EP

Business Context and Reporting Period

Company: Empire Petroleum Corporation (EP)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2024
Business Overview: Independent energy company focused on optimizing developed oil and gas production in New Mexico, North Dakota, Texas, and Louisiana. The company is currently executing the "Starbuck Drilling Program" in North Dakota.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 24% in Q3 2024 compared to Q3 2023, driven by a 20% increase in oil production volumes (144,674 Bbls vs 120,177 Bbls) due to new wells in North Dakota and asset acquisitions in New Mexico. This was partially offset by a 9% decrease in realized oil prices ($71.48/Bbl vs $78.98/Bbl).
• Gas Price Collapse: Natural gas revenue plummeted 98% in Q3 2024 due to depressed prices in New Mexico ($0.03/Mcf vs $2.10/Mcf in Q3 2023).
• Increased Costs: Depreciation, Depletion, and Amortization (DD&A) surged 159% in Q3 2024 due to the capitalization of costs from the Starbuck Drilling Program. General and Administrative expenses rose 45% due to increased headcount.
• Capital Expenditures: Incurred capital expenditures for the nine months ended September 30, 2024, were approximately $38.3 million, a significant increase from $6.2 million in the prior year period, primarily for the North Dakota drilling program.
• Equity Issuance: The company completed a subscription rights offering in April 2024 raising approximately $20.7 million and another in November 2024 raising $10.0 million.

Guidance, Outlook, Risks, and Contingencies

• Liquidity and Going Concern: The company reported negative working capital of $(15.26M) and was not in compliance with the current ratio covenant of its revolving credit facility as of September 30, 2024. A waiver was obtained from the lender on November 12, 2024. Management states that substantial doubt regarding the ability to continue as a going concern has been alleviated by committed financial support from major shareholders (Phil Mulacek and Energy Evolution) and recent equity offerings.
• Debt Covenants: The company requires additional funds to satisfy payables related to the Starbuck Drilling Program and to maintain compliance with debt covenants over the next 12 months.
• Derivatives: As of September 30, 2024, the company settled all outstanding commodity derivative positions, realizing a net gain of $300,000.
• Legal/Environmental: The company deposited $1.0 million into an escrow account for an Agreed Compliance Order with the New Mexico Oil Conservation Division regarding inactive wells. Work is complete, and the company expects the return of the remaining $200,000 by year-end 2024.

Investor Verification Checklist

• Covenant Compliance: Verify the status of the current ratio covenant waiver and the company's ability to maintain compliance without further dilution or debt restructuring.
• Capital Needs: Assess the sufficiency of the $3.15M cash balance and recent equity proceeds against the $38.3M in incurred capital expenditures and outstanding payables.
• Gas Price Sensitivity: Evaluate the impact of the severe drop in natural gas prices ($0.03/Mcf) on future cash flows, given the company's exposure in New Mexico.
• Related Party Transactions: Review the terms of the $5.0M promissory note from Energy Evolution (converted to equity) and the ongoing Purchase Option for New Mexico assets to understand potential future dilution or asset acquisition costs.
• Asset Retirement Obligations: Monitor the growth in Asset Retirement Obligations (ARO), which increased to $29.7M, driven by new well completions.