Evolution Petroleum, Denbury Resources settle litigation

Evolution Petroleum Corp. (NYSE MKT: EPM) has entered into a settlement agreement regarding its litigation with Denbury Onshore LLC, a subsidiary of Denbury Resources Inc.  The settlement resolves all outstanding disputes between the parties.  The parties have agreed to this settlement to avoid the costs and uncertainty of continuing litigation with no admission of fault or liability by either party with regard to any of the claims or counterclaims.  Each party dismissed with prejudice all of its claims and counterclaims in the litigation.

Pursuant to the settlement agreement, Evolution will receive a cash payment of $27.5 million on or prior to June 30, 2016, along with other mutual consideration between the parties.  Among such other consideration, Denbury conveyed to Evolution a working interest in the Mengel Upper Glen Rose Sand interval within the Delhi Unit, proportionate to Evolution's 23.9% working interest in the primary Holt-Bryant zones in the Delhi Unit.

The Mengel, similar in reservoir characteristics to the rest of the Delhi Field, was originally part of the Delhi Unit. However, it was separated in title and ownership prior to Evolution's purchase of the Delhi Unit and, therefore, not included in the original transaction between Evolution and Denbury in 2006.  Denbury acquired the Mengel working interest in late 2014. The Mengel has produced approximately 1.4 million barrels of oil and 5 billion cubic feet of natural gas to date from primary and secondary production. It currently does not produce significant amounts of oil or gas, but is believed to be prospective for CO2 enhanced oil recovery.  The timing of joint development of the Mengel by the parties will be dependent on crude oil prices and other economic and technical aspects of the project. Evolution does not expect to immediately record proved reserves for the Mengel.

In the settlement, the parties also reached agreements on other contractual issues related to Evolution's proportionate ownership of the CO2 recycle facility and associated real estate and terms related to long-term CO2 pipeline transportation costs following the late 2019 expiration of the current fixed price arrangement.  In addition, Evolution will convey to Denbury approximately 0.2% of its overriding royalty interest effective as of July 1, 2016.  Following this conveyance, Evolution's combined mineral and overriding royalty interests will be reduced from approximately 7.4% to 7.2%, while its working interest will remain unchanged at 23.9% with a net revenue interest of 19.0%, for a combined net revenue interest of 26.2%.  The settlement further provides Evolution access to certain geological, geophysical and technical information regarding the Delhi Field for its internal analysis and reserves report.

Expected income tax effects
Based on our preliminary calculation of income taxes for the fiscal year ended June 30, 2016, the substantial majority of the cash settlement proceeds are expected to be offset by existing net operating loss and percentage depletion carryforwards.  Accordingly, the incremental cash income taxes related to the settlement are expected to be substantially below the statutory income tax rate.  Further, with the additional income from the settlement, Evolution believes that all dividends paid on both its common and preferred stock for the current fiscal year will be treated as qualified dividends for tax purposes and none of such dividends will be treated as return of capital.

 

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