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What changed in EMPIRE PETROLEUM CORP's 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of EMPIRE PETROLEUM CORP's 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+138 added−121 removedSource: 10-K (2024-03-28) vs 10-K (2023-03-31)

Top changes in EMPIRE PETROLEUM CORP's 2023 10-K

138 paragraphs added · 121 removed · 92 edited across 5 sections

Item 1. Business

Business — how the company describes what it does

27 edited+12 added−10 removed27 unchanged
Biggest changeYear 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.
Biggest changeYear Ended December 31, 2023 Year Ended December 31, 2022 Production and operating data: Net sales volumes: Oil (Bbl) 487,869 482,818 Natural gas (Mcf) 854,274 875,647 Natural gas liquids (Bbl) 136,013 160,809 Total (Boe) 766,261 789,568 Average price per unit: Oil (a) $ 75.19 $ 93.16 Natural gas $ 2.02 $ 5.18 Natural gas liquids $ 12.21 $ 22.76 Total (Boe) $ 52.29 $ 67.34 Operating costs and expenses per Boe: Lease operating expense (excluding workovers) $ 21.70 $ 19.92 Workovers $ 15.66 $ 9.95 Total Lease operating expense $ 37.36 $ 29.87 Production and ad valorem taxes $ 3.97 $ 4.99 Depreciation, depletion, amortization and accretion $ 6.33 $ 4.19 General & administrative (excluding stock-based compensation) $ 15.71 $ 12.18 Stock-based compensation $ 4.10 $ 3.44 (a) Excludes the effect of net cash receipts from (payments on) derivatives.
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.
Markets and 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.
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.
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 defined by accounting standards related to disclosures about segments of an enterprise.
This marketing effort endeavors to obtain the combined highest netback and most secure market available at that time. -8- 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.
This marketing effort endeavors to obtain the combined highest netback and most secure market available at that time. 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 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.
We anticipate that the prices of oil and natural gas will fluctuate in the near future. 9 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.
The heavy and increasing regulatory burdens on the oil and natural gas industry increase our cost of doing business and, consequently, affect profitability. -9- Our oil and natural gas operations are also subject to numerous federal, state and local laws and regulations relating to environmental protection.
The heavy and increasing regulatory burdens on the oil and natural gas industry increase our cost of doing business and, consequently, affect profitability. Our oil and natural gas operations are also subject to numerous federal, state and local laws and regulations relating to environmental protection.
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.
He is also a member of the Society of Petroleum Engineers and the Society of Petroleum Evaluation Engineers. Brian Weatherl, Vice President of Engineering for the Company, 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.
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.
Empire operates the following wholly-owned subsidiaries in its areas of operations: • Empire New Mexico LLC (“Empire New Mexico”) ○ Empire New Mexico LLC d/b/a Green Tree New Mexico ○ Empire EMSU LLC ○ Empire EMSU-B LLC ○ Empire AGU LLC ○ Empire NM Assets LLC • Empire Rockies Region ○ Empire North Dakota LLC (“Empire North Dakota”) ○ Empire ND 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.
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.
We have no firm delivery commitments for oil or natural gas. 7 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.
The following table represents our oil and natural gas reserves at December 31, 2023 and 2022.
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.
These laws and regulations may impose substantial liabilities if we fail to comply or if any contamination resu lts from our operations. Employees At December 31, 2023, we had 50 full-time employees, not including contract personnel and outsourced service providers.
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 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. We have begun technical work for uplift opportunities in Texas.
In 2021, we did not separately report the NGLs in New Mexico. -7- 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.
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.
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 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 producing properties have reasonably predictable production profiles and cash flows, subject to commodity price and cost fluctuations.
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.
For 2023, 70% of revenues from oil, natural gas, and NGL sales were to three customers. For 2022, 68% of revenues from oil, natural gas, and NGL sales were to four customers.
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.
All prices and costs associated with operating wells were held constant in accordance with SEC guidelines. Prices of $75.45 per barrel of oil, $1.51 per Mcf and $9.82 per barrel of NGL were utilized at December 31, 2023. Prices of $91.14 per barrel and $4.23 per Mcf and $36.29 per barrel of NGL were utilized at December 31, 2022.
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.
Oil Natural Gas NGL (Mbbl) (MMcf) (Mbbl) MBoe Proved developed at December 31, 2023 6,924 6,104 1,171 9,112 Proved developed at December 31, 2022 8,826 12,936 2,262 13,244 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.
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%. -6- 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.
Empire Louisiana Empire Louisiana includes 12 gross (10 net) producing wells and three saltwater disposal wells in the Miocene, Frio, Cockfield, and Wilcox formations. Empire Louisiana’s assets primarily produce oil. Production and Operating Data The following table sets forth a summary of our production and operating data for the years ended December 31, 2023 and 2022.
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.
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. 8 Marketing Arrangements We market our oil and natural gas in accordance with standard energy industry practices.
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.
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. On March 8, 2022, our common stock began trading on the NYSE American under the symbol “EP” and CUSIP 292034303.
Empire New Mexico’s assets primarily produce oil with natural gas and NGLs accompanying oil production.
We also have 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.
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.
Assets are located in the following formations: · Madison (primary source of production) · Bakken · Duperow · Red River · Ratcliffe/Mission Canyon The existing producing properties 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.
Overview Empire Petroleum Corporation is an independent energy company that engages in unlocking value in developed assets.
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.
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. -5- Empire New Mexico Empire New Mexico was formed when we purchased producing assets from XTO in May 2021.
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.
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.
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 We have begun technical work for uplift opportunities in New Mexico.
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 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 include approximately 670 gross (483 net) producing and injection wells on a contiguous and consolidated acreage position consisting of 48,000 gross (41,000 net).
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.
The data will then be added to the development plan while the vertical well will be placed on production in the first quarter of 2024. Empire Texas Empire Texas includes approximately 121 gross (106 net) producing wells on approximately 43,000 gross (30,000 net) acres as well as 77 miles of gathering lines and pipelines with related facilities and equipment.
Removed
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.
Added
Available Information Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as well as proxy statements and other information we file with, or furnish to, the SEC are available free of charge on our website at www.empirepetroleumcorp.com.
Removed
As is common in the industry in which we operate, we selectively participate in drilling and developmental activities in non-operated properties.
Added
We make these documents available as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. The information contained on our website, or available by hyperlink from our website, is not incorporated into this Form 10-K or other documents we file with, or furnish to, the SEC.
Removed
We have been able to capitalize on operational improvements to allow more immediate recovery of reserves.
Added
We intend to use our website as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. Such disclosures will be included on our website in the “Investor Relations” sections.
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(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.
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Accordingly, investors should monitor such portions of our website, in addition to following our press releases, SEC filings and public conference calls and webcasts. 5 In addition, we use social media to communicate with our investors and the public about our company, our businesses and our results of operations.
Removed
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.
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The information we post on social media could be deemed to be material information. Therefore, we encourage investors, the media and others interested in our company to review the information we post on the social media channels listed in the “Investor Relations” section of our website. Properties We are an independent operator in four geographic areas in the United States.
Removed
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.
Added
Empire North Dakota Empire North Dakota includes approximately 138 gross (108 net) producing or injection wells on 24,000 gross (18,000 net) acres in North Dakota and western Montana. We also have smaller nonoperating interests in 70 gross (less than 1 net) vertical wells. These properties primarily produce oil with some related gas production.
Removed
Natural gas pricing in 2022 includes prices received for NGLs during the year.
Added
In the fourth quarter of 2023, the Company commenced a program to further develop its Starbuck Field located in North Dakota (the “Starbuck Drilling Program”). Empire expects 2024 to be a year of progress as it continues to advance the Starbuck Drilling Program.
Removed
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.
Added
The Starbuck Drilling Program’s first well came online in December 2023 and a total of five wells in the Upper Charles formation have been placed on production as of the filing date of this report. The Company is currently optimizing completions while increasing the core production through its enhanced oil recovery (“EOR”) program.
Removed
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.
Added
The Company currently has one rig in the Starbuck Field.
Removed
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.
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As the Starbuck Field is strategically designed for EOR production, the Company anticipates EOR development to begin in the second quarter of 2024 with the goal of providing a meaningful increase in production beginning as soon as the second half of 2024 and going forward. 6 Empire has also logged five vertical pilot wells to help identify additional pay and extend existing reservoirs, which has confirmed three additional primary zones of interest and two secondary zones of interest.
Added
In addition, the Company has drilled a vertical appraisal well in the Starbuck Field to core two new target zones for development. The two new primary target zones of development have been successfully cored and the cores are under analysis.
Added
At December 31, 2023 and 2022, we had approximately 1,000 gross (710 net) producing and injection wells.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

33 edited+14 added−2 removed164 unchanged
Biggest changeLimitation of investments in and financings for fossil fuel energy companies could result in the restriction, delay or cancellation of drilling programs or development or production activities. -17- Additionally, in March 2022, the SEC issued a proposed rule that would mandate extensive disclosure of climate risks, including financial impacts, related governance and strategy and GHG emissions, for all U.S.-listed public companies.
Biggest changeLimitation of investments in and financings for fossil fuel energy companies could result in the restriction, delay or cancellation of drilling programs or development or production activities. 17 Additionally, in March 2024, the SEC issued a final rule that requires a public company to disclose, among other things, material climate-related risks, activities to mitigate or adapt to such risks, information about the company’s board of directors' oversight of climate-related risks and management’s role in managing material climate-related risks, and information on any climate-related targets or goals that are material to the company’s business, results of operations, or financial condition.
The industry has experienced significant price fluctuations for these services during the last year and this trend is expected to continue into the future. These cost uncertainties could, in the future, significantly increase our production costs. Our ability to use our existing net operating loss carryforwards or other tax attributes could be limited.
The industry has experienced significant price fluctuations for these services during the last year and this trend is expected to continue into the future. These cost uncertainties could, in the future, significantly increase our production costs. Our ability to use our existing net operating loss carryforwards or other tax attributes could be further limited.
There is no assurance that such permits, leases, licenses, and approvals will not contain terms and provisions which may adversely affect our exploration and development activities. Other A cyber incident could result in information theft, data corruption, operational disruption and/or financial loss.
There is no assurance that such permits, leases, licenses, and approvals will not contain terms and provisions which may adversely affect our exploration and development activities. 20 Other A cyber incident could result in information theft, data corruption, operational disruption and/or financial loss.
We have six shares of Series A Voting Preferred Stock currently issued and outstanding. The Series A Voting Preferred Stock was issued in connection with the strategic investment in us by Energy Evolution (Master Fund), Ltd. (the “Fund”). For so long as the Series A Voting Preferred Stock is outstanding, our board of directors will consist of six directors.
We have six shares of Series A Voting Preferred Stock currently issued and outstanding. The Series A Voting Preferred Stock was issued in connection with the strategic investment in us by Energy Evolution Master Fund, Ltd. For so long as the Series A Voting Preferred Stock is outstanding, our board of directors will consist of six directors.
Actual future net cash flows also will be affected by factors such as: • the amount and timing of actual production; • levels of future capital spending; • increases or decreases in the supply of or demand for oil and natural gas; and • changes in governmental regulations or taxation.
Actual future net cash flows also will be affected by factors such as: · the amount and timing of actual production; · levels of future capital spending; · increases or decreases in the supply of or demand for oil, natural gas, and NGLs; and · changes in governmental regulations or taxation.
Three of the directors are designated as the Series A Directors and the three other directors (each, a “common director”) are elected by the holders of -21- common stock and/or any preferred stock (other than the Series A Voting Preferred Stock) granted the right to vote on the common directors.
Three of the directors are designated as the Series A Directors and the three other directors (each, a “common director”) are elected by the holders of common stock and/or any preferred stock (other than the Series A Voting Preferred Stock) granted the right to vote on the common directors.
These factors include, but are not limited to, the following: • changes in global supply and demand for oil and natural gas, which could be negatively affected by concerns about public health crises, pandemics and epidemics, such as the COVID-19 pandemic; • the price and quantity of imports of foreign oil and natural gas; • political conditions, including trade or other economic sanctions, armed conflict in Ukraine, the price cap on Russian oil and embargoes, in or affecting other oil-producing activity; • the level of global oil and natural gas exploration and production activity; • the level of global oil and natural gas inventories; • weather conditions; • technological advances affecting energy consumption; and • the price and availability of alternative fuels. -14- Lower oil and natural gas prices may not only decrease our revenues on a per unit basis but also may reduce the amount of oil and natural gas that we can produce economically.
These factors include, but are not limited to, the following: · changes in global supply and demand for oil and natural gas, which could be negatively affected by concerns about public health crises, pandemics and epidemics, such as the COVID-19 pandemic; · the price and quantity of imports of foreign oil and natural gas; · political conditions, including trade or other economic sanctions, armed conflict in Ukraine and the Middle East, the price cap on Russian oil and embargoes, in or affecting other oil-producing activity; · the level of global oil and natural gas exploration and production activity; · the level of global oil and natural gas inventories; · weather conditions, including extreme climatic events; · technological advances affecting energy consumption; and · the price and availability of alternative fuels. 14 Lower oil and natural gas prices may not only decrease our revenues on a per unit basis but also may reduce the amount of oil and natural gas that we can produce economically.
In addition, completion operations and other activities conducted on adjacent or nearby wells could cause production from our wells to be shut in for indefinite periods of time, could result in increased lease operating expenses and could adversely affect the production and reserves from our wells after they re-commence production.
In addition, completion operations and other activities, including water disposal activities, conducted on adjacent or nearby wells could cause production from our wells to be shut in for indefinite periods of time, could result in increased lease operating expenses and could adversely affect the production and reserves from our wells after they re-commence production.
There is also a risk that financial institutions will be required to adopt policies that have the effect of reducing the funding provided to the fossil fuel sector.
There is also a risk that financial institutions will be pressured or required to adopt policies that have the effect of reducing the funding provided to the fossil fuel sector.
At December 31, 2022, all of our total estimated proved reserves were attributable to properties located in these areas.
At December 31, 2023, all of our total estimated proved reserves were attributable to properties located in these areas.
The loss or unavailability of any of our executive officers or other key employees could have a material adverse effect on our business. We depend greatly on the efforts of our executive officers and other key employees to manage our operations.
The loss or unavailability of any of our executive officers or other key employees could have a material adverse effect on our business. W e depend greatly on the efforts of our executive officers and other key employees to manage our operations.
We currently intend to retain future earnings to fund the development and growth of our business, to repay indebtedness and for general corporate purposes, and therefore, do not anticipate paying any cash dividends on our common stock in the foreseeable future.
We have not declared or paid any dividends on our common stock. We currently intend to retain future earnings to fund the development and growth of our business, to repay indebtedness and for general corporate purposes, and therefore, do not anticipate paying any cash dividends on our common stock in the foreseeable future.
General market conditions, including the level of, and fluctuations in, the trading prices of stocks generally could also have a similar negative impact. The stock markets regularly experience price and volume volatility that affects many companies’ stock prices without regard to the operating performance of those companies. Volatility of this type may affect the trading price of our common stock.
General market conditions, including the level of, and fluctuations in, the trading prices of stocks generally could also have a similar negative impact. The stock markets regularly experience price and volume volatility that affects many companies’ stock prices without regard to the operating performance of those companies.
There can be no assurance that the trend of more expansive and stricter environmental legislation and regulations will not continue. -15- As a result of previous low prices for oil, natural gas and NGL, we may be required to take significant future write-downs of the financial carrying values of our properties in the future.
There can be no assurance that the trend of more expansive and stricter environmental legislation and regulations will not continue. 15 If forecasted prices for oil, natural gas and NGL decrease, we may be required to take significant future write-downs of the financial carrying values of our properties in the future.
Increases in the level of indebtedness could have adverse effects on our financial condition and results of operations, including: • imposing additional cash requirements on us in order to support interest payments, which reduces the amount we have available to fund our operations and other business activities; • increasing the risk that we may default on our debt obligations; • increasing our vulnerability to adverse changes in general economic and industry conditions, economic downturns and adverse developments in our business; • limiting our ability to sell assets, engage in strategic transactions or obtain additional financing for working capital, capital expenditures, general corporate and other purposes; • limiting our flexibility in planning for or reacting to changes in our business and the industry in which we operate; and • increasing our exposure to a rise in interest rates, which will generate greater interest expense. -12- Our ability to meet our debt obligations and reduce our level of indebtedness depends on future performance, which is affected by general economic conditions and financial, business and other factors, many of which are outside of the scope of management’s control.
Increases in the level of indebtedness could have adverse effects on our financial condition and results of operations, including: · imposing additional cash requirements on us in order to support interest payments, which reduces the amount we have available to fund our operations and other business activities; · increasing the risk that we may default on our debt obligations; · increasing our vulnerability to adverse changes in general economic and industry conditions, economic downturns and adverse developments in our business; · limiting our ability to sell assets, engage in strategic transactions or obtain additional financing for working capital, capital expenditures, general corporate and other purposes; · limiting our flexibility in planning for or reacting to changes in our business and the industry in which we operate; and · increasing our exposure to a rise in interest rates, which will generate greater interest expense.
Provisions of our certificate of incorporation and bylaws and Delaware law may inhibit a takeover, which could limit the price investors might be willing to pay in the future for our common stock.
Volatility of this type may affect the trading price of our common stock. 21 Provisions of our certificate of incorporation and bylaws and Delaware law may inhibit a takeover, which could limit the price investors might be willing to pay in the future for our common stock.
In the event that we were to undergo an “ownership change” (as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”)), our federal NOL carryforwards generated prior to the ownership change would be subject to annual limitations, which could defer or eliminate our ability to utilize these tax losses against future taxable income.
In the event that an entity has an “ownership change” (as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”)), an entity’s federal net operating loss carryforwards (“NOLs”) generated prior to an ownership change would be subject to annual limitations, which could defer or eliminate our ability to utilize these tax losses against future taxable income.
We are dependent on digital technologies including information systems and related infrastructure, to process and record financial and operating data, communicate with our employees, business partners, and stockholders, analyze 3-D seismic and drilling information, estimate quantities of oil and natural gas reserves as well as other activities related to our business. -20- As dependence on digital technologies has increased, cyber incidents, including deliberate attacks or unintentional events, have also increased.
We are dependent on digital technologies including information systems and related infrastructure, to process and record financial and operating data, communicate with our employees, business partners, and stockholders, analyze 3-D seismic and drilling information, estimate quantities of oil and natural gas reserves as well as other activities related to our business.
The federal regulation of methane emissions from oil and natural gas facilities has been subject to uncertainty in recent years and the EPA is currently proposing new and updated rules for both new and existing sources.
The federal regulation of methane emissions from oil and natural gas facilities has been subject to considerable attention in recent years. In December 2023, the EPA finalized new and updated rules for both new and existing sources.
Our business requires substantial capital expenditures. Management may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a decline in oil and natural gas reserves. The oil and natural gas industry is capital intensive.
Management may be unable to obtain needed capital or financing on satisfactory terms or at all, which could lead to a decline in oil and natural gas reserves. The oil and natural gas industry is capital intensive. Management makes and expects to continue to make substantial capital expenditures for the acquisition and development of reserves.
A cyber-attack could include gaining unauthorized access to digital systems for the purposes of misappropriating assets or sensitive information, corrupting data, causing operational disruption, or result in denial-of-service on websites.
As dependence on digital technologies has increased, cyber incidents, including deliberate attacks or unintentional events, have also increased. A cyber-attack could include gaining unauthorized access to digital systems for the purposes of misappropriating assets or sensitive information, corrupting data, causing operational disruption, or result in denial-of-service on websites.
President Biden has recommitted the United States to the Paris Agreement and, in April 2021, announced a goal of reducing the -19- United States' emissions by 50 to 52% below 2005 levels by 2030.
President Biden has recommitted the United States to the Paris Agreement and, in April 2021, announced a goal of reducing the United States' emissions by 50 to 52% below 2005 levels by 2030. Various U.S. states and local governments have also publicly committed to furthering the goals of the Paris Agreement.
Additional financing also may not be available on acceptable terms or at all. In the event additional capital resources are unavailable, management may curtail activities or be forced to sell some assets on an untimely or unfavorable basis.
Additional financing also may not be available on acceptable terms or at all. In the event additional capital resources are unavailable, management may curtail activities or be forced to sell some assets on an untimely or unfavorable basis. The loss or unavailability of capital provided by our two largest stockholders could have a material adverse effect on our business.
However, given the long-term trend toward increasing regulation, future federal GHG regulations of the oil and natural gas industry remain a significant possibility.
As a result, we cannot predict the scope of any final methane regulatory requirements or the cost to comply with such requirements. However, given the long-term trend toward increasing regulation, future federal GHG regulations of the oil and natural gas industry remain a significant possibility.
The EPA's proposed rules, if finalized would make existing regulations more stringent, expand the scope of source types covered by the rules and require states to develop plans to reduce methane and volatile organic compound emissions from existing sources that must be at least as effective as presumptive standards set by EPA.
The final rules make existing regulations more stringent, expand the scope of source types covered by the rules and require states to develop plans to reduce methane and volatile organic compound emissions from existing sources. These new rules will likely be subject to legal challenges.
Although the final form and substance of this rule and its requirements are not yet known and its ultimate impact on our business is uncertain, compliance with the proposed rule, if finalized, may result in additional legal, accounting and financial compliance costs.
The new rule is already subject to legal challenges. Although the ultimate impact of the new rule on our business is uncertain given such legal challenges, compliance with the new rule, if upheld, may result in additional legal, accounting and financial compliance costs.
Management makes and expects to continue to make substantial capital expenditures for the acquisition and development of reserves. We intend to finance future capital expenditures through cash flow from operations or incurring additional indebtedness.
We intend to finance future capital expenditures through cash flow from operations, incurring additional indebtedness, or capital raises.
These efforts have included consideration of cap-and-trade programs, carbon taxes, GHG disclosure obligations and regulations that directly limit GHG emissions from certain sources. Moreover, President Biden highlighted addressing climate change as a priority of his administration, issued several executive orders related to climate change and recommitted the United States to long-term international goals to reduce emissions.
Moreover, President Biden highlighted addressing climate change as a priority of his administration, issued several executive orders related to climate change and recommitted the United States to long-term international goals to reduce emissions, and continues to require the incorporation of climate change considerations into executive agency decision-making.
The emissions fee and funding provisions of the law could increase operating costs within the oil and natural gas industry and accelerate the transition away from fossil fuels, which could in turn adversely affect our business and results of operations.
The emissions fee and funding provisions of the law could increase operating costs within the oil and natural gas industry and accelerate the transition away from fossil fuels, which could in turn adversely affect our business and results of operations. 19 At the international level, the United Nations ("UN") -sponsored "Paris Agreement" requires member states to submit non-binding, individually-determined reduction goals known as Nationally Determined Contributions every five years after 2020.
The loss or unavailability of any of our executive officers or other key employees could have a material adverse effect on our business. We do not expect to declare or pay any dividends in the foreseeable future. We have not declared or paid any dividends on our common stock.
The loss or unavailability of any of our executive officers or other key employees could have a material adverse effect on our business. We have had material weaknesses in our internal control over financial reporting in prior fiscal years.
At December 31, 2022, we had approximately $18.6 million of federal net operating loss (“NOL”) carryforwards generated in prior years that could offset against future taxable income. Utilization of any NOL depends on many factors, including our ability to generate future taxable income, which cannot be assured.
Additionally, utilization of any NOL depends on many factors, including our ability to generate future taxable income, which cannot be assured. At December 31, 2023, we had a tax valuation allowance recorded on the NOLs.
At December 31, 2022, commitments from the financial institution under our Senior Revolving Credit Facility (as amended, the “Credit Facility”) were approximately $6.1 million, of which approximately $300,000 was unused commitments. Management continues to review existing indebtedness, and may seek to repay, refinance, repurchase, redeem, exchange or otherwise terminate existing indebtedness.
In addition, we had approximately $1.1 million outstanding under a joint development agreement with a related party as of December 31, 2023 (See Note 4 of Notes to Consolidated Financial Statements). Management continues to review existing indebtedness, and may seek to repay, refinance, repurchase, redeem, exchange or otherwise terminate existing indebtedness.
Our total indebtedness at December 31, 2022 was $7.2 million. Our subsidiaries Empire Louisiana and Empire North Dakota had approximately $5.9 million of outstanding aggregate principal indebtedness at December 31, 2022.
Our total indebtedness at December 31, 2023 was $5.7 million. At December 31, 2023, commitments from a financial institution under a Revolving Credit Facility (the “Credit Facility”) with Empire North Dakota and Empire NDA were approximately $10.0 million, of which approximately $5.5 million was unused and approximately $4.5 million was outstanding.
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The EPA is currently seeking public comments on its proposal. However, all of these regulatory actions will likely be subject to legal challenges. As a result, we cannot predict the scope of any final methane regulatory requirements or the cost to comply with such requirements.
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Our ability to meet our debt obligations and reduce our level of indebtedness depends on future performance, which is affected by general economic conditions and financial, business and other factors, many of which are outside of the scope of management’s control. 12 Our business requires substantial capital expenditures.
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At the international level, the United Nations ("UN") -sponsored "Paris Agreement" requires member states to submit non-binding, individually-determined reduction goals known as Nationally Determined Contributions every five years after 2020.
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Our two largest stockholders, Energy Evolution Master Fund, Ltd. and Phil Mulacek, have been a significant source of capital for our acquisitions of oil and natural gas properties and the development of our oil and natural gas reserves. We have been dependent on this capital to fund our growth plans, including our current drilling programs.
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The loss of this capital could have a material adverse effect on our business, especially our growth plans.
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The final rule also requires, on a phased-in basis, disclosure of Scope 1 and/or Scope 2 GHG emissions by certain larger public companies, which currently would not apply to Empire given its size, when those emissions are material and the filing of an attestation report covering the required disclosure of such company’s Scope 1 and/or Scope 2 emissions.
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A full Section 382 analysis was prepared in 2023 and it was determined that our NOLs were subject to limitations under Section 382.
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At December 31, 2023, we had approximately $24.3 million of federal NOLs generated in prior years that could offset against future taxable income, however, $4.7 million of the NOLs were limited as of December 31, 2023 due to ownership changes. NOLs created prior to 2018 have a 20-year expiration period and NOLs arising after 2017 have an indefinite life.
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In the event that we were to undergo any further “ownership change”, our NOLs generated prior to an ownership change would be subject to further annual limitations, which could defer or eliminate our ability to utilize these tax losses against future taxable income.
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Depending on participation in our Rights Offering announced in March 2024, it is likely that an ownership change will occur which could further limit the utilization of the NOLs.
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These efforts have included consideration of cap-and-trade programs, carbon taxes, GHG disclosure obligations and regulations that directly limit GHG emissions from certain sources.
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In December 2023, the 28 th session of Conference Parties was held where parties signed on to an agreement to transition away from fossil fuels and increase renewable energy capacity so as to achieve net zero by 2050, although no timeline for doing so is set.
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Failure to maintain effective internal control over financial reporting could adversely affect our ability to report our financial condition and results of operations accurately and on a timely basis. As a result, our business, operating results and liquidity could be harmed.
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As disclosed in our prior annual reports on Form 10-K, we identified a material weakness in internal controls over financial reporting as of December 31, 2022 and 2021. We believe that this material weakness has been successfully remediated.
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Our failure to maintain effective internal control over financial reporting could adversely affect our ability to report our financial results on a timely and accurate basis, which could result in a loss of investor confidence in our financial reports or have a material adverse effect on our ability to operate our business or access sources of liquidity.
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Furthermore, because of the inherent limitations of any system of internal control over financial reporting, including the possibility of human error, the circumvention or overriding of controls and fraud, even effective internal controls may not prevent or detect all misstatements. We do not expect to declare or pay any dividends in the foreseeable future.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeAs of December 31, 2022, and through the filing date of this Annual Report on Form 10-K, management does not believe the ultimate resolution of any such actions or potential actions of which management is currently aware will have a material effect on our consolidated financial position or results of operations.
Biggest changeAs of December 31, 2023, and through the filing date of this Annual Report on Form 10-K, management does not believe the ultimate resolution of any such actions or potential actions of which management is currently aware will have a material effect on our consolidated financial position or results of operations. ITEM 4. MINE SAFETY DISCLOSURES.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Market Information Our common stock is traded on the NYSE American under the symbol "EP". Stockholders At March 31, 2023, there were approximately 900 stockholders of record of our common stock. Dividends We have never paid cash dividends on our common stock.
Biggest changeITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. Market Information Our common stock is traded on the NYSE American under the symbol "EP". Stockholders At March 28, 2024, there were approximately 1,250 stockholders of record of our common stock. Dividends We have never paid cash dividends on our common stock.
Issuer Repurchase of Equity Securities No private or open market repurchases of common stock were made by us during the fourth quarter of 2022. Unregistered Sales of Equity Securities No such sales that have not been previously reported on a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.
Issuer Repurchase of Equity Securities No private or open market repurchases of common stock were made by us during the fourth quarter of 2023. Unregistered Sales of Equity Securities No such sales that have not been previously reported on a Quarterly Report on Form 10-Q or a Current Report on Form 8-K.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeYears Ended December 31, 2022 2021 $ Variance Variance % Oil revenues $ 44,978,554 $ 22,326,289 22,652,265 101% Natural gas revenues 4,534,370 2,288,481 2,245,889 98% NGL revenues 3,659,451 2,888,747 770,704 27% Total product revenues 53,172,375 27,503,517 Lease operating expense 23,584,039 13,283,758 10,300,281 78% Production and ad valorem taxes 3,943,466 2,102,772 1,840,694 88% Depreciation, depletion, amortization and accretion 3,307,097 3,716,754 (409,657 ) -11% Impairment 936,620 — 936,620 NM General and administrative expense (excluding stock-based compensation) 9,614,948 7,366,061 2,248,887 31% Stock-based compensation 2,716,541 1,095,970 1,620,571 148% Cash-based interest expense 473,205 436,053 37,152 9% Non-cash interest expense 36,335 8,164,646 (8,128,311 ) -100% Operating Income (Loss) 8,784,163 (473,370 ) 9,257,533 -1956% Net Income (Loss) 7,084,130 (18,614,962 ) 25,699,092 NM NM: A percentage calculation is not meaningful due to change in signs, a zero-value denominator or a percentage change greater than 200. -24- Revenues Revenues increased primarily as a result of higher volumes due to a full year impact of the XTO acquisition as well as higher commodity prices in 2022.
Biggest changeYears Ended December 31, 2023 2022 $ Variance Variance % Oil revenues $ 36,684,494 $ 44,978,554 (8,294,060 ) -18% Natural gas revenues 1,726,754 4,534,370 (2,807,616 ) -62% NGL revenues 1,660,256 3,659,451 (1,999,195 ) -55% Total product revenues 40,071,504 53,172,375 Lease operating expense 28,625,481 23,584,039 5,041,442 21% Production and ad valorem taxes 3,044,411 3,943,466 (899,055 ) -23% Depreciation, depletion, amortization and accretion 4,852,555 3,307,097 1,545,458 47% Impairment — 936,620 (936,620 ) -100% General and administrative expense (excluding stock-based compensation) 12,034,184 9,614,948 2,419,236 25% Stock-based compensation 3,144,751 2,716,541 428,210 16% Cash-based interest expense 650,637 473,205 177,432 37% Non-cash interest expense 349,790 36,335 313,455 NM Operating Income (Loss) (11,625,091 ) 8,784,163 (20,409,254 ) NM Net Income (Loss) (12,469,605 ) 7,084,130 (19,553,735 ) NM NM: A percentage calculation is not meaningful due to change in signs, a zero-value denominator or a percentage change greater than 200.
The accuracy of reserve estimates is a function of: • The quality and quantity of available data; • The interpretation of that data; • The accuracy of various mandated economic assumptions; and • The judgments of the persons preparing the estimates. -27- Proved reserves information included in this report is based on estimates prepared by independent petroleum engineers, Cawley Gillespie &Associates.
The accuracy of reserve estimates is a function of: · The quality and quantity of available data; · The interpretation of that data; · The accuracy of various mandated economic assumptions; and · The judgments of the persons preparing the estimates. Proved reserves information included in this report is based on estimates prepared by independent petroleum engineers, Cawley Gillespie &Associates.
Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 2022 and 2021, a valuation allowance for deferred tax assets was recorded. Management applies the accounting standards related to uncertainty in income taxes.
Valuation allowances are established to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 2023 and 2022, a valuation allowance for deferred tax assets was recorded. Management applies the accounting standards related to uncertainty in income taxes.
Such changes could trigger an impairment of our oil and natural gas properties and have an impact on our depletion expense prospectively. For example, a change of 10 percent in our total proved reserves could change our annual depletion and amortization expense by $200,000. The actual impact would depend on the specific areas impacted.
Such changes could trigger an impairment of our oil and natural gas properties and have an impact on our depletion expense prospectively. For example, a change of 10 percent in our total proved reserves could change our annual depletion and amortization expense by $350,000. The actual impact would depend on the specific areas impacted.
The independent petroleum engineers evaluated 100% of our estimated proved producing reserve quantities and their related future net cash flows as of December 31, 2022. Estimates prepared by others may be higher or lower than these estimates.
The independent petroleum engineers evaluated 100% of our estimated proved producing reserve quantities and their related future net cash flows as of December 31, 2023. Estimates prepared by others may be higher or lower than these estimates.
In 2022, we recognized expenses totaling approximately $1,269,000 in conjunction with resolution of a Texas sales tax audit for prior periods for which the initial assessment was received in April 2022. This total includes consulting fees and an accrual for $528,000 for the final settlement which will be paid in early 2023.
In 2022, we recognized expenses totaling approximately $1,269,000 in conjunction with resolution of a Texas sales tax audit for prior periods for which the initial assessment was received in April 2022. This total includes consulting fees and an accrual for $528,000 for the final settlement which was paid in 2023.
In periods subsequent to the initial measurement of the ARO, we must recognize period-to-period changes in the liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows. Stock-Based Compensation We recognize stock-based compensation expense associated with restricted stock units, which consists of time-based awards and options.
In periods subsequent to the initial measurement of the ARO, we must recognize period-to-period changes in the liability resulting from the passage of time and revisions to either the timing or the amount of the original estimate of undiscounted cash flows. Stock-Based Compensation We recognize stock-based compensation expense associated with restricted stock units and options.
Our stock-based compensation increased in 2022 due to a higher number of awards in 2022. We anticipate stock-based compensation to continue to be utilized in 2023 and beyond to attract and retain talented personnel and compensate Board members and consultants.
Stock-based Compensation We utilize stock-based compensation to compensate members of management and retain talented personnel. Our stock-based compensation increased in 2023 due to a higher number of awards in 2023. We anticipate stock-based compensation to continue to be utilized in 2024 and beyond to attract and retain talented personnel and compensate our board members and consultants.
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.
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.
We assess our oil and gas properties for impairment when circumstances indicate the carrying value may be greater than its estimated future net cash flows. In 2022, estimated future cash flows from our properties in Louisiana were less than the net book value. As a result, we recorded a $936,000 impairment expense.
We assess our oil and gas properties for impairment when circumstances indicate the carrying value may be greater than its estimated future net cash flows. In 2022, estimated future cash flows from our properties in Louisiana were less than the net book value.
We have no uncertain tax positions at either December 31, 2022 or December 31, 2021. -28-
We have no uncertain tax positions at either December 31, 2023 or December 31, 2022.
Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. Critical Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities.
Critical Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosures of contingent assets and liabilities.
Overview Our primary business is the exploration and development of oil and gas interests. We have incurred significant losses from operations in years prior to 2022, and there is no assurance that we will maintain profitability or obtain funds necessary to finance our future operations.
Overview Our primary business is the optimization and development of oil and gas interests. In 2022 we had net income from operations but have incurred losses from operations in 2023 and in years prior to 2022. There is no assurance that we will be profitable or obtain funds necessary to finance our future operations.
Asset Retirement Obligation Asset retirement obligations (“AROs”) consist primarily of estimated future costs associated with the plugging and abandonment of oil and natural gas wells, removal of equipment and facilities from leased acreage, and land restoration in accordance with applicable local, state and federal laws.
We performed an assessment as of December 31, 2023 and did not identify any impairments. 29 Asset Retirement Obligation Asset retirement obligations (“AROs”) consist primarily of estimated future costs associated with the plugging and abandonment of oil and natural gas wells, removal of equipment and facilities from leased acreage, and land restoration in accordance with applicable local, state and federal laws.
An impairment expense could result if oil and gas prices decline in the future as it may not be economic to develop some of these unproved properties. We performed an assessment as of December 31, 2022 and identified one area that was impaired and recorded an impairment in 2022 of $936,000.
An impairment expense could result if oil and gas prices decline in the future as it may not be economic to develop some of these unproved properties.
Interest Expense Cash-based interest expense increased slightly as a decrease due to a lower outstanding balance under our Credit Facility was offset by the impact of higher interest rates. We have minimal interest-bearing vehicle and equipment notes payable.
Interest Expense Cash-based interest expense increased as higher interest rates were partially offset by a lower outstanding balance under our Credit Facility. We have minimal interest-bearing vehicle and equipment notes payable. Non-cash interest expense is primarily attributable to the related party note payable as described in Note 7 of Notes to Consolidated Financial Statements.
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. Business Strategy Our business strategy is to obtain long-term growth in reserves and cash flow on a cost-effective basis.
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. Production and Operating Data The following table sets forth a summary of our production and operating data for the years ended December 31, 2023 and 2022.
We have generated net operating losses since inception, which would normally reflect a tax benefit in the consolidated statement of operations and a deferred asset on the consolidated balance sheet.
In addition, 2023 includes interest from $10,000,000 of bridge loans from related parties that were subsequently converted to equity (See Note 15 of Notes to Consolidated Financial Statements). Income taxes We have generated net operating losses since inception, which would normally reflect a tax benefit in the consolidated statement of operations and a deferred asset on the consolidated balance sheet.
We also participated in the drilling of four non-operated wells through Empire Rockies Region in 2022 spending approximately $600,000. In 2021, we had a cash outflow of approximately $2.5 million related to four other non-operated drilled wells.
We also participated in the drilling of four non-operated wells through Empire Rockies Region in 2022 spending approximately $600,000. In 2022, we were able to negotiate for the release of the sinking fund requirement. Approximately $2.8 million and $2 million of the sinking fund balance was returned to us in 2023 and 2022, respectively.
In 2021, a non-cash charge was recorded to interest expense of approximately $7.0 million related to interest and amortization of debt issuance costs for convertible notes issued in 2021 that were fully converted prior to December 31, 2021. -25- Income taxes For 2022, we had income before income taxes which would result in a tax provision that was offset by a change in the valuation allowance due to the anticipated use of the NOL carryforward.
For 2023, we had a loss before income taxes for which the tax benefit was offset by a change in valuation allowance. For 2022, we had income before income taxes which resulted in a tax provision that was offset by a change in the valuation allowance due to the anticipated use of the NOL carryforward and intangible drilling costs.
Depreciation, Depletion, Amortization and Accretion and Impairment DD&A decreased in 2022 as compared to 2021 despite an increase in production volumes. The decrease in the expense is primarily related to New Mexico depletion rate due to the impact of a higher reserve base in 2022. Accretion expense was slightly higher in 2022 as the overall obligation increases over time.
Production taxes were lower for 2023 compared to 2022 as a result of the lower product revenues discussed above. Depreciation, Depletion, Amortization and Accretion and Impairment The higher DD&A in 2023 as compared to 2022 primarily related to a higher depletable basis from capital expenditures in 2023. Accretion expense was higher in 2023 as the overall obligation increases over time.
We expect to incur costs related to limited drilling activities in core areas as well as future oil and natural gas acquisitions. It is expected that management will use a combination of cash on hand and cash flows from operations as well as seeking additional debt or equity funding for these acquisitions and to fund ongoing operations.
It is expected that management will use a combination of cash on hand and cash flows from operations as well as seeking additional debt or equity funding to fund these ongoing activities. 27 Working Capital Working capital (presented below) was $(6.3) million as of December 31, 2023 compared to $5.1 million as of December 31, 2022, representing a change of approximately $(11.4) million.
Approximately $2 million of the sinking fund balance was returned to us in 2022. -26- Cash Flows from Financing Activities In 2022, we received approximately $3.4 million in cash from warrant exercises. We also made approximately $1.2 million of principal payments in 2022 on our Credit Facility.
Principal payments made on our revolving line of credit with CrossFirst Bank were approximately $1.5 million and $1.2 million in 2023 and 2022, respectively. In 2023, we received approximately $12.5 million from stock issuances and warrant exercises. In 2022, we received approximately $3.4 million in cash from warrant exercises.
As of December 31, 2022 2021 Current Assets $ 22,734,973 $ 13,118,020 Current Liabilities $ 17,620,660 $ 12,054,487 Working Capital $ 5,114,313 $ 1,063,533 Cash Flows Year Ended December 31, Cash flows provided by (used in): 2022 2021 Variance Operating activities $ 18,055,783 $ 3,170,282 $ 14,885,501 Investing activities (11,413,487 ) (24,716,878 ) 13,303,391 Financing activities 1,690,275 25,000,772 (23,310,497 ) Cash Flows from Operating Activities Ongoing operations from core assets contributed to cash flows provided by operating activities for the year ended December 31, 2022.
As of December 31, 2023 2022 Current Assets $ 18,744,904 $ 22,734,973 Current Liabilities $ 25,049,572 $ 17,620,660 Working Capital $ (6,304,668 ) $ 5,114,313 Cash Flows Year Ended December 31, Cash flows provided by (used in): 2023 2022 Variance Operating activities $ (9,887,500 ) $ 18,055,783 $ (27,943,283 ) Investing activities (14,767,339 ) (11,413,487 ) (3,353,852 ) Financing activities 20,502,905 1,690,275 18,812,630 Cash Flows from Operating Activities Cash flows from operating activities in 2023 was impacted by lower commodity prices and higher operating expenses compared to 2022, partially offset by higher oil volumes.
The $11.9 million not related to acquisitions primarily reflects well enhancement projects in North Dakota and non-operated drilling. We anticipate capital expenditures in 2023 that will be funded with cash on hand, cash flows from operations, debt, and/or equity issuances.
We anticipate capital expenditures in 2024 that will be funded with cash on hand, cash flows from operations, debt, and/or equity issuances. 28 Related Party Transactions In 2023, we received $10 million in bridge loan funds from Phil Mulacek and Energy Evolution Master Fund, Ltd., related parties, which were subsequently converted to our common shares.
Cash Flows from Investing Activities Cash flows from investing activities in 2022 reflect $2.7 million related to acquisitions of oil and natural gas properties as compared to $19.5 million in 2021 which primarily related to the XTO acquisition that occurred in May 2021.
In addition, 2023 includes $2 million related to the acquisition of additional interest in our New Mexico oil and gas properties compared to $2.7 million of acquisitions in 2022.
Lease Operating Expense and Production Taxes Lease operating expense was higher in 2022 primarily as a result of a full year of operations in New Mexico after the May 2021 XTO acquisition. Lease operating expenses for New Mexico were approximately $5.1 million more in 2022 than for 2021.
NGL sales volumes were lower in 2023 compared to 2022 primarily due to lower volumes in New Mexico. Lease Operating Expense and Production Taxes Lease operating expense was higher in 2023 primarily due to higher workover activities. Lease operating expense includes approximately $12.0 million of workover expense for 2023 as compared to approximately $7.9 million for 2022.
General and Administrative Expense Board compensation expense, exclusive of stock-based compensation, was approximately $388,000 in 2022 as compared to $209,000 in 2021. Overall personnel expense increased approximately $500,000 in 2022 over 2021.
Board compensation expense, exclusive of stock-based compensation, was approximately $588,000 in 2023 as compared to $388,000 in 2022. In addition, 2023 expenses were higher due to legal costs related to potential financing transactions and compliance work related to our New Mexico operations.
We have quarterly payment obligations related to our bank debt of $300,000 per quarter (increased to $500,000 per quarter in 2023) in addition to minimal monthly payments for notes payable arising from the purchase of vehicles and equipment. Capital Resources Capital Expenditures For 2022, additions to oil and natural gas properties totaled $14.6 million including $2.7 million related to acquisitions.
Capital Resources Capital Expenditures For 2023, additions to oil and natural gas properties totaled $27 million including $2.1 million related to acquisitions. The $25 million not related to acquisitions primarily reflects development of our North Dakota operations.
Removed
Management regularly evaluates potential acquisitions of properties that would enhance current core areas of operation. 2021 XTO Acquisition On March 12, 2021, the Company, through its wholly owned subsidiary Empire New Mexico, entered into a purchase and sale agreement with XTO Holdings, LLC (a subsidiary of ExxonMobil) to acquire, among other things, certain oil and natural gas properties in New Mexico.
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Year Ended December 31, 2023 Year Ended December 31, 2022 Production and operating data: Net sales volumes: Oil (Bbl) 487,869 482,818 Natural gas (Mcf) 854,274 875,647 Natural gas liquids (Bbl) 136,013 160,809 Total (Boe) 766,261 789,568 Average price per unit: Oil (a) $ 75.19 $ 93.16 Natural gas $ 2.02 $ 5.18 Natural gas liquids $ 12.21 $ 22.76 Total (Boe) $ 52.29 $ 67.34 Operating costs and expenses per Boe: Lease operating expense (excluding workovers) $ 21.70 $ 19.92 Workovers $ 15.66 $ 9.95 Total Lease operating expense $ 37.36 $ 29.87 Production and ad valorem taxes $ 3.97 $ 4.99 Depreciation, depletion, amortization and accretion $ 6.33 $ 4.19 General & administrative (excluding stock-based compensation) $ 15.71 $ 12.18 Stock-based compensation $ 4.10 $ 3.44 (a) Excludes the effect of net cash receipts from (payments on) derivatives.
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The transaction closed in May 2021. For more information about the transaction, refer to Note 4 of our Consolidated Financial Statements included in this report. Results of Operations The following table reflects our summary operating information.
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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. 25 Results of Operations The following table reflects our summary operating information.
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Average realized oil price in 2022 was approximately $93 per barrel, while average realized price in 2021 was approximately $67, an increase in price of approximately 39%. Realized natural gas price for 2022 was approximately $5.18 per Mcf, while realized pricing for 2021 was approximately $3.68 per Mcf, an increase in price of approximately 41%.
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Revenues Revenues for 2023 decreased compared to the prior year primarily due to lower realized oil, natural gas and NGL prices and lower NGL volumes, partially offset by higher oil volumes in North Dakota.
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Net oil volumes were approximately 483,000 Bbls for 2022, an increase of 45% over the same period in the prior year. Net natural gas volumes were approximately 876,000 Mcf for 2022 as compared to approximately 622,000 for 2021, an increase of approximately 41%. NGL revenues are primarily from our New Mexico properties acquired from XTO.
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Realized oil prices for 2023, were approximately $75.19 per barrel, while realized prices for the prior year were approximately $93.16 per barrel, a decrease in price of approximately 19%. Oil volumes were higher by approximately 5,000 barrels primarily due to increased production in North Dakota partially offset by lower production in New Mexico.
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Production and ad valorem taxes have increased as a direct result of the XTO acquisition’s properties and increased volumes produced and sold, paired with higher realized prices.
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Realized natural gas prices for 2023, were approximately $2.02 per Mcf, while realized prices for the prior year were approximately $5.18 per Mcf, a decrease in price of approximately 61%. Realized NGL prices for 2023, were approximately $12.21 per barrel, while realized prices for the prior year were approximately $22.76 per barrel, a decrease in price of approximately 46%.
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In addition to recompletions and sidetrack well drilling activity in North Dakota, we also undertook workover and other lease operating activities in 2022; North Dakota’s lease operating expenses increased by approximately $3.3 million period-over-period as a result of increased field activity.
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Workover expense in New Mexico increased due in part to a higher level of compliance-related activities. In addition, workover expense in North Dakota was higher for 2023 as the Company continued to work over wells in the state to enhance production alongside capital recompletions and sidetrack drilling started in 2022.
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Fees paid for professional services including outsourced services and legal increased over 2021 by approximately $500,000 as a direct result of acquisition-related work, SEC filings related to our operations, and our successful uplisting from the OTCQB to the NYSE American.
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As a result, we recorded a $936,000 impairment expense. 26 General and Administrative Expense (excluding stock-based compensation) General and Administrative Expense (excluding stock-based compensation) increased primarily due to higher employee expenses related to increased headcount in 2023 compared to 2022 and $505,000 related to severance expense for two executives in 2023 (See Note 14 of Notes to Consolidated Financial Statements).
Removed
Included in general and administrative expenses for 2021 is $989,000 for expense associated with a non-cash right to buy shares in conjunction with the conversion of unsecured notes payable in 2021 as discussed in Note 9 to the Consolidated Financial Statements included in this report. Stock-based Compensation We utilize stock-based compensation to compensate members of management and retain talented personnel.
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For 2023 and 2022, our effective tax rates were 1% and 3%, respectively. Liquidity As noted below, our working capital is negative as of December 31, 2023 and is primarily a result of a higher level of payables related to capital spending in North Dakota.
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Non-cash interest expense is fully attributable to the related party notes payable as described in Note 9 to the Consolidated Financial Statements included in this report.
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In addition, the Company was not in compliance with the current ratio covenant under its Credit Facility as of December 31, 2023; however, the Company obtained a compliance waiver from the lender for December 31, 2023. As of December 31, 2023, we had approximately $8 million in cash on hand and approximately $5.5 million available on the Credit Facility.
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For periods prior to 2022, our effective tax rate is 0%. Due to having current taxable income which cannot be fully offset by NOLs, the tax rate is 3% in 2022.
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For additional information regarding the Credit Facility, see Note 7 of Notes to Consolidated Financial Statements. The Company will require additional funds to satisfy these payables related to the capital spending program which are greater than estimated cash flows from operations over the next 12 months.
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Liquidity As of December 31, 2022, we had approximately $12 million cash on hand and approximately $300,000 available on the Credit Facility. For additional information regarding the Credit Facility, see Note 8 to the Consolidated Financial Statements included in this report.
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Management has initiated plans to raise the necessary funds including the commencement of a rights offering expected to raise up to approximately $20.66 million (see Note 18 of Notes to Consolidated Financial Statements).
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Working Capital Working capital (presented below) was $5.1 million as of December 31, 2022 compared to $1.1 million as of December 31, 2021, representing a change of approximately $4.0 million.
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Phil Mulacek and Energy Evolution Master Funds, Ltd, both related parties of the Company and largest shareholders collectively owning 46% of the common shares outstanding, have indicated that they intend to participate in the rights offering and fully subscribe to the shares of Common Stock corresponding to their subscription rights and intend to exercise their over-subscription rights.
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This change is primarily a result of the acquisition of producing properties in New Mexico, which served to increase volumes sold for the year ended December 31, 2022, as well as the stronger pricing environment in 2022.
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See Note 1 - Liquidity and Going Concern of Notes to Consolidated Financial Statements for further discussion of management’s plans. We expect to incur costs related to drilling activities in core areas.
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In 2021, we incurred approximately $18.0 million in non-cash expenses related to the convertible notes payable (See Related Party Transactions for more information) that contributed to a net loss for financial reporting purposes.
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This change was primarily driven by payables related to the Starbuck Drilling Program.
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As part of the XTO acquisition, we entered into an agreement to create a sinking fund for future plugging liabilities, paying approximately $4.8 million into that fund in 2021. In 2022, we were able to negotiate for the release of the sinking fund requirement.
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Cash flow from operating activities in 2022 benefited from higher commodity prices and higher natural gas and NGL volumes.
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In 2021, the XTO acquisition and operations executing our mission were funded by proceeds from debt issued of approximately $20.5 million as well as proceeds from stock and warrant issuances of approximately $11.3 million.
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Cash Flows from Investing Activities Cash flows from investing activities in 2023 includes approximately $25 million of additions to oil and gas properties primarily due to the development of our operations in North Dakota, partially offset by approximately $9.9 million for a change in accounts payable related to capital expenditures.
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Related Party Transactions The 2021 issuance of a secured convertible note and an unsecured convertible note to Energy Evolution, a related party, as well as the conversion of these notes in 2021 are described further in Note 9 to the Consolidated Financial Statements included in this report. These transactions were related party transactions for accounting purposes.
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In 2022, we had approximately $11.4 million of additions to oil and gas properties primarily, partially offset by approximately $1.2 million for a change in accounts payable related to capital expenditures.
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Cash Flows from Financing Activities In 2023, we received $10 million from related parties in the form of bridge loans which were subsequently converted to our common shares (See Note 15 of Notes to Consolidated Financial Statements).
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In 2023, we entered into a new revolving line of credit with Equity Bank (See Note 7 of Notes to Consolidated Financial Statements) and used approximately $4.5 million to retire the outstanding balance of our previous revolving line of credit with CrossFirst Bank.
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In addition, we sold shares to both parties and received $5 million in proceeds from each party. Both transactions are described further in Note 15 of Notes to Consolidated Financial Statements. These transactions were related party transactions for accounting purposes. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements.

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