Crude Oil ( ) Brent Crude ( ) Natural Gas ( ) S&P 500 ( ) PHLX Oil ( )

Evolution Petroleum Corporation (NYSE MKT: EPM) today reported additional detail regarding operating results for the quarter ended December 31, 2014.

Dividend on Common Stock

Last week we declared a quarterly cash dividend payable to common stock at the end of March 2015 in the amount of $0.05 per share. When the board of directors first adopted payment of cash dividends on common stock, the price of oil was fluctuating around $100 per barrel and the board believed that the $0.10 per share dividend rate announced at that time was sustainable within a reasonable level of oil price volatility. Although the board of directors considered hedging a portion of oil sales, that option was ultimately not pursued due to our nonoperating status at Delhi and the uncertainty over the timing of our working interest reversion that ultimately occurred November 1, 2014.

The extreme drop in oil price has reduced expected free cash flow to a level that does not support the previously approved dividend rate, and the new dividend rate is based on our analysis of expected available cash flows.

The long-lived Delhi project is expected to produce oil through and beyond the year 2050, and near term volatility in oil price is not expected to substantially impact our long term value; however, it is a factor impacting near term financial decisions. A material improvement in oil prices and/or a change in the timing of Delhi capital expenditures could be the basis for the board of directors to revisit the dividend rate.  Over the longer term, we continue to believe that growth in our dividend rate is likely, as funded by expected growing free cash flow from Delhi.

Delhi Field Operating Expense

For the quarter ended December 31, 2014, we reported that our 23.9% working interest share of lease operating expense (LOE) for the two months of the quarter following our November 1, 2014 reversion totaled $2.8 million. Following receipt of additional information, we learned that a portion of that expense was due to a high level of CO2 purchases by the operator during the quarter.  The operator has further informed us that volumes of CO2 purchases in the near term are expected to be significantly less than what we experienced in the recent quarter. Our CO2 cost per thousand cubic feet (MCF) is tied to the price of oil and is calculated as one percent of the price of oil received at the field plus a $0.20 per MCF transportation fee. The cost of CO2 is up to 50% or more of our monthly LOE, depending upon oil price.

The portion of LOE that is not related to CO2 purchases nor related to the remediation of the environmental event of June 2013, includes costs related to power, staff, work-overs, repairs and maintenance. These expenses have historically fluctuated from month to month. In the quarter, the portion of our Delhi LOE not related to CO2 purchases was substantially higher than the historical average level.

The table below summarizes our cost analysis of expected LOE per barrel of oil production at various realized oil prices, based on the expected level of CO2 purchases in the near term and the historical level of LOE not related to CO2 purchases. The table illustrates the dynamic between oil price and projected expense. Reserves associated with our working interest are approximately 28% of our Delhi proved reserves as of June 30, 2014.

Realized oil price:

$50

$60

$70

$80

LOE per working interest barrel

$28-30

$30-32

$32-34

$34-36

LOE per barrel including royalty

$20-22

$22-24

$23-25

$24-26

 

Looking Forward

Based on observed market prices, Delhi oil prices for the quarter ending March 31, 2015 are expected to be lower than the quarter ended December 31, 2014, in which we realized an average of approximately $70 per barrel. As noted above, a lower oil price will also reduce our variable Delhi operating expense, partially offsetting the reduction in revenues.

Robert Herlin, Chairman and CEO, said “As the company’s largest non-institutional shareholder, I am very focused on how best to transfer the value we have created to shareholders. Our overall strategy of returning to shareholders free cash flow above the level required to sustain our expected capital expenditures has not changed, and our primary operating objective has been, and will continue to be, growing and protecting our Delhi asset.

“While the artificial lift business today does not provide material operating margin, we continue to believe that it offers the potential for growth in the future. Given its low capital requirements, our artificial lift business provides strong upside without diverting capital from our foundation Delhi asset.

“In the past, I have often been asked by shareholders when we would attempt to find another Delhi, and have usually replied that the unique circumstances leading to the original acquisition of the field would be difficult to replicate. Any acquisition that we might consider must meet our strict criteria, including being a good fit with our particular expertise, diversify our revenue base, add reserves at no less a discount to market value than our own reserves, and add considerable upside at modestly higher commodity prices. Any such transaction would have to be accretive to cash flow and value per share, and support future increases in dividends.”

Randy Keys, President and CFO, added “We continue to look for ways to reduce costs and expect that future quarters will reflect that effort. It is important to note that the company enjoys a debt-free balance sheet, and we are well positioned to endure a prolonged period of relatively low commodity prices.”

About Evolution Petroleum

Evolution Petroleum Corporation develops incremental petroleum reserves and share­holder value by applying conventional and specialized technology to known oil and gas resources, onshore in the United States. Principal assets include interests in a CO2-EOR project in Louisiana’s Delhi Field and a patented technology designed to extend the life and increase ultimate recoveries of depletion drive oil and gas wells. Additional information, including the Company’s annual report on Form 10-K and its quarterly reports on Form 10-Q, is available on its website at www.evolutionpetroleum.com. Additional information regarding GARP® is available on the www.garplift.com website.

Cautionary Statement

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