Empire Petroleum Corporation: Q2 2020 Form 10-Q Summary
Business Context and Reporting Period
Empire Petroleum Corporation is an oil and natural gas exploration, development, and production company. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, with comparisons to the corresponding 2019 periods. The company was a smaller reporting company and had 21,392,277 common shares outstanding at June 30, 2020.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|---|---|
| Oil and gas sales | $994,529 | $1,996,758 | $2,308,929 | $2,320,968 |
| Net derivative gain (loss) | $(402,374) | $500,728 | $2,106,671 | $432,369 |
| Total revenue | $592,155 | $2,497,486 | $4,415,600 | $2,753,337 |
| Operating loss | $(2,849,966) | $(1,843,092) | $(2,272,842) | $(2,396,651) |
| Net loss | $(2,973,185) | $(2,006,060) | $(1,385,170) | $(2,593,562) |
| Basic and diluted loss per share | $(0.14) | $(0.10) | $(0.07) | $(0.14) |
- Six-month production totaled 74,060 barrels of oil, 57,863 Mcf of natural gas, and 83,704 barrels of oil equivalent, compared with 42,621 barrels, 22,560 Mcf, and 46,381 Boe, respectively, in 2019.
- Average six-month realized prices declined to $43.45 per oil barrel, $1.84 per Mcf of natural gas, and $39.72 per Boe, compared with $54.65, $2.96, and $51.66, respectively, in 2019.
- For the six months, operating expenses, production taxes, depreciation, depletion, amortization, and accretion totaled $3,444,600, and the company recorded an $800,452 impairment of oil and natural gas properties.
- Net cash used in operating activities was $294,287 for the six months ended June 30, 2020, compared with $54,611 of cash provided in 2019. Investing activities used $195,600, while financing activities provided $775,700.
- Cash was $285,813 at June 30, 2020, compared with no cash at December 31, 2019. Management reported a working-capital deficit of $9,412,190.
- Total liabilities were $28,938,364 and stockholders’ deficit was $5,815,075 at June 30, 2020. Notes payable totaled approximately $8.9 million, including $8.397 million outstanding under the senior revolver.
Material Changes Versus the Prior Comparable Period
- Second-quarter oil and gas sales declined approximately 50% because of lower commodity prices and reduced production in response to market conditions. The resulting total revenue decline was partly offset by lower operating and general and administrative expenses.
- The second-quarter derivative result changed from a $500,728 gain in 2019 to a $402,374 loss in 2020 as oil prices recovered from March lows.
- Six-month total revenue increased primarily because of a $2.107 million derivative gain, compared with a $432,369 gain in 2019. Oil and gas sales were essentially unchanged.
- The six-month net loss improved by $1.208 million, primarily due to higher derivative gains and a $1.144 million gain on asset sales, partly offset by the property impairment and higher operating costs.
- The company completed the April 2020 acquisition of Pardus oil and gas properties in Texas. The transaction included 139 gross wells, approximately 30,000 net acres, gathering infrastructure, and assumed obligations, with total recorded consideration of $985,820 and a contingent payment of up to $2 million.
- The planned $8.5 million acquisition of Ovintiv properties was terminated after the company could not obtain financing. The company recorded a $725,000 allowance against its $850,000 deposit and was negotiating for return of the remaining deposit.
- Shares outstanding increased from 20,367,277 at December 31, 2019 to 21,392,277 at June 30, 2020, reflecting conversion of $102,500 of notes into 1,025,000 common shares.
Guidance, Outlook, Risks, and Unusual Items
- Management did not provide quantitative earnings or production guidance. It expects to pursue additional oil and gas acquisitions and anticipates financing future acquisitions and working capital needs through debt and equity transactions.
- The company states that continued operations depend on achieving profitability and/or obtaining additional financing. The senior revolver matures March 27, 2021, and the company was not in compliance with its funded-debt-to-EBITDAX covenant at June 30, 2020.
- COVID-19 and commodity-price volatility reduced demand and prices, constrained production, and created risks involving storage capacity, purchaser force majeure claims, shut-ins, operating margins, and future liquidity.
- Oil and gas derivatives generated significant cash receipts and gains during the first six months. Outstanding oil swaps were scheduled to settle by October 2021, but the company cautioned that it may not be able to add additional hedges at favorable prices.
- The company recorded an $800,452 impairment based on lower oil and gas prices. Further impairments, lower reserves, reduced production, and weaker cash flows are possible if prices remain depressed.
- Asset retirement obligations increased substantially to $15.653 million, including $9.508 million recognized in connection with the Pardus acquisition.
- A $160,700 Paycheck Protection Program loan was received in May 2020. The company expected most of the loan to be forgiven, subject to applicable SBA criteria.
- Subsequent to quarter-end, the company entered into a joint development and financing arrangement under which Petroleum & Independent Exploration, LLC could loan up to $2 million at 6% interest and received rights to specified working and revenue interests. The arrangement also contemplated a $525,000 equity and warrant investment.
Investor Verification Checklist
- Verify the company’s ability to remedy the senior revolver covenant violation and refinance or repay the approximately $8.4 million revolver before its March 2021 maturity.
- Assess liquidity, including the $285,813 cash balance, $9.412 million working-capital deficit, operating cash burn, and dependence on new debt or equity financing.
- Review the status and recoverability of the $125,000 net Ovintiv acquisition deposit after the $725,000 allowance.
- Evaluate oil and gas price assumptions, reserve values, derivative settlement exposure, and the potential for additional property impairments.
- Review the economics, contingent payment terms, asset retirement obligations, and production performance of the Pardus acquisition.
- Confirm the dilution and control implications of outstanding options, warrants, and the post-quarter-end PIE securities transaction.