Empire Petroleum Corporation: Q1 2020 Form 10-Q Summary
Business Context and Reporting Period
Empire Petroleum Corporation explores and develops oil and natural gas interests through wholly owned subsidiaries. This unaudited Form 10-Q covers the three months ended March 31, 2020, with comparison to the three months ended March 31, 2019. The company had 21,392,277 common shares outstanding at March 31, 2020 and three employees.
Financial Results and Key Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Oil and gas sales | $1.314 million | $0.344 million | +282% |
| Derivative gain (loss) | $2.509 million | $(0.088) million | Favorable change of $2.597 million |
| Total revenue | $3.823 million | $0.256 million | +1,395% |
| Operating income (loss) | $0.577 million | $(0.554) million | Improved by $1.131 million |
| Net income (loss) | $1.588 million | $(0.588) million | Improved by $2.176 million |
| Net income margin | 41.5% | Not meaningful | Driven substantially by derivatives and asset sale gain |
| Net cash from operating activities | $0.171 million | $(0.114) million | Improved by $0.284 million |
| Cash at period end | $0.590 million | $0.030 million | +$0.560 million |
Production increased to 35,884 barrels of oil and 12,440 Mcf of natural gas, or 37,957 barrels of oil equivalent, from 5,038 barrels of oil, 1,796 Mcf of natural gas and 6,835 barrels of oil equivalent in the prior-year quarter. Average realized prices declined to $50.56 per oil barrel from $59.92 and to $1.87 per Mcf from $2.83.
Operating expenses, production taxes, depreciation, depletion, amortization and accretion totaled $1.917 million, compared with $0.197 million in Q1 2019. The company recorded an $0.800 million impairment of oil and gas properties due to lower commodity prices and a $1.144 million gain on asset sales.
Total assets were $12.978 million at March 31, 2020, including $0.590 million of cash, $1.533 million of current unrealized derivative gains, $0.219 million of long-term derivative gains and an $0.850 million deposit for a proposed acquisition. Total liabilities were $16.226 million, resulting in stockholders’ deficit of $3.248 million.
The balance sheet shows $8.339 million of current notes payable and no long-term notes payable. The notes disclose an outstanding Senior Revolver balance of $8.397 million; investors should reconcile this difference. The revolver matures March 27, 2021, bears interest at prime plus 1.5% (4.75% at March 31, 2020), is secured by substantially all subsidiary assets and includes financial covenants. The company was not in compliance with the funded-debt-to-EBITDAX covenant at quarter-end.
Material Changes Versus the Prior Comparable Period
- Oil and gas production and sales increased substantially following property acquisitions completed in 2019.
- Derivative results changed from an $0.088 million loss to a $2.509 million gain, primarily because of declining oil prices on outstanding swaps.
- Operating costs increased significantly with the expanded asset base, while general and administrative expense decreased to $0.529 million from $0.613 million.
- The company recognized an $0.800 million property impairment; no comparable impairment was recorded in Q1 2019.
- The company generated $0.171 million of operating cash flow but used $0.196 million in investing activities and received $0.615 million from financing activities.
- Three senior unsecured notes totaling $102,500 were converted into 1,025,000 common shares in January 2020.
Outlook, Risks, Contingencies and Unusual Items
- Management states that recent losses and the need for additional financing raise substantial going-concern risks. At March 31, 2020, the company reported $0.590 million of cash and a working-capital deficit of $7.159 million.
- COVID-19, the OPEC-Russia production dispute and reduced energy demand caused substantial oil-price volatility. Lower prices could reduce revenue, cash flow, production, reserve values and liquidity, and could cause production shut-ins or covenant breaches.
- The company had derivative positions covering a substantial amount of expected remaining 2020 production, but there is no assurance that additional favorable hedges can be obtained.
- The company deposited $0.850 million toward an $8.5 million Ovintiv acquisition scheduled to close April 30, 2020. As of the filing, COVID-19-related financing difficulties prevented completion, and the company was negotiating either cancellation and return of the deposit or additional time.
- On April 7, 2020, the company closed a Texas acquisition involving 139 gross wells and approximately 30,000 net acres. The transaction included assumed obligations and a contingent payment of up to $2.0 million based on production and oil-price conditions.
- On May 5, 2020, the company received a $160,700 PPP loan at 1% interest, with potential forgiveness subject to SBA criteria.
- Management disclosed no legal proceedings, no defaults upon senior securities and effective disclosure controls as of March 31, 2020.
Most Important Facts for Investors to Verify
- Reconcile the balance-sheet current notes payable of $8.339 million with the Note 8 revolver balance of $8.397 million.
- Assess the consequences and lender rights associated with the revolver covenant violation and the March 27, 2021 maturity.
- Evaluate whether the $1.588 million quarterly profit is sustainable, given that it was heavily affected by a $2.509 million derivative gain and a $1.144 million asset-sale gain.
- Confirm the final disposition of the $0.850 million Ovintiv deposit and the financing and closing status of the April 2020 Texas acquisition.
- Review commodity-price sensitivity, reserve impairment risk, hedge settlement exposure and potential production shut-ins resulting from COVID-19-related demand and storage constraints.
- Assess the company’s ability to raise additional debt or equity capital to fund operations, acquisitions and working-capital needs.