Empire Petroleum Corporation — Form 10-Q Summary
Business Context and Reporting Period
Empire Petroleum Corporation is an oil and natural gas exploration and development company. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, with comparisons to the corresponding 2020 periods. The company had 33 employees and 74,323,764 common shares outstanding at September 30, 2021.
Financial Performance and Position
| Metric | Q3 2021 | Q3 2020 | Nine Months 2021 | Nine Months 2020 |
|---|---|---|---|---|
| Total revenue | $10.1 million | $1.5 million | $16.9 million | $6.0 million |
| Operating income (loss) | $2.3 million | $(1.6) million | $(0.6) million | $(3.9) million |
| Net income (loss) | $(3.7) million | $(1.6) million | $(10.0) million | $(3.0) million |
| Net loss per share | $(0.06) | $(0.07) | $(0.19) | $(0.14) |
| Operating margin | 22.8% | (106.4%) | (3.7%) | (65.7%) |
| Cash flow from operations | Not separately provided | Not separately provided | $0.6 million | $(2.0) million |
Q3 revenue growth reflected higher production, improved commodity prices, and inclusion of the XTO properties for part of the period. Nine-month revenue included $13.9 million of oil sales, $1.5 million of natural gas sales, $1.9 million of natural gas liquids sales, and a $0.6 million net derivative loss.
- Q3 production totaled 192,303 Boe, compared with 54,938 Boe in Q3 2020. Nine-month production totaled 345,920 Boe, compared with 138,648 Boe.
- Q3 average realized price was $50.11 per Boe versus $33.72; the nine-month average was $50.10 versus $37.34.
- Cash was $3.2 million at September 30, 2021, compared with $0.2 million at December 31, 2020. Current assets were $11.7 million and current liabilities were $9.9 million.
- Total debt was $13.9 million gross and $10.7 million net of discounts and issuance costs; long-term debt was $9.5 million. Asset retirement obligations were $20.8 million.
- Stockholders’ equity improved to $3.7 million from a deficit of $18.4 million, primarily due to substantial equity issuances and debt conversions, despite the year-to-date net loss.
Material Changes Versus the Prior Comparable Period
- The May 2021 acquisition of XTO oil and natural gas properties in New Mexico had a purchase price of $17.9 million and materially increased production, assets, operating costs, and asset retirement obligations.
- Oil, natural gas, and other product sales increased to $10.1 million in Q3 from $1.6 million and to $17.5 million for nine months from $4.0 million.
- Operating expenses increased with production and acquired assets, while operating income improved in Q3 but remained negative for the nine-month period.
- Interest expense increased to $4.5 million in Q3 and $7.4 million for nine months, primarily from convertible-note discounts and related financing costs.
- The company recorded no oil and gas property impairment in 2021, compared with an $0.8 million impairment charge in the first nine months of 2020.
- Derivative results shifted from a $2.0 million gain in the first nine months of 2020 to a $0.6 million loss in 2021.
- Common shares outstanding increased from 24.9 million at December 31, 2020 to 74.3 million at September 30, 2021 through warrant exercises, equity issuances, and debt conversions.
Debt, Liquidity, Outlook, and Risks
Operating cash flow was positive at $0.6 million for the first nine months, but investing activities used $22.7 million, including $17.9 million for oil and gas properties and $4.3 million deposited into a sinking fund. Financing activities provided $25.1 million through debt and equity financing. Management stated that it expects available funding sources to meet 2021 liquidity requirements, but provided no assurance that future funding will be adequate.
- The senior revolver had a $7.4 million balance, a $20.0 million maximum facility size, and a March 2024 maturity. The company reported compliance with its debt covenants at September 30, 2021.
- In September 2021, $6.5 million of secured convertible debt was exchanged for shares and warrants. The remaining $5.7 million principal was extended to June 30, 2023 and may be settled in cash or common stock at the lender’s discretion at maturity.
- Management intends to pursue additional operated and non-operated oil and gas acquisitions, expected to be financed through debt or equity transactions.
- Commodity prices, production declines, acquisition execution, derivative coverage, environmental obligations, and access to financing remain significant risks.
- The company has incurred significant cumulative losses and stated there is no assurance it will achieve profitability or obtain sufficient financing to continue and expand operations.
- COVID-19-related demand, price volatility, production curtailments, storage constraints, and possible effects on debt covenants remain identified risks.
- The company agreed to use commercially reasonable efforts to separate Green Tree New Mexico in a stockholder spin-off by December 31, 2022; the liquidity effect is uncertain.
- Disclosure controls and procedures were assessed as not effective because of limited accounting resources and insufficient segregation of duties.
Subsequent and Unusual Items
- In October 2021, the SBA forgave the company’s $106,850 PPP loan.
- The company agreed to acquire New Mexico oil and gas interests for an initial $1.1 million purchase price, with closing scheduled for December 8, 2021.
- A shelf registration statement declared effective in November 2021 permits offerings of up to $350 million of securities, subject to market conditions and capital needs, and resale of up to 21,360,165 shares by selling stockholders.
- The September 2021 debt modification generated $2.3 million of inducement expense and resulted in a $2.0 million embedded conversion-option liability.
- The interim financial statements are unaudited and contain management estimates that may differ from actual results.
Investor Verification Items
- Verify the company’s ability to fund near-term maturities, acquisition activity, sinking-fund requirements, and ongoing operating needs.
- Review the terms, conversion rights, collateral, and potential dilution associated with the amended secured convertible notes and other warrants and options.
- Assess the sustainability of positive operating cash flow after excluding working-capital movements and non-cash financing adjustments.
- Evaluate commodity-price sensitivity, derivative positions, production forecasts, and the potential for future impairment charges.
- Review asset retirement obligations and environmental liabilities, particularly those related to the XTO acquisition.
- Monitor the proposed Green Tree New Mexico spin-off and related-party ownership and financing arrangements.
- Follow remediation of ineffective disclosure controls and the impact of the company’s planned equity shelf registration.