Empire Petroleum Corporation (AMEX.EP), Q3 2022 Earnings Phone Transcript

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

Operator: Good morning, and welcome to Empire Petroleum Corporation’s Third Quarter 2022 Earnings conference call. All participants will remain in listen-only mode. Today’s event will be taped. I’d like to now turn the conference over To Wes Harris, Partner of Al Petrie Advisors. Please go ahead.

Photo by Zachary Theodore at Unsplash

Wes Harris Operator, thank you and good morning to 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. Tommy Pritchard (Chairman Executive Officer and Director) and Mike Morrisett (President and Director) will be joining me today on the conference call. Eugene Sweeney is Chief Operating Officer. Kevin Vann is Vice President of finance, Strategic Planning, and Kevin Vann are also on the call. Tommy will open the call by making some opening remarks. Mike will then present a third quarter financial review. Tommy will then return and make closing comments, before opening the line for questions.

Before I hand the call to management, I want to make the following comments regarding forward-looking statement. For the purposes of the Private Securities Litigation Reform Act (95), forward-looking statements may be made during this conference call regarding future plans, expectations, and prospects for Company. Due to various factors, including those discussed within the Company’s filings to the SEC, actual results could differ materially. The Company does not assume any obligation to make changes to the conference call information. This conference calls also contains non-GAAP financial metrics.

Yesterday’s earnings release contains reconciliations of these non GAAP financial measures with the most directly comparable GAAP measure. This conference call will be recorded. With that, I’d like Tommy Pritchard to take the call. Tommy?

Tommy Pritchard Thanks, Wes. Everyone, welcome and thank you so much for your interest in Empire Petroleum. We appreciate your joining us today to discuss the Company’s recent results and outlook. We were happy with our overall financial and operational performance for the third quarter. This was another great quarter for the Company. The quarter saw sales volumes of 205,380 BOE or 2,232 BOE per day. This was 3% more than the second quarter. Although commodity prices in the industry were lower than they were in the second quarter of 2018, we still enjoy strong pricing levels. The result was 14.8million in third quarter revenue. Adjusted net income was 3.7 million, and adjusted EBITDA was 4.8 million or $23.36 each Boe.

We were delighted to have increased our cash position by more than 25%, to 15.7 million, at the close of the second quarter. In addition to paying down debt, we ended the quarter with $16million in liquidity. Organic development was a particularly busy quarter in the third quarter. Our field enhancement program was launched at our Starbucks field in Bottineau, North Dakota, as we discussed it on our last earnings conference. The plan, which is expected to cost 10 millions, targets increased production by 50 to 1,000 — 500 – 1,000 barrels of crude oil per day and a 100% rise in reserve growth. This is only a fraction of the potential of the field. Starbucks started the waterflood conformance Phase in July with the aim to increase water drive in flood areas.

This phase included workovers of several injector wells. We plugged any perforations that were not productive, re-perforated target areas, and re-stimulated them. The injection rates were then increased by anywhere from 300% up to 800% over the previous levels. Each of the wells we worked over was now injecting approximately 900 barrels per day. The waterflood conformance stage also included work to increase the source water and to ensure that the field’s water pump infrastructure is able to deliver adequate flow rates for new injection. Along with increasing the field’s waterflood potential during the third quarter we also re-perforated, re-stimulated many producing wells.

We are pleased with the current results and anticipate further production increases in the future. Six sidetracks were also successfully drilled at Starbucks in the third quarter. These six sidetracks were located on a very small part of the approximately 7,000-acre field. They reached lateral lengths of approximately 10,000 ft in the producing formations. Full tubing drilling was used because it allows us to reduce rig time, have a smaller footprint and a shorter build section. We also benefit from enhanced directional control and under balanced drilling capabilities for smaller thickness. The initial target for the lengths of the laterals was 1,000-1500ft with the possibility of increasing the lengths. We are currently completing wells and expect to increase production from 3,000 barrels per month to well above 15,000 barrels each month.

Once we have a more clear view of the results of all our efforts, it will be exciting to update the market about our well reserve. We completed the upgrades of several Starbucks service facilities. This work, which began last year, was intended to improve thermal efficiency and decrease the need to use high-to oil services in winter months. These can cause costly delays for oil pickup. We are looking forward to finishing this phase of our field improvement program at Starbucks before the end of the year. We also appreciate the hard work of our workers and contractors who supported this program. The spudding four Bakken wells, which will be completed during the fourth quarter of this year, was another highlight in operational development.

I’m happy to also report that we received payouts on the four Bakken wells we completed and drilled last year. They all had production beginning in December 2021. Our 100 gallons per hour aiming machine, left over from the acquisition of Canyons Trinity River Midstream (Texas) and Fort Trinidad Field (Texas), was another key development in the third quarter. This is the largest single sale of tangible assets resulting from this acquisition. We also brought in house orbit pumps during the third quarter. Orbit was our consultant to lease operations in Bottineau, North Dakota. We hired four employees, including a field supervisor who has been with us for the past few years in North Dakota.

We continue to expand our Houston oil-and-gas team. With that, I will turn it over Mike for more information on financial results. Mike?

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Mike Morrisett Tommy, thanks for your participation and a warm welcome to all. We are grateful for your participation in today’s conference call. Today, my comments will focus primarily on our financial situation and sequential quarterly results. Our 10-Q and press release provide detailed information on the comparisons to last years third quarter. Tommy shared that our third quarter production increased to more than 205,000 Boe. This was approximately 124,000 barrels, 232,000 Mcf (natural gas) and 1.8million gallons of NGLs. Higher sales volumes from our assets in New Mexico and Texas contributed to the sequential rise in 2022’s second quarter. However, this was partially offset partly by lower production at our assets in the Rockies Region.

This was due to the fact that we had to temporarily shut down certain well production while we execute the Starbuck Field Enhancement Program Tommy mentioned. Although we saw some price declines from second quarter levels, the pricing is still strong with $92.22 per barrel, $6.86 per Mcf natural gas, and $0.91 per gallon NGLs. Third quarter revenue was $14.8 million due to higher production levels and lower prices. Our income statement also includes the most important expense line items. Operating expenses for the third quarter totaled $8.5 million. This included a $1.4million non-cash writeoff. The write-off was not included in operating expenses. They were $7.1million compared to $5.5million for the second quarter of 2022. This is primarily due the increased workovers performed in advance capital development programs at the New Mexico and Rockies Region assets.

General and administrative expenses, which exclude non-cash share-based pay, were $2 million or $9.93/Boe in the third quarter 2022 as compared to $2.8 million (or $14.32/Boe) for the second quarter 2022. The sequential decline was largely due to lower professional fees. The $1.1 million of other expenses for the third quarter was $0.2 million higher than the $0.2 million recorded in the second quarter. Non-cash $1.4million settlement related to the acquisition of New Mexico assets was the reason for the increase. Net income for the third quarter was $0.2 million, or $0.01 per share, as compared to $5.5 million and $0.24 per share in the second quarter. The sequential decline was due to lower realized pricing, as well as the $1.4 million non-cash write-off and $1.4 million settlement. This was partially offset partly by higher production.

Adjusted net income was $3.7million, or $0.16 per dilute share, in the third quarter. In contrast to $6 million and $0.26 per diluted shares in the first quarter, adjusted EBITDA was $4.8million for the quarter. This compares to $6.8million for the second quarter. Both adjusted net income and adjusted EBITDA decreased in the third quarter due to lower realize pricing, partially offset by increased production. We spent approximately 500,000 in development activities for non-operative drills during the first nine months 2022. We anticipate increasing capital expenditures in future quarters. We ended the third quarter with $15.7million in cash. This is 27% more than June 30. Our September 30 debt balance was $7.8million, with $0.4 million of pay down during the third quarter.

The final result was liquidity of $16million at the end of third quarter. This is a 26% increase over June 30. With that, I’ll pass it to Tommy for any final thoughts. Tommy?

Tommy Pritchard Yes. Thank you Mike. We have many exciting things happening with the Company, as you heard today during the call. We look forward to a strong fourth quarter. We plan to finish the current phase in the Starbuck Field Enhancement Program. This will include upgrades to existing surface facilities to improve operational efficiency. We plan to permit three wells, including one in Montana, and two in North Dakota, in the Rockies. Additionally we will reenter a well from Louisiana. We have remained focused on identifying assets that could be developed on large amounts of held-by production acreage. Our debt levels are low.

We are executing initiatives that have helped to increase production, operating income, and cash flow. If the pricing environment is stable, we believe that we are on track to have a great year in 2023. As a final note, I want thank our employees for their tireless efforts. We appreciate the support from our shareholders. With that, I’ll return the call to my operator.

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