EMPIRE PETROLEUM CORP

Previous wording

The following discussion should be read together with the consolidated financial statements and notes to consolidated financial statements, which are included in this Annual Report on Form 10-K in Item 8, Financial Statements and Supplementary Data, and the information set forth in Part I, Item 1A – Risk Factors.

Current wording

The following discussion and analysis presents management’s perspective of our business, financial condition and overall performance. This information is intended to provide investors with an understanding of our past performance, current financial condition and outlook for the future and should be read in conjunction with the consolidated financial statements and notes to consolidated financial statements, which are included in this Annual Report on Form 10-K in Item 8, Financial Statements and Supplementary Data, and the information set forth in Part I, Item 1A – Risk Factors.

Previous wording

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 in years prior to 2022. There is no assurance that we will be profitable or obtain funds necessary to finance our future operations.

Current wording

Our primary business is the optimization and development of oil and gas interests. We have incurred losses from operations in 2024 and 2023. There is no assurance that we will be profitable or obtain funds necessary to finance our future operations.

Previous wording

The following table sets forth a summary of our production and operating data for the years ended December 31, 2023 and 2022.

Current wording

The following table sets forth a summary of our production and operating data:

Previous wording

The following table reflects our 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 our summary of 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 2023 decreased compared to the prior year primarily due to lower realized oil, natural gas and NGL prices and lower NGL volumes, partially offset by higher oil volumes in North Dakota.

Current wording

Revenues for 2024 increased compared to prior year primarily due to higher oil volumes in North Dakota due to our Starbuck Drilling Program partially offset by a slight overall decline in commodity prices.

Previous wording

Realized oil prices for 2023, were approximately $75.19 per barrel, while realized prices for the prior year were approximately $93.16 per barrel, a decrease in price of approximately 19%. Oil volumes were higher by approximately 5,000 barrels primarily due to increased production in North Dakota partially offset by lower production in New Mexico.

Current wording

Realized oil prices for 2024 were approximately $71.44 per barrel, while realized prices for the prior year were approximately $75.19 per barrel, a decrease in price of approximately 5%. Oil volumes were higher by approximately 93,000 barrels or 19% primarily due to new wells completed in North Dakota during the third quarter of 2024 as well as the acquisition of additional working interest in New Mexico.

Previous wording

Realized natural gas prices for 2023, were approximately $2.02 per Mcf, while realized prices for the prior year were approximately $5.18 per Mcf, a decrease in price of approximately 61%.

Current wording

Realized natural gas prices for 2024 were approximately $0.37 per Mcf, while realized prices for the prior year were approximately $2.02 per Mcf, a decrease in price of approximately 82%. 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 2023, were approximately $12.21 per barrel, while realized prices for the prior year were approximately $22.76 per barrel, a decrease in price of approximately 46%. NGL sales volumes were lower in 2023 compared to 2022 primarily due to lower volumes in New Mexico.

Current wording

Realized NGLs prices for 2024 were approximately $14.21 per barrel, while realized prices for the prior year were approximately $12.21 per barrel, an increase in price of approximately 16%.

Previous wording

Lease operating expense was higher in 2023 primarily due to higher workover activities. Lease operating expense includes approximately $12.0 million of workover expense for 2023 as compared to approximately $7.9 million for 2022. Workover expense in New Mexico increased due in part to a higher level of compliance-related activities. In addition, workover expense in North Dakota was higher for 2023 as the Company continued to work over wells in the state to enhance production alongside capital recompletions and sidetrack drilling started in 2022.

Current wording

Lease operating expense was lower in 2024 primarily due to lower workover activities partially offset by higher expenses related to an increase in production. Lease operating expense includes approximately $5.9 million of total workover expense for 2024 as compared to approximately $12.0 million for 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 lower for 2023 compared to 2022 as a result of the lower product revenues discussed above.

Current wording

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

Previous wording

Depreciation, Depletion, Amortization and Accretion and Impairment

Current wording

Depreciation, Depletion, Amortization, Accretion and Impairment

Previous wording

We assess our oil and gas properties for impairment when circumstances indicate the carrying value may be greater than its estimated future net cash flows. In 2022, estimated future cash flows from our properties in Louisiana were less than the net book value. As a result, we recorded a $936,000 impairment expense.

Current wording

We assess our oil and gas properties for impairment when circumstances indicate the carrying value may be greater than its estimated future net cash flows. There was no impairment recorded during the years ended December 31, 2024 and 2023.

Previous wording

We utilize stock-based compensation to compensate members of management and retain talented personnel. Our stock-based compensation increased in 2023 due to a higher number of awards in 2023. We anticipate stock-based compensation to continue to be utilized in 2024 and beyond to attract and retain talented personnel and compensate our board members and consultants.

Current wording

We utilize stock-based compensation to compensate members of management and retain talented personnel. Our stock-based compensation decreased in 2024 due to a lower number of awards in 2024. We anticipate stock-based compensation to continue to be utilized in 2025 and beyond to attract and retain talented personnel and compensate our board members and consultants.

Previous wording

Cash-based interest expense increased as higher interest rates were partially offset by a lower outstanding balance under our Credit Facility. We have minimal interest-bearing vehicle and equipment notes payable.

Current wording

Cash-based interest expense increased slightly due to a higher outstanding balance under our Credit Facility partially offset by lower interest rates. We have minimal interest-bearing vehicle and equipment notes payable.

Previous wording

Non-cash interest expense is primarily attributable to the related party note payable as described in Note 7 of Notes to Consolidated Financial Statements. In addition, 2023 includes interest from $10,000,000 of bridge loans from related parties that were subsequently converted to equity (See Note 15 of Notes to Consolidated Financial Statements).

Current wording

Non-cash interest expense is primarily attributable to the conversion to equity of the related party note payable as described in Note 7 of Notes to Consolidated Financial Statements.

Previous wording

We have generated net operating losses since inception, which would normally reflect a tax benefit in the consolidated statement of operations and a deferred asset on the consolidated balance sheet. However, because of the current uncertainty as to our ability to achieve sustained profitability and the potential limitation of NOL carryforwards, a valuation reserve has been established that offsets the amount of any tax benefit available for each period presented in the consolidated statements of operations.

Current wording

We have generated net operating losses since inception, which would normally reflect a tax benefit in the consolidated statement of operations and a deferred asset on the consolidated balance sheet. However, because of the current uncertainty as to our ability to achieve sustained profitability and the potential limitation of NOL carryforwards, a full valuation allowance has been established that offsets the amount of any tax benefit available for each period presented in the consolidated statements of operations.

Previous wording

For 2023, we had a loss before income taxes for which the tax benefit was offset by a change in valuation allowance. For 2022, we had income before income taxes which resulted in a tax provision that was offset by a change in the valuation allowance due to the anticipated use of the NOL carryforward and intangible drilling costs. For 2023 and 2022, our effective tax rates were 1% and 3%, respectively.

Current wording

We had a loss before income taxes for 2024 and 2023, respectively, which the tax benefit was offset by a change in the valuation allowance. For 2024 and 2023, our effective tax rates were 0% and 1%, respectively.

Previous wording

As noted below, our working capital is negative as of December 31, 2023 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 December 31, 2023; however, the Company obtained a compliance waiver from the lender for December 31, 2023. As of December 31, 2023, we had approximately $8 million in cash on hand and approximately $5.5 million available on the Credit Facility. For additional information regarding the Credit Facility, see Note 7 of Notes to Consolidated Financial Statements. The Company will require additional funds to satisfy these payables related to the capital spending program which are greater than estimated cash flows from operations over the next 12 months. Management has initiated plans to raise the necessary funds including the commencement of a rights offering expected to raise up to approximately $20.66 million (see Note 18 of Notes to Consolidated Financial Statements). Phil Mulacek and Energy Evolution Master Funds, Ltd, both related parties of the Company and largest shareholders collectively owning 46% of the common shares outstanding, have indicated that they intend to participate in the rights offering and fully subscribe to the shares of Common Stock corresponding to their subscription rights and intend to exercise their over-subscription rights. See Note 1 - Liquidity and Going Concern of Notes to Consolidated Financial Statements for further discussion of management’s plans.

Current wording

As noted below, our working capital is negative as of December 31, 2024, which is primarily the result of a lower cash balance due to capital spending as part of our Starbuck Drilling Program and return-to-production efforts in Texas. As of December 31, 2024, we had approximately $2.3 million in cash on hand and approximately $8.7 million available under our Credit Facility. Empire will require additional funds to satisfy the payables discussed above which are greater than estimated cash flows from operations over the next 12 months. Phil Mulacek and Energy Evolution, both related parties of Empire and our largest two stockholders, owning 21.2% and 31.9%, respectively, of the common shares outstanding as of December 31, 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 April Rights Offering and November Rights Offering, management continues to seek additional sources of capital via the debt or equity markets to improve liquidity going forward. See Liquidity and Going Concern in Note 1 of Notes to Consolidated Financial Statements for further discussion of management’s plans.

Previous wording

We expect to incur costs related to drilling activities in core areas. It is expected that management will use a combination of cash on hand and cash flows from operations as well as seeking additional debt or equity funding to fund these ongoing activities.

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. During 2024, Empire has incurred approximately $42.2 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

In 2023, we received approximately $12.5 million from stock issuances and warrant exercises. In 2022, we received approximately $3.4 million in cash from warrant exercises.

Current wording

In 2024, we received approximately $0.6 million from stock issuances and warrant exercises. In 2023, we received approximately $12.5 million from stock issuances and warrant exercises.

Previous wording

For 2023, additions to oil and natural gas properties totaled $27 million including $2.1 million related to acquisitions. The $25 million not related to acquisitions primarily reflects development of our North Dakota operations. We anticipate capital expenditures in 2024 that will be funded with cash on hand, cash flows from operations, debt, and/or equity issuances.

Current wording

For 2024, Empire incurred approximately $42.2 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. For 2023, additions to oil and natural gas properties totaled $27.0 million including $2.1 million related to acquisitions. The approximate $25.0 million not related to acquisitions primarily reflects development of our North Dakota operations.

Previous wording

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities. Because estimates and assumptions require significant judgment, future actual results could differ from those estimates and could have a significant impact on our results of operations, financial position and cash flows. We re-evaluate our estimates and assumptions at least on a quarterly basis. In our management’s opinion, the more significant reporting areas impacted by management’s judgments and estimates are as follows:

Current wording

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“US 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. Because estimates and assumptions require significant judgment, future actual results could differ from those estimates and could have a significant impact on our results of operations, financial position and cash flows. We re-evaluate our estimates and assumptions at least on a quarterly basis and periodically update 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 estimates during the year ended December 31, 2024. In our management’s opinion, the more significant reporting areas impacted by management’s judgments and estimates are as follows:

Previous wording

We use the successful efforts method of accounting for oil and natural gas operations. Under this method, costs to acquire oil and natural gas properties, drill successful exploratory wells, drill and equip development wells, and install production facilities are capitalized. Estimated proved oil and natural gas reserves, management’s outlook on commodity prices and projected future cash flows of oil and natural gas reserves are a significant part of our financial calculations. Following are examples of how these estimates affect financial results:

Current wording

We use the successful efforts method of accounting for oil and natural gas operations. Under this method, costs to acquire oil and natural gas properties, drill successful exploratory wells, drill and equip development wells, and install production facilities are capitalized. Estimated proved oil and natural gas reserves, management’s outlook on commodity prices and projected future cash flows of oil and natural gas reserves are a significant part of our financial calculations. The following are examples of how these estimates affect financial results:

Previous wording

Proved oil and natural gas reserves are the estimated quantities of oil, natural gas and NGLs which geological and engineering data demonstrate with reasonable certainty to be recoverable in future periods from known reservoirs under existing economic and operating conditions. Reserve quantities and future cash flows included in this report are prepared in accordance with guidelines established by the SEC and the Financial Accounting Standards Board (“FASB”). The accuracy of reserve estimates is a function of:

Current wording

Proved oil and natural gas reserves are the estimated quantities of oil, natural gas and NGLs which geological and engineering data demonstrate with reasonable certainty to be recoverable in future periods from known reservoirs under existing economic and operating conditions. Reserve quantities and future cash flows included in this report are prepared in accordance with guidelines established by the SEC and the FASB. The accuracy of reserve estimates is a function of:

Previous wording

Proved reserves information included in this report is based on estimates prepared by independent petroleum engineers, Cawley Gillespie &Associates. The independent petroleum engineers evaluated 100% of our estimated proved producing reserve quantities and their related future net cash flows as of December 31, 2023. Estimates prepared by others may be higher or lower than these estimates. Because these estimates depend on many assumptions, all of which may differ substantially from actual results, reserve estimates may be different from the quantities of oil and natural gas that are ultimately recovered. Management may make revisions to reserve estimates throughout the year as additional information becomes available. Such changes could trigger an impairment of our oil and natural gas properties and have an impact on our depletion expense prospectively. For example, a change of 10 percent in our total proved reserves could change our annual depletion and amortization expense by $350,000. The actual impact would depend on the specific areas impacted.

Current wording

Proved reserves information included in this report is based on estimates prepared by independent petroleum engineers, CG&A. The independent petroleum engineers evaluated 100% of our estimated proved producing reserve quantities and their related future net cash flows as of December 31, 2024. Estimates prepared by others may be higher or lower than these estimates. Because these estimates depend on many assumptions, all of which may differ substantially from actual results, reserve estimates may be different from the quantities of oil and natural gas that are ultimately recovered. Management may make revisions to reserve estimates throughout the year as additional information becomes available. Such changes could trigger an impairment of our oil and natural gas properties and have an impact on our depletion expense prospectively. For example, a change of 10 percent in our total proved reserves could change our annual depletion expense by approximately $0.9 million. The actual impact would depend on the specific areas impacted.

Previous wording

We assess our proved properties for impairment using estimates of future undiscounted cash flows. This assessment requires significant judgment and assumptions including commodity price outlooks, estimates of reserve quantities, expected lease operating costs and capital costs. An impairment expense could result if oil and gas prices decline in the future as it may not be economic to develop some of these unproved properties. We performed an assessment as of December 31, 2023 and did not identify any impairments.

Current wording

We assess our proved properties for impairment using estimates of future undiscounted cash flows. This assessment requires significant judgment and assumptions including commodity price outlooks, estimates of reserve quantities, expected lease operating costs and capital costs. An impairment expense could result if oil and gas prices decline in the future as it may not be economic to develop some of these unproved properties. We performed an assessment as of December 31, 2024 and 2023, and did not identify any impairments, respectively.

Previous wording

Asset retirement obligations (“AROs”) consist primarily of estimated future costs associated with the plugging and abandonment of oil and natural gas wells, removal of equipment and facilities from leased acreage, and land restoration in accordance with applicable local, state and federal laws. The discounted fair value of an ARO liability is required to be recognized in the period in which it is incurred, with the associated asset retirement cost capitalized as part of the carrying cost of the oil and natural gas asset. The recognition of an ARO requires that management make numerous assumptions regarding such factors as the estimated probabilities, amounts and timing of settlements; the credit-adjusted risk-free rate to be used; inflation rates; and future advances in technology. In periods subsequent to the initial measurement of the ARO, we must recognize period-to-period changes in the liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows.

Current wording

Asset retirement obligations (“ARO”) consist primarily of estimated future costs associated with the plugging and abandonment of oil and natural gas wells, removal of equipment and facilities from leased acreage, and land restoration in accordance with applicable local, state and federal laws. The discounted fair value of an ARO liability is required to be recognized in the period in which it is incurred, with the associated asset retirement cost capitalized as part of the carrying cost of the oil and natural gas asset. The recognition of an ARO requires that management make numerous assumptions regarding such factors as the estimated probabilities, amounts and timing of settlements; the credit-adjusted risk-free rate to be used; inflation rates; and future advances in technology. In periods subsequent to the initial measurement of the ARO, we must recognize period-to-period changes in the liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows.

Previous wording

Deferred tax expense or benefit represents the change in the balance of deferred tax assets or liabilities. Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 2023 and 2022, a valuation allowance for deferred tax assets was recorded.

Current wording

Deferred tax expense or benefit represents the change in the balance of deferred tax assets or liabilities. Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 2024 and 2023, a full valuation allowance for deferred tax assets was recorded.

Previous wording

Management applies the accounting standards related to uncertainty in income taxes. This accounting guidance clarifies the accounting for uncertainties in income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the consolidated financial statements. It requires that we recognize in the consolidated financial statements the financial effects of a tax position, if that position is more likely than not of being sustained upon examination, including resolution of any appeals or litigation processes, based upon the technical merits of the position. It also provides guidance on measurement, classification, interest, penalties and disclosure. We have no uncertain tax positions at either December 31, 2023 or December 31, 2022.

Current wording

Management applies the accounting standards related to uncertainty in income taxes. This accounting guidance clarifies the accounting for uncertainties in income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the consolidated financial statements. It requires that we recognize in the consolidated financial statements the financial effects of a tax position, if that position is more likely than not of being sustained upon examination, including resolution of any appeals or litigation processes, based upon the technical merits of the position. It also provides guidance on measurement, classification, interest, penalties and disclosure. We had no uncertain tax positions at December 31, 2024, or December 31, 2023.