EMPIRE PETROLEUM CORP quarterly report, Q1 FY2023

Empire Petroleum Corporation: Q1 2023 Form 10-Q Summary

Business Context and Reporting Period

Empire Petroleum Corporation is an independent oil and gas company focused on optimizing developed production and maximizing reserve recovery. The company operates properties through subsidiaries in New Mexico, North Dakota, Texas, and Louisiana. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the same period in 2022.

Financial Performance and Position

Metric	Q1 2023	Q1 2022
Total revenue	$10.1 million	$12.4 million
Product revenue	$10.1 million	$12.5 million
Operating income (loss)	$(2.2) million	$3.7 million
Net income (loss)	$(2.5) million	$3.6 million
Operating cash flow	$(5.1) million	$3.1 million
Capital expenditures	$2.2 million	$0.4 million
Ending cash	$6.8 million	$5.4 million

Revenue declined 19% year over year. Oil revenue fell 14%, natural gas revenue fell 26%, and NGL revenue fell 58%.
Production increased: oil volumes rose approximately 5% to 120,257 barrels, natural gas volumes rose approximately 8% to 231,218 Mcf, and total production rose to 198,549 Boe from 190,064 Boe.
Average realized prices declined to $74.33 per oil barrel from $91.17, $2.84 per Mcf from $4.13, and $50.87 per Boe from $65.85.
Operating margin was approximately negative 22% and net margin approximately negative 24%, compared with positive margins in Q1 2022.
Lease operating expense increased 43% to $6.5 million, including approximately $2.7 million of workover expense versus $1.5 million in the prior-year quarter.
General and administrative expense increased to $4.0 million, including $949,639 of stock-based compensation and $360,000 of former CEO severance.
Interest expense increased 114% to $237,299, primarily reflecting higher interest rates.
Cash decreased by $5.2 million during the quarter. Operating cash outflows and debt payments more than offset the $2.8 million return of sinking-fund deposits.
Working capital was $2.3 million at March 31, 2023, down from $5.1 million at December 31, 2022. The current ratio was approximately 1.2.
Total debt was $7.1 million, including $5.4 million outstanding under the senior revolver and $1.1 million owed to a related party. Total asset retirement obligations were $25.1 million.

Material Changes Versus the Prior Comparable Period

Lower commodity prices outweighed higher production volumes and drove the revenue decline.
Higher workover activity, North Dakota development activity, general and administrative costs, stock compensation, and interest expense contributed to the swing from profit to loss.
Operating cash flow changed from a $3.1 million inflow to a $5.1 million outflow. Management attributed the change to lower prices and a $2.1 million payment related to withholding obligations from a former CEO’s option exercise.
Oil and gas property additions increased to $2.2 million, primarily for North Dakota well enhancement projects, recompletions, and non-operated drilling.
The company completed the return of approximately $2.8 million remaining in a sinking fund during the quarter.
Former CEO Thomas W. Pritchard resigned in March 2023. He received approximately $360,000 of severance, and surrendered 340,234 RSUs and options in satisfaction of an approximately $2.1 million receivable.
Michael R. Morrisett became CEO on March 17, 2023 and receives no additional compensation for the role.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

The filing provides no formal earnings, production, or revenue guidance.
Management expects a significant 2023 capital program, funded through cash on hand, operating cash flow, and potentially additional debt or equity financing. It also expects limited drilling and future acquisitions in core areas.
In May 2023, the company signed an agreement to acquire additional working interests in New Mexico properties for $6.7 million; closing was expected in summer 2023.
At March 31, 2023, management reported approximately $300,000 of availability under the credit facility and $6.8 million of cash. The revolver matures May 26, 2024, has a $6.18 million commitment that is reduced by $500,000 per quarter beginning March 31, 2023, and bore interest at 9.5% at quarter-end. The company reported compliance with its debt covenants.
Management states that sustained profitability and sufficient financing are not assured. Key risks include commodity-price volatility, financing availability, production and development costs, environmental regulation, competition, and the ability of joint-interest partners to reimburse costs.
The company’s disclosure controls and internal control over financial reporting were not effective because of a material weakness related to insufficient accounting resources and timely review of financial reporting. Remediation efforts were continuing.
Commodity put options provided price protection for portions of projected production, with second-, third-, and fourth-quarter 2023 volumes and floor prices disclosed in the filing.
Management does not expect current legal proceedings or environmental matters to have a material adverse effect, but the company remains subject to ordinary-course litigation and extensive environmental obligations.

Important Facts for Investors to Verify

Whether commodity prices and production volumes improve enough to restore positive operating cash flow.
Funding sources and closing conditions for the planned $6.7 million New Mexico acquisition.
Available borrowing capacity and the quarterly reductions to the revolver commitment ahead of its May 2024 maturity.
Progress in remediating the material weakness in internal control over financial reporting.
The sustainability of elevated workover, administrative, stock-based compensation, and debt-service costs.
The magnitude and timing of future asset retirement obligations and other environmental or plugging expenditures.
The terms and economic impact of the related-party joint development agreement and associated $1.1 million obligation.