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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2022
For the transition period from to
Commission File Number 001-32942
EVOLUTION PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
Nevada
(State or other jurisdiction of
incorporation or organization)
41-1781991
(IRS Employer
Identification No.)
1155 Dairy Ashford Road, Suite 425, Houston, Texas 77079
(Address of principal executive offices and zip code)
(713) 935-0122
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.001 par value
Securities registered pursuant to Section 12(g) of the Act: None
Trading Symbol(s)
EPM
Name of Each Exchange On Which Registered
NYSE American
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes: ☐ No: ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes: ☐ No: ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: ☒ No: ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit such files). Yes: ☒ No: ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definition of "large accelerated filer",
"accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
☒
Smaller reporting company
Emerging growth company
☒
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to
Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley
Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.). Yes: ☐ No: ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates on December 31, 2021, the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing
price on that date of $5.05 on the NYSE American was $154.7 million.
The number of shares outstanding of the registrant’s common stock, par value $0.001, as of September 9, 2022, was 33,466,905.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement related to the registrant’s 2022 Annual Meeting of Stockholders to be filed within 120 days of the end of the fiscal year covered by this report are incorporated by reference into Part III of this
report.
Table of Contents
EVOLUTION PETROLEUM CORPORATION
2022 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Forward-Looking Statements
Glossary of Selected Petroleum Industry Terms
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Exhibits and Financial Statement Schedules
From 10-K Summary
Exhibit Index
Signatures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Reserved
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Consolidated Financial Statements and Supplementary Data
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Directors, Executive Officers, and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
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We use the terms, “EPM,” “Company,” “we,” “us,” and “our” to refer to Evolution Petroleum Corporation, and unless the context
otherwise requires, its wholly-owned subsidiaries.
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FORWARD-LOOKING STATEMENTS
This Form 10-K and the information referenced herein contains forward-looking statements within the meaning of the Private
Securities Litigations Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. All statements, except for statements of historical fact, that relate to the anticipated future activities, plans, strategies, objectives or
expectations of the Company are forward-looking statements. The words “plan,” “expect,” “project,” “estimate,” “may,” “assume,”
“believe,” “anticipate,” “intend,” “budget,” “forecast,” “predict” and other similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain such identifying words or phrases. These statements appear in a number
of places and include statements regarding our plans, beliefs or current expectations, including the plans, beliefs and expectations of our
officers and directors. Forward-looking statements include statements regarding: expectations of plans, strategies and objectives of the
Company, including anticipated development activity and capital spending; the Company’s capital allocation strategy, capital structure,
anticipated sources of funding, growth in long-term shareholder value and ability to preserve balance sheet strength; the benefits of the
Company’s multi-basin portfolio, including operational and commodity flexibility; the Company’s ability to maximize cash flow and the
application of excess cash flows to reduce long-term debt and to pay dividends and repurchase shares pursuant to its Share Repurchase
Program; oil, natural gas and NGLs production and commodity mix, GHG emissions and ESG performance; anticipated oil, natural gas
and NGL prices; anticipated drilling and completions activity; estimates of the Company’s oil, NGLs and natural gas reserves and
recoverable quantities; future interest expense; the Company’s ability to access credit facilities and other sources of liquidity to meet
financial obligations throughout commodity price cycles; the Company’s ability to manage debt and financial ratios, finance growth and
comply with financial covenants; the implementation and outcomes of risk management programs, including exposure to commodity price
and interest rate fluctuations, the volume of oil, NGLs and natural gas production hedged, and the markets or physical sales locations
hedged; the impact of changes in federal, state, provincial and local, rules and regulations; anticipated compliance with current or
proposed environmental legislation, including the costs thereof; adequacy of provisions for abandonment and site reclamation costs; the
Company’s operational and financial flexibility, discipline and ability to respond to evolving market conditions; the declaration and
payment of future dividends and any anticipated repurchase the Company’s outstanding common shares; the adequacy of the Company’s
provision for taxes and legal claims; the Company’s ability to manage cost inflation and expected cost structures, including expected
operating, transportation, processing and labor expenses; the competitiveness of the Company against its peers, including with respect to
capital, materials, people, assets and production; oil, NGL and natural gas inventories and global demand for oil, NGL and natural gas; the
outlook of the oil and natural gas industry generally, including impacts from changes to the geopolitical environment; anticipated staffing
levels; anticipated payments related to the Company’s commitments, obligations and contingencies, and the ability to satisfy the same; and
the possible impact of accounting and tax pronouncements, rule changes and standards.
Readers are cautioned against unduly relying on forward-looking statements which, by their nature, involve numerous assumptions
and are subject to both known and unknown risks and uncertainties (many of which are beyond our control) that may cause such
statements not to occur, or actual results to differ materially and/or adversely from those expressed or implied. These assumptions include:
future commodity prices and basis differentials; the ability of the Company to access credit facilities and shelf prospectuses; assumptions
contained in the Company’s corporate guidance; the availability of attractive commodity or financial hedges and the enforceability of risk
management programs; expectations that counterparties will fulfill their obligations pursuant to gathering, processing, transportation and
marketing agreements; access to adequate gathering, transportation, processing and storage facilities; assumed tax, royalty and regulatory
regimes; expectations and projections made in light of, and generally consistent with, the Company’s historical experience and its
perception of historical industry trends; and the other assumptions contained herein.
Readers are cautioned that the assumptions, risks and uncertainties referenced above, and in the other documents incorporated herein
by reference (if any), are not exhaustive. Although the Company believes the expectations represented by its forward-looking statements
are reasonable based on the information available to it as of the date such statements are made, forward-looking statements are only
predictions and statements of our current beliefs and there can be no assurance that such expectations will prove to be correct.
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When considering any forward-looking statement, the reader should keep in mind the risk factors that could cause our actual results to
differ materially from those contained in any forward-looking statement. Important factors that could cause actual results to differ
materially from those in the forward-looking statements herein include the timing and extent of changes in commodity prices for oil and
natural gas, operating risks and other risk factors as described in Part I, Item 1A. Risk Factors and elsewhere in this report and as also may
be described from time to time in our future reports we file with the Securities and Exchange Commission. Readers should also consider
such information in conjunction with our consolidated financial statements and related notes and Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations in this report. There also may be other factors that we cannot anticipate or that
are not described in this report, generally because we do not currently perceive them to be material. Such factors could cause results to
differ materially from our expectations.
Forward-looking statements speak only as of the date they are made, and we do not undertake to update these statements other than as
required by law. Readers are advised, however, to review any further disclosures we make on related subjects in our periodic filings with
the Securities and Exchange Commission.
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Term
Bbl
BCF
BFPD
BOE
BOEPD
BOPD
BTU
CO2
GLOSSARY OF SELECTED PETROLEUM INDUSTRY TERMS
Definition
One stock tank barrel, of 42 U.S. gallons of liquid volume, used herein in reference to oil or NGL.
Billion cubic feet.
Barrels of fluid per day.
Barrels of oil equivalent. BOE is calculated by converting six MCF of natural gas and 42 gallons of NGL to one
Bbl of oil which reflects energy equivalence and not price equivalence. Natural gas prices per MCF and NGL
prices per barrel often differ significantly from the equivalent amount of oil.
Barrels of oil equivalent per day.
Barrels of oil per day.
British Thermal Unit: the standard unit of measure of energy equal to the amount of heat required to raise the
temperature of one pound of water one degree Fahrenheit. One Bbl of oil is typically 5.8 MMBTU, and one
standard MCF is typically one MMBTU.
Carbon Dioxide; CO2 is a gas that can be found in naturally occurring reservoirs, is typically associated with
ancient volcanoes, is a major byproduct from manufacturing and power production, and is also utilized in
enhanced oil recovery through injection into an oil reservoir.
EOR
Developed Reserves Reserves of any category that can be expected to be recovered (i) through existing wells with existing equipment
and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of
a new well; and (ii) through installed extraction equipment and infrastructure operational at the time of the
reserves estimate if the extraction is by a means not involving a well.
Enhanced Oil Recovery; projects that involve injection of heat, miscible or immiscible gas, or chemicals into oil
reservoirs, typically following full primary and secondary waterflood recovery efforts, in order to gain
incremental recovery of oil from the reservoir.
An area consisting of a single reservoir or multiple reservoirs all grouped within or related to the same geologic
structural features and/or stratigraphic features.*
Sale or transfer of all or part of the operating rights from the working interest owner (the assignor or farmout
party), to an assignee (the farm-in party) who assumes all or some of the burden of development, in return for an
interest in the property. The assignor may retain an overriding royalty or any other type of interest. For Federal
tax purposes, a farmout may be structured as a sale or lease, depending on the specific rights and carved out
interests retained by the assignor.
The total acres or number of wells participated in, regardless of the amount of working interest owned.
Farmout
Field
Gross Acres or
Gross Wells
Horizontal Drilling
Hydraulic
Fracturing
LOE
MBBL
MMBBBL
MBOE
MMBOE
MMBOEPD
MCF
MMCF
MMBTU
Mineral Royalty
Interest
Involves drilling horizontally out from a vertical well-bore, thereby potentially increasing the area and reach of
the well-bore that is in contact with the reservoir.
Involves pumping a fluid with or without particulates into a formation at high pressure, thereby creating fractures
in the rock and leaving the particulates in the fractures to ensure that the fractures remain open which potentially
increases the ability of the reservoir to produce oil or natural gas.
Lease Operating Expense(s); a current period expense incurred to operate a well.
One thousand barrels.
One million barrels.
One thousand barrels of oil equivalent.
One million barrels of oil equivalent.
One million barrels of oil equivalent per day.
One thousand cubic feet of natural gas at standard conditions, being approximately sea level pressure and 60
degrees Fahrenheit temperature.
One million cubic feet of natural gas at standard conditions, being approximately sea level pressure and 60
degrees Fahrenheit temperature.
One million British Thermal Units.
A royalty interest that is retained by the owner of the minerals underlying a lease. See “Royalty Interest.”
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Net Acres or Net
Wells
NGL
Non-operated
Interest
Non-operated
Working Interest
NYMEX
OOIP
Operator
Overriding Royalty
Interest or ORRI
Permeability
Porosity
Proved Developed
Nonproducing
Reserves
Proved Developed
Producing Reserves
(“PDP”)
Proved Reserves
The sum of the fractional working interests owned in gross acres or gross wells.
Natural Gas Liquids; the combination of ethane, propane, butane and natural gasoline that can be removed from
natural gas through processing, typically through refrigeration plants that utilize low temperatures, or through
plants that utilize compression, temperature reduction and expansion to a lower pressure.
An interest in an oil and/or natural gas property but does not participate in or have any responsibility for actual
operation of the property.
An interest in an oil and/or natural gas property but does not participate in or have any responsibility for actual
operation of the property, but is burdened with the cost of development and operation of the property.
New York Mercantile Exchange.
Original Oil in Place; an estimate of the barrels originally contained in a reservoir before any production
therefrom.
An oil and natural gas joint venture participant that manages the joint venture, pays venture costs and bills the
venture’s non-operators for their share of venture costs. The operator is also responsible to market all oil and
natural gas production, except for those non-operators who take their production in-kind.
A royalty interest that is created out of the operating or working interest. Unlike a royalty interest, an overriding
royalty interest terminates with the operating interest from which it was created or carved out of. See “Royalty
Interest.”
The measure of ease with which a fluid can move through a reservoir. The unit of measure is a darcy (d), or any
metric derivation thereof, such as a millidarcy (md), where one darcy equals 1,000 millidarcy. Extremely low
permeability of 10 millidarcy, or less, are often associated with source rocks, such as shale. Extraction of
hydrocarbons from a source rock is more difficult than a sandstone reservoir where permeability typically ranges
one to two darcy or more.
The relative volume of the pore space (or open area) compared to the total bulk volume of the reservoir, stated in
percent. Higher porosity rocks provide more storage space for hydrocarbon accumulations than lower porosity
rocks in a given cubic volume of reservoir.
The extraction of oil and natural gas from reservoirs using natural or initial reservoir pressure combined with
artificial lift techniques such as pumps.
Primary Recovery
Method
Producing Reserves Any category of reserves that have been developed and production has been initiated.*
Producing Well
Proved Developed
Reserves
Any well that has been developed and production has been initiated.*
Proved Reserves that can be expected to be recovered (i) through existing wells with existing equipment and
operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a
new well; and (ii) through installed extraction equipment and infrastructure operational at the time of the reserves
estimate if the extraction is by a means not involving a well.
Proved Reserves that have been developed and no material amount of capital expenditures are required to bring
on production, but production has not yet been initiated due to timing, markets, or lack of third party completed
connection to a natural gas sales pipeline.*
Proved Reserves that have been developed and production has been initiated.*
Estimated quantities of oil, natural gas, and NGLs which geologic and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs under existing economic, operating
methods, and government regulations prior to the time at which contracts providing the right to operate expire,
unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic
methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the
operator must be reasonably certain that it will commence the project within a reasonable time.*
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Proved
Undeveloped
Reserves (“PUD”)
Present Value
Productive Well
PV-10
Reservoir
Royalty or Royalty
Interest
Secondary Recovery
Method
Shut-in Well
Standardized
Measure
Tertiary Recovery
Method
Undeveloped
Reserves
Proved Reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells
where a relatively major expenditure is required for recompletion.* (i) Reserves on undrilled acreage shall be
limited to those directly offsetting development spacing areas that are reasonably certain of production when
drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic
producibility at greater distances. (ii) Undrilled locations can be classified as having undeveloped reserves only if
a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the
specific circumstances justify a longer time. (iii) Under no circumstances shall estimates for undeveloped
reserves be attributable to any acreage for which an application of fluid injection or other improved recovery
technique is contemplated, unless such techniques have been proved effective by actual projects in the same
reservoir or an analogous reservoir or by other evidence using reliable technology establishing reasonable
certainty.
When used with respect to oil and natural gas reserves, present value means the estimated future net revenues
computed by applying current prices of oil and natural gas reserves (with consideration of price changes only to
the extent provided by contractual arrangements) to estimated future production of proved oil and natural gas
reserves as of the date of the latest balance sheet presented, less estimated future expenditures (based on current
costs to be incurred in developing and producing the proved reserves) computed using a discount factor and
assuming continuation of existing economic conditions.
A well that is producing oil or natural gas or that is capable of production.
Means the present value, discounted at 10% per annum, of future net revenues (estimated future gross revenues
less estimated future costs of production, development, and asset retirement costs) associated with reserves and is
not necessarily the same as market value. PV-10 does not include estimated future income taxes. Unless
otherwise noted, PV-10 is calculated using the pricing scheme as required by the Securities and Exchange
Commission (“SEC”). PV-10 of proved reserves is calculated the same as the standardized measure of discounted
future net cash flows, except that the standardized measure of discounted future net cash flows includes future
estimated income taxes discounted at 10% per annum. See the definition of standardized measure of discounted
future net cash flows.
A porous and permeable underground formation containing a natural accumulation of producible oil and/or
natural gas that is confined by impermeable rock or water barriers and is individual and separate from other
reservoirs.
The mineral owner’s share of oil or natural gas production (typically between 1/8 and ¼), free of costs, but
subject to severance taxes unless the lessor is a government. In certain circumstances, the royalty owner bears a
proportionate share of the costs of making the natural gas saleable, such as processing, compression, and
gathering.
The extraction of oil and natural gas from reservoirs utilizing water injection (waterflooding) in order to maintain
or increase reservoir pressure and direct the displacement of oil into producing wells.
A well that is not on production, but has not been plugged and abandoned. Wells may be shut-in in anticipation
of future utility as a producing well, plugging and abandonment or other use.
The standardized measure of discounted future net cash flows. The Standardized Measure is an estimate of future
net cash flows associated with proved reserves, discounted at 10% per annum. Future net cash flows are
calculated by reducing future net revenues by estimated future income tax expenses and discounting at 10% per
annum. The Standardized Measure and the PV-10 of proved reserves are calculated in the same exact fashion,
except that the Standardized Measure includes future estimated income taxes discounted at 10% per annum. The
Standardized Measure is in accordance with accounting standards generally accepted in the United States of
America (“GAAP”).
The extraction of oil and natural gas from reservoirs which employs injection of gas, heat, or chemicals into the
reservoir in order to change the physical properties of the oil and aid in its extraction, also known as Enhanced
Oil Recovery (EOR).
Reserves of any category that are expected to be recovered from new wells on undrilled acreage, or from existing
wells where a relatively major expenditure is required for recompletion.*
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Water Injection
Well
Working Interest
Workover
A well which is used to inject water under high pressure into a producing formation to maintain sufficient
pressure to produce the recoverable reserves.
The interest in the oil and natural gas in place which is burdened with the cost of development and operation of
the property. Also called the operating interest.
A remedial operation on a completed well to restore, maintain, or improve the well’s production.
*
This definition may be an abbreviated version of the complete definition as defined by the SEC in Rule 4-10(a) of Regulation S-X.
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Item 1. Business
PART I
Note: See Glossary of Selected Petroleum Industry Terms starting on page iv.
General
Evolution Petroleum Corporation is an independent energy company focused on maximizing total returns to its shareholders through the
ownership of and investment in onshore oil and natural gas properties in the United States. Our long-term goal is to maximize total
shareholder return from a diversified portfolio of long-life oil and natural gas properties built through acquisition and through selective
development, production enhancement, and other exploitation efforts on our oil and natural gas properties.
Recent Developments
Dividend Declaration and Share Repurchase Program
On September 12, 2022, Evolution’s Board of Directors approved and declared a quarterly dividend of $0.12 per common share payable
September 30, 2022. This represents a 20% increase over the $0.10 per common share dividend paid in the fourth quarter of fiscal year
2022. Also, on September 8, 2022, our Board of Directors authorized a share repurchase program, under which we are approved to
repurchase up to $25 million of our common stock through December 31, 2024. We intend to fund any repurchases from working capital
and cash provided by operating activities. As we continue to focus on our goal of maximizing total shareholder return, the Board of
Directors along with the management team believe that a share repurchase program is complimentary to the existing dividend policy and
is a tax efficient means to further improve shareholder return. The shares may be repurchased from time to time in open market
transactions, through privately negotiated transactions or by other means in accordance with federal securities laws. The timing, as well as
the number and value of shares repurchased under the program, will depend on a variety of factors, including management’s assessment of
the intrinsic value of our common shares, the market price of our common stock, general market and economic conditions, and applicable
legal requirements. The value of shares authorized for repurchase by our Board of Directors does not require us to repurchase such shares
or guarantee that such shares will be repurchased, and the program may be suspended, modified, or discontinued at any time without prior
notice.
Jonah Field Acquisition
On April 1, 2022, we acquired non-operated working interests in the Jonah Field in Sublette County, Wyoming (the “Jonah Field
Acquisition”). After taking into account the deposit on the acquisition, customary closing adjustments and an effective date of February 1,
2022, cash consideration was $26.4 million. The acquired properties include an average net working interest of approximately 20% and an
average net revenue interest of approximately 15% in 595 producing wells and approximately 950 net acres. The properties are operated
by Jonah Energy (“Jonah”), an established operator in the geographic region.
Williston Basin Acquisition
On January 14, 2022, we acquired non-operated working interests in 73 producing wells in the Williston Basin with an average net
working interest of approximately 39% and average net revenue interest of approximately 33% located on approximately 45,000 net acres
(approximately 90% held by production) across Billings, Golden Valley, and McKenzie Counties in North Dakota (the “Williston Basin
Acquisition”). After taking into account customary closing adjustments and an effective date of June 1, 2021, cash consideration was
$25.2 million which includes cash expenses related to the acquisition. The properties are operated by Foundation Energy Management
(“Foundation”), an established operator in the geographic region.
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Business Strategy
Our business strategy is to maximize total shareholder return based on our assessment of the operating environment and marketplace,
subject to our obligations to other stakeholders. The key elements of our strategy to accomplish our goal of maximizing shareholder return
are:
● Maintaining a strong balance sheet and conservative financial management;
● Growing the asset base through investment in our existing properties, direct acquisitions of new low decline oil and natural gas
properties, or accretive acquisitions of similar companies; and
● Returning cash to shareholders by sustaining and growing our dividend payout over time or repurchases of our shares in the open
market.
Properties
Our oil and natural gas properties consist of non-operated interests in the Delhi Holt-Bryant Unit in the Delhi Field in Northeast
Louisiana; the Hamilton Dome Field located in Hot Springs County, Wyoming; the Barnett Shale located in North Texas; the Williston
Basin in North Dakota; the Jonah Field in Sublette County, Wyoming; and small overriding royalty interests in four onshore central Texas
wells.
Delhi Field – Enhanced Oil Recovery CO2 Flood – Onshore Louisiana
Our interests in the Delhi Field, a CO2-EOR project, consist of approximately 24% average net working interest, with an associated 19%
revenue interest and separate overriding royalty and mineral interests of approximately 7% yielding a total average net revenue interest of
approximately 26%. The field is operated by Denbury Onshore LLC (“Denbury”), a subsidiary of Denbury Inc. The Delhi Field is located
in northeast Louisiana in Franklin, Madison, and Richland Parishes and encompasses approximately 14,000 gross unitized acres, or
approximately 3,200 net acres.
For the year ended June 30, 2022, our average net daily production from the Delhi Field properties was 1.2 MBOE per day (“MBOEPD”)
consisting of 81% oil and 19% natural gas liquids (“NGLs”). The primary producing reservoirs in the
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field are the Tuscaloosa and Paluxy formations. Produced oil from the field is priced off of Louisiana Light Sweet (“LLS”) crude, which
often trades at a premium to West Texas Intermediate (“WTI").
Hamilton Dome –Hot Springs County, Wyoming
Our interests in the Hamilton Dome Field, a secondary recovery field utilizing water injection wells to pressurize the reservoir, consists of
approximately 24% average net working interest, with an associated 20% average net revenue interest (inclusive of a small overriding
royalty interest). The approximately 5,900 gross acre unitized field, of which we hold approximately 1,400 net acres, is operated by Merit
Energy Company (“Merit”), a private oil and natural gas company, who owns the vast majority of the remaining working interest in the
Hamilton Dome Field. The Hamilton Dome Field is located in the southwest region of the Big Horn Basin in northwest Wyoming.
For the year ended June 30, 2022, our average net daily production from the Hamilton Dome Field properties was 0.4 MBOEPD
consisting of 100% oil. The primary producing reservoirs in the field are the Tensleep and Phosphoria. Produced oil from the field is
subject to Western Canadian Select pricing.
Barnett Shale - North Texas
On May 7, 2021, we acquired non-operated working interests in the Barnett Shale (the “Barnett Shale Acquisition”), a natural gas
producing shale reservoir consisting of approximately 21,000 net acres held by production across nine North Texas counties (Bosque,
Denton, Erath, Hill, Hood, Johnson, Parker, Somervell, and Tarrant), in the Barnett Shale. The acreage consists of an average net working
interest of approximately 17% and associated average net revenue interest of approximately 14% (inclusive of small overriding royalty
interests). The oil and natural gas properties are primarily operated by Diversified Energy Company with approximately 10% of wells
operated by seven other operators.
For the year ended June 30, 2022, our average net daily production from the Barnett Shale properties was 3.5 MBOEPD consisting of 79%
natural gas, 20% NGLs, and 1% oil. The producing reservoir is the Barnett Shale, which is also the source rock. Hydrocarbons produced
from our Barnett Shale properties are sold to Gulf Coast markets.
Williston Basin – Williston, North Dakota
On January 14, 2022, we acquired non-operated working interests in 73 producing wells in the Williston Basin with an average net
working interest of approximately 39% and average net revenue interest of approximately 33% located on approximately 45,000 net acres
(approximately 90% held by production) across Billings, Golden Valley, and McKenzie Counties in North Dakota. The properties are
operated by Foundation, an established operator in the geographic region.
Average net daily production from the date of acquisition through June 30, 2022 was 0.5 MBOEPD. For the year ended June 30, 2022, our
average net daily production from the Willison Basin properties consisted of 81% oil, 11% NGLs, and 8% natural gas. The primary
producing reservoirs are the Three Forks, Pronghorn, and Bakken formations. Hydrocarbons produced from the Williston Basin properties
are sold to local refineries and purchasers.
Jonah Field – Sublette County, Wyoming
On April 1, 2022, we acquired non-operated working interests in the Jonah Field in Sublette County, Wyoming. The acquired properties
include an average net working interest of approximately 20% and an average net revenue interest of approximately 15% in 595 producing
wells and approximately 950 net acres all held by production. The properties are operated by Jonah Energy, an established operator in the
geographic region.
Average net daily production from the date of acquisition through June 30, 2022 was 2.1 MBOEPD. For the year ended June 30, 2022 our
average net daily production from the Jonah Field properties consisted of 88% natural gas, 7% NGL, and 5% oil. Hydrocarbons produced
from our Jonah Field properties are sold to West Coast markets.
Refer to “Production volumes, average sales price and average production costs” table below for further information regarding our
properties and their fiscal year results.
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Estimated Oil and Natural Gas Reserves and Estimated Future Net Revenues
The Securities and Exchange Commission (“SEC”) sets rules related to reserve estimation and disclosure requirements for oil and natural
gas companies. These rules require disclosure of oil and natural gas proved reserves by significant geographic area, using the trailing 12-
month average price, calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-
month period prior to the end of the reporting period, rather than year-end prices, and allows the use of new technologies in the
determination of proved reserves if those technologies have been demonstrated empirically to lead to reliable conclusions about reserve
volumes. Subject to limited exceptions, the rules also require that proved undeveloped reserves may only be classified as such if a
development plan has been adopted indicating that they are scheduled to be drilled within five years.
There are numerous uncertainties inherent in estimating quantities of proved reserves and estimates of reserves quantities and values must
be viewed as being subject to significant change as more data about the properties becomes available.
Summary of Oil & Gas Reserves for Fiscal Year Ended 2022
Our proved reserves as of June 30, 2022, denominated in thousands of barrels of oil equivalent (MBOE), were estimated by our
independent reservoir engineers, DeGolyer and MacNaughton (“D&M”) and Netherland, Sewell & Associates, Inc. (“NSAI”), both
worldwide petroleum consultants.
D&M evaluated the reserves for our Barnett Shale, Hamilton Dome, and Delhi Field properties. D&M, which was formed in 1936, has
completed more than 23,000 projects in more than 100 countries. The scope and results of their procedures are summarized in a letter
from the firm, which is included as Exhibit 99.1 to this Annual Report on Form 10-K.
NSAI evaluated the reserves for our Williston Basin and Jonah Field properties. NSAI, which was founded in 1961, began evaluating
these properties when we acquired each of them during the fiscal year ended June 30, 2022. The scope and results of their procedures are
summarized in a letter from the firm, which is included as Exhibit 99.2 to this Annual Report on Form 10-K.
The following table sets forth our estimated proved reserves as of June 30, 2022. For additional reserve information, see our Supplemental
Disclosure about Oil and Natural Gas Properties (unaudited) to our consolidated financial statements in Item 8. Financial Statements and
Supplementary Data. The New York Mercantile Exchange (“NYMEX”) previous 12-month unweighted arithmetic average first-day-of-
the-month price used to calculate estimated revenues was $85.82 per barrel of oil and $5.19 per MMBtu of natural gas. The net price per
barrel of NGLs was $44.24, which does not have any single comparable reference index price. The NGL price was based on historical
prices received. For periods for which no historical price information was available, we used comparable pricing in the geographic area.
Pricing differentials were applied based on quality, processing, transportation, location and other pricing aspects for each individual
property and product.
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Reserves as of June 30, 2022
Reserve Category
Proved:
Developed Producing
Developed Non-Producing
Undeveloped
Total Proved
Product Mix
Total Proved by Property:
Delhi Field
Hamilton Dome Field
Barnett Shale
Williston Basin
Jonah Field
Total Proved
Oil
(MBbls)
Natural Gas
(MMcf)
NGLs
(MBbls)
Total Reserves
(MBOE)(1)
Percent of
Total Proved
8,705
157
2,608
11,470
32%
4,159
2,374
96
4,472
369
11,470
104,723
71
2,197
106,991
49%
—
—
65,619
3,709
37,663
106,991
6,299
19
623
6,941
19%
1,797
—
3,649
1,012
483
6,941
32,458
188
3,597
36,243
100%
5,956
2,374
14,682
6,102
7,129
36,243
89.6 %
0.5 %
9.9 %
100.0 %
16.4 %
6.6 %
40.5 %
16.8 %
19.7 %
100.0 %
(1) Equivalent oil reserves are defined as six Mcf of natural gas and 42 gallons of NGLs to one barrel of oil conversion ratio which
reflects energy equivalence and not price equivalence. Natural gas prices per Mcf and NGL prices per barrel often differ significantly
from the equivalent amount of oil.
Internal Controls Over Reserves Estimation Process and Qualifications of Technical Persons with Oversight for the Company’s
Overall Reserve Estimation Process
Our policies regarding internal controls over reserves estimates require such estimates to be prepared by an independent petroleum
engineering firm under the supervision of our internal reserve engineering team, which includes third-party consultants. Our internal
reserve engineering team and third-party consultants have a combined experience of over 80 years in Petroleum Engineering. The person
responsible for overseeing the preparation of our reserves estimates has a Bachelor of Science Degree in Petroleum Engineering from
Texas A&M University, is a registered Professional Engineer in the State of Texas, has over 40 years of oil and natural gas experience
including large independents and financial firm services for projects and acquisitions. Our Board of Directors also has oversight of our
reserve estimation process and contains an independent director who is a Registered Professional Engineer with experience in energy
company reserve evaluations. Such reserve estimates comply with generally accepted petroleum engineering and evaluation principles,
definitions, and guidelines as established by the SEC.
The reserves information in this filing is based on estimates prepared by D&M and NSAI. The person responsible for the preparation of
the reserve report at D&M is Dilhan Ilk, Senior Vice President and Division Manager of North America. Dr. Ilk received a Bachelor of
Science degree in Petroleum Engineering in 2003 from Istanbul Technical University and a Master’s degree and Doctorate in Petroleum
Engineering in 2005 and 2010, respectively, from Texas A&M University, and he has in excess of 10 years of experience in oil and natural
gas reservoir studies and evaluations. The person responsible for the preparation of the reserve report at NSAI is Steven W. Jansen, P.E.,
Vice President. Mr. Jansen, a Licensed Professional Engineer in the State of Texas (No. 112973), has been practicing consulting petroleum
engineering at NSAI since 2011 and has over four years of prior industry experience. He graduated from Kansas State University in 2007
with a Bachelor of Science Degree in Chemical Engineering.
We provide D&M and NSAI with our property interests, production, current operating costs, current production prices, estimated
abandonment costs and other information in order for them to prepare the reserve estimates. This information is reviewed by our senior
management team, designated operations personnel, and third-party consultants to ensure accuracy and completeness of the data prior to
submission to the reserve engineers. The scope and results of D&M’s and NSAI’s procedures, as well as their professional qualifications,
are summarized in the letters included as Exhibit 99.1 and Exhibit 99.2, respectively, to this Annual Report on Form 10-K.
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Proved Undeveloped Reserves
During the year ended June 30, 2022 our proved undeveloped (“PUD”) reserves changed as follows:
Proved undeveloped reserves:
June 30, 2021
Revisions of previous estimates
Improved recovery, extensions and discoveries
June 30, 2022
Oil
(MBbls)
Natural Gas
(MMcf)
NGLs
(MBbls)
Total Reserves
(MBOE)(1)
1,605
(1,605)
2,608
2,608
—
—
2,197
2,197
208
(208)
623
623
1,813
(1,813)
3,597
3,597
(1) Equivalent oil reserves are defined as six Mcf of natural gas and 42 gallons of NGLs to one barrel of oil conversion ratio which
reflects energy equivalence and not price equivalence. Natural gas prices per Mcf and NGL prices per barrel often differ significantly
from the equivalent amount of oil.
Our PUD reserves were 3.6 MMBOE as of June 30, 2022, with related future development costs of approximately $61.7 million, which
are associated with the Williston Basin properties. At June 30, 2021, our PUD reserves were 1.8 MMBOE, which were associated with
Test Site V at our Delhi Field. PUD reserves associated with Test Site V were removed in the fiscal year ended June 30, 2022. The
technical and economic merits of Test Site V remain attractive; however, the operator does not currently have Test Site V on its
expenditure schedule for the next five years and, as a result, has been excluded from our proved reserves at this time. See “Drilling and
Present Activities” below for a further discussion of our expected development of the PUDs added for the Williston Basin properties.
Drilling and Present Activities
Currently, none of our oil and natural gas properties are operated by us. We therefore rely on information from our operators regarding
near-term drilling programs. As certain of our properties are considered fully developed, there are no plans to drill wells in fiscal year
2023 in the Hamilton Dome Field, the Delhi Field and the Jonah Field. At this time, operators of our Delhi Field, Hamilton Dome Field,
Barnett Shale, Williston Basin, and Jonah Field properties are running workover rigs focusing on projects to return previously shut-in
wells to production.
During fiscal year 2022, we participated in the drilling of two gross wells in Barnett Shale which were brought online during the fourth
quarter of the fiscal year. Our net interest in each of these wells is approximately one percent or less. There are currently no plans to
participate in the drilling of additional wells in the Barnett Shale in fiscal year 2023.
In the latter half of fiscal year 2022, our management team and third-party consulting engineers performed a technical review of drilling
locations on our Williston Basin properties. Currently, there are 20 PUD drilling locations in the Pronghorn and Three Forks formations
attributed to these properties. Pursuant to agreements we have with the operator, Foundation, we can propose drilling wells, in which the
operator may participate. In the event the operator does not participate in our proposed drilling well, we have the right to undertake all
necessary activities to drill, complete and install related facilities for the well. Ongoing operations of any well we elect to drill will be
turned over to the operator of the property upon completion.
Our operator, Foundation, has also identified four PUD sidetrack locations in the Williston Basin targeting the Birdbear formation. Our
management team and third-party consulting engineers have reviewed Foundation’s plans and technical justification and plan to
participate in the drilling of two of these wells during fiscal year 2023 and included the expected cost in our fiscal year 2023 capital
budget.
For further discussion, see “Highlights for our Fiscal Year 2022” and “Capital Expenditures” within Item 7. Management’s Discussion and
Analysis of Financial Conditions and Results of Operations.
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Production volumes, average sales price and average production costs
The following table summarizes our crude oil, natural gas, and natural gas liquids production volumes, average sales price per unit,
average daily production on an equivalent basis, production costs, and production costs per unit for the periods indicated:
2022
Years Ended June 30,
2021
2020
Volume
Price
Volume Price
Volume
Price
Production:
Crude oil (MBBL)
Delhi Field
Hamilton Dome Field
Barnett Shale
Williston Basin
Jonah Field
Other
Total
Natural gas (MMCF)
Barnett Shale
Williston Basin
Jonah Field
Other
Total
Natural gas liquids (MBBL)
Delhi Field
Barnett Shale
Williston Basin
Jonah Field
Other
Total
Equivalent (MBOE) (1)
Delhi Field
Hamilton Dome Field
Barnett Shale
Williston Basin(2)
Jonah Field(2)
Other
Total
Average daily production (BOEPD) (1)
Delhi Field
Hamilton Dome Field
Barnett Shale
Williston Basin
Jonah Field
Other
Total
Production costs (in thousands, except per BOE)
Lease operating costs
Delhi Field
Hamilton Dome Field
Barnett Shale
Williston Basin
Jonah Field
Other
Total
358
150
9
71
10
21
619
6,087
40
1,000
14
7,141
83
256
10
12
3
364
441
150
1,280
88
189
25
2,173
1,208
411
3,507
241
518
68
5,953
Amount
$ 14,933
5,480
22,825
2,419
2,990
10
$ 48,657
$
$
$
$
$
$
$
$
86.57
76.03
82.56
101.25
112.50
58.57
85.11
5.11
6.30
7.80
1.21
5.49
48.02
46.91
38.50
52.92
18.33
46.89
79.32
76.03
34.27
88.93
50.57
52.08
50.13
$
$
$
$
$
$
$
49.43
42.23
52.50
—
—
—
47.59
2.73
—
—
—
2.73
18.95
24.37
—
—
—
21.42
43.80
42.23
19.23
—
—
—
36.87
410
143
2
—
—
—
555
963
—
—
—
963
93
78
—
—
—
171
503
143
241
—
—
—
887
1,378
392
660
—
—
—
2,430
540
98
—
—
—
—
638
—
—
—
1
1
106
—
—
—
—
106
646
98
—
—
—
—
744
1,765
268
—
—
—
—
2,033
$
per BOE Amount
9,463
$
4,080
3,028
—
—
16
$ 16,587
33.86
36.53
17.83
27.49
15.82
0.40
22.39
$
per BOE Amount
$ 10,659
$
2,835
—
—
—
12
$ 13,506
18.81
28.53
12.56
—
—
—
18.69
$
$
$
$
$
$
$
$
47.63
29.18
—
—
—
—
44.79
—
—
—
2.00
2.00
9.60
—
—
—
—
9.60
41.39
29.18
—
—
—
—
39.78
per BOE
16.50
$
28.93
—
—
—
—
18.15
$
(1)
Equivalent oil reserves are defined as six Mcf of natural gas and 42 gallons of NGLs to one barrel of oil conversion ratio which reflects energy equivalence and not
price equivalence. Natural gas prices per Mcf and NGL prices per barrel often differ significantly from the equivalent amount of oil.
(2) Average daily production presented in the table above represents our fiscal year production divided by 365 days in the year. At Williston and Jonah, our average daily
production since their respective acquisition dates of January 14, 2022 and April 1, 2022 through June 30, 2022, was 0.5 MBOEPD and 2.1 MBOEPD, respectively.
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Productive Wells
The following table sets forth the number of productive oil and natural gas wells in which we own a working interest as of June 30, 2022.
Oil
Natural gas
Total
Acreage Data
Company Operated
Gross
Net
Non-Operated
Net
Gross
Gross
Total
—
—
—
—
—
—
344
1,455
1,799
83.4
209.7
293.1
344
1,455
1,799
Net
83.4
209.7
293.1
The following table sets forth certain information regarding our developed and undeveloped lease acreage as of June 30, 2022. Developed
acreage refers to acreage on which wells have been drilled or completed to a point that would allow production of oil and natural gas in
commercial quantities. Undeveloped acreage refers to acreage on which wells have not been drilled or completed to a point that would
permit production of oil and natural gas in commercial quantities whether or not the acreage contains proved reserves.
Field(1)
Delhi Field, Louisiana
Hamilton Dome Field, Wyoming
Barnett Shale, Texas
Williston Basin, North Dakota
Jonah Field, Wyoming
Total(2)
Developed Acreage
Net
Gross
Undeveloped Acreage
Net
Gross
Total
Gross
Net
9,126
5,908
123,777
124,800
5,280
268,891
2,180
1,389
20,918
37,306
956
62,749
4,510
—
—
23,680
—
28,190
1,077
—
—
7,389
—
8,466
13,636
5,908
123,777
148,480
5,280
297,081
3,257
1,389
20,918
44,695
956
71,215
(1) Except for our undeveloped acreage in Williston Basin, North Dakota (see expiration table below), all acreage, including any
undeveloped, nonproductive or undrilled acreage, is held by existing production as long as continuous production is maintained in the
unit.
(2) This table excludes acreage attributable to small overriding royalty interests retained in various formations in the Texas Giddings
Field area. Except for de minimis production that began on two leases during late fiscal year 2019, none of such acreage is currently
producing and our interests are subject to expiration if leases are not maintained by others or commercial production is not
established. It does not currently appear likely that we will obtain any significant value from these interests and no reserves have been
assigned to any of the Giddings’ interests.
We acquired the Williston Basin properties on January 14, 2022. The table below reflects our net undeveloped acreage in Williston Basin,
North Dakota as of June 30, 2022 that will expire each year if we do not establish production in paying quantities on the units in which
such acreage is included to maintain the lease:
Fiscal Year
2023
2024
2025
2026
2027 & beyond
Net Acreage
Expiration(1)
1,369
440
1,664
860
309
4,642
(1) Excluded 2,747 net acres held by existing production as long as continuous production is maintained in the unit.
Markets and Customers
Our production is marketed to third parties in a manner consistent with industry practices. In the United States market where our
properties are operated, crude oil, natural gas, and NGLs are readily transportable and marketable. In the
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Jonah Field, we take our natural gas and NGL working interest production in-kind and market separately to purchasers on six-month
contracts for natural gas and to Enterprise Products Partners L.P. for NGLs. We do not currently market our share of oil, natural gas, or
NGLs production from the Delhi Field, the Hamilton Dome Field, the Barnett Shale or the Williston Basin separately from the operators’
shares of production. Although we have the right to take our working interest production in-kind, we are currently selling our production
through the field operators pursuant to the delivery and pricing terms of their sales contracts. Under such arrangements, we typically do
not know the identity of the buyers.
As a non-operator, we are highly dependent on the success of our third-party operators and the decisions made in connection with their
operations. The third-party operator sells the oil, natural gas, and NGLs to the purchaser, collects the cash, and distributes the cash to us.
In the years ended June 30, 2022 and 2021, three operators each distributed over 10% of our oil, natural gas and NGL revenues making up
approximately 83% and 100% of total revenues for the years, respectively.
As the acquisition of the Williston Basin and Jonah Field properties occurred in the second half of fiscal year 2022, we expect purchases
of our crude oil, natural gas, and NGL production from these properties to represent a larger percentage of total sales in fiscal year 2023
and beyond. The loss of a purchaser at any of our five major producing properties or disruption to pipeline transportation from these fields
could adversely affect our net realized pricing and potentially our near-term production levels.
Market Conditions
Prices we receive for crude oil, natural gas, and NGLs are influenced by many factors that are beyond our control, the exact effect of
which is difficult to predict. These factors include changes in supply and demand, market prices, government regulation, weather, and
actions of major foreign producers.
Oil prices over the past few years have fluctuated widely and been extremely volatile. For example, average daily prices for WTI oil
ranged from a high of $123.64 per barrel to a low of $35.64 per barrel over our last two fiscal years. The price of oil per barrel dropped
substantially in fiscal 2020 as a result of the impact of the novel coronavirus (“COVID-19”) pandemic and geopolitical factors but
recovered to an average of $108.83 per barrel during the fiscal fourth quarter of 2022. The severe drop in oil price during the pandemic
and market share competition between OPEC+ members in the spring of 2020 substantially and adversely impacted oil, natural gas, and
NGL prices during the balance of 2020, and thus impacted the trailing 12-month commodity prices required for reserves and ceiling tests
for asset carrying value which in turn led to substantial impairments during our first and second quarters of fiscal 2021. Worldwide factors
such as global health pandemics, geopolitical, international trade disruptions and tariffs, macroeconomics, supply and demand, refining
capacity, petrochemical production, and derivatives trading, among others, influence prices for oil, natural gas, and NGLs. Local factors
also influence prices for oil, natural gas, and NGLs and include increasing or decreasing production trends, quality differences, regulation,
and transportation issues unique to certain producing regions and reservoirs.
Competition
The oil and natural gas industry is highly competitive for prospects, acreage, and capital. Our competitors include major integrated oil and
natural gas companies, numerous independent oil and natural gas companies, individuals, and drilling and income programs. Many of our
competitors are large, well-established companies with substantially larger operating staff and greater capital resources. Competitors are
national, regional, or local in scope and compete on the basis of financial resources, technical prowess or local knowledge. The principal
competitive factors in our industry are expertise in given geographical areas and geologic systems and the ability to efficiently conduct
operations, achieve technological advantages, identify and acquire economically producible reserves, and obtain capital at rates that allow
economic investments.
Risk Management
We are exposed to certain risks relating to our ongoing business operations, including commodity price risk. In accordance with our
company policies and the covenants under the Senior Secured Credit Facility, derivative
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instruments are occasionally utilized to hedge our exposure to price fluctuations and reduce the variability in our cash flows associated
with anticipated sales of future oil and natural gas production. We do not enter into derivative contracts for speculative trading purposes.
While there are many different types of derivative instruments available, we typically use costless collars and fixed-price swaps to attempt
to manage price risk. Costless collar agreements are put and call options used to establish floor and ceiling commodity prices for a fixed
volume of production during a certain time period. All costless collar agreements provide for payments to counterparties if the settlement
price under the agreement exceeds the ceiling and payments from the counterparties if the settlement price under the agreement is below
the floor. The fixed-price swap agreements call for payments to, or receipts from, counterparties depending on whether the index price of
oil or natural gas for the period is greater or less than the fixed price established for the period contracted under the fixed-price swap
agreement.
It is our policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by
management as competent and competitive market makers. We will continue to evaluate the benefit of employing derivatives in the future.
Our hedge policies and objectives may change as our operational profile changes. See Item 7A. Quantitative and Qualitative Disclosures
About Market Risk and Note 8, “Derivatives” to our consolidated financial statements in Item 8. Financial Statements and Supplementary
Data for additional information.
Government Regulation
As an oil and natural gas exploration and production company, our interests are subject to numerous legal requirements.
Regulation of Oil and Natural Gas Production
Federal, state, tribal and local authorities have promulgated extensive rules covering oil and natural gas exploration, production and
related operations. Those regulations require our operating partners to obtain permits, post bonds and submit reports. They also may
address conservation, including unitization or pooling of oil and natural gas properties, well locations, the method of drilling and casing
wells, surface use and restoration of properties where wells are drilled, sourcing and disposal of water used in the process of drilling,
completion and abandonment, the establishment of maximum rates of production from wells, and plugging and abandonment of
wells. The effect of these regulations is to limit the amount of oil and natural gas that we can produce and to limit the number of wells or
the locations at which we can produce. Moreover, many states impose a production or severance tax with respect to the production and
sale of oil, natural gas and natural gas liquids within their jurisdictions. Failure to comply with any applicable legal requirements may
result in substantial penalties. Because such regulations are frequently amended or reinterpreted, we are unable to predict future
compliance costs or impacts. Significant expenditures may be required to comply with governmental laws and regulations, however, and
may have a material adverse effect on our financial condition and results of operations.
Regulation of Transportation of Oil and Natural Gas
The prices for crude oil, condensate and natural gas liquids and natural gas are negotiated and not currently regulated. But Congress,
which has been active in oil and natural gas regulation, could impose price controls in the future.
Our sales of crude oil and natural gas are affected by the availability, terms and cost of transportation. The Federal Energy Regulatory
Commission (“FERC”) primarily regulates interstate oil and natural gas transportation rates. In some circumstances, FERC regulations
also may affect intrastate pipelines. In addition, states may impose on intrastate pipelines various obligations relating to such matters as
safety, environmental protection, nondiscriminatory take and rates. The basis for intrastate oil and natural gas pipeline regulation, and the
degree of regulatory oversight and scrutiny given to such matters, vary from state to state. To the extent effective interstate and intrastate
rates are equally applicable to all comparable shippers, we believe that the regulation of oil and natural gas transportation rates will not
affect our business in any way that is of material difference from those of our competitors who are similarly situated.
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Environmental Matters
Our properties are subject to extensive and changing federal, state and local laws and regulations relating to protection of the environment,
worker safety and human health. Such requirements may address:
● the generation, storage, handling, emission, transportation and disposal of materials;
● reclamation or remediation of sites, including former operating areas;
● the acquisition of a permit or other authorization;
● air emissions;
● protection of water supplies;
● limits on construction, drilling and other activities in wilderness or other environmentally sensitive areas; and
● assessment of environmental impacts.
Failure to comply with such requirements may result in a variety of sanctions, including, fines, administrative orders and injunctions. In
addition, issuing authorities may revoke, adversely modify or deny permits necessary for our operations. In the opinion of management,
our properties are in substantial compliance with applicable environmental laws and regulations, and we have no material commitments
for capital expenditures to comply with existing environmental requirements. Nevertheless, changes in existing environmental laws and
regulations or in interpretations thereof could have a significant impact on our company, as well as the oil and natural gas industry in
general. Significant environmental requirements that may affect our operations are described below.
The Comprehensive Environmental, Response, Compensation, and Liability Act (“CERCLA”) and comparable state statutes impose strict,
joint and several liability on owners and operators of sites and on persons who arranged for the disposal of “hazardous substances” found
at such sites. It is not uncommon for neighboring landowners or other third parties to also file claims for personal injury and property
damage allegedly caused by any hazardous substances released into the environment. Although CERCLA currently excludes petroleum
from its definition of “hazardous substance,” our operations do entail handling other chemicals that may be subject to the statute. In
addition, state laws affecting our properties may impose cleanup liability relating to petroleum and petroleum related products. The
Federal Resource Conservation and Recovery Act (“RCRA”) and comparable state statutes govern the disposal of “solid waste” and
“hazardous waste.” Violations may result in substantial fines. Although RCRA currently classifies certain oil field wastes as “non-
hazardous,” such exploration and production wastes could be reclassified as hazardous, thereby subjecting our operations to more
stringent handling and disposal requirements. In some circumstances, moreover, RCRA authorizes both the federal government and
private persons to seek injunctions requiring the cleanup of wastes, whether hazardous or non-hazardous.
The Endangered Species Act (“ESA”) protects fish, wildlife and plants that are listed as threatened or endangered. Under the ESA,
exploration and production operations may not significantly impair or jeopardize a protected species or its habitat. The ESA provides for
criminal penalties for willful violations. Our operations also may be subject to other statutes that protect animals and plants such as the
Migratory Bird Treaty Act. Although we believe that our properties are in compliance with such statutes, any change in these statutes or
any reclassification of a species as endangered could subject our company (directly or indirectly through our operating partners) to
significant expenses to modify operations, could force discontinuation of certain operations altogether and could limit the locations our
operating partners may utilize in the future.
The Clean Air Act (“CAA”) is the comprehensive federal law addressing sources of air emissions. Oil and natural gas production and
natural gas processing operations are among the many source categories subject to the CAA. Regulated emissions from oil and natural gas
operations include sulfur dioxide, volatile organic compounds (“VOCs”) and hazardous air pollutants such as benzene, among others.
In particular, the Environmental Protection Agency (“EPA”) proposed in November 2021 to impose new CAA rules restricting methane (a
greenhouse gas) and VOC emissions from new, existing and modified facilities in the oil and gas sector. Among other things, EPA’s
proposed new rule would require states to implement plans that meet or exceed established emission reduction guidelines for oil and
natural gas facilities. These regulations and proposals and any other
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new regulations requiring the installation of more sophisticated pollution control equipment could have a material adverse impact on our
business, results of operations and financial condition.
The Clean Water Act (the “CWA”) is the primary federal law controlling the discharge of produced waters and other pollutants into waters
of the United States. Permits must be obtained for such discharges and to conduct construction activities in waters and wetlands. Some
states also require permits for discharges or operations that may impact groundwater.
The CAA, CWA and comparable state statutes authorize civil, criminal and administrative penalties for violations. Further, the CWA and
Oil Pollution Act may impose liability on owners or operators of onshore facilities that impact surface waters.
Pursuant to the Safe Drinking Water Act, EPA (or an authorized state) regulates the construction, operation, permitting, and closure of
injection wells used to place oil and natural gas wastes and other fluids underground for storage or disposal. The primary objective of
injection well operating requirements is to ensure the mechanical integrity of the injection apparatus and to prevent migration of fluids
from the injection zone into underground sources of drinking water. Underground injection associated with oil and gas operations,
particularly the disposal of produced water, has been linked in some cases to localized earthquakes. This in turn has led to new legislative
and regulatory initiatives, which have the potential to restrict injection in certain wells or limit operations in certain areas.
Substantially all of the oil and natural gas production in which we have an interest is developed from unconventional sources that require
hydraulic fracturing as part of the completion process. Hydraulic fracturing involves the injection into the formation of water, sand and
chemicals under pressure to stimulate production. From time to time, legislation has been proposed in the United States Congress to repeal
the Safe Drinking Water Act’s exemption for hydraulic fracturing from the definition of “underground injection” and to require federal
permitting of hydraulic fracturing. If ever enacted, such legislation would add to our production costs.
Scrutiny of hydraulic fracturing activities continues in other ways. Several states where our properties are located have also proposed or
adopted legislative or regulatory restrictions on hydraulic fracturing. A number of municipalities likewise have enacted bans on hydraulic
fracturing. We cannot predict whether any other legislation restricting hydraulic fracturing will be enacted and if so, what its provisions
would be. If additional levels of regulation and permits were to be required through the adoption of new laws and regulations at the
federal, state, tribal or local level, it could lead to delays, increased operating costs and process prohibitions that could materially
adversely affect our revenue and results of operations.
The National Environmental Policy Act (“NEPA”) requires federal agencies to assess the environmental effects of their proposed actions
prior to making decisions. Among the broad range of actions covered by NEPA are decisions on permit applications and federal land
management. Many of the activities of our third-party operating partners involve federal decisions subject to NEPA. Such federal actions
may trigger robust NEPA review, which could lead to delays and increased costs that could materially adversely affect our revenues and
results of operations. In 2022, moreover, the Biden Administration reversed changes to NEPA rules enacted under the Trump
Administration that had been intended to streamline NEPA review. The revised regulations lay the foundation for additional scrutiny of
impacts on climate change, which could affect the assessment of projects ranging from oil and gas leasing to development on public and
Indian lands.
Climate Change
Climate change has become a major public concern and policy issue in the United States and around the world. Much of the debate has
focused on greenhouse gas (“GHG”) emissions from oil and natural gas, particularly carbon dioxide and methane.
In the United States, there is no comprehensive federal regulatory statute addressing climate change, although Congress does periodically
consider such measures. At the federal level, the United States therefore has primarily addressed climate change through executive actions
and regulatory initiatives pursuant to existing statutes. These include rejoining
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the Paris Agreement on climate change, the Biden Administration’s commitment to cut greenhouse gas emissions by 2030 to 50-52
percent of 2005 levels, various executive orders, limiting land available for oil and gas leasing, the United States Methane Emissions
Reduction Action Plan, and Clean Air Act rules (such as the November 2021 proposal to regulate methane from the oil and gas sector). In
addition, several states have already implemented or are considering programs to reduce GHG emissions. These include cap and trade
programs, promotion of alternative forms of energy, transportation standards and restrictions on particular GHGs. To the extent that new
climate change measures are adopted, and our third-party operating partners must further control GHG emissions, our business may be
adversely impacted.
In addition, recent court decisions have left open the question of whether tort claims alleging property damage may proceed against
sources of GHG emissions under state common law. Thus there is some litigation risk for such claims.
Legislation or regulations that may be adopted to address climate change could also affect the markets for our products by making our
products more or less desirable than competing sources of energy. To the extent that our products are competing with higher GHG
emitting energy sources, for example, our products would become more desirable in the market with more stringent limitations on GHG
emissions. But in 2022, the United States enacted the Inflation Reduction Act that, among other things, creates a series of financial
incentives intended to discourage use of oil and natural gas (including imposing a fee on methane emissions) and to promote alternative
sources of energy. To the extent that our products are competing with lower GHG emitting energy sources such as solar and wind, our
products may become less desirable in the market with such government intervention. We cannot predict with any certainty at this time
how these possibilities may affect our operations.
Various studies on climate change indicate that extreme weather conditions and other risks may occur in the future in the areas where we
operate. Although we have not experienced any material impact from such extreme conditions to date, no assurance can be given that they
will not have a material adverse effect on our business in the future.
See discussion captioned “Government regulation and liability for oil and natural gas operations and environmental matters may adversely
affect our business and results of operations” in Item 1A. Risk Factors.
Insurance
We maintain insurance on our oil and natural gas properties and operations for risks and in amounts customary in the industry. Such
insurance includes, but is not limited to, general liability, excess liability, control of well, operators extra expense, casualty, fraud, and
directors and officer’s liability coverage. Not all losses are insured, and we retain certain risks of loss through deductibles, limits, and self-
retentions. We do not carry business interruption or lost profits coverage.
Human Capital, Sustainability, and ESG
Employees
As of June 30, 2022, we had eight full-time employees, not including contract personnel and outsourced service providers. We believe that
we have positive relations with our employees. Our team is broadly experienced in oil and natural gas operations, development,
acquisitions, and financing. We follow a strategy of outsourcing most of our property accounting, human resources, administrative, and
other non-core functions. For our full-time employees, our benefits package, as determined by our Board of Directors, includes medical,
dental, and vision insurance, 401(k) contributions based on a portion of the employee’s base salary, short and long-term performance-
based and service-based incentive pay (i.e., annual bonuses and stock awards), and paid time off.
Our workforce is provided with annual training and is expected to sign an acknowledgement regarding our policies and disclosures which
include, but are not limited to, the Corporate Sustainability Report (“CSR”), employee handbook, human rights, code of ethics, health and
safety, emergency procedures, conflicts of interest, insider trading, bribery, kickbacks, discrimination, diversity, equality, and inclusion.
Sustainability and ESG
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In fiscal year 2021, we formed an Environmental Social Governance (“ESG”) Task Force. Under the supervision of our Board of
Directors, the Nominating and Corporate Governance committee, and senior management, the ESG task force is responsible for the
creation and implementation of our CSR and ESG initiatives. Evolution’s inaugural CSR was published in November 2021. This report is
accessible on our website at www.evolutionpetroleum.com.
The ESG Task Force has formalized our existing ESG programs, proposed and implemented new ESG initiatives, monitored adherence to
ESG standards, and provided public disclosures for our stakeholders. In fiscal year 2022, the ESG Task Force continued to disclose,
enhance, implement, and provide training for a number of new and existing policies and procedures. These include, but are not limited to:
formalizing and implementing charitable donation program and employee volunteer initiative, completing our first annual company-wide
ESG training program for both the Board of Directors and our workforce, implementation of safety inspections and health and safety
coordinators, and incorporating ESG considerations into our compensation structure.
We are committed to high standards of conduct and ethics in order to contribute to the sustainability of our business. Our core values are
the base to support our strategy and long-term success. We believe integrity is paramount and we are committed to develop and produce
energy resources in environmentally, socially, and ethically respectful and responsible ways. Our people are critical to our success and as
such we promote and maintain a safe and inclusive work environment. We strategically plan for the long-term and strive to maintain
capital discipline and stakeholder transparency and continuous focus on returning capital to shareholders. We work with third-party
operators that share our desire to operate and work responsibly, particularly for the natural environments in which they operate.
As a non-operator of our current properties, we do not have direct control over environmental initiatives at a property-level. However, we
believe it is important to partner with third-party operators that share our core values and are committed to being environmental stewards
as they responsibly produce energy resources. We recognize that the expectations, requirements, and responsibilities of operators
regarding safeguarding the environment and environmental stewardship continue to evolve. We are, and will continue to be, committed to
supporting our third-party operators as they respond to these expectations, requirements, and responsibilities.
At present, we do not report or collect data regarding emissions, water use, waste generation, spills, or other similar measurements on
behalf of our operating partners. We host regular operations meetings with our operating partners in which we discuss asset level
operations, expenses, any environmental issues and compliance, as well as ESG and health and safety related topics.
We do not report Scope 1 GHG, or direct, emissions to the EPA as we are not the operator of our properties, nor do we have financial
control over our oil and natural gas properties and operations. We prefer to partner with third-party operators that work to reduce their
Scope 1 GHG emissions, and we encourage them to accelerate their efforts as appropriate in this regard. As a non-operator, the Company
reports in its CSR the estimated Scope 2 GHG emissions for its corporate office located in Houston, Texas. Scope 2 GHG emissions are
based on indirect emissions representing purchased electricity. We are one of many tenants leasing space in our corporate office building
and do not know the actual amount of electricity used in our space. As such, we estimate our consumption by multiplying the electricity
purchased for the entire building by the percentage of the floor area that we occupy. Water use is also reported in the CSR and is
calculated in a similar fashion.
We maintain a hotline which operates 24/7/365 and allows anonymous and confidential reporting for employees, consultants, partners, and
contractors, including the ability to report concerns or violations of our policies through the phone or internet (Phone: 877-628-7489 /
Website: www.epm.alertline.com).
Additional Information
We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other reports with the SEC.
Our reports filed with the SEC are available free of charge to the general public through our website at www.evolutionpetroleum.com.
These reports are accessible on our website as soon as reasonably practicable after being filed with, or furnished to, the SEC. This Annual
Report on Form 10-K and our other filings can also be obtained by contacting: Corporate Secretary, 1155 Dairy Ashford Road, Suite 425,
Houston, Texas 77079, or calling
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(713) 935-0122. These reports are also available at the SEC Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that
file electronically with the SEC.
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Item 1A. Risk Factors
Our business involves a high degree of risk. If any of the following risks, or any risk described elsewhere in this Annual Report on
Form 10-K, actually occurs, our business, financial condition, or results of operations could suffer. The risks described below are not the
only ones facing us. Additional risks not presently known to us or which we currently consider to be immaterial also may adversely affect
us.
Risks Related to Our Business:
A substantial or extended decline in oil and natural gas prices may adversely affect our business, financial condition, results of
operations and our ability to meet our capital expenditure obligations and financial commitments.
The price we receive for our oil and natural gas significantly influences our revenue, profitability, access to capital, capital spending, and
future rate of growth. At June 30, 2022, approximately 32% of our proved reserves were oil reserves, 49% were natural gas and 19% were
NGLs. Oil, natural gas and NGLs are commodities and their prices are subject to wide fluctuations in response to relatively minor changes
in supply and demand. For example, over our last two fiscal years average daily prices for WTI oil ranged from a high of $123.64 per
barrel to a low of a $35.64 per barrel, and Henry Hub natural gas prices ranged from a high of $23.86 to a low of $1.33 per MMBTU.
Historically, the markets for oil, natural gas, and NGLs have been volatile and these markets will likely continue to be volatile in the
future. The prices we receive for our production depend on numerous factors beyond our control, including, but not limited to the
following:
● changes in global supply and demand for oil and natural gas;
● worldwide and regional economic conditions impacting the global supply and demand for oil and natural gas;
● social unrest, political instability or armed conflict in major oil and natural gas producing regions outside the United States,
such as the conflict between Ukraine and Russia, and acts of terrorism or sabotage;
● the ability and willingness of the members of OPEC+ to agree and maintain oil price and production controls;
● the price and quantity of imports of foreign oil and natural gas;
● governmental, scientific, and public concern over the threat of climate change arising from greenhouse gas emissions;
● the level of global oil and natural gas exploration and production;
● the level of global oil and natural gas inventories;
● localized supply and demand fundamentals of regional, domestic, and international transportation availability;
● weather conditions, natural disasters, and seasonal trends;
● domestic and foreign governmental regulations, including embargoes, sanctions, tariffs, and environmental regulations;
● speculation as to the future price of oil and the speculative trading of oil and natural gas futures contracts;
● price and availability of competitors’ supplies of oil and natural gas;
● technological advances affecting energy consumption;
● increasing attention to Environmental Social Governance (“ESG”) matters; and
● the price, availability and use of alternative fuels.
Substantially all of our production is sold to purchasers under short-term (less than 12-month) contracts at market-based prices. A decline
in oil, natural gas, and NGL prices will reduce our cash flows, borrowing ability, the present value of our reserves, and our ability to
develop future reserves. We may be unable to obtain needed capital or financing on satisfactory terms. Low oil, natural gas, and NGL
prices may also reduce the amount of oil, natural gas, and NGL that we can produce economically, which could lead to a decline in our oil,
natural gas and NGL reserves. Generally, we hedge substantially less than all of our anticipated oil and natural gas production and
typically only with the requirements of our Senior Secured Credit Facility. To the extent that we have not hedged production, any
significant and extended decline in oil, natural gas, and NGL prices may adversely affect our financial position.
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Our existing oil and natural gas production will decline; we may be unable to acquire or develop the additional oil and natural gas
reserves that are required in order to sustain our production and business operations.
The volume of production from oil and natural gas properties declines as reserves are depleted, with the rate of decline depending on
reservoir characteristics. Environmental issues, operating problems, or lack of extended future investment in any of our properties would
cause our net production of oil, natural gas, and NGLs to decline significantly over time, which could have a material adverse effect on
our financial condition.
The types of resources we focus on have substantial operational risks.
Our business plan focuses on the acquisition and development of known resources in partially depleted, naturally fractured, or low
permeability reservoirs. Our Delhi Field and Hamilton Dome Field properties produce from relatively shallow reservoirs, while our
Barnett Shale, Williston Basin and Jonah Field properties produce from deeper reservoirs. Shallower reservoirs usually have lower
pressure, which generally translates into lower reserves volumes in place. Deeper reservoirs have higher pressures and usually more
reserves volumes in place, but capturing those reserves often comes at increased drilling and completion costs and risks and, generally, a
higher rate of production decline. Low permeability reservoirs require more wells and substantial stimulation for development of
commercial production. Naturally fractured reservoirs require penetration of sufficient un-depleted fractures to establish commercial
production. Depleted reservoirs require successful application of newer, or more expensive, technologies to produce incremental reserves.
Our approach on the development and application of technologies on these different types of reservoirs could have a material adverse
effect on our results of operations.
The CO2-EOR project in the Delhi Field, operated by Denbury, requires significant amounts of CO2 reserves, development capital, and
technical expertise, the sources of which to date have been committed by the operator. Although initial CO2 injection began at the Delhi
Field in November 2009, initial oil production response began in March 2010. Additional capital remains to be invested to fully develop
the EOR project and maximize the value of the properties. The operator’s failure to manage these and other technical, environmental,
operational, strategic, financial, and logistical risks may ultimately cause enhanced recoveries from the planned CO2-EOR project to fall
short of our expectations in volume and/or timing. Such occurrences could have a material adverse effect on our results of operations and
financial condition.
We have limited control over the activities on properties we do not operate.
All of our property interests are operated by third-party working interest owners, not by us. As a result, we have limited ability to
influence or control the operations or future development of such properties, including compliance with environmental, safety, and other
standards, or the amount of capital expenditures that we will be required to fund with respect to such properties. Operators of these
properties may act in ways that are not in our best interest. Moreover, we are dependent on the other working interest owners of such
projects to fund their contractual share of the capital expenditures of such projects. These limitations and our dependence on the operator
and other working interest owners for these projects could cause us to incur unexpected future costs, result in lower production, and
materially and adversely affect our financial condition and results of operations.
We will be subject to risks in connection with acquisitions.
We periodically evaluate acquisitions of reserves, properties, prospects, leaseholds, and other strategic transactions that appear to fit within
our overall business strategy. The successful acquisition of producing properties requires an assessment of several factors, including, but
not limited to:
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recoverable reserves;
future oil and natural gas prices and their appropriate differentials;
development and operating costs;
potential for future drilling and production;
validity of the seller's title to properties, which may be less than expected at closing; and
potential environmental issues, litigation, and other liabilities.
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The accuracy of these assessments is inherently uncertain. In connection with these assessments, we perform a review of the subject
properties that we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems
nor will it permit us to become sufficiently familiar with the properties to fully assess their deficiencies and potential recoverable reserves.
Inspections may not always be performed on every well, and environmental problems are not necessarily observable at the ground surface
or otherwise when an inspection is performed. Even when problems are identified, the seller may be unwilling or unable to provide
effective contractual protection against all or part of the problems. Moreover, in the event of such an acquisition, there is a risk that we
could ultimately be liable for unknown obligations related to acquisitions and, importantly, that our assumptions regarding future oil and
natural gas prices, differentials, reserves, or production could prove materially inaccurate and have a material adverse effect on our
financial condition, results of operations, or cash flows.
We may encounter difficulties integrating the operations of newly acquired oil and natural gas properties or businesses.
Increasing our reserve base through acquisitions has been an important part of our business strategy. We may encounter difficulties
integrating newly acquired oil and natural gas properties or businesses. In particular, we may face significant challenges in consolidating
functions and integrating procedures, personnel, and business operations in an effective manner. The failure to successfully integrate such
properties or businesses into our Company may adversely affect our business and results of operations. Any acquisition we make may
involve numerous risks, including:
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a significant increase in our indebtedness and working capital requirements;
the inability to timely and effectively integrate the operations of recently acquired businesses or assets;
the incurrence of substantial costs to address unforeseen environmental and other liabilities arising out of the acquired
businesses or assets;
liabilities arising from the operation of the acquired businesses or assets before our acquisition;
our lack of drilling or operational history in the areas in which the acquired business operates;
customer or key employee loss from the acquired business;
increased administration of new personnel;
additional costs due to increased scope and complexity of our business;
potential disruption of our ongoing business; and
assumptions made on estimated development by the operator may not be accurate or may change.
Additionally, significant acquisitions can change the nature of our operations and business depending upon the character of the acquired
properties, which may have substantially different operating and geological characteristics or be in different geographic locations than our
existing properties. To the extent that we acquire properties substantially different from the properties we currently own or that require
different technical expertise, we may not be able to realize the economic benefits of these acquisitions as effectively as with acquisitions
within our current footprint and expertise. We may not be successful in addressing these risks or any other problems encountered in
connection with any acquisition we may make.
Oil and natural gas development, re-completion of wells from one reservoir to another reservoir, restoring wells to production, and
drilling and completing new wells are speculative activities which involve numerous risks and substantial uncertain costs.
Our growth will be partially dependent upon the success of future development programs on our properties. Drilling for oil and natural gas
and extracting NGLs and re-working existing wells involve numerous risks. The cost of drilling, completing, and operating wells is
substantial and uncertain; drilling operations may be curtailed, delayed, or canceled as a result of a variety of factors beyond our control,
including, but not limited to:
● unexpected drilling conditions;
● pressure fluctuations or irregularities in reservoir formations;
● equipment failures or accidents;
● well blowouts and other releases of hazardous materials;
● inability to obtain or maintain leases on economic terms, where applicable;
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● the cost and availability of goods and services, such as drilling rigs, fracture stimulation services, and tubulars;
● adverse weather conditions;
● compliance with governmental requirements; and
● shortages or delays in the availability of drilling rigs or crews and the delivery of equipment.
Drilling or re-working is a highly speculative activity. Even when fully and correctly utilized, modern well completion and production
techniques, such as Horizontal Drilling or CO2 injection, do not guarantee that we will find and produce oil and/or natural gas in economic
quantities. Our future drilling, completion and production activities may not be successful and, if unsuccessful, such failure would have an
adverse effect on our future results of operations and financial condition.
We may also identify and develop prospects through a number of methods, some of which may include Horizontal Drilling or tertiary
injectants, and some of which may be unproven. The drilling and results for these prospects may be particularly uncertain. We cannot
ensure that these projects can be successfully developed or that wells will, if drilled, encounter reservoirs of commercially productive oil
or natural gas.
Our oil and natural gas reserves are only estimates and may prove to be inaccurate.
There are numerous uncertainties inherent in estimating oil and natural gas reserves and their estimated values. Our reserves are only
estimates that may prove to be inaccurate because of these inherent uncertainties. Reservoir engineering is a subjective process of
estimating underground accumulations of oil and natural gas that cannot always be measured in an exact manner. Estimates of
economically recoverable oil and natural gas reserves depend upon a number of variable factors. These factors include historical
production from the area compared with production from other comparable producing areas, assumptions concerning effects of regulations
by governmental agencies, future oil and natural gas product prices, future operating costs, severance and excise taxes, development costs,
workover costs, and remedial costs. Some or all of these assumptions utilized in estimating reserve volumes may vary considerably from
actual results. For these reasons, estimates of the economically recoverable quantities of reserves, classifications of such reserves based on
risk of recovery, and estimates of the future net cash flows expected from reserves may vary substantially depending on the timing and
different engineers preparing reserves estimates.
Accordingly, reserve estimates may be subject to downward or upward adjustments. Actual production, revenue, and expenditures with
respect to our reserves will likely vary from estimates; such variances may be material. The information regarding discounted future net
cash flows included in this report should not be considered as the current market value of the estimated oil and natural gas reserves
attributable to our properties. The estimated discounted future net cash flows from proved reserves are based on the 12-month average
price, calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior
to the end of the reporting period, and costs as of the date of the estimate, while actual future prices and costs may be materially higher or
lower. Actual future net cash flows also will be affected by factors such as the amount and timing of actual production, supply and demand
for oil and natural gas, increases or decreases in consumption, and changes in governmental regulations or taxation. In addition, the 10%
discount factor, which is required by the SEC to be used in calculating discounted future net cash flows for reporting purposes, is not
necessarily the most appropriate discount factor. Interest rates in effect vary from time to time based on risks associated with us or the oil
and natural gas industry in general. The Standardized Measure does not necessarily correspond to market value.
Regulatory and accounting requirements may require substantial reductions in reporting proven reserves.
On a periodic basis, we review the carrying value of our oil and natural gas properties under the applicable rules of various regulatory
agencies, including the SEC. Under the full cost method of accounting that we use, the after-tax carrying value of our oil and natural gas
properties may not exceed the present value of estimated future net after-tax cash flows from proved reserves, discounted at 10%.
Application of this “ceiling” test requires pricing future revenues at the previous 12-month average beginning-of-month price and requires
a write-down of the carrying value for accounting purposes if the ceiling is exceeded. We may in the future be required to write down the
carrying value of our oil and natural gas properties when oil and natural gas prices are depressed or unusually volatile. Whether we will be
required to
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take such a charge will depend in part on the prices of oil and natural gas during the previous period and the effect of reserve additions or
revisions and capital expenditures during such period. If a write-down is required, it would result in a current charge to our earnings but
would not impact our current cash flow from operating activities. A large write-down could adversely affect our compliance with the
current financial covenants under our credit facility, could limit our access to future borrowings under that facility, or require repayment of
any amounts that might be outstanding at the time.
Our derivative activities could result in financial losses or could reduce our income.
We are required under the terms of our Senior Secured Credit Facility to hedge a certain portion of our anticipated oil and natural gas
production for future periods. We may also elect to hedge additional production volumes from time to time based upon our view of the
attractiveness of commodity futures and the risks that downward price fluctuations might pose to our business plans. When we engage in
hedging transactions, we typically utilize costless collars or fixed price swaps to cost-effectively provide us with some protection against
price changes. We have not historically designated any of our derivative instruments as hedges for accounting purposes and record all
derivative instruments on our balance sheet at fair value. Changes in the fair value of our derivative instruments are recognized in
earnings. Accordingly, our earnings may fluctuate significantly as a result of changes in the fair value of our future derivative instruments.
Derivative arrangements may also expose us to the risk of financial loss in some circumstances, including, but not limited to, if:
● actual production is less than the volume covered by the derivative instruments;
● the counterparty to the derivative instrument defaults on its contract obligations; or
● there is a change in the expected differential between the underlying price in the derivative instrument and actual price
received.
In addition, in a rising commodity price environment, derivative arrangements will limit the extent to which we might benefit from
increases in prices of oil and natural gas and may expose us to cash margin requirements.
Our operations may require significant amounts of capital and additional financing may be necessary in order for us to continue our
exploitation activities.
Cash flow from our production may not be sufficient to fund our ongoing activities at all times. From time to time, we may require
additional financing in order to carry out oil and natural gas acquisitions, exploitation, and development activities. If our revenues
decrease as a result of decreases in production, lower oil and natural gas prices or otherwise, it will affect our ability to expend the
necessary capital to replace our reserves or to maintain our current production. If our cash flow from operations is not sufficient to satisfy
our capital expenditure requirements, there can be no assurance that additional debt or equity financing will be available to meet these
requirements or be available to us on favorable terms.
Government regulation and liability for oil and natural gas operations and environmental matters may adversely affect our business
and results of operations.
Oil and natural gas operations are subject to extensive federal, state, and local government regulations, which may change from time to
time. Matters subject to regulation include discharge permits for drilling operations, drilling bonds, reports concerning operations, the
spacing of wells, unitization and pooling of properties, and taxation. From time to time, regulatory agencies have imposed price controls
and limitations on production by restricting the rate of flow of oil and natural gas from wells below actual production capacity in order to
conserve supplies of oil and natural gas. There are federal, state, and local laws and regulations primarily relating to protection of human
health and the environment applicable to the development, production, handling, storage, transportation, and disposal of oil and natural
gas, by-products thereof, the emission of CO2 or other greenhouse gases, and other substances and materials released, produced or used in
connection with oil and natural gas operations. These laws and regulations may affect the costs, manner, and feasibility of our operations
by, among other things, requiring us to make significant expenditures in order to comply and restricting the areas available for oil and gas
production. Failure to comply with these laws and regulations may result in substantial liabilities to third-parties or governmental entities.
In addition, we may be liable for significant environmental damages and cleanup costs, without regard to fault, for releases of hazardous
materials on or from property we own or
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operate, even if we did not cause or contribute to the release. We are also subject to changing and extensive tax laws, the effects of which
cannot be predicted. The implementation of new, or the modification of existing, laws or regulations, could have a material adverse effect
on us, such as by imposing new emission controls, penalties, fines and/or fees, taxes and tariffs on carbon that could have the effect of
raising prices to the end user and thereby reducing the demand for our products.
The risks arising out of the threat of climate change, including transition risks and physical risks, may adversely affect our business
and results of operations.
The threat of climate change poses both transition risks and physical risks that could have a material adverse effect on us. Transition risks
may arise from political and regulatory, legal, technological or financial changes as society tries to safeguard the climate, while physical
risks may result from extreme weather events or other shifts in the natural world.
We have been facing increased political and regulatory risks as federal, state and local governments have adopted new measures to restrict
sources of greenhouse gas emissions and promote energy alternatives. Many such measures have been proposed, and still more can be
expected. From time to time, there are proposals to ban Hydraulic Fracturing of oil and natural gas wells and to remove more lands, both
onshore and offshore, from new hydrocarbon production. Many other actions could be pursued such as more rigorous requirements for
drilling and construction permits, stricter greenhouse gas emissions standards for both new and existing sources, further limits on
construction of new pipelines, reinstatement of the ban on oil exports, enhanced reporting obligations, taxing carbon emissions and
creating further incentives for use of alternative energy sources. These actions may cause operational delays or restrictions, increased
operating costs and additional regulatory burdens.
Litigation risks are also increasing for oil and natural gas companies. A number of suits alleging, among other things, that oil and natural
gas companies created public nuisances by producing fuels that contributed to climate change have been brought in state or federal court.
Technological changes may drive market demand for products other than oil and natural gas. Wider adoption of hybrid engines and
electric cars, for example, would reduce demand for our products. At the same time, our capital and operating costs may increase if we
need to add new emission reduction technologies.
There are also financial risks for the petroleum industry. It may become more difficult for us to access the capital markets if the threat of
climate change discourages new investment. Institutional lenders who provide financing to fossil-fuel energy companies also have become
more attentive to sustainable lending practices, and some of them may elect not to provide funding for fossil fuel energy companies.
Limitation of investments in and financings for the energy industry could result in the restriction, delay or cancellation of drilling
programs or development or production activities.
The threat of climate change also may subject our operations and business to severe weather or other natural hazards, such as flooding,
drought, wildfires, and extreme temperatures. Any such event could halt production or exploration activities, disrupt transportation and
reduce consumer demand.
Poor general economic, business, or industry conditions may have a material adverse effect on our results of operations, liquidity, and
financial condition.
During the last few years, concerns over inflation, energy costs, volatile oil and natural gas prices, geopolitical issues, the availability and
cost of credit, the United States mortgage market, uncertainties with regard to European sovereign debt, the slowdown in economic
growth in large emerging and developing markets, such as China, regional or worldwide increases in tariffs or other trade restrictions, and
other issues have contributed to increased economic uncertainty and diminished expectations for the global economy. Concerns about
global economic conditions have had a significant adverse impact on domestic and international financial markets and commodity prices.
If uncertain or poor economic, business, or industry conditions in the United States or abroad remain prolonged, demand for petroleum
products could diminish or stagnate, and production costs could increase. These situations could impact the price at which we can sell our
oil, natural gas, and NGLs, affect our vendors', suppliers', and customers' ability to continue operations, and ultimately adversely impact
our results of operations, liquidity, and financial condition.
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Events outside of our control, including a pandemic or broad outbreak of an infectious disease, such as the ongoing global outbreak of
a novel strain of the coronavirus (“COVID-19”), may materially adversely affect our business.
We face risks related to pandemics, outbreaks, or other public health events that are outside of our control and could significantly disrupt
our operations and adversely affect our financial condition. In December 2019, COVID-19 was identified in Wuhan, China and rapidly
spread around the world. This virus and its variants, and governmental actions to contain it, continue to have a material impact globally.
These and other actions could, among other things, impact the ability of our employees and contractors to perform their duties, cause
increased technology and security risk due to extended and company-wide telecommuting, and lead to disruptions in our permitting
activities and critical business relationships. Additionally, governmental restrictions intended to contain COVID-19 or future pandemics
have in the past, and may in the future, significantly impact economic activity and markets and dramatically reduce actual or anticipated
demand for oil and natural gas, adversely impacting the prices we receive for our production. The severity and duration of any such events
are uncertain and difficult to predict, as is the extent that such events may have on our business.
Our business could be negatively affected by security threats. A cyber-attack or similar incident could occur and result in information
theft, data corruption, operational disruption, damage to our reputation, and/or financial loss.
The oil and natural gas industry has become increasingly dependent on digital technologies to conduct certain exploration, development,
production, processing, and financial activities. We depend on digital technology to estimate quantities of oil and natural gas reserves,
manage operations, process and record financial and operating data, analyze seismic and drilling information, and communicate with our
employees and third-party partners. Our technologies, systems, networks, seismic data, reserves information, or other proprietary
information, and those of our operators, vendors, suppliers, customers, and other business partners may become the target of cyber-attacks
or information security breaches. Cyber-attacks or information security breaches could result in the unauthorized release, gathering,
monitoring, misuse, loss or destruction of proprietary and other information, or could otherwise lead to the disruption of our business
operations or other operational disruptions in our exploration or production operations. Cyber-attacks are becoming more sophisticated
and certain cyber incidents, such as surveillance, may remain undetected for an extended period and could lead to disruptions in critical
systems or the unauthorized release of confidential or otherwise protected information. These events could lead to financial losses from
remedial actions, loss of business, disruption of operations, damage to our reputation, or potential liability. Also, computers control nearly
all of the oil and natural gas distribution systems in the United States and abroad. Computers are necessary to transport our oil and natural
gas production to market. A cyber-attack directed at oil and natural gas distribution systems could damage critical distribution and storage
assets or the environment, delay or prevent delivery of production to markets and make it difficult or impossible to accurately account for
production and settle transactions. Cyber incidents have increased, and the United States government has issued warnings indicating that
energy assets may be specific targets of cybersecurity threats. Our systems and insurance coverage for protecting against cybersecurity
risks may not be sufficient. Further, as cyber-attacks continue to evolve, we may be required to expend significant additional resources to
continue to modify or enhance our protective measures or to investigate and remediate any vulnerability to cyber-attacks.
Our insurance may not protect us against all of the operating risks to which our business is exposed.
The oil and natural gas business involves numerous operating hazards such as well blowouts, mechanical failures, explosions,
uncontrollable flows of oil, natural gas, or well fluids, fires, formations with abnormal pressures, hurricanes and storms, flooding,
pollution, releases of toxic gas, and other environmental hazards and risks, which can result in (1) damage to or destruction of wells and/or
production facilities, (2) damage to or destruction of formations, (3) injury to persons, (4) loss of life, or (5) damage to property, the
environment or natural resources. While we carry general liability, control of well, and operator’s extra expense coverage typical in our
industry, we are not fully insured against all risks incidental to our business. Should we experience any losses, the costs of our premiums
may rise, which could in turn reduce the amount of insurance we are able to carry.
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The loss of key personnel could adversely affect us.
We depend to a large extent on the services of certain key management personnel, including our executive officers. The loss of one or
more key personnel could have a material adverse effect on our operations. In particular, our future success is dependent upon the abilities
of our executive officers to source, evaluate, and close deals, raise capital, and oversee our development activities and operations.
Presently, we are not a beneficiary of any key man life insurance.
Oilfield service and materials prices may increase, and the availability of such services and materials may be inadequate to meet our
needs.
Our business plan to develop or redevelop oil and natural gas resources requires third-party oilfield service vendors and various material
providers, which we do not control. We also rely on third-party carriers for the transportation and distribution of our oil and natural gas
production. As our production increases, so does our need for such services and materials. Generally, we do not have long-term
agreements with our service and materials providers. Accordingly, there is a risk that any of our service providers could discontinue
providing services for any reason or we may not be able to source the services or materials we need. Any delay in locating, establishing
relationships, and training our sources could result in production shortages and maintenance problems, resulting in loss of revenue to us.
In addition, if costs for such services and materials increase, it may render certain or all of our projects uneconomic, as compared to the
earlier prices we may have assumed when deciding to redevelop newly purchased or existing properties. Further adverse economic
outcomes may result from the long lead times often necessary to execute and complete our redevelopment plans.
We may assume risks and financial responsibility for drilling and completing wells on our Williston Basin properties if our operating
partner declines to drill wells and it or other joint interest owners elect not to participate.
As discussed elsewhere in this report, pursuant to agreements related to our interests in the Williston Basin properties, we have the ability
to propose to the operator a drilling plan for certain wells, which the operator may accept or reject. In the event the operator rejects our
proposed drilling plan, we have the right to undertake all necessary activities to drill and complete the wells and related facilities in
accordance with our proposed drilling plan. In the event we undertake to do so, and the operator and other joint interest owners elect not to
participate, we will bear the entire liability and expense associated with drilling and completing the wells and related facilities, subject
only to our right to recoup costs incurred on behalf of non-participating joint interest owners to the extent a well generates sufficient
revenues to do so. Ongoing operations of any wells we elect to drill, will be turned over to the operator of the property upon completion. If
we elect to proceed to drill and complete wells we have proposed and the operator has rejected, certain of the risks highlighted elsewhere
in this report, including, without limitation, the risks associated with drilling oil and natural gas wells and in addition to bearing the
liability and costs associated with any wells we elect to drill and complete, many of the risks highlighted elsewhere herein will be
exacerbated, including, without limitation, the risks of developing economic reserves; the risks associated with the drilling and completion
of oil and natural gas wells, including potential environmental and other operating liabilities, inadequate insurance to cover the expenses
and liabilities associated with such risks, price increases and delivery delays for required drilling and completion equipment, products and
services; and financing risks, as we may be required to bear a share of such expenses to an extent that is disproportionate to our economic
interest in the property.
We cannot market the oil and natural gas that we produce without the assistance of third-parties.
The marketability of the oil and natural gas that we produce depends upon the proximity of our reserves and production to, and the
capacity of, facilities and third-party services, including oil and natural gas gathering systems, pipelines, trucking or terminal facilities,
and processing facilities necessary to make the products marketable for end use. The unavailability or lack of capacity of such services
and facilities could result in the shut-in of producing wells or the delay or discontinuance of development plans for properties. A shut-in,
delay, or discontinuance could adversely affect our financial condition.
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We face strong competition from larger oil and natural gas companies.
Our competitors include major integrated oil and natural gas companies, numerous larger independent oil and natural gas companies,
individuals, and drilling and income programs. Many of our competitors are large, well-established companies with substantially larger
operating staffs and greater capital resources. We may not be able to successfully conduct our operations, evaluate and select suitable
properties, or consummate transactions in this highly competitive environment. Specifically, these larger competitors may be able to pay
more for development projects and productive oil and natural gas properties and may be able to define, evaluate, bid for, and purchase a
greater number of properties and prospects than our financial or human resources permit. In addition, such companies may be able to
expend greater resources on hiring contract service providers, obtaining oilfield equipment, and acquiring the existing and changing
technologies that we believe are, and will be, increasingly important to attaining success in our industry.
We have been, and in the future may become, involved in legal proceedings related to our properties or operations and, as a result, may
incur substantial costs in connection with those proceedings.
From time to time we may be a defendant or plaintiff in various lawsuits. The nature of our operations exposes us to further possible
litigation claims in the future. There is risk that any matter in litigation could be decided unfavorably against us regardless of our belief,
opinion, and position, which could have a material adverse effect on our financial condition, results of operations, and cash flow.
Litigation can be very costly, and the costs associated with defending litigation could also have a material adverse effect on our financial
condition. Adverse litigation decisions or rulings may damage our business reputation.
Ownership of our oil, natural gas, and mineral production depends on good title to our property.
Good and clear title to our oil, natural gas, and mineral properties is important to our business. Although title reviews will generally be
conducted prior to the purchase of most oil, natural gas, and mineral producing properties or the commencement of drilling wells, such
reviews do not assure that an unforeseen defect in the chain of title will not arise to defeat our claim. This could result in a reduction or
elimination of the revenue received by us from such properties.
Unanticipated changes in effective tax rates or laws or adverse outcomes resulting from examination of our income or other tax
returns could adversely affect our financial condition and results of operations.
We are subject to tax by U.S. federal, state, and local tax authorities. Our future effective tax rates could be subject to volatility or
adversely affected by a number of factors, including:
● changes in the valuation of our deferred tax assets and liabilities;
● expected timing and amount of the release of any tax valuation allowances;
● tax effects of stock-based compensation;
● costs related to intercompany restructurings; or
● changes in tax laws, regulations, or interpretations thereof.
For example, in previous years, legislation has been proposed to eliminate or defer certain key U.S. federal income tax deductions
historically available to oil and natural gas exploration and production companies. Such proposed changes have included: (1) a repeal of
the percentage depletion allowance for oil and natural gas properties; (2) the elimination of deductions for intangible drilling and
exploration and development costs; (3) the elimination of the deduction for certain production activities; and (4) an extension of the
amortization period for certain geological and geophysical expenditures. With President Biden taking office in 2021 and the shift in the
control of Congress, there is an increased risk of the enactment of legislation that alters, eliminates, or defers these or other tax deductions
utilized within the industry, which could adversely affect our business, financial condition, results of operations, and cash flows.
In addition, we may be subject to audits of its income, sales, and other transaction taxes by U.S. federal, state, and local taxing authorities.
Outcomes from these audits could have an adverse effect on our financial condition and results of operations.
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Risks Associated with our Common Stock
Our stock price has been and may continue to be volatile.
Our common stock has a relatively low trading volume and the market price has been, and is likely to continue to be, volatile. The
variance in our stock price makes it difficult to forecast the stock price at which an investor may be able to buy or sell shares of our
common stock. The market price for our common stock could be subject to fluctuations as a result of factors that are out of our control,
such as:
● actual or anticipated variations in our results of operations;
● changes or fluctuations in the commodity prices of oil and natural gas;
● general conditions and trends in the oil and natural gas industry;
● redemption demands on institutional funds that hold our stock; and
● general economic, political, and market conditions.
Significant ownership of our common stock is concentrated in a small number of shareholders who may be able to affect the outcome
of the election of our directors and all other matters submitted to our stockholders for approval.
As of June 30, 2022, our executive officers and directors, in the aggregate, beneficially owned approximately 2,554,184 million shares, or
approximately 7.6% of our outstanding common stock and, based on recent filings with the SEC, we believe two large unaffiliated fund
complexes each owned in excess of 6% of the outstanding shares of our common stock. As a result, a significant percentage of our
common stock is concentrated in the hands of relatively few shareholders. These shareholders could potentially exercise significant
influence over matters submitted to our stockholders for approval (including the election and removal of directors and any merger,
consolidation or sale of all or substantially all of our assets). This concentration of ownership may have the effect of delaying, deferring,
or preventing any matter that requires shareholder approval, including a change in control of our company, impede a merger,
consolidation, takeover, or other business combination involving our company or discourage a potential acquirer from making a tender
offer or otherwise attempting to obtain control of our company, which in turn could have an adverse effect on the market price of our
common stock.
The market for our common stock is limited and may not provide adequate liquidity.
Our common stock trades on the NYSE American. Trading volume in our common stock is relatively low compared to larger companies.
Our holders may find it more difficult to sell their shares, should they desire to do so, based on the trading volume and price of our stock
at that time relative to the quantity of shares to be sold.
If securities or industry analysts do not publish research reports about our business, or if they downgrade our stock, the price of our
common stock could decline.
Small, relatively unknown companies can achieve visibility in the trading market through research and reports that industry or securities
analysts publish. To our knowledge, only two research analysts actively cover our company. The limited number of published reports by
securities analysts could limit the interest in our common stock and negatively affect our stock price. We do not have any control over the
research and reports these analysts publish or whether they will be published at all. If any analyst who does cover us downgrades our
stock, our stock price could decline. If any analyst ceases coverage of our company or fails to regularly publish reports on us, we could
lose visibility in the financial markets, which in turn could cause our stock price to decline.
Payment of dividends on our common stock has been in the past, and could be in the future, reduced or eliminated.
Our Board of Directors declared cash dividends on our common stock for the first time in December 2013 and we have declared and paid
quarterly cash dividends since that time. However, there is no certainty that dividends will be declared by our Board of Directors in the
future. Any payment of cash dividends on our common stock in the future will be dependent upon the amount of funds legally available,
our earnings, if any, our financial condition, our business plan,
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restrictions contained in current or future debt instruments, contractual covenants or arrangements we may enter into, our anticipated
capital requirements, and other factors that our Board of Directors may think are relevant. Although it is our intent to maintain a steady
dividend for our shareholders, there is no guarantee that we will be able to do so.
There may be future sales or issuances of our common stock, which will dilute the ownership interests of stockholders and may
adversely affect the market price of our common stock.
We may in the future issue additional shares of common stock, including securities that are convertible into or exchangeable for, or that
represent the right to receive, common stock or substantially similar securities, which may result in dilution to our stockholders. In
addition, our stockholders may be further diluted by future issuances under our equity incentive plans. The market price of our common
stock could decline as a result of sales or issuances of a large number of shares of our common stock or similar securities in the market
after this offering or the perception that such sales or issuances could occur.
Non-U.S. holders may be subject to U.S. income tax and withholding tax with respect to gain on disposition of the Company’s common
stock.
We believe we are a U.S. real property holding corporation. As a result, Non-U.S. holders that own (or are treated as owning under
constructive ownership rules) more than a specified amount of our common stock during a specified time period may be subject to U.S.
federal income tax and withholding on a sale, exchange or other disposition of such common stock, and may be required to file a U.S.
federal income tax return.
Investor sentiment towards climate change, fossil fuels, sustainability, and other ESG matters could adversely affect our business and
our stock price.
There have been efforts in recent years aimed at the investment community, including investment advisors, sovereign wealth funds, public
pension funds, universities, and other groups, to promote the divestment of shares of fossil fuel companies, as well as to pressure lenders
and other financial services companies to limit or curtail activities with fossil fuel companies. As a result, some financial intermediaries,
investors, and other capital markets participants have reduced or ceased lending to, or investing in, companies that operate in industries
with higher perceived environmental exposure, such as the oil and natural gas industry. For example, in December 2020, the State of New
York announced that it will be divesting the state’s Common Retirement Fund from fossil fuels. If this or similar divestment efforts are
continued, the price of our common stock or debt securities, and our ability to access capital markets or to otherwise obtain new
investment or financing, may be negatively impacted.
Members of the investment community are also increasing their focus on ESG practices and disclosures, including practices and
disclosures related to greenhouse gases and climate change in the energy industry in particular, and diversity and inclusion initiatives and
governance standards among companies more generally. As a result, we may face increasing pressure regarding our ESG practices and
disclosures. Additionally, members of the investment community may screen companies such as ours for ESG performance before
investing in our common stock or debt securities or lending to us. Over the past few years there has also been an acceleration in investor
demand for ESG investing opportunities, and many large institutional investors have committed to increasing the percentage of their
portfolios that are allocated towards ESG-focused investments. As a result, there has been a proliferation of ESG-focused investment
funds seeking ESG-oriented investment products.
If we are unable to meet the ESG standards or investment or lending criteria set by these investors and funds, we may lose investors,
investors may allocate a portion of their capital away from us, our cost of capital may increase, the price of our common stock may be
negatively impacted, and our reputation may also be negatively affected.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
Information regarding our properties is included in Item 1. Business above and in Note 5, “Property and Equipment” to our consolidated
financial statements in Item 8. Consolidated Financial Statements and Supplementary Data, which information is incorporated herein by
reference.
Item 3. Legal Proceedings
See Note 11, “Commitments and Contingencies” to our consolidated financial statements in Item 8. Consolidated Financial Statements
and Supplementary Data for a description of any legal proceedings, which is incorporated herein by reference.
Item 4. Mine Safety Disclosures
Not Applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock
Our common stock is currently traded on the NYSE American stock exchange under the ticker symbol “EPM”.
Shares Outstanding and Holders
As of June 30, 2022, there were 33,470,710 shares of common stock issued and outstanding. As of September 1, 2022, there were
approximately 219 registered shareholders of our common stock.
Dividends
We began paying cash quarterly dividends on our common stock in December 2013. Over the last two fiscal years, we made the following
cash dividends per share:
Fourth quarter ended June 30,
Third quarter ended March 31,
Second quarter ended December 31,
First quarter ended September 30,
Fiscal Year
2022
2021
$
$
$
$
0.100
0.100
0.075
0.075
$
$
$
$
0.050
0.030
0.025
0.025
As of June 30, 2022, we have paid 35 consecutive quarterly dividends on our common stock. In September 2022, the Company declared a
$0.12 per share dividend payable on September 30, 2022. Any future determination with regard to the payment of dividends will be at the
discretion of the Board of Directors and will be dependent upon our future earnings, financial condition, results of operations, applicable
dividend restrictions, capital requirements, and other factors deemed relevant by the Board of Directors.
Securities Authorized For Issuance Under Equity Compensation Plans
Plan category
Equity compensation plans approved by security holders:
Outstanding options
Outstanding contingent rights to shares
Total
Equity compensation plans not approved by security holders
Total
Number of
securities to
be issued
upon exercise
of outstanding
options,
warrants and
rights (a)
Weighted-average
exercise
price of
outstanding
Options, warrants
and rights (b)
Number of securities
remaining
available for future
issuance under
equity compensation
plans (excluding
securities reflected
in column (a))(1)
— $
50,062 (1)
50,062
—
50,062
$
—
—
—
—
—
1,804,275
—
1,804,275
(1)
In December 2016, we adopted the Equity Incentive Plan (the “2016 Plan”), which authorized the issuance of 1.1 million shares of common stock.
On December 9, 2020, an amendment to the 2016 Plan was approved by our stockholders that increased the number of shares available for issuance
by 2.5 million shares to a maximum of 3.6 million shares. As of June 30, 2022, we have granted 1.8 million equity awards under the 2016 Plan and
1.8 million shares of common stock remain available for future grants.
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Issuer Purchases of Equity Securities
During the fourth quarter ended June 30, 2022, we did not purchase any common stock in the open market under the previously
announced share repurchase program and no shares of common stock were surrendered by our employees to pay their share of payroll
taxes arising from vesting of restricted stock.
Item 6. Reserved
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
Liquidity and Capital Resources
Results of Operations
Critical Accounting Policies
General
Executive Overview
Evolution Petroleum Corporation is an independent energy company focused on maximizing total returns to its shareholders through the
ownership of and investment in onshore oil and natural gas properties in the United States. In support of that objective, our long-term goal
is to maximize total shareholder return from a diversified portfolio of long-life oil and natural gas properties built through acquisitions and
through selective development opportunities, production enhancements, and other exploitation efforts on our oil and natural gas
properties.
Our oil and natural gas properties consist of non-operated interests in the Delhi Holt-Bryant Unit in the Delhi Field in Northeast
Louisiana, a CO2 enhanced oil recovery (“EOR”) project; non-operated interests in the Hamilton Dome Field located in Hot Springs
County, Wyoming, a secondary recovery field utilizing water injection wells to pressurize the reservoir; non-operated interests in the
Barnett Shale located in North Texas, a natural gas producing property; non-operated interests in the Williston Basin in North Dakota, a
producing oil and natural gas property; non-operated interests in the Jonah Field in Sublette County, Wyoming, a natural gas producing
field; and small overriding royalty interests in four onshore central Texas wells.
Our non-operated interests in the Delhi Field, a CO2-EOR project, consist of approximately 24% average net working interest, with an
associated 19% revenue interest and separate overriding royalty and mineral interests of approximately 7% yielding a total average net
revenue interest of approximately 26%. The field is operated by Denbury Onshore LLC (“Denbury”). The Delhi Field is located in
northeast Louisiana in Franklin, Madison, and Richland Parishes and encompasses approximately 14,000 gross unitized acres, or
approximately 3,200 net acres.
Our non-operated interests in the Hamilton Dome Field, a secondary recovery field utilizing water injection wells to pressurize the
reservoir, consists of approximately 24% average net working interest, with an associated 20% average net revenue interest (inclusive of a
small overriding royalty interest). The approximately 5,900 gross acre unitized field, of which we hold approximately 1,400 net acres, is
operated by Merit Energy Company (“Merit”), who owns the vast majority of the remaining working interest in the Hamilton Dome Field.
The Hamilton Dome Field is located in the southwest region of the Big Horn Basin in northwest Wyoming.
Our non-operated interests in the Barnett Shale, a natural gas producing shale reservoir, consists of approximately 17% average net
working interest with an associated 14% average net revenue interest (inclusive of small overriding royalty interests). The approximately
21,000 net acres are held by production across nine North Texas counties. The oil and natural gas properties are primarily operated by
Diversified Energy Company with approximately 10% of wells operated by seven other operators.
On January 14, 2022, we acquired non-operated working interests in 73 producing wells in the Williston Basin with an average net
working interest of approximately 39% and average net revenue interest of approximately 33% located on approximately 45,000 net acres
(approximately 90% held by production) across Billings, Golden Valley, and McKenzie Counties in North Dakota (the “Williston Basin
Acquisition”). After taking into account customary closing adjustments and an effective date of June 1, 2021, cash consideration was
$25.2 million which includes $0.3 million of transaction costs related to the acquisition. The properties are operated by Foundation Energy
Management (“Foundation”), an established operator in the geographic region.
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On April 1, 2022, we acquired non-operated working interests in the Jonah Field in Sublette County, Wyoming (the “Jonah Field
Acquisition”). After taking into account the deposit on the acquisition, customary closing adjustments and an effective date of February 1,
2022, cash consideration at closing was $26.4 million (including $0.2 million of transaction costs). The acquired properties include an
average net working interest of approximately 20% and an average net revenue interest of approximately 15% in 595 producing wells and
950 net acres. The properties are operated by Jonah (“Jonah”), an established operator in the geographic region.
Recent Developments
Dividend Declaration and Share Repurchase Program
On September 12, 2022, Evolution’s Board of Directors approved and declared a quarterly dividend of $0.12 per common share payable
September 30, 2022. This represents a 20% increase over the $0.10 per common share dividend paid in the fourth quarter of fiscal year
2022. Also, on September 8, 2022, the Board of Directors authorized a share repurchase program, under which we are approved to
repurchase up to $25 million of our common stock through December 31, 2024. We intend to fund repurchases from available working
capital and cash provided by operating activities. As we continue to focus on our goal of maximizing total shareholder return, the Board of
Directors along with the management team believe that a share repurchase program is complimentary to the existing dividend policy and
is a tax efficient means to further improve shareholder return. The shares may be repurchased from time to time in open market
transactions, through privately negotiated transactions or by other means in accordance with federal securities laws. The timing, as well as
the number and value of shares repurchased under the program, will depend on a variety of factors, including management’s assessment of
the intrinsic value of our shares, the market price of our common stock, general market and economic conditions, and applicable legal
requirements. The value of shares authorized for repurchase by our Board of Directors does not require us to repurchase such shares or
guarantee that such shares will be repurchased, and the program may be suspended, modified, or discontinued at any time without prior
notice.
Highlights for our Fiscal Year 2022 and Operations Update
● Generated revenue of $108.9 million and net income of $32.6 million.
● Production averaged 5,953 net BOEPD.
● Returned to shareholders $11.8 million in cash dividends. We have paid out to shareholders more than $86.3 million in cash
dividends since inception of the dividend program in December 2013.
● Funded all operations, development capital expenditures, and dividends out of operating cash flow.
● Closed the Jonah Field Acquisition on April 1, 2022 and the Williston Basin Acquisition on January 14, 2022, which
included total proved reserves of 7.1 MMBOE and 6.1 MMBOE, respectively, as of June 30, 2022 as estimated by
Netherland, Sewell & Associates, Inc. (“NSAI”) an independent reservoir engineering firm.
● Increased proved reserves 55% since prior year-end primarily due to the acquisitions of the Jonah Field properties in
April 2022 and Williston Basin properties in January 2022.
● Maintained a strong financial position with low leverage.
Proved Reserves
Proved oil equivalent reserves as of June 30, 2022 were 36.2 MMBOE, a 55% increase from the previous year primarily due to the
acquisitions of properties in the Williston Basin and Jonah Field in January 2022 and April 2022, respectively. The Standardized Measure
for proved reserves increased 259% to $314.8 million, primarily due to the acquisitions of
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properties in the Williston Basin and Jonah Field and an increase in the SEC mandated trailing 12-month average first day of the month
prices for oil and natural gas. Prices increased from $49.72 per barrel of oil, $2.46 per MMBtu of natural gas and $19.81 per barrel of
NGLs at June 30, 2021 to $85.82 per barrel of oil, $5.19 per MMBtu of natural gas and $44.24 per barrel of NGLs at June 30, 2022. Our
proved reserves consist of 32% oil, 49% natural gas, and 19% NGLs; 90% are classified as proved developed producing and 10% are
proved undeveloped.
The following table is a summary of our proved reserves as of June 30, 2022 and 2021:
Reserves MMBOE
% Developed
Liquids %
Standardized Measure ($MM)
Proved Reserves
2022
2021
Change
36.2
90 %
51 %
$
314.8
$
23.4
92 %
65 %
87.6
55 %
(2)%
(14)%
259 %
Additional property and project information is included under Item 1. Business and in Note 5, “Property and Equipment” and our
Supplemental Disclosure about Oil and Natural Gas Properties (unaudited) to our consolidated financial statements in Item 8. Financial
Statements and Supplementary Data, and in Exhibit 99.1 and 99.2 of this Form 10-K.
At June 30, 2022, we had total net proved reserves of 36.2 MMBOE, a 12.8 MMBOE increase from the previous year of 23.4 MMBOE.
The net increase in total proved reserves was the result of acquisitions of 9.3 MMBOE, additions and extensions of 3.6 MMBOE and net
positive revisions of 2.1 MMBOE, partially offset by production of 2.2 MMBOE. Net positive revisions of 2.1 MMBOE increased
primarily due to improvement in SEC trailing 12-month pricing partially offset by the removal of 1.8 MMBOE of PUDs related to Test
Site V and 0.7 MMBOE of PDP at our Delhi Field property.
Impact of the COVID-19 Pandemic and Geopolitical factors
The global economy has been deeply impacted by the effects of the novel coronavirus (“COVID-19”) pandemic and related efforts to
mitigate the spread of the disease. These events led to crude oil prices falling to historic lows during the second quarter of 2020 and
remaining depressed through much of 2020.
In 2021, the demand for oil and natural gas began to recover primarily as a result of the roll-out of the COVID-19 vaccine and lessening of
pandemic related government restrictions on individuals and businesses. In addition, the recent special military operation of Russia into
Ukraine and the subsequent sanctions imposed on Russia and other actions have created significant market uncertainties, including
uncertainties around potential supply disruptions for oil and natural gas, which has further enhanced volatility in global commodity prices
in the first half of 2022. Given the dynamic nature of these events, we cannot reasonably estimate the period of time that these market
conditions will persist.
Currently, none of our oil and natural gas properties are operated by us. As a result, in the past we have had limited ability to influence or
control the operation or future development of such properties. Despite these uncertainties, we remain focused on our long-term objectives
and continue to be proactive with our third-party operators to review capital expenditures and alter plans as appropriate to increase
shareholder value.
Liquidity and Capital Resources
As of June 30, 2022, we had $8.3 million in cash and cash equivalents compared to $5.3 million at June 30, 2021. Our primary sources of
liquidity and capital resources during the year ended June 30, 2022 were cash provided by operations as well as net borrowings under our
Senior Secured Credit Facility. Our primary uses of liquidity and capital resources for the year ended June 30, 2022 were acquisitions of
oil and natural gas properties and cash dividend payments to our common stockholders. As of June 30, 2022, working capital was $6.1
million, a decrease of $5.4 million from working capital of $11.5 million as of June 30, 2021.
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The Senior Secured Credit Facility has a maximum capacity of $50.0 million subject to a borrowing base determined by the lender based
on the value of our oil and natural gas properties. The Senior Secured Credit Facility has a current borrowing base of $50.0 million, with
$21.3 million drawn as of June 30, 2022. Since year-end, we have paid down another $9.0 million under our Senior Secured Credit
Facility and as of August 31, 2022, we have $12.3 million outstanding. The Senior Secured Credit Facility is secured by substantially all
of our reserves associated with our oil and natural gas properties and matures on April 9, 2024.
Any future borrowings bear interest, at our option, at either the London Interbank Offered Rate (“LIBOR”) plus 2.75% or the Prime Rate,
as defined under the Senior Secured Credit Facility, plus 1.0%. The Senior Secured Credit Facility contains covenants requiring the
maintenance of (i) a total leverage ratio of not more than 3.00 to 1.00, (ii) a current ratio of not less than 1.00 to 1.00, and (iii) a
consolidated tangible net worth of not less than $40.0 million, each as defined in the Senior Secured Credit Facility. It also contains other
customary affirmative and negative covenants and events of default. As of June 30, 2022, we were in compliance with all covenants under
the Senior Secured Credit Facility.
We are currently working on our annual redetermination with MidFirst Bank. We expect that our borrowing base will remain at $50.0
million and the Margined Collateral Value, as defined in the Ninth Amendment to the Senior Secured Credit Facility, will be set at
$125.0 million. We are required to enter into hedges on a rolling 12-month basis when the borrowings under the Senior Secured Credit
Facility exceed 25% of the Margined Collateral Value. Based on the current amount outstanding, the utilization percentage under the
required hedging covenant is below the minimum utilization threshold of 25% and as a result we are not required to enter into additional
hedges at this time. At each redetermination, our Margined Collateral Value takes into account the estimated value of our oil and natural
gas properties, proved developed reserves, total indebtedness, and other relevant factors consistent with customary oil and natural gas
lending criteria.
On February 7, 2022, we entered into the Ninth Amendment to the Senior Secured Credit Facility. This amendment, among other things,
modified the definition of utilization percentage related to the required hedging covenant such that for the purposes of determining the
amount of future production to hedge, the utilization of the Senior Secured Credit Facility will be based on the Margined Collateral Value,
as defined in the agreement, to the extent it exceeds the borrowing base then in effect. This amendment also required us to enter into
hedges for the next 12-month period ending February 2023, covering 25% of expected oil and natural gas production over that period.
On November 9, 2021, we entered into the Eighth Amendment to the Senior Secured Credit Facility. This amendment, among other
things, increased the borrowing base to $50.0 million and added a hedging covenant whereby we must hedge a certain amount of our
future production on a rolling 12-month basis when 25% or more of the borrowing base is utilized. The hedging covenant was amended in
the Ninth Amendment, as discussed above.
On August 5, 2021, we entered into the Seventh Amendment of our Senior Secured Credit Facility which, among other things, added
definitions for the terms “Acquired Entity or Mineral Interests” and “Acquired Entity or Mineral Interests EBITDA Adjustment.”
Additionally, the consolidated tangible net worth covenant level was reduced to $40.0 million from $50.0 million.
We have historically funded operations through cash from operations and working capital. The primary source of cash is the sale of
produced crude oil, natural gas, and NGLs. A portion of these cash flows is used to fund capital expenditures and pay cash dividends to
shareholders. We expect to manage near-future development activities for our properties with cash flows from operating activities and
existing working capital.
We are pursuing new growth opportunities through acquisitions and other transactions. In addition to cash on hand, we have access to the
undrawn portion of the borrowing base available under our Senior Secured Credit Facility. We also have an effective shelf registration
statement with the SEC under which we may issue up to $500.0 million of new debt or equity securities.
The Board of Directors instituted a cash dividend on common stock in December 2013. We have since paid 35 consecutive quarterly
dividends. Distribution of a substantial portion of free cash flow in excess of operating and capital requirements through cash dividends
remains a priority of our financial strategy, and it is our long-term goal to increase
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dividends over time, as appropriate. During the industry downturn primarily due to COVID-19, effective in the quarter ended June 30,
2020, the Board of Directors adjusted the quarterly dividend rate from $0.10 per share to $0.025 per share. The reduction in the dividend
rate at that time allowed us to conserve cash for additional financial flexibility while continuing to reward shareholders with a yield of
approximately 3% at the then current stock price levels. In light of our improving financial performance and industry outlook, the Board
of Directors has since increased the dividend rate, with the most recent increase occurring on September 12, 2022, when the Board of
Directors declared a dividend of $0.12 per share payable on September 30, 2022.
Also, on September 8, 2022, our Board of Directors authorized a share repurchase program, under which we are approved to repurchase
up to $25 million of our common stock through December 31, 2024. We intend to fund any repurchases from working capital and cash
provided by operating activities. As we continue to focus on our goal of maximizing total shareholder return, the Board of Directors along
with the management team believe that a share repurchase program is complimentary to the existing dividend policy and is a tax efficient
means to further improve shareholder return. Refer to Note 15, “Subsequent Events,” for a further discussion of our share repurchase
program.
Capital Expenditures
For the year ended June 30, 2022, we incurred $2.6 million on development capital expenditures, $26.4 million for the Jonah Field
Acquisition (net of customary purchase price adjustments, excluding $3.0 million in non-cash asset retirement obligations), and $25.2
million for the Williston Basin Acquisition (net of customary purchase price adjustments, excluding $2.4 million in non-cash asset
retirement obligations) and less than $0.1 million at the Delhi Field and Hamilton Dome Field, for plugging and abandoning costs.
Based on discussions with our operators, we expect capital workover projects to continue in all the fields. At Delhi Field, we anticipate
capital costs for a NGL plant heat exchanger project which is currently underway. Overall, for fiscal year 2023, we expect budgeted
capital expenditures to be in the range of $6.5 million to $9.5 million, which excludes any potential acquisitions. Our expected capital
expenditures for the next 12 months include Foundation, the operator of our Williston Basin properties, drilling two sidetrack locations
targeting the Birdbear formation. Our fiscal year 2023 budget does not include any capital expenditures for drilling at our Pronghorn and
Three Forks locations.
As of June 30, 2022, our PUD reserves included 3.6 MMBOE of reserves and approximately $61.7 million of future development costs
associated with the Williston Basin properties.
Funding for our anticipated capital expenditures over the near-term is expected to be met from cash flows from operations and current
working capital, as well as borrowings under our Senior Secured Credit Facility as needed for future acquisitions or development of PUD
reserves at our Pronghorn and Three Forks locations.
Full Cost Pool Ceiling Test
As of June 30, 2022, our capitalized costs of oil and natural gas properties were below the full cost valuation ceiling; however, we could
experience an impairment if commodity price levels were to substantially decline. Lower commodity prices would reduce the excess, or
cushion, of our valuation ceiling over our capitalized costs and may adversely impact our ceiling tests in future quarters. We cannot give
assurance that a write-down of capitalized oil and natural gas properties will not be required in the future. Under the full cost method of
accounting, capitalized costs of oil and natural gas properties, net of accumulated depletion, depreciation, and amortization and related
deferred taxes, are limited to the estimated future net cash flows from proved oil and natural gas reserves, discounted at 10%, plus the
lower of cost or fair value of unproved properties, as adjusted for related income tax effects (the valuation “ceiling”). If capitalized costs
exceed the full cost ceiling, the excess would be charged to expense as a write-down of oil and natural gas properties in the quarter in
which the excess occurred. The quarterly ceiling test calculation requires that we use the average first day of the month price for our
petroleum products during the 12-month period ending with the balance sheet date. The prices used in calculating our ceiling test as of
June 30, 2022 were $85.82 per barrel of oil, $5.19 per MMBtu of natural gas and $44.24 per barrel of NGLs. At December 31, 2020 and
September 30, 2020, we recorded ceiling test impairment charges of $15.2 million and $9.6 million, respectively. The ceiling test
impairments were driven by decreases in the first-day-of-the-month average price for oil used in the ceiling test calculation. At June 30,
2022, a 10% decrease in commodity
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prices used to determine our proved reserves would not have resulted in an impairment of our oil and natural gas properties.
Crude Oil
Natural Gas
Overview of Cash Flow Activities
Twelve-Month Period Ended:
6/30/2021 9/30/2021 12/31/2021
$
$
49.72
2.46
$
$
57.64
2.97
$
$
66.55
3.64
3/31/2022
75.28
4.15
$
$
$
$
6/30/2022
85.82
5.19
Cash flows provided by operating activities
Cash flows used in investing activities
Cash flows provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Years Ended June 30,
2021
2022
$
$
52,460
(54,873)
5,416
3,003
$
$
4,733
(18,769)
(349)
(14,385)
$
$
Change
47,727
(36,104)
5,765
17,388
Cash provided by operating activities increased $47.7 million during the fiscal year ended June 30, 2022 compared to fiscal year ended
June 30, 2021 primarily due to an increased average daily production and an approximate $13.26 per BOE average realized price increase
which both contributed to higher revenues in fiscal year 2022.
Cash used in investing activities increased $36.1 million primarily due to the acquisition of the Jonah Field properties in April 2022
totaling $26.4 million (net of customary purchase price adjustments) and Williston Basin properties in January 2022 totaling $25.8 million
(net of customary purchase price adjustments), compared to the acquisition of the Barnett Shale properties in May 2021 for $18.3 million
(net of customary purchase price adjustments). In addition, capital expenditures increased $1.0 million in fiscal year 2022 due to increased
capital workovers for certain return-to-production projects now viable with the increase in commodity prices.
Net cash flows provided by financing activities were $5.4 million for the year ended June 30, 2022, compared to $0.3 million of net cash
flows used in financing activities for the year ended June 30, 2021. As of June 30, 2021, we had borrowings of $4.0 million outstanding
under our Senior Secured Credit Facility. During the year ended June 30, 2022, we increased these borrowings by a net $17.3 million,
ending the year with $21.3 million outstanding under the Senior Secured Credit Facility. In fiscal year 2022, we used cash of $11.8
million for dividends paid to our common stockholders compared to $4.3 million in fiscal year 2021.
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We reported net income of $32.6 million for the year ended June 30, 2022 compared to a net loss of $16.4 million for the year ended
June 30, 2021. The following table summarizes the comparison of financial information for the periods presented:
Results of Operations
Years Ended June 30, 2022 and 2021
(in thousands, except per unit and per BOE amounts)
Net income (loss)
Revenues:
Crude oil
Natural gas
Natural gas liquids
Total Revenue
Operating costs:
Lease operating costs:
CO2 costs
Ad valorem and production taxes
Other lease operating costs
Depletion, depreciation, and amortization:
Depletion of full cost proved oil and gas properties
Depreciation of other property and equipment
Amortization of intangibles
Accretion of asset retirement obligations
Impairment of proved property
Impairment of Well Lift Inc. - related assets
General and administrative:
General and administrative
Stock-based compensation
Other Income (expenses):
Net gain (loss) on derivative contracts
Interest and other income
Interest expense
Income tax (expense) benefit
Production:
Crude oil (MBBL)
Natural gas (MMCF)
Natural gas liquids (MBBL)
Equivalent (MBOE)(1)
Average daily production (BOEPD)(1)
Average price per unit(2):
Crude oil (BBL)
Natural gas (MCF)
NGL (BBL)
Equivalent (BOE)(1)
Average cost per unit:
Operating costs:
Lease operating costs:
CO2 costs
Ad valorem and production taxes
Other lease operating costs
Depletion of full cost proved oil and gas properties
General and administrative:
General and administrative
Stock-based compensation
Years Ended June 30,
2022
2021
Variance
$
32,628
$
(16,438)
$
52,683
39,174
17,069
108,926
7,708
6,960
33,989
7,518
4
—
531
—
—
6,710
125
(3,763)
95
(572)
(8,513)
619
7,141
364
2,173
5,953
85.11
5.49
46.89
50.13
3.55
3.20
15.64
3.46
3.09
0.06
$
$
$
$
26,411
2,629
3,662
32,702
3,062
1,280
12,245
4,903
7
47
210
24,792
146
5,496
1,258
(615)
40
(103)
4,984
555
963
171
887
2,430
47.59
2.73
21.42
36.87
3.45
1.44
13.80
5.53
6.20
1.42
$
49,066
26,272
36,545
13,407
76,224
4,646
5,680
21,744
2,615
(3)
(47)
321
(24,792)
(146)
1,214
(1,133)
(3,148)
55
(469)
(13,497)
64
6,178
193
1,286
3,523
37.52
2.76
25.47
13.26
0.10
1.76
1.84
(2.07)
(3.11)
(1.36)
Variance %
(298.5) %
99.5 %
1,390.1 %
366.1 %
233.1 %
151.7 %
443.8 %
177.6 %
53.3 %
(42.9) %
(100.0) %
152.9 %
(100.0) %
(100.0) %
22.1 %
(90.1) %
511.9 %
137.5 %
455.3 %
(270.8) %
11.5 %
641.5 %
112.9 %
145.0 %
145.0 %
78.8 %
101.1 %
118.9 %
36.0 %
2.9 %
122.2 %
13.3 %
(37.4) %
(50.2) %
(95.8) %
(1) Equivalent oil reserves are defined as six MCF of natural gas and 42 gallons of NGLs to one barrel of oil conversion ratio which reflects energy equivalence and not
price equivalence. Natural gas prices per MCF and NGL prices per barrel often differ significantly from the equivalent amount of oil.
(2) Amounts exclude the impact of cash paid or received on the settlement of derivative contracts since we did not elect to apply hedge accounting.
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Revenues
Fiscal year ended June 30, 2022 revenues increased 233.1% to $108.9 million compared to $32.7 million for the fiscal year ended June 30,
2021. The increase in revenue is primarily due to a 145% increase in average daily equivalent production from 2,430 BOEPD to 5,953
BOEPD due the addition of the Jonah Field Acquisition in April 2022, Williston Basin Acquisition in January 2022, and Barnett Shale
Acquisition in May 2021, which increased current fiscal year production by approximately 518 BOEPD, 241 BOEPD, and 2,847 BOEPD,
respectively. In addition, our average realized commodity prices (excluding the impact of derivative contracts) increased approximately
$13.26 per BOE, or 36%, for the fiscal year ended June 30, 2022 compared to June 30, 2021. Oil and natural gas prices are inherently
volatile and began to stabilize in 2021 and continuing into 2022. Our average realized oil price was higher primarily due to the recovery of
WTI pricing in 2022, as the demand for oil has begun to recover primarily as a result of the roll-out of the COVID -19 vaccines, lessening
of pandemic related government restrictions on individuals and businesses, and sanctions affecting Russian oil and natural gas supplies.
Lease Operating Costs
The following table summarizes CO2 costs per Mcf and CO2 volumes for the years ended June 30, 2022 and 2021. CO2 purchase costs are
for the Delhi Field. Under our contract with the Delhi Field operator, purchased CO2 is priced at 1% of the realized oil price in the field
per Mcf, plus sales taxes and transportation costs as per contract terms.
CO2 costs per MCF
CO2 volumes (MMCF per day, gross)
Years Ended June 30,
2021
2022
Variance
Variance %
$
$
1.07
82.6
$
0.71
49.1
0.36
33.5
50.7 %
68.2 %
The $4.6 million increase in CO2 costs for the fiscal year ended June 30, 2022 was primarily due to a 68.2% increase in purchased CO2
volumes combined with a 50.7% increase in CO2 costs per MCF, which was driven by a 78.8% increase in our average realized oil price.
The increase in purchased CO2 volumes is due to the completion of preventative maintenance on the pipeline that supplies newly
purchased CO2 to the Delhi Field which resulted in temporary suspension of CO2 purchases for the three months ended September 30,
2021. Additionally, CO2 purchase nominations increased throughout fiscal year 2022 to compensate for reduced reservoir pressure. CO2
purchases provide approximately 20% of the injected volumes in the field and the field’s recycle facilities provide the other 80%. The
pipeline is owned and operated by Denbury and we do not have any ownership in the pipeline. On a per unit basis, CO2 costs were $3.55
per BOE and $3.45 per BOE for the years ended June 30, 2022 and 2021, respectively.
Ad valorem and production taxes were $7.0 million and $1.3 million for the years ended June 30, 2022 and 2021, respectively. On a per
unit basis, ad valorem and production taxes were $3.20 per BOE and $1.44 per BOE for the years ended June 30, 2022 and 2021,
respectively. The increase in ad valorem and production taxes is primarily due to increases in oil and natural gas prices and increased
production volumes described above as production taxes are based on sales at the wellhead.
Compared to fiscal year ended June 30, 2021, other lease operating costs increased 177.6% primarily due to the Jonah Field Acquisition in
April 2022, Williston Basin Acquisition in January 2022 and Barnett Shale Acquisition in May 2021. Other lease operating costs per BOE
for our Jonah Field, Williston Basin and Barnett Shale properties were approximately $10.69 per BOE, $21.86 per BOE and $14.70 per
BOE, respectively, for the years ended June 30, 2022. Other lease operating costs for the Delhi and Hamilton Dome fields increased $0.8
million and $0.9 million, respectively, due to higher labor, electricity and chemical expenses during the year ended June 30, 2022.
Depletion expense increased $2.6 million or 53.3% from $4.9 million for the fiscal year ended June 30, 2021 to $7.5 million for the
fiscal year ended June 30, 2022 primarily due to an increase in production. On a per unit basis, depletion expense was $3.46 per BOE and
$5.53 per BOE for the fiscal years ended June 30, 2022 and 2021, respectively. The integration of the Jonah Field properties in
April 2022, Williston Basin properties in January 2022, and Barnett Shale properties in May 2021 together with the ceiling test
impairments recorded during the fiscal year ended June 30, 2021 contributed to the overall lower composite depletion per BOE rate for
the year ended June 30, 2022.
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Impairment of Proved Property
We utilize the full cost method of accounting for our oil and natural gas properties under the full cost method of accounting, capitalized
costs of oil and natural gas properties, net of accumulated depletion, depreciation, and amortization and related deferred taxes, are limited
to the estimated future net cash flows from proved oil and natural gas reserves, discounted at 10%, plus the lower of cost or fair value of
unproved properties included in the amortization base, plus the cost of unproved properties excluded from amortization, as adjusted for
related income tax effects (the valuation “ceiling”). As of June 30, 2022, our net book value of oil and natural gas properties did not
exceed the current ceiling. During the fiscal year ended June 30, 2021, we recorded a proved property impairment of $24.8 million
primarily as a result of the decline in the price of oil over the historical 12-month period.
Impairment of Well Lift Inc. - Related Expenses
Our royalty rights and investment in Well Lift, Inc. (“WLI”) resulted from the separation of our artificial lift technology operations in
December 2015. We conveyed our patents and other intellectual property to WLI and retained a 5% royalty on future gross revenues
associated with the technology. We own approximately 18% of the common stock and 100% of the preferred stock of WLI and account
for our investment in this private company at cost less impairment, if any, plus or minus changes resulting from observable price changes
in orderly transactions for the identical or a similar investment of the same issuer, if such were to occur. We evaluate the investment for
impairment when we identify any events or changes in circumstances that might have a significant adverse effect on the fair value of the
investment. As of March 31, 2021, we reviewed our investment in WLI for potential impairment and, as a result, recorded an impairment
expense of $0.1 million. This impairment charge was recorded based on a variety of factors including the level of activity associated with
this technology.
General and Administrative Expenses
General and administrative expenses for the fiscal year ended June 30, 2022 increased $1.2 million, or 22.1%, to $6.7 million compared to
$5.5 million for the fiscal year ended June 30, 2021. The increase is primarily due to approximately $0.2 million for salary and employee
benefits due to additional personnel, $0.3 million in severance, $0.2 million for professional fees related to increased accounting services
as a result of the Jonah Field Acquisition, the Williston Basin Acquisition and the Barnett Shale Acquisition, and $0.3 million for
increased business development activity. On a per unit basis, general and administrative expenses decreased $3.11 per BOE to $3.09 per
BOE for the year ended June 30, 2022 from $6.20 per BOE for the prior year. The decrease in general and administrative expenses on a
per unit basis are due to the increased production volumes described above.
Stock-based Compensation Expenses
Stock-based compensation decreased $1.1 million, or 90%, to $0.1 million for the year ended June 30, 2022 compared to $1.3 million the
prior period due to a $1.2 million reduction in current period expense related to the forfeiture of unvested shares in connection with
severance.
Net Gain (Loss) on Derivative Contracts
Periodically, we utilize commodity derivative financial instruments to reduce our exposure to fluctuations in oil and natural gas prices. We
have elected not to designate our open derivative contracts for hedge accounting, and accordingly, we recorded the net change in the mark-
to-market valuation of the derivative contracts in the consolidated statements of operations. The amounts recorded on the consolidated
statements of operations related to derivative contracts represent the (i) gains (losses) related to fair value adjustments on our open, or
unrealized, derivative contracts, and (ii) gains (losses) on settlements of derivative contracts for positions that have settled or been
realized. The table below summarizes our net realized and unrealized gains (losses) on derivative contracts as well as the impact of net
realized (gains) losses on our average realized prices for the periods presented. As a result of the Williston Basin Acquisition in
January 2022 and Jonah Field Acquisition in April 2022, we were required by the terms of our Senior Secured Credit Facility to hedge a
portion of our production. The increase in commodity prices since entering into the hedges resulted in a realized loss on hedges for
the year ended June 30, 2022 and an unrealized loss due to the mark-to-market value of
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remaining hedges. Certain of our hedges begin to expire in October 2022 with our final hedges expiring March 2023. As of June 30,
2022, we had a $0.2 million derivative asset all of which was classified as current, and a $2.2 million derivative liability, all of which was
classified as current.
(in thousands, except per unit and per BOE amounts)
Realized gain (loss) on derivative contracts
Unrealized gain (loss) on derivative contracts
Total net gain (loss) on derivative contracts
Average realized crude oil price per Bbl
Cash effect of oil derivative contracts per Bbl
Crude oil price per Bbl (including impact of realized derivatives)
Average realized natural gas price per Mcf
Cash effect of natural gas derivative contracts per Mcf
Natural gas price per Mcf (including impact of realized derivatives)
Interest Expense
Years Ended June 30,
2022
2021
Variance
Variance %
$
$
$
$
$
$
(1,769)
(1,994)
(3,763)
85.11
(1.24)
83.87
5.49
(0.14)
5.35
$
$
$
$
$
$
(2,526)
1,911
(615)
47.59
(4.55)
43.04
2.73
—
2.73
$
$
$
$
$
$
757
(3,905)
(3,148)
37.52
3.31
40.83
2.76
(0.14)
2.62
(30.0) %
(204.3) %
511.9 %
78.8 %
(72.7) %
94.9 %
101.1 %
— %
96.0 %
Interest expense increased $0.5 million during the fiscal year ended June 30, 2022 compared to fiscal year 2021 primarily due to the
increased borrowings outstanding on our Senior Secured Credit Facility due to our acquisitions throughout the year.
Income tax (expense) provision
For the year ended June 30, 2022, we recognized income tax expense of $8.5 million on net income before income taxes of $41.1 million
compared to an income tax benefit of $5.0 million on net loss before income taxes of $21.4 million for the year ended June 30, 2021.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America
requires that we select certain accounting policies and make estimates and assumptions that affect the reported amounts of the assets,
liabilities, and disclosures of contingent assets and liabilities as of the date of the balance sheet as well as the reported amounts of
revenues and expenses during the reporting period. These policies, together with our estimates, have a significant effect on our
consolidated financial statements. Our significant accounting policies are included in Note 1, “Summary of Significant Events and
Accounting Policies” to our consolidated statements in Item 8. Following is a discussion of our most critical accounting estimates,
judgments, and uncertainties that are inherent in the preparation of our consolidated financial statements.
Oil and Natural Gas Properties. Companies engaged in the production of oil and natural gas are required to follow accounting rules that
are unique to the oil and natural gas industry. We apply the full cost accounting method for our oil and natural gas properties as prescribed
by SEC Regulation S-X Rule 4-10. Under this method of accounting, the costs of unsuccessful and successful, exploration and
development activities are capitalized as properties and equipment. This includes any internal costs that are directly related to property
acquisition, exploration, and development activities but does not include any costs related to production, general corporate overhead, or
similar activities. Gain or loss on the sale or other disposition of oil and natural gas properties is not recognized unless the gain or loss
would significantly alter the relationship between capitalized costs and proved reserves. Oil and natural gas properties include costs that
are excluded from costs being depleted or amortized. Oil and natural gas property costs excluded represent investments in unevaluated
properties. We exclude these costs until the property has been evaluated. Costs are transferred to the full cost pool as the properties are
evaluated. As of June 30, 2022, we had no unevaluated property costs. Oil and natural gas properties include costs that are excluded from
depletion and amortization, which represent investments in unproved and unevaluated properties and include non-producing leasehold,
geologic and geophysical costs associated with leasehold or drilling interests, and exploration drilling costs.
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Estimates of Proved Reserves. The estimated quantities of proved oil and natural gas reserves have a significant impact on the
underlying financial statements. The estimated quantities of proved reserves are used to calculate depletion expense and the estimated
future net cash flows associated with those proved reserves is the basis for determining impairment under the quarterly ceiling test
calculation. The process of estimating oil and natural gas reserves is very complex and requires significant decisions in the evaluation of
all available geologic, geophysical, engineering, and economic data. Estimated reserves are often subject to future revisions, which could
be substantial, based on the availability of additional information; this includes reservoir performance, additional development activity,
new geologic and geophysical data, additional drilling, technological advancements, price changes, and other economic factors. As a
result, material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure
that the reported reserve estimates prepared by our third-party independent engineers represent the most accurate assessments possible, the
subjective decisions and variances in available data for the properties make these estimates generally less precise than other estimates
included in our financial statements. Material revisions to reserve estimates and/or significant changes in commodity prices could
substantially affect our estimated future net cash flows of our proved reserves. These changes could affect our quarterly ceiling test
calculation and could significantly affect our depletion rate. A 10% decrease in commodity prices used to determine our proved reserves
as of June 30, 2022 would not have resulted in an impairment of our oil and natural gas properties. Holding all other factors constant, a
reduction our proved reserve estimates at June 30, 2022 of 10% would affect depletion, depreciation, and amortization expense by
approximately $0.4 million.
On December 31, 2008, the SEC issued its final rule on the modernization of reporting oil and natural gas reserves. The rule allows
consideration of new technologies in evaluating reserves, generally limits the designation of proved reserves to those projects forecasted to
be drilled five years from the initial recognition date of such reserves, allows companies to disclose their probable and possible reserves to
investors, requires reporting of oil and natural gas reserves using an average price based on the previous 12-month unweighted arithmetic
average first-day-of-the-month price rather than year-end prices, revises the disclosure requirements for oil and natural gas operations, and
revises accounting for the limitation on capitalized costs for full cost companies.
Valuation of Deferred Tax Assets. We make certain estimates and judgments in determining our income tax expense for financial
reporting purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities that arise from differences
in the timing and recognition of revenue and expense for tax and financial reporting purposes. Our federal and state income tax returns are
generally not prepared or filed before the consolidated financial statements are prepared or filed; therefore, we estimate the tax basis of
our assets and liabilities at the end of each period as well as the effects of tax rate changes, tax credits, and net operating loss carry backs
and carry forwards. Adjustments related to these estimates are recorded in our tax provision in the period in which we file our income tax
returns. Further, we must assess the likelihood that we will be able to recover or utilize our deferred tax assets. If recovery is not likely, we
must record a valuation allowance against such deferred tax assets for the amount we would not expect to recover; this would result in an
increase to our income tax expense. The deferred tax asset and valuation allowance of $0.1 million related to the portion of the NOLs that
are limited by IRC Section 382 were written off during the year ended June 30, 2022.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in
making the assessment of the ultimate realization of deferred tax assets. The Company has historically established a valuation allowance
against net operating losses and other deferred tax assets to the extent it believes the future benefit from these assets will not be realized in
the statutory carryforward periods, based upon the level of historical taxable income and projections for future taxable income over the
periods for which the deferred tax assets are deductible. At the time of this report, we have not recorded a valuation allowance for our
expected inability to realize the future benefits of certain federal and state deferred tax assets as further discussed in Note 7, “Income
Taxes”.
Stock-based Compensation. The fair value, and for certain awards the expected vesting period, of our performance-based awards were
determined using a Monte Carlo simulation. This technique uses a geometric Brownian motion model with defined variables and
randomly generates values for each variable through multiple trials. Variables include stock price volatility, expected term of the award,
the expected risk-free interest rate, and the expected dividend yield of our stock. The risk-free interest rate used is the U.S. Treasury yield
for bonds matching the expected term of the award on the date of grant. Vesting of performance-based awards is based on our total
common stock return compared to a peer
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group of other companies in our industry with comparable market capitalizations and, for certain awards, our share price attaining a set
target.
Recent Accounting Pronouncements. Refer to Note 1, “Summary of Significant Events and Accounting Policies” to our consolidated
financial statements in Item 8. Financial Statements and Supplementary Data for discussion of the recent accounting pronouncements
issued by the Financial Accounting Standards Board.
Item 7A. Quantitative and Qualitative Disclosures About Market Risks
Derivative Instruments and Hedging Activity
We are exposed to various risks, including energy commodity price risk, such as price differentials between the NYMEX commodity price
and the index price at the location where our production is sold. When oil, natural gas, and natural gas liquids prices decline significantly,
our ability to finance our capital budget and operations may be adversely impacted. We expect energy prices to remain volatile and
unpredictable, therefore we monitor commodity prices to identify the potential need for the use of derivative financial instruments to
provide partial protection against declines in oil and natural gas prices. We do not enter into derivative contracts for speculative trading
purposes.
We are exposed to market risk on our open derivative contracts related to potential non-performance by our counterparties. It is our policy
to enter into derivative contracts only with counterparties that are creditworthy institutions deemed by management as competitive market
makers. For the derivative contracts settled during fiscal 2022 and 2021, we did not post collateral. We account for our derivative activities
under the provisions of ASC 815, Derivatives and Hedging, (“ASC 815”). ASC 815 establishes accounting and reporting that every
derivative instrument be recorded on the balance sheet as either an asset or liability measured at fair value. See Note 8, “Derivatives” to
our consolidated financial statements for more details.
Interest Rate Risk
We are exposed to changes in interest rates. Changes in interest rates affect the interest earned on our cash and cash equivalents.
Additionally, any borrowings under the Senior Secured Credit Facility will bear interest, at our option, at either LIBOR plus 2.75%,
subject to a minimum LIBOR of 0.25%, or the Prime Rate, as defined under the Senior Secured Credit Facility, plus 1.00%. LIBOR rates
are sensitive to the period of contract and market volatility, as well as changes in forward interest rate yields. Under our current policies,
we do not use interest rate derivative instruments to manage exposure to interest rate changes.
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Item 8. Consolidated Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 659)
Consolidated Balance Sheets as of June 30, 2022 and 2021
Consolidated Statements of Operations for the Years ended June 30, 2022 and 2021
Consolidated Statements of Cash Flows for the Years ended June 30, 2022 and 2021
Consolidated Statements of Changes in Stockholders’ Equity for the Years ended June 30, 2022 and 2021
Notes to Consolidated Financial Statements
Supplemental Disclosure about Oil and Natural Gas Properties (unaudited)
43
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47
48
49
50
72
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
Evolution Petroleum Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Evolution Petroleum Corporation and subsidiaries (the “Company”) as
of June 30, 2022 and 2021, the related consolidated statements of operations, cash flows, and changes in stockholders’ equity for the years
then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2022 and
2021, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As
part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that
was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material
to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole,
and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
The Impact of Proved Oil and Natural Gas Reserves on Depletion, Depreciation and Amortization (“DD&A”) and Full Cost
Ceiling Test Impairment Calculation (“Ceiling Test”)
As described in Note 1, the Company follows the full cost method of accounting, pursuant to which oil and natural gas properties are
amortized using the unit-of-production method over total proved reserves. The Company’s proved oil and natural gas properties are
evaluated for impairment by the Ceiling Test, utilizing the Company’s proved oil and natural gas reserves in accordance with accounting
principles generally accepted in the United States of America and SEC
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guidelines. For the year ended June 30, 2022, the Company recorded DD&A related to its proved oil and natural gas properties of
approximately $7.5 million, and there was no ceiling test impairment.
The Company engages two independent reservoir engineering firms, to serve as a management specialist and to assist with the estimation
of proved oil and natural gas reserves. To estimate the volume of proved oil and natural gas reserves and associated future net cash flows,
management and their specialists make significant estimates and assumptions including forecasting the production decline rate of
producing properties and forecasting the timing and volume of production associated with the Company’s development plan for proved
undeveloped properties (“PUDs”). The estimation of proved oil and natural gas reserves is impacted by management’s judgments and
estimates regarding the financial performance of wells associated with proved reserves to determine if wells are expected, with reasonable
certainty, to be economical under the appropriate pricing assumptions required. Changes in significant assumptions or engineering data
could have a significant impact on the amount of DD&A and impairment recorded for the Company’s proved oil and natural gas
properties.
We identified the impact of proved oil and natural gas reserves on DD&A and the Ceiling Test as a critical audit matter due to use of
significant judgment by management, including the use of specialists, when developing the estimates of proved oil and natural gas
reserves. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit
evidence related to the significant assumptions used in developing those estimates of proved oil and natural gas reserves.
The primary procedures we performed to address this critical audit matter included:
● Evaluating the knowledge, skill, and ability of the Company's third-party reservoir engineering specialists and their relationship
to the Company, inquiries of those reservoir engineers regarding the process followed and judgments made to estimate the
proved reserve volumes, and reading the reserve report prepared by the reservoir engineering specialists.
● Evaluating significant assumptions used by management and its specialists in developing the estimates of proved oil and natural
gas reserves, including pricing differentials, future operations costs, future production rates and capital expenditures. The
procedures performed included tests of the data inputs used by specialists for completeness and accuracy and an evaluation of
the specialist’s findings. The procedures performed included:
o Testing the data inputs used by specialist for completeness and accuracy;
o Testing the specialist’s findings for mathematical accuracy; and,
o
Performing analytical procedures on pricing, reserve quantities and cost estimates developed by management and its
specialists. Those procedures entailed comparisons of:
◾ prices to historical benchmark prices, adjusted for pricing differentials,
◾ production forecasts to recent historical actual production,
◾ projections of lease operating costs to costs incurred by property during fiscal year ended June 30, 2022, and
◾ projected production taxes to recent historical taxes incurred and to statutory tax rates.
● Evaluating the accuracy of revenue and working interest percentages used in the reserve reports by comparing a sample of such
interests to the land records.
● Performing retrospective review of historical estimates of proved oil and natural gas reserves to identify potential management
bias in estimates.
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Testing the accuracy of the Company’s depletion and impairment calculations that included these proved reserves.
/s/ Moss Adams LLP
Houston, Texas
September 14, 2022
We have served as the Company’s auditor since 2017.
45
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EVOLUTION PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
June 30, 2022
June 30, 2021
Assets
Current assets
Cash and cash equivalents
Receivables from crude oil, natural gas, and natural gas liquids sales
Receivables for federal and state income tax refunds
Derivative contract assets
Prepaid expenses and other current assets
Total current assets
Property and equipment, net of depletion, depreciation, amortization, and impairment
Oil and natural gas properties, net—full-cost method of accounting, of
which none were excluded from amortization
Other property and equipment, net
Total property and equipment, net
Other assets, net
Total assets
Current liabilities
Liabilities and Stockholders' Equity
Accounts payable
Accrued liabilities and other
Derivative contract liabilities
State and federal taxes payable
Total current liabilities
Long term liabilities
Senior secured credit facility
Deferred income taxes
Asset retirement obligations
Operating lease liability
Total liabilities
Commitments and contingencies (Note 11)
Stockholders' equity
Common stock; par value $0.001; 100,000,000 shares authorized: issued and
outstanding 33,470,710 and 33,514,952 shares as of June 30, 2022 and 2021,
respectively
Additional paid-in capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$
$
$
$
8,280
24,080
—
170
3,838
36,368
110,508
—
110,508
1,171
148,047
15,133
11,893
2,164
1,095
30,285
21,250
7,099
13,899
—
72,533
33
42,629
32,852
75,514
148,047
$
$
$
$
5,277
8,687
3,108
—
1,036
18,108
58,516
11
58,527
71
76,706
1,613
4,943
—
38
6,594
4,000
5,957
5,539
21
22,111
34
42,541
12,020
54,595
76,706
See accompanying notes to consolidated financial statements.
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Table of Contents
EVOLUTION PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Revenues
Crude oil
Natural gas
Natural gas liquids
Total revenues
Operating costs
Lease operating costs
Depletion, depreciation, and amortization
Impairment of proved property
Impairment of Well Lift Inc. - related assets
General and administrative expenses
Total operating costs
Income (loss) from operations
Other income and expenses
Net gain (loss) on derivative contracts
Interest and other income
Interest expense
Income (loss) before income taxes
Income tax (expense) benefit
Net income (loss)
Earnings (loss) per common share:
Basic
Diluted
Weighted average number of common shares outstanding
Basic
Diluted
Years Ended June 30,
2022
2021
$
$
$
$
$
$
$
$
52,683
39,174
17,069
108,926
48,657
8,053
—
—
6,835
63,545
45,381
(3,763)
95
(572)
41,141
(8,513)
32,628
0.97
0.96
32,952
33,306
26,411
2,629
3,662
32,702
16,587
5,167
24,792
146
6,754
53,446
(20,744)
(615)
40
(103)
(21,422)
4,984
(16,438)
(0.50)
(0.50)
32,744
32,744
See accompanying notes to consolidated financial statements.
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Table of Contents
EVOLUTION PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depletion, depreciation, and amortization
Impairment of proved property
Impairment of Well Lift Inc. - related assets
Stock-based compensation
Settlement of asset retirement obligations
Deferred income taxes
Unrealized loss on derivative contracts
Accrued settlements on derivative contracts
Other
Changes in operating assets and liabilities:
Receivables
Prepaid expenses and other current assets
Accounts payable and accrued expenses
State and federal income taxes payable
Net cash provided by operating activities
Cash flows from investing activities:
Acquisition of oil and natural gas properties
Capital expenditures for oil and natural gas properties
Net cash used in investing activities
Cash flows from financing activities:
Common stock dividends paid
Common stock repurchases, including stock surrendered for tax withholding
Borrowings under credit facility
Repayments of credit facility
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosures of cash flow information:
Cash paid for interest on Senior secured credit facility
Cash paid for income taxes
Cash received from income tax refunds
Non-cash investing and financing transactions:
Increase (decrease) in accrued purchases of property and equipment
Oil and natural gas property costs attributable to the recognition of asset retirement obligations
See accompanying notes to consolidated financial statements.
48
Years Ended June 30,
2021
2022
$
32,628
$
(16,438)
8,053
—
—
125
—
1,142
1,994
919
(10)
(11,427)
(538)
18,516
1,058
52,460
(53,342)
(1,531)
(54,873)
(11,796)
(38)
34,000
(16,750)
5,416
3,003
5,277
8,280
523
6,294
3,223
1,094
7,807
$
$
5,167
24,792
146
1,258
(101)
(5,104)
615
(2,791)
10
(6,632)
(546)
4,498
(141)
4,733
(18,297)
(472)
(18,769)
(4,342)
(7)
7,000
(3,000)
(349)
(14,385)
19,662
5,277
86
758
142
(80)
2,883
$
$
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EVOLUTION PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands)
Balances at June 30, 2020
Issuance of restricted common stock
Common stock repurchases, including stock
surrendered for tax withholding
Retirements of treasury stock
Stock-based compensation
Net income (loss)
Common stock dividends paid
Balances at June 30, 2021
Issuance of restricted common stock
Forfeitures of restricted stock
Common stock repurchases, including stock
surrendered for tax withholding
Retirements of treasury stock
Stock-based compensation
Net income (loss)
Common stock dividends paid
Balances at June 30, 2022
Common Stock
Shares
Par Value
Additional
Paid-in
Capital
Retained
Earnings
Treasury
Stock
Total
Stockholders'
Equity
32,957
561
$
—
(3)
—
—
—
33,515
336
(373)
—
(7)
—
—
—
33,471
$
33
1
—
—
—
—
—
34
—
(1)
—
—
—
—
—
33
$
41,291
(1)
$
32,800
—
$
— $
—
—
(7)
1,258
—
—
42,541
—
1
—
(38)
125
—
—
42,629
$
—
—
—
(16,438)
(4,342)
12,020
—
—
—
—
—
32,628
(11,796)
32,852
$
$
(7)
7
—
—
—
—
—
—
(38)
38
—
—
—
— $
74,124
—
(7)
—
1,258
(16,438)
(4,342)
54,595
—
—
(38)
—
125
32,628
(11,796)
75,514
See accompanying notes to consolidated financial statements.
49
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Events and Accounting Policies
Nature of Operations. Evolution Petroleum Corporation is an independent energy company focused on maximizing returns to
stockholders through the ownership of and investment in onshore oil and natural gas properties in the United States. The Company’s long-
term goal is to maximize total shareholder return from a diversified portfolio of long-life oil and natural gas properties built through
acquisitions and through selective development, production enhancement, and other exploitation efforts on its oil and natural gas
properties.
The Company’s producing properties consist of non-operated interests in the Delhi Holt-Bryant Unit in the Delhi Field in Northeast
Louisiana, a CO2 enhanced oil recovery (“EOR”) project; non-operated interests in the Hamilton Dome Field located in Hot Springs
County, Wyoming, a secondary recovery field utilizing water injection wells to pressurize the reservoir; non-operated interests in the
Barnett Shale located in North Texas, a natural gas producing property; non-operated interests in the Williston Basin in North Dakota, a
producing oil and natural gas reservoir; non-operated interests in the Jonah Field in Sublette County, Wyoming; and small overriding
royalty interests in four onshore Texas wells.
Principles of Consolidation and Reporting. The consolidated financial statements include the accounts of Evolution Petroleum
Corporation and its wholly-owned subsidiaries (the “Company”). All significant intercompany transactions have been eliminated in
consolidation. The consolidated financial statements for the previous year may include certain reclassifications to conform to the current
presentation. To conform with the current year presentation, “Accrued payables” disclosed in Footnote 14, “Additional Financial
Information” is included with “Accrued liabilities and other” instead of “Accounts Payable” at June 30, 2021 on the consolidated balance
sheets and “Net gain (loss) on derivative contracts” is included with “Other income and expenses” instead of “Total operating costs” for
the year ended June 30, 2021 on the consolidated statements of operations. These reclassifications have no impact on previously reported
net income or stockholders’ equity.
Risk and Uncertainties. None of the Company’s ownership interests are operated by the Company and involve other third-party working
interest owners. As a result, the Company has a limited ability to influence or control the operation or future development of such
properties. However, the Company is proactive with its third-party operators to review spending and alter plans as appropriate.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally acceptable in the United
States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities, if any, at the date of the consolidated financial statements and the reported amounts of revenues and
expenses during the respective reporting periods. Significant estimates include (a) reserve quantities and estimated future cash flows
associated with proved reserves, which may significantly impact depletion expense and potential impairments of oil and natural gas
properties, (b) asset retirement obligations, (c) stock-based compensation, (d) fair values of derivative assets and liabilities, (e) income
taxes and the valuation of deferred tax assets, (f) commitments and contingencies, and (g) accruals of crude oil, natural gas, and natural
gas liquids (“NGL”) revenues and expenses. The Company analyzes estimates and judgements based on historical experience and various
other assumptions and information that are believed to be reasonable. Estimates and assumptions about future events and their effects
cannot be predicted with certainty and, accordingly, these estimates may change as additional information is obtained, as new events
occur, and as the Company’s environment changes. Actual results may differ from the estimates and assumptions used in the preparation
of the Company’s consolidated financial statements.
Cash and Cash Equivalents. The Company considers all highly liquid investments, with original maturities of 90 days or less when
purchased, to be cash and cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable consist of accrued hydrocarbon revenues due under
normal trade terms, generally requiring payment within 30 to 60 days of production, and other miscellaneous receivables. No interest is
charged on past-due balances. Payments made on accounts receivable are applied to the earliest unpaid items. The Company establishes
provisions for losses on accounts receivable if it is determined that collection of all or a part of an outstanding balance is not probable.
Collectability is reviewed regularly
50
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and an allowance is established or adjusted, as necessary, using the specific identification method. As of June 30, 2022 and 2021, no
allowance for doubtful accounts was considered necessary.
Oil and Natural Gas Properties. The Company uses the full-cost method of accounting for its investments in oil and natural gas
properties. Under this method of accounting, all costs incurred in the acquisition, exploration and development of oil and natural gas
properties, including unproductive wells, are capitalized. This includes any internal costs that are directly related to property acquisition,
exploration, and development activities but does not include any costs related to production, general corporate overhead, or similar
activities. Gain or loss on the sale or other disposition of oil and natural gas properties is not recognized, unless the gain or loss would
significantly alter the relationship between capitalized costs and proved reserves.
The depreciable base for oil and natural gas properties includes the sum of all capitalized costs net of depletion, estimated future
development costs, and asset retirement costs (net of salvage values) not included in oil and natural gas properties, less costs excluded
from amortization. The depreciable base of oil and natural gas properties is amortized using the unit-of-production method over total
proved reserves.
The capitalized costs of the Company’s oil and natural gas properties, net of accumulated amortization and related deferred income taxes
are subject to a full cost ceiling limitation in which the costs are not allowed to exceed their related estimated future net revenues
discounted at 10%, net of tax considerations. Any excess over the full cost ceiling limitation is charged to expense as an impairment and is
reflected as additional accumulated depletion, depreciation, and amortization or as a credit to oil and natural gas properties.
Oil and natural gas properties include costs that are excluded from depletion and amortization, which represent investments in unproved
and unevaluated properties and include non-producing leasehold, geologic and geophysical costs associated with leasehold or drilling
interests, and exploration drilling costs. These costs are excluded until the project is evaluated and proved reserves are established or
impairment is determined. As of June 30, 2022 and 2021, the Company did not have any costs excluded from depletion and amortization.
Other Property and Equipment. Other property and equipment includes building leasehold improvements, data processing and
telecommunications equipment, office furniture, and office equipment. These items are recorded at cost and depreciated over expected
lives of the individual assets or group of assets, which range from three to seven years. The assets are depreciated using the straight-line
method. Realization of the carrying value of other property and equipment is reviewed for possible impairment whenever events or
changes in circumstances indicate that the carrying amount may not be recoverable. Assets are determined to be impaired if a forecast of
undiscounted estimated future net operating cash flows directly related to the asset, including disposal value, if any, is less than the
carrying amount of the asset. If any asset is determined to be impaired, the loss is measured as the amount by which the carrying amount
of the asset exceeds its fair value. Repair and maintenance costs are expensed in the period incurred.
Asset Retirement Obligations. An asset retirement obligation (“ARO”) associated with the retirement of a tangible long-lived asset is
recognized as a liability in the period incurred. It is associated with an increase in the carrying amount of the related long-lived asset, the
Company’s oil and natural gas properties. The cost of the tangible asset, including the asset retirement cost, is depleted over the useful life
of the asset. The initial recognition or subsequent revision of asset retirement cost is considered a Level 3 fair value measurement. The
asset retirement obligation is recorded at its estimated fair value, measured by reference to the expected future cash outflows required to
satisfy the retirement obligation discounted at the Company’s credit-adjusted risk-free interest rate. Accretion expense is recognized over
time as the discounted liability is accreted to its expected settlement value. If the estimated future cost of the asset retirement obligation
changes, an adjustment is recorded to both the asset retirement obligation and the long-lived asset. Revisions to estimated asset retirement
obligations can result from changes in retirement cost estimates, revisions to estimated inflation rates, and changes in the estimated timing
of abandonment.
Fair Value of Financial Instruments. The Company’s financial instruments consist of cash and cash equivalents, accounts receivable,
accounts payable, derivative instruments, and debt. Except for derivatives, the carrying amounts of cash and cash equivalents, accounts
receivable and accounts payable are short-term instruments and approximate fair value due to their highly liquid nature. The carrying
amount of debt approximates fair value as the variable rates on the
51
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Senior Secured Credit Facility, as defined in Note 6, “Senior Secured Credit Facility,” are market interest rates. The fair values of the
Company’s derivative assets and liabilities are based on a third-party industry-standard pricing model that uses market data obtained from
third-party sources, including quoted forward prices for oil and natural gas, discount rates, and volatility factors.
Concentrations of Credit Risk. The Company’s primary concentrations of credit risk are the risks of uncollectible accounts receivable,
and to a lesser extent, the non-performance by counterparties under the Company’s derivative contracts, and cash and cash equivalent
balances in excess of limits federally insured by the Federal Deposit Insurance Corporation.
Substantially all of the Company’s accounts receivable as of June 30, 2022 is from crude oil, natural gas, and NGL sales to third-party
purchasers in the oil and natural gas industry. The Company holds working interests in crude oil and natural gas properties for which a
third-party serves as operator. As a non-operator, the Company primarily markets its production through its field operators, except at the
Jonah Field, where the Company takes its natural gas and NGL production in-kind. As a non-operator, the Company is highly dependent
on the success of its third-party operators and the decisions made in connection with their operations. The third-party operator sells the
crude oil, natural gas, and NGLs to the purchaser, collects the cash, and distributes the cash to the Company. In the years ended June 30,
2022 and 2021, three operators each distributed over 10% of the Company’s crude oil, natural gas and natural gas liquids revenues making
up approximately 83% and 100% of total revenues for the years, respectively. The majority of the Company’s crude oil, natural gas, and
NGL production is sold to purchasers under short-term (less than 12 months) contracts at market-based prices.
Derivative Instruments. The Company follows Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging (“ASC 815”).
From time to time, in accordance with the Company’s policy and the covenants under the Senior Secured Credit Facility, it may hedge a
portion of its forecasted crude oil, natural gas, and NGL production. All derivative instruments are recorded on the consolidated balance
sheet as either an asset or liability measured at fair value. The Company nets its derivative instrument fair value amounts executed with
the same counterparty pursuant to an International Swap Dealers Association Master Agreement (“ISDA”); the agreement provides for net
settlement over the term of the contract and in the event of default or termination of the contract. Although the derivative instruments
provide an economic hedge of the Company’s exposure to commodity price volatility, the Company elected not to meet the criteria to
qualify its derivative instruments for hedge accounting treatment. Accordingly, the Company records the net change in the mark-to-market
valuation of these positions, as well as payments and receipts on settled contracts, in “Net gain (loss) on derivative contracts” on the
consolidated statements of operations.
Estimates of Proved Reserves. The estimated quantities of proved oil and natural gas reserves have a significant impact on the underlying
financial statements. The estimated quantities of proved reserves are used to calculate depletion expense and the estimated future net cash
flows associated with those proved reserves is the basis for determining impairment under the quarterly ceiling test calculation. The
process of estimating oil and natural gas reserves is very complex and requires significant decisions in the evaluation of all available
geologic, geophysical, engineering, and economic data. Estimated reserves are often subject to future revisions, which could be
substantial, based on the availability of additional information; this includes reservoir performance, additional development activity, new
geologic and geophysical data, additional drilling, technological advancements, price changes, and other economic factors. As a result,
material revisions to existing reserve estimates may occur from time to time. Although every reasonable effort is made to ensure that the
reported reserve estimates prepared by the Company’s third-party independent engineers represent the most accurate assessments possible,
the subjective decisions and variances in available data for the properties make these estimates generally less precise than other estimates
included in the Company’s financial statements. Material revisions to reserve estimates and/or significant changes in commodity prices
could substantially affect the Company’s estimated future net cash flows of its proved reserves. These changes could affect the Company’s
quarterly ceiling test calculation and could significantly affect its depletion rate.
Income Taxes. The Company recognizes deferred tax assets and liabilities based on the differences between the tax basis of assets and
liabilities and its reported amounts in the financial statements that may result in taxable or deductible amounts in future years. The
measurement of deferred tax assets may be reduced by a valuation allowance based upon management’s assessment of available evidence
if it is deemed more likely than not that some or all of the deferred tax
52
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assets will not be realizable. The Company recognizes a tax benefit from an uncertain position when it is more likely than not that the
position will be sustained upon examination which is based on the technical merits of the position. The Company records the largest
amount of tax benefit that is greater than 50% likely of being realized upon settlement with a taxing authority. The Company classifies any
interest and penalties associated with income taxes as income tax expense.
Earnings (Loss) Per Share. The Company grants restricted stock awards which entitle the recipient to all of the rights of a shareholder
of the Company including non-forfeitable rights to receive all dividends or other distributions paid with respect to such share; therefore, it
applies the two-class method of calculating basic and diluted earnings (loss) per share (“EPS”) in accordance with ASC 260, Earnings Per
Share (“ASC 260”). Basic EPS is computed by dividing earnings or loss available to common stockholders, after allocating undistributed
earnings to participating securities, by the weighted-average number of common shares outstanding during the period. The computation of
diluted EPS is similar to the computation of basic EPS, except that the denominator is increased to include the number of additional
common shares that would have been outstanding if potentially dilutive common shares had been issued. Unvested performance-based
restricted stock awards and unvested contingent restricted share units are only potentially dilutive if the awards meet their respective
performance criteria as of the period end. The Company uses the treasury stock method to determine the effect of potentially dilutive
common shares on diluted EPS, unless the effect would be anti-dilutive. The unamortized stock-based compensation expense related to
unvested awards is assumed to be used to repurchase shares of common stock at the average market price during the period. The
incremental shares (the difference between the number of shares assumed issued and the number of shares assumed repurchased) are
included in the denominator of the diluted EPS computation. Awards with performance-based vesting restrictions are included in the
computation of diluted shares, if dilutive, when the underlying performance conditions either (i) were satisfied as of the end of the
reporting period or (ii) would be considered satisfied if the end of the reporting period were the end of the related contingency period.
Correction of Immaterial Error
The Company has identified an issue related to its historical process of calculating the Company’s EPS. The Company grants restricted
stock awards which entitle the recipient to all of the rights of a shareholder of the Company including non-forfeitable rights to receive all
dividends or other distributions paid with respect to such shares. Unvested restricted stock is forfeitable until earned and therefore not
considered outstanding for basic EPS. Because restricted stock awards have the non-forfeitable right to share in dividends and earnings
with common shareholders prior to vesting, the Company must apply the two-class method of allocating distributed and undistributed
earnings to unvested restricted stock and outstanding common shares. Historically, it was identified by management that the Company had
not been applying the two-class method of calculating basic and diluted EPS in accordance with ASC 260. Rather, the Company was
considering all restricted stock grants as outstanding at the time of issuance in the calculation of EPS.
At March 31, 2022, the Company determined that its unvested restricted stock awards are participating securities which contain non-
forfeitable rights to dividends. As a result, the Company is required to adjust “Net income (loss) attributable to common stockholders” to
allocate dividends paid to unvested shares as well as undistributed earnings. In addition, the Company determined that its basic and diluted
weighted average shares outstanding were also not adjusted correctly to reflect these participating securities.
The Company concluded the adjustments were immaterial to its 2021 annual and interim financial statements and its 2022 interim
financial statements in accordance with the guidance in Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”)
No. 99, Materiality and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the
Current Year Financial Statements. The correction resulted in a decrease of $0.01 per basic and diluted share for the year ended June 30,
2021. See Note 13, “Earnings (Loss) per Common Share” for more details.
53
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company noted the following adjustments to its Earnings (loss) per common share presentation for the year ended June 30, 2021 (in
thousands, except per share amounts):
As reported:
Net income (loss) for earnings per share calculation
Weighted average number of common shares outstanding — Basic
Weighted average number of common shares and dilutive potential common shares used
in diluted earnings per share
Net earnings (loss) per common share — Basic
Net earnings (loss) per common share — Diluted
Revised:
Net income (loss) for earnings per share calculation
Weighted average number of common shares outstanding — Basic
Weighted average number of common shares and dilutive potential common shares used
in diluted earnings per share
Net earnings (loss) per common share — Basic
Net earnings (loss) per common share — Diluted
Recently Adopted Accounting Pronouncements
Year Ended June 30,
2021
$
$
$
$
$
$
(16,438)
33,264
33,264
(0.49)
(0.49)
(16,503)
32,744
32,744
(0.50)
(0.50)
Income Taxes. In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”) as part of its initiative to reduce
complexity in the accounting standards. The amendments in ASU 2019-12 remove certain exceptions related to the incremental approach
for intra-period tax allocation and the general methodology for calculating income taxes in an interim period and reducing diversity in
practice for the recognition of enacted changes in tax law. ASU 2019-12 also clarifies and simplifies other aspects of accounting for
income taxes. ASU 2019-12 is effective for annual periods, including interim periods within those annual periods, beginning after
December 15, 2020. Effective October 1, 2020, the Company adopted this new standard prospectively and it had no impact on the
Company’s consolidated financial statements.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”). ASU 2016-13 changes the
impairment model for most financial assets and certain other instruments, including trade and other receivables, and requires the use of a
new forward-looking expected loss model that will result in the earlier recognition of allowances for losses. Early adoption is permitted
and entities must adopt the amendment using a modified retrospective approach to the first reporting period in which the guidance is
effective. For smaller reporting companies, as provided by ASU 2019-10, Financial Instruments - Credit Losses (Topic 326), Derivatives
and Hedging (Topic 815), and Leases (Topic 842), ASU 2016-13 is effective for annual periods, including interim periods within those
annual periods, beginning after December 15, 2022. The Company is currently evaluating the impact of ASU 2016-13 but does not expect
that it will have a material effect on the Company’s financial position, results of operations, cash flows or disclosures.
Other accounting pronouncements that have recently been issued by the FASB or other standards-setting bodies are not expected to have a
material impact on the Company’s financial position, results of operations, cash flows or disclosures.
54
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Leases
Operating leases are reflected as an operating lease right of use (“ROU”) asset included in “Other assets, net”, and as a ROU liability in
“Accrued liabilities and other” and “Operating lease liability” on the Company’s consolidated balance sheets. Operating lease ROU
assets and liabilities are recognized at the commencement date of an arrangement based on the present value of lease payments over the
lease term. In addition to the present value of lease payments, the operating lease ROU asset would also include any lease payments made
to the lessor prior to lease commencement less any lease incentives and initial direct costs incurred, if any. Lease expense for operating
lease payments is recognized on a straight-line basis over the lease term and are presented as “General and administrative expenses” in the
consolidated statements of operations. Certain leases have payment terms that vary based on the usage of the underlying assets. Variable
lease payments are not included in ROU assets and lease liabilities. For all operating leases, lease and non-lease components are
accounted for as a single lease component.
As a non-operator and having adequate liquidity, the Company has generally not entered into lease transactions. The Company’s only
operating lease is for corporate office space in Houston, Texas, effective May 1, 2019 and which expires November 30, 2022. The
Company has no leases that meet the criteria for classification as a finance lease or a short-term lease.
The Company makes certain assumptions and judgments when evaluating a contract that meets the definition of a lease under ACS 842,
Leases. At adoption, July 1, 2019, as the Company’s operating lease did not provide an implicit rate, an incremental borrowing rate was
calculated using the prime-rate-based borrowing rate under the Company’s Senior Secured Credit Facility as the term facility was based
on a similar lease term and is appropriately risk-adjusted. The lease term was determined by considering any option available to extend or
to early terminate the lease which the Company believed was reasonably certain to be exercised.
The table below summarized the Company’s leases for the years ended June 30, 2022 and 2021 (in thousands, except years and discount
rate):
Statements of Operations:
Operating lease costs
Statements of Cash Flow:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Balance Sheets:
Operating lease ROU asset (included in other assets)
Accrued liabilities and other - current
Operating lease liability - long-term
Other:
Weighted average remaining lease term in years
Weighted average discount rate
55
$
$
$
Years Ended June 30,
2022
2021
52
$
52
$
$
62
21
26
—
60
71
64
21
0.42
5.15 %
1.34
5.15 %
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2022, the future minimum lease payments associated with the Company’s non-cancellable operating lease for office space
are as follows (in thousands):
Fiscal Year
2023
Total operating lease payments
Less: discount to present value
Total operating lease liabilities
Less: current operating lease liabilities
Non current operating lease liabilities
$
June 30, 2022
26
26
—
26
26
—
$
The Company applied the following practical expedients as provided in the standards update which provide elections to not reassess:
● Not to apply the recognition requirements in the lease standard to short-term leases (a lease that at commencement date has
a lease term of 12 months or less and does not contain a purchase option that the Company is reasonably certain to exercise).
● Whether an expired or existing pre-adoption date contracts contained leases.
● Lease classification of any expired or existing leases.
● Initial direct costs for any expired or existing leases.
● Not to separate lease components from non-lease components in a contract and accounting for the combination as a lease
(reflected by asset class).
Note 3. Revenue Recognition
The Company’s revenues are primarily generated from its crude oil, natural gas and NGL production from the Delhi Field in Northeast
Louisiana, the Hamilton Dome Field in Wyoming, the Barnett Shale properties located in North Texas, the Williston Basin properties in
North Dakota, and the Jonah Field in Sublette County, Wyoming. Additionally, an overriding royalty interest retained in a past divestiture
of Texas properties historically provided de minimis revenue, with the exception of the three months ended December 31, 2021 in which
the Company received $1.1 million for past royalties that accumulated over a period of approximately three years. These past royalties
were recorded as operating revenues within the consolidated statements of operations for the year ended June 30, 2022. Going forward,
the Company expects de minimis revenue from these royalty interests. The following table disaggregates the Company’s revenues by
major product for the years ended June 30, 2022 and 2021 (in thousands):
Revenues
Crude oil
Natural gas
Natural gas liquids
Total revenues
Years Ended June 30,
2022
2021
$
$
52,683
39,174
17,069
108,926
$
$
26,411
2,629
3,662
32,702
As of June 30, 2022, as a non-operator, the Company did not take production in-kind and did not negotiate contracts with customers for its
production from the Delhi Field, the Hamilton Dome Field, the Barnett Shale properties or the Willison Basin properties. The Company
recognizes crude oil, natural gas, and NGL production revenue at the point in time when custody and title (“control”) of the product
transfers to the customer. The sales of oil and natural gas are made under contracts which the Company’s third-party operators of its wells
have negotiated with customers, which typically include variable consideration that is based on pricing tied to local indices and volumes
delivered in the current month. The Company receives payment from the sale of oil and natural gas production one to two months after
delivery.
In the Jonah Field, the Company has elected to take its natural gas and NGL working interest production in-kind and markets separately to
different purchasers for natural gas and to Enterprise Products Partners L.P. (“Enterprise”) for its NGLs.
56
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Judgments made in applying the guidance in ASC 606, Revenue from Contracts with Customers, relate primarily to determining the point
in time when control of product transfers to the customer. The Company does not believe that significant judgments are required with
respect to the determination of the transaction price, including amounts that represent variable consideration, as volume and price carry a
low level of estimation uncertainty given the precision of volumetric measurements and the use of index pricing with predictable
differentials. Accordingly, the Company does not consider estimates of variable consideration to be constrained.
The Company’s contractual performance obligations arise upon the production of hydrocarbons from wells in which the Company has an
ownership interest. The performance obligations are considered satisfied at a point in time upon control transferring to a customer at a
specified delivery point. Consideration is allocated to completed performance obligations at the end of an accounting period.
Revenue is recorded in the month when contractual performance obligations are satisfied. However, settlement statements from the
purchasers of hydrocarbons and the related cash consideration are received by field operators before distributing the Company’s share one
to two months after production has occurred, which is typical in the oil and natural gas industry. As a result, the Company must estimate
the amount of production delivered to the customer and the consideration that will ultimately be received for the sale of the product. To
estimate accounts receivable from operators’ contracts with customers, the Company uses knowledge of its properties, information from
field operators, historical performance, contractual arrangements, index pricing, quality and transportation differentials, and other factors
as the basis for these estimates. Because the contractual performance obligations have been satisfied and an unconditional right to
consideration exists as of the balance sheet date, the Company recognized amounts due from contracts with field operators as
“Receivables from crude oil, natural gas, and natural gas liquids sales” on the consolidated balance sheets. Differences between
estimates and actual amounts received for product sales are recorded in the month that payment is received from the purchaser as remitted
to the Company by field operators.
Note 4. Acquisitions
On April 1, 2022, the Company closed the acquisition of non-operated interests in the Jonah Field in Sublette County, Wyoming from
Exaro Energy III, LLC (the “Jonah Field Acquisition”). After taking into account customary closing adjustments and an effective date of
February 1, 2022, total cash consideration for the Jonah Field Acquisition was $26.4 million (“Jonah Purchase Agreement”). The
Company accounted for this transaction as an asset acquisition and allocated $24.8 million of the purchase price (including $0.2 million of
transaction costs) to proved oil and natural gas properties. Approximately, $1.6 million of the consideration transferred related to deposits
transferred to the Company at closing, the largest related to a $1.2 million deposit with Enterprise for a gas gathering contract which was
recorded to “Other assets, net” on the consolidated balance sheets. In addition, the Company recognized $3.0 million in non-cash asset
retirement obligations. The transaction was funded with cash on hand and $17.0 million in borrowings under the Company’s Senior
Secured Credit Facility.
On January 14, 2022, the Company completed the acquisition of non-operated working interests in the Williston Basin in North Dakota
from Foundation Energy Fund VII-A, LP and Foundation Energy Management, LLC (the “Williston Basin Acquisition”). After taking
into account customary closing adjustments and an effective date of June 1, 2021, cash consideration was $25.2 million which included
$0.3 million of capitalized transaction costs related to the acquisition. The Company accounted for the transaction as an asset acquisition
and allocated all of the purchase price (including capitalized transaction costs) to proved oil and natural gas properties. The Company also
recognized $2.4 million in non-cash asset retirement obligations. The transaction was funded with cash on hand and $16.0 million in
borrowings under the Company’s Senior Secured Credit Facility.
On May 7, 2021, the Company acquired an approximate 17% average net working interest and a 14% average net revenue interest in non-
operated oil and natural gas properties in the Barnett Shale from Tokyo Gas Americas for net cash consideration of $17.4 million, after
taking into account customary closing adjustments, and also recognized $2.8 million in non-cash asset retirement obligations (the “Barnett
Shale Acquisition”). The Company determined that the properties acquired did not meet the definition of a business; therefore, the
transaction was accounted for as an asset acquisition. During the nine months ended March 31, 2022, the Company recorded a downward
purchase price
57
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
adjustment of $0.9 million related to its acquisition of the Barnett Shale properties as a result of the completion of the final settlement
statement.
In accordance with the FASB’s authoritative guidance on asset acquisitions, the Company allocated the cost of the acquisition to the assets
acquired and liabilities assumed based on a relative fair value basis of the assets acquired and liabilities assumed, with no recognition of
goodwill or bargain purchase gain recorded. Incremental legal and professional fees related directly to the acquisitions were capitalized as
part of the acquisition cost. The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (exit price). Fair value measurements also utilize market assumptions of
market participants.
Note 5. Property and Equipment
Property and equipment as of June 30, 2022 and 2021 consisted of the following (in thousands):
Oil and natural gas properties
Property costs subject to amortization
Less: Accumulated depletion, depreciation, and amortization
Oil and natural gas properties, net
Other property and equipment
Furniture, fixtures and office equipment, at cost
Less: Accumulated depreciation
Other property and equipment, net
June 30, 2022
June 30, 2021
$
$
$
$
188,634
(78,126)
110,508
148
(148)
—
$
$
$
$
129,123
(70,607)
58,516
155
(144)
11
As of June 30, 2022 and 2021, all oil and natural gas property costs were subject to amortization. Depletion on oil and natural gas
properties was $7.5 million and $4.9 million for the years ended June 30, 2022 and 2021, respectively. Depreciation on other properties
and equipment was less than $0.1 million for both the years ended June 30, 2022 and 2021.
During the years ended June 30, 2022 and 2021, the Company incurred development capital expenditures of $2.6 million and $0.6 million,
respectively. In addition, during the year ended June 30, 2022, the Company recorded a downward $0.9 million purchase adjustment
related to its acquisition of the Barnett Shale properties. The Company received $0.9 million during the year ended June 30, 2022
primarily related to effective date net revenues received from the previous owner of the properties.
The Company uses the full cost method of accounting for its investments in oil and natural gas properties. All costs of acquisition,
exploration, and development of oil and natural gas reserves are capitalized as the cost of oil and natural gas and properties when incurred.
To the extent capitalized costs of evaluated oil and natural gas properties, net of accumulated depletion, exceed the discounted future net
revenues of proved oil and natural gas reserves, net of deferred taxes, such excess capitalized costs result in an impairment charge.
At June 30, 2022, the ceiling test value of the Company’s reserves was calculated based on the first-day-of-the-month average for the 12-
months ended June 30, 2022 of the West Texas Intermediate (“WTI”) crude oil spot price of $85.82 per barrel and Henry Hub natural gas
spot price of $5.19 per MMBtu, adjusted by market differentials by field. The net price per barrel of NGLs was $44.24, which was based
on historical differentials to WTI as NGLs do not have any single comparable reference index price. Using these prices, the Company’s
net book value of oil and natural gas properties as of June 30, 2022 did not exceed the current ceiling. There was no impairment on oil and
natural gas properties for the year ended June 30, 2022.
At June 30, 2021, the ceiling test value of the Company’s reserves was calculated based on the first-day-of-the-month average for the 12-
months ended June 30, 2021 of the WTI crude oil spot price of $49.72 per barrel and Henry Hub natural gas spot price of $2.46 per
MMBtu, adjusted by market differentials by field. The net price per barrel of NGLs was $19.81, which was based on historical
differentials to WTI as NGLs do not have any single comparable reference
58
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
index price. Using these prices, the Company’s net book value of oil and natural gas properties at June 30, 2021 did not exceed the current
ceiling. At December 31, 2020 and September 30, 2020, the Company recorded ceiling test impairment charges of $15.2 million and $9.6
million, respectively. The ceiling test impairments were driven by decreases in the first-day-of-the-month average for crude oil used in the
ceiling test calculation, from $47.37 per barrel at June 30, 2020 to $43.63 per barrel at September 30, 2020 to $39.54 per barrel at
December 31, 2020. For the year ended June 30, 2021, the Company recorded total impairment on oil and natural gas properties of $24.8
million recorded as “Impairment of proved property” on the consolidated statements of operations.
Note 6. Senior Secured Credit Facility
On April 11, 2016, the Company entered into a three-year, senior secured reserve-based credit facility, as amended, (the “Senior Secured
Credit Facility”) with MidFirst Bank in an amount up to $50.0 million with a current borrowing base of $50.0 million. On November 2,
2020, the Company entered into the Fifth Amendment to the Senior Secured Credit Facility extending the maturity to April 9, 2024. The
borrowing base will be redetermined semiannually, with the lenders and the Company each having the right to one interim unscheduled
redetermination between any two consecutive semi-annual redeterminations. The borrowing base takes into account the estimated value of
the Company’s oil and natural gas properties, proved reserves, total indebtedness, and other relevant factors consistent with customary oil
and natural gas lending criteria. The Senior Secured Credit Facility included a placement fee of 0.50% on the initial borrowing base
amounting to $50.0 million and carries a commitment fee of 0.25% per annum on the undrawn portion of the borrowing base. Any
borrowings under the Senior Secured Credit Facility will bear interest, at the Company’s option, at either London Interbank Offered Rate
("LIBOR") plus 2.75%, subject to a minimum LIBOR of 0.25%, or the Prime Rate, as defined under the Senior Secured Credit Facility,
plus 1.00%.
The Company may elect, at its option, to prepay any borrowings outstanding under the Senior Secured Credit Facility without premium or
penalty. Amounts outstanding under the Senior Secured Credit Facility are guaranteed by the Company’s direct and indirect subsidiaries
and secured by a security interest in substantially all of the properties of the Company and its subsidiaries. Borrowings under the Senior
Secured Credit Facility may be used for the acquisition and development of oil and natural gas properties, investments in cash flow
generating properties complimentary to the production of oil and natural gas, and for letters of credit or other general corporate purposes.
The Senior Secured Credit Facility contains certain events of default, including non-payment; breaches or representation and warranties;
non-compliance with covenants; cross-defaults to material indebtedness; voluntary or involuntary bankruptcy; judgments and change in
control. The Senior Secured Credit Facility also contains financial covenants including a requirement that the Company maintain, as of the
last day of each fiscal quarter, (i) a maximum total leverage ratio of not more than 3.00 to 1.00, (ii) a current ratio of not less than 1.00 to
1.00, and (iii) a consolidated tangible net worth of not less than $40.0 million, each as defined in the Senior Secured Credit Facility. As of
June 30, 2022, the Company had $21.3 million borrowings outstanding under its Senior Secured Credit Facility, resulting in $28.7 million
of available borrowing capacity. As of June 30, 2022, the Company was in compliance with the financial covenants under the Senior
Secured Credit Facility.
The Company is currently working on its annual redetermination with MidFirst Bank. It expects that the borrowing base will remain at
$50.0 million and the Margined Collateral Value, as defined in the Ninth Amendment to the Senior Secured Credit Facility, will be set at
$125.0 million. The Company is required to enter into hedges on a rolling 12-month basis when the borrowings exceed 25% of the
Margined Collateral Value. Based on the current amount outstanding, the utilization percentage under the required hedging covenant is
below the minimum utilization threshold of 25% and as a result the Company is not required to enter into additional hedges at this time.
On February 7, 2022, the Company entered into the Ninth Amendment to the Senior Secured Credit Facility. This amendment, among
other things, modified the definition of utilization percentage related to the required hedging covenant such that for the purposes of
determining the amount of future production to hedge, the utilization of the Senior Secured Credit Facility will be based on the Margined
Collateral Value, as defined in the agreement, to the extent it exceeds the borrowing base then in effect. This amendment also required the
Company to enter into hedges for the next 12-month period ending February 2023, covering 25% of expected crude oil and natural gas
production over that period.
59
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 9, 2021, the Company entered into the Eighth Amendment to the Senior Secured Credit Facility. This amendment, among
other things, increased the borrowing base to $50.0 million and added a hedging covenant whereby the Company must hedge a minimum
of 25% to 75% of future production on a rolling 12-month basis when 25% or more of the borrowing base is utilized. The hedging
covenant was amended in the Ninth Amendment, as discussed above.
On August 5, 2021 the Company entered into the Seventh Amendment to the Senior Secured Credit Facility which, among other things,
added definitions for the terms “Acquired Entity or Mineral Interests” and “Acquired Entity or Mineral Interests EBITDA Adjustment.”
Additionally, the consolidated tangible net worth covenant level was reduced to $40.0 million from $50.0 million.
On January 5, 2021, and effective as of December 28, 2020, the Company entered into the Sixth Amendment to the Senior Secured Credit
Facility which replaced the debt service coverage ratio (as defined therein) maintenance covenant with a new covenant requiring current
ratio (as defined therein) of not less than 1.00 to 1.00.
Note 7. Income Taxes
The Company files a consolidated federal income tax return in the United States and various combined and separate filings in several state
and local jurisdictions.
There were no unrecognized tax benefits, nor any accrued interest or penalties associated with unrecognized tax benefits during the years
ended June 30, 2022 and 2021. The Company believes that it has appropriate support for the income tax positions taken and to be taken on
the Company’s tax returns and that the accruals for tax liabilities are adequate for all open years based on its assessment of many factors
including past experience and interpretations of tax law applied to the facts of each matter. The Company’s federal and state income tax
returns are open to audit under the statute of limitations for the fiscal years ended June 30, 2018 through June 30, 2021 for federal tax
purposes and for the fiscal years ended June 30, 2017 through June 30, 2021 for state tax purposes. To the extent the Company utilizes net
operating losses (“NOLs”) generated in earlier years, such earlier years may also be subject to audit.
Income tax (expense) benefit for the years ended June 30, 2022 and 2021 is comprised of the following (in thousands):
Current:
Federal
State
Total current income tax (expense) benefit
Deferred:
Federal
State
Total deferred income tax (expense) benefit
Total income tax (expense) benefit
June 30, 2022
June 30, 2021
$
$
(6,309)
(1,062)
(7,371)
(913)
(229)
(1,142)
(8,513)
$
$
334
(454)
(120)
3,987
1,117
5,104
4,984
For the year ended June 30, 2022 the Company recognized income tax expense of $8.5 million and had an effective tax rate of 20.7%
compared to an income tax benefit of $5.0 million and an effective tax rates of 23.3% for the year ended June 30, 2021.
In certain prior years, the Company undertook a project to seek potential cash tax savings opportunities identifying available Enhanced Oil
Recovery credits (“EOR credits”) related to its interests in the Delhi Field. To take advantage of the EOR credits, the Company amended
federal and state tax returns for the years ended June 30, 2017 and 2018 and incorporated the associated impacts into its 2019 tax returns.
Principally as a result of the EOR credits, the Company recorded a net tax benefit of $2.8 million during fiscal 2020, all of which was
received during the year ended June 30, 2022. During year ended June 30, 2022, the Company recognized an income tax benefit of
$0.4 million attributable to the EOR credit.
60
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s effective tax rate will typically differ from the statutory federal rate as a result of state income taxes, primarily in the
states of Louisiana and Texas, due to percentage depletion in excess of basis, valuation allowance, enhanced oil recovery credit, and other
permanent differences. The following table presents the reconciliation of the Company’s income taxes calculated at the statutory federal
tax rate to the income tax (expense) benefit (in thousands).
Income tax (expense) benefit computed at the statutory federal
rate:
Reconciling items:
Return to provision adjustments
Depletion in excess of tax basis
State income taxes, net of federal tax benefit
Permanent differences related to stock-based compensation and
other
Federal valuation allowance
EOR credit benefit
Other
Income tax (expense) benefit
% of Income
Before
June 30, 2022
Income Taxes
June 30, 2021
$
(8,640)
21.0 % $
4,499
(2)
190
(1,020)
3
623
377
(44)
(8,513)
$
— %
(0.5)%
2.5 %
— %
(1.5)%
(0.9)%
0.1 %
20.7 % $
(20)
176
523
(55)
(570)
336
95
4,984
% of Income
Before
Income Taxes
21.0 %
(0.1)%
0.8 %
2.4 %
(0.3)%
(2.7)%
1.6 %
0.6 %
23.3 %
Deferred income taxes primarily represent the net tax effect of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of net deferred income tax
assets (liabilities) recognized are as follows (in thousands):
June 30, 2022
June 30, 2021
Deferred tax assets:
Non-qualified stock-based compensation
Net operating loss carry-forwards and other carry-forwards
Derivative losses
Asset retirement obligations
Other deferred tax assets
$
Gross deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liability:
Oil and natural gas properties
Total deferred tax liability
Net deferred tax liability
$
106
8
427
3,128
238
3,907
—
3,907
(11,006)
(11,006)
$
(7,099)
$
310
365
—
1,285
161
2,121
(862)
1,259
(7,216)
(7,216)
(5,957)
As of June 30, 2022, the Company had a federal tax loss carryforward of approximately $0.6 million that it acquired through a reverse
merger in May 2004. The majority of the tax loss carryforwards from the reverse merger expired without being utilized. The remaining
deferred tax asset and valuation allowance of $0.1 million related to the portion of the NOLs that were limited by IRC Section 382 was
written off during the year ended June 30, 2022. The Company has considered all positive and negative evidence to assess the likelihood
that it will be able to realize its deferred tax assets. Realization is dependent on generating sufficient taxable income over the period the
deferred tax assets are deductible. For the three-year period ending June 30, 2022, the Company is in a cumulative income position. Based
on the weight of available evidence, the Company believes that it is more likely than not that the deferred tax assets will be realized. As
result, the Company has released the valuation allowance of $0.6 million.
Note 8. Derivatives
The Company is exposed to certain risks relating to its ongoing business operations, including commodity price risk and interest rate risk.
In accordance with the Company’s policy and the requirements under the Senior Secured Credit
61
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Facility (as discussed in Note 6, “Senior Secured Credit Facility”), it may hedge or may be required to hedge a varying portion of
anticipated oil and natural gas production for future periods. Derivatives are carried at fair value on the consolidated balance sheets as
assets or liabilities, with the changes in the fair value included in the consolidated statements of operations for the period in which the
change occurs. The Company’s hedge policies and objectives may change significantly as its operational profile changes. The Company
does not enter into derivative contracts for speculative trading purposes.
It is the Company’s policy to enter into derivative contracts only with counterparties that are creditworthy financial or commodity hedging
institutions deemed by management as competent and competitive market makers. As of June 30, 2022, the Company did not post
collateral under any of its derivative contracts as they are secured under the Company’s Senior Secured Credit Facility.
The Company has in the past and may utilize in the future costless put/call collars and fixed-price swaps to hedge a portion of its
anticipated future production. A costless collar consists of a sold call, which establishes a maximum price the Company will receive for
the volumes under contract, and a purchased put that establishes a minimum price. Fixed-price swaps are designed so that the Company
receives or makes payments based on a differential between fixed and variable prices for the volumes under contract. The Company has
elected not to designate its open derivative contracts for hedge accounting. Accordingly, the Company records the net change in the mark-
to-market valuation of the derivative contracts and all payments and receipts on settled derivative contracts in “Net gain (loss) on
derivative contracts” on the consolidated statements of operations.
All derivative contracts are recorded at fair market value in accordance with ASC 815 and ASC 820, Fair Value Measurement ("ASC
820") and included in the consolidated balance sheets as assets or liabilities. The “Derivative contract assets” and “Derivative contract
liabilities” represent the difference between the market commodity prices and the hedged prices for the remaining volumes of production
hedges as of June 30, 2022 (the “mark-to-market valuation”). The following table summarizes the location and fair value amounts of all
derivative contracts in the consolidated balance sheets as of June 30, 2022 and 2021 (in thousands):
Derivatives not designated
as hedging contracts
under ASC 815
Commodity contracts
Commodity contracts
Total derivatives not designated as hedging
contracts under ASC 815
Balance sheet
location
Current assets -
derivative contract
assets
Other assets -
derivative contract
assets
Derivative Contract Asset
June 30, 2022 June 30, 2021
Balance sheet
location
Derivative Contract Liability
June 30, 2022 June 30, 2021
$
$
170
$
—
170
$
—
—
—
Current liabilities -
derivative contract
liabilities
Long term liabilities -
derivative contract
liabilities
$
$
2,164
$
—
2,164
$
—
—
—
The following table summarizes the location and amounts of the Company’s realized and unrealized gains and losses on derivative
contracts in the Company’s consolidated statements of operations (in thousands). "Realized gain (loss) on derivative contracts" represents
all receipts (payments) on derivative contracts settled during the period. "Unrealized gain (loss) on derivative contracts" represents the net
change in the mark-to-market valuation of the derivative contracts.
Derivatives not designated
as hedging contracts
under ASC 815
Commodity contracts:
Realized gain (loss) on derivative contracts
Unrealized gain (loss) on derivative contracts
Total net gain (loss) on derivative contracts
Location of gain (loss)
recognized in income on
derivative contracts
Other income and expenses - net gain
(loss) on derivative contracts
Other income and expenses - net gain
(loss) on derivative contracts
Years Ended June 30,
2022
2021
$
$
(1,769)
(1,994)
(3,763)
$
$
(2,526)
1,911
(615)
62
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of June 30, 2022, the Company had the following open crude oil and natural gas derivative contracts:
Period
July 2022 - October 2022
November 2022 - February 2023
July 2022 - October 2022
November 2022 - March 2023
July 2022 - February 2023
Instrument
Collar
Collar
Collar
Collar
Collar
Commodity
Natural Gas
Natural Gas
Natural Gas
Natural Gas
Crude Oil
Volumes in
MMBTU/Bbl
Weighted Average
Floor Price per
MMBTU/Bbl
Weighted Average
Ceiling Price per
MMBTU/Bbl
$
471,640
443,750
317,579
374,072
122,389
$
3.75
3.75
5.25
5.25
70.00
5.05
7.30
6.67
7.50
87.50
The Company presents the fair value of its derivative contracts at the gross amounts in the consolidated balance sheets. The following
table shows the potential effects of master netting arrangements on the fair value of the Company’s derivative contracts as of June 30,
2022 and 2021 (in thousands):
Offsetting of Derivative Assets and Liabilities
Gross amounts presented in the Consolidated Balance
Sheet
Amounts not offset in the Consolidated Balance Sheet
Net amount
Derivative Contract Asset
Derivative Contract Liability
June 30, 2022
June 30, 2021
June 30, 2022
June 30, 2021
$
$
170
(170)
—
$
$
—
—
—
$
$
2,164
(170)
1,994
$
$
—
—
—
The Company enters into an ISDA with each counterparty prior to a derivative contract with such counterparty. The ISDA is a standard
contract that governs all derivative contracts entered into between the Company and the respective counterparty. The ISDA allows for
offsetting of amounts payable or receivable between the Company and the counterparty, at the election of both parties, for transactions that
occur on the same date and in the same currency.
Note 9. Fair Value Measurement
Accounting guidelines for measuring fair value establish a three-level valuation hierarchy for disclosure of fair value measurements. The
valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability
of the inputs employed in the measurement.
The three levels are defined as follows:
Level 1—Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or
liabilities.
Level 2—Other inputs that are observable directly or indirectly, such as quoted prices in markets that are not active or inputs
which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3—Unobservable inputs for which there are little or no market data and which the Company makes its own assumptions
about how market participants would price the assets and liabilities.
Fair Value of Derivative Instruments. The Company’s determination of fair value incorporates not only the credit standing of the
counterparties involved in transactions with the Company resulting in receivables on the Company’s consolidated balance sheets, but also
the impact of the Company’s nonperformance risk on its own liabilities. Fair value is defined as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a
fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The Company utilizes market data or
assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in
the inputs to the valuation technique. These inputs can be readily observable (Level 1) market corroborated (Level 2), or generally
unobservable (Level 3). The Company classifies fair value balances based on observability of those inputs.
63
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As required by ASC 820, a financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is
significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value
measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their placement within the fair value
hierarchy levels. There were no transfers between fair value hierarchy levels for any period presented. The following table, set forth by
level within the fair value hierarchy, shows the Company’s financial assets and liabilities that were accounted for at fair value as of
June 30, 2022 (in thousands). The Company did not have any open positions as of June 30, 2021.
Assets
Derivative contract assets
Liabilities
Derivative contract liabilities
Level 1 Level 2 Level 3 Total
June 30, 2022
$
$
— $
170
$
— $
170
— $
2,164
$
— $
2,164
Derivative contracts listed above as Level 2 include costless put/call collars that are carried at fair value. The Company records the net
change in fair value of these positions in “Net gain (loss) on derivative contracts” in the Company’s consolidated statements of
operations. The Company is able to value the assets and liabilities based on observable market data for similar instruments, which resulted
in the Company reporting its derivatives as Level 2. This observable data includes the forward curves for commodity prices based on
quoted market prices and implied volatility factors related to changes in the forward curves. See Note 8, “Derivatives,” for additional
discussion of derivatives.
The Company’s derivative contracts are with large utilities with investment grade credit ratings which are believed to have minimal credit
risk. As such, the Company is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts;
however, the Company does not anticipate such nonperformance.
Other Fair Value Measurements. The following disclosure of the estimated fair value of financial instruments is made in accordance with
the requirements of ASC 825, Financial Instruments. The estimated fair value amounts have been determined at discrete points in time
based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair
value of cash and cash equivalents, accounts receivable, and accounts payable approximates their carrying value due to their short-term
nature. The estimated fair value of the Company’s Senior Secured Credit Facility approximates carrying value because the interest rates
approximate current market rates.
The Company follows the provisions of ASC 820, for nonfinancial assets and liabilities measured at fair value on a non-recurring basis.
These provisions apply to the Company’s initial measurement and any subsequent revision of ARO for which fair value is calculated using
discounted future cash flows derived from historical costs and management’s expectations of future cost environments. Significant Level 3
inputs used in the calculation of ARO include the costs of plugging and abandoning wells, surface restoration, and reserve lives.
Subsequent to initial recognition, revisions to estimated asset retirement obligations are made when changes occur for input values. See
Note 10, “Asset Retirement Obligations,” for a reconciliation of the beginning and ending balances of the liability for the Company’s
ARO.
Note 10. Asset Retirement Obligations
The Company’s ARO represents the estimated present value of the amount expected to be incurred to plug, abandon, and remediate its oil
and natural gas properties at the end of their productive lives in accordance with applicable laws and regulations. The Company records
the ARO liability on the consolidated balance sheets and capitalizes the cost in “Oil and natural gas properties, net” during the period in
which the obligation is incurred. The Company records the accretion of its ARO liabilities in “Depletion, depreciation and amortization”
expense in the consolidated statements of operations.
64
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a reconciliation of the activity related to the Company’s ARO liability (inclusive of the current portion) for the years
ended June 30, 2022 and 2021 (in thousands):
Years Ended
Asset retirement obligations — beginning of period
Liabilities incurred
Liabilities settled(1)
Liabilities acquired(2)
Accretion of discount
Revisions of previous estimates(3)
Asset retirement obligations — end of period
Less: current asset retirement obligations
Long-term portion of asset retirement obligations
$
$
June 30, 2022 June 30, 2021
2,589
—
(99)
2,806
210
77
5,583
(44)
5,539
5,583
219
(17)
5,400
531
2,205
13,921
(22)
13,899
$
$
(1)
Primarily related to abandonment of one Delhi Field and one Hamilton Dome Field well for the year ended June 30, 2022 and abandonment of two
non-scheduled Delhi Field wells for the year ended June 30, 2021.
(2) Liabilities acquired during the years ended June 30, 2022 and 2021 were primarily due to the Jonah Field Acquisition and the Williston Basin
Acquisition in 2022, and the Barnett Shale Acquisition in 2021. See Note 4, “Acquisitions,” for additional information on the Company’s
acquisition activities.
Primarily related to upward revisions for increased estimates for the year ended June 30, 2022 and two difficult-to-plug Delhi Field wells for
the year ended June 30, 2021.
(3)
Note 11. Commitments and Contingencies
The Company is subject to various claims and contingencies in the normal course of business. In addition, from time to time, the
Company receives communications from government or regulatory agencies concerning investigations or allegations of noncompliance
with laws or regulations in jurisdictions in which the Company operates. The Company discloses such matters if it believes there is a
reasonable possibility that a future event or events will confirm a material loss through impairment of an asset or the incurrence of a
material liability. The Company accrues a material loss if it believes it probable that a future event or events will confirm a loss and the
loss is reasonably estimable. Furthermore, the Company will disclose any matter that is unasserted if it considers it probable that a claim
will be asserted and there is a reasonable possibility that the outcome will be unfavorable and material in amount. The Company expenses
legal defense costs as they are incurred.
Note 12. Stockholders’ Equity
Common Stock
As of June 30, 2022, the Company had 33,470,710 shares of common stock outstanding.
The Company began paying quarterly cash dividends on common stock in December 2013. As of June 30, 2022, the Company has
cumulatively paid over $86.3 million in cash dividends. The Company paid dividends of $11.8 million and $4.3 million to its common
stockholders during the years ended June 30, 2022 and 2021, respectively. The following table reflects the dividends paid within the
respective quarterly periods:
Fourth quarter ended June 30,
Third quarter ended March 31,
Second quarter ended December 31,
First quarter ended September 30,
$
Fiscal Year
2022
2021
$
0.100
0.100
0.075
0.075
0.050
0.030
0.025
0.025
On September 12, 2022, Evolution’s Board of Directors approved and declared a quarterly dividend of $0.12 per common share payable
September 30, 2022. This represents a 20% increase over the $0.10 per common share dividend paid in the fourth quarter of fiscal year
2022. Also, on September 8, 2022, the Board of Directors authorized a share
65
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
repurchase program, under which the Company is approved to repurchase up to $25 million of its common stock through December 31,
2024. The Company intends to fund repurchases from working capital and cash provided by operating activities. The Board of Directors
along with the management team believe that a share repurchase program is complimentary to the existing dividend policy and is a tax
efficient means to further improve shareholder return. The shares may be repurchased from time to time in open market transactions,
through privately negotiated transactions or by other means in accordance with federal securities laws. The timing, as well as the number
and value of shares repurchased under the program, will depend on a variety of factors, including management’s assessment of the
intrinsic value of the Company’s shares, the market price of the Company's common stock, general market and economic conditions, and
applicable legal requirements. The value of shares authorized for repurchase by the Company's Board of Directors does not require the
Company to repurchase such shares or guarantee that such shares will be repurchased, and the program may be suspended, modified, or
discontinued at any time without prior notice. Refer to Note 15, “Subsequent Events,” for a further discussion.
In May 2015, the Board of Directors approved a share repurchase program covering up to $5.0 million of the Company’s common stock.
Since inception of the program through June 30, 2020, the Company spent $4.0 million to repurchase 706,858 common shares at an
average price of $5.72 per share. This program has since concluded and there were no shares purchased under this program during
the years ended June 30, 2022 and 2021. Under the program’s terms, shares were repurchased only on the open market and in accordance
with the requirements of the SEC. Such shares were initially recorded as treasury stock, then subsequently cancelled.
During the years ended June 30, 2022 and 2021, the Company also acquired treasury stock from holders of newly vested stock-based
awards to fund the recipients’ payroll tax withholding obligations. The treasury shares were subsequently cancelled. Such shares were
valued at fair market value on the date of vesting. The following table shows all treasury stock purchases in the last two fiscal years (in
thousands, except per share amounts):
Years Ended
Number of treasury shares acquired
Average cost per share
Total cost of treasury shares acquired
Expected Tax Treatment of Dividends
June 30, 2022 June 30, 2021
3
7
2.79
5.09
7
38
$
$
$
$
For the fiscal year ended June 30, 2021, all common stock dividends for that fiscal year were treated for tax purposes as qualified dividend
income to the recipients. Based on its current projections for the fiscal year ended June 30, 2022, the Company expects all common stock
dividends for such period to be treated as qualified dividend income to the recipients.
Stock-Based Incentive Plan
The Evolution Petroleum Corporation 2016 Equity Incentive Plan (“2016 Plan”), approved at the December 2016 annual meeting of
stockholders, authorizes the issuance of 1.1 million shares of common stock prior to its expiration on December 8, 2026. Incentives under
the 2016 Plan may be granted to employees, directors, and consultants of the Company in any one or a combination of the following
forms: incentive stock options and non-statutory stock options, stock appreciation rights, restricted stock awards and restricted stock unit
awards, performance share awards, performance cash awards, and other forms of incentives valued in whole or in part by reference to, or
otherwise based on, the Company’s common stock, including its appreciation in value. On December 9, 2020, an amendment to the 2016
Plan was approved by its stockholders which increased the number of shares available for issuance by 2.5 million shares to a maximum of
3.6 million shares. As of June 30, 2022 and 2021, approximately 1.8 million shares and 2.2 million shares, respectively, remained
available for grant under the 2016 Plan.
The Company estimates the fair value of stock-based compensation awards on the grant date to provide the basis for future compensation
expense. For the years ended June 30, 2022, and 2021, the Company recognized $0.1 million and $1.3 million, respectively, related to
stock-based compensation expense recorded as a component of “General and
66
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
administrative expenses” on the consolidated statements of operations. During the year ended June 30, 2022, the Company recognized a
reduction of $1.2 million to stock-based compensation expense for the forfeiture of unvested shares in connection with severance.
Time-Vested Restricted Stock Awards
Time-vested restricted stock awards contain service-based vesting conditions and expire after a maximum of four years from the date of
grant if unvested. The common shares underlying these awards are issued on the date of grant and participate in dividends paid by the
Company. These service-based awards vest with continuous employment by the Company, generally in annual installments over terms of
three to four years. Awards to the Company’s directors have one-year cliff vesting. For such awards, grant date fair value is based on
market value of the Company’s common stock at the time of grant. This value is then amortized ratably over the service period. Previously
recognized amortization expense subsequent to the last vesting date of an award is reversed in the event that the holder has no longer
rendered service to the Company resulting in forfeiture of the award.
Performance-Based Restricted Stock Awards and Performance-Based Contingent Stock Units
Performance-based restricted stock awards and performance-based contingent stock units contain market-based vesting conditions based
on the price of the Company’s common stock, the intrinsic value indexed solely to its common stock and the intrinsic value indexed to its
common stock compared to the performance of the common stock of its peers. The common shares underlying the Company’s
performance-based restricted stock awards are issued on the date of grant and participate in dividends paid by the Company and expire
after a maximum of four years from the date of grant if unvested. Performance-based contingent share units do not participate in dividends
and shares are only issued in part or in full upon the attainment of vesting conditions which generally have a lower probability of
achievement and expire after a maximum of four years from the date of grant if unvested. Shares underlying performance-based
contingent share units are reserved from the 2016 Plan. Performance-based restricted stock awards and contingent restricted stock units
are valued using a Monte Carlo simulation and geometric Brownian motion techniques applied to the historical volatility of the
Company’s total stock return compared to the historical volatilities of other companies or indices to which the Company compares its
performance and/or the Company’s absolute total stock return. For certain awards, this Monte Carlo simulation also provides an expected
vesting term. Stock-based compensation is recognized ratably over the expected vesting period, so long as the award holder remains an
employee of the Company. Previously recognized compensation expense is only reversed for the awards with market-based vesting
conditions if the requisite service period is not rendered by the holder resulting in forfeiture of the award.
Vesting of grants with performance-based vesting conditions is dependent on the future price of the Company’s common stock. Such
awards vest in part or in full if the trailing total returns on the Company’s common stock for a specified three-year period exceed the
corresponding total returns of various quartiles of indices consisting of peer companies or, in some cases, vest when the average of the
Company’s closing common stock price over a defined measurement period meets or exceeds a required common stock price.
During the year ended June 30, 2022, the Company granted a total of 0.4 million equity awards that included 0.2 million shares of time-
vested restricted stock primarily to employees under its long-term incentive pay program together with annual awards to its directors, 0.1
million shares of performance-based restricted stock and 0.1 million performance-based contingent shares unit awards.
During the year ended June 30, 2021, the Company granted a total of 0.7 million equity awards that included 0.3 million time-vested
restricted stock primarily to employees under its long term incentive program together with annual awards to its directors, 0.3 million
performance-based restricted stock awards, and 0.1 million performance-based contingent share unit awards. In addition to the foregoing,
in connection with the retirement of the Company’s former Chief Financial Officer, vesting was accelerated as to approximately 0.1
million aggregate shares of service- and performance-based equity awards (with a weighted average fair value of $5.15 per share) which,
for accounting purposes, was treated as a cancellation and replacement of the same number of awards which had a fair value of $2.79 per
share.
67
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For performance-based awards granted during the years ended June 30, 2022 and 2021, the assumptions used in the Monte Carlo
simulation valuations were as follows:
Weighted average fair value of performance-based awards granted
Risk-free interest rate
Expected term in years
Expected volatility
Dividend yield
Unvested restricted stock awards as of June 30, 2022 consisted of the following:
Award Type
Time-vested awards
Performance-based awards
Unvested at June 30, 2022
Years Ended June 30,
$
$
2022
3.10
0.53% to 0.60%
2.64 to 2.79
64.7 %
4.8% to 6.3%
2021
3.08
0.23 %
2.56
56.9 %
3.2 %
Number of
Restricted
Shares
Weighted
Average
Grant-Date
Fair Value
241,089
100,122
341,211
$
$
5.10
3.19
4.54
The following table sets forth the restricted stock transactions for the years ended June 30, 2022 and 2021:
Unvested at June 30, 2020
Time-vested shares granted
Performance-based shares granted
Vested
Forfeited
Unvested at June 30, 2021
Service-based shares granted
Performance-based shares granted
Vested
Forfeited
Unvested at June 30, 2022
Weighted
Average
Grant-Date
Unamortized
Compensation
Expense
Weighted
Average
Remaining
Amortization
Fair Value (In thousands) Period (Years)
Aggregate Intrinsic
Value (1)
(In thousands)
$
$
5.53
2.97
3.07
5.09
5.15
3.37
5.88
3.31
3.77
3.35
4.54
$
$
1,531
1.9
$
3,320
1,092
2.1
$
1,863
Number of
Restricted
Shares
285,028
365,479
246,160
(176,848)
(50,524)
669,295
205,077
131,293
(291,227)
(373,227)
341,211
(1) The intrinsic value of restricted stock was calculated as the closing market price on June 30, 2022 and 2021 of the underlying stock
multiplied by the number of restricted shares that would be issuable. The total fair value of shares vested was $1.5 million and $0.6
million for the years ended June 30, 2022 and 2021, respectively.
68
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unvested contingent restricted stock units table below consists solely of performance-based awards for the year ended June 30, 2022 and
2021:
Number of
Restricted
Stock Units
Weighted Average
Grant-Date
Fair Value
Unamortized
Compensation
Expense
Weighted
Average
Remaining
Amortization
(In thousands) Period (Years)
Aggregate Intrinsic
Value (1)
(In thousands)
Unvested at June 30, 2020
Performance-based awards granted
Unvested at June 30, 2021
Performance-based awards granted
Vested
Forfeited
Expired
Unvested at June 30, 2022
200,000
123,080
323,080
65,649
—
(338,667)
—
50,062
$
$
3.50
1.76
2.84
2.67
—
2.90
—
2.21
$
$
169
2.0
$
1,602
68
1.7
$
273
(1) The intrinsic value of contingent restricted stock units was calculated as the closing market price on June 30, 2022 and 2021 of the
underlying stock multiplied by the number of restricted shares that would be issuable.
Note 13. Earnings (Loss) per Common Share
The following table sets forth the computation of basic and diluted earnings (loss) per common share, reflecting the application of the two-
class method (in thousands, except per share amounts):
Numerator
Net income (loss)
Undistributed earnings allocated to unvested restricted stock
Net income (loss) for earnings per share calculation
Denominator
Weighted average number of common shares outstanding — Basic
Effect of dilutive securities:
Unvested restricted stock
Contingent restricted stock grants
Weighted average number of common shares and dilutive potential common shares used in diluted earnings per
share
Net earnings (loss) per common share — Basic
Net earnings (loss) per common share — Diluted
Years Ended
June 30, 2022 June 30, 2021
$
$
$
$
32,628
(673)
31,955
$
$
(16,438)
(65)
(16,503)
32,952
32,744
354
—
—
—
33,306
32,744
0.97
0.96
$
$
(0.50)
(0.50)
Unvested Restricted Stock (both service-based and performance-based), totaling approximately 20,000 for the year ended June 30, 2022
were not included in the computation of diluted earnings per common share because the effect would have been anti-dilutive.
Unvested Restricted Stock (both service-based and performance-based), totaling 0.3 million for the year ended June 30, 2021, were not
included in the computation of diluted earnings per common share because the effect would have been anti-dilutive due to the net loss.
In addition, unvested performance-based restricted stock and unvested contingent restricted share units that would not meet the
performance criteria as of the period end are excluded from the computation of diluted earnings per common share.
69
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Additional Financial Statement Information
Certain amounts on the consolidated balance sheets are comprised of the following (in thousands):
June 30, 2022
June 30, 2021
Prepaid expenses and other current assets:
Receivable for settlement proceeds from acquisitions(1)
Prepaid insurance
Prepaid federal and state income taxes
Prepaid subscription and licenses
Carryback of EOR tax credit
Prepaid other
Total prepaid expenses and other current assets
Other assets, net:
Deposit(2)
Right of use asset under operating lease(3)
Less: Accumulated amortization of right of use asset
Other assets, net
Accrued liabilities and other:
Accrued payables
Accrued incentive and other compensation
Accrued royalties payable(4)
Accrued severance
Accrued franchise taxes
Accrued ad valorem taxes
Accrued settlements on derivative contracts
Operating lease liability(3)
Asset retirement obligations due within one year
Accrued - other
Total Accrued liabilities and other
$
$
$
$
$
$
2,263
743
8
38
347
439
3,838
1,150
161
(140)
1,171
8,070
626
1,517
332
58
120
919
26
22
203
11,893
$
$
$
$
$
$
—
366
97
108
416
49
1,036
—
161
(90)
71
3,996
631
—
53
35
108
—
64
44
12
4,943
(1) Receivables related to customary purchase adjustments of $1.6 million and $0.7 million related to the Jonah Field Acquisition and
Williston Basin Acquisition, respectively. See Note 4, “Acquisitions” for a further discussion.
(2) The deposit of $1.2 million is related to a long-term gas gathering deposit with Enterprise entered into at closing of the Jonah Field
Acquisition. See Note 4, “Acquisitions” for additional information.
(3) Operating leases are reflected as an operating lease ROU asset included in “Other assets, net” and as an operating lease liability,
current in “Accrued liabilities and other” and “Operating lease liability” on the Company’s consolidated balance sheets. Operating
lease ROU assets and operating lease liabilities are recognized at commencement date of an arrangement based on the present value
of lease payments over the lease term and amortized on a straight-line basis over the lease term. The ROU asset reflected in “Other
assets, net” above is related to the Company’s corporate office lease. See Note 2, “Leases” for additional information.
(4) Accrued royalties payable for the year ended June 30, 2022 related to royalty and owner payments in the Jonah Field as the Company
takes its natural gas and NGL working interest production in-kind. See Note 3, “Revenue Recognition” for a further discussion.
Note 15. Subsequent Events
On September 12, 2022, the Company declared a quarterly cash dividend of $0.12 per share of common stock to shareholders of record on
September 21, 2022 and payable on September 30, 2022.
On September 8, 2022, the Company’s Board of Directors authorized a share repurchase program, under which the Company is approved
to repurchase up to $25 million of its common stock through December 31, 2024. The Company intends to fund repurchases from working
capital and cash provided by operating activities. As the Company continues to focus on its goal of maximizing total shareholder return,
the Board of Directors along with the management team believe that a share repurchase program is complimentary to the existing dividend
policy and is a tax efficient means to
70
EVOLUTION PETROLEUM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
further improve shareholder return. The shares may be repurchased from time to time in open market transactions, through privately
negotiated transactions or by other means in accordance with federal securities laws. The timing, as well as the number and value of
shares repurchased under the program, will depend on a variety of factors, including management’s assessment of the intrinsic value of the
Company’s shares, the market price of the Company's common stock, general market and economic conditions, and applicable legal
requirements. The value of shares authorized for repurchase by the Company's Board of Directors does not require the Company to
repurchase such shares or guarantee that such shares will be repurchased, and the program may be suspended, modified, or discontinued at
any time without prior notice.
71
Supplemental Disclosure about Oil and Natural Gas Properties (unaudited)
Capitalized costs relating to oil and natural gas producing activities
The following table summarizes the amounts of capitalized costs relating to oil and natural gas producing activities and the amount of
related accumulated depletion (in thousands).
Oil and natural gas properties
Property costs subject to amortization
Less: Accumulated depletion, depreciation, and amortization
Oil and natural gas properties, net
June 30, 2022 June 30, 2021 June 30, 2020
$
$
188,634
(78,126)
110,508
$
$
129,123
(70,607)
58,516
$
$
107,390
(40,878)
66,512
Costs incurred for oil and natural gas property acquisition, exploration, and development activities
The following table summarizes costs incurred and capitalized in oil and natural gas property acquisition, exploration, and development
activities (in thousands). Property acquisition costs are those costs incurred to lease property, including both undeveloped leasehold, and
the purchase of reserves in place. Exploration costs include costs of identifying areas that may warrant examination, examining specific
areas that are considered to have prospects containing oil and natural gas reserves, costs of drilling exploratory wells, geologic and
geophysical assessment costs, and carrying costs on undeveloped properties. Development costs are incurred to obtain access to proved
reserves, including the cost of drilling. Development costs also include amounts incurred due to the recognition of asset retirement
obligations of $7.8 million, $2.9 million, and $0.9 million during the years ended June 30, 2022, 2021, and 2020, respectively.
For the Years Ended June 30,
2022
2021
2020
Oil and Natural Gas Activities
Property acquisition costs:
Proved property
Unproved property
Exploration costs
Development costs
Total costs incurred for oil and natural gas activities
Estimated Net Quantities of Proved Oil and Natural Gas Reserves
$
$
49,920 $ 18,297 $
9,338
—
—
—
—
—
—
9,591
2,430
3,436
59,511 $ 21,733 $ 11,768
The following estimates of net proved oil and natural gas reserves of the Company’s oil and natural gas properties located entirely within
the United States are based on evaluations prepared by third-party reservoir engineers, DeGolyer & MacNaughton (“D&M”) and
Netherland, Sewell & Associates, Inc. (“NSAI”). Reserve volumes and values were determined under the method prescribed by the SEC
for the fiscal years ended June 30, 2022, 2021 and 2020. SEC methodology requires the application of the previous 12-month unweighted
arithmetic average first-day-of-the-month price, and current costs held constant throughout the projected reserve life, when estimating
whether reserve quantities are economical to produce.
Our policies regarding internal controls over reserves estimates require such estimates to be prepared by an independent petroleum
engineering firm under the supervision of our internal reserve engineering team, which includes third-party consultants. Our internal
reserve engineering team and third-party consultants have a combined experience of over 80 years in Petroleum Engineering. The person
responsible for overseeing the preparation of our reserves estimates has a Bachelor of Science Degree in Petroleum Engineering from
Texas A&M University, is a registered Professional Engineer in the State of Texas, has over 40 years of oil and natural gas experience
including large independents and financial firm services for projects and acquisitions. Our Board of Directors also has oversight of our
reserve estimation process and contains an independent director who is a Register Professional Engineer with experience in energy
72
company reserve evaluations. Such reserve estimates comply with generally accepted petroleum engineering and evaluation principles,
definitions, and guidelines as established by the SEC.
The person responsible for the preparation of the reserve report at D&M is Dilhan Ilk, Senior Vice President and Division Manager of
North America. Dr. Ilk received a Bachelor of Science degree in Petroleum Engineering in 2003 from Istanbul Technical University and a
Master’s degree and Doctorate in Petroleum Engineering in 2005 and 2010, respectively, from Texas A&M University, and he has in
excess of 10 years of experience in oil and natural gas reservoir studies and evaluations. The person responsible for the preparation of the
reserve report at NSAI is Steven W. Jansen, P.E., Vice President. Mr. Jansen, a Licensed Professional Engineer in the State of Texas (No.
112973), has been practicing consulting petroleum engineering at NSAI since 2011 and has over four years of prior industry experience.
He graduated from Kansas State University in 2007 with a Bachelor of Science Degree in Chemical Engineering.
Proved oil and natural gas reserves are estimated quantities of oil, natural gas, and NGLs that geologic and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.
Proved developed oil and natural gas reserves are reserves that can be expected to be recovered through existing wells with existing
equipment and operating methods. There are uncertainties inherent in estimating quantities of proved oil and natural gas reserves,
projecting future production rates, and timing of development expenditures. Accordingly, reserve estimates often differ from the quantities
of oil and natural gas that are ultimately recovered.
Estimated quantities of proved oil, natural gas, and NGL reserves and changes in quantities of proved developed and undeveloped reserves
for each of the periods indicated are as follows:
Proved developed and undeveloped reserves:
June 30, 2019
Revisions of previous estimates
Purchase of reserves in place
Production (sales volumes)
June 30, 2020
Revisions of previous estimates
Purchase of reserves in place
Production (sales volumes)
June 30, 2021
Revisions of previous estimates
Improved recovery, extensions and discoveries
Purchase of reserves in place
Production (sales volumes)
June 30, 2022
Crude Oil
(MBbls)
Natural Gas
(MMcf)
Natural Gas
Liquids
(MBbls)
Equivalent
(MBOE)
7,616
(2,179)
3,427
(638)
8,226
662
87
(555)
8,420
(1,111)
2,608
2,172
(619)
11,470
—
—
—
—
—
—
49,534
(963)
48,571
25,268
2,197
38,096
(7,141)
106,991
1,365
734
—
(106)
1,993
92
4,957
(171)
6,871
(944)
623
755
(364)
6,941
8,981
(1,445)
3,427
(744)
10,219
754
13,300
(887)
23,386
2,157
3,597
9,276
(2,173)
36,243
73
Proved developed and undeveloped reserves:
June 30, 2019
Revisions of previous estimates
Purchase of reserves in place
Production (sales volumes)
June 30, 2020
Revisions of previous estimates
Purchase of reserves in place
Production (sales volumes)
June 30, 2021
Revisions of previous estimates
Improved recovery, extensions and discoveries
Purchase of reserves in place
Production (sales volumes)
June 30, 2022
Proved
Developed
Reserves
MBOE
Proved
Undeveloped
Reserves
Total
Proved
Reserves
7,399
(1,727)
3,427
(744)
8,355
805
13,300
(887)
21,573
3,970
—
9,276
(2,173)
32,646
1,582
282
—
—
1,864
(51)
—
—
1,813
(1,813)
3,597
—
—
3,597
8,981
(1,445)
3,427
(744)
10,219
754
13,300
(887)
23,386
2,157
3,597
9,276
(2,173)
36,243
For the fiscal year ended June 30, 2022, notable changes in total proved reserves included the following:
● Purchase of reserves in place. During the fiscal year ended 2022, the Company completed the Williston Basin Acquisition and
the Jonah Field Acquisition. See Note 4, “Acquisitions” for more details.
● Improved recovery, extensions and discoveries. During the fiscal year 2022, the Company added 3.6 MBOE of PUD reserves
associated with drilling locations at its Willison Basin properties.
● Revisions of previous estimates. Net Revisions in fiscal year 2022 totaled 2.2 MMBOE, which included a net positive revision in
the Company’s proved developed reserves of 4.0 MMBOE offset by the removal of 1.8 MMBOE of PUD reserves at the Delhi
Field, related to Test Site V. At this time, the operator at Delhi does not currently have Test Site V on its expenditure schedule
for the next five years and, as a result, has been excluded from the Company’s PUD reserves. The net positive revision in the
Company’s proved developed reserves of 4.0 MMBOE includes positive revisions totaling 4.7 MMBOE primarily related to the
improvement in the SEC trailing 12-month pricing offset by a 0.7 MMBOE downward adjustment at Delhi due to lower than
anticipated production during fiscal year 2022.
For the fiscal year ended June 30, 2021, notable changes in total proved reserves included the following:
● Purchase of reserves in place. During the fiscal year ended 2021, the Company completed the Barnett Shale Acquisition. See
Note 4, “Acquisitions” for more details.
● Revisions of previous estimates. Revisions in fiscal year 2021 were primarily due to positive revisions at Hamilton Dome Field
reflecting the impact of increased oil pricing in the field on future production and extension of reserves economic limit. Positive
NGL revisions at Delhi Field reflect the impact of increased pricing on future production and the extension of reserves economic
limit. Positive natural gas revisions in the Barnett Shale properties reflect the impact of increased natural gas prices from the date
of the Barnett Shale Acquisition on May 7, 2021 to the end of the fiscal year on June 30, 2021.
For the fiscal year ended June 30, 2020, notable changes in total proved reserves included the following:
● Purchase of reserves in place. During the fiscal year ended 2020, the Company acquired certain mineral interest in the Hamilton
Dome Field.
● Revisions of previous estimates. Revisions in fiscal year 2020 were primarily due to negative revisions at Hamilton Dome Field
reflecting the impact of lower pricing on future economic production. In March 2020, the operator began to shut-in wells that
were not economic at lower prices. The use of an SEC price deck for reserves at June 30, 2020 precludes volumes that are
uneconomic at such prices. Positive NGL revisions at Delhi Field reflect adjusted methodology of forecasting NGLs
independently from the oil production as forecasted by the Company’s independent reservoir engineering firm.
74
Future oil and natural gas sales, production, and development costs have been estimated using prices and costs in effect at the end of
the years indicated, as required by ASC 932, Extractive Activities - Oil and Gas (“ASC 932”). ASC 932 requires that net cash flow
amounts be discounted at 10%. Future production and development costs are computed by estimating the expenditures to be incurred in
developing and producing proved oil and natural gas reserves and for asset retirement obligations, assuming continuation of existing
economic conditions. Future income tax expenses are computed by applying the appropriate period-end statutory tax rates to the future
pretax net cash flow related to proved oil and natural gas reserves, less the tax basis of the related properties. The future income tax
expenses do not give effect to tax credits, allowances, or the impact of general and administrative costs of ongoing operations relating to
the Company’s proved oil and natural gas reserves. Changes in the demand for oil and natural gas, inflation, and other factors make such
estimates inherently imprecise and subject to substantial revision. The table below should not be construed to be an estimate of the current
market value of the Company’s proved reserves.
The Standardized Measure of discounted future net cash flows related to proved oil and natural gas reserves as of June 30, 2022, 2021 and
2020 are as follows (in thousands):
Future cash inflows
Future production costs and severance taxes
Future development costs
Future income tax expenses
Future net cash flows
10% annual discount for estimated timing of cash flows
Standardized measure of discounted future net cash flows
$
$
For the Years Ended June 30,
2021
2022
1,846,708
(997,362)
(105,966)
(159,912)
583,468
(268,685)
314,783
$
$
632,620
(398,022)
(29,339)
(42,368)
162,891
(75,308)
87,583
$
$
2020
399,358
(240,400)
(24,623)
(21,982)
112,353
(49,862)
62,491
Future cash inflows represent expected revenues from production of period-end quantities of proved reserves based on the previous 12-
month unweighted arithmetic average first-day-of-the-month commodity prices for each year and reflect adjustments for lease quality,
transportation fees, energy content, and regional price differentials.
NYMEX prices used in determining future cash flows:
Oil (Bbl)
Gas (MMBtu)
For the Years Ended June 30,
2021
2020
2022
$
$
85.82
5.19
$
$
49.72
2.46
$
47.37
n/a
The NGL prices utilized for future cash inflows were based on historical prices received, where available.
A summary of the changes in the standardized measure of discounted future net cash flows applicable to proved oil, natural gas, and NGL
reserves is as follows (in thousands):
Balance, beginning of year
Net changes in sales prices and production costs related to future production
Changes in estimated future development costs
Sales of oil and gas produced during the period, net of production costs
Net change due to extensions, discoveries, and improved recovery
Net change due to revisions in quantity estimates
Net change due to purchase of minerals in place
Development costs incurred during the period
Accretion of discount
Net change in discounted income taxes
Other
Balance, end of year
75
For the Years Ended June 30,
2021
2020
2022
$
$
87,583
171,602
(6,320)
(60,269)
43,495
48,177
100,675
—
14,425
(65,559)
(19,026)
314,783
$
$
62,491
11,538
403
(16,115)
—
6,841
31,461
—
7,529
(10,678)
(5,887)
87,583
$
$
126,732
(83,857)
(4,100)
(16,094)
—
(6,746)
10,365
1,431
16,267
17,079
1,414
62,491
Table of Contents
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act
reports is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s
rules and forms; this information is accumulated and communicated to our management, including our Principal Executive Officer and
Principal Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an evaluation, under the supervision and with the
participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation,
our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures are effective in
ensuring that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act) as a process designed by, or under the supervision of, our principal executive and
principal financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America. Generally accepted accounting principles include those policies
and procedures that:
● pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions
of the assets of the company;
● provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of the company; and
● provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those
systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with
the participation of management, including the Principal Executive Officer and the Principal Financial Officer, an evaluation was
conducted on the effectiveness of our internal control over financial reporting based on criteria established in the Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Management
concluded that we maintained effective internal control over financial reporting as of June 30, 2022.
Effective April 27, 2020, the Securities and Exchange Commission adopted certain amendments to the accelerated filer and large
accelerated filer definitions to more appropriately tailor the types of issuers that are included in the categories
76
Table of Contents
of accelerated and large accelerated filers and to promote capital formation, preserve capital, and reduce unnecessary burdens for certain
smaller issuers while maintaining investor protections. As a result of the amendments, certain low-revenue issuers will remain obligated,
among other things, to establish and maintain internal control over financial reporting and have management assess the effectiveness of its
internal control over financial reporting, but they will not be required to have their management’s assessment of the effectiveness of
internal controls over financial reporting attested to and reported on by an independent auditor. As a result, the effectiveness of our
internal control over financial reporting as of June 30, 2022 has not been audited by Moss Adams LLP, the independent registered public
accounting firm that also audited our financial statements.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the three months ended June 30, 2022 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure regarding foreign jurisdictions that prevent inspections
Not applicable.
77
Table of Contents
Item 10. Directors, Executive Officers, and Corporate Governance
PART III
Incorporated by reference to our Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days of the end of our 2022 fiscal year.
Item 11. Executive Compensation
Incorporated by reference to our Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days of the end of our 2022 fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Incorporated by reference to our Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days of the end of our 2022 fiscal year.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Incorporated by reference to our Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days of the end of our 2022 fiscal year.
Item 14. Principal Accountant Fees and Services
Incorporated by reference to our Proxy Statement to be filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days of the end of our 2022 fiscal year.
78
Table of Contents
PART IV.
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this report:
1. Financial Statements.
The consolidated financial statements of the Company and its subsidiaries are included in Part II, Item 8 of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Changes in Stockholders’ Equity
Notes to the Consolidated Financial Statements
Supplemental Disclosure about Oil and Natural Gas Properties (unaudited)
2. Financial Statements Schedules and Supplementary Information Required to be Submitted:
None.
3. Exhibits
A list of the exhibits filed or furnished with this report on Form 10-K (or incorporated by reference to exhibits previously filed or
furnished by us) is provided in the Exhibit Index of this report. Those exhibits incorporated by reference herein are indicated as
such by the information supplied in the parenthetical thereafter. Otherwise, the exhibits are filed herewith.
Item 16. Form 10-K Summary
None.
79
Table of Contents
EXHIBIT INDEX
EXHIBIT
NUMBER
3.1
3.2
3.3
3.4
3.5
4.1
4.1.1
4.2
4.3†
4.4†
4.4.1†
4.5†
4.6†
10.1
10.2
10.2.1
10.2.2
10.2.3
10.2.4
EXHIBIT INDEX
DESCRIPTION
Articles of Incorporation (incorporated by reference to Exhibit 3.1 of our Current Report on Form 8-K filed February 7,
2002)
Certificate of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.2 of our Current Report
on Form 8-K filed February 7, 2002)
Certificate of Amendment to Articles of Incorporation (incorporated by reference to Exhibit 3.3 of our Registration
Statement on Form SB-2/A filed October 19, 2005)
Certificate of Designation of Rights and Preferences for 8.5% Series A Cumulative Preferred Stock (incorporated by
reference to Exhibit 3.1 of our Current Report on Form 8-K filed June 29, 2011)
Amended Bylaws (incorporated by reference to Exhibit 2.1 of our Annual Report on Form 10-KSB filed March 31,
2004)
Description of Evolution Petroleum Corporations, securities registered under Section 12 of the Exchange Act
(incorporated by reference to our Registration of Securities on Form 8-A filed July 13, 2006)
Specimen form of the Company's Common Stock Certificate (incorporated by reference to Exhibit 4.7 of our
Registration Statement on Form S-3 filed June 19, 2013)
Majority Voting Policy for Directors (incorporated by reference to Exhibit 99.1 of our Current Report on Form 8-K filed
October 31, 2012)
2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q filed
February 8, 2017)
Form of Restricted Stock Agreement under 2016 Equity Incentive Plan (incorporated by reference to Exhibit 4.1 of our
Quarterly Report on Form 10-Q filed February 8, 2018)
Form of Restricted Stock Agreement under 2016 Equity Incentive Plan as Revised on July 9, 2019 (incorporated by
reference to Exhibit 4.12 of our Annual Report on Form 10-K filed September 13, 2019)
Form of Contingent Restricted Stock Agreement under 2016 Equity Incentive Plan (incorporated by reference to Exhibit
4.2 of our Quarterly Report on Form 10-Q filed February 8, 2018)
Form of Performance Share Unit Award Agreement under 2016 Equity Incentive Plan as Revised on July 9, 2019
(incorporated by reference to Exhibit 4.13 of our Annual Report on Form 10-K filed September 13, 2019)
Form of Indemnification Agreement for Officers and Directors, as adopted on September 20, 2006 (incorporated by
reference to Exhibit 10.1 of our Current Report on Form 8-K filed September 22, 2006)
Credit Agreement dated April 11, 2016 between Evolution Petroleum Corporation and MidFirst Bank (incorporated by
reference to Exhibit 10.1 of our Current Report on Form 8-K filed April 15, 2016)
First Amendment to Credit Agreement dated April 11, 2016, between Evolution Petroleum Corporation and MidFirst
Bank effective October 18, 2016 (incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q filed
November 9, 2016)
Second Amendment to Credit Agreement dated April 11, 2016, between Evolution Petroleum Corporation and MidFirst
Bank effective February 1, 2018 (incorporated by reference to exhibit 10.1 of our Quarterly Report on Form 10-Q filed
February 8, 2018)
Third Amendment to Credit Agreement dated April 11, 2016, between Evolution Petroleum Corporation and MidFirst
Bank effective May 25, 2018 (incorporated by reference to Exhibit 10.10 of our Annual Report on Form 10-K filed
September 10, 2018)
Fourth Amendment to Credit Agreement dated April 11, 2016, between Evolution Petroleum Corporation and MidFirst
Bank effective December 31, 2018 (incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q
filed February 8, 2019)
80
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EXHIBIT
NUMBER
10.2.5
10.2.6
10.2.7
10.2.8
10.2.9
10.3
10.4†
10.5†
10.6
10.6.1
10.6.2
10.6.3
10.7
10.8
14.1
21.1*
23.1*
23.2*
23.3*
31.1*
31.2*
32.1**
DESCRIPTION
Fifth Amendment to Credit Agreement dated April 11, 2016, between Evolution Petroleum Corporation and MidFirst
Bank effective November 2, 2020 (incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q filed
November 9, 2020)
Sixth Amendment to Credit Agreement dated April 11, 2016, between Evolution Petroleum Corporation and MidFirst
Bank effective December 28, 2020 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed
on January 11, 2021)
Seventh Amendment to Credit Agreement dated August 5, 2021, between Evolution Petroleum Corporation and
MidFirst Bank effective June 30, 2021 (incorporated by reference to Exhibit 10.8 of our Quarterly Report on Form 10-Q
filed May 12, 2022)
Eighth Amendment to Credit Agreement dated November 9, 2021, between Evolution Petroleum Corporation and
MidFirst Bank effective November 9, 2021 (incorporated by reference to Exhibit 10.1 of our Quarterly Report on Form
10-Q filed November 10, 2021)
Ninth Amendment to the Credit Agreement dated February 7, 2022, between Evolution Petroleum Corporation and
MidFirst Bank effective February 4, 2022 (incorporated by reference to Exhibit 10.9 of our Quarterly Report on Form
10-Q filed May 12, 2022)
Settlement Agreement, dated June 24, 2016, by and among Denbury Onshore, LLC, Denbury Inc., NGS Sub Corp.,
Tertiaire Resources Company, and the Company (incorporated by reference to Exhibit 10.7 of our Annual Report on
Form 10-K filed September 9, 2016)
Employment Offer Letter to Jason E. Brown dated July 8, 2019 (incorporated by reference to Exhibit 10.12 of our
Annual Report on Form 10-K filed September 13, 2019)
Employment Offer Letter to Ryan Stash dated October 9, 2020 (incorporated by reference to Exhibit 10.1 of our Annual
Report on Form 10-K filed September 14, 2021)
Purchase and Sale Agreement, dated March 29, 2021, between Evolution Petroleum Corporation and TG Barnett
Resources LLP (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on May 11, 2021)
First Amendment to the Purchase and Sale Agreement, dated March 29, 2021, effective April 20, 2021 (incorporated by
reference to Exhibit 10.2 of our Current Report on Form 8-K filed on May 11, 2021)
Second Amendment to the Purchase and Sale Agreement, dated March 29, 2021, effective May 4, 2021 (incorporated by
reference to Exhibit 10.3 of our Current Report on Form 8-K filed on May 11, 2021)
Third Amendment to the Purchase and Sale Agreement, dated March 29, 2021, effective May 6, 2021 (incorporated by
reference to Exhibit 10.4 of our Current Report on Form 8-K filed on May 11, 2021)
Purchase and Sale Agreement, dated January 14, 2022, between Evolution Petroleum Corporation, Foundation Energy
Fund VII-A, LP and Foundation Energy Management, LLC (incorporated by reference to Exhibit 10.6 our Quarterly
Report on Form 10-Q filed May 12, 2022)
Purchase and Sale Agreement, dated April 1, 2022, between Evolution Petroleum Corporation and Exaro Energy III, LL
(incorporated by reference to Exhibit 10.7 of our Quarterly Report on Form 10-Q filed May 12, 2022)
Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 of our Annual Report on Form 10-K
filed September 14, 2021)
List of Subsidiaries of Evolution Petroleum Corporation
Consent of Moss Adams LLP
Consent of DeGolyer & MacNaughton
Consent of Netherland, Sewell & Associates, Inc.
Certification of Principal Executive Officer Pursuant to Rule 15D-14 of the Securities Exchange Act of 1934, as
Amended as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer Pursuant to Rule 15D-14 of the Securities Exchange Act of 1934, as
Amended as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
81
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EXHIBIT
NUMBER
32.2**
99.1*
99.2*
101.INS*
101.SCH*
101.CAL*
101.DEF*
101.LAB*
101.PRE*
104*
DESCRIPTION
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
The summary of DeGolyer and MacNaughton's Report as of June 30, 2022, on oil and gas reserves (SEC Case) dated
August 4, 2022 and certificate of qualification
The summary of Netherland, Sewell & Associates, Inc.’s Report as of June 30, 2022, on oil and gas reserves (SEC Case)
dated August 9, 2022 and certificate of qualification
Inline XBRL Instance Document
Inline XBRL Taxonomy Extension Schema Document
Inline XBRL Taxonomy Extension Calculation Linkbase Document
Inline XBRL Taxonomy Extension Definition Linkbase Document
Inline XBRL Taxonomy Extension Label Linkbase Document
Inline XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Attached hereto.
** Furnished herewith.
† Indicates management contract or compensatory plan or arrangement
82
Table of Contents
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized in the City of Houston, Texas, on the date indicated.
Evolution Petroleum Corporation
Date: September 14, 2022
By:
/s/ KELLY W. LOYD
Kelly W. Loyd
Interim President and Chief Executive Officer
(Principal Executive Officer) and Director
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date
Signature
Title
September 14, 2022
/s/ ROBERT S. HERLIN
Chairman of the Board
September 14, 2022
Robert S. Herlin
/s/ KELLY W. LOYD
Kelly W. Loyd
September 14, 2022
/s/ RYAN STASH
Ryan Stash
September 14, 2022
September 14, 2022
September 14, 2022
/s/ EDWARD J. DIPAOLO
Edward J. DiPaolo
/s/ MYRA C. BIERRIA
Myra C. Bierria
/s/ WILLIAM DOZIER
William Dozier
September 14, 2022
/s/ MARJORIE A. HARGRAVE
Marjorie A. Hargrave
83
Interim President and Chief Executive
Officer (Principal Executive Officer) and
Director
Senior Vice President, Chief Financial Officer
and Treasurer (Principal
Financial Officer and Principal Accounting
Officer)
Lead Director
Director
Director
Director
List of Subsidiaries of Evolution Petroleum Corporation
Name of Subsidiary
Evolution Royalties, Inc.
Evolution Petroleum West, Inc.
NGS Sub Corp.
NGS Technologies, Inc.
Evolution Operating Co., Inc.
Evolution Petroleum OK, Inc.
Tertiaire Resources Company
ARKLA Petroleum, LLC (Subsidiary of NGS Sub. Corp.)
NGS Resources, LLC (Subsidiary of NGS Technologies, Inc.)
Exhibit 21.1
Jurisdiction of
Incorporation or
Organization
Delaware
Delaware
Delaware
Delaware
Texas
Texas
Texas
Louisiana
Texas
CONSENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statements on Forms S-3 (No. 333-265430 and No. 333-193899), Form S-
3/A (No. 333-231412) and Forms S-8 (333-251233, 333-152136, 333-140182, 333-183746 and 333-216098) of Evolution Petroleum
Corporation (the “Company”), of our report dated September 14, 2022, relating to the consolidated financial statements of the Company
which report expresses an unqualified opinion, appearing in this Annual Report on Form 10-K of the Company for the year ended June 30,
2022.
/s/ Moss Adams LLP
Houston, Texas
September 14, 2022
EXHIBIT 23.2
DEGOLYER AND MACNAUGHTON
5001 SPRING VALLEY ROAD
SUITE 800 EAST
DALLAS, TEXAS 75244
September 14, 2022
Evolution Petroleum Corporation
1155 Dairy Ashford Road, Suite 425
Houston, Texas 77079
Ladies and Gentlemen:
We hereby consent to the use of the name DeGolyer and MacNaughton, to references to DeGolyer and MacNaughton, to
the inclusion of our report of third party dated August 4, 2022, and to the inclusion of information taken from our report entitled
"Report as of June 30, 2022 on Reserves and Revenue of Certain Properties with interests attributable to Evolution Petroleum
Corporation" in the Annual Report on Form 10-K of Evolution Petroleum Corporation for the year ended June 30, 2022. We
further consent to the incorporation by reference of information in the Form 10-K in the Evolution Petroleum Corporation
Registration Statements on Form S-8 (File Nos. 333-251233, 333-152136, 333-140182, 333-183746, and 333-216098), Form S-3
(File No. 333-265430), Form S-3/A (File No. 333-231412) and Form S-3 (File No. 333-193899).
Very truly yours,
/S/ DEGOLYER AND MACNAUGHTON
DeGOLYER and MacNAUGHTON
Texas Registered Engineering Firm F-716
EXHIBIT 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
As independent petroleum engineers, we hereby consent to the references to our firm, in the context in which
they appear, and to the references to and the incorporation by reference of our reserves report dated August 9,
2022, included in the Annual Report on Form 10-K of Evolution Petroleum Corporation (the "Company") for the
fiscal year ended June 30, 2022, as well as in the notes to the financial statements included therein. We also
hereby consent to the incorporation by reference of the references to our firm, in the context in which they
appear, and to our reserves reports into the Registration Statements on Form S-3 No. 333-265430, Form S-3/A
No. 333-231412, Form S-3 No. 333-193899, Form S-8 Nos. 333-251233, 333-152136, 333-140182, 333-
183746, and 333-216098.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By:
/s/ Richard B. Talley, Jr.
Richard B. Talley, Jr., P.E.
Chief Executive Officer
Houston, Texas
September 14, 2022
CERTIFICATION
EXHIBIT 31.1
I, Kelly W. Loyd, Interim President and Chief Executive Officer (Principal Executive Officer) and Director, of Evolution Petroleum Corporation, certify
that:
1.
I have reviewed this annual report on Form 10-K of Evolution Petroleum Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Dated: September 14, 2022
/s/ KELLY W. LOYD
Kelly W. Loyd
Interim President and Chief Executive Officer (Principal Executive Officer)
and Director
CERTIFICATION
EXHIBIT 31.2
I, Ryan Stash, Senior Vice President, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) and Treasurer of Evolution
Petroleum Corporation, certify that:
1.
I have reviewed this annual report on Form 10-K of Evolution Petroleum Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Dated: September 14, 2022
/s/ RYAN STASH
Ryan Stash
Senior Vice President, Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer) and Treasurer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
The undersigned, Kelly W. Loyd, Interim President and Chief Executive Officer (Principal Executive Officer) and Director of Evolution
Petroleum Corporation (the “Company”), certifies in connection with the filing with the Securities and Exchange Commission of the Company’s Annual
Report on Form 10-K for the year ended June 30, 2022 (the “Report”) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, to his knowledge, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
IN WITNESS WHEREOF, the undersigned has executed this certification as of September 14, 2022.
/s/ KELLY W. LOYD
Kelly W. Loyd
Interim President and Chief Executive Officer (Principal Executive Officer)
and Director
A signed original of this written statement require d by Section 906 has been provided to Evolution Petroleum Corporation and will be retained
by Evolution Petroleum Corporation and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certificate is being
furnished to the Securities and Exchange Commission as an exhibit to this Form 10-K and shall not be considered filed as part of the Form 10-K.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
The undersigned, Ryan Stash, Senior Vice President, Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) and
Treasurer of Evolution Petroleum Corporation (the “Company”), certifies in connection with the filing with the Securities and Exchange Commission of
the Company’s Annual Report on Form 10-K for the year ended June 30, 2022 (the “Report”) pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, to his knowledge, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
IN WITNESS WHEREOF, the undersigned has executed this certification as of September 14, 2022.
/s/ RYAN STASH
Ryan Stash
Senior Vice President, Chief Financial Officer (Principal Financial Officer
and Principal Accounting Officer) and Treasurer
A signed original of this written statement required by Section 906 has been provided to Evolution Petroleum Corporation and will be retained
by Evolution Petroleum Corporation and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certificate is being
furnished to the Securities and Exchange Commission as an exhibit to this Form 10-K and shall not be considered filed as part of the Form 10-K.
D e G o l y e r a n d M a c N a u g h t o n
5001 Spring Valley Road
Suite 800 East
Dallas, Texas 75244
August 4, 2022
EXHIBIT 99.1
Evolution Petroleum Corporation
1155 Dairy Ashford Rd., Suite 425
Houston, Texas 77079
Ladies and Gentlemen:
Pursuant to your request, this report of third party presents an independent evaluation, as of June 30,
2022, of the extent and value of the estimated net proved developed producing oil, condensate, natural gas
liquids (NGL), and gas reserves of the Delhi field in Louisiana, the proved developed producing condensate,
NGL, and gas reserves of the Barnett Shale in Texas, and the proved developed producing oil reserves of the
Hamilton Dome field in Wyoming in which Evolution Petroleum Corporation and its subsidiaries (collectively
referred to herein as Evolution) have represented they hold an interest. The properties evaluated herein consist
of working and royalty interests. This evaluation was completed on August 4, 2022. Evolution has represented
that these properties account for greater than 63 percent on a net equivalent barrel basis of Evolution’s net
proved reserves as of June 30, 2022. The net proved reserves estimates have been prepared in accordance with
the reserves definitions of Rules 4–10(a) (1)–(32) of Regulation S–X of the United States Securities and
Exchange Commission (SEC). This report was prepared in accordance with the guidelines specified in Item
1202 (a)(8) of Regulation S–K and is to be used for inclusion in certain SEC filings by Evolution.
Reserves estimates included herein are expressed as net reserves. Gross reserves are defined as the total
estimated petroleum remaining to be produced from these properties after June 30, 2022. Net reserves are
defined as that portion of the gross reserves attributable to the interests held by Evolution after deducting all
interests held by others.
2
DeGolyer and MacNaughton
Values for proved developed producing reserves in this report are expressed in terms of future gross
revenue, future net revenue, and present worth. Future gross revenue is defined as that revenue which will
accrue to the evaluated interests from the production and sale of the estimated net reserves. Future net revenue
is calculated by deducting production taxes, ad valorem taxes, operating expenses, capital costs, and
abandonment costs from future gross revenue. Operating expenses include field operating expenses, carbon
dioxide purchase expenses, transportation and processing expenses, compression charges, and overhead that
directly relates to production activities. Capital costs include facilities costs and field maintenance costs.
Abandonment costs are represented by Evolution to be inclusive of those costs associated with the removal of
equipment, plugging of wells, and reclamation and restoration associated with abandonment. At the request of
Evolution, future income taxes were not taken into account in the preparation of these estimates. Present worth
is defined as future net revenue discounted at a nominal discount rate of 10 percent per year compounded at
mid-year on an annual basis over the expected period of realization. Present worth should not be construed as
fair market value because no consideration was given to additional factors that influence the prices at which
properties are bought and sold.
Estimates of reserves and revenue should be regarded only as estimates that may change as further
production history and additional information become available. Not only are such estimates based on that
information which is currently available, but such estimates are also subject to the uncertainties inherent in the
application of judgmental factors in interpreting such information.
Information used in the preparation of this report was obtained from Evolution and from public sources.
In the preparation of this report we have relied, without independent verification, upon such information
furnished by Evolution with respect to the property interests being evaluated, production from such properties,
current costs of operation and development, current prices for production, agreements relating to current and
future operations and sale of production, and various other information and data that were accepted as
represented. A field examination was not considered necessary for the purposes of this report.
Definition of Reserves
Petroleum reserves included in this report are classified by degree of proof as proved developed
producing. Only proved developed producing reserves have been evaluated for this report. Reserves
classifications used in this report are in accordance with the reserves definitions of Rules 4–10(a) (1)–(32) of
Regulation S–X of the SEC. Reserves are judged to be economically producible in future years from known
reservoirs under existing economic and
DeGolyer and MacNaughton
operating conditions and assuming continuation of current regulatory practices using conventional production
methods and equipment. In the analyses of production-decline curves, reserves were estimated only to the limit
of economic rates of production under existing economic and operating conditions using prices and costs
consistent with the effective date of this report, including consideration of changes in existing prices provided
only by contractual arrangements but not including escalations based upon future conditions. The petroleum
reserves are classified as follows:
3
Proved oil and gas reserves – Proved oil and gas reserves are those quantities of oil and gas,
which, by analysis of geoscience and engineering data, can be estimated with reasonable
certainty to be economically producible—from a given date forward, from known reservoirs,
and under existing economic conditions, operating methods, and government regulations—
prior to the time at which contracts providing the right to operate expire, unless evidence
indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic
methods are used for the estimation. The project to extract the hydrocarbons must have
commenced or the operator must be reasonably certain that it will commence the project within
a reasonable time.
(i) The area of the reservoir considered as proved includes:
(A) The area identified by drilling and limited by fluid contacts, if any, and (B)
Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be
judged to be continuous with it and to contain economically producible oil or gas on
the basis of available geoscience and engineering data.
(ii) In the absence of data on fluid contacts, proved quantities in a reservoir are limited
by the lowest known hydrocarbons (LKH) as seen in a well penetration unless
geoscience, engineering, or performance data and reliable technology establishes a
lower contact with reasonable certainty.
(iii) Where direct observation from well penetrations has defined a highest known oil
(HKO) elevation and the potential exists for an associated gas cap, proved oil reserves
may be assigned in the structurally higher portions of the reservoir only if geoscience,
engineering, or performance data and reliable technology establish the higher contact
with reasonable certainty.
DeGolyer and MacNaughton
4
(iv) Reserves which can be produced economically through application of improved
recovery techniques (including, but not limited to, fluid injection) are included in the
proved classification when:
(A) Successful testing by a pilot project in an area of the reservoir with properties no
more favorable than in the reservoir as a whole, the operation of an installed program in
the reservoir or an analogous reservoir, or other evidence using reliable technology
establishes the reasonable certainty of the engineering analysis on which the project or
program was based; and (B) The project has been approved for development by all
necessary parties and entities, including governmental entities.
(v) Existing economic conditions include prices and costs at which economic
producibility from a reservoir is to be determined. The price shall be the average price
during the 12-month period prior to the ending date of the period covered by the report,
determined as an unweighted arithmetic average of the first-day-of-the-month price for
each month within such period, unless prices are defined by contractual arrangements,
excluding escalations based upon future conditions.
Developed oil and gas reserves – Developed oil and gas reserves are reserves of any category
that can be expected to be recovered:
(i) Through existing wells with existing equipment and operating methods or in which
the cost of the required equipment is relatively minor compared to the cost of a new
well; and
(ii) Through installed extraction equipment and infrastructure operational at the time of
the reserves estimate if the extraction is by means not involving a well.
Undeveloped oil and gas reserves – Undeveloped oil and gas reserves are reserves of any
category that are expected to be recovered from new wells on undrilled acreage, or from
existing wells where a relatively major expenditure is required for recompletion.
(i) Reserves on undrilled acreage shall be limited to those directly offsetting
development spacing areas that are reasonably certain of
DeGolyer and MacNaughton
5
production when drilled, unless evidence using reliable technology exists that
establishes reasonable certainty of economic producibility at greater distances.
(ii) Undrilled locations can be classified as having undeveloped reserves only if a
development plan has been adopted indicating that they are scheduled to be drilled
within five years, unless the specific circumstances justify a longer time.
(iii) Under no circumstances shall estimates for undeveloped reserves be attributable to
any acreage for which an application of fluid injection or other improved recovery
technique is contemplated, unless such techniques have been proved effective by actual
projects in the same reservoir or an analogous reservoir, as defined in [section 210.4–10
(a) Definitions], or by other evidence using reliable technology establishing reasonable
certainty.
Methodology and Procedures
Estimates of reserves were prepared by the use of appropriate geologic, petroleum engineering, and
evaluation principles and techniques that are in accordance with the reserves definition of Rules 4–10(a) (1)–
(32) of Regulation S–X of the SEC and with practices generally recognized by the petroleum industry as
presented in the publication of the Society of Petroleum Engineers entitled “Standards Pertaining to the
Estimating and Auditing of Oil and Gas Reserves Information (revised June 2019) Approved by the SPE Board
on 25 June 2019” and in Monograph 3 and Monograph 4 published by the Society of Petroleum Evaluation
Engineers. The method or combination of methods used in the analysis was tempered by experience with
similar reservoirs, stage of development, quality and completeness of basic data, and production history.
Based on the current stage of field development and production performance, reserves were classified
as proved developed producing.
When applicable, the volumetric method was used to estimate the original oil in place (OOIP).
Structure maps were prepared to delineate each reservoir, and isopach maps were constructed to estimate
reservoir volume. Electrical logs, radioactivity logs, core analyses, and other available data were used to prepare
these maps as well as to estimate representative values for porosity and water saturation.
6
DeGolyer and MacNaughton
Estimates of ultimate recovery were obtained after applying recovery factors to OOIP. These recovery
factors were based on consideration of the type of energy inherent in the reservoirs, analyses of the petroleum,
the structural positions of the properties, and the production histories. Certain properties evaluated herein are
produced using enhanced oil recovery methods involving continuous carbon dioxide flooding operations.
Therefore, carbon dioxide versus oil ratios and carbon dioxide injection volumes were analyzed and projected
and were used in the estimation of reserves when applicable.
For depletion-type reservoirs or those whose performance disclosed a reliable decline in producing-rate
trends or other diagnostic characteristics, reserves were estimated by the application of appropriate decline
curves or other performance relationships. In the analyses of production-decline curves, reserves were estimated
only to the limits of economic production as defined under the Definition of Reserves heading of this report.
For the evaluation of unconventional reservoirs, a performance-based methodology integrating the
appropriate geology and petroleum engineering data was utilized for this report. Performance-based
methodology primarily includes (1) production diagnostics, (2) decline-curve analysis, and (3) model-based
analysis (if necessary, based on availability of data). Production diagnostics include data quality control,
identification of flow regimes, and characteristic well performance behavior.
Characteristic rate-decline profiles from diagnostic interpretation were translated to modified
hyperbolic rate profiles, including one or multiple b-exponent values followed by an exponential decline. Based
on the availability of data, model-based analysis may be integrated to evaluate long-term decline behavior, the
effect of dynamic reservoir and fracture parameters on well performance, and complex situations sourced by the
nature of unconventional reservoirs.
In certain cases, reserves were estimated by incorporating elements of analogy with similar wells or
reservoirs for which more complete data were available.
Data provided by Evolution from wells drilled through June 30, 2022, and made available for this
evaluation were used to prepare the reserves estimates herein. These reserves estimates were based on
consideration of monthly production data available through June 30, 2022. Cumulative production, as of June
30, 2022, was deducted from the estimated gross ultimate recovery to estimate gross reserves.
Oil and condensate reserves estimated herein are to be recovered by normal field separation. NGL
reserves estimated herein include pentanes and heavier fractions (C5+) and
7
DeGolyer and MacNaughton
liquefied petroleum gas (LPG), which consists primarily of propane and butane fractions and are the result of
low-temperature plant processing. Oil, condensate, and NGL reserves included in this report are expressed in
thousands of barrels (Mbbl). In these estimates, 1 barrel equals 42 United States gallons. For reporting
purposes, oil and condensate reserves have been estimated separately and are presented herein as a summed
quantity.
Gas quantities estimated herein are expressed as sales gas. Sales gas is defined as the total gas to be
produced from the reservoirs, measured at the point of delivery, after reduction for fuel usage, flare, and
shrinkage resulting from field separation and processing. Gas reserves estimated herein are reported as sales
gas. Gas quantities are expressed at a temperature base of 60 degrees Fahrenheit (°F) and at the pressure base of
the state in which the quantities are located. Gas quantities included in this report are expressed in millions of
cubic feet (MMcf).
Gas quantities are identified by the type of reservoir from which the gas will be produced.
Nonassociated gas is gas at initial reservoir conditions with no oil present in the reservoir. Associated gas is
both gas-cap gas and solution gas. Gas-cap gas is gas at initial reservoir conditions and is in communication
with an underlying oil zone. Solution gas is gas dissolved in oil at initial reservoir conditions. Gas quantities
estimated herein include both associated and nonassociated gas.
Primary Economic Assumptions
Revenue values in this report were estimated using initial prices, expenses, and costs provided by
Evolution. Future prices were estimated using guidelines established by the SEC and the Financial Accounting
Standards Board (FASB). The following economic assumptions were used for estimating the revenue values
reported herein:
Oil, Condensate, and NGL Prices
Evolution has represented that the oil, condensate, and NGL prices were based on a
reference price, calculated as the unweighted arithmetic average of the first-day-of-the-
month price for each month within the 12-month period prior to the end of the
reporting period, unless prices are defined by contractual agreements. The oil,
condensate, and NGL prices were calculated using differentials furnished by Evolution
to the West Texas Intermediate (WTI) reference price of $85.82 per barrel and held
constant thereafter. The
DeGolyer and MacNaughton
8
volume-weighted average prices attributable to the estimated proved reserves over the
lives of the properties were $80.53 per barrel of oil and condensate and $45.00 per
barrel of NGL.
Gas Prices
Evolution has represented that the gas prices were based on a reference price,
calculated as the unweighted arithmetic average of the first-day-of-the-month price for
each month within the 12-month period prior to the end of the reporting period, unless
prices are defined by contractual agreements. Evolution supplied differentials to the
Henry Hub gas reference price of $5.19 per million Btu. The prices were held constant
thereafter. Btu factors were provided by Evolution and used to convert prices from
dollars per million Btu to dollars per thousand cubic feet. The volume-weighted
average price attributable to the estimated proved reserves over the lives of the
properties was $5.292 per thousand cubic feet of gas.
Production and Ad Valorem Taxes
Production taxes were calculated using rates provided by Evolution, including, where
appropriate, abatements for enhanced recovery programs. Ad valorem taxes were
calculated using rates provided by Evolution based on recent payments.
Evolution has represented that the Delhi carbon dioxide flood has been qualified as a
tertiary recovery project and that no oil production taxes will be charged until certain
investment and interest expenses have been paid out from the project revenue. Oil
production taxes then revert to a 12.5-percent rate, which rate is held constant until
average oil production per well drops below 25 barrels per day, and then reduced to
6.25 percent thereafter. Payout is not expected to occur prior to depletion, so no oil
production taxes are included herein for the Delhi field.
Operating Expenses, Capital Costs, and Abandonment Costs
Estimates of operating expenses, provided by Evolution and based on current expenses,
were held constant for the lives of the properties.
DeGolyer and MacNaughton
9
Future capital expenditures were estimated using values from the 12 months prior to
the as-of date of this report, provided by Evolution, and were not adjusted for inflation.
In certain cases, future expenditures, either higher or lower than current expenditures,
may have been used because of anticipated changes in operating conditions, but no
general escalation that might result from inflation was applied. Abandonment costs,
which are those costs associated with the removal of equipment, plugging of wells, and
reclamation and restoration associated with the abandonment, were provided by
Evolution and were not adjusted for inflation.
In our opinion, the information relating to estimated proved reserves, estimated future net revenue from
proved developed producing reserves, and present worth of estimated future net revenue from proved reserves
of oil, condensate, NGL, and gas contained in this report has been prepared in accordance with Paragraphs 932-
235-50-4, 932-235-50-6, 932-235-50-7, 932-235-50-9, 932-235-50-30, and 932-235-50-31(a), (b), and (e) of
the Accounting Standards Update 932-235-50, Extractive Industries – Oil and Gas (Topic 932): Oil and Gas
Reserve Estimation and Disclosures (January 2010) of the FASB and Rules 4–10(a) (1)–(32) of Regulation S–X
and Rules 302(b), 1201, and 1202(a) (1), (2), (3), (4), (8) of Regulation S–K of the SEC; provided, however,
that (i) future income tax expenses have not been taken into account in estimating the future net revenue and
present worth values set forth herein and (ii) estimates of the proved developed reserves are not presented at the
beginning of the year.
To the extent the above-enumerated rules, regulations, and statements require determinations of an
accounting or legal nature, we, as engineers, are necessarily unable to express an opinion as to whether the
above-described information is in accordance therewith or sufficient therefor.
Summary of Conclusions
DeGolyer and MacNaughton has performed an independent evaluation of the extent and value of the
estimated net proved developed producing oil, condensate, NGL, and gas reserves of certain properties in which
Evolution has represented it holds an interest.
The estimated net proved reserves, as of June 30, 2022, of the properties evaluated herein were based
on the definition of proved developed producing reserves of the SEC and are summarized as follows, expressed
in thousands of barrels (Mbbl) and millions of cubic feet (MMcf):
DeGolyer and MacNaughton
10
Estimated by DeGolyer and MacNaughton
Net Reserves
as of
June 30, 2022
Oil and
Condensate
(Mbbl)
NGL
(Mbbl)
Sales Gas
(MMcf)
Proved Developed Producing
6,629
5,445
65,618
DeGolyer and MacNaughton
The estimated future revenue to be derived from the production and sale of the net proved developed
producing reserves, as of June 30, 2022, of the properties evaluated using the guidelines established by the SEC
is summarized as follows, expressed in thousands of dollars (M$):
11
Future Gross Revenue
Production Taxes
Ad Valorem Taxes
Operating Expenses
Capital Costs
Abandonment Costs
Future Net Revenue
Present Worth at 10 Percent
Proved
Developed Producing
(M$)
1,126,121
45,226
38,889
615,474
6,340
23,200
396,992
219,652
While the oil and gas industry may be subject to regulatory changes from time to time that could affect
an industry participant’s ability to recover its reserves, we are not aware of any such governmental actions
which would restrict the recovery of the June 30, 2022, estimated reserves.
DeGolyer and MacNaughton is an independent petroleum engineering consulting firm that has been
providing petroleum consulting services throughout the world since 1936. DeGolyer and MacNaughton does
not have any financial interest, including stock ownership, in Evolution. Our fees were not contingent on the
results of our evaluation. This report has been prepared at the request of Evolution. DeGolyer and
MacNaughton has used all assumptions, data, procedures, and methods that it considers necessary and
appropriate to prepare this report.
Submitted,
/s/ DeGolyer and MacNaughton
DeGOLYER and MacNAUGHTON
Texas Registered Engineering Firm F-716
s/ Dilhan Ilk
Dilhan Ilk, P.E.
Senior Vice President
DeGolyer and MacNaughton
[Seal]
DeGolyer and MacNaughton
CERTIFICATE of QUALIFICATION
I, Dilhan Ilk, Petroleum Engineer with DeGolyer and MacNaughton, 5001 Spring Valley Road, Suite 800
East, Dallas, Texas, 75244 U.S.A., hereby certify:
1. That I am a Senior Vice President with DeGolyer and MacNaughton, which firm did prepare this report
of third party addressed to Evolution dated
August 4, 2022, and that I, as Senior Vice President, was responsible for the preparation of this report
of third party.
2. That I attended Istanbul Technical University, and that I graduated with a Bachelor of Science degree in
Petroleum Engineering in the year 2003, a Master of Science degree in Petroleum Engineering from
Texas A&M University in 2005, and a Doctor of Philosophy degree in Petroleum Engineering from
Texas A&M University in 2010; that I am a Registered Professional Engineer in the State of Texas; that
I am a member of the Society of Petroleum Engineers; and that I have in excess of 11 years of
experience in oil and gas reservoir studies and reserves evaluations.
[Seal]
s/ Dilhan Ilk
Dilhan Ilk, P.E.
Senior Vice President
DeGolyer and MacNaughton
August 9, 2022
EXHIBIT 99.2
Mr. Kelly W. Loyd
Evolution Petroleum Corporation
1155 Dairy Ashford Street, Suite 425
Houston, Texas 77079
Dear Mr. Loyd:
In accordance with your request, we have estimated the proved reserves and future revenue, as of June 30, 2022, to the Evolution
Petroleum Corporation (Evolution) interest in certain oil and gas properties located in North Dakota and Wyoming, referred to
herein as the Jonah and Williston Assets. We completed our evaluation on or about the date of this letter. It is our understanding
that the proved reserves estimated in this report constitute approximately 37 percent of all proved reserves owned by Evolution.
The estimates in this report have been prepared in accordance with the definitions and regulations of the U.S. Securities and
Exchange Commission (SEC) and, with the exception of the exclusion of future income taxes, conform to the FASB Accounting
Standards Codification Topic 932, Extractive Activities—Oil and Gas. Definitions are presented immediately following this letter.
This report has been prepared for Evolution's use in filing with the SEC; in our opinion the assumptions, data, methods, and
procedures used in the preparation of this report are appropriate for such purpose.
We estimate the net reserves and future net revenue to the Evolution interest in the Jonah and Williston Assets, as of June 30,
2022, to be:
Category
Proved Developed Producing
Proved Developed Non-Producing
Proved Undeveloped
Total Proved
Totals may not add because of rounding.
Oil
(MBBL)
Net Reserves
NGL
(MBBL)
Gas
(MMCF)
2,075.5
157.2
2,608.1
4,840.8
854.0
18.8
622.8
39,104.3
70.8
2,197.0
Future Net Revenue (M$)
Total
227,194.5
7,080.8
112,113.3
Present Worth
at 10%
138,170.9
2,504.2
43,494.8
1,495.6
41,372.1
346,388.5
184,169.9
The oil volumes shown include crude oil and condensate. Oil and natural gas liquids (NGL) volumes are expressed in thousands
of barrels (MBBL); a barrel is equivalent to 42 United States gallons. Gas volumes are expressed in millions of cubic feet (MMCF)
at standard temperature and pressure bases.
Reserves categorization conveys the relative degree of certainty; reserves subcategorization is based on development and
production status. As requested, probable and possible reserves that exist for these properties have not been included. The
estimates of reserves and future revenue included herein have not been adjusted for risk. This report does not include any value
that could be attributed to interests in undeveloped acreage beyond those tracts for which undeveloped reserves have been
estimated.
Gross revenue is Evolution's share of the gross (100 percent) revenue from the properties prior to any deductions. Future net
revenue is after deductions for Evolution's share of production taxes, ad valorem taxes, capital costs, abandonment costs, and
operating expenses but before consideration of any income taxes. The future net revenue has been discounted at an annual rate
of 10 percent to determine its present worth, which is shown to indicate the
effect of time on the value of money. Future net revenue presented in this report, whether discounted or undiscounted, should not
be construed as being the fair market value of the properties.
Prices used in this report are based on the 12-month unweighted arithmetic average of the first-day-of-the-month price for each
month in the period July 2021 through June 2022. For oil and NGL volumes, the average West Texas Intermediate spot price of
$85.82 per barrel is adjusted for quality, transportation fees, and market differentials. For gas volumes, the average Henry Hub
spot price of $5.19 per MMBTU is adjusted for energy content, transportation fees, and market differentials. All prices are held
constant throughout the lives of the properties. The average adjusted product prices weighted by production over the remaining
lives of the properties are $82.70 per barrel of oil, $41.45 per barrel of NGL, and $6.24 per MCF of gas.
Operating costs used in this report are based on operating expense records of Evolution. These costs include the per-well
overhead expenses allowed under joint operating agreements along with estimates of costs to be incurred at and below the district
and field levels. Operating costs have been divided into per-well costs and per-unit-of-production costs. Since all properties are
nonoperated, headquarters general and administrative overhead expenses are not included. Operating costs are not escalated for
inflation.
Capital costs used in this report were provided by Evolution and are based on authorizations for expenditure and actual costs from
recent activity. Capital costs are included as required for workovers, new development wells, and production equipment. Based
on our understanding of future development plans, a review of the records provided to us, and our knowledge of similar properties,
we regard these estimated capital costs to be reasonable. Abandonment costs used in this report are Evolution's estimates of the
costs to abandon the wells and production facilities, net of any salvage value. Capital costs and abandonment costs are not
escalated for inflation.
For the purposes of this report, we did not perform any field inspection of the properties, nor did we examine the mechanical
operation or condition of the wells and facilities. We have not investigated possible environmental liability related to the properties;
therefore, our estimates do not include any costs due to such possible liability.
We have made no investigation of potential volume and value imbalances resulting from overdelivery or underdelivery to the
Evolution interest. Therefore, our estimates of reserves and future revenue do not include adjustments for the settlement of any
such imbalances; our projections are based on Evolution receiving its net revenue interest share of estimated future gross
production. Additionally, we have made no specific investigation of any firm transportation contracts that may be in place for these
properties; our estimates of future revenue include the effects of such contracts only to the extent that the associated fees are
accounted for in the historical field- and lease-level accounting statements.
The reserves shown in this report are estimates only and should not be construed as exact quantities. Proved reserves are those
quantities of oil and gas which, by analysis of engineering and geoscience data, can be estimated with reasonable certainty to be
economically producible; probable and possible reserves are those additional reserves which are sequentially less certain to be
recovered than proved reserves. Estimates of reserves may increase or decrease as a result of market conditions, future
operations, changes in regulations, or actual reservoir performance. In addition to the primary economic assumptions discussed
herein, our estimates are based on certain assumptions including, but not limited to, that the properties will be developed
consistent with current development plans as provided to us by Evolution, that the properties will be operated in a prudent manner,
that no governmental regulations or controls will be put in place that would impact the ability of the interest owner to recover the
reserves, and that our projections of future production will prove consistent with actual performance. If the reserves are
recovered, the revenues therefrom and the costs related thereto could be more or less than the estimated amounts. Because of
governmental policies and uncertainties of supply and demand, the sales rates, prices received for the reserves, and costs
incurred in recovering such reserves may vary from assumptions made while preparing this report.
For the purposes of this report, we used technical and economic data including, but not limited to, well test data, production data,
historical price and cost information, and property ownership interests. The reserves in this report
have been estimated using deterministic methods; these estimates have been prepared in accordance with the Standards
Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers
(SPE Standards). We used standard engineering and geoscience methods, or a combination of methods, including performance
analysis and analogy, that we considered to be appropriate and necessary to categorize and estimate reserves in accordance with
SEC definitions and regulations. As in all aspects of oil and gas evaluation, there are uncertainties inherent in the interpretation of
engineering and geoscience data; therefore, our conclusions necessarily represent only informed professional judgment.
The data used in our estimates were obtained from Evolution, public data sources, and the nonconfidential files of Netherland,
Sewell & Associates, Inc. (NSAI) and were accepted as accurate. Supporting work data are on file in our office. We have not
examined the titles to the properties or independently confirmed the actual degree or type of interest owned. The technical person
primarily responsible for preparing the estimates presented herein meets the requirements regarding qualifications, independence,
objectivity, and confidentiality set forth in the SPE Standards. Steven W. Jansen, a Licensed Professional Engineer in the State of
Texas, has been practicing consulting petroleum engineering at NSAI since 2011 and has over 4 years of prior industry
experience. We are independent petroleum engineers, geologists, geophysicists, and petrophysicists; we do not own an interest
in these properties nor are we employed on a contingent basis.
Sincerely,
NETHERLAND, SEWELL & ASSOCIATES, INC.
Texas Registered Engineering Firm F-2699
By:
/s/ C.H. (Scott) Rees II
C.H. (Scott) Rees III, P.E.
Executive Chairman
/s/ Steven W. Jansen
By:
Steven W. Jansen, P.E. 112973
Vice President
Date Signed: August 9, 2022
SWJ:MJM
DEFINITIONS OF OIL AND GAS RESERVES
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)
The following definitions are set forth in U.S. Securities and Exchange Commission (SEC) Regulation S-X Section 210.4-10(a). Also included is
supplemental information from (1) the 2018 Petroleum Resources Management System approved by the Society of Petroleum Engineers, (2) the
FASB Accounting Standards Codification Topic 932, Extractive Activities—Oil and Gas, and (3) the SEC's Compliance and Disclosure
Interpretations.
(1) Acquisition of properties. Costs incurred to purchase, lease or otherwise acquire a property, including costs of lease bonuses and options to
purchase or lease properties, the portion of costs applicable to minerals when land including mineral rights is purchased in fee, brokers' fees,
recording fees, legal costs, and other costs incurred in acquiring properties.
(2) Analogous reservoir. Analogous reservoirs, as used in resources assessments, have similar rock and fluid properties, reservoir conditions
(depth, temperature, and pressure) and drive mechanisms, but are typically at a more advanced stage of development than the reservoir of
interest and thus may provide concepts to assist in the interpretation of more limited data and estimation of recovery. When used to support
proved reserves, an "analogous reservoir" refers to a reservoir that shares the following characteristics with the reservoir of interest:
(i) Same geological formation (but not necessarily in pressure communication with the reservoir of interest);
(ii) Same environment of deposition;
(iii) Similar geological structure; and
(iv) Same drive mechanism.
Instruction to paragraph (a)(2): Reservoir properties must, in the aggregate, be no more favorable in the analog than in the reservoir of interest.
(3) Bitumen. Bitumen, sometimes referred to as natural bitumen, is petroleum in a solid or semi-solid state in natural deposits with a viscosity
greater than 10,000 centipoise measured at original temperature in the deposit and atmospheric pressure, on a gas free basis. In its natural
state it usually contains sulfur, metals, and other non-hydrocarbons.
(4) Condensate. Condensate is a mixture of hydrocarbons that exists in the gaseous phase at original reservoir temperature and pressure, but
that, when produced, is in the liquid phase at surface pressure and temperature.
(5) Deterministic estimate. The method of estimating reserves or resources is called deterministic when a single value for each parameter (from
the geoscience, engineering, or economic data) in the reserves calculation is used in the reserves estimation procedure.
(6) Developed oil and gas reserves. Developed oil and gas reserves are reserves of any category that can be expected to be recovered:
(i) Through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor
compared to the cost of a new well; and
(ii) Through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means
not involving a well.
Supplemental definitions from the 2018 Petroleum Resources Management System:
Developed Producing Reserves – Expected quantities to be recovered from completion intervals that are open and producing at the effective
date of the estimate. Improved recovery Reserves are considered producing only after the improved recovery project is in operation.
Developed Non-Producing Reserves – Shut-in and behind-pipe Reserves. Shut-in Reserves are expected to be recovered from (1) completion
intervals that are open at the time of the estimate but which have not yet started producing, (2) wells which were shut-in for market conditions or
pipeline connections, or (3) wells not capable of production for mechanical reasons. Behind-pipe Reserves are expected to be recovered from
zones in existing wells that will require additional completion work or future re-completion before start of production with minor cost to access
these reserves. In all cases, production can be initiated or restored with relatively low expenditure compared to the cost of drilling a new well.
(7) Development costs. Costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing
the oil and gas. More specifically, development costs, including depreciation and applicable operating costs of support equipment and facilities
and other costs of development activities, are costs incurred to:
Definitions - Page 1 of 7
DEFINITIONS OF OIL AND GAS RESERVES
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)
(i) Gain access to and prepare well locations for drilling, including surveying well locations for the purpose of determining specific
development drilling sites, clearing ground, draining, road building, and relocating public roads, gas lines, and power lines, to the extent
necessary in developing the proved reserves.
(ii) Drill and equip development wells, development-type stratigraphic test wells, and service wells, including the costs of platforms and of
well equipment such as casing, tubing, pumping equipment, and the wellhead assembly.
(iii) Acquire, construct, and install production facilities such as lease flow lines, separators, treaters, heaters, manifolds, measuring devices,
and production storage tanks, natural gas cycling and processing plants, and central utility and waste disposal systems.
(iv) Provide improved recovery systems.
(8) Development project. A development project is the means by which petroleum resources are brought to the status of economically
producible. As examples, the development of a single reservoir or field, an incremental development in a producing field, or the integrated
development of a group of several fields and associated facilities with a common ownership may constitute a development project.
(9) Development well. A well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be
productive.
(10) Economically producible. The term economically producible, as it relates to a resource, means a resource which generates revenue that
exceeds, or is reasonably expected to exceed, the costs of the operation. The value of the products that generate revenue shall be determined
at the terminal point of oil and gas producing activities as defined in paragraph (a)(16) of this section.
(11) Estimated ultimate recovery (EUR). Estimated ultimate recovery is the sum of reserves remaining as of a given date and cumulative
production as of that date.
(12) Exploration costs. Costs incurred in identifying areas that may warrant examination and in examining specific areas that are considered to
have prospects of containing oil and gas reserves, including costs of drilling exploratory wells and exploratory-type stratigraphic test wells.
Exploration costs may be incurred both before acquiring the related property (sometimes referred to in part as prospecting costs) and after
acquiring the property. Principal types of exploration costs, which include depreciation and applicable operating costs of support equipment and
facilities and other costs of exploration activities, are:
(i) Costs of topographical, geographical and geophysical studies, rights of access to properties to conduct those studies, and salaries and
other expenses of geologists, geophysical crews, and others conducting those studies. Collectively, these are sometimes referred to as
geological and geophysical or "G&G" costs.
(ii) Costs of carrying and retaining undeveloped properties, such as delay rentals, ad valorem taxes on properties, legal costs for title
defense, and the maintenance of land and lease records.
(iii) Dry hole contributions and bottom hole contributions.
(iv) Costs of drilling and equipping exploratory wells.
(v) Costs of drilling exploratory-type stratigraphic test wells.
(13) Exploratory well. An exploratory well is a well drilled to find a new field or to find a new reservoir in a field previously found to be productive
of oil or gas in another reservoir. Generally, an exploratory well is any well that is not a development well, an extension well, a service well, or a
stratigraphic test well as those items are defined in this section.
(14) Extension well. An extension well is a well drilled to extend the limits of a known reservoir.
(15) Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural
feature and/or stratigraphic condition. There may be two or more reservoirs in a field which are separated vertically by intervening impervious
strata, or laterally by local geologic barriers, or by both. Reservoirs that are associated by being in overlapping or adjacent fields may be treated
as a single or common operational field. The geological terms "structural feature" and "stratigraphic condition" are intended to identify localized
geological features as opposed to the broader terms of basins, trends, provinces, plays, areas-of-interest, etc.
(16) Oil and gas producing activities.
(i) Oil and gas producing activities include:
(A) The search for crude oil, including condensate and natural gas liquids, or natural gas ("oil and gas") in their natural states and
original locations;
Definitions - Page 2 of 7
DEFINITIONS OF OIL AND GAS RESERVES
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)
(B) The acquisition of property rights or properties for the purpose of further exploration or for the purpose of removing the oil or gas
from such properties;
(C) The construction, drilling, and production activities necessary to retrieve oil and gas from their natural reservoirs, including the
acquisition, construction, installation, and maintenance of field gathering and storage systems, such as:
(1) Lifting the oil and gas to the surface; and
(2) Gathering, treating, and field processing (as in the case of processing gas to extract liquid hydrocarbons); and
(D) Extraction of saleable hydrocarbons, in the solid, liquid, or gaseous state, from oil sands, shale, coalbeds, or other nonrenewable
natural resources which are intended to be upgraded into synthetic oil or gas, and activities undertaken with a view to such
extraction.
Instruction 1 to paragraph (a)(16)(i): The oil and gas production function shall be regarded as ending at a "terminal point", which is the outlet
valve on the lease or field storage tank. If unusual physical or operational circumstances exist, it may be appropriate to regard the terminal
point for the production function as:
a. The first point at which oil, gas, or gas liquids, natural or synthetic, are delivered to a main pipeline, a common carrier, a refinery, or a
b.
marine terminal; and
In the case of natural resources that are intended to be upgraded into synthetic oil or gas, if those natural resources are delivered to a
purchaser prior to upgrading, the first point at which the natural resources are delivered to a main pipeline, a common carrier, a refinery,
a marine terminal, or a facility which upgrades such natural resources into synthetic oil or gas.
Instruction 2 to paragraph (a)(16)(i): For purposes of this paragraph (a)(16), the term saleable hydrocarbons means hydrocarbons that are
saleable in the state in which the hydrocarbons are delivered.
(ii) Oil and gas producing activities do not include:
(A) Transporting, refining, or marketing oil and gas;
(B) Processing of produced oil, gas, or natural resources that can be upgraded into synthetic oil or gas by a registrant that does not
have the legal right to produce or a revenue interest in such production;
(C) Activities relating to the production of natural resources other than oil, gas, or natural resources from which synthetic oil and gas
can be extracted; or
(D) Production of geothermal steam.
(17) Possible reserves. Possible reserves are those additional reserves that are less certain to be recovered than probable reserves.
(i) When deterministic methods are used, the total quantities ultimately recovered from a project have a low probability of exceeding
proved plus probable plus possible reserves. When probabilistic methods are used, there should be at least a 10% probability that the
total quantities ultimately recovered will equal or exceed the proved plus probable plus possible reserves estimates.
(ii) Possible reserves may be assigned to areas of a reservoir adjacent to probable reserves where data control and interpretations of
available data are progressively less certain. Frequently, this will be in areas where geoscience and engineering data are unable to
define clearly the area and vertical limits of commercial production from the reservoir by a defined project.
(iii) Possible reserves also include incremental quantities associated with a greater percentage recovery of the hydrocarbons in place than
the recovery quantities assumed for probable reserves.
(iv) The proved plus probable and proved plus probable plus possible reserves estimates must be based on reasonable alternative
technical and commercial interpretations within the reservoir or subject project that are clearly documented, including comparisons to
results in successful similar projects.
(v) Possible reserves may be assigned where geoscience and engineering data identify directly adjacent portions of a reservoir within the
same accumulation that may be separated from proved areas by faults with displacement less than formation thickness or other
geological discontinuities and that have not been penetrated by a wellbore, and the registrant believes that such adjacent portions are
in communication with the known (proved) reservoir. Possible reserves may be assigned to areas that are structurally higher or lower
than the proved area if these areas are in communication with the proved reservoir.
Definitions - Page 3 of 7
DEFINITIONS OF OIL AND GAS RESERVES
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)
(vi) Pursuant to paragraph (a)(22)(iii) of this section, where direct observation has defined a highest known oil (HKO) elevation and the
potential exists for an associated gas cap, proved oil reserves should be assigned in the structurally higher portions of the reservoir
above the HKO only if the higher contact can be established with reasonable certainty through reliable technology. Portions of the
reservoir that do not meet this reasonable certainty criterion may be assigned as probable and possible oil or gas based on reservoir
fluid properties and pressure gradient interpretations.
(18) Probable reserves. Probable reserves are those additional reserves that are less certain to be recovered than proved reserves but which,
together with proved reserves, are as likely as not to be recovered.
(i) When deterministic methods are used, it is as likely as not that actual remaining quantities recovered will exceed the sum of estimated
proved plus probable reserves. When probabilistic methods are used, there should be at least a 50% probability that the actual
quantities recovered will equal or exceed the proved plus probable reserves estimates.
(ii) Probable reserves may be assigned to areas of a reservoir adjacent to proved reserves where data control or interpretations of
available data are less certain, even if the interpreted reservoir continuity of structure or productivity does not meet the reasonable
certainty criterion. Probable reserves may be assigned to areas that are structurally higher than the proved area if these areas are in
communication with the proved reservoir.
(iii) Probable reserves estimates also include potential incremental quantities associated with a greater percentage recovery of the
hydrocarbons in place than assumed for proved reserves.
(iv) See also guidelines in paragraphs (a)(17)(iv) and (a)(17)(vi) of this section.
(19) Probabilistic estimate. The method of estimation of reserves or resources is called probabilistic when the full range of values that could
reasonably occur for each unknown parameter (from the geoscience and engineering data) is used to generate a full range of possible outcomes
and their associated probabilities of occurrence.
(20) Production costs.
(i) Costs incurred to operate and maintain wells and related equipment and facilities, including depreciation and applicable operating costs
of support equipment and facilities and other costs of operating and maintaining those wells and related equipment and facilities. They
become part of the cost of oil and gas produced. Examples of production costs (sometimes called lifting costs) are:
(A) Costs of labor to operate the wells and related equipment and facilities.
(B) Repairs and maintenance.
(C) Materials, supplies, and fuel consumed and supplies utilized in operating the wells and related equipment and facilities.
(D) Property taxes and insurance applicable to proved properties and wells and related equipment and facilities.
(E) Severance taxes.
(ii) Some support equipment or facilities may serve two or more oil and gas producing activities and may also serve transportation, refining,
and marketing activities. To the extent that the support equipment and facilities are used in oil and gas producing activities, their
depreciation and applicable operating costs become exploration, development or production costs, as appropriate. Depreciation,
depletion, and amortization of capitalized acquisition, exploration, and development costs are not production costs but also become part
of the cost of oil and gas produced along with production (lifting) costs identified above.
(21) Proved area. The part of a property to which proved reserves have been specifically attributed.
(22) Proved oil and gas reserves. Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and
engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs,
and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right
to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are
used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will
commence the project within a reasonable time.
(i) The area of the reservoir considered as proved includes:
Definitions - Page 4 of 7
DEFINITIONS OF OIL AND GAS RESERVES
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)
(A) The area identified by drilling and limited by fluid contacts, if any, and
(B) Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain
economically producible oil or gas on the basis of available geoscience and engineering data.
(ii)
In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons (LKH) as seen in
a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact with
reasonable certainty.
(iii) Where direct observation from well penetrations has defined a highest known oil (HKO) elevation and the potential exists for an
associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience,
engineering, or performance data and reliable technology establish the higher contact with reasonable certainty.
(iv) Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid
injection) are included in the proved classification when:
(A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole,
the operation of an installed program in the reservoir or an analogous reservoir, or other evidence using reliable technology
establishes the reasonable certainty of the engineering analysis on which the project or program was based; and
(B) The project has been approved for development by all necessary parties and entities, including governmental entities.
(v) Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price
shall be the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an
unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by
contractual arrangements, excluding escalations based upon future conditions.
(23) Proved properties. Properties with proved reserves.
(24) Reasonable certainty. If deterministic methods are used, reasonable certainty means a high degree of confidence that the quantities will be
recovered. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or
exceed the estimate. A high degree of confidence exists if the quantity is much more likely to be achieved than not, and, as changes due to
increased availability of geoscience (geological, geophysical, and geochemical), engineering, and economic data are made to estimated ultimate
recovery (EUR) with time, reasonably certain EUR is much more likely to increase or remain constant than to decrease.
(25) Reliable technology. Reliable technology is a grouping of one or more technologies (including computational methods) that has been field
tested and has been demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or in
an analogous formation.
(26) Reserves. Reserves are estimated remaining quantities of oil and gas and related substances anticipated to be economically producible, as
of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable
expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and gas or
related substances to market, and all permits and financing required to implement the project.
Definitions - Page 5 of 7
DEFINITIONS OF OIL AND GAS RESERVES
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)
Note to paragraph (a)(26): Reserves should not be assigned to adjacent reservoirs isolated by major, potentially sealing, faults until those
reservoirs are penetrated and evaluated as economically producible. Reserves should not be assigned to areas that are clearly separated from
a known accumulation by a non-productive reservoir (i.e., absence of reservoir, structurally low reservoir, or negative test results). Such areas
may contain prospective resources (i.e., potentially recoverable resources from undiscovered accumulations).
Excerpted from the FASB Accounting Standards Codification Topic 932, Extractive Activities—Oil and Gas:
932-235-50-30 A standardized measure of discounted future net cash flows relating to an entity's interests in both of the following shall be
disclosed as of the end of the year:
a. Proved oil and gas reserves (see paragraphs 932-235-50-3 through 50-11B)
b. Oil and gas subject to purchase under long-term supply, purchase, or similar agreements and contracts in which the entity participates in
the operation of the properties on which the oil or gas is located or otherwise serves as the producer of those reserves (see paragraph
932-235-50-7).
The standardized measure of discounted future net cash flows relating to those two types of interests in reserves may be combined for
reporting purposes.
932-235-50-31 All of the following information shall be disclosed in the aggregate and for each geographic area for which reserve quantities
are disclosed in accordance with paragraphs 932-235-50-3 through 50-11B:
a. Future cash inflows. These shall be computed by applying prices used in estimating the entity's proved oil and gas reserves to the year-
end quantities of those reserves. Future price changes shall be considered only to the extent provided by contractual arrangements in
existence at year-end.
b. Future development and production costs. These costs shall be computed by estimating the expenditures to be incurred in developing
and producing the proved oil and gas reserves at the end of the year, based on year-end costs and assuming continuation of existing
economic conditions. If estimated development expenditures are significant, they shall be presented separately from estimated
production costs.
c. Future income tax expenses. These expenses shall be computed by applying the appropriate year-end statutory tax rates, with
consideration of future tax rates already legislated, to the future pretax net cash flows relating to the entity's proved oil and gas reserves,
less the tax basis of the properties involved. The future income tax expenses shall give effect to tax deductions and tax credits and
allowances relating to the entity's proved oil and gas reserves.
d. Future net cash flows. These amounts are the result of subtracting future development and production costs and future income tax
expenses from future cash inflows.
e. Discount. This amount shall be derived from using a discount rate of 10 percent a year to reflect the timing of the future net cash flows
relating to proved oil and gas reserves.
f. Standardized measure of discounted future net cash flows. This amount is the future net cash flows less the computed discount.
(27) Reservoir. A porous and permeable underground formation containing a natural accumulation of producible oil and/or gas that is confined
by impermeable rock or water barriers and is individual and separate from other reservoirs.
(28) Resources. Resources are quantities of oil and gas estimated to exist in naturally occurring accumulations. A portion of the resources may
be estimated to be recoverable, and another portion may be considered to be unrecoverable. Resources include both discovered and
undiscovered accumulations.
(29) Service well. A well drilled or completed for the purpose of supporting production in an existing field. Specific purposes of service wells
include gas injection, water injection, steam injection, air injection, salt-water disposal, water supply for injection, observation, or injection for in-
situ combustion.
(30) Stratigraphic test well. A stratigraphic test well is a drilling effort, geologically directed, to obtain information pertaining to a specific geologic
condition. Such wells customarily are drilled without the intent of being completed for hydrocarbon production. The classification also includes
tests identified as core tests and all types of expendable holes related to hydrocarbon exploration. Stratigraphic tests are classified as
"exploratory type" if not drilled in a known area or "development type" if drilled in a known area.
Definitions - Page 6 of 7
DEFINITIONS OF OIL AND GAS RESERVES
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)
(31) Undeveloped oil and gas reserves. Undeveloped oil and gas reserves are reserves of any category that are expected to be recovered from
new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.
(i) Reserves on undrilled acreage shall be limited to those directly offsetting development spacing areas that are reasonably certain of
production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility
at greater distances.
(ii) Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they
are scheduled to be drilled within five years, unless the specific circumstances, justify a longer time.
From the SEC's Compliance and Disclosure Interpretations (October 26, 2009):
Although several types of projects — such as constructing offshore platforms and development in urban areas, remote locations or
environmentally sensitive locations — by their nature customarily take a longer time to develop and therefore often do justify longer time
periods, this determination must always take into consideration all of the facts and circumstances. No particular type of project per se justifies a
longer time period, and any extension beyond five years should be the exception, and not the rule.
Factors that a company should consider in determining whether or not circumstances justify recognizing reserves even though development
may extend past five years include, but are not limited to, the following:
● The company's level of ongoing significant development activities in the area to be developed (for example, drilling only the minimum
number of wells necessary to maintain the lease generally would not constitute significant development activities);
● The company's historical record at completing development of comparable long-term projects;
● The amount of time in which the company has maintained the leases, or booked the reserves, without significant development activities;
●
The extent to which the company has followed a previously adopted development plan (for example, if a company has changed its
development plan several times without taking significant steps to implement any of those plans, recognizing proved undeveloped
reserves typically would not be appropriate); and
● The extent to which delays in development are caused by external factors related to the physical operating environment (for example,
restrictions on development on Federal lands, but not obtaining government permits), rather than by internal factors (for example, shifting
resources to develop properties with higher priority).
(iii) Under no circumstances shall estimates for undeveloped reserves be attributable to any acreage for which an application of fluid
injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects
in the same reservoir or an analogous reservoir, as defined in paragraph (a)(2) of this section, or by other evidence using reliable
technology establishing reasonable certainty.
(32) Unproved properties. Properties with no proved reserves.
Definitions - Page 7 of 7