Empire Petroleum Corporation (AMEX:EP) Q3 2022 Earnings Call Transcript November 15, 2022

Operator: Good day, and welcome to the Empire Petroleum Corporation Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. Please note that today's event is being recorded. I would now like to turn the conference over to Wes Harris, Partner at Al Petrie Advisors. Please go ahead.

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Wes Harris: Thank you, operator, and good morning everyone. Empire Petroleum released their third quarter financial results yesterday afternoon, the copy of the press release is available on the Company's website at www.empirepetroleumcorp.com on the News and Press Releases page in the Investor Relations section. With me on the call today are Tommy Pritchard, Chief Executive Officer and Director; and Mike Morrisett, President and Director. Also on the call are Eugene Sweeney, Chief Operating Officer; and Kevin Vann, Vice President of finance and Strategic Planning. Tommy will begin the call with some opening remarks. Mike will then provide a financial review of the third quarter and Tommy will then come back and provide closing comments before opening the call for questions.

Before turning the call over to management, I would like to make the following remarks concerning forward-looking statements. Please note that various remarks that may be made on this conference call about future expectations, plans and prospects for the Company constitute forward-looking statements for the purposes of safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Actual results may vary materially from those indicated by these forward-looking statements, as a result of various important factors, including those discussed in the Company's filings with the SEC. The Company assumes no obligation to update the information contained in this conference call. This conference call also includes reference to contain non-GAAP financial measures.

Reconciliations of these non-GAAP financial measures to the most directly comparable measure under GAAP are contained in our earnings announcement release yesterday. Finally, this conference call is being recorded. So with that, I'd like to turn the call over to Tommy Pritchard. Tommy?

Tommy Pritchard: Thanks, Wes. Welcome everyone, and thank you for your interest in Empire Petroleum. We appreciate you joining us today to discuss our recent results and outlook. The third quarter marked another successful period for the Company and we were pleased with the overall operational and financial performance. We posted sales volumes for the quarter of 205,380 Boe or 2,232 Boe a day, which was 3% higher than the second quarter. While commodity prices for the industry were lower than the second quarter, we continue to benefit from pricing levels that remained strong overall. The combined result was third quarter revenue of 14.8 million. Adjusted net income of 3.7 million and adjusted EBITDA of 4.8 million or $23.36 per Boe.

We were especially pleased to increase our cash position more than 25% from the end of the second quarter to 15.7 million while also paying down debt to end the quarter with $16 million of liquidity. The third quarter was especially busy on the organic development front. As we discussed our on our last earnings call, at the end of the second quarter, we kicked off our field enhancement program at our Starbucks field in Bottineau County, North Dakota. The plan is projected to cost 10 million and targets increased production of 50 to 1,000 -- 500 to 1,000 barrels of oil a day, and a 100% growth in reserves. This represents a small portion of the overall potential of the field. We began the waterflood conformance phase at Starbucks in early July with the goal to increase the water drive in the flood in the proper zones.

A key element of this phase was performing workovers on several injector wells, whereby we plugged perforations in non-productive zones, as well as re-perforated target zones and re-stimulated the wells. Reserves were -- injection rates then increased from anywhere from 300% to 800% over previous levels to where each of the wells that we worked over were now injecting a rate of approximately 900 barrels a day. Another key element of the waterflood conformance phase was work done to increase our source water and ensure that the field's water pump infrastructure was beefed up to provide adequate flow rates for new injection. In addition to enhancing the field's waterflood capacity during the third quarter, we also re-perforated and re-stimulated several producing wells.

We've been pleased with the results seen to-date and expect to see further increases to production over the coming months. During the third quarter, we also successfully drilled six sidetracks at Starbucks. The six sidetracks were only on a small portion of the approximately 7,000 acre field and achieved lateral lengths in the producing formations of approximately 10,000 feet. Full tubing drilling was used as with it, we benefit from reduced rig time, a smaller footprint, a shorter build section, as well as under balanced drilling capability and enhanced directional control were required for smaller thickness. The initial target for the lateral lengths was 1,000 to 1,500 feet with the option to continue for longer lengths. We're completing the wells currently and expectations are for an increase in production from 3,000 barrels a month to well over 15,000 barrels a month.

We look forward to updating the market concerning our well reserves once we have a more definitive view as to the outcome of our efforts. Finally, we completed the upgrade of a number of the service facilities at Starbucks. This work began last year and was targeted to maximize thermal efficiency and lessened the need for high to oil services in the winter months, which can create costly delays for oil pickup. We look forward to completing this phase of our field enhancement program at Starbucks by the end of this year and appreciate all the hard work by our workforce and our contractors in support of this successful program. Other operational development highlights in the third quarter included the spudding of four new Bakken wells that will be completed in this year's fourth quarter.

I'm also pleased to report that during the third quarter, we reached payout on the four our Bakken wells we drilled and completed last year, all of which had initial production starting in December of 2021. Another key development for the third quarter was the sale of our 100 gallons per minute aiming plant that was remaining from our purchase of Canyons Trinity River Midstream and the Fort Trinidad Field in Texas. This transaction represents the largest sale of a tangible asset from that acquisition. And finally, during the third quarter, we brought in house orbit pumping. Orbit was our consultant for lease operations in Bottineau County in North Dakota. With this, we brought on four full-time employees including a field superintendent that's worked with us in North Dakota for the last few years.

We also continue to round out our oil and gas team in Houston. So with that, I'll turn it over to Mike to discuss financial results in more detail. Mike?

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Mike Morrisett: Thanks, Tommy, and hello, everyone. We appreciate your participation on today's call. My comments today will primarily focus on our financial position and sequential quarterly results. For detailed discussion concerning comparisons to last year third quarter, please see our press release and 10-Q. As Tommy discussed, we were pleased to have our third quarter production grow to more than 205,000 Boe that was comprised of approximately 124,000 barrels of oil, 232,000 Mcf of natural gas and 1.8 million gallons of NGLs. Contributing to the sequential increase from the second quarter of 2022 was higher sales volumes associated with our assets in New Mexico, Texas and Louisiana, which were partially offset by declines in production for our assets in the Rockies Region.

This was primarily associated with taking certain well production offline temporarily as we complete the execution of the Starbuck Field Enhancement Program that Tommy just discussed. Looking at pricing, we did see some pull back from second quarter levels but still relies strong pricing including $92.22 per barrel of oil, $6.86 per Mcf of natural gas and $0.91 per gallon of NGLs. The combined result of increased production levels that were offset by lower pricing was third quarter revenue of $14.8 million. Looking at the more significant expense line items on our income statement. Operating expenses for the third quarter were $8.5 million, and that included a $1.4 million non-cash write-off. Excluding the write-off, operating expenses were $7.1 million compared to $5.5 million for the second quarter of 2022, which was primarily a result of increased workovers and other activities executed in advance of the capital development programs at our New Mexico and Rockies Region assets.

General and administrative expenses, excluding non-cash share-based compensation were $2 million or $9.93 per Boe in the third quarter of 2022 versus $2.8 million or $14.32 per Boe for the second quarter of 2022. Significantly contributing to the sequential decrease was lower professional services fees. Other expense for the third quarter was $1.1 million compared to $0.2 million in the second quarter. Driving the increase was a non-cash $1.4 million settlement related to the purchase of our New Mexico assets. The end result was net income for the third quarter of $0.2 million or $0.01 per diluted share, versus $5.5 million or $0.24 per diluted share for the second quarter. Contributing to the sequential decrease was lower realized pricing as well as the non-cash $1.4 million write-off and non cash $1.4 million settlement that was partially offset by higher production.

Adjusted net income for the third quarter was $3.7 million or $0.16 per diluted share compared to $6 million or $0.26 per diluted share in the second quarter while adjusted EBITDA was $4.8 million for the third quarter compared to $6.8 million in the second quarter. The sequential quarterly decreases in both adjusted net income and adjusted EBITDA were substantially due to low realize pricing partially offset by higher production. For the first nine months of 2022, we spent approximately 500,000 on development activities for non-operative drilling and we anticipate additional capital expenditures in the coming quarters. Now, turning to the balance sheet, we ended the third quarter with $15.7 million in cash, a 27% increase from June 30. Our debt balance of September 30 was $7.8 million, which included a pay down of $0.4 million during the third quarter.

The result was liquidity of $16 million at the end of the third quarter, representing a 26% increase from June 30. So with that, I'll turn it back over to Tommy for some final thoughts. Tommy?

Tommy Pritchard: Yes. Thanks Mike. As you heard during our call today, we have a lot of exciting things going on with the Company and look forward to ending the year with the strong fourth quarter. During the fourth quarter, we plan to complete the current phase of the Starbuck Field Enhancement Program, which will include upgrades to surface facilities as needed to further drive operational efficiencies. We also plan to permit three wells in the Rockies including two in North Dakota and one well in Montana and reenter a well in Louisiana. Our efforts have and continued to rank focus on targeting previously developed assets with upside potential on our large held-by-production acreage, while keeping our debt level at low levels.

The initiatives we're executing have and will continue to grow production, operating income and cash flow. We believe we're on a trajectory to have a standout year in 2023, assuming the solid pricing environment holds up. In closing, I want to thank our workforce for their continued dedication as important. Appreciate the ongoing support of our shareholders. With that, I'll turn the call back to the operator.

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