Empire Petroleum Corporation: 2023 Q3 Form 10-Q Summary
Business Context and Reporting Period
Empire Petroleum Corporation is an independent energy company focused on optimizing developed oil and natural gas production through field management, workovers, recompletions and development activities. The filing covers the three and nine months ended September 30, 2023, with comparisons to the same periods in 2022. The financial statements are unaudited and prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total revenue | $9.1 million | $14.0 million | $28.9 million | $42.2 million |
| Product revenue | $10.3 million | $14.0 million | $30.2 million | $42.2 million |
| Operating income (loss) | $(2.6) million | $1.4 million | $(7.2) million | $11.0 million |
| Net income (loss) | $(2.7) million | $0.2 million | $(7.7) million | $9.4 million |
| Operating margin | (28.8%) | 10.3% | (24.8%) | 26.1% |
| Net margin | (30.0%) | 1.5% | (26.5%) | 22.2% |
| Net cash from operating activities | Not presented quarterly | $(6.0) million | $14.9 million | |
| Capital expenditures and property acquisitions | Not presented quarterly | $7.7 million | $3.7 million | |
| Cash balance | Not presented quarterly | $11.0 million | $15.7 million |
- Q3 production totaled 188,396 Boe, including 120,177 barrels of oil, 195,908 Mcf of natural gas and 35,568 barrels of NGLs. Nine-month production totaled 581,252 Boe.
- Q3 average realized prices were $78.98 per oil barrel, $2.10 per Mcf of natural gas and $11.57 per NGL barrel. Nine-month averages were $74.77, $2.06 and $12.06, respectively.
- Lease operating expense was $7.1 million in Q3 and $20.7 million for nine months. Nine-month workover expense was approximately $8.9 million, compared with $5.3 million in the prior-year period.
- At September 30, 2023, total liabilities were $57.4 million, including $15.7 million of debt, $27.7 million of asset retirement obligations and $1.1 million of lease liabilities.
- Working capital was $1.6 million, compared with $5.1 million at December 31, 2022. Management reported approximately $300,000 of availability under the Credit Facility.
Material Changes Versus the Prior Comparable Period
- Total revenue declined 35% in Q3 and 31% for the first nine months, primarily because of lower oil, natural gas and NGL prices. Nine-month oil revenue fell 22%, natural gas revenue fell 65% and NGL revenue fell 60%.
- Q3 oil volumes declined approximately 3%, partly because of facility maintenance in New Mexico; nine-month oil volumes increased approximately 2%.
- The company shifted from profitability to losses. Nine-month operating income declined by $18.2 million and net income declined by $17.0 million versus 2022.
- Net derivative losses increased to $1.2 million in Q3 and $1.3 million for nine months, compared with a $42,000 gain and a $94,000 loss, respectively, in the comparable periods.
- Nine-month lease operating expense increased 22%, while depreciation, depletion, amortization and accretion increased 37%. General and administrative expense increased 14%, including higher stock-based compensation and executive separation costs.
- Operating cash flow deteriorated by $20.9 million year over year. The company funded investments and operations partly through $10.0 million of related-party bridge loans and $2.5 million from warrant exercises.
- Total assets increased to $76.3 million from $71.5 million, while stockholders’ equity declined to $18.8 million from $23.2 million. Oil and gas properties, net, increased to $52.6 million from $43.9 million.
Guidance, Outlook, Risks and Unusual Items
- In October 2023, the company began a North Dakota drilling program expected to include 10 to 14 wells at an estimated total cost of $20 million to $22 million. Funding is expected from debt or equity issuances, cash on hand and operating cash flow.
- Phil Mulacek and Energy Evolution committed to provide at least an additional $10 million through equity or another mutually agreed instrument; the filing does not specify final terms or timing.
- The $10.0 million related-party bridge loans bear interest at 7%, mature December 31, 2024 after amendment, are guaranteed by the company and are subordinated to CrossFirst Bank’s secured credit facility. Interest is payable in company common shares.
- The Credit Facility had $4.4 million outstanding at September 30, 2023, an amended commitment of $5.2 million, a 10% interest rate and an August 2024 maturity. The company stated that it was in compliance with its covenants at September 30, 2023.
- Outstanding commodity derivatives include WTI fixed-price swaps covering quarterly volumes through 2024 and put options covering 41,000 barrels in the fourth quarter of 2023. Derivatives generated significant losses during the period and may limit benefit from higher commodity prices on hedged volumes.
- Asset retirement obligations increased to $27.7 million, including a $2.3 million revision primarily related to updated New Mexico plugging cost estimates.
- Executive changes included the March 2023 resignation of the former CEO, approximately $360,000 of CEO severance, the July 2023 separation of the former COO with $145,000 of severance, and the appointment of Michael R. Morrisett as CEO.
- The company reported that its disclosure controls and internal control over financial reporting were not effective because of an existing material weakness involving insufficient accounting resources and processes. Remediation efforts, including additional accounting personnel and control enhancements, remain ongoing.
- Management cautioned that continued losses, commodity-price volatility, financing needs, competition, environmental regulation and the ability to secure sufficient funding could materially affect future results. The filing states that there is no assurance the company will maintain profitability or obtain the funds required to finance operations.
- The company has one year, subject to extension, to exercise a $5.0 million option to acquire additional New Mexico working interests. It issued 67,000 common shares valued at approximately $601,000 for the option.
Investor Verification Checklist
- Verify the terms, maturity, share-settlement mechanics and use of proceeds of the related-party bridge loans and the committed additional $10 million of funding.
- Assess liquidity against the planned $20 million to $22 million North Dakota drilling program, the August 2024 Credit Facility maturity and required debt repayments.
- Review commodity hedge volumes, fixed prices, put floors and potential future derivative losses.
- Evaluate whether production growth and workover activity can offset lower commodity prices and the company’s high operating and plugging costs.
- Review the $27.7 million asset retirement obligation, updated plugging estimates and future cash requirements.
- Monitor remediation of the material weakness in internal control over financial reporting.
- Confirm the exercise decision and economics of the New Mexico purchase option before its expiration or extension.