EMPIRE PETROLEUM CORP

Previous wording

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.

Current wording

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 Empire 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 Empire’s failure to secure short and long-term financing necessary to sustain and grow its operations, increased competition, changes in the markets in which Empire participates and the technology utilized by Empire and new legislation regarding environmental matters. These risks and other risks that could affect Empire's business are more fully described in reports Empire 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. Empire undertakes no duty to update any of the forward-looking statements in this Form 10-Q.

Previous 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.

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 Empire’s critical accounting policies during the nine months ended September 30, 2024.

Previous wording

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.

Current wording

Empire’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. Empire’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 Empire’s sources of liquidity. Although Empire 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 Empire’s future needs.

Previous 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.

Current wording

As noted below, our working capital is negative as of September 30, 2024, which is primarily the result of a higher level of payables related to capital spending as part of our Starbuck Drilling Program in North Dakota. In addition, Empire was not in compliance with the current ratio covenant under the Revolver as of September 30, 2024; however, Empire obtained a compliance waiver from the lender for September 30, 2024. As of September 30, 2024, we had approximately $3.1 million in cash on hand and approximately $0.2 million available on the Revolver. Empire 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. Phil Mulacek and Energy Evolution Master Fund, Ltd, both related parties of Empire and our largest two shareholders, owning 20.3% and 31.4%, respectively, of the common shares outstanding as of September 30, 2024, have indicated that they will, and have the ability to, provide sufficient support to sustain the operating, investing, and financing activities of Empire, as necessary. In addition to the November Rights Offering, discussed elsewhere in this document, management continues to seek additional sources of capital via the debt or equity markets to improve liquidity going forward. See the liquidity and going concern discussion included in notes to unaudited interim 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 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.

Current wording

Empire expects to continue to incur costs related to drilling activities in core areas as well as future oil and natural gas acquisitions in core areas. As of September 30, 2024, Empire has incurred approximately $38.3 million of additions to oil and natural gas properties, primarily related to the drilling program in the Starbuck field of North Dakota. It is expected that Empire 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

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.

Current wording

The impact of higher oil production 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 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.

Current wording

Cash flows from investing activities in the first nine months of 2024 include approximately $48.8 million of additions to oil and natural gas properties primarily due to the development of our operations as part of our Starbuck Drilling Program in North Dakota.

Previous 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).

Current wording

Cash flow from financing activities in 2024 includes net proceeds from the April Rights Offering of approximately $20.5 million (see Note 10). In addition, cash flows from financing activities in 2024 includes $5.0 million from a promissory note issued to Empire by a related party and approximately $4.0 million borrowed on Empire’s Revolver (see Note 8).

Previous 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.

Current wording

For the nine months ended September 30, 2024, Empire incurred approximately $38.3 million of additions to oil and natural gas properties which primarily reflects continued drilling and completions activity related to our Starbuck Drilling Program in North Dakota.

Previous 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.

Current wording

The following table sets forth a summary of Empire’s production and operating data for the three and nine months ended September 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

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.

Current wording

The following table reflects Empire’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.

Previous wording

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.

Current wording

Revenues for the three months ended September 30, 2024, increased slightly compared to the prior year primarily due to higher oil, natural gas and NGL sales volumes, substantially offset by lower realized oil and natural gas prices.

Previous 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.

Current wording

Net oil sales volumes were approximately 145,000 Bbls for the three months ended September 30, 2024, an increase of approximately 20% over the same period in the prior year. Oil volumes in third-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 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.

Current wording

Realized natural gas prices for the three months ended September 30, 2024, were $0.03 per mcf, while realized prices for the same period in the prior year were $2.10 per mcf. This is primarily due to the depressed natural gas prices in the third quarter of 2024 in New Mexico.

Previous wording

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%.

Current wording

Realized NGL prices for the three months ended September 30, 2024, were $13.84 per barrel, while realized prices for the same period in the prior year were $11.57 per barrel, an increase in price of approximately 20%.

Previous 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.

Current wording

Lease operating expense was lower for the three months ended September 30, 2024, compared to the same period in 2023 primarily due to lower workover costs. Lease operating expense includes approximately $1.4 million of workover expense for the three months ended September 30, 2024, as compared to $3.2 million for the same period in 2023. The higher workover expense in 2023 was primarily in New Mexico as Empire continued to work over wells in the region to enhance and maintain production.

Previous wording

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

Current wording

Production taxes were higher for the three months ended September 30, 2024, compared to the same period in 2023 as a result of the higher product revenues discussed above.

Previous wording

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.

Current wording

The higher DD&A for the three months ended September 30, 2024, compared to the same period in 2023 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 as part of our Starbuck Drilling Program in North Dakota.

Previous wording

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.

Current wording

General and administrative expense, excluding stock-based compensation, increased for the three months ended September 30, 2024, compared to the same period in 2023 primarily due to an increase in salaries and benefits period over period associated with an increase in employee headcount.

Previous wording

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.

Current wording

Empire utilizes stock-based compensation to compensate the Board, members of management, and retain talented personnel. Empire 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.

Previous wording

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.

Current wording

The following table reflects Empire’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.

Previous 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.

Current wording

Revenues for the nine months ended September 30, 2024, increased compared to the prior year primarily due to higher oil, natural gas, and NGL sales volumes, partially offset by lower realized oil and natural gas prices.

Previous wording

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.

Current wording

Net oil sales volumes were approximately 436,000 Bbls for the nine months ended September 30, 2024, an increase of approximately 18% 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.

Previous 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.

Current wording

Realized natural gas prices for the nine months ended September 30, 2024, were $0.38 per mcf, while realized prices for the same period in the prior year were $2.06, 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

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%.

Current wording

Realized NGL prices for the nine months ended September 30, 2024, were approximately $13.87 per barrel, while realized prices for the same period in the prior year were approximately $12.06 per barrel, an increase in price of approximately 15%.

Previous wording

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.

Current wording

The increase in lease operating expense for the nine months ended September 30, 2024, was primarily associated with an increase in production, partially offset by lower workover expenses year over year. Lease operating expense includes approximately $5.3 million of workover expense for the nine months ended September 30, 2024, as compared to $8.9 million for the same period in 2023. The higher workover expense in 2023 was primarily in New Mexico as Empire continued to work over wells in the region to enhance and maintain production.

Previous wording

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

Current wording

Production taxes were higher for the nine months ended September 30, 2024, compared to the same period in 2023 as a result of the higher product revenues discussed above.

Previous 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.

Current wording

The higher DD&A in 2024 is due in part to the increase in production, the acquisition of additional working interest in New Mexico as well as the impact of the capitalized costs associated with drilling activity associated with our Starbuck Drilling Program in North Dakota.

Previous 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.

Current wording

General and administrative expense, excluding stock-based compensation, increased for the nine months ended September 30, 2024, compared to the same period in 2023 primarily due to an increase in salaries and benefits period over period associated with an increase in employee headcount.

Previous wording

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.

Current wording

Empire utilizes stock-based compensation to compensate members of the Board, management, and retain talented personnel. Empire 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 of Directors awards in 2023.