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Executives

Lisa Elliott – IR

Robert Herlin – Chairman, CEO and Co-founder

Sterling McDonald – CFO

Analysts

Neal Dingmann – SunTrust

Dick Feldman – Monarch Capital

Evolution Petroleum Corporation (EPM) F2Q2011 Earnings Conference Call February 10, 2011 11:00 AM ET

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Evolution’s Second Quarter of Fiscal 2011 Earnings Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator Instructions) This conference is being recorded today Thursday, February 10, 2011. I would now like to turn the conference over to Lisa Elliott of DRG&L. Please go ahead ma’am.

Lisa Elliott

Thank you, Brandy and good morning everyone. We appreciate you joining us for Evolution Petroleum’s conference call to discuss results for the second quarter of fiscal 2011 which ended December 31.

In a moment I’ll turn the call over to management. But first I do have the regular items to go through. If you’d like to be on the company’s e-mail distribution list to receive future news releases, please feel free to let me now. My contact information is in the earnings release that the Evolution put out this morning. If you wish to listen to the replay of today’s call, it will be available in a few hours and archive for one year via webcast by going to the Company’s Web site at www.evolutionpetroleum.com or via recorded telecom replay until February 17, 2011. And that dialing number and pass can also be found in the earnings release.

Information reported on the call today is valid only as of today, February 10, 2011 and therefore time sensitive information may no longer be accurate as of the date of any replay.

Today management is going to say certain topics that may contain forward-looking information, which are based on management believes as well as assumptions made by management and information currently available to them.

Forward-looking information includes statements regarding expected future dealing results production and expenses. Although management believes that these expectations reflect in such forward-looking statements are reasonable they can get no assurance that such expectations footprint to be correct. Such statements are subject to certain risks and uncertainties and assumptions, which are listed and described in the company’s filings with the Securities Exchange Commission. If one or more of these risks materialize or should underline expansions to prevent correct actual results may differ materially from those expected.

Also, today’s call may include discussions of probable or possible reserves or use terms like volumes, reserve potential or recoverable reserves. Please note that these estimates are non-proved reserves or resources all by their very nature more respectively different estimates of proved resources and reserves and accordingly, our subjects – greater risks. Now with that, I would like turn the call over to Bob Herlin Evolution’s Chief Executive Officer. Bob.

Robert Herlin

Thanks, Lisa. Please excuse, I’ve got a cold today as my voice (inaudible). Good morning to everybody and thank you for joining us today. As Lisa mentioned, this morning we released our financial operating results for the fiscal second quarter. So we’re just going to review some of the key events and numbers and projects. Sterling McDonald our CFO will provide some additional information on the financial number and then will take the question.

In the second quarter, we focused on continuing the development of our field acreage under our joint venture. We also drilled our first well in the mid-depth Haskell County, Oklahoma Shale project. We further benefited from the growing production at Delhi, which is continuing strongly as we enter calendar 2011.

As we bring on new productions in the Giddings Field in the Haskell County, Oklahoma over the next few weeks and as our Delhi production continues to grow, our cash flow and bottom line should improve substantially, obviously subjected to commodity prices.

Now, let me give an update on our various projects. At Delhi, we realized a 37% increase in production volumes. They totaled 6266 net barrels of oil in second quarter as more of the producer wells in initial Phase I respond to injected CO2, these volumes continue to grow and we expect to see much higher sales volume in Q3 based on production today that we’ve seen in Q3 of ‘011.

We are also pleased that the first CO2 injections in Phase II began in late December. The Phase II is more than doubled the size of Phase I in terms of total number of wells. We should see production as far as for the Phase II later this year. Phase III, which is similar in size of Phase II is being installed in the field down to 2011 and the remaining two Phases IV and V will similarly follow. Our independent reservoir engineer has agreed with us but there is a good potential for expanding the project other reservoirs within the year. As previously announced we have 9.4 million barrels of approved reserves and 5.7 million barrels of probable reserves obviously all 100% oil and a third of that is coming from our non-cost-bearing royalty interest. We currently expect not to bear any capital expenditures associated with accrued reserves. At Giddings Field, our production experienced normal decline, first what has been a temporary loss of production from one well. The overall production from the 10n wells was about 51% oil and natural gas liquids.

In our joint venture – our joint project we have now filled three wells. One well was just put on production and another should be connected sales volume shortly and third is still producing back the water. As I mentioned in the past we have found that best (inaudible) Burleson and Grimes and the Chalk and Georgetown formations as the portfolio we typically have a range of results, good wells there and four wells so we’d to like to evaluate the program. So let’s review those wells today so far. In September, we drilled the – which is a reentry operation of single 4100 lateral (inaudible). During drilling, we lost an unusually large volume of water to the formation from our drilling. Whilst it’s common to have the flow back 20% to 25% of that lost water we’ve now produced back over 30% and we’re still – that water. As a result, we now have minimal expectations for this well.

In contrast, during second quarter, we drilled the (inaudible) number one well, a well with two closing laterals of 3200 feet and 4360 feet in the Georgetown formation in northern Grimes County. To meet the volume completion we did our normal well bore clean our operation, which gave us a very strong potential production rate in pressure. Production is expected to begin in February in the next week or two subjected to completion of our flow on connection – two different gas gatherers in our existing saltwater disposal well. It’s important to note that, we have four other development locations on leasehold around its well.

In December, we drilled our third well the Lightsey-Lightsey in Brazos County with a single 4560 foot lateral with a Buda formation. Keep in mind all of these formations we’ve talked at Georgetown Buda are all naturally fractured, therefore we don’t have to put in artificial fraction. The Lightsey only requires a short gas gathering pipelines that we are able to get it on production in early February.

Currently it’s producing a pipeline constraint for the average rate of 1.3 million cubic feet for 124 barrels of oil per day. The gas being produced is very rich (inaudible). So the overall production is very oily. Now our share of capital expenditures for the two wells in port program, today is about $700,000. However, we paid about 10% of costs. Our JV partner is awaiting production results from these two wells before making an elections to participate here (inaudible) there are many few option wells.

We are also exploring opportunities and entering to second JV to develop the remaining drilling locations that we have in this program. That would require increase our planned capital expenditures subject to what we have terms with JVR.

Our goal is to get up production volumes in the Giddings Field moving back up both with the contribution new protection from joint venture wells, but also putting our best producer today that Pearson back to production.

In November the Pearson we believe was impacted by influx of drilling fluid water lost during the drilling of our nearby joint well. We believe that production extends favorably it has products as the way established in the Pearson well maybe in the fall (inaudible) upon production.

In Oklahoma we’ve been primarily focused on our first test of the mid depth Woodford Shale, Haskell County where we have over 8100 net acres. We completed a re-entry into the John Wells #1 at about 5100 depth and successfully established good production. We’re currently installing a short gathering pipeline connection to expect the (inaudible) gas deals later this month. As we previously announced our first three tests in this leasehold are being conducted by re-entering existing wellbores which states part of their comp. These vertical wells do not require large flat inconsequently total well costs are less than $500,000 for brand new well.

You have to ask for this re-entry to expect the production expect to be very economic even at current gas prices. Our 8100 (ph) net acreage positions spreads over 30 section. Given its potential exposure to more than 18,000 gross acres for development (inaudible). We also are engaged in utilization of our second location in Haskell County. We expect to begin that re-entry work at March. Utilization process allows us to postpone additional acreage and thereby increase our leasehold position while holding the leases of reproduction. And in the Wagoner County, which is the shallow Woodford play. We continued our production test in Limon #1 to extensive dewatering operation which lowers the reserve pressure and which allows the gas to flow, Limon is the Eastern most block of our for acreage market. Today we had a good test in our Western most block they are just with Southern block was (inaudible) didn’t work as well as well we like based on results there we are selectively allowing certain leases to expire without excising our new option.

In the artificial lift technology effort we are continuing our extended negotiations for our first joint venture application of our technologies. The third party we are working with has identified two wells to be tested and is working internally to complete the joint venture details but as we previously reported progress has been hour slower than we expect or even desire. We recently entered into early stage discussions with few of the operators to buy this technology in Giddings field and expect to buy (inaudible) more well and fully owned well later this year.

And with that I am going to turn it over to Sterling.

Sterling McDonald

Thanks Bob, Let me just say that the big picture here is that our losses are narrowing with fiscal Q2 the current year having above 34% in prior year’s quarter.

I think the financial results are fairly summarized in the first section in our press release, so I won’t bore you by reading it, but I think the big picture is this. First of all, our losses are narrowing and as I said, showing a 34% improvement from the prior year’s quarter.

Secondly, our field income is improving as lower production is more than offset by lower field expense and higher product price. On this point, we expect that production is at (inaudible) and as we look forward to new production coming online and giving and serious ramp ups beginning at Delhi.

Three, our cash G&A remains basically unchanged and that’s true for many sequential quarters. Fourth, our cash flow from operations before changes in working capital has remained modestly positive, as you probably know and looking at this metric, we have doubled on both sides of the positive and negative line, but pretty much been a break-even for I have to go back and look that I imagine it’s been four, two or three years now. Due to the nature of our royalty production increases Delhi will fall straight to the cash register on our free tax bottom line helping our cash flow from operations tremendously.

Our balance sheet is strong with no debt and although our working capital is strong it’s been due to the additional investments in our business and not as a result of our burns (ph) due to overhead. Working capital is $3.2 million on December 31st when compared to 4.9 million on June 30, 2010, out of the 2.3 million of capital expenditures that we incurred during the six months ending December 31, 2010. About 765,000 was for leasehold acquisitions and about a million and a half was for development activity.

Looking forward, assuming field income continues its improvement, working capital should also be at a relative bottom allowing us to complete the current year’s capital program from our own sources of capital and hopefully building working capital modestly along the way. Obviously though, there is little room for additional capital expenditure until operating correction takes hold further or additional sources of financing are obtained.

I would like to also point out that unlike many of our competitors; we’ve never experienced to write down our cost goal. We know that such charges are dismissed through their non-cash nature, but when overlooked to results in the depletion rate that is charged short of full cycle finding and development cost. In our case, we’ve been very fortunate in being extremely capital efficient resulting in low depletion rate in the $4 plus range that is pure inductive of our historical full cycle F&D cost. In our business $15 and the respectable bogie especially when speaking of a portfolio that consists of 90% or more of liquid touches out (ph).

In summary, financials in life were never perfect but financials in life were pretty good here at Evolution Petroleum.

I’ll now turn the call back to Bob.

Robert Herlin

Thanks Sterling. We are quite pleased, extremely pleased that production volume to go high or rapidly increasing in phase I. In addition, (inaudible) is now meeting the first of the large scale expansion phases. Initial results from our JV drilling program in Giddings in aggregate are attractive so far. As a result we think that our next quarter results will be substantially improved both in volumes and revenues and also in the bottom line assuming current prices go up. In addition in the second half of fiscal year we should start realizing meaningful contributions from our Haskell County property.

With that we’re ready to take questions. Operator, please open the line for questions.

Question-and-Answer-Session

Operator

Thank you sir. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from the line of Neal Dingmann with SunTrust. Please go ahead.

Neal Dingmann – SunTrust

Good morning guys. Nice quarter.

Robert Herlin

Hi Neal.

Neal Dingmann – SunTrust

Say Bob just wondering that the Woodford Shale when you talked a little bit on Haskell County as far as the force pool I’m wondering what kind of acreage we’re talking there you could increase with that and you know what you see in other potential acreage pieces you could sort of add on around that as well.

Robert Herlin

Sure. Like I said, our – we have 8100 net acres there, but that’s spread over 30 sections. So a section being 640 that adds up to about 18, 19000 co-acres that we could force our way into, so that would add in those 10 to 11,000 acres potentially. Now some of that will participate in the working, but probably the majority I would think was to end up leasing to your under terms that are specified by the core that is overseen in these deduction process. So, it’s – I think it’s a reasonable target to say we could look at possibly doubling our acreage position and it lead very attractive.

Neal Dingmann – SunTrust

Okay. And then over the (inaudible). It sounds like I think you understand that, I understand I guess the big issue ahead with the one well. What is sort of the plan I guess if you laid out for the rest of the year, how many wells do you anticipate drilling or how many rigs do you anticipate working there for remainder of the calendar year.

Robert Herlin

Sure. Well our JV allows for up to two more wells, the partner has right to select the two locations that they want to do, if they do at all obviously they have the right to participate. Our CapEx budget assumes that we will drill two more wells in that program given that our fiscal year is just the June 30, I would think that it is unlikely we will do more than those two unless we did start up a new JV which is something that we are certainly working very hard to make happen.

Neal Dingmann – SunTrust

Got it. And then just two more questions, I could on Delhi that Sterling’s point as far as when that, I guess, really starts ramping up and drops immediately to the bottom line, have you started thinking about I guess now that the time is becoming closer plans with that cash given you have no debt on the balance sheet and I mean is it just look at acquisitions is it look at what you have and continue to expand your drilling obviously beside the pull we were talking about the prior questions. I’m just wondering about your thoughts now that we are getting closer to that point?

Robert Herlin

Well, it’s somewhat difficult for me to start getting too (inaudible) on that kind of topic, because that’s something that the Board of Directors gets to weigh in on obviously. The initial part is that is why we have these other projects just to give us a large pool of development drilling opportunities that are close to factory type approach particularly out of Haskell County that potentially could be over – well over 100 locations to drill at very, very low cost gas. We do have these additional things or shale locations (inaudible) getting. That would be unusual cash over the next year or two. We’re fairly confident and have to be careful about this, because it seems like it’s taken all the (inaudible), but do you think that this artificial lift technology has got a lot of potential we just have to get to the hurdle of getting demonstrated and the other work with a large public company before – internal politics can be very tough to get through this. So that’s what we’re doing, we’re waiting to do all these issues. But we think that’s how our potential, which is in that’s hundreds of these applications. Just I’m giving (inaudible) loan. So we think that we have a fair range of opportunity to deploy capitals very efficiently and very accreditively in value to the shareholder. One thing we’re not going to do is, just because we have cash, go out and – that’s one of the reasons why we like to point out that employees own 20% of the company on a beneficial basis. Everything we do we look at and say, okay, it’s coming to my pocket. It is what I do with my own money and so we are very careful in all these projects that we do.

Neal Dingmann – SunTrust

Okay. And then last, we’ve got a good (inaudible) into as far as that artificial lift technology in the press release that does talk about, the first joint venture application. I’m just wondering how do you go about or what is the sort of compensation structure going to look like or is that still being determined you mentioned all these potential under so potential applications. I just want to know, do you work that out with each partner be separate is or kind of a mythology or how will that be worked out. I guess I’m not, necessarily doubting the technology as much just curious about the payment structure.

Robert Herlin

Well, that is something that’s for negotiation. People are very reluctant as you might imagine to stand over mineral right for some of the (inaudible) about. So early stage we more unlikely are going to be doing a case of installing the technology in exchange for a field barrel or yet process type right contractual right just for a demonstration. And now whether or not that is in the case going forward I am not I can’t tell you, ideally, what we are doing is we are looking at wells that are at the low end of their productive life, it typically made of fair amount of reserves but they are now approaching the marginal type of operation. And so what we are doing is adding incremental substantial reserves compared to what they are and we think that has – adds a lot of value. If we can add 20, 30, 40,000 BOE of reserves per well for $5 a BOE in the ground we believe that that has a lot value. I think the other side is contributing a minimal interest than a wellbore and facility the pump in the other tanks (inaudible). So that I will ask to value into it. We tried to approach it, that it’s kind of a contribution of they contribute the (inaudible), contribute the facility, we contribute the technology in the cost of explorations and then we kind of share the benefit of that. That is obviously it’s going to be a case where I should start with negotiations where the deal would be good for. Some of them employ for those fees, some of them are participation they will just vary.

Neal Dingmann – SunTrust

Got it, got it. Thanks guys, nice quarter.

Robert Herlin

Thank you.

Operator

Thank you. (Operator Instructions). And your next question comes from the line Dick Feldman with Monarch Capital. Please go ahead.

Dick Feldman – Monarch Capital

Good morning guys.

Robert Herlin

Hi Dick.

Dick Feldman – Monarch Capital

No mention was made of the project you had in Texas.

Robert Herlin

South Texas.

Dick Feldman – Monarch Capital

Yeah. What is the status of that?

Sterling McDonald

Right, that is our Neptune project. We finally in the first quarter – late in first quarter actually in November, finally got our permit from the State to allow us to dispose the water that we’ve had attending for many, many months which allowed us to restart production, which we did. Allow us to start our production test, the first producing well (inaudible) making about 2 barrels a day, which is far less than what we were expecting.. So, I think as I mentioned earlier in our last call, we’re just being very careful on that project, we don’t want to go throwing a bunch of money until we look for shale it’s worth it. Since the initial results are limited, we’re going to just continue to produce that well and see if that cleans up just getting (ph) better. In the meantime I’m not put any more capital into that project, in fact some of the outline leases what we are laying expires.

Dick Feldman – Monarch Capital

Okay.

Robert Herlin

And just builds the core lease.

Dick Feldman – Monarch Capital

And going to Haskell County, you said that you start depending upon the results of the unitization, that you could have as much as 100 locations. Would you be able to give us what you’re finding costs would be or roughly what that reserves potential would be with that?

Robert Herlin

It’s really early on. Anything I gave you now would be – as my (inaudible) on this breath purely speculative. Perhaps you know we’re looking to try and get it less than an hour.

Dick Feldman – Monarch Capital

Okay.

Sterling McDonald

And even at current product prices that could be an attractive investment opportunity even though it’s not popular right now in the market.

Dick Feldman – Monarch Capital

Because it’s a – natural gas is not profitable?

Sterling McDonald

That’s right.

Dick Feldman – Monarch Capital

Okay

Sterling McDonald

These wells – ongoing cost is 400,000 to 500,000 at least. They don’t require big flat (inaudible) required much at all. We’ve had some kind of unique wire handling facilities that we’re installing that made us to think of the working grade that helped to drive down the operating cost, which is always in this area is a big issue is how you handle the water and people to have to hold the water off at one and $2 a barrel quickly give up on the project because the operating expenses we think we’ve got a way and have started demonstrating that to ourselves that we can handle that water for a very small fraction of that cost, which then opens up this opportunity.

Sterling McDonald

How would you know that this is a relative business in terms of what’s spend for what you get and we’re really in different as to what the products are as long as the relationship between F&D operating and product prices are.

Dick Feldman – Monarch Capital

Sticking again to the Woodford and Wagoner County, you’ve talked about some point within the southern part of the acreage do you think you will go ahead in the other part or is it still you don’t have enough data to –

Robert Herlin

Well we are continuing our testing, as I said, we had four blocks all together, our western block, southern block, eastern and northern. The western block tested great, it was a spectacular win for us. Then we went to the southern block and that did not work out very well. And now on the eastern block and we have got that well testing and going on and it is too early to make termination but it is not going as south block. We have not tested the northern block yet. Until we have a real good handle as to what works and why it works it is hard to spend the lifetime (inaudible) up there. And so, what we are doing is what we are making sure we keep our leasehold together around the areas that worked unless so in the areas we don’t work. We don’t work today.

Dick Feldman – Monarch Capital

You mentioned earlier in the call that I think you spent about 750 odd, but more than 60,000 on leasehold. Where – with those expenditures in new areas that you’ve not mentioned yet or are they in existing areas?

Robert Herlin

It’s mostly in existing areas, primarily in lease renewals and maybe taking up odd ends of places around existing projects and so forth. There is roughly existing areas.

Dick Feldman – Monarch Capital

Okay. Well, thank you and keep up the good work.

Robert Herlin

Thanks, Rick (ph).

Operator

Thank you. (Operator Instructions). And we do have a question from the line of Mike (inaudible) with Global Hunter Securities. Please go ahead.

Sterling McDonald

Hi, Mike.

Unidentified Analyst

Just a quick question for you guys. In the Giddings field, you guys did about 16,000 barrels this quarter 21,000 in the first quarter. Did you think you guys to get a backup to that 20,000 barrel – third and fourth quarter?

Robert Herlin

Our production should be substantially improved, because the wells we’re bring on from the JV program plus the fact we’re getting can appears from back online and it start contributing. So, I’m not – can say exactly what kind of the target number, but we should see, I would think we should see I would think – we would see a substantial increment in Giddings in the third and fourth quarter.

Sterling McDonald

Especially the fourth, we are already halfway through the third quarter and the new production not on line yet and there is some test look alike it starting to come back. So, we don’t have a half quarter to work with right now. I think from an overall standpoint we will probably see some pickup at Delhi that will help the numbers in the third quarter at the fourth quarter we are yet to see more contribution for Giddings.

Unidentified Analyst

Okay, great and that Pearson well what was that producing before you guys encounter those challenges?

Robert Herlin

It was making about 15 barrels and about 500 Mcf a day.

Unidentified Analyst

500 Mcf? Okay perfect. All right guys thank you very much.

Operator

Thank you and at this time there are no further questions. I’d like to turn the call back over to management for any closing comments.

Robert Herlin

Thank you for listening this morning and supporting the company and feel free to give us a call any time and we will be happy to tell any of the publicly available information to you. Thanks again.

Operator

Ladies and gentlemen this concludes the Evolution Second Quarter and Fiscal 2011 Earnings Conference Call. If you’d like to listen to a reply of today’s conference please dial 303-590-3030 followed by a pass code of 4406348. ACT would like to thank you for your participation. You may now disconnect.

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