2022-07-012022-12-310001006655epm:OilAndNaturalGasAssetsInScoopAndStackPlaysMemberus-gaap:SubsequentEventMember2024-01-050001006655srt:MaximumMember2023-09-120001006655epm:BarnettShaleMember2022-07-012022-12-310001006655srt:NaturalGasPerThousandCubicFeetMember2023-07-012023-12-310001006655srt:NaturalGasPerThousandCubicFeetMember2022-07-012022-12-310001006655srt:MinimumMember2023-07-012023-12-310001006655srt:MaximumMember2023-07-012023-12-310001006655srt:CrudeOilMember2023-12-310001006655srt:CrudeOilMember2022-12-310001006655srt:NaturalGasPerThousandCubicFeetMember2023-12-310001006655srt:NaturalGasPerThousandCubicFeetMember2022-12-3100010066552023-10-012023-12-3100010066552022-10-012022-12-310001006655srt:MinimumMemberus-gaap:SecuredOvernightFinancingRateSofrOvernightIndexSwapRateMember2016-04-1100010066552016-04-110001006655us-gaap:RevolvingCreditFacilityMemberepm:SeniorSecuredReserveBasedCreditFacilityMemberus-gaap:LineOfCreditMember2016-04-110001006655us-gaap:RevolvingCreditFacilityMemberepm:SeniorSecuredReserveBasedCreditFacilityMemberus-gaap:LineOfCreditMemberus-gaap:SecuredOvernightFinancingRateSofrOvernightIndexSwapRateMember2023-05-052023-05-050001006655us-gaap:RevolvingCreditFacilityMemberepm:SeniorSecuredReserveBasedCreditFacilityMemberus-gaap:LineOfCreditMember2023-05-0500010066552023-09-120001006655epm:OilAndNaturalGasAssetsInScoopAndStackPlaysMemberus-gaap:SubsequentEventMember2024-01-052024-01-0500010066552022-07-012022-12-310001006655srt:RevisionOfPriorPeriodReclassificationAdjustmentMember2023-06-3000010066552023-12-3100010066552023-06-3000010066552024-02-0200010066552023-07-012023-12-31utr:acreiso4217:USDxbrli:sharesutr:bblxbrli:sharesiso4217:USDxbrli:pureiso4217:USDutr:acreepm:agreementepm:locationepm:itemiso4217:USDutr:MMBTUiso4217:USDutr:bbl

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 December 31, 2023

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)

Graphic

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)

(713935-0122

(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 February 2, 2024, 33,456,330 shares of the Registrant’s Common Stock, $0.001 par value per share, were outstanding.

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 December 31, 2023 and June 30, 2023

4

Condensed Consolidated Statements of Operations (Unaudited) for the three and six months ended December 31, 2023 and 2022

5

Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended December 31, 2023 and 2022

6

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the three and six months ended December 31, 2023 and 2022

7

Notes to Unaudited Condensed Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures about Market Risks

37

Item 4.

Controls and Procedures

37

PART II. OTHER INFORMATION

38

Item 1.

Legal Proceedings

38

Item 1A.

Risk Factors

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

Item 3.

Defaults Upon Senior Securities

39

Item 4.

Mine Safety Disclosures

39

Item 5.

Other Information

39

Item 6.

Exhibits

40

Signatures

41

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.

1

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 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.

2

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.

3

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)

    

December 31, 2023

    

June 30, 2023

Assets

 

 

Current assets

 

 

Cash and cash equivalents

$

8,460

$

11,034

Receivables from crude oil, natural gas, and natural gas liquids revenues

10,119

7,884

Prepaid expenses and other current assets

2,569

2,277

Total current assets

21,148

21,195

Property and equipment, net of depletion, depreciation, and impairment

 

Oil and natural gas properties—full-cost method of accounting:

Oil and natural gas properties, subject to amortization, net

100,111

105,781

Oil and natural gas properties, not subject to amortization

3,370

Total property and equipment, net

103,481

105,781

Other assets

1,337

1,341

Total assets

$

125,966

$

128,317

Liabilities and Stockholders' Equity

 

Current liabilities

 

Accounts payable

$

8,233

$

5,891

Accrued liabilities and other

6,294

6,027

State and federal taxes payable

365

Total current liabilities

14,527

12,283

Long term liabilities

 

Deferred income taxes

6,161

6,803

Asset retirement obligations

17,738

17,012

Operating lease liability

101

125

Total liabilities

38,527

36,223

Commitments and contingencies (Note 9)

Stockholders' equity

 

Common stock; par value $0.001; 100,000,000 shares authorized: issued and

outstanding 33,506,794 and 33,247,523 shares as of December 31, 2023

and June 30, 2023, respectively

34

33

Additional paid-in capital

40,920

40,098

Retained earnings

46,485

51,963

Total stockholders' equity

87,439

92,094

Total liabilities and stockholders' equity

$

125,966

$

128,317

See accompanying notes to unaudited condensed consolidated financial statements.

4

EVOLUTION PETROLEUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(In thousands, except per share amounts)

 

Three Months Ended

Six Months Ended

December 31, 

December 31, 

 

2023

2022

2023

    

2022

Revenues

Crude oil

$

11,759

$

13,100

$

24,375

$

28,263

Natural gas

6,531

17,370

12,083

37,218

Natural gas liquids

2,734

3,206

5,167

7,992

Total revenues

21,024

33,676

41,625

73,473

Operating costs

 

 

 

Lease operating costs

12,358

15,041

24,241

34,157

Depletion, depreciation, and accretion

4,598

3,458

8,860

7,056

General and administrative expenses

2,502

2,581

5,105

5,053

Total operating costs

19,458

21,080

38,206

46,266

Income (loss) from operations

1,566

12,596

3,419

27,207

Other income (expense)

 

 

 

Net gain (loss) on derivative contracts

846

243

Interest and other income

104

7

220

13

Interest expense

(34)

(129)

(66)

(372)

Income (loss) before income taxes

1,636

13,320

3,573

27,091

Income tax (expense) benefit

(554)

(2,933)

(1,017)

(5,997)

Net income (loss)

$

1,082

$

10,387

$

2,556

$

21,094

Net income (loss) per common share:

 

 

 

 

Basic

$

0.03

$

0.31

$

0.08

$

0.63

Diluted

$

0.03

$

0.31

$

0.08

$

0.62

Weighted average number of common shares outstanding:

 

 

 

 

Basic

32,693

33,174

32,676

33,154

Diluted

32,900

33,394

32,940

33,356

See accompanying notes to unaudited condensed consolidated financial statements.

5

EVOLUTION PETROLEUM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

Six Months Ended December 31, 

 

    

2023

    

2022

Cash flows from operating activities:

 

 

Net income (loss)

$

2,556

$

21,094

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

Depletion, depreciation, and accretion

8,860

7,056

Stock-based compensation

1,036

702

Settlement of asset retirement obligations

(71)

Deferred income taxes

(642)

(355)

Unrealized (gain) loss on derivative contracts

(2,189)

Accrued settlements on derivative contracts

(919)

Other

3

(4)

Changes in operating assets and liabilities:

 

Receivables from crude oil, natural gas, and natural gas liquids revenues

(2,239)

8,113

Prepaid expenses and other current assets

(274)

(316)

Accounts payable and accrued liabilities

2,443

(5,398)

State and federal income taxes payable

(365)

56

Net cash provided by operating activities

11,378

27,769

Cash flows from investing activities:

Acquisition of oil and natural gas properties

(31)

Capital expenditures for oil and natural gas properties

(5,705)

(2,886)

Net cash used in investing activities

(5,705)

(2,917)

Cash flows from financing activities:

 

 

Common stock dividends paid

(8,034)

(8,085)

Common stock repurchases, including stock surrendered for tax withholding

(213)

(87)

Repayments of senior secured credit facility

(21,250)

Net cash (used in) provided by financing activities

(8,247)

(29,422)

Net increase (decrease) in cash and cash equivalents

(2,574)

(4,570)

Cash and cash equivalents, beginning of period

11,034

8,280

Cash and cash equivalents, end of period

$

8,460

$

3,710

Supplemental disclosures of cash flow information:

Non-cash investing and financing transactions:

Increase (decrease) in accrued capital expenditures for oil and natural gas properties

$

(142)

$

(768)

See accompanying notes to unaudited condensed consolidated financial statements.

6

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 December 31, 2023

Balances at September 30, 2023

33,440

$

33

$

40,465

$

49,424

$

$

89,922

Issuance of restricted common stock

84

1

(1)

Common stock repurchases, including stock surrendered for tax withholding

(108)

(108)

Retirements of treasury stock

(17)

(108)

108

Stock-based compensation

564

564

Net income (loss)

1,082

1,082

Common stock dividends paid

(4,021)

(4,021)

Balances at December 31, 2023

33,507

$

34

$

40,920

$

46,485

$

$

87,439

For the Six Months Ended December 31, 2023

Balances at June 30, 2023

33,248

$

33

$

40,098

$

51,963

$

$

92,094

Issuance of restricted common stock

288

1

(1)

Common stock repurchases, including stock surrendered for tax withholding

(213)

(213)

Retirements of treasury stock

(29)

(213)

213

Stock-based compensation

1,036

1,036

Net income (loss)

2,556

2,556

Common stock dividends paid

(8,034)

(8,034)

Balances at December 31, 2023

33,507

$

34

$

40,920

$

46,485

$

$

87,439

For the Three Months Ended December 31, 2022

Balances at September 30, 2022

33,546

$

33

$

42,811

$

39,533

$

$

82,377

Issuance of restricted common stock

296

1

(1)

Forfeitures of restricted stock

(26)

Common stock repurchases, including stock surrendered for tax withholding

(61)

(61)

Retirements of treasury stock

(8)

(61)

61

Stock-based compensation

494

494

Net income (loss)

10,387

10,387

Common stock dividends paid

(4,059)

(4,059)

Balances at December 31, 2022

33,808

$

34

$

43,243

$

45,861

$

$

89,138

For the Six Months Ended December 31, 2022

Balances at June 30, 2022

33,471

$

33

$

42,629

$

32,852

$

$

75,514

Issuance of restricted common stock

375

1

(1)

Forfeitures of restricted stock

(26)

Common stock repurchases, including stock surrendered for tax withholding

(87)

(87)

Retirements of treasury stock

(12)

(87)

87

Stock-based compensation

702

702

Net income (loss)

21,094

21,094

Common stock dividends paid

(8,085)

(8,085)

Balances at December 31, 2022

33,808

$

34

$

43,243

$

45,861

$

$

89,138

See accompanying notes to unaudited condensed consolidated financial statements.

7

Table of Contents

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 Jonah Field in Sublette County, Wyoming, a natural gas and natural gas liquids producing field; the Williston Basin in North Dakota, producing oil and natural gas properties; the Barnett Shale located in North Texas, natural gas and natural gas liquids producing properties; 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; the Chaveroo oilfield in Chaves and Roosevelt Counties of New Mexico; 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 12, “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-

8

Table of Contents

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.  The Company entered into a strategic partnership with PEDEVCO Corp. (“PEDEVCO”) on September 12, 2023, to jointly develop the Chaveroo oilfield in the Permian Basin in New Mexico (the “Chaveroo Field”). Per the terms of the participation agreement (the “Participation Agreement”) with PEDEVCO, Evolution paid for acreage associated with nine initial drilling locations totaling approximately $0.4 million. As of December 31, 2023, the Company recorded the payment for the initial acreage as unevaluated costs, excluded from the full cost pool. Refer to Note 3, “Property and Equipment,” for further details.

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.

9

Table of Contents

EVOLUTION PETROLEUM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 2. Revenue Recognition

The Company’s revenues are primarily generated from its crude oil, natural gas and NGL production from 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 disaggregates the Company’s revenues by major product for the three and six months ended December 31, 2023 and 2022 (in thousands):

 

Three Months Ended

Six Months Ended

December 31, 

December 31, 

 

    

2023

2022

2023

    

2022

Revenues

Crude oil

$

11,759

$

13,100

$

24,375

$

28,263

Natural gas

6,531

17,370

12,083

37,218

Natural gas liquids

2,734

3,206

5,167

7,992

Total revenues

$

21,024

$

33,676

$

41,625

$

73,473

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 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.

10

Table of Contents

EVOLUTION PETROLEUM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

Note 3. Property and Equipment

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

    

December 31, 2023

    

June 30, 2023

Oil and natural gas properties

 

 

Property costs subject to amortization

$

199,526

$

197,049

Property costs not subject to amortization

3,370

Less: Accumulated depletion, depreciation, and impairment

(99,415)

(91,268)

Oil and natural gas properties, net

$

103,481

$

105,781

As of December 31, 2023, $3.4 million of oil and natural gas property costs were not subject to amortization. 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 Field, 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, or nine drilling locations. Following completion of the initial nine development wells, the Company will have the right, but not the obligation, to elect to participate and acquire a 50% working interest share in the next development block, for up to a total of approximately 16,000 gross acres for the payment of $450 per acre. The Company allocated all of the acreage costs associated with the initial acreage purchase to unevaluated oil and natural gas properties. As of December 31, 2023, the Company has incurred approximately $3.0 million in capital expenditures related to the drilling and completion of an initial three wells. These capital expenditures are recorded as unevaluated property costs.

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 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 $8.1 million and $6.5 million for the six months ended December 31, 2023 and 2022, respectively. During the six months ended December 31, 2023 and 2022, the Company incurred development capital expenditures of $2.4 million and $2.1 million, respectively.

At December 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 December 31, 2023 of the West Texas Intermediate (“WTI”) crude oil spot price

11

Table of Contents

EVOLUTION PETROLEUM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

of $78.21 per barrel and Henry Hub natural gas spot price of $2.63 per MMBtu, adjusted by market differentials by field. The net price per barrel of NGLs was $31.57, which was based on historical differentials to WTI as NGLs do not have any single comparable reference index price. Using these prices, at December 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 necessary.

At December 31, 2022, 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 December 31, 2022 of the WTI crude oil spot price of $94.14 per barrel and Henry Hub natural gas spot price of $6.40 per MMBtu, adjusted by market differentials by field. The net price per barrel of NGLs was $48.50, which was based on historical prices received as NGLs do not have any single comparable reference index price. Using these prices, at December 31, 2022 the cost center ceiling was higher than the capitalized costs of oil and natural gas properties, and as a result, no write-down was necessary.

Note 4. 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%.

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 December 31, 2023, the Company did not have any borrowings outstanding under its Senior Secured Credit Facility, resulting in $50.0 million of available borrowing capacity. As of December 31, 2023, the Company is in compliance with the financial covenants under the Senior Secured Credit Facility.

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

12

Table of Contents

EVOLUTION PETROLEUM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

Note 5. 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 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 six months ended December 31, 2023, the Company recognized income tax expense of $1.0 million and had an effective tax rate of 28.5% compared to income tax expense of $6.0 million and an effective tax rate of 22.1% for the six months ended December 31, 2022.

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, North Dakota, and Texas, 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 6. 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 4, “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 June 30, 2023, all of the Company’s derivative contracts had expired. The Company has no open derivative contracts as of December 31, 2023 or June 30, 2023, and 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.

The Company has in the past, and may utilize in the future, commodity derivative contracts such as costless put/call collars and fixed-price swaps to hedge a portion of its anticipated future production. A costless collar consists of a sold

13

Table of Contents

EVOLUTION PETROLEUM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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”). 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 six months ended December 31, 2023 and 2022 (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

Six Months Ended

as hedging contracts

recognized in income on

December 31, 

December 31, 

under ASC 815

    

derivative contracts

    

2023

2022

2023

    

2022

Commodity contracts:

Realized gain (loss) on derivative contracts

Other income and expenses - net gain (loss) on derivative contracts

$

$

(224)

$

$

(1,946)

Unrealized gain (loss) on derivative contracts

Other income and expenses - net gain (loss) on derivative contracts

1,070

2,189

Total net gain (loss) on derivative contracts

$

$

846

$

$

243

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 7. 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.

14

Table of Contents

EVOLUTION PETROLEUM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

As required by ASC 820, a financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgement, and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels. There were no transfers between fair value hierarchy levels for any period presented in this report. The Company did not have any open positions at December 31, 2023 or June 30, 2023.

Other Fair Value Measurements. The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of ASC 825, Financial Instruments. The estimated fair value amounts have been determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair value of cash and cash equivalents, accounts receivable, and accounts payable approximates their carrying value due to their short-term nature. The estimated fair value of the Company’s Senior Secured Credit Facility approximates carrying value because the interest rates approximate current market rates.

The Company follows the provisions of ASC 820, for nonfinancial assets and liabilities measured at fair value on a non-recurring basis. These provisions apply to the Company’s initial measurement and any subsequent revision of asset retirement obligations (“ARO”) for which fair value is calculated using discounted future cash flows derived from historical costs and management’s expectations of future cost environments. Significant Level 3 inputs used in the calculation of ARO include the costs of plugging and abandoning wells, surface restoration, and reserve lives. Subsequent to initial recognition, revisions to estimated asset retirement obligations are made when changes occur for input values. See Note 8, “Asset Retirement Obligations, for a reconciliation of the beginning and ending balances of the liability for the Company’s ARO.

Note 8. Asset Retirement Obligations

The Company’s ARO represents the estimated present value of the amount expected to be incurred to plug, abandon, and remediate its oil and natural gas properties at the end of their productive lives in accordance with applicable laws and regulations. The Company records the ARO liability on the unaudited condensed consolidated balance sheets and capitalizes the cost in “Oil and natural gas properties, subject to amortization, net” during the period in which the obligation is incurred. The Company records the accretion of its ARO liabilities in “Depletion, depreciation and accretion” expense in the unaudited condensed consolidated statements of operations.

15

Table of Contents

EVOLUTION PETROLEUM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following is a reconciliation of the activity related to the Company’s ARO liability (inclusive of the current portion) for the period ended December 31, 2023 (in thousands):

 

    

December 31, 2023

Asset retirement obligations — beginning of period

$

17,067

Accretion of discount

712

Asset retirement obligations — end of period

17,779

Less: current asset retirement obligations

(41)

Long-term portion of asset retirement obligations

$

17,738

Note 9. Commitments and Contingencies

The Company is subject to various claims and contingencies in the normal course of business. In addition, from time to time, the Company receives communications from government or regulatory agencies concerning investigations or allegations of noncompliance with laws or regulations in jurisdictions in which the Company operates. The Company discloses such matters if it believes there is a reasonable possibility that a future event or events will confirm a material loss through impairment of an asset or the incurrence of a material liability. The Company accrues a material loss if it believes it probable that a future event or events will confirm a loss and the loss is reasonably subject to estimation. Furthermore, the Company will disclose any matter that is unasserted if it considers it probable that a claim will be asserted and there is a reasonable possibility that the outcome will be unfavorable and material in amount. The Company expenses legal defense costs as they are incurred.

Note 10. Stockholders’ Equity

Common Stock

As of December 31, 2023, the Company had 33,506,794 shares of common stock outstanding.

The Company began paying quarterly cash dividends on common stock in December 2013. As of December 31, 2023, the Company has cumulatively paid over $110.4 million in cash dividends. The Company paid dividends of $8.0 million and $8.1 million to its common stockholders during the six months ended December 31, 2023 and 2022, respectively. The following table reflects the dividends paid per share within the respective three-month periods:

Fiscal Year

    

2024

    

2023

Second quarter ended December 31,

$

0.120

$

0.120

First quarter ended September 30,

0.120

0.120

On September 8, 2022, the Board of Directors approved a share repurchase program, under which the Company is authorized to repurchase up to $25.0 million of its common stock in the open market through December 31, 2024. The Company intends to fund repurchases from working capital and cash provided by operating activities. The Board of Directors along with the management team believe that a share repurchase program is complimentary to the existing dividend policy and is a tax efficient means to further improve shareholder return. The shares may be repurchased from time to time in open market transactions, through privately negotiated transactions or by other means in accordance with federal securities laws. The timing, as well as the number and value of shares repurchased under the program, will depend on a variety of factors, including management’s assessment of the intrinsic value of the Company’s shares, the market price of the Company’s common stock, the Company’s capital needs and resources, general market and economic conditions, and applicable legal requirements. The value of shares authorized for repurchase by the Company’s Board of Directors does not require the Company to repurchase such shares or guarantee that such shares will be repurchased, and the program may be suspended, modified, or discontinued at any time without prior notice.

16

Table of Contents

EVOLUTION PETROLEUM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In November 2023, the Company entered into a Rule 10b5-1 plan that authorizes a broker to repurchase shares in the open market subject to pre-defined limitations on trading volume and price. The plan is effective until June 30, 2024, unless extended, renewed or terminated by the Company, and has a maximum authorized amount of $0.8 million over that period. The Company may alter the terms of the plan from time to time to the extent it determines changes are necessary to achieve the intended objectives of the repurchase program. No shares were purchased under this plan during the period ended December 31, 2023.

During the six months ended December 31, 2023 and 2022, the Company acquired treasury stock upon the ordinary course of scheduled vestings of employee stock-based awards to fund payroll tax withholding obligations. These treasury shares were subsequently cancelled. Such shares were valued at fair market value on the date of vesting.

The following table summarizes all treasury stock purchases during the six months ended December 31, 2023 and 2022:

Six Months Ended

December 31, 

    

2023

2022

Number of treasury shares acquired

29,236

12,049

Average cost per share

$

7.29

$

7.19

Total cost of treasury shares acquired

$

213,015

$

86,690

Expected Tax Treatment of Dividends

For the fiscal year ended June 30, 2023, all common stock dividends for that fiscal year were treated for tax purposes as qualified dividend income to the recipients. Based on its current projections for the fiscal year ended June 30, 2024, the Company expects all common stock dividends for such period to be treated as qualified dividend income to the recipients. Such projections are based on the Company’s reasonable expectations as of December 31, 2023 and are subject to change based on the Company’s final tax calculations at the end of the fiscal year.

Stock-Based Incentive Plan

The Evolution Petroleum Corporation 2016 Equity Incentive Plan (as amended, the “2016 Plan”) authorizes the issuance of 3.6 million shares of common stock prior to its expiration on December 8, 2026. Incentives under the 2016 Plan may be granted to employees, directors, and consultants of the Company in any one or a combination of the following forms: incentive stock options and non-statutory stock options, stock appreciation rights, restricted stock awards and restricted stock unit awards, performance share awards, performance cash awards, and other forms of incentives valued in whole or in part by reference to, or otherwise based on, the Company’s common stock, including its appreciation in value. As of December 31, 2023 and June 30, 2023, approximately 0.9 million shares and 1.3 million shares, respectively, remained available for grant under the 2016 Plan.

The Company estimates the fair value of stock-based compensation awards on the grant date to provide the basis for future compensation expense. During the three and six months ended December 31, 2023, the Company recognized $0.6 million and $1.0 million, respectively, related to stock-based compensation. During the three and six months ended December 31, 2022, the Company recognized $0.5 million and $0.7 million, respectively, related to stock-based compensation expense. Stock-based compensation expense is recorded as a component of “General and administrative expenses” on the unaudited condensed consolidated statements of operations.

Time-Vested Restricted Stock Awards

Time-vested restricted stock awards contain service-based vesting conditions and expire after a maximum of four years from the date of grant if unvested. The common shares underlying these awards are issued on the date of grant and participate in dividends paid by the Company. These service-based awards vest with continuous employment by the Company, generally in annual installments over terms of three to four years. Awards to the Company’s directors

17

Table of Contents

EVOLUTION PETROLEUM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

generally have one-year cliff vesting. For such awards, grant date fair value is based on market value of the Company’s common stock at the time of grant. This value is then amortized ratably over the service period. Previously recognized amortization expense subsequent to the last vesting date of an award is reversed in the event that the holder has no longer rendered service to the Company resulting in forfeiture of the award.

Performance-Based Restricted Stock Awards and Performance-Based Contingent Stock Units

Performance-based restricted stock awards and performance-based contingent stock units contain market-based vesting conditions based on the price of the Company’s common stock, the intrinsic value indexed solely to its common stock or the intrinsic value indexed to its common stock compared to the performance of the common stock of its peers. The common shares underlying the Company’s performance-based restricted stock awards are issued on the date of grant and participate in dividends paid by the Company and expire after a maximum of four years from the date of grant if unvested. Performance-based contingent share units do not participate in dividends and shares are only issued in part or in full upon the attainment of vesting conditions, generally have a lower probability of achievement and expire after a maximum of four years from the date of grant if unvested. Shares underlying performance-based contingent share units are reserved from the 2016 Plan. Performance-based restricted stock awards and contingent restricted stock units are valued using a Monte Carlo simulation and geometric Brownian motion techniques applied to the historical volatility of the Company’s total stock return compared to the historical volatilities of other companies or indices to which the Company compares its performance and/or the Company’s absolute total stock return. For certain awards, this Monte Carlo simulation also provides an expected vesting term. Stock-based compensation is recognized ratably over the expected vesting period, so long as the award holder remains an employee of the Company. Previously recognized compensation expense is only reversed for the awards with market-based vesting conditions if the requisite service period is not rendered by the holder resulting in forfeiture of the award or as a result of regulatory required clawback.

Vesting of grants with performance-based vesting conditions is dependent on the future price of the Company’s common stock. Such awards vest in part or in full if the trailing total returns on the Company’s common stock for a specified three-year period exceed the corresponding total returns of various quartiles of indices consisting of peer companies or, in some cases, vest when the average of the Company’s closing common stock price over a defined measurement period meets or exceeds a required common stock price.

During the six months ended December 31, 2023, the Company granted a total of 0.4 million equity awards that included 0.2 million time-vested restricted stock awards, 0.1 million performance-based restricted stock awards, and 0.1 million performance-based contingent stock units.

During the six months ended December 31, 2022, the Company granted a total of 0.4 million equity awards that included 0.3 million time-vested restricted stock awards, 0.1 million performance-based restricted stock awards, and less than 0.05 million of performance-based contingent stock units.

For performance-based awards granted during the six months ended December 31, 2023 and 2022, the assumptions used in the Monte Carlo simulation valuations were as follows:

Six Months Ended

December 31, 

    

2023

    

2022

Weighted average fair value of performance-based awards granted

$

3.58

$

6.69

Risk-free interest rate

4.87%

3.91% to 4.44%

Expected term in years

2.77

2.66 to 2.78

Expected volatility

55.0%

69.6% to 70.9%

Dividend yield

7.4%

6.1%

18

Table of Contents

EVOLUTION PETROLEUM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unvested restricted stock awards as of December 31, 2023 consisted of the following:

Weighted

Number of

Average

Restricted

Grant-Date

Award Type

    

Shares

    

Fair Value

Time-vested awards

439,603

$

6.61

Performance-based awards

278,688

5.46

Unvested at December 31, 2023

718,291

$

6.16

The following table sets forth the restricted stock award transactions for the six months ended December 31, 2023:

Weighted

Weighted

Unamortized

Average

Number of

Average

Compensation

Remaining

Restricted

Grant-Date

Expense

Amortization

    

Shares

    

Fair Value

    

(In thousands)

    

Period (Years)

Unvested at June 30, 2023

595,414

6.48

$

2,827

2.4

Time-vested shares granted

152,192

6.24

Performance-based shares granted

136,315

4.80

Vested

(165,630)

6.26

Unvested at December 31, 2023

718,291

$

6.16

$

3,470

2.1

The following table sets forth contingent restricted stock unit transactions for the six months ended December 31, 2023:

Weighted

Unamortized

Average

Number of

Weighted Average

Compensation

Remaining

Restricted

Grant-Date

Expense

Amortization

 

    

Stock Units

    

Fair Value

    

(In thousands)

    

Period (Years)

Unvested at June 30, 2023

96,398

$

3.49

$

195

1.9

Performance-based awards granted

102,239

1.95

Unvested at December 31, 2023

198,637

$

2.70

$

320

2.0

19

Table of Contents

EVOLUTION PETROLEUM CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 11. Earnings (Loss) per Common Share

The following table sets forth the computation of basic and diluted earnings (loss) per common share, reflecting the application of the two-class method (in thousands, except per share amounts):

 

Three Months Ended

Six Months Ended

December 31,