Outlook for 8.6%-Yield Evolution Petroleum Stock Bullish on Big Acquisition

By John Whitefoot, BA | June 14, 2024

Why EPM Stock Has Large Upside

Sometimes the outlook for crude oil is strong; sometimes it’s not. It all depends on the economic cycle, supply/demand metrics, and black swan events.

Despite all the talk about renewable, green energy, the fact is, the world will need a growing supply of crude oil for decades to come. Regardless of where crude prices go, that dependency bodes well for oil and natural gas exploration companies like Evolution Petroleum Corp (NYSEAMERICAN:EPM).

The Houston, Texas-based company is engaged in the development, production, and ownership of onshore oil and gas properties in the U.S. With a market cap of about $185.0 million, Evolution Petroleum is on the small side, but it’s been working on getting a lot larger.

The company owns working interests and royalty interests that provide a proportionate share of net cash flows received from the operator of the assets. (Source: “Investor Presentation: March 2024,” Evolution Petroleum Corp, last accessed June 11, 2024.)

For instance, it holds interests in a CO₂-enhanced oil recovery project in northeast Louisiana’s Delhi field. Its Delhi Holt-Bryant Unit interests cover approximately 13,636 acres. (Source: “Evolution Petroleum Corporation (EPM),” Yahoo! Finance, last accessed June 11, 2024.)

The company has been growing its assets through a number of strategic acquisitions over the last number of years:

Hamilton Dome in Wyoming: about 1,400 net acres (acquisition closed in November 2019)
Barnett Shale in Texas: about 21,000 net acres (acquisition closed in May 2021)
Williston Basin in North Dakota: about 43,300 net acres (acquisition closed in January 2022)
Jonah Field in Wyoming: about 950 net acres (acquisition closed in April 2022)
Chaveroo Oilfield in New Mexico: about 8,000 net acres (entered into in September 2023)

(Source: “Investor Presentation: March 2024,” Evolution Petroleum Corp, op. cit.)

In February, Evolution Petroleum closed on its $43.5-million acquisition of about 3,700 net acres of oil and gas assets in the SCOOP and STACK plays in central Oklahoma. (Source: “Evolution Petroleum Announces Acquisition of Non-Operated Oil and Gas Assets,” Evolution Petroleum Corp, January 9, 2024.)

The properties produce approximately 1,550 barrels of oil equivalent per day (BOEPD). The SCOOP and STACK plays contain about 230 producing wells and more than 300 gross, high-quality, undeveloped locations. Together, the two acquisitions equal the largest transaction in Evolution Petroleum’s history.

Thanks to the company’s aggressive acquisition strategy, it’s able to build up its daily production. And thanks to a low production decline, it has, as of this writing, more than 15 years’ worth of reserves.

Evolution Petroleum Corp Marked Its Highest-Ever Oil Production

For the third quarter of fiscal 2024 (ended March 31, 2024), Evolution Petroleum announced that its revenues increased by 10% quarter-over-quarter to $23.02 million. (Source: “Evolution Petroleum Reports Third Quarter Fiscal 2024 Results and Declares Quarterly Cash Dividend for the Fiscal 2024 Fourth Quarter,” Evolution Petroleum Corp, May 7, 2024.)

The company reported third-quarter net income of $300,000, or $0.01 per diluted share, and adjusted net income of $1.0 million, or $0.03 per share. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased by 24% quarter-over-quarter to $8.5 million.

Evolution Petroleum Corp’s average production increased in the third fiscal quarter by 14% quarter-over-quarter to 7,209 net BOEPD. Had the SCOOP and STACK acquisition closed at the beginning of the quarter, the company’s average production would have increased by 835 BOEPD.

During the quarter, the company achieved its highest-ever oil production: roughly 2,200 barrels per day. It also produced 23,242 thousand cubic feet per day (MCFPD), or 3,879 BOEPD, of natural gas and 1,143 BOEPD of natural gas liquids (NGL).

Commenting on the third-quarter results, Kelly Lloyd, Evolution Petroleum Corp’s CEO and president, said, “We have added scale, diversification, and investment flexibility to our portfolio. The production for a portion of the quarter from our SCOOP/STACK acquisitions and the incremental production from 19 newly drilled SCOOP/STACK wells, as well as production from the initial three wells at Chaveroo, were instrumental to our performance this quarter.” (Source: Ibid.)

He continued, “Chaveroo and SCOOP/STACK not only bolstered our quarterly average production by more than 1,000 BOEPD but were also key to the impressive 27% increase in quarter over quarter crude oil production.”

Analysts expect the company to report earnings of $0.16 per share for fiscal 2024 and $0.46 per share for fiscal 2025. They also expect the company to report revenues of $90.2 million for fiscal 2024 and $113.74 million for fiscal 2025. (Source: Yahoo! Finance, op. cit.)

Dividends Paid for More Than 40 Consecutive Quarters

Returning capital to shareholders is an important pillar of Evolution Petroleum Corp’s business plan. Lloyd noted, “We remain steadfast in our commitment to delivering long-term total returns to our shareholders.” (Source: Ibid.)

Whereas many oil and gas companies suspended their dividends during the 2020 COVID-19 crisis, for Evolution Petroleum stock, it was business as usual. As of this writing, Evolution Petroleum hasn’t skipped a dividend in 42 consecutive quarters. (Source: “Dividend and Split History,” Evolution Petroleum Corp, last accessed June 11, 2024.)

On June 28, the company will maintain its payout at $0.12 per share for the eighth consecutive quarter. That works out to a forward yield of 8.6% (as of this writing).

Evolution Petroleum Stock Has About 50% Upside

Despite Evolution Petroleum Corp reporting high revenue growth and its highest-ever oil production—as well as making strategic acquisitions—EPM stock hasn’t exactly been lighting up Wall Street.

Evolution Petroleum stock is, as of this writing, down by 1.75% year-to-date and 26.8% year-over-year.

The outlook for EPM stock is solid, though. Crude oil may be trading around $80.00 per barrel at the moment, but Goldman Sachs Group (NYSE:GS) expects Brent crude oil prices to hit $86.00 per barrel this summer. (Source: “Goldman Sachs Sees Oil Prices Rising to $86 This Summer,” OilPrice.com, June 10, 2024.)

Wall Street analysts have provided a 12-month share-price target for Evolution Petroleum stock of $8.25. That points to potential gains of approximately 48%.

Chart courtesy of StockCharts.com

The Lowdown on Evolution Petroleum Corp

Evolution Petroleum is an energy company with a growing portfolio of properties in some of the most prolific onshore oil and gas fields in the U.S.

The company says that, due to its business structure, it’s one of the lower-risk investment vehicles in the energy industry. Moreover, it has a strong balance sheet, an active acquisition strategy, and a substantial inventory of drilling locations.

This should allow Evolution Petroleum Corp to generate reliable cash flow and reward its shareholders with sustainable dividends and opportunistic share buybacks.