EPM
EVOLUTION PETROLEUM (EPM) (Speculative Issue based on market cap and nature of business) May 2007
Investment/Trade rationale:
1)Evolution Petroleum (EPM) is an oil and gas company with a strategic opportunity in enhanced oil-recovery methods. Stock ownership is currently made of a majority of insider shareholders (14% Management + 46% Non Management Directors) and there is upside potential in the stock as the company becomes better known among institutional investors (current market cap=$79.4 Million), particularly given the strength of energy related commodity pricing (oil and gas).
2) EPM is backed by assets and has entered into favorable arrangements (see discussion below for factual details).
3) EPM operates a high margin business model. CO2 Enhanced oil recovery per barrel cost is approximately $15 per barrel of oil/cost includes production tax costs. At current prices, the cost structure provides for high margins and strong business fundamentals assuming execution is as the company projects.
4) Strong and experienced management team. Particularly as a result of the technical and unconventional nature of the business model that EPM operates, strong management is very important for the long term success of the company and stock. The company recently brought on Edward Schell as Manager of Drilling and Unconventional Resources (Edward brings 24 years of relevant experience from Anadarko and Union Pacific).
5) Current supply/demand/pricing dynamics for oil and gas.
Key Investment Risks
1) Evolution Petroleum is an unconventional E&P business. There are fundamental business risks associated with the company’s ability to effectively execute on the technical strategy/recovery methods and there is uncertainty with company projections (the company has little performance history to date).
2) EPM is a thinly capitalized micro-cap stock. It will be more difficult to trade in and out of positions (short term) and the stock will be more sensitive to momentum based share price movement. As the share price gains upward momentum, any negative development/news would likely cause sharp (exaggerated) percentage declines in the value of the stock.
3) Meeting any capital needs/dilutive equity offerings. The company has undergone numerous dilutive equity offerings over the past 2 years (based on presentation material, the offerings appear to have been done without damaging shareholder value nor detrimentally impacting investor confidence to date).
4) Commodity pricing risk (although of lesser importance based on the business model and existing cost/pricing structure).
Highlights:
*Headquartered in Houston, Texas, EPM (formerly Natural Gas Systems and formed in 2003/based on current business model) is a petroleum company incorporated in Nevada, engaged primarily in the acquisition, exploitation and development of properties for the production of crude oil and natural gas. EPM acquires established oil and gas properties and exploits them through the application of conventional and specialized technology to increase production and/or recoveries.
*EPM’s business is grounded on the premise that many oil and gas fields discovered, developed and produced primarily before the 1970's offer the potential of re-entering, restoring production and/or replacing wells with significant amounts of economically recoverable reserves. According to the presentation, many if not most fields were found and fully developed prior to the current period of prices consistently above $25 per barrel and modern technology (and many, if not most, of those oil and gas fields reached maturity or abandonment with substantial amounts of residual oil and gas due to low prices, low energy, or old technology.)
*EPM is focused on an overall strategy of acquiring controlling working interests in oil and gas resources within established fields and redeveloping the fields through the application of capital and technology to convert the oil and gas resources into profitable producing reserves. Its strategy is intended to generate scalable development opportunities at normally pressured depths, exhibiting relatively low completion risk, generally longer and more predictable production lives, less expenditures on infrastructure and lower operational risks.
*Within the overall strategy, EPM has established and highlighted three specific business initiatives: 1) Enhanced oil recovery (EOR) using miscible and immiscible gas flooding; 2) Technology based redevelopment of mature oil and gas fields to recover bypassed resources; and 3)Unconventional gas reservoir development using modern stimulation and completion technologies.
Key Assets/Projects
Delhi Field:The Delhi Field is located in northeastern Louisiana about 30 miles west of the Mississippi River. The Field extends about 12 miles in length and the Holt Bryant Unit covers 13,636 acres. Discovered in the mid-1940's, the Delhi Field has cumulatively produced, according to outside engineers, approximately 210 million barrels of oil and substantial quantities of natural gas from approximately 450 wells completed in Tuscaloosa, Paluxy and Glen Rose reservoirs, at depths less than 3,500'. About 190 million barrels of oil have been produced from the Holt Bryant Unit within the Field. About 90% of the wells were plugged and abandoned predominantly in the 1980's and 1990's. At the time of purchase, the Field had declined to a production level of approximately 18 barrels of oil per day from six producing wells.
Evolution Petroleum, sold to Denbury Resources (DNR, a NYSE listed company with $4.9Billion Market capitalization) for $50 million in gross cash proceeds: 1)100% working interest (80% revenue interest) in the Holt Bryant Unit; 2) 75% working interest (60% revenue interest) in certain depths outside of the Holt Bryant Unit within the Delhi Field. Evolution Petroleum now owns: 1) 7.4% royalty (revenue) interest in the Delhi Holt Bryant Unit; 2) 25% reversionary working interest (20% revenue interest) in the Holt Bryant Unit; 3) 25% working interest (20% revenue interest) in certain depths outside of the Holt Bryant Unit The reversionary working interest reverts after DNR receives $200 million of net revenues, less operating expenses, from the 100% working interest (80% revenue interest) in the Holt Bryant Unit. DNR has committed to spend at least $100 million of capital on the project, and no capital expenditures are included in the operating expenses or deducted from their revenues for the calculation of payout. DNR has publicly stated that it projects recovery of 30 – 40 million barrels of oil, net to its ownership and therefore net of any interests held by EPM. The equivalent projected recovery of future oil production, net to EPM’s retained ownership, ranges from 9 million to 15 million barrels of oil. Current estimates by various parties of the original oil-in-place (OOIP) in the Delhi Holt Bryant Unit range from 350 million to 400+ million barrels of oil. Therefore, after subtraction of oil produced to date, estimates of remaining oil in place range from 160 million to 210+ million barrels of oil.
Tullos Field: EPM owns 100% of the working interest in approximately 150 producing oil wells, 18 water disposal wells and approximately 90 nonproducing wells in the Tullos Urania, Colgrade and Crossroads Fields in central Louisiana (the Tullos Field Area). The Tullos Field Area includes several hundred wells owned by EPM and other operators with over 50 million barrels of cumulative oil production since its discovery in 1925. EPM’s wells produce oil with high volumes of water from the Wilcox reservoir at a depth of approximately 1500'. Current oil production is constrained by insufficient water re-injection capacity, and a significant number of wells are not producing due to mechanical reasons. EPM initiated a program of repairing such wells and returning them to production, followed by applying for permits to convert producing wells to water injection and increase overall capacity for disposing of produced water in the Wilcox formation, to allow increased total fluid production and thereby increase oil production.
Net Proved Developed Reserves in Tullos Urania Field area were assigned by Evolution’s outside engineers. In accordance with SEC rules and definitions, outside engineers estimated that 399,000 net barrels of proved developed oil reserves were owned as of July 1, 2005. Evolution believes that additional reserves can be realized through our ongoing development program. Based on purchase prices, and including the proved developed reserves as of July 1, 2005 and net production to the Company's interests prior to that date, the company estimates that Tullos proved developed reserves were purchased at a cost equivalent to $3.65 per barrel of oil.
New Projects
EPM is currently reviewing acquisition and development candidates that fit the following guidlines: 1)Producing or tested reservoirs of depth shallower than 10,000 feet; 2)Low permeability or dual porosity reservoirs, typically evidenced by low annual production declines; 3) Development potential with scale; 4) Fully mature oil fields deeper than 3,000’ with cumulative production of at least 100 MMBO; 5)Fields with mature horizontal wells; 6)Operational control; 7)Concentrated operations - substantial number of wells within a local area; and 8)Value range from $1,000,000 to $100,000,000+
Management
Robert S. Herlin, President, Chief Executive Officer & DirectorMr. Herlin co-founded the Company and served as President, CEO and Director since the inception. He has 26 years of experience in development, mergers and acquisitions, operations and finance. Previously, Mr. Herlin served as Chief Financial Officer and, subsequently, as President and Chief Executive Officer for Benz Energy, Ltd, an oil and gas exploration company focused on 3 D seismic applications. Harvard MBA.
Sterling McDonald, Chief Financial OfficerMr. McDonald joined NGS as Chief Financial Officer in 2003. Since joining us, he has also been responsible for the administrative functions of the Company. From 1999 to 2003, Mr. McDonald acted as an independent consultant and interim Chief Financial Officer to various companies, predominantly in the petroleum sector. From 1997 to 1999, he served as Chief Financial Officer for PetroAmerican Services, a subsidiary of an integrated NYSE-traded oil and gas company.
Daryl Mazzanti, Vice President for OperationsMr. Mazzanti joined EPM in mid-2005 to oversee all field operations. He previously served Anadarko as Manager of U.S. Business Development. As Production Manager, Austin Chalk for Anadarko and its predecessor, UPRC, he managed 1,300 wells with 65 employees and 25,000 boe of daily production. Mr. Mazzanti previously managed operations in the Carthage Field in East Texas and fields in west and south Texas.
Edward Schell, General Manager of Drilling and Unconventional Resources. Recently joined from Anadarko and brings 24 years of related experience.
Institutional Holders Structure
Rubicon Fund Management $3,481,600 (5.08%) AMEX
River Road Asset Management $4,129,072 (6.03%) Shares Outstanding: 26.70Million
Sterling Johnston $837,120 (1.22%) Market Cap: $79.74
GRT Capital $453,120 (0.66%) Float: 10.14 Million
Ameriprise Financial $757,434 (1.11%) Average Daily Volume: 39.980
Disclaimer:
The information contained in this report is based entirely on information available to the public and has been obtained from the company featured herein, as well as other sources, in each case without independent verification. The information featured herein is considered reliable, but cannot be guaranteed as to accuracy or completeness. The information includes certain forward-looking statements within the meaning of Section 21E of the SEC Act of 1934, which may be affected by unforeseen circumstances or certain risks. The reader is hereby advised to review all SEC filings for a more complete description of the Company's business, including the financial statements and all risk factors set forth therein. By accepting and reading this report, the reader hereby acknowledges that neither VirtualHedge Fund, nor any other affiliate thereof makes any representation, either express or implied, as to the accuracy, completeness, fitness for a particular purpose or future results, of any statement contained herein. NeitherVirtual HedgeFund, nor any of its officers, agents or affiliates, accepts any liability whatsoever for any statements made herein, including without limitation any liability for direct, consequential or special damages of any kind or nature.
Investment/Trade rationale:
1)Evolution Petroleum (EPM) is an oil and gas company with a strategic opportunity in enhanced oil-recovery methods. Stock ownership is currently made of a majority of insider shareholders (14% Management + 46% Non Management Directors) and there is upside potential in the stock as the company becomes better known among institutional investors (current market cap=$79.4 Million), particularly given the strength of energy related commodity pricing (oil and gas).
2) EPM is backed by assets and has entered into favorable arrangements (see discussion below for factual details).
3) EPM operates a high margin business model. CO2 Enhanced oil recovery per barrel cost is approximately $15 per barrel of oil/cost includes production tax costs. At current prices, the cost structure provides for high margins and strong business fundamentals assuming execution is as the company projects.
4) Strong and experienced management team. Particularly as a result of the technical and unconventional nature of the business model that EPM operates, strong management is very important for the long term success of the company and stock. The company recently brought on Edward Schell as Manager of Drilling and Unconventional Resources (Edward brings 24 years of relevant experience from Anadarko and Union Pacific).
5) Current supply/demand/pricing dynamics for oil and gas.
Key Investment Risks
1) Evolution Petroleum is an unconventional E&P business. There are fundamental business risks associated with the company’s ability to effectively execute on the technical strategy/recovery methods and there is uncertainty with company projections (the company has little performance history to date).
2) EPM is a thinly capitalized micro-cap stock. It will be more difficult to trade in and out of positions (short term) and the stock will be more sensitive to momentum based share price movement. As the share price gains upward momentum, any negative development/news would likely cause sharp (exaggerated) percentage declines in the value of the stock.
3) Meeting any capital needs/dilutive equity offerings. The company has undergone numerous dilutive equity offerings over the past 2 years (based on presentation material, the offerings appear to have been done without damaging shareholder value nor detrimentally impacting investor confidence to date).
4) Commodity pricing risk (although of lesser importance based on the business model and existing cost/pricing structure).
Highlights:
*Headquartered in Houston, Texas, EPM (formerly Natural Gas Systems and formed in 2003/based on current business model) is a petroleum company incorporated in Nevada, engaged primarily in the acquisition, exploitation and development of properties for the production of crude oil and natural gas. EPM acquires established oil and gas properties and exploits them through the application of conventional and specialized technology to increase production and/or recoveries.
*EPM’s business is grounded on the premise that many oil and gas fields discovered, developed and produced primarily before the 1970's offer the potential of re-entering, restoring production and/or replacing wells with significant amounts of economically recoverable reserves. According to the presentation, many if not most fields were found and fully developed prior to the current period of prices consistently above $25 per barrel and modern technology (and many, if not most, of those oil and gas fields reached maturity or abandonment with substantial amounts of residual oil and gas due to low prices, low energy, or old technology.)
*EPM is focused on an overall strategy of acquiring controlling working interests in oil and gas resources within established fields and redeveloping the fields through the application of capital and technology to convert the oil and gas resources into profitable producing reserves. Its strategy is intended to generate scalable development opportunities at normally pressured depths, exhibiting relatively low completion risk, generally longer and more predictable production lives, less expenditures on infrastructure and lower operational risks.
*Within the overall strategy, EPM has established and highlighted three specific business initiatives: 1) Enhanced oil recovery (EOR) using miscible and immiscible gas flooding; 2) Technology based redevelopment of mature oil and gas fields to recover bypassed resources; and 3)Unconventional gas reservoir development using modern stimulation and completion technologies.
Key Assets/Projects
Delhi Field:The Delhi Field is located in northeastern Louisiana about 30 miles west of the Mississippi River. The Field extends about 12 miles in length and the Holt Bryant Unit covers 13,636 acres. Discovered in the mid-1940's, the Delhi Field has cumulatively produced, according to outside engineers, approximately 210 million barrels of oil and substantial quantities of natural gas from approximately 450 wells completed in Tuscaloosa, Paluxy and Glen Rose reservoirs, at depths less than 3,500'. About 190 million barrels of oil have been produced from the Holt Bryant Unit within the Field. About 90% of the wells were plugged and abandoned predominantly in the 1980's and 1990's. At the time of purchase, the Field had declined to a production level of approximately 18 barrels of oil per day from six producing wells.
Evolution Petroleum, sold to Denbury Resources (DNR, a NYSE listed company with $4.9Billion Market capitalization) for $50 million in gross cash proceeds: 1)100% working interest (80% revenue interest) in the Holt Bryant Unit; 2) 75% working interest (60% revenue interest) in certain depths outside of the Holt Bryant Unit within the Delhi Field. Evolution Petroleum now owns: 1) 7.4% royalty (revenue) interest in the Delhi Holt Bryant Unit; 2) 25% reversionary working interest (20% revenue interest) in the Holt Bryant Unit; 3) 25% working interest (20% revenue interest) in certain depths outside of the Holt Bryant Unit The reversionary working interest reverts after DNR receives $200 million of net revenues, less operating expenses, from the 100% working interest (80% revenue interest) in the Holt Bryant Unit. DNR has committed to spend at least $100 million of capital on the project, and no capital expenditures are included in the operating expenses or deducted from their revenues for the calculation of payout. DNR has publicly stated that it projects recovery of 30 – 40 million barrels of oil, net to its ownership and therefore net of any interests held by EPM. The equivalent projected recovery of future oil production, net to EPM’s retained ownership, ranges from 9 million to 15 million barrels of oil. Current estimates by various parties of the original oil-in-place (OOIP) in the Delhi Holt Bryant Unit range from 350 million to 400+ million barrels of oil. Therefore, after subtraction of oil produced to date, estimates of remaining oil in place range from 160 million to 210+ million barrels of oil.
Tullos Field: EPM owns 100% of the working interest in approximately 150 producing oil wells, 18 water disposal wells and approximately 90 nonproducing wells in the Tullos Urania, Colgrade and Crossroads Fields in central Louisiana (the Tullos Field Area). The Tullos Field Area includes several hundred wells owned by EPM and other operators with over 50 million barrels of cumulative oil production since its discovery in 1925. EPM’s wells produce oil with high volumes of water from the Wilcox reservoir at a depth of approximately 1500'. Current oil production is constrained by insufficient water re-injection capacity, and a significant number of wells are not producing due to mechanical reasons. EPM initiated a program of repairing such wells and returning them to production, followed by applying for permits to convert producing wells to water injection and increase overall capacity for disposing of produced water in the Wilcox formation, to allow increased total fluid production and thereby increase oil production.
Net Proved Developed Reserves in Tullos Urania Field area were assigned by Evolution’s outside engineers. In accordance with SEC rules and definitions, outside engineers estimated that 399,000 net barrels of proved developed oil reserves were owned as of July 1, 2005. Evolution believes that additional reserves can be realized through our ongoing development program. Based on purchase prices, and including the proved developed reserves as of July 1, 2005 and net production to the Company's interests prior to that date, the company estimates that Tullos proved developed reserves were purchased at a cost equivalent to $3.65 per barrel of oil.
New Projects
EPM is currently reviewing acquisition and development candidates that fit the following guidlines: 1)Producing or tested reservoirs of depth shallower than 10,000 feet; 2)Low permeability or dual porosity reservoirs, typically evidenced by low annual production declines; 3) Development potential with scale; 4) Fully mature oil fields deeper than 3,000’ with cumulative production of at least 100 MMBO; 5)Fields with mature horizontal wells; 6)Operational control; 7)Concentrated operations - substantial number of wells within a local area; and 8)Value range from $1,000,000 to $100,000,000+
Management
Robert S. Herlin, President, Chief Executive Officer & DirectorMr. Herlin co-founded the Company and served as President, CEO and Director since the inception. He has 26 years of experience in development, mergers and acquisitions, operations and finance. Previously, Mr. Herlin served as Chief Financial Officer and, subsequently, as President and Chief Executive Officer for Benz Energy, Ltd, an oil and gas exploration company focused on 3 D seismic applications. Harvard MBA.
Sterling McDonald, Chief Financial OfficerMr. McDonald joined NGS as Chief Financial Officer in 2003. Since joining us, he has also been responsible for the administrative functions of the Company. From 1999 to 2003, Mr. McDonald acted as an independent consultant and interim Chief Financial Officer to various companies, predominantly in the petroleum sector. From 1997 to 1999, he served as Chief Financial Officer for PetroAmerican Services, a subsidiary of an integrated NYSE-traded oil and gas company.
Daryl Mazzanti, Vice President for OperationsMr. Mazzanti joined EPM in mid-2005 to oversee all field operations. He previously served Anadarko as Manager of U.S. Business Development. As Production Manager, Austin Chalk for Anadarko and its predecessor, UPRC, he managed 1,300 wells with 65 employees and 25,000 boe of daily production. Mr. Mazzanti previously managed operations in the Carthage Field in East Texas and fields in west and south Texas.
Edward Schell, General Manager of Drilling and Unconventional Resources. Recently joined from Anadarko and brings 24 years of related experience.
Institutional Holders Structure
Rubicon Fund Management $3,481,600 (5.08%) AMEX
River Road Asset Management $4,129,072 (6.03%) Shares Outstanding: 26.70Million
Sterling Johnston $837,120 (1.22%) Market Cap: $79.74
GRT Capital $453,120 (0.66%) Float: 10.14 Million
Ameriprise Financial $757,434 (1.11%) Average Daily Volume: 39.980
Disclaimer:
The information contained in this report is based entirely on information available to the public and has been obtained from the company featured herein, as well as other sources, in each case without independent verification. The information featured herein is considered reliable, but cannot be guaranteed as to accuracy or completeness. The information includes certain forward-looking statements within the meaning of Section 21E of the SEC Act of 1934, which may be affected by unforeseen circumstances or certain risks. The reader is hereby advised to review all SEC filings for a more complete description of the Company's business, including the financial statements and all risk factors set forth therein. By accepting and reading this report, the reader hereby acknowledges that neither VirtualHedge Fund, nor any other affiliate thereof makes any representation, either express or implied, as to the accuracy, completeness, fitness for a particular purpose or future results, of any statement contained herein. NeitherVirtual HedgeFund, nor any of its officers, agents or affiliates, accepts any liability whatsoever for any statements made herein, including without limitation any liability for direct, consequential or special damages of any kind or nature.
