Empire Petroleum Corporation — 2021 Q2 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 six months ended June 30, 2021, compared with the corresponding 2020 periods. The company completed the acquisition of New Mexico oil and natural gas properties from XTO on May 14, 2021, with an effective date of January 1, 2021.
Key financial metrics
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Total revenue | $4.7 million | $0.6 million | $6.8 million | $4.4 million |
| Operating loss | $(2.1) million | $(2.8) million | $(2.9) million | $(2.3) million |
| Net loss | $(5.3) million | $(3.0) million | $(6.3) million | $(1.4) million |
| Net loss per share | $(0.09) | $(0.14) | $(0.14) | $(0.07) |
| Net cash used in operating activities | Not separately reported for the quarter | $(2.5) million | $(1.1) million |
Approximate operating margins were negative 43.8% for the second quarter and negative 43.0% for the first six months. Approximate net margins were negative 111.7% and negative 92.0%, respectively. The results were affected by increased interest expense, amortization of convertible-debt discounts, general and administrative costs, and derivative losses.
- Second-quarter product sales before derivative effects were $4.9 million, including $4.1 million of oil sales, $0.4 million of natural gas liquids sales, and $0.4 million of natural gas sales.
- Six-month production was 153,616 Boe, compared with 83,704 Boe in the prior-year period. Second-quarter production was 103,913 Boe, compared with 45,747 Boe.
- Average realized price per Boe was $44.34 in the second quarter and $44.54 for the first six months, compared with $32.51 and $39.72, respectively, in 2020.
- Cash was $1.0 million at June 30, 2021, compared with $0.2 million at December 31, 2020. Management reported a working capital deficit of $13.2 million.
- Total assets increased to $43.1 million from $11.2 million at year-end 2020, primarily reflecting acquired oil and gas properties and related assets.
- Gross debt was $23.7 million, or $15.6 million net of discounts and issuance costs, compared with $9.0 million gross and $9.0 million net at December 31, 2020. Current maturities were $7.1 million.
- Stockholders’ deficit improved to $(6.2) million from $(18.4) million, principally due to equity issuances, warrant exercises, and conversions.
Material changes versus the prior comparable period
- Revenue increased substantially because of higher commodity prices, higher production, and contributions from the XTO and Pardus properties. Product sales increased to $4.9 million in the second quarter from $1.0 million and to $7.4 million for the six months from $2.3 million.
- Operating expenses increased with higher production and the acquired properties. General and administrative expense increased to $3.2 million in the second quarter and $4.1 million for the six months, including a $989,115 expense related to rights offered to investors in connection with convertible notes.
- Interest expense increased to $2.8 million in the second quarter and $2.9 million for the six months, compared with $0.1 million and $0.3 million, respectively, largely due to convertible-note discounts and issuance costs.
- The company recorded a $0.5 million derivative loss for the six months, compared with a $2.1 million derivative gain in 2020. No impairment of oil and natural gas properties was recorded in 2021, compared with an $0.8 million impairment charge in the first half of 2020.
- Operating cash flow remained negative at $(2.5) million. Investing cash outflows were $(23.1) million, including $17.9 million for oil and gas property acquisitions, a $3.85 million sinking-fund deposit, and a $1.25 million related-party investment. Financing activities provided $26.4 million through debt and equity funding.
- Shares outstanding increased to 65.7 million from 24.9 million at December 31, 2020. The increase included warrant exercises, common-stock issuances, and note conversions.
Guidance, outlook, risks, contingencies, and unusual items
- No formal financial or production guidance was provided. Management expects to pursue additional oil and gas acquisitions and anticipates financing future acquisitions and working capital needs through debt or equity transactions.
- Management stated that substantial doubt exists regarding the company’s ability to continue as a going concern. Continued operations depend on achieving profitability and obtaining additional financing or refinancing existing obligations.
- The senior revolver had a $7.7 million balance at June 30, 2021, matured initially in March 2022, and required commodity-derivative thresholds and financial covenants. The company was not in compliance with the commodity-derivative requirement at quarter-end, although it was in compliance with other stated covenants. A July 7, 2021 amendment waived the noncompliance and extended maturity to March 2024.
- The company issued a $16.25 million senior secured convertible note to a related party in connection with the XTO acquisition. The note matures December 31, 2021, is secured by Empire New Mexico assets, and had $2.8 million of principal prepayments through June 30, 2021. The related embedded conversion option was recorded as a derivative liability of $6.1 million at quarter-end.
- The company had a $3.75 million letter of credit, collateralized by a corresponding certificate of deposit, supporting the XTO performance bond. It also was required to fund a sinking account for the bond.
- Oil and gas prices, production levels, reserve estimates, derivative positions, COVID-19-related demand changes, acquisition financing, environmental obligations, and asset-retirement obligations could materially affect results.
- The company disclosed that its disclosure controls and procedures were not effective because of limited accounting resources and insufficient segregation of duties.
- Subsequent events included termination of the North Dakota acquisition agreement, rescission of the $1.25 million related-party investment with proceeds applied to the secured convertible note, and additional warrant and option exercises.
Most important facts for investors to verify
- Liquidity and going concern: Verify available cash, the $13.2 million working capital deficit, near-term maturities, and the company’s ability to refinance or raise capital.
- Convertible debt: Review the December 31, 2021 secured-note maturity, conversion terms, collateral, related-party status, and potential equity dilution.
- Revolver compliance: Confirm the effect of the July 2021 amendment, revised borrowing commitment, covenant requirements, and ongoing derivative obligations.
- Acquisition economics: Assess production, reserves, operating costs, retirement obligations, and integration results for the XTO and Pardus properties.
- Dilution: Review the 65.7 million shares outstanding, remaining options and warrants, and additional shares potentially issuable upon note conversion or equity incentives.
- Internal controls: Monitor remediation of the disclosed ineffective disclosure controls and the related risk of reporting errors.