Business Context and Reporting Period
Empire Petroleum Corporation is a U.S. independent oil and natural gas producer focused on optimizing developed assets, reducing operating costs and acquiring proved developed producing properties. It operates in New Mexico, North Dakota, Montana, Texas and Louisiana as one reportable segment. This Form 10-K covers the fiscal year ended December 31, 2022; the filing does not provide a separate fourth-quarter summary.
The company operated approximately 1,100 wells and reported 40 full-time employees at year-end. Its common stock trades on the NYSE American under the symbol EP.
Financial and Operating Highlights
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total product revenues | $53.2 million | $27.5 million | Up 93% |
| Total revenue, including other items and derivatives | $52.9 million | $27.1 million | Up 95% |
| Operating income (loss) | $8.8 million | $(0.5) million | Improved by $9.3 million |
| Net income (loss) | $7.1 million | $(18.6) million | Improved by $25.7 million |
| Net cash provided by operating activities | $18.1 million | $3.2 million | Up $14.9 million |
| Capital expenditures and acquisitions | $13.9 million | $25.8 million | Down $11.8 million |
| Cash balance | $11.9 million | $3.6 million | Up $8.3 million |
| Working capital | $5.1 million | $1.1 million | Up $4.0 million |
| Total debt | $7.2 million | $8.6 million | Down $1.4 million |
Net production increased to 789,568 Boe from 539,796 Boe, including 482,818 barrels of oil, 875,647 Mcf of natural gas and 160,809 barrels of NGLs. Average realized prices were $93.16 per oil barrel, $5.18 per Mcf of natural gas and $22.76 per NGL barrel. Total realized revenue per Boe increased to $67.34 from $50.95.
Operating income margin was approximately 16.6% and net income margin was approximately 13.4%, based on total revenue. Lease operating expense increased to $23.6 million, or $29.87 per Boe, from $13.3 million, or $24.61 per Boe. Production and ad valorem taxes increased to $3.9 million, while DD&A and accretion totaled approximately $3.3 million. General and administrative expense was $12.3 million, including $2.7 million of stock-based compensation.
Material Changes Versus the Prior Comparable Period
- Revenue and production benefited from the full-year contribution of the May 2021 XTO New Mexico acquisition and higher commodity prices.
- Oil volumes increased approximately 45%, natural gas volumes increased approximately 41% and total production increased approximately 46%.
- Lease operating expense rose primarily because of the full-year New Mexico operations and increased North Dakota workover, recompletion and sidetrack activity.
- The company recorded a $936,620 impairment charge for Louisiana properties whose estimated future cash flows were below carrying value.
- General and administrative expense increased 46% to $12.3 million. The increase included approximately $1.27 million related to resolution of a Texas sales-tax audit and higher professional-service costs.
- Interest expense declined substantially because 2021 included significant non-cash costs associated with convertible debt and related conversion transactions.
- The company invested $14.6 million in oil and natural gas properties, including approximately $2.7 million of acquisitions and $11.9 million in development and enhancement activities.
- Net proved developed reserves increased to 13.244 MMBoe from 10.403 MMBoe. The standardized measure increased to $147.7 million from $93.9 million, primarily reflecting price, reserve and revision effects; these estimates are not a measure of fair value.
Liquidity, Debt and Cash Flow
Year-end cash was $11.9 million and available borrowing capacity was approximately $300,000. The senior revolving credit facility had approximately $5.9 million outstanding, a total commitment of approximately $6.1 million at year-end and a maturity date of May 26, 2024. The facility bears variable interest at Wall Street Journal Prime plus 1.50%; the filing states the rate was 9.0% at December 31, 2022. The company was in compliance with its debt covenants at year-end.
Quarterly principal payments were $300,000 and were scheduled to increase to $500,000 in 2023. Management expects to fund 2023 capital expenditures, limited drilling and potential acquisitions with cash on hand, operating cash flow and potentially additional debt or equity financing. No formal production, revenue or earnings guidance is provided.
Asset retirement obligations increased to $25.0 million from $20.6 million. The company also had approximately $18.6 million of federal net operating loss carryforwards, subject to utilization limitations and a full valuation allowance.
Outlook, Commentary, Risks and Unusual Items
- Management’s strategy is to optimize existing production, lower unit costs, improve margins and pursue acquisitions in predictable, long-life producing fields.
- The company completed a four-well North Dakota pilot drilling program and was completing the wells at year-end. It expects limited drilling and continued capital investment in 2023.
- Commodity prices, production volumes, reserve replacement, operating costs, transportation availability and access to capital are the primary drivers of future performance.
- Four customers accounted for 68% of oil, natural gas and NGL sales in 2022, creating customer concentration, although management believes alternative purchasers are available.
- Operations and proved reserves are geographically concentrated in five states and depend on third-party gathering, processing and transportation infrastructure.
- Commodity derivatives produced a $387,930 loss in 2022. Outstanding 2023 WTI put options covered quarterly volumes ranging from 15,340 to 46,400 barrels with floor prices between $40 and $65 per barrel.
- The company recorded approximately $1.4 million of non-cash expense related to the final settlement of the XTO performance-bond arrangements and approximately $1.4 million of expense related to its Texas joint development agreement.
- A $528,000 Texas sales-tax settlement was accrued at year-end and paid in the first quarter of 2023.
- Management identified a material weakness in internal control over financial reporting related to insufficient accounting expertise and controls for complex and non-routine transactions. Remediation efforts were ongoing, including additional personnel, an external controls review and planned 2023 testing.
- Former CEO Thomas W. Pritchard resigned in March 2023. The company disclosed approximately $360,000 of severance and received shares and options in satisfaction of a $2.1 million receivable related primarily to incorrect withholding on an earlier option exercise. Michael R. Morrisett was appointed CEO in March 2023.
- Key risks include oil and gas price volatility, debt refinancing and covenant risk, environmental and plugging obligations, climate and ESG-related regulation and capital-market access, cyber incidents, reserve-estimation uncertainty and potential future impairments.
Investor Verification Items
- Verify the company’s ability to maintain positive operating cash flow while meeting increased 2023 debt amortization and ongoing asset-retirement obligations.
- Review the senior revolving facility’s borrowing-base commitments, covenants, interest rate and May 2024 maturity.
- Assess whether higher lease operating costs and service-provider inflation could offset production and pricing benefits.
- Evaluate the sustainability of the 2022 profit, including the effects of unusually favorable commodity prices and non-cash or one-time items.
- Review the material weakness remediation plan and any subsequent auditor or management disclosures regarding internal controls.
- Examine reserve assumptions, standardized measure sensitivity and the potential for additional impairment charges if commodity prices decline.
- Monitor customer, geographic, transportation and derivative concentrations, as well as environmental and plugging liabilities.
- Confirm the resolution of the Texas sales-tax matter, the former CEO receivable and related-party joint development obligations.