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Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

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<h3>KEY POINTS</h3>
<ul>
<li>Evolution owns, manages, and develops onshore US producing oil and natural gas properties and strives to maximize Total Shareholder Return via a combination of dividends, buybacks, and investment of cash flow in highly selective acquisitions, prudent development drilling, and enhancement of existing production.</li>
<li>Three producing-property acquisitions closed since 4QFY21 have diversified the company’s commodity mix, geographic footprint, and reserve categories.</li>
<li>Beginning with the FY20 and FY21 acquisitions of Hamilton Dome and Barnett Shale, respectively, Evolution has added scale, geographic diversity, and commodity diversity to the asset base.</li>
<li>FYE22 proved reserve bookings included 20 gross horizontal Pronghorn/Three Forks locations in the Williston Basin. Engineers identified another 136 gross probable/possible locations. Inventory provides an investment option to compete for capital.</li>
<li>Sustainable dividends are a pillar of management’s Total Shareholder Return strategy. The latest quarterly dividend paid (9/30/22) represented a 20% increase from the prior quarter to $0.12 from $0.10. The current yield is 6.2%.</li>
<li>In September 2022, the board authorized a $25 million share repurchase plan in effect through December 31, 2024, to provide another tool to contribute to shareholder return if management deems the value of the stock more attractive than other investment opportunities.</li>
<li>Our FY23 estimates incorporate 20% Y/Y production growth and do not include any acquisitions. Management has not provided an operating outlook for FY23, pending discussions on capital plans with the operators of its assets.</li>
</ul>
<h3>ESTIMATES</h3>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/244/original/image_668293783241666224601963.png?1666224604" class="editor-image img-responsive" data-smartkarma-image-id="304244"></figure>
<h2>SHAREHOLDER RETURN PROPOSITION</h2>
<p>Evolution’s shareholder return proposition is built on a foundation of assembling a stable, long-lived oil and natural gas production base, heavily skewed toward proved developed producing reserves, capable of delivering a predictable shallow-decline production profile and generating free cash flow. Depending on the commodity cycle, management can allocate free cash to property acquisitions, debt repayment, and returns to shareholders through dividends and/or share repurchases. During FY22, producing-property acquisitions in the Williston Basin and Jonah Field added scale, commodity diversity, and an inventory of undeveloped locations to Evolution’s asset base. Undeveloped locations in the Williston Basin add an investment opportunity to compete for capital.</p>
<p>FY22 acquisitions set the stage for EBITDAX growth in FY23. 4QFY22 results included a full-quarter contribution from the Williston and Jonah Field acquisitions and benefited from strong commodity prices. 4Q22 production averaged 7,452 BOE/d, gains of 70% and 33% from 4QFY21 and 3QFY22, respectively. Buoyed by strong realized commodity prices, which averaged $106.83/bbl of oil and $7.66/Mcf of natural gas, 4QFY22 EBITDAX was $21.7 million, representing 42% of full-year EBITDAX. Without attempting to predict any FY23 acquisitions or development drilling and assuming a light production decline through FY23E with 4QFY23E production 7% lower than 4QFY22, our FY23 production estimate is 7,145 BOE/d. Our FY23 production estimate is 20% higher than FY22. Assuming FY23 average NYMEX oil and natural gas prices of $90.39/bbl and $7.23/Mcf, our FY23 EBITDAX estimate is ~$65 million, 26% above FY22. Figure 1 highlights Evolution’s three-year growth record.</p>
<p>Figure 1: Growth in Production, EBITDAX, and Free Cash Flow</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/245/original/image_257583311251666224660573.png?1666224661" class="editor-image img-responsive" data-smartkarma-image-id="304245"></figure>
<div class="content-remarks">
<p>Source: Company reports and Water Tower Research estimates</p>
</div>
<p>Evolution paid its first quarterly dividend in the fourth quarter of 2013 and has paid one ever since (see Figure 2). The dividend paid in the first calendar quarter of 2022 returned to the pre-pandemic level of $0.10/share. The third quarter 2022 dividend was increased 20% to $0.12/share. Including the dividend paid on September 30, 2022, Evolution has returned ~$94 million (~$2.85/share) to shareholders through dividends and share repurchases since the December quarter of 2013.</p>
<p>Figure 2: 36 Consecutive (Calendar) Quarterly Dividends</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/246/original/image_782424704261666224687547.png?1666224688" class="editor-image img-responsive" data-smartkarma-image-id="304246"></figure>
<div class="content-remarks">
<p>Source: Company reports</p>
</div>
<p>On September 8, 2022, Evolution’s board authorized a share repurchase program of up to $25 million through December 31, 2024. Any repurchases will be funded from working capital and cash provided by operations rather than debt. The authorization provides the board and management another tool to further Evolution’s Total Shareholder Return strategy, which can compete for capital with other options when they believe the intrinsic value of the shares represents a compelling value.</p>
<p>A conservative financial posture underpins management’s goal of delivering a sustainable dividend. At the end of FY22, Evolution had $21.3 million outstanding on its RBL credit facility and $8.3 million of cash, for net debt of $13.0 million. Free cash flow in 1HY23 could allow the company to reduce borrowings to zero. The company’s long-term goal is to maintain leverage below 1.0x annualized EBITDAX. An acquisition that increases the ratio above that threshold would have an accompanying plan to bring leverage back within the company’s comfort zone.</p>
<h2>ASSET DIVERSITY</h2>
<p>As of June 30, 2022, Evolution’s proved reserves totaled 36.2 MMBOE (see Figure 3). The reserves were prepared by the company’s independent third-party engineering firms DeGolyer and MacNaughton (D&amp;M) and Netherland, Sewell, &amp; Associates (NSAI). The report was based on previous 12-month SEC prices of $85.28/bbl of oil and $5.19/Mcf of natural gas. FYE22 proved reserves grew 55% from FYE21. Acquired assets in the Williston Basin and Jonah Field were the primary source of Y/Y growth.</p>
<p>Figure 3: Proved Reserve Profile as of June 30, 2022</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/247/original/image_42210640271666224730794.png?1666224732" class="editor-image img-responsive" data-smartkarma-image-id="304247"></figure>
<div class="content-remarks">
<p>Source: Company reports</p>
</div>
<p>Evolution is a highly selective and effective acquiror of producing assets and has closed acquisitions over the past few years that have diversified the commodity mix, geographic footprint, and reserve categories of the company’s asset base. Evolution acquired non-operated assets in the Barnett Shale in 4QFY21, the Williston Basin in 3QFY22, and the Jonah Field in 4QFY22. Fully 88% of 4QFY22 production and 77% of FYE22 proved reserves have been acquired since 4QFY21.</p>
<p>Figure 4: Basin Diversity of Production and Proved Reserves</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/248/original/image_56032872281666224758044.png?1666224759" class="editor-image img-responsive" data-smartkarma-image-id="304248"></figure>
<div class="content-remarks">
<p>Source: Company reports</p>
</div>
<p>Acquisitions have increased the natural gas weighting of Evolution’s asset base and provide exposure to different end-markets. Natural gas represented 59% of 4QFY total production volumes compared with 0% in 3QFY21, prior to the Barnett Shale purchase. Natural gas produced in Jonah Field is sold to western US gas markets providing some pricing diversity to the Barnett Shale production, which is sold in US Gulf Coast markets. Figure 5 highlights the hydrocarbon mix and production netbacks for FY22. Higher netbacks in the Williston Basin, Hamilton Dome, and Delhi Field reflect the higher liquids weighting in their production streams.</p>
<p>Figure 5: FY22 Production Mix and Netback&nbsp;(1)</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/249/original/image_372989458291666224786207.png?1666224787" class="editor-image img-responsive" data-smartkarma-image-id="304249"></figure>
<div class="content-remarks">
<p>(1) Production netback equals production sales price less production cost</p>
<p>Source: Company reports</p>
</div>
<p>The Williston Basin acquisition added a significant inventory of undeveloped drilling locations, which could be sources of future production and proved reserve upside (see Figure 6). Proved reserves here at FYE22 were 6.1 MMBOE, representing 17% of the company’s total. The year-end reserve report, prepared by NSAI, included proved undeveloped reserves attributable to 20 gross Pronghorn/Three Forks two-mile horizontal lateral undrilled locations. The NSAI report also classified 136 gross Pronghorn/Three Forks two-mile laterals in probable/possible categories. Thirty of the 136 locations are probable because they do not meet the SEC’s criteria that proved undeveloped locations must be in a company’s five-year development plan. The remaining possible locations would be developed after the probable locations.</p>
<p>Figure 6: Williston Basin Development Upside</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/250/original/image_778422425301666224826955.png?1666224828" class="editor-image img-responsive" data-smartkarma-image-id="304250"></figure>
<div class="content-remarks">
<p>Source: Company reports</p>
</div>
<p>The Williston Basin inventory provides management with an investment option to compete for capital with acquisitions, dividends, and share repurchases. Under the terms of a joint-development agreement with Foundation Energy Management, the Williston Basin operator, Evolution has the ability to propose new-drill wells. Foundation is obligated to operate the wells regardless of whether it participates for its working interest share.</p>
<h2>FINANCIALS</h2>
<h2>EBITDA Estimates</h2>
<p>As noted earlier, three acquisitions (Barnett Shale, Williston Basin, and Jonah Field) have added significant scale and diversity to Evolution’s asset base since 3QFY21. FY22 production averaged 5,954 BOE/d, a 145% Y/Y increase from FY21. Higher production and stronger commodity prices drove FY22 EBITDA to $51.8 million from $8.1 million in FY21. The FY22 production netback was $27.73/BOE, compared with $18.18/BOE in FY21.</p>
<p>4QFY22 results, which included a full-quarter’s contribution from the Jonah Field assets, were more telling of the transformed asset base. Production averaged 7,452 BOE/d, a 70% Y/Y increase from 4QFY21. Natural gas represented 59% of 4QFY22 production, compared with 40% of 4QFY21. The Barnett Shale acquisition closed in 4QFY21. Prior to that acquisition, Evolution’s production was ~85% oil and 100% liquids. EBITDA in 4Q22 was $21.7 million, representing 42% of the full-year total.</p>
<p>Management has not provided a FY23 operating outlook. The company owns non-operated working interest across its asset portfolio. Final decisions regarding capital activity on the assets are primarily at the discretion of the operators. The exception is the Williston Basin, where the joint-development agreement provides Evolution the right to propose wells. Without visibility into operator plans into C2023, we have laid out a slightly declining quarterly 2023 production profile. Our FY23 average is 7,145 BOE/d, a 20% Y/Y gain from FY22. Our 4QFY23 production estimate is 6,900 BOE/d, a 7% decrease from 4QFY22. Based on average FY23 oil and natural gas prices of $90.39/bbl and $7.23/Mcf, we estimate FY23 EBITDA of $65.4 million (see Figure 7).</p>
<p>Figure 7: Summary EBITDA Model (June Fiscal Year)</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/251/original/image_838370359311666224858929.png?1666224861" class="editor-image img-responsive" data-smartkarma-image-id="304251"></figure>
<div class="content-remarks">
<p>Source: Company reports and Water Tower Research estimates</p>
</div>
<h2>Capitalization</h2>
<p>On June 30, 2022, Evolution had $21.3 million outstanding on its RBL facility and $8.3 million of cash, for net debt of $13.0 million (see Figure 8). Our model suggests the company could reduce borrowings to near zero by the end of C2022.</p>
<p>Figure 8: Capitalization ($ millions)</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/252/original/image_386940175321666224914299.png?1666224915" class="editor-image img-responsive" data-smartkarma-image-id="304252"></figure>
<div class="content-remarks">
<p>(1) As of September 9, 2022</p>
<p>(2) As of October 18, 2022</p>
<p>Source: Company reports and Water Tower Research estimates</p>
</div>
<p>The company’s current RBL borrowing base is $50 million. The fall redetermination is underway and management expects the borrowing base will be unchanged. The margined collateral value of Evolution’s reserves is expected to be set at $125 million. The facility requires the company to hedge on a rolling 12-month basis when borrowings exceed 25% of the margined collateral value to the extent it exceeds the borrowing base. Based on the current amount outstanding, which is below the 25% minimum threshold, the company is not required to add additional hedges at the moment.</p>
<h2>Valuation</h2>
<p>Evolution is currently trading at 3.5x our FY23 EBITDA estimates. Our adjusted EV is based on our year-end FY23 net debt estimate. As noted earlier, Evolution increased the quarterly dividend payable on September 30, 2022, to $0.12/share from $0.10/share. The current yield is 6.2%.</p>
<p>Figure 9: Valuation Summary (millions)</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/304/253/original/image_508642699331666224949666.png?1666224950" class="editor-image img-responsive" data-smartkarma-image-id="304253"></figure>
<div class="content-remarks">
<p>(1) As of September 9, 2022</p>
<p>(2) As of October 18, 2022</p>
<p>Source: Company reports and Water Tower Research estimates</p>
</div>
<h3>DISCLOSURES</h3>
<div></div>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Jeff Robertson, who is the writer of this report, covers the Natural Resources sector for WTR. Mr. Robertson and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.<br><br>WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY POINTS

Evolution owns, manages, and develops onshore US producing oil and natural gas properties and strives to maximize Total Shareholder Return via a combination of dividends, buybacks, and investment of cash flow in highly selective acquisitions, prudent development drilling, and enhancement of existing production.
Three producing-property acquisitions closed since 4QFY21 have diversified the company’s commodity mix, geographic footprint, and reserve categories.
Beginning with the FY20 and FY21 acquisitions of Hamilton Dome and Barnett Shale, respectively, Evolution has added scale, geographic diversity, and commodity diversity to the asset base.
FYE22 proved reserve bookings included 20 gross horizontal Pronghorn/Three Forks locations in the Williston Basin. Engineers identified another 136 gross probable/possible locations. Inventory provides an investment option to compete for capital.
Sustainable dividends are a pillar of management’s Total Shareholder Return strategy. The latest quarterly dividend paid (9/30/22) represented a 20% increase from the prior quarter to $0.12 from $0.10. The current yield is 6.2%.
In September 2022, the board authorized a $25 million share repurchase plan in effect through December 31, 2024, to provide another tool to contribute to shareholder return if management deems the value of the stock more attractive than other investment opportunities.
Our FY23 estimates incorporate 20% Y/Y production growth and do not include any acquisitions. Management has not provided an operating outlook for FY23, pending discussions on capital plans with the operators of its assets.

ESTIMATES

SHAREHOLDER RETURN PROPOSITION
Evolution’s shareholder return proposition is built on a foundation of assembling a stable, long-lived oil and natural gas production base, heavily skewed toward proved developed producing reserves, capable of delivering a predictable shallow-decline production profile and generating free cash flow. Depending on the commodity cycle, management can allocate free cash to property acquisitions, debt repayment, and returns to shareholders through dividends and/or share repurchases. During FY22, producing-property acquisitions in the Williston Basin and Jonah Field added scale, commodity diversity, and an inventory of undeveloped locations to Evolution’s asset base. Undeveloped locations in the Williston Basin add an investment opportunity to compete for capital.
FY22 acquisitions set the stage for EBITDAX growth in FY23. 4QFY22 results included a full-quarter contribution from the Williston and Jonah Field acquisitions and benefited from strong commodity prices. 4Q22 production averaged 7,452 BOE/d, gains of 70% and 33% from 4QFY21 and 3QFY22, respectively. Buoyed by strong realized commodity prices, which averaged $106.83/bbl of oil and $7.66/Mcf of natural gas, 4QFY22 EBITDAX was $21.7 million, representing 42% of full-year EBITDAX. Without attempting to predict any FY23 acquisitions or development drilling and assuming a light production decline through FY23E with 4QFY23E production 7% lower than 4QFY22, our FY23 production estimate is 7,145 BOE/d. Our FY23 production estimate is 20% higher than FY22. Assuming FY23 average NYMEX oil and natural gas prices of $90.39/bbl and $7.23/Mcf, our FY23 EBITDAX estimate is ~$65 million, 26% above FY22. Figure 1 highlights Evolution’s three-year growth record.
Figure 1: Growth in Production, EBITDAX, and Free Cash Flow


Source: Company reports and Water Tower Research estimates

Evolution paid its first quarterly dividend in the fourth quarter of 2013 and has paid one ever since (see Figure 2). The dividend paid in the first calendar quarter of 2022 returned to the pre-pandemic level of $0.10/share. The third quarter 2022 dividend was increased 20% to $0.12/share. Including the dividend paid on September 30, 2022, Evolution has returned ~$94 million (~$2.85/share) to shareholders through dividends and share repurchases since the December quarter of 2013.
Figure 2: 36 Consecutive (Calendar) Quarterly Dividends


Source: Company reports

On September 8, 2022, Evolution’s board authorized a share repurchase program of up to $25 million through December 31, 2024. Any repurchases will be funded from working capital and cash provided by operations rather than debt. The authorization provides the board and management another tool to further Evolution’s Total Shareholder Return strategy, which can compete for capital with other options when they believe the intrinsic value of the shares represents a compelling value.
A conservative financial posture underpins management’s goal of delivering a sustainable dividend. At the end of FY22, Evolution had $21.3 million outstanding on its RBL credit facility and $8.3 million of cash, for net debt of $13.0 million. Free cash flow in 1HY23 could allow the company to reduce borrowings to zero. The company’s long-term goal is to maintain leverage below 1.0x annualized EBITDAX. An acquisition that increases the ratio above that threshold would have an accompanying plan to bring leverage back within the company’s comfort zone.
ASSET DIVERSITY
As of June 30, 2022, Evolution’s proved reserves totaled 36.2 MMBOE (see Figure 3). The reserves were prepared by the company’s independent third-party engineering firms DeGolyer and MacNaughton (D&amp;M) and Netherland, Sewell, &amp; Associates (NSAI). The report was based on previous 12-month SEC prices of $85.28/bbl of oil and $5.19/Mcf of natural gas. FYE22 proved reserves grew 55% from FYE21. Acquired assets in the Williston Basin and Jonah Field were the primary source of Y/Y growth.
Figure 3: Proved Reserve Profile as of June 30, 2022


Source: Company reports

Evolution is a highly selective and effective acquiror of producing assets and has closed acquisitions over the past few years that have diversified the commodity mix, geographic footprint, and reserve categories of the company’s asset base. Evolution acquired non-operated assets in the Barnett Shale in 4QFY21, the Williston Basin in 3QFY22, and the Jonah Field in 4QFY22. Fully 88% of 4QFY22 production and 77% of FYE22 proved reserves have been acquired since 4QFY21.
Figure 4: Basin Diversity of Production and Proved Reserves


Source: Company reports

Acquisitions have increased the natural gas weighting of Evolution’s asset base and provide exposure to different end-markets. Natural gas represented 59% of 4QFY total production volumes compared with 0% in 3QFY21, prior to the Barnett Shale purchase. Natural gas produced in Jonah Field is sold to western US gas markets providing some pricing diversity to the Barnett Shale production, which is sold in US Gulf Coast markets. Figure 5 highlights the hydrocarbon mix and production netbacks for FY22. Higher netbacks in the Williston Basin, Hamilton Dome, and Delhi Field reflect the higher liquids weighting in their production streams.
Figure 5: FY22 Production Mix and Netback&nbsp;(1)


(1) Production netback equals production sales price less production cost
Source: Company reports

The Williston Basin acquisition added a significant inventory of undeveloped drilling locations, which could be sources of future production and proved reserve upside (see Figure 6). Proved reserves here at FYE22 were 6.1 MMBOE, representing 17% of the company’s total. The year-end reserve report, prepared by NSAI, included proved undeveloped reserves attributable to 20 gross Pronghorn/Three Forks two-mile horizontal lateral undrilled locations. The NSAI report also classified 136 gross Pronghorn/Three Forks two-mile laterals in probable/possible categories. Thirty of the 136 locations are probable because they do not meet the SEC’s criteria that proved undeveloped locations must be in a company’s five-year development plan. The remaining possible locations would be developed after the probable locations.
Figure 6: Williston Basin Development Upside


Source: Company reports

The Williston Basin inventory provides management with an investment option to compete for capital with acquisitions, dividends, and share repurchases. Under the terms of a joint-development agreement with Foundation Energy Management, the Williston Basin operator, Evolution has the ability to propose new-drill wells. Foundation is obligated to operate the wells regardless of whether it participates for its working interest share.
FINANCIALS
EBITDA Estimates
As noted earlier, three acquisitions (Barnett Shale, Williston Basin, and Jonah Field) have added significant scale and diversity to Evolution’s asset base since 3QFY21. FY22 production averaged 5,954 BOE/d, a 145% Y/Y increase from FY21. Higher production and stronger commodity prices drove FY22 EBITDA to $51.8 million from $8.1 million in FY21. The FY22 production netback was $27.73/BOE, compared with $18.18/BOE in FY21.
4QFY22 results, which included a full-quarter’s contribution from the Jonah Field assets, were more telling of the transformed asset base. Production averaged 7,452 BOE/d, a 70% Y/Y increase from 4QFY21. Natural gas represented 59% of 4QFY22 production, compared with 40% of 4QFY21. The Barnett Shale acquisition closed in 4QFY21. Prior to that acquisition, Evolution’s production was ~85% oil and 100% liquids. EBITDA in 4Q22 was $21.7 million, representing 42% of the full-year total.
Management has not provided a FY23 operating outlook. The company owns non-operated working interest across its asset portfolio. Final decisions regarding capital activity on the assets are primarily at the discretion of the operators. The exception is the Williston Basin, where the joint-development agreement provides Evolution the right to propose wells. Without visibility into operator plans into C2023, we have laid out a slightly declining quarterly 2023 production profile. Our FY23 average is 7,145 BOE/d, a 20% Y/Y gain from FY22. Our 4QFY23 production estimate is 6,900 BOE/d, a 7% decrease from 4QFY22. Based on average FY23 oil and natural gas prices of $90.39/bbl and $7.23/Mcf, we estimate FY23 EBITDA of $65.4 million (see Figure 7).
Figure 7: Summary EBITDA Model (June Fiscal Year)


Source: Company reports and Water Tower Research estimates

Capitalization
On June 30, 2022, Evolution had $21.3 million outstanding on its RBL facility and $8.3 million of cash, for net debt of $13.0 million (see Figure 8). Our model suggests the company could reduce borrowings to near zero by the end of C2022.
Figure 8: Capitalization ($ millions)


(1) As of September 9, 2022
(2) As of October 18, 2022
Source: Company reports and Water Tower Research estimates

The company’s current RBL borrowing base is $50 million. The fall redetermination is underway and management expects the borrowing base will be unchanged. The margined collateral value of Evolution’s reserves is expected to be set at $125 million. The facility requires the company to hedge on a rolling 12-month basis when borrowings exceed 25% of the margined collateral value to the extent it exceeds the borrowing base. Based on the current amount outstanding, which is below the 25% minimum threshold, the company is not required to add additional hedges at the moment.
Valuation
Evolution is currently trading at 3.5x our FY23 EBITDA estimates. Our adjusted EV is based on our year-end FY23 net debt estimate. As noted earlier, Evolution increased the quarterly dividend payable on September 30, 2022, to $0.12/share from $0.10/share. The current yield is 6.2%.
Figure 9: Valuation Summary (millions)


(1) As of September 9, 2022
(2) As of October 18, 2022
Source: Company reports and Water Tower Research estimates

DISCLOSURES

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Asset Base Supports Shareholder Return Strategy

Evolution Petroleum

Asset Base Supports Shareholder Return Strategy