Empire Petroleum Corp Q2 FY2022 Earnings Call

Good day, and welcome to the Empire Petroleum Second Quarter 2022 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Stephanie Prince of PCG Advisory. Please go ahead.

Thank you, NJ, and thank you to everyone joining us today. Empire Petroleum released their second quarter financial results early this morning, if you don't have a copy of the press release, please go to the company's website at empirepetroleumcorp.com and click on the News and Press Releases in the Investor Relations section. With me on the call today are Tommy Pritchard, CEO and Board Director; and Mike Morrisett, President and Board Director. Also on the call are Eugene Sweeney, COO; and Angela Baker, Chief Accounting Officer. Tommy will begin the call with an introduction to Empire Petroleum, along with some opening remarks. Mike will then provide a financial review of the second quarter 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. I would now like to turn the call over to Tommy Pritchard, Tommy?

Yes. Thanks, Stephanie. Welcome, everybody, thank you for your interest in Empire. Since this is our first ever call, I thought it might be a good idea to step back for a second, tell you all kind of how we got here. And then, of course, we're available after the call to fill everybody in, and I also will direct you to our website where you can download our most recent presentation and previous presentations. Empire has been a public entity since the mid-80s, Mike and I took over back in 2018, and we focused on buying, producing predeveloped properties. At that time, the stock traded on the OTCQB Exchange. We bought our first properties at the end of 2018 in Louisiana followed that up in 2019 where we were successful bidders for a private equity bank's North Dakota and Montana properties from EnergyQuest. In 2020, we added the Fort Trinidad Field of Texas, which had us operating in Texas for the first time. In 2021, we added this transformative New Mexico acquisition when we bought the iconic Eunice Monument and our Arrowhead Grayburg field from Exxon or XTO, with the help of our largest shareholder, the Energy Evolution Fund. That brings us to 2022, where we uplisted on the New York Stock Exchange American and became a member of the Russell 3000 and 2000, and we'll talk about our record second quarter here. Obviously, there's much more to the story than that, but you can take a look at our website for previous presentations, and we'll be happy to field calls after this call or whenever you'd like to reach out to us. So let me share with you our record results for the second quarter. As you can tell, we're pretty excited about these results. The results are a direct reflection of our ability to execute on our core strategy of controlling operating costs, and while we have consistent production and the ability to add scalable assets. During the quarter, Empire benefited from strong production and higher realized oil and gas prices. The result was record-setting revenue and net income. Revenue increased 26% over our first quarter. In fact, when you combine both quarters, Empire's revenue was higher than all of last year or any previous year at $29.5 million. Our net income combined for the two quarters is $9.5 million and our EBITDA is over $13 million. Our total debt remains low at 8.2%, while our cash position closed the quarter out at 12.4%. Empire's sales volume was 195,000 BOE almost doubling the same quarter of last year, which we reported last year. This doubling shows what a transformative acquisition, coupled with a focused eye on production and costs, can do for a company like Empire. At the end of our second quarter, Empire kicked off its Priority Well program in our Starbucks field in Bottineau County, North Dakota. The plan is projected to cost $10 million and target strong increases in production and reserves. Early phase work will start at the end of the second quarter, and we saw our team restimulating current completions in the field. They are focused on water pressure conformance in the waterflood, injecting several times the previous injection rates, thereby increasing reservoir pressures, and what we've seen in our early results is showing terrific response and adding to our production. In the second quarter, Empire closed on its successful acquisition of the land of the Madison Unit also in Bottineau County. This unit is the other half of the land of the field that we didn’t operate or own, and the acquisition added to our production. More importantly, it adds to our growing priority well list for 2023 and beyond. The field was originally calculated to contain nearly 15 million barrels in place, and combined with Starbucks, that exposes Empire to over 40 million barrels in just those two deals alone. We have several other deals in North Dakota that have similar characteristics. Our capital spend program is still on track. Even though we haven't provided guidance, we've picked up the pace. We look forward to continued results from this in the second half of 2022. Looking forward into the third quarter, our operations will continue at Starbucks as we lateral sidetrack that to seven wells utilizing a coiled tubing drilling unit. These sidetracks are designed to expose more wellbore to productive zones. Empire will also drill up to four new vertical wells in the field. Of course, we'll continue to upgrade surface facilities as we move along for better operational efficiencies. Now I'd like to turn the call over to Mike to discuss our financial results.

Thanks, Tommy, and good morning and afternoon, everyone. My comments today will primarily focus on selected financial data and quarterly results compared to 2022 Q1 and, in some cases, the same period a year ago. For a more detailed discussion of our financials, please see our second quarter 10-Q we filed yesterday with the SEC, and our earnings press release this morning. Looking at our statement of operations, revenue from oil, natural gas, and natural gas liquids was $16.5 million for the second quarter compared to $13 million for 2022 Q1. This is up from $4.9 million in the 2021 comparable period. Our operating expenses in Q2 were $5.5 million, which was a slight increase from Q1 of $5.2 million. Altogether, our net income for the quarter was $5.5 million, up from $3.6 million in Q1 2022. Just to point out, that a year ago for the same period, we had a net loss of $5.3 million. As the majority of our production is from oil, the average oil prices received for second quarter production realized $109 per barrel versus $91 per barrel in the first quarter of 2022. Regarding our cash position, we started out 2022 with $3.7 million, and at the end of this quarter, we had $12.4 million. During the second quarter and in July, our outstanding legacy warrants were 100% exercised at $2 per share. This resulted in an increase of just over 1.5 million common shares issued and $3.4 million of cash inflow. Currently, we have approximately 21.6 million common shares outstanding, with insiders owning almost 50%. I'm happy to report that in the second quarter, we earned $0.27 per share, $0.24 fully diluted, and that was up from $0.18, $0.15 fully diluted in 2022 Q1. As a company and operating strategy, we're not really big on debt. We have a small RBL, about $7 million with CrossFirst here in Tulsa. It's collateralized only by our assets in North Dakota, Montana, and Louisiana. We paid down $300,000 per quarter. We are unhedged at the moment except for a few puts to facilitate our RBL covenant. Our current and future capital spend is to facilitate increased production at a low cost per barrel. This was accomplished organically with assets we already own. As Tommy mentioned, we are currently in a field in North Dakota that will involve about a $10 million spend. Our goal is to bring on new production at less than $10,000 per barrel, and in some cases, much less. In the second quarter, we also purchased the other half of the Landa field in North Dakota for $1.4 million, paid for with cash on hand, and this is one of our many 2023 projects. Around the time of being included in the Russell indexes, we initiated an ATM with Raymond James. Given our strong position and anticipated future cash flow at this point in time, we really don't foresee utilizing the ATM at the current price levels of our stock. As we just recently uplisted to the NYSE American, we're focused on increasing liquidity. We look forward to meeting more investors in an effort to broaden our shareholder base. And with that, I'll turn it back over to Tommy to wrap up the call and move us on to Q&A.

Yes. Thanks, Mike. As you heard from Mike and me, our 2022 second quarter results demonstrate our emphasis on predeveloped assets with upside, large held-by-production acreage, and low debt levels. We expect that going forward, production, operating cash flow, and net income will continue to grow throughout the remainder of 2022, assuming the existing price environment continues. Complementing these efforts are our ongoing capital expenditures drill program and initiatives to drive efficiencies in our operating cost structure. And now we'd like to open it up to questions and answers.

Our first question today comes from indiscernible of MLM Capital Management.

I'd like to congratulate you on a great quarter, but I'd also like to ask when you're going to have an investment bank follow you in research to provide some kind of signal on whether they like it or buy, sell, hold, whatever. Do you see anything in the near future?

Yes. David, that's a great question, and we'd love to be able to answer it. However, Mike and I both came from the financial community, and times are a lot different than when we were in the business. We hope if we keep putting up numbers like we have and our stock performs accordingly that folks will start covering us. But for right now, I don't have any real comments on anyone picking us up anytime soon.

The next question today comes from George Mickelson from Dakota.

Congratulations on the quarter, certainly nice numbers. I have two or three questions for you if you have a moment. First question is, you talked about the Starbucks field and you're discussing an increase in production by year-end. Can you give me any more detailed description of what kind of targeted increase you're looking for?

Yes, I'll begin and then we can have Eugene join in. Our COO Eugene is responsible for that project. This field was unitized back in 2008 and consists of a water drive with two waterfloods across two different formations. Over the years, not much was done with the existing wells, and only a small amount of fluid was injected into the formation. We assessed the situation and determined that with the formations at a depth of 3,000 feet, we could increase the fluid injection and add more wells to enhance the pressure water drive throughout the field, which would significantly boost production. Rather than go on, I'll let Eugene provide additional insights. Eugene, what would you like to add?

Thanks, Tommy. Yes, George, to answer your question, we're targeting at least a 500-barrel a day increase. That's our daily production target, and we're aiming to double the reserves count on that. We’re looking at that as a conservative target. We're expecting to exceed that, but that's our baseline.

And you're looking for that by year-end, or?

By year-end, that's correct.

And George, we put together a presentation for folks to look at after the call, and a little bit of detail on the Starbucks enhancement program is included in a few slides in that. So I direct you to that.

Do you have any goal of what you're hoping your total barrel production will be by year-end? I know you're around 2,000, I believe it's around 2,000 a day now. Are you shooting for 3,000, 4,000, sticking at 2,000? Do you have any goal in mind?

I think we started the year discussing our target, and we'd like to double our production this year from 2,000 to 4,000. I'm not saying we're guaranteed to achieve that, but hopefully, we'll be well on our way. It all depends on how the Starbucks field responds to our actions and how quickly we can deliver services. Currently, we are on track to at least meet Eugene's focus, and we would be very disappointed if we didn't reach that.

Got you. Last question. Just curious, any additional acquisitions in your pipeline? Anything you're looking at in the future that you can talk about?

We always have a full pipeline of acquisitions, whether it's something we've proactively pursued or is in the market. The problem right now is that the bid-off spread between what the sellers anticipate with $90 to $100 oil and what we're willing to pay is quite wide. If we can find some good bolt-on acquisitions, like the Landa acquisition or something similar, we'll definitely consider participating.

Seeing no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Tommy Pritchard for any closing remarks.

Yes. Thank you, operator. To sum this up, first of all, thank you for your questions. We're very excited about the future and the opportunities in our existing portfolio of assets. We're going to remain focused on keeping our costs low and allocating our capital to the highest return projects. Thank you all for joining today, and we're excited to continue to work hard for our shareholders. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.