Empire Petroleum Corporation: Fiscal 2020 Form 10-K Summary
Business Context and Reporting Period
Empire Petroleum Corporation is a small reporting company engaged in the acquisition, development and production of oil and natural gas properties. This Form 10-K covers the fiscal year ended December 31, 2020, with comparative information for 2019. Producing properties are located primarily in Texas, Louisiana, North Dakota and Montana. The company reported 190 producing wells at year-end 2020, of which it operated 156, and employed 11 full-time employees.
In April 2020, Empire acquired Texas properties comprising approximately 139 gross wells, 30,000 net acres and related gathering infrastructure. A planned $8.5 million Ovintiv acquisition was terminated after Empire was unable to obtain financing; the company received $50,000 of its $850,000 deposit and recorded the forfeited amount in general and administrative expense.
Financial Performance and Key Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Oil and natural gas sales | $5.99 million | $5.83 million | 3% increase |
| Net realized and unrealized derivative gain | $1.74 million | $0.03 million | Increase of $1.71 million |
| Total revenue | $7.73 million | $5.86 million | 32% increase |
| Operating loss | $(17.58) million | $(6.15) million | Worsened by $11.43 million |
| Net loss | $(16.84) million | $(6.65) million | 153% larger loss |
| Basic and diluted loss per share | $(0.74) | $(0.33) | Worsened |
| Net cash used in operating activities | $(1.72) million | $(0.59) million | Higher cash use |
Production increased to 188,104 Boe from 119,756 Boe, including 164,869 barrels of oil and 139,412 Mcf of natural gas. Average realized prices declined to $42.00 per barrel of oil from $53.37 and to $2.53 per Mcf of natural gas from $2.95. Total realized price per Boe declined to $38.68 from $51.35. Production and operating costs declined to $25.90 per Boe from $36.22, but impairment charges, depletion and general and administrative costs resulted in substantial losses. The filing does not provide a clear consolidated gross-margin percentage; based on reported totals, the operating margin was approximately negative 228% in 2020.
Major 2020 expenses included $8.67 million of oil and natural gas property impairment, $7.37 million of general and administrative expense, $3.12 million of depletion, depreciation and amortization, and $0.93 million of asset-retirement-obligation accretion. G&A increased 103%, primarily due to stock-option expense, acquisition and capital-raising costs, and higher administrative costs.
At December 31, 2020, cash was $157,695, total current assets were $2.22 million and total current liabilities were $6.07 million. Total assets were $11.25 million, total liabilities were $29.69 million and stockholders’ deficit was $(18.44) million. The company had approximately $9.04 million of gross debt, or $9.02 million net of debt issuance costs, including $8.12 million outstanding under its senior revolver. Approximately $400,000 of bank-line availability remained.
Capital expenditures and acquisitions used $0.51 million of cash in 2020, while financing activities provided $1.02 million, including $0.93 million of debt proceeds and $0.53 million from stock and warrant issuances. The company reported no off-balance-sheet arrangements. Its standardized measure of discounted future net cash flows declined to $20.77 million from $37.30 million, using substantially lower commodity-price assumptions.
Material Changes Versus 2019
- Production volumes increased approximately 57%, primarily from acquired properties and a full year of production from North Dakota assets.
- Commodity prices declined materially, partially offsetting volume gains and limiting the increase in oil and gas sales to 3%.
- Derivative gains increased to $1.74 million from $33,643; 2020 cash receipts from derivatives were $1.52 million.
- Empire recorded an $8.67 million impairment charge in 2020, compared with none in 2019, reflecting lower commodity prices and a decision to focus on producing properties rather than undeveloped drilling.
- Asset-retirement obligations increased to $15.36 million from $5.79 million, principally from obligations assumed in acquisitions.
- Shares issued and outstanding increased to 24.89 million at December 31, 2020 from 20.37 million, excluding subsequent issuances and potential dilution from options and warrants.
- The company granted or had outstanding substantial equity awards. At year-end, 10 million stock options were outstanding, and 37.9 million options and warrants were excluded from diluted EPS because they were anti-dilutive.
Guidance, Outlook, Risks and Unusual Items
Management provided no formal production, revenue or earnings guidance. Management expects continued costs for acquisitions and intends to seek additional equity and debt financing for working capital and future investments. The company’s independent auditor reported substantial doubt about its ability to continue as a going concern because of recurring losses, negative working capital, dependence on financing and the need for economically recoverable reserves and profitable production.
The senior revolver originally matured in March 2021. A March 2021 amendment extended maturity to March 2022, reset the collateral-base commitment to $8.52 million, suspended certain leverage and interest-coverage covenants through March 31, 2021, and revised future leverage requirements. Covenant compliance and refinancing remain material risks.
Empire’s operations are highly exposed to oil and natural gas prices, COVID-19-related demand and storage disruptions, production declines, regional transportation constraints, environmental and regulatory requirements, asset-retirement costs, service-provider pricing, and competition from larger companies. Four customers accounted for approximately 95% of 2020 operating revenue, creating customer-concentration risk.
Management concluded that disclosure controls and procedures were not effective at December 31, 2020 because of insufficient accounting resources and limited segregation of duties. A financial consultant was engaged in the first quarter of 2021, and management planned to add accounting personnel. The filing states that the financial statements fairly present the company’s position despite the material weakness.
Subsequent events included the exercise by PIE of warrants to purchase 23.6 million shares for $3.35 million, a planned $17.8 million New Mexico acquisition, a planned $0.9 million North Dakota acquisition, and approximately $3.15 million raised through February and March 2021 stock and warrant issuances. These transactions could materially affect leverage, production, liquidity and share dilution.
Most Important Facts for Investors to Verify
- Whether the company can raise sufficient capital to fund operations, meet debt obligations and close or finance announced acquisitions.
- Compliance with the amended senior revolver covenants, borrowing-base reductions and maturity requirements.
- The sustainability of production growth and the effect of declining commodity prices on reserves, impairment and cash flow.
- The amount and timing of asset-retirement obligations and other assumed acquisition liabilities.
- The remediation of the material weakness in internal control over financial reporting.
- The fully diluted share count after PIE’s warrant exercise, subsequent equity offerings and outstanding options and warrants.
- The final status, consideration and financing of the announced New Mexico and North Dakota acquisitions.
- The filing’s inconsistent customer-concentration disclosures and reserve-location descriptions, which should be reconciled to the audited notes and subsequent filings.