Evolution Petroleum Reports Operating Results for First Quarter of Fiscal 2013

HOUSTON, Nov. 7, 2012 /PRNewswire/ -- Evolution Petroleum Corporation (NYSE MKT: EPM) today reported operating and financial results for the quarter ended September 30, 2012, its first fiscal quarter of 2013 ("Q1-13").

Highlights include:

Earned $1.0 million of net income to common shareholders, up 7% from $0.9 million in the previous quarter ("Q4-12") and essentially flat compared to the year-ago quarter ("Q1-12")
Produced an average 581 net barrels of oil equivalent ("BOE") per day, essentially flat compared to the prior quarter and 14% higher than the year-ago quarter
Drilled and completed two new Mississippian Lime oil wells, our first in the oil play out of an inventory of 114 gross drilling locations
Completed our fourth successful commercial installation of GARP® technology with good results

Robert Herlin, CEO, said: "We are pleased to have maintained production, revenues and earnings for the quarter despite being adversely affected for most of the quarter by the operator's temporary restricted production in the Delhi Field that carried over from the last quarter. As expected, cooler weather in September allowed the operator to restore production back to pre-summer rates, and we fully expect that equipment planned to be added will prevent a re-occurrence in the future. Indeed, current production has now achieved a record level, reflecting incremental oil response resulting from 2011 capital expenditures and resumption of CO₂ injections at normal rates."

"We also have completed the drilling and hydraulic fracturing of our first two Mississippian Lime wells in Kay County, Oklahoma and expect to have both on production during the second fiscal quarter."

"In the first quarter of our fiscal year, we continued to execute our strategy of redeploying internal cash flow generated from our foundation asset, the Delhi Field, into our emerging Mississippian Lime oil project where we have approximately 5,400 net acres, providing us ample running room for a multi-year development plan."

Financial Results for the Quarter Ended September 30, 2012

Quarterly net income to common shareholders increased 7% to $1.0 million, or $0.03 per share diluted, compared to net income of $0.9 million, or $0.03 per share diluted, for the prior quarter. Current net income was flat compared to the year-ago quarter.

Revenues decreased 6% to $4.3 million compared to the prior quarter, but increased 11% compared to the year-ago quarter. The decline in revenues from the prior quarter was primarily due to a lower mix of oil in our volumes combined with lower oil and NGL prices, partially offset by higher natural gas prices. Revenue increases over the year- ago quarter were due to 14% higher volumes and a greater mix of oil in our volumes, offset by lower commodity prices.

Compared to the prior quarter, operating expense was down 4%, primarily due to lower lease operating expense. Operating expense increased 26% over the year-ago quarter due to the increased number of wells added in the Lopez Field, the Mississippian Lime project and our GARP® initiative, as well as higher depletion expense due to higher sales volumes and a 9% increase in the depletion rate to $5.33 per BOE. Operating expense compared to the year-ago quarter was further impacted by higher bonus accruals, legal expense and public company expense, offset by lower stock compensation expense. Results for all periods included significant non-cash stock compensation expense amounting to 21% of total general and administrative expense in the current quarter, as compared to 30% in the year-ago quarter.

Sales volumes of 581 BOE per day were flat compared to the prior quarter and increased 14% over the year-ago quarter. Compared to the prior quarter, volumes were impacted by a 3% decrease at Delhi as the result of the previously mentioned temporary operational constraint, offset by an 8% increase in other oil volumes due to the Lopez Field and our GARP® program, a 17% increase in NGL volumes and a 10% increase in natural gas volumes. Increases over the year-ago quarter were due primarily to a 15% increase at Delhi, a 44% increase in other crude oil volumes from additions at Lopez and in our GARP® program, and a 9% increase in gas volumes offset by a 4% decrease in NGL volumes.

Our blended product price decreased 8% from the prior quarter and 3% from the year-ago quarter to $80.30 per BOE, both due to a changing mix of volumes and lower overall oil and NGL prices. Our realized natural gas price in the current quarter was 38% lower than the year-ago quarter, but 19% higher than the prior quarter. Please see our 10-Q for the quarter ended September 30, 2012 for additional detail.

Delhi Field

Sales volumes at Delhi averaged 374 net barrels of oil ("BO") per day (5,057 gross BO per day) during the current quarter, a 3% decrease from the prior quarter and a 15% increase over the year-ago quarter. As previously disclosed, the operator restricted production and CO₂ injection during the summer due to high ambient temperatures and limited cooling capacity that reduced the ability to handle recycle CO₂. As ambient temperatures declined in September, this restriction was lifted and field production was restored to pre-summer rates. Work is planned to add cooling capacity to prevent a re-occurrence. Due to the restriction being lifted and beginning contributions from 2011 capital expenditures, production is now exceeding pre-summer rates. Gross production is forecasted by our independent reservoir engineer to reach a peak level of 11,800 BO per day by late 2017. Project work has been focused since late calendar 2011 on the eastern half of the field.

Our realized oil price was $103.78 per barrel compared to $110.09 in the prior quarter and $105.78 in the year-ago quarter. In the current quarter, we realized a $10.88 premium on our Delhi volumes compared to our Texas oil volumes.

Mississippi Lime

Our primary focus for redeploying cash flow this year is the Mississippian Lime play in north central Oklahoma where we completed the drilling of our first two Mississippian Lime oil wells in Kay County, Oklahoma. In addition to our 45% working interest in a salt water disposal well completed last quarter, we own a 45% working interest in the Sneath #1-24H well and a 36.6% working interest in the Hendrickson #1-1H well. In the Sneath #1-24H, we hydraulically fractured a 3,100' lateral section in late October, and recently completed the hydraulic fracturing of a 4,000' lateral section in the Hendrickson #1-1H.

Industry experience to date shows that the Mississippian Lime formation requires dewatering before oil and gas production begins to increase to its peak rate. Consequently, we expect meaningful oil and gas production to begin in both wells during the second fiscal quarter as their reservoirs must be partially depressurized to allow oil and gas production from the rock matrix. We plan to monitor and evaluate the results from the Sneath and Hendrickson wells for the purpose of optimizing drilling and completion techniques in anticipation of full-scale development. We continue to look for opportunities to expand our position in the play.

These wells are the first of 114 gross probable drilling locations assigned by our independent reservoir engineer. Our capital program for fiscal 2013 is primarily focused on this project.

GARP®

We installed our artificial lift technology on a fourth well pursuant to our commercial agreements, converting a well with no production into a 20+ gross BOE per day producer, composed of 5-6 BO per day and more than 90 thousand cubic feet per day of liquids rich natural gas. We own a 99% working interest before payout and a 76.5% working interest after payout. Total gross production from our four commercial installations was 55-60 BOE per day (27-30 net BOE per day) in early November.

Other Fields

Production from our wells in the Giddings Field essentially maintained rates subject to natural declines. Pursuant to our focus on the Mississippian Lime and GARP® projects combined with continued low natural gas prices, we have elected to monetize much of our non-core Giddings interests through agreements in principle that are expected to close during our second fiscal quarter. The sales are expected to significantly lower our overall depletion rate due to the removal of future capital expenditures associated with proved undeveloped reserves having high natural gas content and relatively high development cost.

Lopez Field production continues to improve and benefit from the extensive work-over efforts during the latter portion of fiscal 2012. The Lopez #5 is averaging more than 15 BO per day and the Garcia #1 is averaging approximately 8 BO per day. Our third producer is still in the early stages of dewatering. Overall, we have 37 proved and probable drilling locations on our leases, but are evaluating the potential in South Texas compared to other projects as to scale, profitability and timing.

Capital Expenditures, Liquidity and Capital Resources

Capital expenditures during Q1-13 were $2.7 million, invested primarily to drill two new Mississippian Lime oil wells, one new GARP® installation and other projects. We are on track to achieve our planned 2013 capital plan of $10 million, of which 85% is targeted to drilling new oil wells in our Mississippian Lime growth asset.

At September 30, 2012 we had cash and cash equivalents of $13.1 million, up from $11.6 million from the same period last year, and ended the current quarter with no debt. Existing working capital of $12.8 million and projected cash flows from operations are more than sufficient to fund our remaining 2013 capital budget.

Conference Call

Evolution Petroleum will host a conference call on Thursday, November 8 at 11:00 a.m. Eastern Time (10:00 a.m. Central) to discuss these results. To access the call, please dial 1-800-860-2442 (U.S.), 1-412-858-4600 (International) or 1-866-605-3852 (Canada). The conference call will also be broadcast live via the Internet and can be accessed through Evolution's corporate website, www.evolutionpetroleum.com.

About Evolution Petroleum

Evolution Petroleum Corporation develops incremental petroleum reserves and shareholder value by applying conventional and specialized technology to known oil and gas resources, onshore in the United States. Principal assets as of June 30, 2012 include 13.4 MMBOE of proved reserves and 12.7 MMBOE of probable reserves with PV-10* of $445 million and $174 million, respectively, and no debt. Producing assets include a CO₂-EOR project with growing production in Louisiana's Delhi Field, and producing wells and proved drilling locations in the Giddings Field of Central Texas and Lopez Field in South Texas. Other assets include a 45% interest in a joint venture with 114 gross (25 net to EPM) probable drilling locations in the Mississippian Lime play in Oklahoma and a patented artificial lift technology designed to extend the life of horizontal wells with oil or associated water production. Additional information, including the Company's annual report on Form 10-K and its quarterly reports on Form 10-Q, is available on its website at (www.evolutionpetroleum.com).

Cautionary Statement

All statements contained in this press release regarding potential results and future plans and objectives of the Company are forward-looking statements that involve various risks and uncertainties. There can be no assurance that such statements will prove to be accurate and actual results and future events could differ materially from those anticipated in such statements. The Company undertakes no obligation to update or review any forward-looking statement, whether as a result of new information, future events, or otherwise. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, those factors that are disclosed under the heading "Risk Factors" and elsewhere in our documents filed from time to time with the United States Securities and Exchange Commission and other regulatory authorities. Statements regarding our ability to complete transactions, successfully apply technology applications in the re-development of oil and gas fields, realize future production volumes, realize success in our drilling and development activity and forecasts of legal claims, prices, future revenues and income and cash flows and other statements that are not historical facts contain predictions, estimates and other forward-looking statements. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved and these statements will prove to be accurate. Important factors could cause actual results to differ materially from those included in the forward-looking statements.

* PV-10 of proved reserves is a pre-tax non-GAAP measure reconciled to the after-tax Standardized Measure of Future Net Cash Flows below. We believe that the presentation of the non-GAAP financial measure of PV-10 provides useful and relevant information to investors because of its wide use by analysts and investors in evaluating the relative monetary significance of oil and natural gas properties, and as a basis for comparison of the relative size and value of our reserves to other companies' reserves. We also use this pre-tax measure when assessing the potential return on investment related to oil and natural gas properties and in evaluating acquisition opportunities. Because there are many unique factors that can impact an individual company when estimating the amount of future income taxes to be paid, we believe the use of a pre-tax measure is valuable for evaluating our Company. PV-10 is not a measure of financial or operating performance under GAAP, nor is it intended to represent the current market value of our estimated oil and natural gas reserves. PV-10 should not be considered in isolation or as a substitute for the Standardized Measure as defined under GAAP, and reconciled below. Probable reserves are not recognized by GAAP, and therefore the PV-10 of probable reserves cannot be reconciled to a GAAP measure.

The following table provides a reconciliation of PV-10 of each of our proved properties to the Standardized Measure.

	For the Years Ended June 30
		2012		2011

Estimated future net revenues	$	858,510,526	$	741,212,773
10% annual discount for estimated timing of future cash flows		(412,995,901)		(365,874,315)
Estimated future net revenues discounted at 10% (PV-10)		445,514,625		375,338,458
Estimated future income tax expenses discounted at 10%		(161,917,132)		(146,890,504)
Standardized Measure	$	283,597,493	$	228,447,954

Company Contact:
Sterling McDonald, VP & CFO
(713) 935-0122
smcdonald@evolutionpetroleum.com

- Financial Tables to Follow -

Evolution Petroleum Corporation and Subsidiaries Consolidated Condensed Statements of Operations (Unaudited)

		Three Months Ended
		September 30,
		2012		2011
Revenues
Crude oil	$	4,005,422	$	3,448,595
Natural gas liquids		119,611		188,455
Natural gas		166,513		247,806
Total revenues		4,291,546		3,884,856

Operating Costs
Lease operating expenses		316,169		202,917
Production taxes		21,373		14,035
Depreciation, depletion and amortization		296,917		236,891
Accretion of discount on asset retirement obligations		21,107		16,972
General and administrative expenses *		1,705,424		1,405,175
Total operating costs		2,360,990		1,875,990

Income from operations		1,930,556		2,008,866

Other
Interest income		5,616		7,246
Interest (expense)		(16,428)		---
		(10,812)		7,246

Net income before income taxes		1,919,744		2,016,112

Income tax provision		760,218		872,594

Net Income	$	1,159,526	$	1,143,518

Dividends on Preferred Stock		168,575		127,835

Net income available to common shareholders	$	990,951	$	1,015,683

Basic	$	0.04	$	0.04

Diluted	$	0.03	$	0.03

Weighted average number of common shares

Basic		27,938,297		27,669,355

Diluted		31,763,488		31,279,350

*General and administrative expenses for the three months ended September 30, 2012 and 2011 included non-cash stock-based compensation expense of $353,790 and $416,695, respectively.

Evolution Petroleum Corporation and Subsidiaries Consolidated Condensed Balance Sheets (Unaudited)

		September 30,		June 30,
		2012		2012
Assets
Current assets
Cash and cash equivalents	$	13,134,457	$	14,428,548
Certificates of deposit		250,000		250,000
Receivables
Oil and natural gas sales		1,616,515		1,343,347
Joint interest partner		30,390		96,151
Income taxes		92,885		92,885
Other		190		190
Deferred tax asset		325,235		325,235
Prepaid expenses and other current assets		176,803		233,433
Total current assets		15,626,475		16,769,789

Property and equipment, net of depreciation, depletion, and amortization
Oil and natural gas properties — full-cost method of accounting, of which $7,782,060 and $6,042,094 at September 30, 2012 and June 30, 2012, respectively, were excluded from amortization.		42,313,561		40,476,172
Other property and equipment		80,022		92,271
Total property and equipment		42,393,583		40,568,443

Advances to joint interest operating partner		325,995		1,366,921
Other assets		269,780		250,333

Total assets	$	58,615,833	$	58,955,486

Liabilities and Stockholders' Equity
Current liabilities
Accounts payable	$	438,238	$	407,570
Due to joint interest partner		1,313,222		3,217,975
Accrued compensation		346,382		1,005,624
Royalties payable		242,203		294,013
Income taxes payable		183,289		91,967
Other current liabilities		256,759		71,768
Total current liabilities		2,780,093		5,088,917

Long term liabilities
Deferred income taxes		6,804,145		6,205,093
Asset retirement obligations		998,342		968,677
Deferred rent		65,724		70,011

Total liabilities		10,648,304		12,332,698

Commitments and contingencies

Stockholders' equity
Preferred stock, par value $0.001; 5,000,000 shares authorized:8.5% Series A Cumulative Preferred Stock, 1,000,000 shares authorized, 317,319 shares issued and outstanding at September 30, 2012, with a liquidation preference of $25.00 per share.		317		317
Common stock; par value $0.001; 100,000,000 shares authorized: issued 28,840,163 shares at September 30, 2012 and 28,670,424 at June 30, 2012; outstanding 28,051,963 shares and 27,882,224 shares as of September 30, 2012 and June 30, 2012, respectively		28,840		28,670
Additional paid-in capital		29,770,534		29,416,914
Retained earnings		19,049,860		18,058,909
		48,849,551		47,504,810
Treasury stock, at cost, 788,200 shares as of September 30, 2012 and June 30, 2012		(882,022)		(882,022)

Total stockholders' equity		47,967,529		46,622,788

Total liabilities and stockholders' equity	$	58,615,833	$	58,955,486

Evolution Petroleum Corporation and Subsidiaries Consolidated Condensed Statements of Cash Flows (Unaudited)

		Three Months Ended September 30,
		2012		2011
Cash flows from operating activities
Net Income	$	1,159,526	$	1,143,518
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization		307,129		236,891
Stock-based compensation		353,790		416,695
Accretion of discount on asset retirement obligations		21,107		16,972
Settlements of asset retirement obligations		(22,211)		(30,969)
Deferred income taxes		599,052		659,767
Accrued compensation		---		(180,000)
Deferred rent		(4,287)		(2,542)
Changes in operating assets and liabilities:
Receivables from oil and natural gas sales		(273,168)		106,424
Receivables from income taxes and other		---		28,678
Due to/from joint interest partner		(49,344)		(25,964)
Prepaid expenses and other current assets		56,630		(83,359)
Accounts payable and accrued expenses		(637,799)		(108,329)
Royalties payable		(51,810)		(387,747)
Income taxes payable		161,166		144,246
Net cash provided by operating activities		1,619,781		1,934,281

Cash flows from investing activities
Acquisitions of oil and natural gas properties		(743,720)		(167,964)
Development of oil and natural gas properties		(1,868,892)		(311,739)
Advances to joint venture operating partner		(101,790)		—
Other assets		(14,684)		(13,771)
Net cash used in investing activities		(2,729,086)		(493,474)

Cash flows from financing activities
Proceeds from issuances of preferred stock, net		---		6,054,456
Preferred stock dividends paid		(168,575)		(127,835)
Deferred loan costs		(16,211)		---
Net cash provided by (used in) by financing activities		(184,786)		5,926,621

Net increase (decrease) in cash and cash equivalents		(1,294,091)		7,367,428

Cash and cash equivalents, beginning of period		14,428,548		4,247,438

Cash and cash equivalents, end of period	$	13,134,457	$	11,614,866

Our supplemental disclosures of cash flow information for the three months ended September 30, 2012 and 2011 are as follows:

		Three Months Ended
		September 30,
		2012		2011
Income taxes paid	$	—	$	—

Non-cash transactions:
Change in accounts payable used to acquire oil and natural gas leasehold interests and develop oil and natural gas properties		124,372		(136,610)
Change in due to joint interest partner used to acquire oil and natural gas leasehold interests and develop oil and natural gas properties		(646,932)		---
Change in accounts payable related to joint venture activities		---		225,438
Oil and natural gas properties incurred through recognition of asset retirement obligations		8,558		(30,969)

Results of Operations

		Three Months Ended
		September 30,					%
		2012		2011		Variance	Change
Sales Volumes, net to the Company:

Crude oil (Bbl)		39,082		33,160		5,922	17.9	%

NGLs (Bbl)		3,381		3,522		(141)	(4.0)	%

Natural gas (Mcf)		65,869		60,707		5,162	8.5	%
Crude oil, NGLs and natural gas (BOE)		53,441		46,800		6,641	14.2	%

Revenue data:

Crude oil	$	4,005,422	$	3,448,595	$	556,827	16.1	%

NGLs		119,611		188,455		(68,844)	(36.5)	%

Natural gas		166,513		247,806		(81,293)	(32.8)	%
Total revenues	$	4,291,546	$	3,884,856	$	406,690	10.5	%

Average price:
Crude oil (per Bbl)	$	102.49	$	104.00	$	(1.51)	(1.5)	%
NGLs (per Bbl)		35.38		53.51		(18.13)	(33.9)	%
Natural gas (per Mcf)		2.53		4.08		(1.55)	(38.0)	%
Crude oil, NGLs and natural gas (per BOE)	$	80.30	$	83.01	$	(2.71)	(3.3)	%

Expenses (per BOE)
Lease operating expenses and production taxes	$	6.32	$	4.64	$	1.68	36.2	%
Depletion expense on oil and natural gas properties (a)	$	5.33	$	4.89	$	0.44	9.0	%

(a)	Excludes depreciation of office equipment, furniture and fixtures, and other assets of $12,249 and $7,829, for the three months ended September 30, 2012 and 2011, respectively.

SOURCE Evolution Petroleum Corporation

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