Empire Petroleum Corporation: Q2 2022 Form 10-Q Summary
Business Context and Reporting Period
Empire Petroleum Corporation is an independent energy company focused on optimizing developed oil and natural gas production through field management, production enhancement, and cost control. The unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Empire operated through eight wholly owned subsidiaries across North Dakota, New Mexico, Texas, and Louisiana. The company remained a smaller reporting company and was listed on NYSE American under the symbol EP. Common shares outstanding were 21,685,047 as of August 15, 2022.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 |
|---|---|---|---|---|
| Total revenue | $16.5 million | $4.7 million | $29.6 million | $6.8 million |
| Operating income | $5.8 million | $(2.1) million | $9.6 million | $(2.9) million |
| Net income | $5.5 million | $(5.3) million | $9.2 million | $(6.3) million |
| Operating margin | 35.2% | $(43.8)% | 32.3% | $(43.0)% |
| Net margin | 33.5% | $(111.7)% | 30.9% | $(92.0)% |
| Net cash from operating activities | Not separately presented | Not separately presented | $11.0 million | $(2.5) million |
- Second-quarter product sales were $16.5 million, consisting primarily of oil sales of $13.3 million, gas sales of $1.4 million, and natural gas liquids sales of $1.8 million.
- Six-month product sales were $29.7 million before derivative losses and other revenue items. Net realized and unrealized derivative losses were $23,893 in the second quarter and $136,214 for the six-month period.
- Second-quarter net income increased by $10.8 million year over year; six-month net income increased by $15.4 million.
- Production increased to 195,207 BOE in the second quarter and 383,162 BOE for the first six months, compared with 103,913 BOE and 153,616 BOE, respectively, in the prior-year periods.
- Average realized oil prices, including applicable derivative effects, were $108.62 per barrel in the second quarter and $100.69 for the six-month period, compared with $58.54 and $54.71 in the prior-year periods.
- Operating costs increased with production growth. Six-month operating expense was $10.7 million, production taxes were $2.0 million, and depreciation, depletion, amortization, and accretion were $1.6 million.
- Cash increased to $12.4 million at June 30, 2022 from $3.6 million at December 31, 2021. Working capital increased to $10.7 million from $1.1 million.
- Six-month investing cash outflows were $4.3 million, including $2.2 million for oil and natural gas property acquisitions, $1.2 million for property additions, and a $640,000 sinking-fund deposit.
- Six-month financing cash inflows were $2.1 million, including $3.0 million from option and warrant exercises, partially offset by $922,000 of debt principal payments.
Debt, Liquidity, and Balance Sheet
- Total notes payable were $8.2 million at June 30, 2022, including $6.5 million under the senior revolver, $1.3 million under the related-party PIE term loan, and $426,000 of equipment, vehicle, and insurance-related notes.
- The senior revolver had a maximum borrowing capacity of $20.0 million, an existing commitment of $7.1 million, and approximately $300,000 of availability at June 30, 2022. The facility matures March 27, 2024 and bears interest at Wall Street Journal Prime plus 1.5%, or 6.25% as of June 30, 2022.
- Management stated that the company was in compliance with its debt covenants at June 30, 2022.
- Total liabilities were $41.3 million, including $21.4 million of asset retirement obligations. Stockholders’ equity was $22.8 million, compared with $9.8 million at year-end 2021.
Material Changes Versus the Prior Comparable Period
- Revenue and production rose substantially due to the full-period contribution from the New Mexico XTO properties acquired in May 2021, increased production from legacy assets, well-recompletion efforts, and favorable commodity prices.
- Six-month BOE production increased approximately 150%, while second-quarter BOE production increased nearly 90%.
- Operating expenses and production taxes increased with higher volumes and the New Mexico acquisition, but margins improved significantly because revenue growth exceeded cost increases.
- Interest expense declined 92% for the six-month period, primarily because of a lower credit-facility balance and the absence of significant prior-year convertible-note-related expense.
- The company acquired North Dakota producing properties in April 2022 for approximately $1.4 million and assumed $233,659 of non-cash asset retirement obligations.
- Common shares increased from 19.8 million at December 31, 2021 to 21.4 million at June 30, 2022, principally from option and warrant exercises. All remaining warrants to purchase approximately 202,000 shares at $2.00 per share were exercised by July 10, 2022.
- The company completed a one-for-four reverse stock split effective March 7, 2022, with share amounts retrospectively adjusted in the filing.
Guidance, Outlook, Risks, and Unusual Items
- Management expects additional capital expenditures and future oil and gas acquisitions. These activities are expected to be funded through operating cash flow, additional debt, and/or equity issuances; no formal production or earnings guidance was provided.
- Management expects stock-based compensation to continue for employees, management, directors, and consultants.
- The company uses WTI put options to manage commodity-price exposure. Outstanding contracts at June 30, 2022 covered portions of production through 2023, with stated floor prices ranging from $48.74 to $60.00 per barrel.
- A Texas sales-tax audit created a potential exposure of approximately $1.3 million. Empire accrued $650,000 and intends to seek redetermination; the final amount may be higher or lower.
- Asset retirement obligations increased to $21.4 million and represent estimated future plugging, abandonment, and environmental remediation costs.
- Management stated that the company has incurred significant historical operating losses and may need additional financing to sustain and expand operations. Commodity prices, production declines, acquisition execution, competition, environmental regulation, and access to capital remain material risks.
- Disclosure controls and procedures were determined to be ineffective at June 30, 2022 because of insufficient accounting resources and an existing internal-control weakness. An outside company was conducting an internal-controls review expected to conclude in the third quarter of 2022, while enhanced controls were being implemented.
- Management stated that no legal proceedings were expected to have a material adverse effect, and no material environmental liabilities were identified as of the balance-sheet date.
Important Facts for Investors to Verify
- Verify whether high commodity prices and the New Mexico acquisition continue to support production, revenue, and margins after the reporting period.
- Monitor liquidity because the filing reports only approximately $300,000 available under the credit facility despite $12.4 million of cash.
- Review senior-revolver covenant compliance, borrowing availability, maturity terms, and required commodity hedging.
- Assess the final outcome of the Texas sales-tax audit and the adequacy of the $650,000 accrual.
- Evaluate the $21.4 million asset retirement obligation and future plugging, abandonment, and remediation requirements.
- Track dilution from exercised warrants, outstanding options, stock-based compensation, and any future equity financing.
- Review remediation of the ineffective disclosure controls and internal-control weakness.
- Confirm final settlement of the approximately $400,000 receivable related to the XTO acquisition.