EMPIRE PETROLEUM CORP

Previous wording

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 three months ended March 31, 2024.

Current wording

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.

Previous wording

As of March 31, 2024, the Company had approximately $3.5 million of cash on hand and approximately $1.1 million available on its Credit Facility. For additional information regarding the Credit Facility, see Note 8 to the Condensed Consolidated Financial Statements included in this report.

Current wording

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.

Previous wording

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 March 31, 2024, the Company has incurred approximately $25 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.

Current wording

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.

Previous wording

Working capital (presented below) decreased by approximately $6.9 million between December 31, 2023 and March 31, 2024. This change was primarily driven by payables related to the Starbuck Drilling Program and a lower cash balance at March 31, 2024.

Current wording

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).

Previous wording

The impact of higher commodity prices and lower general and administrative expenses during the first quarter of 2024 contributed to the increase in cash flows from operating activities. General and administrative expense in 2023 included $360,000 of severance paid to the Company’s former CEO.

Current wording

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.

Previous wording

Cash flows from investing activities in the first quarter of 2024 includes approximately $17 million of additions to oil and gas properties primarily due to the development of our operations in North Dakota.

Current wording

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.

Previous wording

Cash flows from financing activities for the first quarter of 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).

Current wording

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).

Previous wording

For the three months ended March 31, 2024, the Company incurred approximately $13.4 million of additions to oil and natural gas properties which primarily reflects continued drilling and completions activity in North Dakota. As previously discussed, the Company began a capital program in the third quarter of 2023 in North Dakota.

Current wording

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.

Previous wording

The following table sets forth a summary of the Company’s production and operating data for the three months ended March 31, 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.

Current wording

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.

Previous wording

Net oil sales volumes were approximately 131,000 Bbls for the three months ended March 31, 2024, an increase of approximately 9% over the same period in the prior year. Oil volumes in first-quarter 2024 increased primarily due to new wells completed in North Dakota during the period.

Current wording

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.

Previous wording

Realized NGL prices for the three months ended March 31, 2024 were approximately $11.97 per barrel, while realized prices for the same period in the prior year were approximately $12.70 per barrel, a decrease in price of approximately 6%.

Current wording

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%.

Previous wording

Lease operating expense was higher in 2024 due in part to higher power and fuel costs, higher contract labor and an increase in employee headcount in first-quarter 2024 compared to first-quarter 2023. Lease operating expense includes approximately $2.0 million workover expense for the three months ended March 31, 2024 as compared to $2.7 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.

Current wording

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.

Previous wording

General and administrative expense, excluding stock-based compensation, decreased in 2024 compared to 2023 primarily due to the $360,000 of severance expense for the former CEO in first quarter of 2023 (see Note 12) despite an increase in salaries and benefits period over period associated with an increase in employee headcount.

Current wording

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.

Previous wording

Revenues for the three months ended March 31, 2024 increased over the same period as the prior year primarily due to higher oil sales volumes despite a decrease in realized prices.

Current wording

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.

Previous wording

Realized oil prices for the three months ended March 31, 2024 were approximately $72.21 per barrel, while realized prices for the same period in the prior year were approximately $74.33 per barrel, a decrease in price of approximately 3%.

Current wording

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%.

Previous wording

Realized natural gas prices for the three months ended March 31, 2024 were approximately $1.78 per mcf, while realized prices for the same period in the prior year were approximately $2.84 per mcf, a decrease in price of approximately 37%.

Current wording

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.

Previous wording

Production taxes were higher for the first quarter of 2024 compared to the same period in 2023 as a result of the higher product revenues discussed above.

Current wording

Production taxes were higher for the first half of 2024 compared to 2023 as a result of the higher product revenues discussed above.

Previous wording

DD&A was higher in the first quarter of 2024 compared to the same period in 2023 due in part to the increase in production and the impact of higher capitalized costs associated with the new drilling activity in North Dakota.

Current wording

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.