EMPIRE PETROLEUM CORP 10-Q

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION 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, the technology utilized by Empire, new legislation regarding environmental matters, general economic conditions including inflation, tariffs and interest rates, uncertainties associated with legal and regulatory matters and successful completion of the August Rights Offering, including future exercise of the warrants issued as part of the August Rights Offering. 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, 2024. 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. Overview Our primary business is the optimization and development of oil and gas interests. We have incurred losses from operations in 2025 and 2024. There is no assurance that we will be profitable or obtain the funds necessary to finance our future operations. We seek to increase shareholder value by growing reserves, production, revenues, and cash flow from operating activities by executing our mission to use highly skilled personnel to thoughtfully and expertly spend capital to realize reserves on producing properties as well as further develop fields. Management places emphasis on operating cash flow in managing our business, as operating cash flow considers the cash expenses incurred during the period and excludes non-cash expenditures not related directly to our operations. Concentration The Company’s producing properties and oil and natural gas reserves are all located in Louisiana, New Mexico, North Dakota, Montana, and Texas. Because of the concentration, the Company is exposed to the impact of regional supply and demand factors, processing or transportation capacity constraints, severe weather events, water shortages, and government regulations specific to the geographic area. The Company also sells a large portion of its oil and natural gas production to a few customers, which increases the risk of temporary sales interruption or a lower price for production if one of these purchasers were lost. Inflation The effect of inflation on the Company has generally been to increase its cost of operations, general and administrative costs and direct costs associated with oil and natural gas production. Properties We are an independent operator in four geographic areas in the United States. For our operated properties, we manage and influence production using a combination of experienced field personnel and third-party service providers to execute our mission. Our producing 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. 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. 23 Business Strategy Our business strategy is to obtain long-term growth in reserves and cash flow on a cost-effective basis. Management regularly evaluates potential acquisitions of properties that would enhance current core areas of operation. Critical Accounting Estimates The preparation of financial statements in conformity with US GAAP requires management to use judgment to make estimates and assumptions that affect certain amounts reported in the unaudited interim 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 six months ended June 30, 2025. LIQUIDITY AND CAPITAL RESOURCES General Empire’s primary sources of short-term liquidity are cash and cash equivalents, net cash provided by operating activities, our Credit Facility 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. Liquidity As noted below, our working capital is negative as of June 30, 2025, which is primarily the result of a lower cash balance due to capital spending as part of our Starbuck Drilling Program, return-to-production efforts in Texas and a decrease in production due to operational challenges with five wells in North Dakota during the first quarter of 2025. As of June 30, 2025, we had approximately $2.3 million in cash on hand and approximately $4.0 million available under our Credit Facility; however, the Company’s available borrowing capacity under the Credit Facility continues to decrease due to a monthly reduction to the borrowing capacity under the Credit Facility (see Note 8). Empire also entered into a promissory note with Phil Mulacek for up to a total available principal amount of $4.0 million, of which $2.0 million was obtained upon entering into the note. Finally, the Company is scheduled to complete a subscription rights offering in August 2025 which is expected to raise approximately $5.0 million of gross proceeds; however, a portion of these proceeds will be used to settle the outstanding balance of the promissory note with Phil Mulacek. Despite these transactions, the Company will require additional funds to satisfy the payables discussed above which are greater than estimated cash flow from operations over the next 12 months. Phil Mulacek and Energy Evolution, both related parties of Empire and our largest two stockholders, 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. 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 Unaudited Interim Condensed Consolidated Financial Statements for further discussion of management’s plans. 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 the first six months of 2025, Empire incurred approximately $3.3 million of total additions to oil and natural gas properties, primarily related to the drilling program in the Starbuck field of North Dakota and return-to-production efforts in Texas. 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. 24 Working Capital Working capital is presented in the table below. This change of approximately $2.7 million was primarily driven by payables related to the Starbuck Drilling Program in North Dakota, costs incurred related to the return-to-production efforts in Texas and the related party promissory note discussed above. June 30, December 31, (in thousands) 2025 2024 Current Assets $ 14,519 $ 12,351 Current Liabilities 26,167 21,270 Working Capital $ (11,648 ) $ (8,919 ) Cash Flows For the Six Months Ended June 30, (in thousands) 2025 2024 Change Cash flows provided by (used in): Operating activities $ (1,525 ) $ 2,106 $ (3,631 ) Investing activities (3,212 ) (30,514 ) 27,302 Financing activities 4,779 29,873 (25,094 ) Cash Flows from Operating Activities Cash flows from operating activities decreased period over period primarily due to lower production volumes in North Dakota and New Mexico and lower realized commodity prices consistent with general market pricing trends. Cash Flows from Investing Activities Cash flows from investing activities are primarily related to approximately $3.2 million of cash additions to oil and natural gas properties during the first six months of 2025 compared to approximately $30.1 million of cash additions to oil and natural gas properties during first half of 2024 associated with the Starbuck Drilling Program in North Dakota with the decline period over period due to the Company nearing completion of this project. Cash Flows from Financing Activities Cash flows from financing activities include $2.0 million and $5.0 million in 2025 and 2024, respectively, from promissory notes issued to Empire by various related parties (see Note 8). Empire also borrowed approximately $3.0 million and $4.0 million on its Credit Facility during the same respective periods. In the first half of 2024, the Company also completed its April Rights Offering and issued warrants to Energy Evolution that were exercised in the period (see Note 10). Capital Resources Capital Expenditures For the six months ended June 30, 2025, Empire incurred approximately $3.3 million of total additions to oil and natural gas properties which is primarily from finalizing drilling and completions activity related to our Starbuck Drilling Program in North Dakota and continued return-to-production efforts in Texas. 25 Production and Operating Data The following table sets forth a summary of Empire’s production and operating data for the three and six months ended June 30, 2025 and 2024. Because of normal production declines, increased or decreased production due to future acquisitions, divestitures, development, and fluctuations in commodity prices, the historical information presented below should not be interpreted as being indicative of future results. For the Three Months Ended June 30, For the Six Months Ended June 30, 2025 2024 2025 2024 Production and Operating Data: Net Production Volumes: Oil (Bbl) 135,854 160,283 255,489 291,043 Natural Gas (Mcf) 237,133 241,242 437,001 453,063 Natural Gas Liquids (Bbl) 39,091 39,612 70,544 74,397 Total (Boe) 214,467 240,102 398,867 440,951 Average Price per Unit: Oil (1) $ 58.92 $ 76.66 $ 62.84 $ 74.66 Natural gas $ 0.93 $ (0.48 ) $ 1.76 $ 0.58 Natural gas liquids $ 13.33 $ 15.58 $ 12.98 $ 13.89 Total (Boe) $ 40.78 $ 53.26 $ 44.47 $ 52.21 Operating Costs and Expenses per Boe: Lease operating expense (excluding workovers) $ 27.56 $ 24.95 $ 28.31 $ 25.78 Workovers $ 2.22 $ 6.47 $ 2.16 $ 8.08 Total Lease operating expense $ 29.78 $ 31.42 $ 30.47 $ 33.86 Production and ad valorem taxes $ 3.58 $ 4.44 $ 3.71 $ 4.31 Depreciation, depletion, amortization and accretion $ 14.50 $ 13.20 $ 14.70 $ 11.67 General & administrative (excluding stock-based compensation) $ 13.55 $ 9.80 $ 15.30 $ 11.87 Stock-based compensation $ 2.27 $ 2.47 $ 2.55 $ 2.95 Total General & administrative $ 15.82 $ 12.27 $ 17.85 $ 14.82 (1) Excludes the effect of net cash receipts from (payments on) derivatives. Bbl – One stock tank barrel, of 42 U.S. gallons liquid volume, used herein in reference to oil, condensate, or natural gas liquids. Mcf – One thousand cubic feet of natural gas. Boe – One barrel of oil equivalent, a standard convention used to express oil and natural gas volumes on a comparable oil equivalent basis. Natural gas equivalents are determined under the relative energy content method by using the ratio of 6.0 Mcf of natural gas to 1.0 Bbl of oil or condensate. 26 Three Months Ended June 30, 2025 and 2024 Results of Operations The following table reflects Empire’s summary operating information for the three months ended June 30, 2025 and 2024. 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. For the Three Months Ended June 30, Percent (in thousands) 2025 2024 Variance Change Oil Sales $ 8,005 $ 12,287 $ (4,282 ) -35% Gas Sales 221 (116 ) 337 NM NGL Sales 521 617 (96 ) -16% Total Product Revenues 8,747 12,788 Lease Operating Expense 6,387 7,543 (1,156 ) -15% Production and Ad Valorem Taxes 768 1,066 (298 ) -28% Depreciation, Depletion, Amortization & Accretion 3,110 3,169 (59 ) -2% General and Administrative (excluding stock-based compensation) 2,906 2,354 552 23% Stock-Based Compensation 486 592 (106 ) -18% Cash-Based Interest Expense 324 257 67 26% Non-Cash Interest Expense 10 478 (468 ) -98% Operating Loss (4,903 ) (1,926 ) (2,977 ) 155% Net Loss (5,056 ) (4,390 ) (666 ) 15% NM: A percentage calculation is not meaningful due to change in signs, a zero-value denominator or a percentage change that is greater than 200. Revenues Revenues for the three months ended June 30, 2025, decreased compared to the prior year primarily due to lower oil sales volumes and lower realized oil and NGL prices. Net oil sales volumes were approximately 136,000 Bbls for the three months ended June 30, 2025, a decrease of approximately 15% over the same period in the prior year primarily due to the redrilling efforts in North Dakota previously discussed and natural decline. Realized oil prices for the three months ended June 30, 2025, were $58.92 per barrel, while realized prices for the same period in the prior year were $76.66 per barrel, a decrease of approximately 23% due to a general decline in overall market prices. Realized natural gas prices for the three months ended June 30, 2025, were $0.93 per Mcf, while realized prices for the same period in the prior year were ($0.48) 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. Realized NGLs prices for the three months ended June 30, 2025, were $13.33 per barrel, while realized prices for the same period in the prior year were $15.58 per barrel, a decrease of approximately 14%. Lease Operating Expense and Production Taxes Lease operating expense was lower for the three months ended June 30, 2025, compared to the same period in 2024 primarily due to lower workover costs. Lease operating expense includes approximately $0.5 million of workover expense for the three months ended June 30, 2025, compared to approximately $1.6 million for the same period in 2024. The higher workover expense in 2024 was primarily in New Mexico as Empire continued work in the region to enhance and maintain production. Production taxes were lower for the three months ended June 30, 2025, compared to the same period in 2024 as a result of the lower product revenues discussed above. 27 Depreciation, Depletion, Amortization and Accretion The lower DD&A for the three months ended June 30, 2025, compared to the same period in 2024 is primarily due to lower production volumes period over period, partially offset by the acquisition of additional working interest in New Mexico and the impact of the capitalized costs associated with the new drilling activity as part of our Starbuck Drilling Program in North Dakota in second quarter of 2024. Accretion also increased slightly from prior period due to the new drilling activity and additional interest. General and Administrative Expense (excluding stock-based compensation) General and administrative expense, excluding stock-based compensation, increased for the three months ended June 30, 2025, compared to the same period in 2024 primarily due to an increase in salaries and benefits period over period associated with an increase in employee headcount. Stock-based Compensation Stock-based compensation decreased period over period due to a lower number of awards in second quarter 2025. 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 2025 and beyond to attract and retain talented personnel and compensate Board members and consultants. Interest Expense Interest expense decreased for the three months ended June 30, 2025 compared to the same period in 2024 primarily due to certain non-cash interest expense in the second quarter of 2024 from the convertible promissory note further described in Note 8 partially offset by a higher average outstanding balance on the Company’s Credit Facility. 28 Six Months Ended June 30, 2025 and 2024 Results of Operations The following table reflects Empire’s summary operating information for the six months ended June 30, 2025 and 2024. 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. For the Six Months Ended June 30, Percent (in thousands) 2025 2024 Variance Change Oil Sales $ 16,054 $ 21,729 $ (5,675 ) -26% Gas Sales 769 261 508 195% NGL Sales 916 1,033 (117 ) -11% Total Product Revenues 17,739 23,023 Lease Operating Expense 12,153 14,930 (2,777 ) -19% Production and Ad Valorem Taxes 1,480 1,899 (419 ) -22% Depreciation, Depletion, Amortization & Accretion 5,862 5,144 718 14% General and Administrative (excluding stock-based compensation) 6,103 5,233 870 17% Stock-Based Compensation 1,017 1,302 (285 ) -22% Cash-Based Interest Expense 592 437 155 35% Non-Cash Interest Expense 38 613 (575 ) -94% Operating Loss (8,859 ) (6,323 ) (2,536 ) 40% Net Loss (9,277 ) (8,364 ) (913 ) 11% Revenues Revenues for the six months ended June 30, 2025, decreased compared to the prior year primarily due to lower sales volumes across all products and lower realized oil prices. Net oil sales volumes were approximately 255,000 Bbls for the six months ended June 30, 2025, a decrease of approximately 12% over the same period in the prior year primarily due to redrilling efforts in North Dakota. Realized oil prices for the six months ended June 30, 2025, were $62.84 per barrel, while realized prices for the same period in the prior year were $74.66 per barrel, a decrease of approximately 16% due to a general decline in overall market prices. Realized natural gas prices for the six months ended June 30, 2025, were $1.76 per Mcf, while realized prices for the same period in the prior year were $0.58 per Mcf. The increase is due to depressed natural gas prices in New Mexico during second quarter of 2024. Realized NGLs prices for the six months ended June 30, 2025, were $12.98 per barrel, while realized prices for the same period in the prior year were $13.89 per barrel, a decrease of approximately 7%. Lease Operating Expense and Production Taxes Lease operating expense was lower for the six months ended June 30, 2025, compared to the same period in 2024 primarily due to lower workover costs. Lease operating expense includes approximately $0.9 million of workover expense for the six months ended June 30, 2025, compared to approximately $3.6 million for the same period in 2024. The higher workover expense in 2024 was primarily in New Mexico as Empire continued work in the region to enhance and maintain production. Production taxes were lower for the six months ended June 30, 2025, compared to the same period in 2024 as a result of the lower product revenues discussed above. 29 Depreciation, Depletion, Amortization and Accretion The higher DD&A for the six months ended June 30, 2025, compared to the same period in 2024 is primarily due to the acquisition of additional working interest in New Mexico and the impact of the capitalized costs associated with the new drilling activity as part of our Starbuck Drilling Program in North Dakota in second quarter of 2024, partially offset by lower production volumes period over period. Accretion also increased slightly from prior period due to the new drilling activity and additional interest. General and Administrative Expense (excluding stock-based compensation) General and administrative expense, excluding stock-based compensation, increased for the six months ended June 30, 2025, compared to the same period in 2024 primarily due to an increase in salaries and benefits period over period associated with an increase in employee headcount. Stock-based Compensation Stock-based compensation decreased period over period due to a lower number of awards in 2025. 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 2025 and beyond to attract and retain talented personnel and compensate Board members and consultants. Interest Expense Interest expense decreased for the six months ended June 30, 2025 compared to the same period in 2024 primarily due to certain non-cash interest expense in 2024 from the convertible promissory note further described in Note 8 partially offset by a higher average outstanding balance on the Company’s Credit Facility. 30 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 (the “Exchange Act”) and are not required to provide this information.