Empire Petroleum Corporation: Q1 2021 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 months ended March 31, 2021, compared with the three months ended March 31, 2020. The company reported six employees and 57,515,920 common shares outstanding at March 31, 2021.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Oil and gas sales | $2.46 million | $1.31 million |
| Total revenue, including derivatives | $2.10 million | $3.82 million |
| Operating income (loss) | $(0.86) million | $0.58 million |
| Net income (loss) | $(1.00) million | $1.59 million |
| Basic and diluted EPS | $(0.03) | $0.08 |
| Net cash used in operating activities | $(0.63) million | $(0.68) million |
| Capital and acquisition investing cash flow | $(1.96) million | $0.65 million |
| Net cash provided by financing activities | $6.35 million | $0.62 million |
| Cash at period end | $3.91 million | $0.59 million |
- Oil and gas production increased to 46,760 Boe from 37,957 Boe. Oil production was 39,926 barrels and natural gas production was 41,004 Mcf.
- Operating expenses were $2.96 million, including $0.91 million of general and administrative expense. No oil and gas property impairment was recorded in Q1 2021 versus $0.80 million in Q1 2020.
- Operating margin was approximately negative 41% and net margin approximately negative 48%, based on reported total revenue.
- Total assets were $17.09 million and total liabilities were $30.05 million at March 31, 2021. Stockholders’ deficit improved to $(12.95) million from $(18.44) million at December 31, 2020, primarily due to equity issuances and warrant exercises.
- Working capital was negative $7.05 million. Current liabilities included $8.40 million of current notes payable, while cash was $3.91 million.
Material changes versus the prior comparable period
- Oil and gas sales increased by approximately $1.14 million, primarily reflecting the Pardus properties, which contributed approximately $0.96 million and were not owned in Q1 2020.
- Total revenue declined because the derivative result changed from a $2.51 million gain in Q1 2020 to a $0.36 million loss in Q1 2021. Management attributed the change primarily to higher oil prices in 2021.
- General and administrative expense increased by $377,065 to $906,048, due primarily to increased staffing and professional fees related to planned acquisitions.
- The company moved from net income of $1.59 million to a net loss of $997,180. Q1 2020 benefited from a $1.14 million gain on asset sales and the large derivative gain.
- Financing cash flow increased substantially because of $3.35 million from warrant exercises and $3.14 million from common stock and warrant issuances.
- Outstanding shares increased from 24.89 million at December 31, 2020 to 57.52 million at March 31, 2021, reflecting warrant exercises and equity issuance.
Guidance, outlook, risks and unusual items
- Management plans to pursue additional oil and gas acquisitions and expects to finance acquisitions and working capital through a combination of debt and equity. No quantitative earnings or production guidance was provided.
- Management concluded that substantial doubt exists regarding the company’s ability to continue as a going concern. The company has incurred significant losses, has a working capital deficit, and may need additional financing or restructuring.
- The company had $7.85 million outstanding under its Senior Revolver at March 31, 2021, with maturity on March 27, 2022. It was not in compliance with required financial covenants, including EBITDAX-to-interest and funded-debt-to-EBITDAX ratios.
- Commodity prices, production levels, derivative results, reserve estimates, acquisition execution, financing availability and COVID-19-related demand and operating disruptions could materially affect results and liquidity.
- Subsequent to quarter-end, the company closed acquisitions of New Mexico properties for a stated purchase price of $17.8 million and North Dakota properties for $0.9 million. It also entered into a $16.25 million senior secured convertible note and $3.24 million of unsecured convertible notes.
- The New Mexico transaction required a $5.0 million performance bond, supported by a $3.75 million letter of credit and related certificate of deposit collateral. The company also entered into a $3.75 million demand promissory note collateralized by a similar certificate of deposit.
- The company applied for forgiveness of its $160,700 PPP loan and received a second-draw PPP loan of $106,850 after quarter-end; forgiveness remained subject to SBA approval.
- Disclosure controls and procedures were determined to be ineffective because of limited accounting resources and insufficient segregation of duties. Management engaged a financial consultant to assist with remediation.
- Legal proceedings and environmental liabilities were not considered material by management as of March 31, 2021, although the company remains subject to environmental laws and ordinary-course claims.
Important facts for investors to verify
- Whether the company can refinance, restructure or repay the Senior Revolver before its March 2022 maturity and cure its covenant violations.
- The funding sources and final terms used to complete the New Mexico and North Dakota acquisitions, including the associated collateral, debt and liquidity requirements.
- Whether the reported acquisitions generate sufficient production and cash flow to support debt service and asset-retirement obligations.
- The status of PPP loan forgiveness and the effect of any unforgiven amounts.
- The company’s ability to remediate ineffective disclosure controls and maintain reliable financial reporting as operations expand.
- Exposure to oil and natural gas price volatility, derivative losses, reserve impairment and further production or demand disruptions.