EVOLUTION PETROLEUM CORP

As of December 31, 2023 and June 30, 2023, we had no borrowings outstanding on our Senior Secured Credit Facility. As of December 31, 2023, we had $8.5 million in cash and cash equivalents compared to $11.0 million in cash and cash equivalents at June 30, 2023. Our primary sources of liquidity and capital resources during the six months ended December 31, 2023 were cash provided by operations and the unused portion of our Senior Secured Credit Facility. Our primary uses of liquidity and capital resources for the three months ended December 31, 2023 were cash dividend payments to our common stockholders, capital expenditures on our existing oil and natural gas properties, and initial cash consideration paid for unevaluated oil and natural gas properties under our Participation Agreement with PEDEVCO. As of December 31, 2023, working capital was $6.6 million, a decrease of $2.3 million from working capital of $8.9 million as of June 30, 2023.

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. The Senior Secured Credit Facility is secured by substantially all of our oil and natural gas properties and matures on April 9, 2026.

Borrowings bear interest, at our option, at either the SOFR plus 2.80% or the Prime Rate, as defined under the Senior Secured Credit Facility, plus 1.0%. During the six months ended December 31, 2023, we did not have any borrowings outstanding under our Senior Secured Credit Facility. 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, including a hedging covenant discussed below, and events of default. As of December 31, 2023, we were in compliance with all covenants under the Senior Secured Credit Facility.

On May 5, 2023, we entered into the Tenth Amendment to the Senior Secured Credit Facility. This amendment, among other things, extended the maturity of our Senior Secured Credit Facility to April 9, 2026, converted our benchmark interest rate from LIBOR to SOFR plus a credit spread adjustment of 0.05%, and modified the Margined Collateral Value, as defined in the Ninth Amendment to the Senior Secured Credit Facility, to $95.0 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. The required amount of hedged oil and natural gas production is related to the amount of borrowings outstanding. 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. We expect to be subject to these hedge requirements upon the closing of our pending SCOOP/STACK Acquisitions.

We have historically funded operations through cash from operations and working capital and utilized our credit facility for property acquisitions. Our primary source of cash from operations 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 fund near-future capital expenditures with cash flows from operating activities and existing working capital, and as needed from borrowings under our Senior Secured Credit Facility.

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, totaling $50.0 million as of December 31, 2023. 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.

Our Board of Directors instituted a cash dividend on common stock in December 2013. We have since paid 41 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 dividends over time, as appropriate. On February 5, 2024, the Board of Directors declared a quarterly cash dividend of $0.12 per share of common stock to shareholders of record on March 15, 2024 and payable on March 28, 2024.

On September 8, 2022, our Board of Directors approved a share repurchase program, under which we are authorized to repurchase up to $25.0 million of our common stock in the open market 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 a complimentary option to the existing dividend policy and investment opportunities, and is a tax efficient means to further improve shareholder return.

In November 2023, we entered into a Rule 10b5-1 plan that authorizes a broker to repurchase shares in the open market subject to pre-defined limitations on trading volume and price. The plan is effective until June 30, 2024, unless extended, renewed or terminated, and has a maximum authorized amount of $0.8 million over that period. We may alter the terms of the plan from time to time to the extent we determine changes are necessary to achieve the intended objectives of our repurchase program.

Capital Expenditures

During the six months ended December 31,2023, we incurred $5.7 million in capital expenditures. During the current quarter, we participated in the drilling and completion of the initial three wells in the Chaveroo Field. During the first fiscal quarter, we participated in the drilling and completion of two new wells in the Delhi Field. First production at Chaveroo Field is expected in February 2024. Production of the Delhi wells came online in the first fiscal quarter of 2024 and produced consistently in the second fiscal quarter.

Based on discussions with our operators, we expect capital workover projects to continue in all the fields. Overall, for fiscal year 2024, we expect budgeted capital expenditures to be in the range of $10.0 million to $14.0 million, which excludes any potential acquisitions. Our expected capital expenditures for fiscal year 2024 include the two new drilled wells at Delhi Field and three wells at Chaveroo Field, both of which are discussed above. We also expect to start incurring capital expenditures, in the fourth quarter at Chaveroo Field, for the second development block consisting of six horizontal wells. As mentioned inRecent Developments, the Company has entered into three separate definitive agreements to purchase oil and natural gas properties in the SCOOP/STACK plays in central Oklahoma for a combined purchase price of $43.5 million, before customary closing adjustments. Our budgeted capital expenditures discussed above do not include any potential capital projects associated with properties in the SCOOP/STACK Acquisitions.

Funding for our anticipated capital expenditures over the near-term is expected to be met from cash flows from operations and current working capital and, as needed, from borrowings under our Senior Secured Credit Facility.

Full Cost Pool Ceiling Test

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 December 31, 2023 were $78.21 per barrel of oil, $2.63 per MMBtu of natural gas and $31.57 per barrel of NGLs. As of December 31, 2023, our capitalized costs of oil and natural gas properties were below the full cost valuation ceiling. If commodity price levels were to substantially decline from the 12-month average first day of the month pricing levels as of December 31, 2023 and remain down for a prolonged period of time, our valuation ceiling over our capitalized costs may be reduced and 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. Additionally, a 10% reduction in respective commodity prices at December 31, 2023, while all other factors remained constant, would not have generated an impairment.

Overview of Cash Flow Activities

Cash provided by operating activities for the six months ended December 31, 2023 decreased $16.4 million compared to the six months ended December 31, 2022 primarily due to a decrease in revenues. Total revenues decreased $31.8 million as compared to the prior year period primarily due to lower commodity prices coupled with lower sales volumes. Our average realized price per barrel of oil equivalent (“BOE”) decreased $18.37, or 34.1% from the prior year period. Refer to*“Results of Operations”* below for further information.

Cash used in investing activities for the six months ended December 31, 2023 increased $2.8 million compared to the six months ended December 31, 2022 due to an increase in capital expenditures related to the drilling and completion of three new wells in the Chaveroo Field during the current quarter.

Net cash flows used in financing activities for the six months ended December 31, 2023 decreased $21.2 million from the six months ended December 31,2022. In the prior year period, we had repayments totaling $21.3 million of borrowings outstanding under our Senior Secured Credit Facility. For the six months ended December 31, 2023 and 2022, cash dividends paid to our common stockholders were $8.0 million and $8.1 million, respectively.