Empire Petroleum Corporation 10-Q Summary
Business Context and Reporting Period
Empire Petroleum Corporation is an independent energy company focused on optimizing developed oil and gas production through field management, workovers, recompletions and related development activities. The unaudited Form 10-Q covers the three and six months ended June 30, 2023, with comparisons to the corresponding 2022 periods.
Key Financial Metrics
| Metric | Q2 2023 | Q2 2022 | Six Months 2023 | Six Months 2022 |
|---|---|---|---|---|
| Total revenue | $9.7 million | $15.7 million | $19.8 million | $28.1 million |
| Operating income (loss) | $(2.3) million | $5.8 million | $(4.5) million | $9.6 million |
| Net income (loss) | $(2.5) million | $5.5 million | $(4.9) million | $9.2 million |
| Operating margin | (23.7%) | 37.1% | (22.9%) | 34.0% |
| Net margin | (25.4%) | 35.3% | (24.9%) | 32.6% |
| Net cash from operating activities | Not separately reported | Not separately reported | $(8.0) million | $11.0 million |
| Capital expenditures and property additions | Not separately reported | Not separately reported | $3.1 million | $1.2 million |
| Cash balance | June 30, 2023: $1.3 million | December 31, 2022: $11.9 million |
Q2 production totaled 194,306 barrels of oil equivalent, compared with 196,412 Boe in the prior-year quarter. Six-month production increased to 392,856 Boe from 386,477 Boe. Oil and natural gas volumes increased, while natural gas liquids volumes declined.
Q2 realized prices were approximately $71.24 per oil barrel, $1.18 per Mcf of natural gas and $11.81 per NGL barrel, compared with $108.22, $6.34 and $27.03, respectively, in Q2 2022. Total product revenue declined 38% to $9.8 million.
Lease operating expense increased 52% in Q2 to $7.1 million and 48% for the six-month period to $13.6 million. Q2 workover expense was approximately $2.9 million, including approximately $572,000 of plugging and abandonment expense. Six-month workover expense was approximately $5.7 million, including approximately $634,000 of plugging and abandonment expense.
Liquidity, Debt and Balance Sheet
- Working capital was $(583,000) at June 30, 2023, compared with $5.1 million at December 31, 2022.
- Total debt was $6.4 million, including $4.9 million outstanding under the Senior Revolver, $1.1 million payable to a related party and other notes. Current maturities were $2.3 million.
- The revolver had a maximum facility amount of $20.0 million, with approximately $5.2 million of commitment capacity after the August 2023 amendment, subject to quarterly reductions. The stated interest rate was 9.75% at June 30, 2023.
- Management reported approximately $300,000 of availability under the credit facility at June 30, 2023 and stated that the company was in compliance with its debt covenants.
- Asset retirement obligations totaled $27.5 million, up from $25.0 million at year-end 2022, primarily because of revised New Mexico plugging cost estimates.
- Stockholders’ equity declined to $18.3 million from $23.2 million at December 31, 2022, primarily reflecting the six-month net loss.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of lower commodity prices: six-month oil, natural gas and NGL revenues decreased 24%, 59% and 62%, respectively.
- The company moved from profitability to losses. Six-month net income declined by $14.1 million to a $4.9 million loss.
- Operating cash flow declined by $19.0 million year over year to a use of $8.0 million. The decrease reflected lower commodity prices, higher workover and plugging activity, working-capital changes and a $2.1 million payment related to former executive withholding obligations.
- Cash declined by $10.6 million during the first half of 2023, despite the $2.8 million return of a sinking-fund balance.
- Interest expense increased 90% for the six-month period as the credit facility rate rose from 5.0% to 9.75%, despite lower revolver borrowings.
- Stock-based compensation increased to $2.1 million from $863,000 for the six-month period, primarily due to 2023 board awards.
Outlook, Commentary, Risks and Unusual Items
- Management expects additional capital spending in the second half of 2023, including limited drilling and acquisitions in core areas. Funding is expected to come from debt or equity issuances, cash on hand and operating cash flow.
- Management states that funding sources are expected to be adequate but provides no assurance that they will meet future requirements. The company acknowledges a history of operating losses and no assurance of sustained profitability.
- In July 2023, Energy Evolution exercised warrants for 500,000 shares at $5.00 per share, generating $2.5 million of proceeds.
- In August 2023, the company amended and extended its senior revolver maturity to August 23, 2024 and modified its commitment amount. The amendment also adds or changes covenant requirements beginning September 30, 2023, including a maximum funded-debt-to-EBITDAX ratio of 3:1 and a minimum current ratio of 1:1.
- On August 9, 2023, the company and an Energy Evolution subsidiary acquired additional working interests in New Mexico properties for $6.7 million. The subsidiary funded $5.0 million for a 90% interest in the acquired interests, while Empire received a three-year purchase option and agreed to issue shares in connection with that option.
- Former CEO Thomas Pritchard resigned in March 2023. The company paid approximately $360,000 of severance and received surrendered equity awards in satisfaction of an approximately $2.1 million receivable.
- The company’s disclosure controls and procedures were not effective at June 30, 2023 because of an existing material weakness involving insufficient accounting resources and the timely review of financial reporting information. Remediation efforts are ongoing.
- Commodity prices, production declines, workover and plugging costs, financing availability, debt covenant compliance, environmental obligations and joint-interest partner reimbursements are significant risks.
- The company uses oil derivative put options to reduce price volatility. It reported derivative losses of $133,000 for the first six months and entered into additional fixed-price swaps in July 2023 covering approximately 90,000 barrels over 12 months at $72.15 per barrel.
Investor Verification Priorities
- Verify the company’s ability to fund operations and planned capital spending given $1.3 million of cash, negative working capital and negative operating cash flow at June 30, 2023.
- Review the amended revolver terms, borrowing-base capacity, covenant calculations and maturities through August 2024.
- Assess whether workover, plugging and asset-retirement costs are recurring or could increase further, particularly in New Mexico and the Rockies.
- Evaluate the economics, funding structure and purchase-option terms of the August 2023 New Mexico acquisition with Energy Evolution.
- Monitor commodity prices, realized prices, derivative positions and production volumes because revenue and liquidity are highly sensitive to market conditions.
- Review remediation of the material weakness in internal control over financial reporting and any subsequent disclosures regarding control effectiveness.