Business Overview and History
Empire Petroleum Corporation (EP) is an independent energy company operator engaged in optimizing developed production by employing field management methods to maximize reserve recovery while minimizing costs. With a diverse portfolio of producing assets across key basins in the United States, Empire has established itself as a resilient player in the oil and gas industry.
Incorporated in 1985 and based in Tulsa, Oklahoma, Empire Petroleum operates through several wholly-owned subsidiaries, including Empire New Mexico, Empire Rockies Region, Empire Texas, and Empire Louisiana. The company’s primary focus is on optimizing and developing its oil and gas interests, leveraging its expertise to drive operational efficiencies and reserve growth.
Empire’s journey has been marked by both challenges and successes. In 2020, the company faced significant challenges, incurring a net loss of $16.8 million due to asset impairment charges and other unusual items. The financial struggles continued into 2021, with Empire reporting a net loss of $18.6 million. During this period, the company grappled with high debt levels and an unprofitable operating environment.
However, 2022 marked a turning point for Empire. The company reported net income of $7.08 million, a remarkable turnaround from the previous year’s net loss. This performance was driven by a 93% increase in total revenue, which reached $53.27 million, up from $27.68 million in 2021. The company’s adjusted EBITDA also improved significantly, reaching $11.34 million in 2022 compared to a negative $7.37 million in 2021. The positive results were attributed to higher oil and gas revenues as commodity prices recovered. Additionally, Empire was able to reduce its total debt levels during 2022, providing improved financial flexibility to operate and invest in its business.
Unfortunately, 2023 presented new challenges for Empire. The company reported a net loss of $12.47 million for the full year. Total revenue declined by 3% to $40.14 million, while adjusted EBITDA turned negative at -$2.38 million. This downward trend was primarily attributable to lower realized prices for oil, natural gas, and natural gas liquids, as well as increased operating expenses. Empire also had to contend with a decline in production volumes and proved reserves during 2023. In response, the company implemented cost control measures and operational optimization efforts to manage these headwinds.
Financial Performance and Liquidity
Empire’s financial performance has been a mixed bag in recent years. While the company’s net production volumes have remained relatively stable, with 2,099 barrels of oil equivalent per day (Boe/d) in 2023 compared to 2,167 Boe/d in 2022, the decline in commodity prices has had a significant impact on its top and bottom lines.
In terms of liquidity, Empire has been proactive in managing its balance sheet. As of the end of 2023, the company had total debt of $6.68 million, down from $8.00 million in the prior year. Its current ratio stood at 0.75, indicating a need to improve working capital management. The company’s debt-to-equity ratio of 0.19 suggests a relatively conservative capital structure.
Empire’s cash flow generation has also been a point of concern, with operating cash flow declining from $18.06 million in 2022 to -$9.89 million in 2023. Free cash flow, a crucial metric for the industry, turned negative at -$27.43 million in 2023, compared to a positive $4.61 million in the prior year. This decline in cash flow has put pressure on the company’s ability to fund its capital expenditures and maintain financial flexibility.
For the most recent quarter (Q3 2024), Empire reported revenue of $11.38 million, a 24.4% increase compared to Q3 2023. However, the company still incurred a net loss of $3.64 million. Operating cash flow improved significantly to $12.81 million, but free cash flow remained negative at -$5.82 million.
As of September 30, 2024, Empire’s liquidity position showed signs of strain. The company had a cash balance of $3.15 million and only $0.20 million available under its $20 million revolving credit facility. The debt-to-equity ratio stood at 0.16, while the current ratio and quick ratio were 0.43 and 0.38, respectively, indicating potential short-term liquidity challenges.
Operational Highlights and Strategic Initiatives
One of Empire’s key operational highlights has been its Starbuck Drilling Program in North Dakota. The company has continued to invest in this development, reporting the completion of the first stage of enhanced oil recovery (EOR) activities in the third quarter of 2024. These efforts have helped drive a 20% sequential increase in net production volumes to 2,638 Boe/d in the second quarter of 2024.
In addition to its North Dakota operations, Empire has been actively working to optimize its assets in other key regions, such as New Mexico and Texas. The company has reported progress in its technical work for production uplift opportunities in these areas, which it expects to contribute to its long-term growth.
To support its strategic initiatives, Empire has recently taken steps to strengthen its financial position. In the second quarter of 2024, the company successfully completed a $20.66 million rights offering, which it plans to use to fund its current drilling, 3D seismic imaging, and other operational efforts.
Furthermore, in November 2024, Empire announced that it had entered into an amendment to its revolving credit facility with Equity Bank, increasing the total principal commitment from $10.0 million to $20.0 million. This additional liquidity will provide the company with greater financial flexibility to execute its growth plans.
Product Segments and Performance
Empire operates in several key product segments:
Oil Sales: This segment represents the majority of Empire’s revenue, accounting for $32.07 million, or 95% of total product revenues, for the nine months ended September 30, 2024. Oil sales volumes increased 18% year-over-year to 435,720 barrels, driven by new well completions in North Dakota as well as the acquisition of additional working interests in New Mexico. However, realized oil prices declined 2% to $73.60 per barrel compared to the prior year period.
Natural Gas Sales: This segment generated $269,840 in revenues for the first nine months of 2024, a 79% decrease from the same period in 2023. The sharp decline was primarily due to depressed natural gas prices in New Mexico, with realized natural gas prices falling 72% year-over-year to $0.38 per Mcf.
NGL Sales: NGL revenues totaled $1.57 million, up 23% versus the prior year, driven by a 15% increase in realized NGL prices to $13.87 per barrel coupled with a 7% rise in NGL sales volumes to 113,530 barrels.
Other Revenues: Empire reported $36,580 in other revenues for the first nine months of 2024, which include various ancillary income streams.
Geographic Markets
Empire operates primarily in the United States, with producing assets in New Mexico, North Dakota, Montana, Texas, and Louisiana. The company’s diversified portfolio across these regions helps mitigate some of the risks associated with regional price differentials and regulatory changes.
Risks and Outlook
Despite its operational successes, Empire faces several industry-wide challenges that could impact its future performance. The volatile nature of commodity prices, particularly oil and natural gas, poses a significant risk to the company’s financial results. Additionally, the highly competitive landscape in the oil and gas industry, coupled with the need for continuous capital investment, presents ongoing hurdles for Empire to navigate.
The company’s liquidity position remains strained, with a negative working capital balance of $15.26 million as of September 30, 2024. This was primarily driven by a higher level of payables related to Empire’s Starbuck Drilling Program in North Dakota. Empire was also not in compliance with the current ratio covenant under its revolving credit facility as of the third quarter, though it obtained a compliance waiver from the lender. Going forward, the company will require additional funding to satisfy these payables and maintain compliance with debt covenants, which it plans to raise through a combination of equity and debt financing, supported by its largest shareholders.
Management Changes
In March 2023, Thomas W. Pritchard resigned as Chief Executive Officer and a director of Empire to pursue other opportunities. Michael R. Morrisett was appointed as the new CEO. This change in leadership could potentially bring new strategies and operational focus to the company.
Conclusion
Empire Petroleum has demonstrated its resilience in the face of industry challenges, leveraging its operational expertise and strategic initiatives to navigate through turbulent times. While the company’s recent financial results have been mixed, the successful completion of the Starbuck Drilling Program and the strengthening of its balance sheet through the rights offering and credit facility amendment suggest that Empire is well-positioned to capitalize on future opportunities in the oil and gas sector.
The company’s focus on its core product segments, particularly oil sales, and its efforts to optimize production across its geographic markets demonstrate a clear strategy for growth. However, the persistent challenges in the natural gas segment and the overall volatile commodity price environment continue to pose risks to Empire’s financial performance.
As Empire moves forward, its ability to manage its liquidity position, execute on its operational improvements, and navigate the complex regulatory and market landscapes will be crucial to its long-term success. Investors and analysts will closely monitor the company’s ability to execute its growth plans and maintain its financial discipline in the volatile industry environment.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.