Empire Petroleum Corporation — Form 10-Q Summary
Reporting period: Quarterly period ended September 30, 2019. The interim financial statements are unaudited. Empire is an oil and natural gas exploration, development and production company and is classified as a smaller reporting company and non-accelerated filer.
Business Context and Reporting Period
During 2019, Empire expanded through acquisitions of producing oil and natural gas properties. In March 2019, it acquired 184 wells in Montana and North Dakota, of which Empire operates 139. In June 2019, it acquired interests in two producing Louisiana wells. At September 30, 2019, management reported approximately 3,500 Mbbls of proved oil reserves and 900 MMcf of proved natural gas reserves.
Net production for the nine months ended September 30, 2019 was 76,687 barrels of oil, 33,555 Mcf of natural gas and 82,280 BOE. The company had two employees at period-end.
Financial Performance and Position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Oil and natural gas sales | $1.70 million in 2019 versus $0.02 million in 2018 | $4.02 million in 2019 versus $0.02 million in 2018 |
| Derivative gain, net | $0.49 million versus none | $0.93 million versus none |
| Total revenue | $2.19 million versus $0.02 million | $4.94 million versus $0.02 million |
| Operating loss | $0.80 million versus $0.21 million | $3.20 million versus $0.65 million |
| Net loss | $0.95 million, or $0.05 per share, versus $0.23 million, or $0.02 per share | $3.54 million, or $0.19 per share, versus $0.71 million, or $0.06 per share |
| Net cash used in operating activities | Not separately provided | $1.00 million versus $0.54 million |
Production expenses, production taxes, depreciation, depletion, amortization and accretion totaled $2.52 million in the third quarter and $5.01 million for the nine-month period. Nine-month general and administrative expense was $3.13 million, including costs associated with acquisitions, capital raises, wages, professional fees and equity-based awards. Interest expense was $0.34 million for the nine months, compared with $0.06 million in the prior-year period.
Average realized prices were $54.03 per barrel of oil, $2.98 per Mcf of natural gas and $51.57 per BOE for the nine months. Nine-month operating costs per BOE were $36.11 for production, $3.15 for production taxes, $21.67 for depreciation, depletion, amortization and accretion, and $38.00 for general and administrative expense. The filing does not provide a clear consolidated gross margin or EBITDA measure.
At September 30, 2019, cash was $18,076 and working capital was $657,168. Total current assets were $2.57 million, including $1.16 million of accounts receivable and $0.78 million of unrealized derivative gains. Total liabilities were $13.67 million, including $8.15 million of notes payable and $3.76 million of asset retirement obligations. Stockholders’ deficit was $1.87 million.
Cash used in investing activities was $6.05 million, primarily for oil and natural gas property acquisitions. Financing activities provided $6.98 million, including $7.88 million of debt proceeds, offset by $1.07 million of principal payments and $0.17 million of stock and warrant issuance proceeds. Ending cash declined by $66,555 from December 31, 2018.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially because the company had only four days of production in the 2018 third quarter, while 2019 reflected a full quarter and the benefit of acquired properties.
- The EnergyQuest acquisition added 184 wells and approximately 375 BOE per day of reported production at acquisition, while the Warhorse acquisition added interests in two Louisiana wells producing approximately 31 barrels per day combined.
- Total oil and natural gas property costs increased from $1.65 million at December 31, 2018 to $10.88 million at September 30, 2019, before accumulated depletion and depreciation.
- Debt increased materially, with long-term notes payable rising to $7.99 million from $1.18 million at year-end 2018. The CrossFirst Bank revolver commitment was increased to $9.0 million and extended to March 27, 2021.
- Derivative gains of $0.93 million were recognized in the first nine months of 2019, compared with none in 2018. The gains resulted primarily from lower oil prices relative to swap contract prices.
- General and administrative expense increased by $2.48 million year over year, in part because of stock options and warrants granted in 2019.
- Common shares outstanding increased from 17.35 million at December 31, 2018 to 19.87 million at September 30, 2019. Three noteholders converted $107,500 of notes into 1.075 million shares during the second quarter.
Guidance, Outlook, Risks and Unusual Items
Management provided no formal production, revenue or earnings guidance. The company intends to pursue additional operated and non-operated oil and natural gas acquisitions and expects to finance acquisitions and working capital through additional debt or equity financing.
Management disclosed substantial doubt-related going-concern considerations: the company has incurred significant historical losses and its continuation depends on achieving profitable operations and/or obtaining additional debt or equity financing. Cash of $18,076 at September 30, 2019 leaves limited immediate liquidity.
The CrossFirst Bank agreement requires compliance with covenants, including minimum trailing-twelve-month EBITDAX-to-interest expense of 3:1 and funded debt-to-EBITDAX of 4:1, as modified in connection with the EnergyQuest acquisition. The filing does not state whether the company was in compliance with each covenant at September 30, 2019.
Asset retirement obligations totaled $3.76 million. The company also had commodity swaps outstanding through August 2021, with oil swap prices ranging from approximately $49.11 to $61.37 per barrel. Changes in derivative fair values are recorded in earnings rather than hedge accounting.
Important uncertainties include commodity prices, reserve estimates, production declines, acquisition integration, access to financing, covenant compliance, environmental requirements and the recoverability of oil and natural gas properties. Legal proceedings were reported as none, and no new risk factors were reported in Part II.
Important Facts for Investors to Verify
- Availability and terms of additional financing needed to support operations, acquisitions and working capital.
- Compliance with CrossFirst Bank’s EBITDAX and funded-debt covenants and the maturity profile of outstanding debt.
- Whether production volumes, realized prices and operating costs can generate positive operating cash flow after acquisitions.
- Valuation assumptions supporting proved reserves, acquired properties and the $3.76 million asset retirement obligation.
- Expected cash settlement and earnings volatility from outstanding oil and natural gas swaps.
- Potential dilution from 5.00 million outstanding options, warrants and other equity-linked instruments, in addition to the 19.87 million shares outstanding.
- Ability to address the disclosed going-concern risk and reduce the accumulated deficit, which was $20.67 million at September 30, 2019.