EP

Business Context and Reporting Period

Company: Empire Petroleum Corporation (EP)
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2024
Business Overview: An independent energy company focused on optimizing developed production in North Dakota, New Mexico, Texas, and Louisiana. The company is currently executing a capital-intensive drilling program in the Starbuck field (North Dakota) and managing a subscription rights offering to fund operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 12% year-over-year, driven by a 17% increase in oil production volumes (291,000 Bbls vs. 248,670 Bbls) and higher realized oil prices ($74.66/Bbl vs. $72.73/Bbl). Natural gas revenue declined 71% due to depressed prices in New Mexico.
• Increased Losses: Net loss widened by 70% to $8.36 million. This was primarily due to a 140% increase in Depreciation, Depletion, and Amortization (DD&A) resulting from new drilling activity and asset acquisitions, alongside a $1.74 million loss on the revaluation of a financial derivative liability.
• Capital Spending Surge: Capital expenditures incurred jumped to $25.49 million from $3.70 million in the prior year, reflecting the aggressive Starbuck Drilling Program in North Dakota.
• Equity Financing: The company completed a Rights Offering in April 2024, raising approximately $20.66 million in gross proceeds, significantly boosting cash balances.

Outlook, Risks, and Management Commentary

• Liquidity and Covenants: The company reported a negative working capital position of $3.48 million. It was not in compliance with the current ratio covenant (1.0 to 1.0) of its Equity Bank Credit Facility as of June 30, 2024, due to high payables related to capital spending. A compliance waiver was obtained on August 12, 2024.
• Going Concern: Management asserts that substantial doubt regarding the company's ability to continue as a going concern has been alleviated. This is based on committed financial support from major related-party shareholders (Phil Mulacek and Energy Evolution, collectively holding 51% of shares) to fund future obligations and capital programs.
• Debt Structure: A $5.0 million related-party promissory note issued in Q1 2024 was converted into 800,000 shares of common stock in May 2024. The company also has a $10 million revolving credit facility with a maximum commitment of $15 million.
• Operational Focus: Management continues to prioritize the North Dakota drilling program and optimizing production in New Mexico. Future funding requirements will likely be met through a combination of operating cash flows, debt, and equity issuances.

Investor Verification Checklist

• Covenant Compliance: Verify the status of the current ratio covenant waiver and the company's ability to maintain compliance in subsequent quarters given the negative working capital.
• Related Party Dependence: Assess the reliance on major shareholders (Energy Evolution and Phil Mulacek) for future liquidity and the terms of their committed support.
• Capital Expenditure Burn Rate: Monitor the $25.5 million incurred capex against the $20.6 million raised in the Rights Offering to determine remaining funding needs for the Starbuck program.
• Derivative Valuation: Review the impact of the $1.74 million loss on financial derivatives and the potential for future volatility in this line item.
• Asset Retirement Obligations (ARO): Note the ARO balance of $28.65 million and the accretion expense of $977k for the period, which impacts non-cash expenses.