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SCOOP/STACK Acquisition Supportive of Dividend Strategy

Evolution announced a $43.5 million acquisition of non-operated working interest in the SCOOP/STACK unconventional development play in central Oklahoma on January 9, 2024. Our modeling suggests the accretive acquisition supports Evolution’s free cash flow profile and its dividend, which is a critical element of management’s total shareholder return strategy. The properties include ~1,550 BOE/d of production from ~230 producing wells on ~3,700 net leasehold acres as of the November 1, 2023, effective date. Production was 42% oil, 43% natural gas, and 15% NGLs. As of the effective date, 22 gross wells were in process, including 21 awaiting completion (seller is responsible for costs through completion). Thirteen of the wells had been completed and were producing by the announcement date on January 9, 2024. Asset operators include Continental, Ovintiv, EOG, Marathon, and Gulfport. The acquisition further diversifies Evolution’s asset base and supports management’s goal of increasing its exposure to organic volume growth opportunities. Management estimates the acreage supports more than 300 gross undeveloped drilling locations with an average working interest of ~3% (~76.3% LNRI). Together with the strategic development partnership covering the Chaveroo field in the Permian Basin, announced in September 2023, Evolution has added undeveloped drilling opportunities that add incremental capital allocation options to complement management’s goal of seeking the best alternatives to support shareholder value. Alternatives include some combination of growing the dividend, organic development, producing property acquisitions, and debt reduction. The $43.5 million purchase price is subject to customary closing adjustments and will be funded with available cash and borrowings under the existing RBL credit facility. Pro forma leverage is expected to remain well below management’s targeted leverage ratio of 1.0x adjusted EBITDA. Closing is expected in mid-February 2024. Pro forma production is expected to tilt more toward oil. Oil accounts for 42% of the ~1,550 BOE/d production attributable to the SCOOP/STACK assets on the effective date. Oil accounted for 29% of Evolution’s 1QFY24 production of 6,451 BOE/d. Between the acquired volumes and a contribution from the Chaveroo program, we estimate oil could account for ~35% of FY25 production. We have updated our model to reflect the pro forma impact of the SCOOP/STACK acquisition, reflecting a March 1, 2024, close. Our FY24 and FY25 adjusted EBITDA estimates are $30.9 million and $46.7 million, respectively. Our estimates incorporate natural production declines in FY24 before the contribution from the SCOOP/STACK and Chaveroo assets are expected to grow volumes in 2HFY24 and FY25. Evolution is trading at 7.3x and 4.8x our updated FY24 and FY25 estimates and an 8.4% dividend yield.