Empire Petroleum Corporation — FY2018 Form 10-K Summary
Business context and reporting period
This Form 10-K covers the fiscal year ended December 31, 2018, filed April 1, 2019. Empire is a small oil and natural gas exploration, acquisition and production company with properties concentrated in Louisiana. Production began after the 2018 acquisitions; the company had one employee and traded on the OTCQB under “EMPR.”
Financial performance and key metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Oil and gas sales | $352,374 | $0 |
| Unrealized derivative gain | $113,081 | $0 |
| Total revenue | $465,455 | $0 |
| Operating loss | $(915,948) | $(757,069) |
| Net loss | $(1,017,131) | $(830,067) |
| Basic and diluted loss per share | $(0.08) | $(0.08) |
| Net cash used in operating activities | $(564,894) | $(235,963) |
| Capital investment in oil and gas properties | $916,575 | $0 |
| Cash at year-end | $84,631 | $77,780 |
| Total assets | $1,997,273 | $377,780 |
| Total liabilities | $2,147,456 | $249,586 |
| Stockholders’ equity/(deficit) | $(150,183) | $128,194 |
Reported total revenue included a $113,081 unrealized derivative gain; excluding that item, oil and gas sales were $352,374. The approximate net loss margin was 218% of total revenue, and the operating loss margin was approximately 197%. These margins are not representative of a full production year because the company owned producing properties only during part of 2018.
Production totaled 4,284 barrels of oil and 12,111 Mcf of natural gas, or 6,302 BOE. Average realized prices were $70.29 per barrel of oil, $3.05 per Mcf of natural gas and $52.89 per BOE. Year-end production was approximately 100 net BOE per day from nine gross and 8.1 net productive wells.
Operating expenses included $116,288 of production costs, $21,194 of production taxes, $15,527 of depreciation, depletion and amortization, $1,929 of accretion expense and $1,226,465 of general and administrative expense. Interest expense was $101,183. No income tax benefit was recognized because the company maintained a full valuation allowance against its deferred tax assets.
Liquidity, debt and capitalization
- Cash was only $84,631 at December 31, 2018, while current liabilities were $740,986 and total liabilities were $2,147,456.
- Debt included $1,175,820 outstanding under the CrossFirst Bank senior revolver, $254,204 of convertible notes net of debt issuance costs, and $25,000 of related-party notes payable. The filing also describes approximately $1.5 million of aggregate principal indebtedness.
- The CrossFirst facility had a $5 million maximum commitment, with approximately $3.8 million unused at year-end, a stated maturity of September 20, 2020, and interest at prime plus 1.5%.
- The company was not in compliance with certain financial covenants at December 31, 2018. The filing states that the covenants were subsequently modified retrospectively in connection with a later amendment.
- Financing provided $1,488,320 of cash in 2018, including $1,200,820 of long-term debt and $287,500 from stock issuance. The company continues to depend on equity and debt financing to fund operations and acquisitions.
- The company had approximately $10.8 million of federal net operating loss carryforwards, subject to limitations and expiration, with a full valuation allowance recorded.
Material changes versus the prior comparable period
- Empire acquired Louisiana oil and gas properties in three transactions: Cardinal for $293,966 after adjustments, Exodus for $959,338, and Riviera for $162,273. The acquisitions added approximately 3,082 gross developed and undeveloped acres and producing wells.
- Revenue increased from zero in 2017 to $465,455 in 2018, but the net loss increased by $187,064, primarily because general and administrative expense rose by $469,396 to approximately $1.23 million and interest expense increased.
- Oil and gas properties increased to $1,629,770 net from zero, while the company’s accumulated deficit increased to $17,128,346.
- Shares issued and outstanding increased to 17,345,609 at December 31, 2018 from 8,803,942 at December 31, 2017. Numerous warrants were issued in connection with financing, acquisitions and services; 17,524,169 options and warrants were outstanding at year-end and excluded from diluted loss per share because they were anti-dilutive.
- The company terminated and unwound its failed Masterson West II transaction, reversing a $300,000 investment and related equity amounts.
Outlook, management commentary, risks and unusual items
The independent auditor expressed substantial doubt about the company’s ability to continue as a going concern. Management stated that continued operations depend on raising capital, developing economically recoverable reserves and achieving profitable production. The company provided no formal earnings or production guidance.
- Commodity prices, production declines, reserve estimates and operating costs could materially affect revenue, liquidity and the economic value of reserves.
- All producing properties and proved reserves were concentrated in Louisiana, exposing the company to regional weather, regulatory, transportation, processing and market risks.
- Oil and gas sales were concentrated with Katrina Energy, LLC for oil and Cokinos Natural Gas Company for natural gas, although management identified alternative purchasers in the region.
- The company had commodity swaps outstanding through October 31, 2019. The year-end derivative asset was $113,081, and the filing reports a $117,797 gain on derivatives and $4,716 of net cash receipts from derivatives during 2018.
- Asset retirement obligations were $230,650 at year-end, principally assumed in the acquisitions.
- The company faces substantial regulatory, environmental, climate-related, insurance, competitive and financing risks. It had no legal proceedings as of December 31, 2018 and no off-balance-sheet arrangements.
- Subsequent to year-end, Empire closed the acquisition of Energy Quest II properties in Montana and North Dakota for $5,185,383 after adjustments. The transaction involved approximately 20,700 net acres and 183 active wells producing approximately 355 net BOE per day, and was funded in part by $4,880,383 of new revolver borrowings.
- In early 2019, the company raised $167,000 from warrant exercises and issued $90,000 of short-term promissory notes, including notes to directors and officers.
Important facts for investors to verify
- Whether the company obtained sufficient financing and maintained compliance with the amended CrossFirst loan covenants.
- The impact of the Energy Quest II acquisition on production, reserves, debt, operating costs and liquidity.
- The company’s ability to convert approximately 100 net BOE per day of Louisiana production, and the acquired Montana and North Dakota production, into positive operating cash flow.
- The extent of dilution from outstanding warrants, convertible notes and other equity-linked instruments.
- Whether the going-concern uncertainty has been resolved and whether additional equity or debt financing will be required.
- The sustainability of reserve estimates and the reported $12,977,620 standardized measure, which depends on SEC pricing assumptions and estimated future costs.