Empire Petroleum Corporation — Form 10-Q Summary
Business Context and Reporting Period
Empire Petroleum Corporation explores and develops oil and natural gas interests. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. The company reported 24,892,277 common shares outstanding at September 30, 2020.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Oil and gas sales | $1.645 million | $1.695 million | $3.954 million | $4.016 million |
| Total revenue, including derivatives | $1.542 million | $2.188 million | $5.958 million | $4.941 million |
| Net gain/(loss) on derivatives | $(0.103) million | $0.493 million | $2.004 million | $0.925 million |
| Operating loss | $(1.641) million | $(0.802) million | $(3.914) million | $(3.198) million |
| Net loss | $(1.641) million | $(0.947) million | $(3.027) million | $(3.541) million |
| Net loss per share | $(0.07) | $(0.05) | $(0.14) | $(0.19) |
| Net cash used in operating activities | Not provided | Not provided | $(1.970) million | $(1.001) million |
Total revenue declined 29.5% year over year in the third quarter but increased 20.6% for the nine-month period, primarily because of derivative gains in 2020. Net loss margins were approximately negative 106% of total revenue in Q3 and negative 51% for the nine-month period.
- Production increased to 54,938 Boe in Q3 and 138,648 Boe for the nine-month period, versus 36,026 Boe and 82,280 Boe, respectively, in the prior-year periods.
- Average realized price per Boe declined to $33.72 in Q3 and $37.34 for nine months, from $51.27 and $51.57, respectively.
- Cash was $134,374 at September 30, 2020, compared with no reported cash at December 31, 2019.
- Total assets were $22.759 million and total liabilities were $29.690 million, resulting in stockholders’ deficit of $6.931 million.
- Working capital deficit was $10.140 million. Current liabilities included $8.835 million of current notes payable.
- The Senior Revolver had an outstanding balance of approximately $8.397 million, matured March 27, 2021, and bore interest at 4.75% at September 30, 2020.
- The company was not in compliance with the revolver’s EBITDAX-to-interest and funded-debt-to-EBITDAX covenants at September 30, 2020.
Material Changes Versus the Prior Comparable Period
- Q3 oil and gas sales decreased modestly despite higher production, as lower oil and natural gas prices reduced realized revenue.
- Q3 operating expenses, production taxes, depreciation and accretion decreased in aggregate, but general and administrative expense increased by $808,875 to $1.279 million, primarily because of additional employees and professional fees related to the Pardus acquisition.
- The Q3 derivative result changed from a $492,862 gain to a $103,166 loss. For nine months, derivative gains increased from $925,231 to $2.004 million.
- Q3 net loss increased by $694,419 year over year. The nine-month net loss improved by $513,973, primarily due to derivative gains and a $1.269 million gain on asset sales, partly offset by an $800,452 impairment charge and higher operating costs.
- Oil and natural gas property carrying value increased to $19.506 million, from $9.295 million at year-end 2019, largely reflecting acquisitions and asset retirement obligation additions.
- Asset retirement obligations increased to $15.928 million from $5.788 million at December 31, 2019.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management expects to continue pursuing oil and gas acquisitions and anticipates financing future acquisitions and working capital needs through debt or equity transactions. No quantitative earnings or production guidance was provided.
- The company states that continuation as a going concern depends on achieving profitable operations and/or obtaining additional debt or equity financing.
- COVID-19 and commodity-price volatility reduced demand and prices and led management to reduce production. Potential storage constraints, purchaser force majeure claims, production shut-ins and covenant compliance issues could materially affect results.
- The company recorded an $800,452 impairment of oil and gas properties due to lower oil prices.
- The planned $8.5 million Ovintiv acquisition was terminated after the company could not obtain financing. Empire received a $50,000 deposit refund and recorded an aggregate loss of approximately $800,000.
- Empire completed the Pardus acquisition in April 2020. The transaction included a contingent payment obligation initially recorded at $985,820, potentially payable through December 31, 2022 based on production and oil-price conditions.
- Under a joint development agreement, PIE may loan up to $2.0 million at 6% through 2024 to fund well workovers. Approximately $70,000 had been advanced by September 30, 2020, and PIE received specified working and revenue interests in the workover wells.
- PIE also purchased $525,000 of Empire equity and warrants potentially exercisable for a substantial number of additional common shares, creating possible future dilution.
- The company had oil swaps outstanding through October 2021. Derivative gains offset part of the 2020 commodity-price decline, but management stated that additional favorable hedges may not be available.
- The company received a $160,700 PPP loan and expected that most of the amount would be forgiven under then-current SBA guidelines. The ultimate forgiveness amount was not established in the filing.
- In October 2020, the company entered into a $306,000 letter of credit using the revolver commitment and signed a new office lease running through December 2025.
Important Facts for Investors to Verify
- Whether the company can refinance or repay the approximately $8.4 million revolver before its March 2021 maturity.
- The consequences of noncompliance with the revolver’s financial covenants, including any waivers, amendments or lender remedies.
- Availability and terms of additional debt or equity financing required to support operations and acquisitions.
- The recoverability of oil and gas properties and the sensitivity of impairment charges to future commodity prices and production.
- The ultimate amount and timing of the Pardus contingent payment and the status of the PIE workover financing and interest assignments.
- Potential dilution from PIE warrants, existing options and other outstanding warrants.
- The company’s ability to achieve positive operating cash flow, given nine-month operating cash usage of $1.970 million and a $10.140 million working capital deficit.
- The filing’s interim financial statements were unaudited, and management states that interim results may not be indicative of full-year performance.