Michael Bowen Oil and Gas

Discussion Materials
Oil and Gas Drilling
Investment

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
Section 1

Industry Overview

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 The oil and gas drilling and extraction
market in the United States industry is worth $319.5 billion in the United
Trends include rising global demand from States
emerging economies, increased crude oil Crude oil makes up 58.4% of the market
output from offshore drilling, increased natural while natural gas represents 41.6%
gas production from new fields, and pressures
The United States sends 59% of its oil and
from regulations and alternative energy growth
gas exports to Canada and 19% to Mexico
New technologies have allowed increased
exploration of previously unattainable resources Texas, Oklahoma, and Louisiana contain the
Price volatility and high capital costs continue largest amount of industry output and
to threaten smaller industry players revenue in the continental United States
U.S. Oil & Gas Drilling and Extraction Market Segmentati

Oil Demand Correlation with Real GDP Growth (1969 2008) Petroleum refining industry

Natural gas distribution

industry
9% 1% 1%
11% Utilities

59% Industrial users

19%
Oil exports

Gas exports

Sources:
1. Deutsche Bank Markets Research. Oil & Gas for Beginners. 25 January 2013. 5
2. Credit Suisse. Oil & Gas Primer. September 2011.
3. IBISWorld Industry Reports.
 Industry Overview
nd gas drilling and extraction industry features regional dispersion and high revenue volatil

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 8% ConocoPhillips
8%
Economies of scale resulting from large oil Chevron Corporation
6%
and gas deposits help competitors spread 6%
Royal Dutch Shell
high capital costs PLC
Largest players practice downstream vertical 72% BP PLC
integration to guarantee buyers Other
Stringent regulations threaten large and small
U.S. Production
competitorsofand
Crude Oil capital requirements
increase
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 6
January 2013.
2. EIA 2014 Report.
 Porters Five Forces
nd gas drilling and extraction industry is attractive with the potential for long-term profitab

Rivalry
Bargaining Bargaining
Entry of New Among Threat of
Power of Power of
Competitors Existing Substitutes
Buyers Suppliers
Competitors
Few Low Economies Limited oil Low use of
available concentrati of scale fields and alternative
substitutes on of High capital gas energies
Price industry requirement reserves Oil and gas
volatility players s Smaller serve
can deter Critical Stringent firms may separate
buyers commodity regulations share markets
product High risk buyers
and Larger firms
volatility vertically
integrate

LOW MEDIUM LOW HIGH LOW

Sources:
1. Deutsche Bank Markets Research. Oil & Gas for Beginners. 25 7
January 2013.
2. EIA 2014 Report.
Section 2

Company Overview

8
 Evolution Petroleum Company (EPM) Company
Overview
pany has attractive investments and dedicated management that could sustain future grow
Firm Overview Primary Asset Locations
EPM is a petroleum company engaged
MS Lime
primarily in acquisition, exploitation and
development of properties for the production
of crude oil and natural gas
Delhi
Differentiates through innovative proprietary Field
technology, reliance on unconventional drilling
techniques, and exploration of previously Giddings
uneconomical reserves Field
Management and employees own 21% of
sharesRelations
Customer
Market capitalization of $414 million in 2014 Revenue Growth
EPM sells commodities so purchasers retain
little buying power in the long term

9
 Evolution Petroleum Corporation (EPM) Company
Overview
money through Enhanced Oil Recovery, Bypassed Primary Resources, and Unconventional D
Enhanced Oil Recovery Bypassed Primary Resources and Unconventional Develop
Increase the production and recovery of oil Focus on horizontal drilling
and natural gas Mississippi Lime, North Central Oklahoma
Enhanced Oil Recovery from the Holt
GARP Artificial Lift Technology
Bryant Unit in the Delhi Field in Louisiana
Purchased in 2003 for $2.8 million
Operated by Denbury Resources, Inc.
Owns 7.4% interest and 23.9%
revisionary interest

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

12
Section 3

Valuation Analysis

13
EPM WACC Calculation

Source: Capital IQ and Consensus Estimates as of 14

12/31/2011
EPM Discounted Cash Flow Analysis

Source: Capital IQ and Consensus Estimates as of 15

12/31/2011
EPM Sensitivity Analysis

Source: Capital IQ and Consensus Estimates as of 16

12/31/2011
EPM Comparables Analysis

Source: Capital IQ and Consensus Estimates as of 17

12/31/2011
Recent Stock Performance

18
EPM Comparables Analysis Cont.

Source: Capital IQ and Consensus Estimates as of 19

12/31/2011
EPM Valuation/Recommendation

Recommendation: Watch
List

Source: Capital IQ and Consensus Estimates as of 20

12/31/2011
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