Empire Petroleum Corporation — Q1 2022 Form 10-Q Summary
Business Context and Reporting Period
Empire Petroleum Corporation is an independent energy company focused on optimizing developed oil and natural gas production and maximizing reserve recovery. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. The New Mexico properties acquired from XTO Holdings closed in May 2021 and materially affected the current-period results.
Key Financial Metrics
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Product sales | $13.13 million | $2.44 million |
| Total revenue | $13.05 million | $2.10 million |
| Operating income (loss) | $3.73 million | $(0.86) million |
| Net income (loss) | $3.62 million | $(1.00) million |
| Basic earnings (loss) per share | $0.18 | $(0.13) |
| Net cash provided by operating activities | $3.06 million | $(0.63) million |
| Capital expenditures and other investing outflows | $0.96 million | $1.96 million |
| Cash at period end | $5.35 million | $3.91 million |
Revenue growth reflected higher production and commodity prices. Oil revenue was $10.42 million, gas revenue was $0.99 million, and NGL revenue was $1.73 million. The company reported a $112,000 net realized and unrealized derivative loss.
Operating margin was approximately 28.6% of total revenue and net margin was approximately 27.8%. These margins are not necessarily indicative of full-year results. Operating expenses included $5.19 million of lease operating costs, $0.90 million of production taxes, $0.43 million of depreciation, depletion and amortization, $0.33 million of asset-retirement accretion, and $2.46 million of general and administrative expense, including $0.38 million of stock-based compensation.
Balance Sheet, Debt and Liquidity
- Total assets were $52.82 million at March 31, 2022, compared with $50.09 million at December 31, 2021.
- Working capital was $4.75 million, up from $1.06 million at year-end 2021.
- Total debt was $8.17 million, consisting principally of a $6.77 million senior revolver, an $0.82 million PIE related-party term loan, equipment and vehicle notes, and an insurance-provider note.
- The senior revolver has a $7.68 million existing commitment, subject to scheduled quarterly reductions, and matures March 27, 2024. The stated interest rate was 5.0% at March 31, 2022.
- Approximately $300,000 was available under the credit facility at quarter-end. Management expects to fund future acquisitions and operations through operating cash flow and additional debt or equity financing.
- The company was in compliance with its debt covenants at March 31, 2022.
- Asset retirement obligations were $20.97 million, and the company held $5.29 million in a sinking fund related principally to bonding requirements for acquired properties.
Material Changes Versus the Prior Comparable Period
- Total revenue increased approximately 521% to $13.05 million from $2.10 million. Product sales increased approximately 439% to $13.13 million.
- Net production increased to 190,064 Boe from 46,760 Boe. Oil production rose to 114,255 barrels from 39,926 barrels, and NGL production was 1.69 million gallons versus none reported in the prior period.
- Total average realized price per Boe increased to $68.51 from $46.78. Oil pricing increased to $91.17 per barrel from $48.35, while natural gas pricing declined to $4.61 per Mcf from $6.27.
- Lease operating expense increased 266% to $5.19 million, and production and ad valorem taxes increased 431% to $0.90 million, primarily due to the New Mexico assets and higher production.
- Operating income improved by $4.59 million, and net income improved by $4.62 million, resulting in a return to profitability.
- Operating cash flow improved by $3.69 million to $3.06 million. Financing cash flow changed from a $6.35 million inflow in Q1 2021 to a $0.36 million outflow in Q1 2022 because the prior year included substantial stock and warrant proceeds.
- Shares outstanding increased modestly to 19.89 million at March 31, 2022 from 19.84 million at December 31, 2021. The company effected a one-for-four reverse stock split on March 7, 2022 and listed its common stock on the NYSE American.
Guidance, Outlook, Risks and Unusual Items
- No formal quantitative revenue, production or earnings guidance was provided.
- Management expects additional capital expenditures and future oil and gas acquisitions, with funding expected from operating cash flow and potentially additional debt or equity financing.
- Management states that the company has incurred significant losses historically and that sustained profitability and sufficient financing are not assured.
- The company accrued $650,000 for a Texas sales-tax audit. The maximum stated exposure is approximately $1.3 million, and management expects the final assessment to be lower, although the final amount may differ from the accrual.
- The company has approximately $400,000 recorded as a receivable from the seller of the XTO properties and expects final settlement and collection during 2022.
- Six shares of Series A Voting Preferred Stock were issued to the designee of Energy Evolution. The preferred stock has special rights, including the exclusive ability to elect three of six directors while ownership conditions remain satisfied.
- The company uses commodity put options to reduce price volatility. Outstanding contracts provide specified WTI price floors through 2023, but derivative losses reduced reported revenue in the current quarter.
- Disclosure controls and procedures were determined to be ineffective because of insufficient accounting resources and related internal-control weaknesses. The company engaged an outside firm to review controls, with the review expected to conclude in the second quarter of 2022.
- In April 2022, the company closed the acquisition of North Dakota oil and gas properties for approximately $1.4 million. A board co-chair resigned and a replacement director joined the board in April 2022.
- Forward-looking results remain exposed to commodity-price volatility, production declines, acquisition execution, access to financing, environmental requirements, legal proceedings, and the company’s ability to remediate its internal-control weaknesses.
Important Facts for Investors to Verify
- Whether Q1 production and pricing levels are sustainable after separating the effects of the XTO acquisition and commodity-price movements.
- The amount and timing of remaining availability under the senior revolver and compliance with its EBITDAX, leverage, derivative and borrowing-base requirements.
- The final outcome of the Texas sales-tax audit and whether the $650,000 accrual adequately covers the exposure.
- The timing and collectibility of the approximately $400,000 XTO-related settlement receivable.
- The company’s ability to finance planned acquisitions and capital expenditures without excessive dilution or additional leverage.
- Progress and conclusions from the external internal-controls review and whether the disclosed control deficiency is remediated.
- The scale and timing of asset-retirement obligations, sinking-fund deposits and future plugging and abandonment costs.
- The effect of Series A preferred-stock governance rights, related-party transactions with Energy Evolution and PIE, and outstanding warrants and options on shareholder voting power and dilution.