Empire Petroleum Corporation: FY2021 Form 10-K Summary
Business context and reporting period
Empire Petroleum Corporation is a single-segment U.S. oil and natural gas operator focused on acquiring and optimizing proved developed producing properties. The filing covers the fiscal year ended December 31, 2021, compared with fiscal 2020; it is not a quarterly filing. Operations span Louisiana, New Mexico, North Dakota, Montana and Texas.
The company acquired producing properties from XTO Holdings, an ExxonMobil subsidiary, in May 2021 for approximately $17.9 million, with an effective date of January 1, 2021. The acquisition added approximately 730 wells and 40,000 net acres in New Mexico. Empire uplisted from the OTCQB to the NYSE American on March 8, 2022 after a 1-for-4 reverse stock split.
Key financial and operating metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $27.9 million | $7.7 million | +261% |
| Revenue from product sales | $28.3 million | $5.9 million | +380% |
| Operating loss | $(0.5) million | $(17.6) million | Improved by $17.1 million |
| Net loss | $(18.6) million | $(16.8) million | Loss increased by $1.8 million |
| Net loss per share | $(1.27) | $(2.97) | Improved, partly due to increased share count |
| Cash flow from operations | $3.2 million | $(1.7) million | Improved by $4.9 million |
| Cash flow from investing | $(24.7) million | $0.9 million | Declined by $25.6 million |
| Cash flow from financing | $25.0 million | $1.0 million | Increased by $24.0 million |
| Cash balance | $3.6 million | $0.2 million | Increased by $3.5 million |
| Working capital | $1.1 million | $(3.9) million | Improved by approximately $5.0 million |
Oil revenue was $22.3 million, natural gas revenue was $2.6 million and NGL revenue was $3.4 million. Total production increased to 539,796 Boe from 188,104 Boe. Average realized price per Boe increased to $50.61 from $38.68. Operating costs were $26.11 per Boe, production and ad valorem taxes were $3.90 per Boe, and general and administrative expense was $15.68 per Boe. Based on reported total revenue and operating loss, the operating margin was approximately negative 1.7%; the net loss margin was approximately negative 66.7%, heavily affected by non-cash financing-related charges.
Debt totaled $8.6 million at year-end, including $7.1 million under the senior revolver, $0.8 million under the PIE term loan and other notes. The revolver commitment was approximately $7.4 million, of which approximately $0.3 million was unused at December 31, 2021. The revolver bears interest at prime plus 1.5%, matured in March 2024 and was subject to financial covenants; the company reported compliance at year-end. Asset retirement obligations were $20.6 million.
Proved developed reserves increased to approximately 8.448 million barrels of oil and 11.205 Bcf of natural gas at December 31, 2021, compared with 3.331 million barrels and 0.940 Bcf in 2020. The standardized measure of discounted future net cash flows increased to $93.9 million from $20.8 million, primarily because of the XTO acquisition and higher reserve pricing. These estimates are not measures of fair value and depend on commodity prices, costs and reserve assumptions.
Material changes versus the prior comparable period
- Production and revenue rose sharply because of the XTO acquisition, higher commodity prices and increased production from legacy assets.
- Lease operating expense increased to $14.1 million from $4.9 million, including approximately $5.0 million attributable to the New Mexico acquisition. Production and ad valorem taxes increased to $2.1 million from $0.3 million.
- Impairment expense declined to zero from $8.7 million, while DD&A declined to $2.5 million from $3.1 million.
- Operating performance improved substantially, but net loss remained high because of approximately $18.0 million of non-cash expenses associated with convertible notes, including debt discount amortization, embedded conversion options and inducement costs.
- The company raised capital through debt, stock and warrant issuances. Convertible financing was substantially converted into equity by year-end, contributing to shares outstanding increasing to 19.8 million from 6.2 million.
- Investing cash outflows included approximately $17.9 million for the XTO acquisition, $2.5 million for four non-operated wells and $4.8 million deposited into a plugging-related sinking fund.
Guidance, outlook, commentary and risks
Management did not provide formal quantitative earnings, production or capital-spending guidance. Management expects to continue pursuing producing-property acquisitions and to fund acquisitions and ongoing operations through operating cash flow and additional debt or equity financing.
Management emphasizes optimizing existing wells, increasing production, reducing unit costs and growing reserves and operating cash flow. The company does not expect to pay cash dividends in the foreseeable future.
- Commodity prices are volatile and materially affect revenue, reserve values, liquidity, impairment testing and access to capital.
- Liquidity is limited relative to acquisition and operating requirements, with $3.6 million of cash and approximately $0.3 million of unused revolver capacity at year-end.
- The company is dependent on third-party gathering, processing and transportation infrastructure and has geographic and customer concentration. Four customers represented 63% of 2021 oil, gas and NGL sales.
- Debt covenants, variable interest rates, required quarterly revolver reductions and potential borrowing-base reductions could constrain financial flexibility.
- Management reported a material weakness in internal control over financial reporting related to complex and non-routine transactions and insufficient accounting resources. Remediation efforts had begun but were not effective for a sufficient period to conclude that the weakness was remedied.
- Asset retirement, environmental, regulatory and climate-related obligations could increase operating costs or restrict access to capital. The company also disclosed a Texas sales tax audit with potential maximum exposure of approximately $1.3 million, although management expects the final assessment to be lower.
- COVID-19 effects, service-provider costs, labor and equipment availability, cyber incidents, reserve estimation risk and the ability to replace produced reserves remain material risks.
- Commodity derivatives generated a net realized and unrealized loss of $0.6 million in 2021 compared with a $1.7 million gain in 2020. Outstanding put options provided specified $40-per-barrel floors for portions of 2022 production and certain 2023 volumes.
Important facts for investors to verify
- Reconcile the significant difference between the $18.6 million net loss and $3.2 million of operating cash flow, particularly the non-cash convertible-debt charges.
- Review the revolver borrowing base, covenant headroom, quarterly amortization requirements and availability of additional financing.
- Assess the sustainability and decline rates of the New Mexico production acquired from XTO and the assumptions supporting the reserve increase.
- Monitor remediation of the material weakness and the company’s ability to produce timely, accurate reporting for complex financing and acquisition transactions.
- Review potential dilution from outstanding options, warrants, convertible instruments and equity compensation, as well as the effects of the reverse stock split and NYSE American listing.
- Evaluate asset retirement obligations, the $4.8 million sinking fund, the Texas sales tax audit and any additional environmental or plugging liabilities.