Executive Summary / Key Takeaways

• Empire Petroleum ($EP) is an independent energy company focused on acquiring and optimizing production from predeveloped oil and gas properties in the U.S., aiming for cost-effective reserve and cash flow growth.
• The company's core competitive approach lies in specialized field management techniques and operational expertise applied to mature assets, rather than proprietary technology, enabling targeted recovery enhancements and cost control in niche areas.
• Recent performance in Q1 2025 showed a decrease in total revenue to $9.002 million and a net loss of $4.221 million, primarily driven by lower oil volumes (down 9%) and prices (down 7%), partially offset by a significant increase in natural gas revenue (up 45%).
• Empire faces near-term liquidity challenges, reporting negative working capital of $12.4 million as of March 31, 2025, and insufficient expected operating cash flow to meet obligations over the next 12 months, leading to substantial doubt about going concern prior to considering mitigation.
• Crucially, this going concern doubt is alleviated by committed financial support from key related parties, Phil Mulacek (21.1% ownership) and Energy Evolution (31.8% ownership), who are willing and able to provide necessary funds.

The Strategy: Unlocking Potential in Developed Fields

Empire Petroleum operates as an independent energy company with a focused strategy: to acquire and optimize production from already developed oil and gas properties across key U.S. basins. Since 2018, under the leadership of Tommy Pritchard and Mike Morrisett, the company has systematically built its asset base through targeted acquisitions in Louisiana, North Dakota, Montana, Texas, and New Mexico. This approach centers on leveraging existing infrastructure and known reservoirs, applying specialized field management techniques to maximize reserve recovery and minimize costs, a stark contrast to the high-risk, high-cost exploration typical of many E&P firms.

This strategy positions Empire as a niche player within the broader, highly competitive energy sector. The landscape is dominated by integrated supermajors like Exxon Mobil (XOM) and Chevron (CVX), large independents such as ConocoPhillips (COP) and Occidental Petroleum (OXY), and numerous smaller regional operators. Compared to these giants, Empire operates at a significantly smaller scale, with a market capitalization around $192 million, dwarfed by competitors whose market caps range from tens of billions to over $400 billion.

While larger competitors often possess vast financial resources, global reach, and significant investments in cutting-edge proprietary technologies for exploration and extraction, Empire's competitive edge is found in its operational agility and focused expertise on mature fields. Its "technology" is less about a patented invention and more about the skilled application of established petroleum engineering and field management practices – techniques like waterflood conformance, targeted workovers, and horizontal sidetrack drilling – tailored to the specific geological characteristics of its acquired assets. This allows Empire to pursue projects that might be too small or operationally complex for larger companies, aiming for cost-effective production additions. For instance, efforts at the Starbuck field in North Dakota have involved increasing water injection rates by 300-800% to approximately 900 barrels per day in specific wells and drilling sidetracks designed to achieve lateral lengths of around 10,000 feet, with historical expectations from 2022 pointing to significant production increases from these specific wells (e.g., from 3,000 barrels/month to over 15,000 barrels/month from sidetracks). These operational tactics are intended to yield quantifiable benefits in recovery rates and production volumes from existing wells.

However, this niche focus also presents challenges. Empire's smaller scale means it lacks the financial resilience and bargaining power of the majors. Its operational approach, while effective in specific contexts, does not provide the same level of broad efficiency gains or technological moat as the large-scale, R&D-driven technologies employed by companies like XOM or CVX, which can achieve lower per-unit operating costs through advanced drilling and processing. Empire's concentration in a few U.S. regions also exposes it disproportionately to regional supply/demand factors, infrastructure constraints, and specific state regulations, unlike the geographically diversified portfolios of larger players.

Recent Performance and Liquidity Headwinds

Empire's financial performance in the first quarter of 2025 reflects both the opportunities and challenges inherent in its strategy and the current market environment. Total revenue for the three months ended March 31, 2025, decreased to $9.002 million from $9.387 million in the same period of 2024. This decline was primarily driven by lower oil sales, which fell by 15% to $8.049 million, a result of both a 9% decrease in net oil sales volumes (partially due to five wells being down for redrilling in North Dakota) and a 7% decrease in realized oil prices ($67.28/barrel in Q1 2025 vs. $72.21/barrel in Q1 2024). NGL sales also saw a slight decrease. Partially offsetting these declines was a notable 45% increase in natural gas revenues, rising to $548 thousand, driven by higher market prices.

The company reported a net loss of $4.221 million for Q1 2025, compared to a net loss of $3.974 million in Q1 2024. While lease operating expenses decreased (down 22% to $5.766 million, primarily due to lower workover costs), other expenses increased. Depreciation, depletion, amortization, and accretion (DDA) rose by 39% to $2.752 million, reflecting increased capitalized costs from the ongoing Starbuck drilling program and acquired working interests. General and administrative expenses (excluding stock-based compensation) also increased by 11% to $3.197 million, mainly due to higher employee headcount.

A critical concern highlighted in the Q1 2025 financial statements is the company's liquidity position. Empire reported negative working capital of approximately $12.4 million as of March 31, 2025, a deterioration of $3.5 million from the end of 2024. Cash on hand also decreased by $1.2 million during the quarter. This strain on working capital and cash is attributed to ongoing costs from the Starbuck drilling program, unforeseen operational expenses from the Texas return-to-production efforts initiated in late 2024, and reduced cash flows stemming from production downtime in North Dakota.

The company's Credit Facility, while increased to a maximum commitment of $20.0 million in November 2024, had only about $7.8 million of unused commitment as of March 31, 2025, and is subject to monthly reductions of $0.25 million, limiting future access. Management explicitly states that future expected operating cash flows are insufficient to meet obligations over the next 12 months. This situation, prior to considering mitigating factors, raises substantial doubt about Empire's ability to continue as a going concern.

Strategic Support and Future Outlook

Despite the near-term liquidity challenges and the formal disclosure of substantial doubt regarding going concern before considering mitigation, Empire's outlook is significantly shaped by the committed support of its largest shareholders and related parties: Phil Mulacek and Energy Evolution Master Fund, Ltd., who collectively own over 50% of the outstanding common stock. Management has received assurances that these related parties are willing and able to provide additional necessary funds, potentially through warrants or a related party note. Management believes this committed support is probable and sufficient to allow the company to meet its obligations for at least 12 months from the financial statement issuance date, thereby alleviating the going concern doubt.

This related-party support is critical as Empire continues to execute its strategy of enhancing production from its asset base. The Starbuck drilling program in North Dakota remains a key focus, with approximately $2.7 million in capital expenditures incurred in Q1 2025, primarily related to this project, which is nearing completion. The company also continues its return-to-production efforts in Texas, despite encountering unforeseen costs.

Looking ahead, Empire expects to continue incurring costs related to drilling and enhancement activities in its core areas, as well as potentially pursuing future acquisitions that fit its strategy. Funding for these initiatives, ongoing operations, and working capital requirements is anticipated to come from a combination of debt or equity issuances (including potential related-party funding), cash on hand, and future cash flows from operations.

While specific quantitative guidance for full-year 2025 was not provided in the latest filing, the company's strategic narrative centers on the successful execution of its operational programs to drive future growth in reserves, production, revenue, and cash flow. The historical context from 2022 transcripts, where management expressed aspirations to potentially double production year-over-year (from ~2,000 Boe/d to ~4,000 Boe/d) and targeted significant production and reserve increases from the Starbuck field (500-1,000 bbl/d oil increase, 100% reserve growth), indicates the scale of their ambition for asset optimization, although these were outdated targets. The current focus remains on completing ongoing projects and leveraging the operational expertise that forms the core of their competitive approach in their specific market niche.

Key risks to this outlook include the inherent volatility of commodity prices, which directly impacts revenue and the economic viability of projects, as well as the subjective nature of reserve estimations. Operational risks, such as unexpected downtime (as seen in Q1 2025 in North Dakota) and unforeseen costs (as experienced in Texas), can also impact financial performance and liquidity. Furthermore, the company's reliance on committed related-party funding, while currently mitigating going concern risk, represents a concentration risk in its financing structure.

Conclusion

Empire Petroleum presents an investment thesis centered on the potential to unlock value from mature, predeveloped oil and gas assets through specialized operational techniques and focused field management. The company's strategy of acquiring and enhancing production in niche U.S. basins leverages its operational expertise as its primary competitive tool against larger, more technologically advanced industry players. While recent financial results in Q1 2025 show the impact of lower commodity prices and operational challenges, resulting in a net loss and negative working capital, the critical factor underpinning the company's near-term viability and future execution is the committed financial support from its key related-party shareholders. The outlook hinges on the successful completion of ongoing operational programs, particularly at the Starbuck field, and the ability to translate these efforts into sustainable increases in production, reserves, and cash flow. Investors should weigh the potential upside from successful asset optimization against the significant near-term liquidity pressures and reliance on related-party funding, alongside the inherent risks of commodity price volatility and operational execution.