Empire Petroleum Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019; filed August 14, 2019. Empire explores and develops oil and natural gas properties. The interim financial statements are unaudited.
Business Context and Reporting Period
- Empire began generating production following acquisitions completed in 2018 and 2019; it had no production before August 2018.
- During the period, the company acquired oil-producing properties from EnergyQuest II and acquired two producing wells in Louisiana through the Warhorse transaction.
- At June 30, 2019, the company reported approximately 3,500 Mbbls of proved oil reserves and 900 MMcf of proved natural gas reserves.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 |
|---|---|---|
| Oil and natural gas sales | $2.0 million | $2.3 million |
| Derivative gain | $0.5 million | $0.4 million |
| Total revenue | $2.5 million | $2.8 million |
| Operating loss | $(1.8) million | $(2.4) million |
| Net loss | $(2.0) million | $(2.6) million |
| Net loss per share | $(0.10) | $(0.14) |
| Net cash from operating activities | Not provided for the quarter | $0.1 million |
- Six-month production totaled 46,387 BOE, including 42,621 barrels of oil and 3,766 Mcf of natural gas. Second-quarter production totaled 39,553 BOE.
- Six-month average realized prices were $62.42 per barrel of oil, $3.08 per Mcf of natural gas, and $59.10 per BOE.
- Six-month operating costs were $30.05 per BOE, production taxes were $3.22 per BOE, DD&A and accretion were $18.98 per BOE, and general and administrative expense was $75.10 per BOE.
- Cash was zero at June 30, 2019, compared with $84,631 at December 31, 2018. Working capital was negative $640,866.
- Total assets were $11.8 million, including $10.0 million of net oil and natural gas properties. Total liabilities were $12.7 million, resulting in stockholders’ deficit of $0.9 million.
- Notes payable totaled approximately $6.7 million, consisting of $149,602 current and $6.6 million long-term debt. Asset retirement obligations totaled $3.7 million.
Material Changes Versus Prior Comparable Period
- Revenue increased from zero in the prior-year quarter and prior-year six-month period because of the company’s newly acquired producing properties.
- Operating expenses increased to $2.3 million in the quarter and $2.5 million for the six months, primarily because of acquired production assets.
- General and administrative expense rose to $2.0 million in the quarter and $2.7 million for the six months, driven by option and warrant grants, compensation, insurance, acquisition-related professional fees, travel, and capital-raising activities.
- Interest expense increased to $163,000 in the quarter and $197,000 for the six months as debt financing increased.
- Net loss increased from $230,247 to $2.0 million for the quarter and from $476,552 to $2.6 million for the six months.
- Six-month investing cash outflows were $5.7 million, primarily for oil and natural gas property acquisitions. Financing provided $5.6 million, including $6.5 million of debt proceeds, offset by $1.1 million of principal payments.
- Shares outstanding increased to 19,867,277 from 17,345,609 at year-end 2018. In the second quarter, $107,500 of convertible notes were converted into 1,075,000 shares.
Guidance, Outlook, Risks, and Unusual Items
- Management provided no quantitative production, revenue, or earnings guidance.
- Management expects to pursue additional oil and natural gas acquisitions and intends to finance acquisitions and working capital through additional debt and equity financing.
- The company disclosed substantial doubt-related risks: it has incurred significant historical losses, had no cash at period-end, and requires future profitable operations and/or additional financing to continue operations.
- The CrossFirst Bank revolver was increased to $9.0 million and extended to March 27, 2021. The agreement includes EBITDAX-to-interest and funded-debt-to-EBITDAX covenants; the filing does not provide a compliance measurement as of June 30, 2019.
- Derivative instruments generated a $432,369 six-month gain and a $447,236 unrealized derivative asset at June 30, 2019. Outstanding oil and gas swaps settle through November 2020.
- Non-cash items included $3.4 million of additions to asset retirement obligations, $1.5 million of warrant and option value, and $812,500 of compensation expense for vested stock options.
- The company used significant estimates for reserve values, commodity prices, production rates, asset retirement obligations, and acquired-property fair values. Actual results may differ materially.
- Legal proceedings, defaults upon senior securities, and other unregistered equity sales were reported as none for the period.
Investor Verification Checklist
- Verify the company’s ability to raise sufficient debt or equity financing given zero cash, negative working capital, recurring losses, and a stockholders’ deficit.
- Review CrossFirst Bank covenant requirements, actual compliance, borrowing availability, collateral, and debt maturities.
- Assess whether production from the EnergyQuest, Warhorse, and other acquired properties can support operating costs, debt service, and asset retirement obligations.
- Reconcile derivative gains and the $447,236 unrealized derivative asset with the swap volumes, prices, and settlement schedule.
- Evaluate dilution from the 2019 stock option plan, outstanding options and warrants, and convertible instruments.
- Review the assumptions supporting acquired-property valuations, proved reserves, depletion, and the $3.7 million asset retirement obligation.
- Confirm the extent to which reported earnings depend on non-cash option and warrant compensation and derivative fair-value gains.