UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM
_________________
| (Mark One) | ||
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended |
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from: ____________to ____________ |
_____________________
(Exact name of registrant as specified in its charter)
_____________________
(State or Other Jurisdiction of Incorporation or Organization) |
(Commission File Number) |
(I.R.S. Employer Identification No.)
|
| (Address of principal executive offices)(Zip Code) | ||
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
_________________
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller reporting company |
||
| Emerging growth company |
||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
The number of shares of the registrant's common stock, $0.001 par value, outstanding as of the latest practicable date of August 9, 2024 was .
EMPIRE PETROLEUM CORPORATION
TABLE OF CONTENTS
| 1 |
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
EMPIRE PETROLEUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| June 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts Receivable | ||||||||
| Derivative Instruments | ||||||||
| Inventory | ||||||||
| Prepaids | ||||||||
| Total Current Assets | ||||||||
| Property and Equipment: | ||||||||
| Oil and Natural Gas Properties, Successful Efforts | ||||||||
| Less: Accumulated Depreciation, Depletion and Impairment | ( | ) | ( | ) | ||||
| Total Oil and Gas Properties, Net | ||||||||
| Other Property and Equipment, Net | ||||||||
| Total Property and Equipment, Net | ||||||||
| Other Noncurrent Assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts Payable | $ | $ | ||||||
| Accrued Expenses | ||||||||
| Derivative Instruments | ||||||||
| Current Portion of Lease Liability | ||||||||
| Current Portion of Note Payable - Related Party (Note 8) | ||||||||
| Current Portion of Long-Term Debt | ||||||||
| Total Current Liabilities | ||||||||
| Long-Term Debt | ||||||||
| Long Term Lease Liability | ||||||||
| Asset Retirement Obligations | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies (Note 15) | ||||||||
| Stockholders' Equity: | ||||||||
| Series A Preferred Stock - $ Par Value, Shares Authorized, and Shares Issued and Outstanding, Respectively | ||||||||
| Common Stock - $ Par Value, Shares Authorized, and Shares Issued and Outstanding, Respectively | ||||||||
| Additional Paid-in Capital | ||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| Total Stockholders' Equity | ||||||||
| Total Liabilities and Stockholders' Equity | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements.
| 2 |
EMPIRE PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenue: | ||||||||||||||||
| Oil Sales | $ | $ | $ | $ | ||||||||||||
| Gas Sales | ( | ) | ||||||||||||||
| NGL Sales | ||||||||||||||||
| Total Product Revenues | ||||||||||||||||
| Other | ||||||||||||||||
| Loss on Commodity Derivatives | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Revenue | ||||||||||||||||
| Costs and Expenses: | ||||||||||||||||
| Lease Operating Expense | ||||||||||||||||
| Production and Ad Valorem Taxes | ||||||||||||||||
| Depletion, Depreciation & Amortization | ||||||||||||||||
| Accretion of Asset Retirement Obligation | ||||||||||||||||
| General and Administrative Expense: | ||||||||||||||||
| General and Administrative Expense | ||||||||||||||||
| Stock-Based Compensation | ||||||||||||||||
| Total General and Administrative Expense | ||||||||||||||||
| Total Costs and Expenses | ||||||||||||||||
| Operating Income (Loss) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income and (Expense): | ||||||||||||||||
| Interest Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (Expense) (Note 8) | ( | ) | ( | ) | ||||||||||||
| Income (Loss) Before Income Taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income Tax (Provision) Benefit | ||||||||||||||||
| Net Income (Loss) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net Income (Loss) per Common Share: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted Average Number of Common Shares Outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
| 3 |
EMPIRE PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three and Six Months Ended June 30, 2024 and 2023
(Unaudited)
| Additional | ||||||||||||||||||||||||||||
| Common Stock | Preferred Stock | Paid-In | Accumulated | |||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Capital | Deficit | Total | ||||||||||||||||||||||
| Balances, December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net Loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock-Based Compensation | — | |||||||||||||||||||||||||||
| Balances, March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net Loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Rights Offering (Note 10) | — | |||||||||||||||||||||||||||
| Conversion of Related-Party Note (Note 8) | — | |||||||||||||||||||||||||||
| Partial Conversion of Option to Purchase (Note 3) | — | |||||||||||||||||||||||||||
| Warrants Exercised (Note 10) | — | |||||||||||||||||||||||||||
| Stock-Based Compensation | — | |||||||||||||||||||||||||||
| Balances, June 30, 2024 | $ | ( | ) | |||||||||||||||||||||||||
| Additional | ||||||||||||||||||||||||||||
| Common Stock | Preferred Stock | Paid-In | Accumulated | |||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | Capital | Deficit | Total | ||||||||||||||||||||||
| Balances, December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net Loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Impact of Former CEO settlement | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock-Based Compensation | ||||||||||||||||||||||||||||
| Balances, March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Net Loss | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
| Stock-Based Compensation | — | |||||||||||||||||||||||||||
| Balances, June 30, 2023 | ( | ) | ||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
| 4 |
EMPIRE PETROLEUM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net Income (Loss) | $ | ( | ) | $ | ( | ) | ||
| Adjustments to Reconcile Net Income (Loss) to Net Cash | ||||||||
| Provided By Operating Activities: | ||||||||
| Stock-Based Compensation | ||||||||
| Amortization of Right of Use Assets | ||||||||
| Depreciation, Depletion and Amortization | ||||||||
| Accretion of Asset Retirement Obligation | ||||||||
| Loss on Commodity Derivatives | ||||||||
| Settlement on or Purchases of Commodity Derivative Instruments | ( | ) | ( | ) | ||||
| Loss on Financial Derivatives (Note 8) | ||||||||
| Amortization of Debt Discount on Convertible Notes | ||||||||
| Gain on extinguishment of debt | ( | ) | ||||||
| Change in Operating Assets and Liabilities: | ||||||||
| Accounts Receivable | ( | ) | ( | ) | ||||
| Inventory, Oil in Tanks | ( | ) | ( | ) | ||||
| Prepaids, Current | ||||||||
| Accounts Payable | ( | ) | ||||||
| Accrued Expenses | ( | ) | ||||||
| Other Long-Term Assets and Liabilities | ( | ) | ( | ) | ||||
| Net Cash Provided By (Used In) Operating Activities | ( | ) | ||||||
| Cash Flows From Investing Activities: | ||||||||
| Deposit for Acquistion of Oil and Natural Gas Properties | ( | ) | ||||||
| Additions to Oil and Natural Gas Properties (a) | ( | ) | ( | ) | ||||
| Purchase of Other Fixed Assets | ( | ) | ( | ) | ||||
| Cash Paid for Right of Use Assets | ( | ) | ( | ) | ||||
| Sinking Fund Deposit | ||||||||
| Net Cash Provided By (Used In) Investing Activities | ( | ) | ( | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Borrowings on Credit Facility | ||||||||
| Proceeds from Promissory Note - Related Party (Note 8) | ||||||||
| Proceeds from Rights Offering (Net of Transaction Costs) (Note 10) | ||||||||
| Principal Payments of Debt | ( | ) | ( | ) | ||||
| Net Proceeds from Warrant Exercise (Note 10) | ||||||||
| Net Cash Provided By (Used In) Financing Activities | ( | ) | ||||||
| Net Change in Cash | ( | ) | ||||||
| Cash - Beginning of Period | ||||||||
| Cash - End of Period | $ | $ | ||||||
| Supplemental Cash Flow Information: | ||||||||
| Cash Paid for Interest | $ | $ | ||||||
________
| (a) | Incurred capital expenditures were $25,493,019 and $3,696,486 for the respective periods. The differences between incurred and cash capital expenditures is primarily due to changes in related accounts payable. |
See accompanying notes to condensed consolidated financial statements.
| 5 |
EMPIRE PETROLEUM CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Organization and Basis of Presentation
Empire Petroleum Corporation (the “Company”, collectively with its subsidiaries) is an independent energy company operator engaged in optimizing developed production by employing field management methods to maximize reserve recovery while minimizing costs. Empire operates the following wholly-owned subsidiaries in its areas of operations:
| ● | Empire New Mexico, LLC (“Empire New Mexico”) | |||
| o | Empire New Mexico LLC d/b/a Green Tree New Mexico | |||
| o | Empire EMSU LLC | |||
| o | Empire EMSU-B LLC | |||
| o | Empire AGU LLC | |||
| o | Empire NM Assets LLC | |||
| ● | Empire Rockies Region | |||
| o | Empire North Dakota LLC (“Empire North Dakota”) | |||
| o | Empire North Dakota Acquisition LLC (“Empire NDA”) | |||
| ● | Empire Texas (“Empire Texas”), consisting of the following entities: | |||
| o | Empire Texas LLC | |||
| o | Empire Texas Operating LLC | |||
| o | Empire Texas GP LLC | |||
| o | Pardus Oil & Gas Operating, LP (owned 1% by Empire Texas GP LLC and 99% by Empire Texas LLC) | |||
| ● | Empire Louisiana LLC (“Empire Louisiana”) | |||
Empire was incorporated in the State of Delaware in 1985. The consolidated financial statements of Empire Petroleum Corporation and subsidiaries include the accounts of the Company and its wholly-owned subsidiaries.
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company's financial position, the results of operations, and the cash flows for the interim period are included. All adjustments are of a normal, recurring nature. Certain amounts in prior periods have been reclassified to conform to current presentation. Operating results for the interim period are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.
The information contained in this Form 10-Q should be read in conjunction with the audited financial statements and related notes for the year ended December 31, 2023 which are contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on March 28, 2024.
Liquidity and Going Concern
The Company determined that it was not in compliance with the current ratio covenant contained in its revolving line of credit agreement as of June 30, 2024 (see Note 8). Upon discovering this issue, the Company notified the lender to request a waiver. The noncompliance is due to a higher level of payables related to the capital spending program in North Dakota. On August 12, 2024, the Company obtained a compliance waiver from the lender for June 30, 2024. The Company will require funds to be in compliance with debt covenants and satisfy the payables discussed above which are greater than estimated cash flows from operations over the next 12 months.
The Company has initiated a plan to raise additional funds for the payables discussed above as well as the additional capital spending in 2024 in an anticipated form of either a subscription rights equity offering, related party warrants, or a related party note payable that may or may not have conversion rights into shares of common stock of the Company. These fundraising forms are supported through committed financial support from Phil Mulacek and Energy Evolution Master Fund, Ltd ("Energy Evolution"), both related parties of the Company (see Note 14) and our largest stockholders collectively holding 51% of the common shares outstanding. Mr. Mulacek and Energy Evolution have indicated and are willing and able to provide these additional funds, if required, for the Company to continue to meet its obligations over the next 12 months.
Management has considered these plans, including if they are within the control of the Company, in evaluating ASC 205-40, Presentation of Financial Statements-Going Concern. Management believes the above actions are sufficient to allow the Company to meet its obligations as they become due for a period of at least 12 months from the issuance of these financial statements. Management believes that its plans, and support from the existing related-party stockholders discussed above, is probable and has alleviated the substantial doubt regarding the Company's ability to continue as a going concern.
Note 2 – Summary of Significant Accounting Policies
Significant Accounting Policies
During the six months ended June 30, 2024, the Company added one significant accounting policy and estimate relating to convertible debt and derivative liability. Besides this, there have been no material changes to significant accounting policies and estimates from the information provided in the Form 10-K for the year ended December 31, 2023.
Convertible Debt and Derivative Liability
In connection with the Company’s issuance of a Promissory Note in the first quarter of 2024, the Company bifurcated the embedded conversion option, and recorded the embedded conversion option as a long-term derivative liability in the Company’s Condensed Consolidated Balance Sheet in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging. The convertible debt and the derivative liability associated with the Promissory Note were presented on the Condensed Consolidated Balance Sheet as the Long-Term Note Payable – Related Party and long-term Derivative Instruments. The convertible debt was carried at amortized cost. The derivative liability was remeasured at each reporting period using a binomial lattice model with changes in fair value recorded in the Condensed Consolidated Statements of Operations in Other Income (Expense). The conversion option related to the Promissory Note was exercised in the second quarter of 2024. See Note 8 for further details.
| 6 |
Fair Value Measurements
FASB ASC Topic 820, Fair Value Measurement (ASC Topic 820), defines fair value, establishes a consistent framework for measuring fair value and establishes a fair value hierarchy based on the observability of inputs used to measure fair value.
The three-level fair value hierarchy for disclosure of fair value measurements defined by ASC Topic 820 is as follows:
Level 1 – Unadjusted, quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 – Inputs, other than quoted prices within Level 1, that are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.
Level 3 – Prices or valuations that require unobservable inputs that are both significant to the fair value measurement and unobservable. Valuation under Level 3 generally involves a significant degree of judgment from management.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve a degree of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instrument’s complexity. The Company reflects transfers between the three levels at the beginning of the reporting period in which the availability of observable inputs no longer justifies classification in the original level. There were no transfers between fair value hierarchy levels for the period ended June 30, 2024.
Financial instruments and other – The fair values determined for accounts receivable, accrued expenses and other current liabilities were equivalent to the carrying value due to their short-term nature.
Derivatives – Derivative financial instruments are carried at fair value and measured on a recurring basis. The Company’s commodity price hedges are valued based on discounted future cash flow models that are primarily based on published forward commodity price curves; thus, these inputs are designated as Level 2 within the valuation hierarchy.
The fair values of derivative instruments in asset positions include measures of counterparty nonperformance risk, and the fair values of derivative instruments in liability positions include measures of the Company’s nonperformance risk. These measurements were not material to the Condensed Consolidated Financial Statements.
Assets and Liabilities Measured at Fair Value on a Recurring Basis - The Company uses a binomial lattice valuation model to value Level 3 derivative liabilities at inception and on subsequent valuation dates. This model incorporates transaction details such as the Company’s stock price, contractual terms of the Promissory Note, and unobservable inputs classified as Level 3 including risk-free rate and expected volatility. As of the conversion option exercise date of May 24, 2024, these unobservable inputs were 5.0% and 46.9%, respectively.
Fair Value on a Nonrecurring Basis
The Company applies the provisions of fair value measurement on a non-recurring basis to its non-financial assets and liabilities, including oil and gas properties and asset retirement obligations. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments if events or changes in certain circumstances indicate that adjustments may be necessary. No triggering events that require assessment of such items were observed during the six months ended June 30, 2024.
Related Party Transactions
Transactions between related parties are considered to be related party transactions even though they may not be given accounting recognition. FASB ASC 850, Related Party Disclosures requires that transactions with related parties that would have influence in decision making shall be disclosed so that users of the financial statements can evaluate their significance. Related party transactions typically occur within the context of the following relationships: affiliates of the entity; entities for which investments in their equity securities is typically accounted for under the equity method by the investing entity; trusts for the benefit of employees; principal owners of the entity and members of their immediate families; management of the entity and members of their immediate families; and other parties that can significantly influence the management or operating policies of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
| 7 |
Concentrations of Credit Risk
The Company’s accounts receivable are primarily receivables from oil and natural gas purchasers and joint interest owners. The purchasers of the Company’s oil and natural gas production consist primarily of independent marketers, major oil and natural gas companies and gas pipeline companies. Historically, the Company has not experienced any significant losses from uncollectible accounts from its oil and natural gas purchasers. The Company operates a substantial portion of its oil and natural gas properties. As the operator of a property, the Company makes full payments for costs associated with the property and seeks reimbursement from the other working interest owners in the property for their share of those costs. Joint operating agreements govern the operations of an oil or natural gas well and, in most instances, provide for offsetting of amounts payable or receivable between the Company and its joint interest owners. The Company’s joint interest partners consist primarily of independent oil and natural gas producers. If the oil and natural gas exploration and production industry in general was adversely affected, the ability of the Company’s joint interest partners to reimburse the Company could be adversely affected.
Recently Adopted Accounting Standards
The FASB periodically issues new accounting standards in a continuing effort to improve standards of financial accounting and reporting. The Company has reviewed the recently issued pronouncements and concluded that the following new accounting standards are applicable:
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The amendments in this ASU affect entities that issue convertible instruments and/or contracts in an entity’s own equity. The amendments in this ASU primarily affect convertible instruments issued with beneficial conversion features or cash conversion features because the accounting models for those specific features are removed. However, all entities that issue convertible instruments are affected by the amendments to the disclosure requirements of this ASU. For contracts in an entity’s own equity, the contracts primarily affected are freestanding instruments and embedded features that are accounted for as derivatives under the current guidance because of failure to meet the settlement conditions of the derivatives scope exception related to certain requirements of the settlement assessment. Also affected is the assessment of whether an embedded conversion feature in a convertible instrument qualifies for the derivatives scope exception. Additionally, the amendments in this ASU affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. The amendments in this ASU are effective for public business entities, excluding entities eligible to be smaller reporting companies, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Board specified that an entity should adopt the guidance as of the beginning of its annual fiscal year. The Board decided to allow entities to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The Company has adopted this standard for the current year and does not expect it to have a material impact on our consolidated financial statements.
Note 3 – Property
The Company follows the successful efforts method of accounting for its oil and natural gas activities. Under this method, costs to acquire oil and natural gas properties and costs incurred to drill and equip development and exploratory wells are deferred until exploration and completion results are evaluated. Exploration drilling costs are expensed if recoverable reserves are not found. Upon sale or retirement of oil and natural gas properties, the costs and related accumulated depreciation, depletion and amortization are eliminated from the accounts and the resulting gain or loss is recognized.
Costs incurred to maintain wells and related equipment and lease and well operating costs are charged to expense as incurred.
Depletion is calculated on a units-of-production basis at the field level based on total proved developed reserves.
Proved oil and natural gas properties are reviewed for impairment at least annually, or as indicators of impairment arise. There have been no indicators of impairment during the six months ended June 30, 2024.
| 8 |
Aggregate capitalized costs of oil and natural gas properties are as follows:
| June 30, 2024 | December 31, 2023 | |||||||
| Proved properties | $ | $ | ||||||
| Unproved properties | ||||||||
| Work in process | ||||||||
| Gross capitalized costs | ||||||||
| Depreciation, depletion, amortization and impairment | ( | ) | ( | ) | ||||
| Total oil and gas properties, net | $ | $ | ||||||
Depletion and amortization expense related to oil and gas properties
for the three months ended June 30, 2024 and 2023 was approximately $
The Company has completed eight wells in North Dakota related to our Starbuck Drilling program during the first half of 2024.
On April 9, 2024, the Company partially exercised
a purchase option originally issued on August 9, 2023 (the “Purchase Option”) to acquire additional working interests in certain
of the Company’s New Mexico properties from Energy Evolution, a related party.
The additional assets acquired represent approximately 60% of the total assets collectively acquired by the Company and Energy Evolution
in the third quarter of 2023 (the “Option Assets”). As consideration, upon closing of the partial exercise of the Purchase
Option, the Company issued Energy Evolution shares of common stock of the Company based on an agreed upon price of $ per share
for an aggregate agreed upon value of $
Other property and equipment consists of operating lease assets, vehicles, office furniture, and equipment with lives ranging from three to five years. The capitalized costs of other property and equipment are as follows:
| June 30, 2024 | December 31, 2023 | |||||||
| Other property and equipment, at cost | $ | $ | ||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Other property and equipment, net | $ | $ | ||||||
Depreciation expense related to other property and equipment for the
three months ended June 30, 2024 and 2023 was approximately $
Note 4 - Asset Retirement Obligations
The Company’s asset retirement obligations represent the estimated present value of the estimated cash flows the Company will incur to plug, abandon, and remediate its producing properties at the end of their productive lives, in accordance with applicable state laws. Market risk premiums associated with asset retirement obligations are estimated to represent a component of the Company’s credit-adjusted risk-free rate that is utilized in the calculations of asset retirement obligations.
| 9 |
The Company’s asset retirement obligation activity is as follows:
| For the Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Asset retirement obligations, beginning of period | $ | $ | ||||||
| Additions | ||||||||
| Liabilities settled | ( | ) | ( | ) | ||||
| Revisions | ||||||||
| Accretion expense | ||||||||
| Asset retirement obligation, end of period | $ | $ | ||||||
| Less current portion included in Accrued Expenses | ||||||||
| Asset retirement obligation, long-term | $ | $ | ||||||
The additions in 2024 primarily relate to the completion of new wells as part of the Company’s North Dakota Starbuck Drilling Program and additional working interest acquired in New Mexico (see Note 3).
Note 5 – Commodity Derivative Financial Instruments
The Company uses derivative financial instruments to manage its exposure to commodity price fluctuations. Commodity derivative instruments are used to reduce the effect of volatility of price changes on the oil and natural gas the Company produces and sells. The Company does not enter into derivative financial instruments for speculative or trading purposes. The Company’s derivative financial instruments consist of swaps and put options.
The Company does not designate its derivative instruments in such a way that would qualify for hedge accounting. Accordingly, the Company reflects changes in the fair value of its derivative instruments in its consolidated statements of operations as they occur. Unrealized gains and losses related to the contracts are recognized and recorded as changes to the derivative asset or liability on the Company’s consolidated balance sheets.
The following table summarizes the net realized and unrealized losses reported in earnings related to the commodity derivative instruments for the three and six months ended June 30, 2024 and 2023:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Loss on Derivatives: | ||||||||||||||||
| Oil derivatives (a) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
________
| (a) |
The following represents the Company’s net settlements related to derivatives for the three and six months ended June 30, 2024 and 2023:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Oil derivatives | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
The following table sets forth the Company’s outstanding derivative contracts at June 30, 2024:
| 3rd Quarter 2024 | 4th Quarter 2024 | |||||||
| WTI Fixed-Price Swaps: | ||||||||
| Quarterly volume (MBbls) | ||||||||
| Weighted-average fixed price (Bbl) | $ | $ | ||||||
| 10 |
Note 6 – Accounts Receivable
The following table represents the Company’s accounts receivable as of June 30, 2024 and December 31, 2023:
| June 30, 2024 | December 31, 2023 | |||||||
| Oil, Gas and NGL Receivables | $ | $ | ||||||
| Joint Interest Billings | ||||||||
| Other | ||||||||
| Total Accounts Receivable | $ | $ | ||||||
Note 7 – Accrued Expenses
The following table represents the Company’s accrued expenses as of June 30, 2024 and December 31, 2023:
| June 30, 2024 | December 31, 2023 | |||||||
| Accrued and suspended third-party revenue | $ | $ | ||||||
| Accrued salaries and payroll taxes | ||||||||
| Accrued production taxes | ||||||||
| Other | ||||||||
| $ | 8,105,002 | $ | ||||||
Note 8 – Debt Including Debt with Related Parties
The following table represents the Company’s outstanding debt as of June 30, 2024 and December 31, 2023:
As of June 30, 2024 | As of December 31, 2023 | |||||||
| Equity Bank Credit Facility | $ | $ | ||||||
| Note Payable – Related Party | ||||||||
| Equipment and vehicle notes, 0.00% to 9.00% interest rates, due in 2025 to 2028 with monthly payments ranging from $900 to $1,400 per month | ||||||||
| Note Payable to insurance provider, bears 7.29% interest, matures January 2025, monthly payments of principal and interest of $51,067 | ||||||||
| Total Debt | ||||||||
| Less: Current Maturities | ( | ) | ( | ) | ||||
| Less: Note Payable – Related Party | ( | ) | ( | ) | ||||
| Long-Term debt | $ | $ | ||||||
On December 29, 2023, Empire North Dakota and Empire
NDA ("Borrowers”),
| 11 |
The Credit Facility is guaranteed by the Company. Borrowers entered into a security agreement, pursuant to which the obligations under the Credit Facility are secured by liens on substantially all of the assets of Borrowers. Furthermore, the obligations under the Credit Facility are secured by a continuing, first priority mortgage lien, pledge of and security interest in not less than 80% of Borrowers’ producing oil, gas and other leasehold and mineral interests, including without limitation, those situated in the States of North Dakota and Montana.
The Credit Facility requires Borrowers to, commencing as of the fiscal quarter ended December 31, 2023, maintain (a) a current ratio of 1.0 to 1.0 or more and (b) a ratio of funded debt to EBITDAX, calculated quarterly and annually based on a trailing twelve-month basis, of no more than 3.50 to 1.00. The Company was not in compliance with the current ratio covenant as of June 30, 2024, however the Company received a compliance waiver from the lender for June 30, 2024.
Promissory Note – Related Party
On February 16, 2024, the Company issued a Promissory Note in the
aggregate principal amount of $
The Note matures on February 15, 2026 (the "Maturity
Date”) and accrues interest at the rate of
The Company determined that an embedded conversion
feature included in the Note required bifurcation from the host contract that is recognized as a separate derivative liability carried
at fair value.
On May 24, 2024, Energy Evolution elected to convert the Note to shares of common stock of the Company and received 800,000 shares under the terms of the Note.
Note Payable – Related Party
In August 2020, the Company, through its wholly owned
subsidiary, Empire Texas, entered into a joint development agreement (the "JDA”) with Petroleum & Independent Exploration,
LLC and related entities ("PIE”), a related party (see Note 14), dated August 1, 2020. Under the terms of the JDA, PIE will
perform recompletion or workover on specified mutually agreed upon wells ("Workover Wells”) owned by Empire Texas. Concurrent
with the JDA with PIE, the Company entered into a term loan agreement dated August 1, 2020, whereby PIE will loan up to $
On July 31, 2024, PIE, Empire Texas, and the
Company entered into a note repayment and loan termination agreement providing for the payment in full of the remaining outstanding
amount of the $
| 12 |
Note 9 - Leases
As a lessee, the Company leases its corporate office
headquarters in Tulsa, Oklahoma and one field office.
The Company also leases vehicles primarily used in our field operations. These vehicle leases typically have a -year life.
The Company recognizes right-of use lease expense on a straight-line basis, except for certain variable expenses that are recognized when the variability is resolved, typically during the period in which they are paid. Variable right-of-use lease payments typically include charges for property taxes, insurance, and variable payments related to non-lease components, including common area maintenance.
Right-of-use lease expense was approximately $
Supplemental balance sheet information related to the right-of-use leases is as follows:
| June 30, 2024 | December 31, 2023 | |||||||
| Net operating lease asset (included in Other Property and Equivpment) | $ | $ | ||||||
| Current portion of lease liability | $ | $ | ||||||
| Long-term lease liability | ||||||||
| Total right-of-use lease liabilities | $ | $ | ||||||
The weighted-average remaining term for the Company’s right-of-use
leases is years. The weighted-average discount rate was
| Year 1 | $ | ||||
| Year 2 | |||||
| Year 3 | |||||
| Year 4 | |||||
| Year 5 | |||||
| Total lease payments | |||||
| Less imputed interest | ( | ) | |||
| Total lease obligation | $ |
Note 10 – Equity
Pursuant to the Company’s Amended and Restated Certificate of Incorporation (“Charter”), effective as of March 4, 2022, the total number of shares of all classes of stock that the Company has the authority to issue is 200,000,000, consisting of shares of common stock, par value $ per share, and shares of preferred stock, par value $ per share.
Preferred Stock
Preferred stock may be issued from time to time in one or more series at the direction of the Board of Directors and the directors also have the ability to fix dividend rates and rights, liquidation preferences, voting rights, conversion rights, rights and terms of redemption and other rights, preferences, privileges and restrictions as determined by the Board of Directors, subject to certain limitations set forth in the Charter.
| 13 |
Series A Voting Preferred Stock
On March 8, 2022, the Company formalized the issuance of preferred stock as was required under the terms of the Company's May 2021 financing agreements with Energy Evolution and issued six shares of Series A Voting Preferred Stock. The Series A Voting Preferred Stock was issued in connection with the strategic investment in the Company by Energy Evolution. For so long as the Series A Voting Preferred Stock is outstanding, the Company’s Board of Directors will consist of six directors. Three of the directors are designated as the Series A Directors and the three other directors (each, a “common director”) are elected by the holders of common stock and/or any preferred stock (other than the Series A Voting Preferred Stock) granted the right to vote on the common directors. Any Series A Director may be removed with or without cause but only by the affirmative vote of the holders of a majority of the Series A Voting Preferred Stock voting separately and as a single class. The holders of the Series A Voting Preferred Stock have the exclusive right, voting separately and as a single class, to vote on the election, removal and/or replacement of the Series A Directors. Holders of common stock or other preferred stock do not have the right to vote on the Series A Directors. The approval of the holders of the Series A Voting Preferred Stock, voting separately and as a single class, is required to authorize any resolution or other action to issue or modify the number, voting rights or any other rights, privileges, benefits, or characteristics of the Series A Voting Preferred Stock, including without limitation, any action to modify the number, structure and/or composition of the Company’s current Board of Directors.
The Series
A Voting Preferred Stock is held by Phil Mulacek, chairman of the Board of Directors and one of the principals of Energy Evolution, as
Energy Evolution’s designee (the “Initial Holder”). The Series A Voting Preferred Stock may be transferred only to certain
controlled affiliates of the Initial Holder (“Permitted Transferees”), and
The Series A Voting Preferred Stock is not entitled to receive any dividends or distributions of cash or other property except in the event of any liquidation, dissolution or winding up of the Company’s affairs. In such event, before any amount is paid to the holders of the Company’s common stock but after any amount is paid to the holders of the Company’s senior securities, the holders of the Series A Voting Preferred Stock will be entitled to receive an amount per share equal to $1.00.
Except as discussed above or as otherwise set forth in the certificate of designation of the Series A Voting Preferred Stock, the holders of the Series A Voting Preferred Stock have no voting rights.
The Series A Voting
Preferred Stock is not redeemable at the Company’s election or the election of any holder, except the Company may elect to redeem
the
| • | any or all shares of Series A Voting Preferred Stock are held by anyone other than the Initial Holder or a Permitted Transferee; or | |
| • | the Series A Holders together hold less than shares of the Company’s outstanding common stock. |
The Series A Voting Preferred Stock is not convertible into common stock or any other security.
Common Stock
On August 27, 2021, the Company’s Board of Directors approved a one-for-four reverse stock split such that every holder of the Company’s common stock would receive one share of common stock for every four shares owned. The reverse stock split was effective as of 6:00 p.m. Eastern Time on March 7, 2022, immediately prior to the Company’s listing of its common stock on the NYSE American.
The holders of shares of common stock are entitled to one vote per share for all matters on which common stockholders are authorized to vote on. Examples of matters that common stockholders are entitled to vote on include, but are not limited to, election of three of the six directors and other common voting situations afforded to common stockholders.
In April 2024, the Company completed a subscription rights offering (“Rights Offering”) which raised gross proceeds of $ million. The Company distributed at no charge to holders of its common stock, as of the close of business on March 7, 2024 (the record date for the Rights Offering), one subscription right for each share of common stock held. Each subscription right entitled the holder to purchase 0.161 shares of common stock at a subscription price of $5.00 per share per one whole share of common stock. The subscription rights were non-transferable and not listed for trading on any stock exchange or market.
| 14 |
On May 29, 2024,
Earnings Per Share
The computation of diluted shares outstanding for the three and six months ended June 30, 2024 excluded and 1,078,029 shares, respectively, related to stock options, warrants, outstanding RSUs, and convertible debt as their effect would have been anti-dilutive. The computation of diluted shares outstanding for the three and six months ended June 30, 2023 excluded and shares, respectively, related to stock options, warrants, and outstanding RSUs, as their effect would have been anti-dilutive.
The Company recognizes stock-based compensation expense associated with granted stock options and restricted stock units (RSUs). The Company accounts for forfeitures of equity-based incentive awards as they occur. Stock-based compensation expense related to time-based restricted stock units is based on the price of the common stock on the grant date and recognized as vesting occurs. For options, the fair value is determined using the Black-Scholes option valuation assumptions on dividend yield, expected annual volatility, risk-free interest rate and an expected useful life. Stock-based compensation is recorded with a corresponding increase in Additional Paid-in Capital within the Condensed Consolidated Balance Sheets.
The following summary reflects nonvested restricted stock unit activity and related information for the six months ended June 30, 2024.
| Weighted Average | ||||||||
| RSUs | Fair Value (a) | |||||||
| Outstanding, December 31, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Outstanding, June 30, 2024 | $ | |||||||
| (a) Shares are valued at the grant-date market price. | ||||||||
| Weighted Average | ||||||||
| Options | Exercise Price | |||||||
| Outstanding, December 31, 2023 | $ | |||||||
| Granted | ||||||||
| Exercised | ( | ) | ||||||
| Cancelled | ||||||||
| Outstanding, June 30, 2024 | $ | |||||||
The following table summarizes information about stock options outstanding as of June 30, 2024.
| Range of | Options | Weighted Average | Weighted | Options | Weighted | |||||
| Exercise | Outstanding | Remaining | Average | Exercisable | Average | |||||
| Prices | at 6/30/24 | Contractual Life | Exercise Price | at 6/30/24 | Exercise Price | |||||
| $ to $ | years | $ |
$ | |||||||
| 15 |
Note 12 – Executive Separations
On March 16, 2023, Thomas W. Pritchard resigned as
Chief Executive Officer and a director of the Company to pursue other opportunities. Although not required under Mr. Pritchard’s
Employment Agreement with the Company, in recognition of Mr. Pritchard’s past service to the Company, the Company will pay Mr. Pritchard
severance benefits in the amount of approximately $
On March 17, 2023, the Board of Directors appointed Michael R. Morrisett to the position of Chief Executive Officer. Mr. Morrisett did not receive any additional compensation for assuming the role of Chief Executive Officer.
Note 13 – Income Taxes
For all periods presented, the Company’s effective
tax rate is
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||||||
| $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||
| Provision (benefit) at statutory rate | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| State Taxes (net of federal impact) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Nondeductible Expenses | - | - | - | - | ||||||||||||||||||||||||||||
| Stock Options Exercised | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Valuation Allowance | - | - | - | - | ||||||||||||||||||||||||||||
| Income tax provision (benefit) | ||||||||||||||||||||||||||||||||
Note 14 – Related Party Transactions
Energy Evolution is a related party of the Company
as it beneficially owns approximately
The Company has a JDA with PIE to perform completions
or workovers on specified mutually agreed upon wells. As of June 30, 2024, the Company has incurred obligations of approximately $
On February 16, 2024, the Company issued the
Note to Energy Evolution. Energy Evolution advanced the Company $
The Company elected to partially exercise a Purchase Option in the second quarter of 2024 and acquired 60% of certain New Mexico interests from Energy Evolution. See Note 3 for additional information.
On June 28, 2024, Energy Evolution exercised warrants
of the Company and received shares in exchange for $
Accounts Receivable on the Condensed Consolidated
Balance Sheet includes approximately $
| 16 |
Note 15 – Commitments and Contingencies
From time to time, the Company is subject to various legal proceedings arising in the ordinary course of business, including proceedings for which the Company may not have insurance coverage. While many of these matters involve inherent uncertainty, as of the date hereof, the Company does not currently believe that any such legal proceedings will have a material adverse effect on the Company’s business, financial position, results of operations or liquidity.
The Company is subject to extensive federal, state, and local environmental laws and regulations. These laws, among other things, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Management believes no materially significant liabilities of this nature existed as of the balance sheet date.
Agreed Compliance Order
In January 2024, the Company deposited
$
| 17 |
| Item 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q, including this section, includes certain statements that may be deemed “forward-looking statements” within the meaning of federal securities laws. All statements, other than statements of historical facts, which address activities, events, or developments that the Company expects, believes, or anticipates will or may occur in the future, including future sources of financing and other possible business developments, are forward-looking statements. Such statements are subject to a number of assumptions, risks and uncertainties and could be affected by a number of distinct factors, including the Company’s failure to secure short and long-term financing necessary to sustain and grow its operations, increased competition, changes in the markets in which the Company participates and the technology utilized by the Company and new legislation regarding environmental matters. These risks and other risks that could affect the Company's business are more fully described in reports the Company files with the SEC, including its Annual Report on Form 10-K for the year ended December 31, 2023. Actual results may vary materially from the forward-looking statements. The Company undertakes no duty to update any of the forward-looking statements in this Form 10-Q.
Overview
Our primary business is the optimization and development of oil and gas interests. In 2022 we had net income from operations but have incurred losses from operations in 2023 and 2024 and in years prior to 2022. There is no assurance that we will be profitable or obtain funds necessary to finance our future operations.
We seek to increase shareholder value by growing reserves, production, revenues, and cash flow from operating activities by executing our mission to use highly-skilled personnel to thoughtfully and expertly spend capital to realize reserves on producing properties as well as further develop fields.
Management places emphasis on operating cash flow in managing our business, as operating cash flow considers the cash expenses incurred during the period and excludes non-cash expenditures not related directly to our operations.
Business Strategy
Our business strategy is to obtain long-term growth in reserves and cash flow on a cost-effective basis. Management regularly evaluates potential acquisitions of properties that would enhance current core areas of operation.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires management to use judgment to make estimates and assumptions that affect certain amounts reported in the consolidated financial statements. As additional information becomes available, these estimates and assumptions are subject to change and thus impact amounts reported in the future. Critical accounting policies are those accounting policies that involve judgment and uncertainties affecting the application of those policies and the likelihood that materially different amounts would be reported under different conditions or using differing assumptions. Management periodically updates the estimates used in the preparation of the financial statements based on management’s latest assessment of the current and projected business and general economic environment. There have been no significant changes to the Company’s critical accounting policies during the six months ended June 30, 2024.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company’s primary sources of short-term liquidity are cash and cash equivalents, net cash provided by operating activities, and issuance of debt or equity securities. The Company’s short- and long-term liquidity requirements consist primarily of capital expenditures, acquisitions of oil and natural gas properties, payments of contractual obligations, and working capital obligations. Funding for these requirements may be provided by any combination of the Company’s sources of liquidity. Although the Company expects that its sources of funding will be adequate to fund its liquidity requirements, no assurance can be given that such funding sources will be adequate to meet the Company’s future needs.
Liquidity
As noted below, our working capital is negative as of June 30, 2024 and is primarily a result of a higher level of payables related to capital spending in North Dakota. In addition, the Company was not in compliance with the current ratio covenant under its Credit Facility as of June 30, 2024; however, the Company obtained a compliance waiver from the lender for June 30, 2024. As of June 30, 2024, we had approximately $9 million in cash on hand and approximately $0.7 million available on the Credit Facility. For additional information regarding the Credit Facility, see Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements presented elsewhere in this document. The Company will require additional funds to be in compliance with debt covenants and satisfy the payables discussed above which are greater than estimated cash flows from operations over the next 12 months. Management is initiating plans to raise the necessary funds for the capital spending program. Phil Mulacek and Energy Evolution Master Fund, Ltd, both related parties of the Company and largest shareholders collectively owning 51% of the common shares outstanding, have indicated that they intend to participate in management's plans to raise these additional funds. See Note 1 - Liquidity and Going Concern of Notes to Unaudited Condensed Consolidated Financial Statements presented elsewhere in this document for further discussion of management's plans.
| 18 |
The Company expects to incur costs related to drilling activities in core areas as well as future oil and natural gas acquisitions in core areas. As of June 30, 2024, the Company has incurred approximately $34 million of cumulative costs related to the drilling program in the Starbuck field of North Dakota. It is expected that the Company will use a combination of debt or equity issuances, cash on hand, and cash flows from operations to fund capital programs, ongoing operations, and any potential acquisitions.
Working Capital
Working capital (presented below) increased by approximately $2.8 million between December 31, 2023 and June 30, 2024. This change was primarily due to a higher cash balance and lower accounts payable period over period following the closing of the Rights Offering (see Note 10).
| June 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Current Assets | $ | 20,280,092 | $ | 18,744,904 | ||||
| Current Liabilities | 23,761,662 | 25,049,572 | ||||||
| Working Capital | $ | (3,481,570 | ) | $ | (6,304,668 | ) | ||
Cash Flows
| Six Months Ended June 30, | ||||||||||||
| Cash Flows Provided By (Used In): | 2024 | 2023 | Variance | |||||||||
| Operating Activities | $ | 2,106,579 | $ | (7,984,630 | ) | $ | 10,091,209 | |||||
| Investing Activities | (30,513,554 | ) | (1,375,988 | ) | (29,137,566 | ) | ||||||
| Financing Activities | 29,872,240 | (1,288,974 | ) | 31,161,214 | ||||||||
Cash Flows from Operating Activities
The impact of higher oil production, higher commodity prices, and lower workover expenses in 2024 compared to 2023 contributed to the increase in cash flows from operating activities.
Cash Flows from Investing Activities
Cash flows from investing activities in the first half of 2024 include approximately $30 million of additions to oil and natural gas properties primarily due to the development of our operations in North Dakota.
Cash Flows from Financing Activities
Cash flow from financing activities in 2024 includes net proceeds from a Rights Offering of approximately $20.5 million (see Note 10). In addition, cash flows from financing activities in 2024 includes $5 million from a promissory note issued to the Company by a related party and approximately $4 million borrowed on the Company’s Credit Facility (see Note 8).
Capital Resources
Capital Expenditures
For the six months ended June 30, 2024, the Company incurred approximately $25 million of additions to oil and natural gas properties which primarily reflects continued drilling and completions activity in North Dakota.
| 19 |
Production and Operating Data
The following table sets forth a summary of the Company’s production and operating data for the three and six months ended June 30, 2024 and 2023. Because of normal production declines, increased or decreased production due to future acquisitions, divestitures, and development, and fluctuations in commodity prices, the historical information presented below should not be interpreted as being indicative of future results.
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
Production and Operating Data:
| ||||||||||||||||
| Net Production Volumes: | ||||||||||||||||
| Oil (Bbl) | 160,283 | 128,413 | 291,043 | 248,670 | ||||||||||||
| Natural Gas (Mcf) | 241,242 | 211,293 | 453,063 | 442,511 | ||||||||||||
| Natural Gas Liquids (Bbl) | 39,612 | 30,678 | 74,397 | 70,434 | ||||||||||||
| Total (Boe) | 240,102 | 194,306 | 440,951 | 392,856 | ||||||||||||
| Average Price per Unit: | ||||||||||||||||
| Oil (Bbl) | $ | 76.66 | $ | 71.24 | $ | 74.66 | $ | 72.73 | ||||||||
| Natural Gas (Mcf) | $ | (0.48 | ) | $ | 1.18 | $ | 0.58 | $ | 2.04 | |||||||
| Natural Gas Liquids (Bbl) | $ | 15.58 | $ | 11.81 | $ | 13.89 | $ | 12.31 | ||||||||
| Total (Boe) | $ | 53.26 | $ | 50.22 | $ | 52.21 | $ | 50.55 | ||||||||
| Operating Costs and Expenses per Boe: | ||||||||||||||||
| Lease Operating Expense | $ | 31.41 | $ | 36.54 | $ | 33.86 | $ | 34.67 | ||||||||
| Production and Ad Valorem Taxes | $ | 4.44 | $ | 3.71 | $ | 4.31 | $ | 3.77 | ||||||||
| Depreciation, Depletion, Amortization and Accretion | $ | 13.20 | $ | 5.75 | $ | 11.67 | $ | 5.45 | ||||||||
| General and Administrative Expense: | ||||||||||||||||
| General and Administrative Expense | $ | 9.80 | $ | 9.75 | $ | 11.87 | $ | 12.52 | ||||||||
| Stock-Based Compensation | $ | 2.46 | $ | 6.08 | $ | 2.95 | $ | 5.42 | ||||||||
| Total General and Administrative Expense | $ | 12.27 | $ | 15.83 | $ | 14.82 | $ | 17.94 | ||||||||
Bbl – One stock tank barrel, of 42 U.S. gallons liquid volume, used herein in reference to oil, condensate, or natural gas liquids.
Mcf – One thousand cubic feet of natural gas.
Boe – One barrel of oil equivalent, a standard convention used to express oil and natural gas volumes on a comparable oil equivalent basis. Natural gas equivalents are determined under the relative energy content method by using the ratio of 6.0 Mcf of natural gas to 1.0 Bbl of oil or condensate.
| 20 |
Three Months Ended June 30, 2024 and 2023
Results of Operations
The following table reflects the Company’s summary operating information. Because of normal production declines, increased or decreased drilling activity and the effects of acquisitions, the historical information presented below should not be interpreted as indicative of future results.
| Three Months Ended June 30, | ||||||||||||||||
| 2024 | 2023 | Variance | Variance % | |||||||||||||
| Oil Revenues | $ | 12,287,272 | $ | 9,147,611 | $ | 3,139,661 | 34% | |||||||||
| Natural Gas Revenues | (115,833 | ) | 248,686 | (364,519 | ) | -147% | ||||||||||
| NGL Revenues | 617,029 | 362,181 | 254,848 | 70% | ||||||||||||
| Total Product Revenues | 12,788,468 | 9,758,478 | ||||||||||||||
| Lease Operating Expense (Including Workovers) | 7,542,685 | 7,099,000 | 443,685 | 6% | ||||||||||||
| Production and Ad Valorem Taxes | 1,065,718 | 721,275 | 344,443 | 48% | ||||||||||||
| Depreciation, Depletion, Amortization and Accretion | 3,169,430 | 1,116,403 | 2,053,027 | 184% | ||||||||||||
| General and Administrative Expense: | ||||||||||||||||
| General and Administrative Expense | 2,354,080 | 1,894,204 | 459,876 | 24% | ||||||||||||
| Stock-based Compensation | 591,635 | 1,180,806 | (589,171 | ) | -50% | |||||||||||
| Total General and Administrative Expense | 2,945,715 | 3,075,010 | (129,295 | ) | -4% | |||||||||||
| Interest Expense | 735,220 | 184,887 | 550,333 | NM | ||||||||||||
| Operating Income (Loss) | (1,925,306 | ) | (2,301,506 | ) | 376,200 | -16% | ||||||||||
| Net Income (Loss) | (4,389,771 | ) | (2,464,909 | ) | (1,924,862 | ) | 78% | |||||||||
NM: A percentage calculation is not meaningful due to change in signs, a zero-value denominator or a percentage change that is greater than 200.
Revenues
Revenues for the three months ended June 30, 2024 increased compared to the prior year primarily due to higher oil sales volumes, higher realized oil prices and higher NGL prices.
Net oil sales volumes were approximately 160,000 Bbls for the three months ended June 30, 2024, an increase of approximately 25% over the same period in the prior year. Oil volumes in second-quarter 2024 increased primarily due to new wells completed in North Dakota during the period as well as the acquisition of additional working interest in New Mexico.
Realized oil prices for the three months ended June 30, 2024 were approximately $76.66 per barrel, while realized prices for the same period in the prior year were approximately $71.24 per barrel, an increase in price of approximately 8%.
Realized natural gas prices for the three months ended June 30, 2024 were approximately $(.48) per mcf, while realized prices for the same period in the prior year were approximately $1.18 per mcf. This is primarily due to the depressed natural gas prices in the second quarter of 2024 in New Mexico leading to below zero prices as deductions exceeded the natural gas prices.
Realized NGL prices for the three months ended June 30, 2024 were approximately $15.58 per barrel, while realized prices for the same period in the prior year were approximately $11.81 per barrel, an increase in price of approximately 32%.
Lease Operating Expense and Production Taxes
Lease operating expense was higher in second-quarter 2024 compared to 2023 primarily associated with an increase in production, partially offset by lower workover costs. Lease operating expense includes approximately $1.6 million of workover expense for the three months ended June 30, 2024 as compared to $2.9 million for the same period in 2023. The higher workover expense in 2023 was primarily in New Mexico as the Company continued to work over wells in the region to enhance production.
| 21 |
Production taxes were higher for the second quarter 2024 compared to 2023 as a result of the higher product revenues discussed above.
Depreciation, Depletion, Amortization and Accretion
The higher DD&A for the second quarter of 2024 is due in part to the increase in production, the acquisition of additional working interest as well as the impact of the capitalized costs associated with the new drilling activity in North Dakota.
General and Administrative Expense
General and administrative expense, excluding stock-based compensation, increased in the second quarter of 2024 compared to 2023 primarily due to an increase in salaries and benefits period over period associated with an increase in employee headcount.
Stock-based Compensation
The Company utilizes stock-based compensation to compensate the Board, members of management, and retain talented personnel. The Company anticipates stock-based compensation to continue to be utilized in 2024 and beyond to attract and retain talented personnel and compensate Board members and consultants.
Interest Expense
Interest expense increased in the second quarter of 2024 compared to the same period in 2023 primarily due to higher cash interest expense and the amortization of the debt discount both associated with the Promissory Note that was issued in 2024 (see Note 8).
Six Months Ended June 30, 2024 and 2023
Results of Operations
The following table reflects the Company’s summary operating information. Because of normal production declines, increased or decreased drilling activity and the effects of acquisitions, the historical information presented below should not be interpreted as indicative of future results.
| Six Months Ended June 30, | ||||||||||||||||
| 2024 | 2023 | Variance | Variance % | |||||||||||||
| Oil Revenues | $ | 21,729,236 | $ | 18,086,326 | $ | 3,642,910 | 20% | |||||||||
| Natural Gas Revenues | 261,297 | 904,721 | (643,424 | ) | -71% | |||||||||||
| NGL Revenues | 1,033,240 | 867,135 | 166,105 | 19% | ||||||||||||
| Total Product Revenues | 23,023,773 | 19,858,182 | ||||||||||||||
| Lease Operating Expense (Including Workovers) | 14,930,108 | 13,619,163 | 1,310,945 | 10% | ||||||||||||
| Production and Ad Valorem Taxes | 1,899,165 | 1,479,389 | 419,776 | 28% | ||||||||||||
| Depreciation, Depletion, Amortization and Accretion | 5,144,909 | 2,140,167 | 3,004,742 | 140% | ||||||||||||
| General and Administrative Expense: | ||||||||||||||||
| General and Administrative Expense | 5,233,117 | 4,917,483 | 315,634 | 6% | ||||||||||||
| Stock-based Compensation | 1,301,637 | 2,130,445 | (828,808 | ) | -39% | |||||||||||
| Total General and Administrative Expense | 6,534,754 | 7,047,928 | (513,174 | ) | -7% | |||||||||||
| Interest Expense | 1,050,269 | 422,186 | 628,083 | 149% | ||||||||||||
| Operating Income (Loss) | (6,323,453 | ) | (4,524,220 | ) | (1,799,233 | ) | 40% | |||||||||
| Net Income (Loss) | (8,364,967 | ) | (4,924,500 | ) | (3,440,467 | ) | 70% | |||||||||
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Revenues
Revenues for the six months ended June 30, 2024 increased compared to the prior year primarily due to higher oil sales volumes and higher realized oil prices.
Net oil sales volumes were approximately 291,000 Bbls for the six months ended June 30, 2024, an increase of approximately 17% over the same period in the prior year. Oil volumes in 2024 increased primarily due to new wells completed in North Dakota during the period as well as the acquisition of additional working interest in New Mexico.
Realized oil prices for the six months ended June 30, 2024, were approximately $74.66 per barrel, while realized prices for the same period in the prior year were approximately $72.73, an increase in price of approximately 3%.
Realized natural gas prices for the six months ended June 30, 2024, were approximately $.58 per mcf, while realized prices for the same period in the prior year were approximately $2.04, a decrease in price of approximately 72%. The lower prices in 2024 are primarily due to depressed natural gas prices in New Mexico during the period.
Realized NGL prices for the six months ended June 30, 2024, were approximately $13.89 per barrel, while realized prices for the same period in the prior year were approximately $12.31 per barrel, an increase in price of approximately 13%.
Lease Operating Expense and Production Taxes
Lease operating expense was higher in 2024 primarily associated with an increase in production, partially offset by lower workover expenses year over year. Lease operating expense includes approximately $3.6 million of workover expense for the six months ended June 30, 2024 as compared to $5.7 million for the same period in 2023. The higher workover expense in 2023 was primarily in New Mexico as the Company continued to work over wells in the region to enhance production.
Production taxes were higher for the first half of 2024 compared to 2023 as a result of the higher product revenues discussed above.
Depreciation, Depletion, Amortization and Accretion
The higher DD&A in 2024 is due in part to the increase in production, the acquisition of additional working interest as well as the impact of the capitalized costs associated with the new drilling activity in North Dakota.
General and Administrative Expense
General and administrative expense, excluding stock-based compensation, increased in 2024 compared to 2023 primarily due to an increase in salaries and benefits period over period associated with an increase in employee headcount.
Stock-based Compensation
The Company utilizes stock-based compensation to compensate members of the Board, management, and retain talented personnel. The Company anticipates stock-based compensation to continue to be utilized in 2024 and beyond to attract and retain talented personnel and compensate Board members and consultants. The decrease year over year is primarily due to Board awards in 2023.
Interest Expense
Interest expense increased in 2024 compared to the same period in 2023 primarily due to higher cash interest expense and the amortization of the debt discount both associated with the Promissory Note that was issued in 2024 (see Note 8).
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out an evaluation under the supervision and participation of the Company’s Principal Executive Officer and Principal Financial Officer, along with our management, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Securities Exchange Act Rule 13a-15(e). Based on this evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that the disclosure controls and procedures were effective, as of the end of the period covered by this report, in ensuring the information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer (principal executive officer and principal financial officer) to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
While we continue to implement design enhancements to our internal control procedures, there were no changes to our internal control over financial reporting during the three months ended June 30, 2024, which were identified in connection with the evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. It is management’s expectation that the Company will implement enhanced controls throughout 2024 with additional controls implemented as they are identified by management. Management will continue to diligently and rigorously review the financial reporting controls and procedures on an ongoing basis.
Inherent Limitations on Effectiveness of Controls
The Company’s disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their desired objectives. Management recognizes that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of their inherent limitations, disclosure controls and procedures and internal control over financial reporting may not prevent or detect all errors or misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
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PART II. OTHER INFORMATION
| Item 1. | Legal Proceedings |
For information regarding legal proceedings, see Note 15 of the Unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q.
| Item 1A. | Risk Factors |
Not applicable.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | Mine Safety Disclosures |
Not applicable.
| Item 5. | Other Information |
The Company was not informed by any of its directors or Section 16 officers of the adoption or termination of a "Rule 10b5-1 trading arrangement” or "non-Rule 10b5-1 trading arrangement,” as those terms are defined in Item 408 of Regulation S-K, during the second quarter of 2024.
| Item 6. | Exhibits |
| 4 |
| |
| 10.1 |
| |
| 10.2 |
| |
| 31.1 | Rule 13a - 14 (a)/15(d) - 14(a) Certification of Michael R. Morrisett, Chief Executive Officer (submitted herewith). | |
| 31.2 |
| |
| 32.1 | Section 1350 Certification of Michael R. Morrisett, Chief Executive Officer (submitted herewith).
| |
| 32.2 |
| |
| 101 | Financial Statements for Inline XBRL format (submitted herewith).
| |
| 104 | Cover Page Interactive Data File (embedded within Inline XBRL document).
| |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Empire Petroleum Corporation
|
|||
| Date: August 14, 2024 | By: | /s/ Michael R. Morrisett | |
| Michael R. Morrisett | |||
| Chief Executive Officer and President | |||
| (Principal Executive Officer and Principal Financial Officer) | |||
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