Business Context and Reporting Period
Empire Petroleum Corporation filed its Form 10-K for the fiscal year ended December 31, 2011, covering the period referred to in the request as 2011 Q4. The company is a small oil and gas exploration company focused primarily on the Gabbs Valley Prospect in Nevada and the Okie Draw/South Okie Prospect in Wyoming. It had one employee as of December 31, 2011.
- Gabbs Valley: approximately 34,186 gross acres; 50% working interest in 30,346 acres and 88.5% in 3,840 acres.
- Okie Draw: approximately 830 net leased acres.
- The company had no producing wells and no petroleum sales revenue in 2011 or 2010.
Financial Performance and Financial Position
| Metric | 2011 | 2010 |
|---|---|---|
| Petroleum sales revenue | $0 | $0 |
| Production and operating expense | $22,060 | $178,174 |
| General and administrative expense | $222,133 | $231,996 |
| Well abandonment expense | $0 | $2,221,293 |
| Operating loss | $244,193 | $2,631,463 |
| Net loss | $247,432 | $2,627,902 |
| Basic and diluted loss per share | $0.00 | $0.03 |
| Net cash used in operating activities | $263,711 | $197,383 |
| Cash and cash equivalents at year-end | $4,978 | $68,689 |
| Total assets | $326,930 | $377,155 |
| Current liabilities | $111,487 | $149,065 |
| Related-party notes payable | $100,000 | $0 |
| Stockholders’ equity | $215,443 | $228,090 |
Revenue-based margins are not meaningful because the company had no revenue. The company reported a $14,006,553 accumulated deficit at December 31, 2011. Income taxes were $0 because net operating losses were fully offset by a valuation allowance. Approximately $7.85 million of net operating loss carryforwards existed and began expiring in 2012.
Material Changes Versus the Prior Comparable Period
- Net loss improved by approximately $2.38 million, primarily because 2010 included $2.22 million of well abandonment expense related to the Paradise Unit test well.
- Production and operating expense declined by $156,114, largely because certain Gabbs Valley leases were terminated.
- General and administrative expense declined by $9,863, primarily due to lower insurance costs.
- Cash declined by $63,711 during 2011, from $68,689 to $4,978.
- The company issued 2,000,000 common shares to CEO Albert E. Whitehead for $100,000 and issued 495,000 shares in connection with settling service-provider obligations.
- The company recorded a $100,000 convertible note from the Albert E. Whitehead Living Trust, bearing 4% annual interest and convertible at $0.10 per share. The maturity date was extended to August 1, 2012.
- Outstanding shares increased from 83,069,235 to 85,564,235. The company had 1,245,000 stock options outstanding at year-end, with a weighted-average exercise price of $0.142.
Cash Flow, Debt, Liquidity and Outlook
- Operating activities used $263,711 of cash in 2011. Financing provided $200,000, consisting of the $100,000 equity issuance and $100,000 related-party note. There was no investing cash flow in 2011.
- Management stated that the $4,978 cash balance was insufficient to fund operations for the next 12 months. Expected general, administrative, office and other expenses were approximately $10,000 per month.
- The company planned to seek merger opportunities, public or private financing, industry partners and possible management support to continue operations.
- Management stated that the company had no significant ongoing income-producing properties and limited financial resources. The independent auditor included a going-concern uncertainty, citing recurring losses, unproven oil and gas interests and the need for additional financing.
- In January 2012, the CEO advanced an additional $20,000 for general operating purposes.
- Management expected to pursue another Gabbs Valley test and planned to drill or arrange drilling of a South Okie test well in 2012, subject to financing and/or an industry partner. No quantified production, revenue or earnings guidance was provided.
Operations, Risks and Unusual Items
- The 2010 Paradise Unit test well recovered small quantities of oil, but the oil contained significant paraffin and the well was deemed non-commercial. The lease and well were assigned to another party, which assumed specified plugging and reclamation liabilities.
- The company believes the broader Cobble Cuesta structure may contain producible oil but acknowledged that the prospect is remote, with limited nearby infrastructure and no established commercial production.
- Both principal prospects are unproved; future value depends on successful exploration, economically recoverable reserves and access to additional capital.
- Key risks include volatile oil and gas prices, drilling failure, cost inflation for oilfield services, environmental and reclamation liabilities, extensive federal regulation, competition from larger companies, limited trading liquidity and dependence on CEO Albert E. Whitehead.
- The company’s common stock traded on the OTCQB. The reported 2011 quarterly high and low bid prices declined from $0.094/$0.0264 in the first quarter to $0.045/$0.017 in the fourth quarter. No dividends were paid or expected.
- The company reported no legal proceedings, no off-balance-sheet arrangements and no unresolved SEC staff comments. Management concluded that disclosure controls and internal control over financial reporting were effective; the auditor was not required to provide an internal-control attestation report.
Important Facts for Investors to Verify
- Whether the company obtained sufficient financing after year-end to continue operations and meet the August 1, 2012 convertible-note maturity.
- The terms, repayment or conversion status of the $100,000 related-party note and the additional $20,000 CEO advance.
- The status of Gabbs Valley lease obligations, plugging and reclamation liabilities, and any planned additional drilling.
- Whether South Okie drilling occurred or was funded, and whether any economically recoverable reserves were established.
- The company’s ability to generate operating revenue, given that it had no producing wells and reported zero petroleum sales for both 2011 and 2010.
- The impact of potential equity financing on dilution, including the 1,245,000 outstanding options and the company’s substantial accumulated deficit.
- The auditor’s going-concern qualification and the recoverability of assets associated with unproved oil and gas prospects.