Executive Summary / Key Takeaways

• Operational Optimization as Core Strategy: Empire Petroleum's investment thesis centers on its disciplined approach to acquiring and enhancing pre-developed, mature oil and gas assets, employing advanced field management techniques like waterflood conformance and sidetrack drilling to maximize reserve recovery and minimize costs.
• Transformative Operational Initiatives: The Starbuck Field Enhancement Program, targeting a 500-1,000 barrels of oil per day increase and 100% reserve growth, exemplifies EP's ability to unlock significant value from existing assets through focused capital expenditure and operational innovation.
• Financial Headwinds Amidst Strategic Progress: Despite a Q2 2025 revenue decline driven by lower oil prices and production volumes, the company is actively addressing liquidity challenges through related-party support and a recent rights offering, aiming to stabilize its financial foundation for future growth.
• Competitive Niche and Future Growth Drivers: EP operates as a nimble, regionally focused player, leveraging local expertise and cost efficiency to compete against larger E&P firms. The recent favorable ruling for CO2 development in New Mexico's EMSU signals a potential long-term growth avenue and technological evolution.
• Reliance on Commodity Prices and Capital Discipline: While management projects a "standout year" with aspirations to double production, this outlook is heavily contingent on a stable commodity price environment and continued disciplined capital allocation to high-return projects.

The Foundation: A Niche Player's Ascent in U.S. Energy

Empire Petroleum Corporation (NYSE American: EP) is an independent energy company operator dedicated to optimizing developed production across its asset base in New Mexico, North Dakota, Montana, Texas, and Louisiana. Since Mike Morrisett and Tommy Pritchard took the helm in 2018, the company has strategically pivoted to acquiring and enhancing pre-developed producing properties, a move that has fundamentally shaped its current market position. This strategy, focused on maximizing reserve recovery while minimizing costs, has allowed EP to carve out a niche against larger, more diversified exploration and production (E&P) firms.

EP's journey began with its first acquisitions in Louisiana in late 2018, followed by significant expansions into North Dakota and Montana in 2019, and Texas in 2020. A "transformative" New Mexico acquisition in 2021, involving the Eunice Monument and Arrowhead Grayburg field from Exxon/XTO (XOM), further solidified its asset portfolio. This history underscores a consistent focus on mature, producing assets with identified upside, rather than high-risk frontier exploration. The company's uplisting to the NYSE American and inclusion in the Russell 3000 and 2000 indexes in 2022 marked a significant milestone, enhancing its visibility and access to capital.

The broader energy landscape presents a complex backdrop for EP. While demand for traditional fossil fuels remains robust, particularly with trends like AI-driven data center growth increasing overall energy consumption, the industry also faces increasing investment in renewable energy and electrification. This creates an indirect competitive dynamic, where companies like MYR Group Inc. (MYR), specializing in electrical infrastructure and clean energy projects, could divert capital and demand away from traditional oil and gas. For EP, this means a continued need to demonstrate superior efficiency and returns from its conventional assets to remain attractive in a shifting energy mix. Inflation also plays a role, generally increasing EP's operational, general, and administrative costs, as well as direct production expenses.

Operational Innovation: EP's Technological Edge

Empire Petroleum's competitive advantage is not rooted in a singular, proprietary hardware technology, but rather in its sophisticated operational methodology and engineering prowess applied to mature fields. The company's "technology" is its ability to extract maximum value from existing, often overlooked, assets through targeted field management methods. This includes advanced waterflood conformance, precise sidetrack drilling, and strategic infrastructure upgrades.

A prime example of this operational innovation is the Starbuck Field Enhancement Program in Bottineau County, North Dakota, initiated in 2022. This $10 million program was designed to significantly boost production and reserves. Through waterflood conformance, EP successfully increased injection rates in several wells by 300% to 800%, with each well injecting approximately 900 barrels per day. This meticulous approach to managing reservoir pressure is critical for maximizing recovery in mature waterflood units. Furthermore, the program involved re-perforating and re-stimulating producing wells, and successfully drilling six sidetracks with lateral lengths of approximately 10,000 feet. These sidetracks utilized full tubing drilling, a technique that offers tangible benefits such as reduced rig time, a smaller operational footprint, a shorter build section, underbalanced drilling capability, and enhanced directional control in thinner pay zones. The expected production increase from these sidetrack wells alone is substantial, projected to rise from 3,000 barrels per month to over 15,000 barrels per month.

The "so what" for investors is clear: these operational advancements directly translate into enhanced recovery, lower lifting costs, and extended asset life. By applying these techniques, EP aims to bring on new production at a cost of less than $10,000 per barrel, a highly efficient capital allocation strategy. This operational mastery forms a critical competitive moat, allowing EP to generate superior returns from assets that larger players might overlook or deem uneconomical. The company also completed upgrades to surface facilities at Starbuck to maximize thermal efficiency, reducing reliance on costly winter oil services.

Looking ahead, a significant development in August 2025 was the unanimous and favorable ruling from the New Mexico Oil Conservation Commission regarding EP's rights to the Residual Oil Zone (ROZ) in the Eunice Monument South Unit (EMSU). This victory is poised to advance CO2 development in the region, signaling a potential future technological evolution for EP into enhanced oil recovery (EOR) methods that leverage carbon capture, utilization, and storage (CCUS) technologies. While specific quantitative targets for CO2 EOR were not detailed, this strategic win positions EP to potentially unlock additional reserves and align with evolving environmental considerations, further strengthening its long-term asset value.

Financial Performance: Navigating Market Dynamics

Empire Petroleum's financial performance in the second quarter of 2025 reflects the challenging commodity price environment and the impact of its operational initiatives. For the three months ended June 30, 2025, total product revenues decreased by 31.6% to $8.747 million, down from $12.788 million in the prior year period. This decline was primarily driven by lower oil sales volumes and significantly lower realized oil prices. Net oil sales volumes decreased by approximately 15% to 135,854 barrels, attributed to redrilling efforts in North Dakota and natural decline. Realized oil prices fell by approximately 23% to $58.92 per barrel, reflecting a general decline in overall market prices compared to $76.66 per barrel in Q2 2024.

Conversely, natural gas sales saw a substantial increase, with revenue rising 90.5% to $0.221 million, and realized prices climbing to $0.93 per Mcf from $0.48 per Mcf in Q2 2024. This was largely due to unusually depressed natural gas prices in New Mexico during the prior year, which had fallen below zero. Natural Gas Liquid (NGL) sales also experienced a decrease in revenue and realized prices.

The company reported an operating loss of $4.903 million for Q2 2025, a significant increase from $1.926 million in Q2 2024. The net loss for the quarter was $5.056 million, up from $4.390 million year-over-year. For the six months ended June 30, 2025, total product revenues decreased by 23% to $17.739 million, with an operating loss of $8.859 million and a net loss of $9.277 million.

Despite these revenue and profitability challenges, there are notable operational cost improvements. Lease operating expenses were lower for both the three and six-month periods, primarily due to reduced workover costs. However, general and administrative expenses (excluding stock-based compensation) increased due to higher employee headcount and associated salaries and benefits.

Cash flow from operating activities decreased for the six months ended June 30, 2025, to $1.525 million, down from $2.106 million in the prior year, primarily due to lower production volumes and realized commodity prices. Investing activities saw a significant reduction in capital expenditures, with cash additions to oil and natural gas properties totaling $3.2 million in H1 2025, a sharp decline from $30.1 million in H1 2024, as the Starbuck Drilling Program neared completion.

Liquidity and Capital Structure: A Tightrope Walk

Empire Petroleum faces a challenging liquidity position, reporting negative working capital of approximately $11.6 million as of June 30, 2025. This deficit is primarily attributed to payables from the Starbuck Drilling Program, unforeseen operational costs in the Texas return-to-production program, and lower North Dakota oil production. The company's cash on hand was $2.3 million, with $4.0 million available under its Credit Facility, though this capacity is being reduced monthly by $0.25 million.

To address these immediate needs, EP has undertaken several financing initiatives. In June 2025, it secured a $4.0 million promissory note from Phil Mulacek, with $2.0 million already advanced. An August 2025 subscription rights offering is expected to raise $5.0 million in gross proceeds, a portion of which will repay the Mulacek note. Crucially, management has stated that committed financial support from its largest related-party stockholders, Phil Mulacek (21.4% common stock owner) and Energy Evolution Master Fund, Ltd. (31.8% common stock owner), is available and sufficient to meet obligations for at least the next 12 months. This support, potentially through warrants or convertible notes, has alleviated substantial doubt about the company's ability to continue as a going concern.

Historically, EP has maintained a philosophy of low debt. As of Q2 2022, management emphasized not being "big on debt," with a small revolving credit facility collateralized by specific assets. This approach, combined with a focus on efficient capital allocation, aims to bring on new production at a low cost per barrel. While the company's Debt/Equity ratio stands at 0.28 (TTM), its negative working capital and reliance on related-party financing highlight the ongoing need for careful financial management and external support.

Competitive Landscape and Strategic Positioning

Empire Petroleum operates in a highly competitive U.S. onshore E&P market, where it is a smaller, more focused player compared to industry giants like Devon Energy (DVN), EOG Resources (EOG), and Marathon Oil (MRO). These larger competitors benefit from significant scale, diversified asset portfolios, and often superior technological capabilities in advanced drilling and resource recovery.

EP's competitive strategy is to leverage its regional expertise and operational agility in specific basins. While it may lag in overall growth rates, profitability margins, and cash flow generation compared to its larger rivals, its strength lies in its ability to identify and efficiently optimize pre-developed assets that might not move the needle for bigger companies. For instance, EP's targeted $10 million Starbuck program, aiming for a 500-1,000 bbl/day increase, demonstrates a focused capital deployment that can yield significant returns relative to its size. This contrasts with Devon's broader, more capital-intensive approach or EOG's innovation-driven exploration.

The company's customer and supplier dynamics are also influenced by its concentrated geographic footprint. Selling a large portion of its production to a few customers increases the risk of sales interruption or lower prices. However, its regional focus also allows for deeper local relationships and potentially more efficient supply chain management for specific projects. The M&A market remains competitive, with a wide bid-ask spread between sellers' high price expectations and EP's disciplined valuation approach, making strategic "bolt-on" acquisitions challenging but a key part of its growth strategy.

EP's operational model, emphasizing field management and cost control, is its primary defense against the scale and financial resilience of its larger competitors. Its recent success in securing rights for CO2 development in New Mexico's EMSU could provide a long-term strategic advantage, potentially diversifying its operational methods and aligning with future energy transition trends, an area where larger players are also investing.

Outlook and Risks

Empire Petroleum's outlook is a blend of ambitious operational targets and persistent financial challenges, heavily influenced by the volatile commodity price environment. Management's internal aspiration, articulated in Q3 2022, was to double production year-over-year from approximately 2,000 BOE/day to 4,000 BOE/day, contingent on the Starbuck field's performance and service availability. The Starbuck program itself has concrete targets of a 500-1,000 barrels of oil per day increase and 100% reserve growth. Management expressed confidence in a "standout year in 2023," assuming a "solid pricing environment holds up."

For the remainder of 2025, EP expects to continue incurring costs for drilling activities in core areas and potential acquisitions. The recent NMOCD ruling on CO2 development in EMSU opens a new strategic avenue, potentially enhancing future reserve recovery and asset value. The company does not anticipate a material impact from the recently enacted "One Big Beautiful Bill Act" (OBBBA) on its 2025 financial statements.

However, significant risks remain. The "substantial doubt about the Company's ability to continue as a going concern" due to negative working capital and insufficient operating cash flow, while alleviated by related-party support, underscores a precarious financial position. Commodity price volatility is a perpetual risk, directly impacting revenues and potentially leading to asset impairments if prices decline. Geographic and customer concentration expose EP to regional economic downturns, severe weather, and the loss of key purchasers. Legal proceedings, such as the New Mexico trespass action, introduce uncertainty, though management believes no material adverse effects are likely. The company's smaller scale and less diversified asset base make it more vulnerable to these external shocks compared to its larger, more resilient competitors.

Conclusion

Empire Petroleum Corporation presents a compelling, albeit high-risk, investment narrative centered on its operational expertise in optimizing mature oil and gas assets. The company's history of strategic acquisitions and its current focus on enhancing existing fields through targeted technological applications, such as the Starbuck Field Enhancement Program and potential CO2 development, demonstrate a clear path to value creation. These operational innovations, yielding quantifiable benefits in production and reserve growth, are EP's primary competitive differentiator in a market dominated by larger players.

Despite recent financial headwinds marked by declining revenues and persistent liquidity challenges, the unwavering commitment and financial support from its major related-party stockholders provide a critical lifeline, alleviating immediate going concern doubts. The company's future hinges on its ability to execute its operational strategy, maintain stringent cost controls, and capitalize on a stable commodity price environment. For investors, EP represents an opportunity to participate in a focused E&P story where operational mastery and strategic asset management are paramount, but one that demands close monitoring of commodity markets and financial stability.