Item 1. Business
ITEM
1. BUSINESS.
In
this Form 10-K, references to “Empire”, the “Company”, “we”, “our”, and “us”
refer to Empire Petroleum Corporation and its wholly-owned subsidiaries, unless context indicates otherwise.
We
uplisted from the OTCQB to the NYSE American effective March 8, 2022. Immediately prior to the listing, a reverse stock split of 1 for
4 occurred. All pricing and share amounts for periods prior to the reverse stock split have been stated at post-reverse split amounts.
On
March 8, 2022, our common stock began trading on the NYSE American under the symbol “EP” and CUSIP 292034303. Prior to trading
on the NYSE American, our common stock was accessible on the OTCQB.
Overview
Empire
Petroleum Corporation is an independent energy company that engages in unlocking value in developed assets. Empire operates the following
wholly-owned subsidiaries in its areas of operations:
• Empire New Mexico LLC d/b/a Green Tree New Mexico (“Empire New
Mexico”)
• Empire
Rockies Region
○ Empire
North Dakota LLC (“Empire North Dakota”)
○ Empire
North Dakota Acquisition LLC (“Empire NDA”)
• Empire Texas (“Empire Texas”),
consisting of the following entities:
○ Empire
Texas LLC
○ Empire
Texas Operating LLC
○ Empire
Texas GP LLC
○ Pardus
Oil & Gas Operating, LP (owned 1% by Empire Texas GP LLC and 99% by Empire Texas LLC)
• Empire
Louisiana LLC (“Empire Louisiana”)
Empire
was incorporated in the state of Delaware in 1985. The consolidated financial statements of Empire Petroleum Corporation and subsidiaries
include the accounts of the Company and its wholly-owned subsidiaries.
Our
mission is to increase shareholder value by building oil and natural gas reserves in strategic plays in the United States. To accomplish
its mission, we plan on executing the following business strategies:
• Cost-effectively optimize well production
• Reduce
unit operating costs and improve margins
• Target
proved developed producing acquisitions in predictable fields that have historically had
low production decline and long lives
• Focus
on high-quality assets that add scale and provide synergies to our existing portfolio and
core areas of operation
We
operate as a single segment as each of our operating areas have similar economic characteristics and each meet the criteria for aggregation
as defied by accounting standards related to disclosures about segments of an enterprise.
Properties
We
are an independent operator in four geographic areas in the United States. As operator, we manage and influence production on operated
properties. We use a combination of experienced field personnel and third-party service providers to execute our mission. Our properties
have reasonably predictable production profiles and cash flows, subject to commodity price and cost fluctuations.
As
is common in the industry in which we operate, we selectively participate in drilling and developmental activities in non-operated properties.
Decisions to participate in non-operated properties are made after technical and economic analysis of the projects which also considers
the operating expertise and historical track record of the operators.
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Empire New
Mexico
Empire
New Mexico was formed when we purchased producing assets from XTO in May 2021. These assets are located in Lea County, New Mexico and
consist of a contiguous and consolidated acreage position consisting of 48,000 gross (40,000 net) acres held by production from approximately
730 wells with an average WI of 72% and average NRI of 61% and 14 RI wells with an average ORRI of 11%. Empire New Mexico’s assets
primarily produce oil with natural gas and NGLs accompanying oil production. Empire New Mexico’s properties are in the following
formations:
• Grayburg/San
Andres (primary source of production)
• Queen-Seven
Rivers-Yates
• Devonian
• Abo
• Blineberry
• Tubb
• Drinkard
Empire
North Dakota
Empire
North Dakota operates approximately 230 producing properties with an average WI of 89% and NRI of 61% in North Dakota and western Montana
that were acquired in April 2019. These properties primarily produce oil with some related gas production. Assets are located in the
following formations:
• Madison
(primary source of production)
• Bakken
• Duperow
• Red
River
• Ratcliffe/Mission
Canyon
These
assets have experienced near-flat production rates over the last five years. We have been able to capitalize on operational improvements
to allow more immediate recovery of reserves.
Empire
Texas
In
April 2020, Empire Texas acquired approximately 140 gross wells and approximately 30,000 net acres with an average operated WI of 96%
and an average operated NRI of 79% as well as 77 miles of gathering lines and pipelines with related facilities and equipment. Empire
Texas owns concentrated acreage and stacked pay in the historically prolific East Texas Basin. Assets are concentrated in the Fort Trinidad
Field in Houston and Madison Counties with high working interest and historical production from eight separate formations.
Empire Louisiana
Empire Louisiana
acquired its assets in late 2018 and has 10 producing properties and three saltwater disposal wells in the following formations:
• Miocene
• Frio
• Cockfield
• Wilcox
Empire Louisiana’s
assets primarily produce oil from properties with average WI of 58% and NRI of 47%.
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Production
and Operating Data
The
following table sets forth a summary of our production and operating data for the years ended December 31, 2022 and 2021. Because of
normal production declines, increased or decreased production due to future acquisitions, divestitures, and development, fluctuations
in commodity prices and the effects of acquisitions or divestitures, the historical information presented below should not be interpreted
as being indicative of future results.
Year Ended
December 31, 2022
Year Ended
December 31, 2021
Production and operating data:
Net production volumes:
Oil (Bbl)
482,818
333,158
Natural gas (Mcf)
875,647
622,474
Natural gas liquids (Bbl)
160,809
102,893
Total (Boe)
789,568
539,796
Average price per unit:
Oil (a)
$ 93.16
$ 67.01
Natural gas (a)(b)
$ 5.18
$ 3.68
Natural gas liquids (b)
$ 22.76
$ 28.08
Total (Boe)
$ 67.34
$ 50.95
Operating costs and expenses per Boe:
Lease operating expense
$ 29.87
$ 24.61
Production and ad valorem taxes
$ 4.99
$ 3.90
Depreciation, depletion, amortization and accretion
$ 4.19
$ 6.89
General & administrative
$ 15.62
$ 15.68
(a) Excludes
the effect of net cash receipts from (payments on) derivatives.
(b) Includes
gathering and processing costs in 2022 and 2021 that were previously reported in Lease operating expense within Operating
Costs and expenses.
At
December 31, 2022 and 2021, we had approximately 1,100 wells which we operated.
We
completed a pilot drilling program on four wells in North Dakota and are in the process of completing these wells as of December 31,
2022. During 2022, we had no other drilling activity with the exception of four non-operated wells. No wells were in progress as of December
31, 2021, and we had no drilling activity during 2021 with the exception of four non-operated wells.
We
have no delivery commitments for oil or natural gas.
Oil
and Natural Gas Reserves
Our
primary mission is to optimize existing producing properties; as such, there are no reserves estimated for undeveloped properties, though
we own acreage that can be drilled in the future and are also a non-operator WI owner on acreage subject to future drilling activities.
The following table represents our oil and natural gas reserves at December 31, 2022 and 2021.
Oil
Natural Gas
NGL
(Mbbl)
(MMcf)
(Mbbl)
MBoe
Proved developed at December 31, 2022
8,826
12,936
2,262
13,244
Proved developed at December 31, 2021
8,448
11,205
87
10,403
Net
proved reserves were calculated using an unweighted arithmetic average of the first-day-of-the-month price within the 12-month period
for the year. All prices and costs associated with operating wells were held constant in accordance with SEC guidelines. Prices of $91.14
per barrel of oil, $4.23 per Mcf and $36.29 per barrel of NGL were utilized at December 31, 2022. Prices of $64.31 per barrel and $7.34
per Mcf were utilized at December 31, 2021. Natural gas pricing in 2022 includes prices received for NGLs during the year. In 2021, we
did not separately report the NGLs in New Mexico.
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Reserve
Estimation Process
Reserve
estimation is a subjective process as the underground accumulations of crude oil and natural gas cannot be measured in an exact manner,
and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation
and judgment. The quantities of oil and natural gas that are ultimately recovered, production and operating costs, and future oil and
natural gas prices may differ from those assumed in these estimates. Our internal professionals work closely with our external engineers
to ensure the integrity, accuracy, and timeliness of data that is furnished to them for their reserve estimation process.
We
engage an independent petroleum engineering firm, CG&A, to prepare our annual reserve estimates and rely on CG&A’s expertise
to ensure that reserve estimates are prepared in accordance with SEC guidelines.
The
technical person primarily responsible for the preparation of the reserve report is Zane Meekins, Executive Vice President. Mr. Meekins
has been with CG&A since 1989 and graduated from Texas A&M University in 1987 with a bachelor's degree in Petroleum Engineering.
He is a registered professional engineer in Texas and has more than 30 years of experience in the estimation and evaluation of oil and
natural gas reserves. He is also a member of the Society of Petroleum Engineers and The Society of Petroleum Evaluation Engineers.
Brian
Weatherl, Vice President of Engineering, is responsible for our reservoir engineering, and is a qualified reserve estimator and is responsible
for overseeing CG&A during the preparation of the annual reserve estimates. His professional qualifications meet or exceed the qualifications
of reserve estimators set forth in the “Standards Pertaining to Estimation and Auditing of Oil and Natural Gas Reserve Information”
promulgated by the Society of Petroleum Engineers. His qualifications include a Bachelor of Science degree in Petroleum Engineering from
the University of Tulsa in 1984 and he is a member of the Society of Petroleum Engineers. Mr. Weatherl has been estimating and evaluating
reserves for over 35 years.
The
primary inputs to the reserve estimation process are technical information, financial data, ownership interest and production data. The
relevant field and reservoir technical information, which is updated at least annually, is assessed for validity when CG&A has technical
meetings with our personnel. Current revenue and expense information is obtained from accounting records, which are subject to external
quarterly reviews, annual audits, and internal controls over financial reporting. All current financial data such as commodity prices,
lease operating expenses, production taxes and field level commodity price differentials are updated in the reserve database and then
analyzed to ensure that they have been entered accurately and that all updates are complete. Our ownership in mineral interests and well
production data are subject to internal controls and are incorporated into the reserve database as well as verified internally by our
personnel to ensure accuracy and completeness. Once the reserve database has been updated with current information, and the relevant
technical support material has been assembled, CG&A meets with technical personnel to review field performance and future development
plans in order to verify the validity of estimates. Following these reviews, the reserve database is furnished to CG&A so that it
can prepare its independent reserve estimate and final report. The reserve estimates prepared by CG&A are reviewed and compared to
internal estimates by Mr. Weatherl. Material reserve estimation differences are reviewed between CG&A and our technical personnel
and additional data is provided to address any variances. If the supporting documentation does not justify additional changes, CG&A
reserves are accepted. In the event that additional data supports a reserve estimation adjustment, CG&A will analyze the additional
data and may make changes it solely deems necessary. Additional data is usually comprised of updated production information on new wells.
Once the review is completed and all material differences are reconciled the reserve report is finalized and our reserve database is
updated with the final estimates provided by CG&A.
COVID-19
Despite
recoveries in commodity prices, COVID-19 has impacted and may continue to impact the global economy and disrupt global supply chains
and has the potential to continue to create significant volatility and disruption of financial and commodity markets. The extent of the
continuing impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute business strategies
and initiatives in the expected timeframes, is uncertain and depends on various factors outside of our control, including how the pandemic
continues to evolve and how measures taken in response to its effects impact the demand for oil and natural gas, the availability of
personnel, equipment, and services critical to our ability to operate our properties and the impact of potential governmental restrictions.
There is un certainty regarding the extent and duration of any disruption.
Marketing
Arrangements
We
market our oil and natural gas in accordance with standard energy industry practices. This marketing effort endeavors to obtain the combined
highest netback and most secure market available at that time.
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We
sell oil production at the lease locations to third-party purchasers via truck transport or pipeline. We do not transport, refine or
process the oil we produce. We sell our produced oil under contracts using market-based pricing, which is adjusted for differentials
based upon oil quality.
We
sell our natural gas and natural gas liquids under purchase contracts using market-based pricing, which is primarily sold at the lease
location.
Principal
Customers
We
sell our oil, natural gas, and NGL production to marketers which is transported by truck or pipeline to storage facilities arranged by
the marketers. Our marketing of oil and natural gas can be affected by factors beyond our control, the effects of which cannot be accurately
predicted.
For
2022, 68% of revenues from oil, natural gas, and NGL sales were to four customers. For 2021, 63% of revenues from oil, natural gas, and
NGL sales were to four customers. While the loss of these purchasers may result in a temporary interruption in sales of, or a lower price
for, our production, we believe that the loss of these purchasers would not have a material adverse effect on our operations, as there
are alternative purchasers in our producing regions.
Competition
The
oil and natural gas industry in the areas in which we operate is highly competitive. We encounter strong competition from numerous parties,
ranging generally from small independent producers to major integrated companies. We primarily encounter significant competition in acquiring
properties. At higher commodity prices, we also face competition in contracting for oil field services, rigs, pressure pumping and workover
equipment and securing trained personnel. Many of these competitors have financial, technical and personnel resources substantially larger
than ours. As a result, our competitors may be able to pay more for desirable properties, or to evaluate, bid for and purchase a greater
number of properties or prospects than our financial or personnel resources will permit.
In
addition to competition for drilling, pressure pumping and workover equipment, we are also affected by the availability of related equipment
and materials. The oil and natural gas industry periodically experiences shortages of drilling and workover rigs, equipment, pipe, materials
and personnel, which can delay workover and exploration activities and cause significant price increases. We are unable to predict the
timing or duration of any such shortages.
Seasonality
of Business
Weather
conditions often affect the demand for, and prices of, natural gas and can also delay oil and natural gas production. Demand for natural
gas is traditionally higher in the winter, resulting in higher natural gas prices during the first and fourth quarters. Due to these
seasonal fluctuations, results of operations for individual quarterly periods may not be indicative of the results realized on an annual
basis.
Markets;
Price Volatility
The
market price of oil and natural gas is volatile, subject to speculative movement and depends upon numerous factors beyond our
control, including expectations regarding inflation, global and regional demand, political and economic conditions and production
costs. Future profitability, if any, will depend substantially upon the prevailing prices for oil and natural gas. If the
market price for oil and natural gas remains depressed in the future, it could have a material adverse effect on our ability to
raise additional capital necessary to finance operations. Lower oil and natural gas prices may also reduce the amount of oil and
natural gas, if any, that can be produced economically from our properties. We anticipate that the prices of oil and natural
gas will fluctuate in the near future.
Regulation
The
oil and natural gas industry is subject to extensive federal, state and local laws and regulations governing the production, transportation
and sale of hydrocarbons as well as the taxation of income resulting therefrom.
Legislation
affecting the oil and natural gas industry is constantly changing. Numerous federal and state departments and agencies have issued
rules and regulations applicable to the oil and natural gas industry. In general, these rules and regulations regulate, among other
things, the extent to which acreage may be acquired or relinquished; spacing of wells; measures required for preventing waste of oil
and natural gas resources; and, in some cases, rates of production. The heavy and increasing regulatory burdens on the oil and
natural gas industry increase our cost of doing business and, consequently, affect profitability.
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Our
oil and natural gas operations are also subject to numerous federal, state and local laws and regulations relating to environmental protection.
These laws govern, among other things, the amounts and types of substances and materials that may be released into the environment, the
issuance of permits in connection with exploration, drilling and production activities, the reclamation and abandonment of wells and
facility sites and the remediation of contaminated sites. These laws and regulations may impose substantial liabilities if we fail
to comply or if any contamination results from our operations.
Employees
At
December 31, 2022, we had forty full-time employees, not including contract personnel and outsourced service providers. Our team is broadly
experienced in oil and natural gas operations and follows a strategy of outsourcing most accounting, human resources, and other non-core
functions.
Office
Locations
Our
corporate headquarters are at 2200 South Utica Place, Suite 150, Tulsa, Oklahoma, with field offices in North Dakota, Texas, and New
Mexico.
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