Empire Petroleum Corporation — 2019 Form 10-K Summary
Business context and reporting period
Empire Petroleum Corporation is a small reporting company engaged in acquiring, owning and operating oil and natural gas properties in Louisiana, North Dakota and Montana. This Form 10-K covers the fiscal year ended December 31, 2019, with comparison to the year ended December 31, 2018. The company had 145 producing wells at year-end 2019, operated 120, and produced approximately 420 net BOE per day.
During 2019, Empire acquired 184 producing properties from EnergyQuest for approximately $5.6 million and acquired two Louisiana wells for approximately $467,000 including fees. The EnergyQuest properties added approximately 20,700 developed and undeveloped acres.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Oil and gas sales | $5.825 million | $0.352 million | Increase of approximately 1,553% |
| Total revenue, including derivatives | $5.859 million | $0.465 million | Increase of approximately 1,159% |
| Operating loss | $(6.151) million | $(0.916) million | Loss increased |
| Net loss | $(6.655) million | $(1.017) million | Loss increased by $5.637 million |
| Basic and diluted loss per share | $(0.33) | $(0.08) | Higher loss per share |
| Net cash used in operating activities | $(0.592) million | $(0.565) million | Higher use of cash |
| Net cash used in investing activities | $(6.174) million | $(0.917) million | Higher acquisition spending |
| Net cash provided by financing activities | $6.682 million | $1.488 million | Higher financing proceeds |
| Cash at year-end | $0 | $84,631 | Declined to zero |
Revenue growth reflected the 2019 acquisitions and a full year of production from the Louisiana properties. Average realized price per BOE declined to $51.35 from $52.89, while production increased to 119,756 BOE from 6,302 BOE. Operating costs were $4.338 million, production taxes were $379,604, depreciation, depletion and amortization was $3.352 million, and general and administrative expense was $3.635 million. The filing does not present a separately reported gross or operating margin; based on reported figures, the operating loss substantially exceeded revenue.
Total assets increased to $11.015 million from $1.997 million, primarily because of acquired oil and gas properties. Net oil and gas property costs were $9.295 million at December 31, 2019. Total liabilities increased to $15.953 million from $2.147 million, and stockholders’ equity declined to a deficit of $4.939 million from a deficit of $150,183.
Debt, liquidity and capital resources
- Debt outstanding was approximately $7.8 million at year-end, including $7.782 million under the CrossFirst Bank senior revolver and $102,500 of convertible notes.
- The revolver commitment was approximately $8.55 million at year-end, leaving approximately $700,000 of unused availability. The facility bears interest at variable rates and matures March 27, 2021.
- The company reported no cash on hand and expects to seek additional equity and debt financing for working capital, acquisitions and future investments.
- Cash generated from oil and gas activities after cash operating costs and production taxes was $1.142 million, but total operating cash flow remained negative after general and administrative costs and changes in working capital.
- Asset retirement obligations increased to $5.788 million from $230,650, primarily because of liabilities assumed in the 2019 acquisitions.
- The company reported compliance with the revolver’s financial covenants at December 31, 2019.
Material changes versus the prior comparable period
- Production expanded materially following the EnergyQuest and Warhorse acquisitions; year-end producing wells increased from 9 to 145.
- Operating expenses increased to $8.375 million from $154,938, and general and administrative expense increased to $3.635 million from $1.226 million.
- Interest expense increased to $503,607 from $101,183 because of acquisition-related borrowing.
- Noncash stock option and warrant expense increased, including $1.492 million recorded in 2019.
- Shares outstanding increased to 20.367 million at December 31, 2019 from 17.346 million, contributing to dilution risk. The company had 18.346 million options and warrants outstanding that were excluded from diluted loss per share because they were anti-dilutive.
- Proved reserves increased to 3.643 million barrels of oil and 403.6 MMcf of natural gas, compared with 661,000 barrels and 887 MMcf at December 31, 2018. The filing attributes the increase primarily to acquired properties.
Outlook, management commentary, risks and unusual items
The filing provides no formal revenue, earnings or production guidance. Management expects continued acquisition-related expenditures and plans to pursue additional capital and debt financing. The independent auditor included a going-concern explanatory paragraph, stating that substantial doubt exists about the company’s ability to continue as a going concern because of recurring losses, dependence on financing and the need to develop economically recoverable reserves.
- Commodity prices are highly volatile. The company stated that the sharp decline in oil prices in March 2020 could reduce revenue, cash flow, profitability, reserve values, liquidity and access to capital.
- COVID-19-related changes in energy demand and economic conditions could materially affect acquisitions, project development, cash flows and liquidity.
- The company is highly dependent on external financing and has limited liquidity. Failure to obtain financing could require reduced operations, delayed development or unfavorable asset sales.
- Operations and reserves are geographically concentrated in Louisiana, North Dakota and Montana. Three customers accounted for 96% of 2019 operating revenue.
- The company is exposed to variable-rate debt, covenant compliance requirements, environmental and abandonment obligations, regulatory changes, reserve-estimation uncertainty and competition for properties and services.
- Outstanding oil swap contracts were expected to settle through November 30, 2021. Derivatives produced a $33,643 unrealized gain in 2019, compared with a $113,081 gain in 2018.
- Subsequent events included a $500,000 Montana acreage acquisition, sales of Montana interests for $325,000 and $1.010 million, and a March 2020 agreement to acquire approximately 26,600 net acres and 94 active wells for $8.5 million, subject to closing conditions.
- The remaining $102,500 of convertible notes was converted on January 31, 2020 into 1.025 million common shares.
Most important facts for investors to verify
- Whether the company can obtain sufficient financing to fund operations, satisfy debt obligations and close or finance the proposed $8.5 million acquisition.
- The status of the going-concern uncertainty, revolver maturity and covenant compliance after December 31, 2019.
- The impact of 2020 oil-price declines and COVID-19 on production, reserve economics, impairments, liquidity and acquisition plans.
- The accuracy and geographic presentation of reserve data; the filing discusses properties in three states, while supplementary reserve data states that all reserves are located in Louisiana.
- The company’s ability to convert reported production growth into positive operating cash flow, given high operating, depletion, administrative and abandonment costs.
- Potential dilution from the 2019 stock option plan, outstanding warrants, convertible notes and other equity-linked instruments.
- Concentration risk from reliance on three purchasers representing 96% of operating revenue.