Oil and Gas Deposits | Michael Bowen

1
Table of Contents
Section 1 Executive Summary 3 Section 2 Industry
Overview 4 Section 3 Company Overview and
Positioning 8 Section 4 Valuation
Analysis 13 Section 5 Questions 21
2
Executive Summary

• The Oil Drilling and Gas Extraction industry will
  benefit from strong global demand and rising
  prices despite high exploration risks
• Evolution Petroleum Corporation (EPM) possesses a
  solid asset base with a unique strategy and
  innovations to pose a competitive advantage
• We value the company at about 9.19 per share
• We recommend placing Evolution Petroleum
  Corporation on the Watch List so future analysts
  can evaluate its changing risks and growth
  strategies

3
Industry Overview

• Section 1

4
Industry Overview
The oil and gas extraction industry benefits from
rising oil and gas prices and strong global demand
Industry Trends
Industry Composition

• Oil and gas extraction is a mature, stable market
  in the United States
• Trends include rising global demand from emerging
  economies, increased crude oil output from
  offshore drilling, increased natural gas
  production from new fields, and pressures from
  regulations and alternative energy growth
• New technologies have allowed increased
  exploration of previously unattainable resources
• Price volatility and high capital costs continue
  to threaten smaller industry players

• The oil and gas drilling and extraction industry
  is worth 319.5 billion in the United States
• Crude oil makes up 58.4 of the market while
  natural gas represents 41.6
• The United States sends 59 of its oil and gas
  exports to Canada and 19 to Mexico
• Texas, Oklahoma, and Louisiana contain the
  largest amount of industry output and revenue in
  the continental United States

U.S. Oil Gas Drilling and Extraction Market
Segmentation
Oil Demand Correlation with Real GDP Growth (1969
2008)
Sources 1. Deutsche Bank Markets Research.
Oil Gas for Beginners. 25 January 2013. 2.
Credit Suisse. Oil Gas Primer. September 2011.
3. IBISWorld Industry Reports.
5
Industry Overview
The oil and gas drilling and extraction industry
features regional dispersion and high revenue
volatility
Competitive Landscape
Dominant Players in Oil Gas Drilling and
Extraction

• Low concentration due to high geographic
  dispersion
• Top four competitors account for 28 of industry
  revenue
• Economies of scale resulting from large oil and
  gas deposits help competitors spread high capital
  costs
• Largest players practice downstream vertical
  integration to guarantee buyers
• Stringent regulations threaten large and small
  competitors and increase capital requirements

U.S. Production of Crude Oil
Price Determinants

• Prices remain volatile due to changes in supply
  and demand
• Global economic recovery increases transportation
  and industrial energy demands
• Different grades of oil (heavy, light) typically
  attract different prices with lighter oils
  earning a premium since they are easier to refine
• Impurities also affect the price of oil with
  sweet oils, or those with a low sulfur content,
  commanding a premium
• High barriers to entry result from security and
  regulation, capital investments, and the high
  risks associated with exploration

Sources 1. Deutsche Bank Markets Research.
Oil Gas for Beginners. 25 January 2013. 2.
EIA 2014 Report. 3. IBISWorld Industry Reports.
6
Porters Five Forces
The oil and gas drilling and extraction industry
is attractive with the potential for long-term
profitability
LOW
MEDIUM
LOW
HIGH
LOW
Sources 1. Deutsche Bank Markets Research.
Oil Gas for Beginners. 25 January 2013. 2.
EIA 2014 Report. 3. IBISWorld Industry Reports.
7
Company Overview

• Section 2

8
Evolution Petroleum Company (EPM) Company
Overview
The company has attractive investments and
dedicated management that could sustain future
growth
Firm Overview
Primary Asset Locations

• EPM is a petroleum company engaged primarily in
  acquisition, exploitation and development of
  properties for the production of crude oil and
  natural gas
• Differentiates through innovative proprietary
  technology, reliance on unconventional drilling
  techniques, and exploration of previously
  uneconomical reserves
• Management and employees own 21 of shares
• Market capitalization of 414 million in 2014

MS Lime
Delhi Field
Giddings Field
Customer Relations
Revenue Growth

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

9
Evolution Petroleum Corporation (EPM) Company
Overview
EPM earns money through Enhanced Oil Recovery,
Bypassed Primary Resources, and Unconventional
Development.
Bypassed Primary Resources and Unconventional
Development

• Focus on horizontal drilling
• Mississippi Lime, North Central Oklahoma
• GARP Artificial Lift Technology

Carbon Dioxide Oil Recovery at Delhi Field
10
SWOT Analysis
Evolution Petroleum Corporations reliance on
innovative technology and alternative production
and exploration methods differentiate it from the
competition and provide a foundation for future
growth.
Strengths Weaknesses
Proprietary GARP Artificial Lift technology and patents Depends on a few large clients
Rich in assets and proved reserves Depends on crude oil for revenues
Generates scalable reserves potential at a low unit cost with long-term growth potential No presence in growing global markets
Experienced, trained management team with deep experience in innovative oil and gas exploration and production strategies Relies on third party operators, marketers, and technologies
Royalty and interest contracts reduce risk and increase revenues Light debt use may limit exploration opportunities
Opportunities Threats
Delhi Field previously produced millions of barrels of oil indicating future success Exposure to commodity risk stemming from changing world prices of oil and gas
GARP technology provides licensing opportunities Cyclicality of end markets
Increased demand from transportation and industrial sectors Uncertainties inherent in reserve estimations
Cash reserves can help secure future investment opportunities Increased competition from large, vertically-integrated peers
Increased push for domestic energy output could spur demand Price-elastic, highly competitive environment
Sources 1. Company website. 2. EIA 2014
Outlook.
11
Recent Stock Performance
12
Valuation Analysis

• Section 3

13
EPM WACC Calculation
14
EPM Discounted Cash Flow Analysis
15
EPM Sensitivity Analysis
16
EPM Comparables Analysis

17
Recent Stock Performance
18
EPM Comparables Analysis Cont.
19
EPM Valuation/Recommendation
Recommendation Watch List