2024-07-16 10:55:49 ET
Summary
- I calculate a $268M intrinsic value for Evolution in the medium run, based on slightly recovering gas prices. That is $8.16/share.
- Evolution's management knows to buy counter-cyclical assets at depressed prices. Market fears have dropped the stock by 45%.
- Assuming no systemic shocks, Evolution will likely be paying down its debt while paying an 8.80% dividend yield.
Evolution Petroleum Corporation ( EPM ) is an energy small-cap focused on onshore oil and gas in the United States. Its strategy is to build a portfolio of diversified assets by developing and acquiring non-operating interests in several fields across the USA. In the first quarter of 2024, EPM had an average daily production (BOEPD) of 7,209. However, while production has been up 1.7% since last year, prices weighted per unit were actually down 39.3%, destroying margins ( 2024Q3 MD&A, page 33 ).
After recently transitioning towards more oil fields, its reserves are split as follows: 49% natural gas, 32% oil, and 19% NGL (natural gas conversion ratio of 6:1). Evolution's large gas production means it profited heavily on the spike in gas prices but also got hurt by the subsequent crash. Evolution tends to use little hedges, leaving a large upside when gas prices eventually recover....
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Evolution Petroleum: Strategic Management, Ridiculously Cheap Assets, Recovering Gas Prices