Empire Petroleum (NYSE:EP) addressed its low liquidity levels with $10 million total in secured bridge loans from Phil Mulacek (Empire’s Board Chairman) and Energy Evolution Master Fund (Empire’s largest shareholder).
The increased liquidity has allowed Empire to start its Starbuck drilling program. It has estimated that it will cost $20 million to $22 million to complete this drilling program.
Empire has $5.4 million in debt maturing by August 2024 and is generating close to zero adjusted EBITDA at $70s oil. Thus it seems likely that Empire will still need to raise additional funds during 2024. This is not surprising given that bridge loans are typically used as a funding bridge while the company attempts to secure longer-term financing.
Bridge Loans
Empire received a total of $10 million in secured bridge loans in Q3 2023. Phil Mulacek and Energy Evolution Master Fund are each loaning $5 million to Empire. The bridge loans rank junior to Empire’s other secured debt (such as its credit facility debt) and will be senior to any unsecured debt that Empire adds.
The bridge loans mature at the end of December 2024 and have a 7% per year interest rate, with interest paid quarterly in common shares. After the maturity date, any remaining unpaid principal accrues interest at 9% per year.
The terms of the bridge loans appear to be quite reasonable, with the effective interest rate being lower than the effective 10% interest rate on its credit facility debt.
This gives Empire the ability to do more development at Starbuck, although Empire is still likely to need to raise more money during 2024 as bridge loans are typically a temporary measure.
Starbuck Drilling Program
Empire started drilling again at its Starbuck asset in North Dakota. For its drilling program, Empire anticipates drilling 10 to 14 wells. The average capex per well is estimated at $1.6 million to $1.8 million, with total cost of $20 million to $22 million.
Empire had $11.3 million in liquidity at the end of Q3 2023 and its adjusted EBITDA has been pretty close to zero in recent quarters, so it seems likely that the Starbuck drilling program will last well into 2024 and that Empire will also need to secure more funding to complete the program.
Q3 2023 Results
Empire reported net sales volumes averaging 2,048 BOEPD (64% oil, 19% NGLs, and 17% natural gas) in Q3 2023. This was a 4% decline in average daily total sales volumes compared to Q2 2023’s net sales volumes of 2,135 BOEPD (66% oil, 16% NGLs, and 18% natural gas). Empire’s daily oil sales volumes went down by approximately -7% from Q2 2023 to Q3 2023.
Empire’s development activities were quite limited during the first three quarters of 2023 with $5.6 million in capex, so the volume declines are not surprising. However, Empire’s oil cut went down from 66% in Q2 2023 to 64% in Q3 2023 after making a nice jump from 61% in Q1 2023.
The lower oil cut contributed to Empire’s adjusted EBITDA of $0.1 million in Q3 2023 being slightly lower than the $0.5 million to $1.0 million that I projected it would do during the quarter.
Empire’s operating costs remain quite high at over $50 per BOE for its combined lease operating expenses and G&A expenses. At oil prices in the $70s, Empire’s operating margins (not including capex) are close to zero.
Future Outlook
Empire had $11.3 million in liquidity at the end of Q3 2023, consisting of $11 million in cash on hand and $0.3 million in availability under its credit facility.
Empire’s credit facility and its term note both currently mature in August 2024 though, so Empire has $5.4 million in debt coming due by then (including its quarterly required credit facility repayments). The full repayment of that debt would result in Empire having $5.6 million in cash left if it had neutral cash flow between now and August 2024.
At current oil prices, Empire’s adjusted EBITDA is close to zero. The additional production resulting from its Starbuck drilling program should improve Empire’s adjusted EBITDA, but I still project Empire to burn around $10 million to $20 million in cash by the end of 2024 (at current strip) if it completes its proposed Starbuck drilling program (with $20 million to $22 million in capex) by then.
Thus if Empire is unable to refinance its credit facility, it would need another $4 million to $14 million in cash by the end of 2024 to cover its liquidity shortfall. Empire’s $10 million in bridge loans are also due at the end of 2024, although since those are loans from related parties, Empire should have some more flexibility in dealing with that debt.
Conclusion
I had noted Empire’s liquidity challenges before, and it has addressed that for now with $10 million in secured bridge loans that boosted its liquidity to $11.3 million at the end of Q3 2023.
This gives Empire the ability to start drilling at Starbuck, with $20 million to $22 million in planned future capex for this drilling program.
Empire’s adjusted EBITDA is around zero at $70s oil though, not including the impact of additional volumes from new Starbuck drilling. At the current strip, I estimate that Empire could have a $4 million to $14 million liquidity shortfall at the end of 2024 if it completes its Starbuck drilling program by then.
This does not include the potential repayment of the $10 million in bridge loans by the end of 2024. Thus there is still a high chance that Empire needs to raise more funds in 2024, likely through an equity offering and/or divestitures. I am currently keeping Empire’s estimated value at $6 per share at long-term $75 WTI oil.
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